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 registrants 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. (X)
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 non-affiliates of the registrant was $3,640,546,466 as of the close of trading reported on the Consolidated Transaction Reporting System on June 30, 2003. The Company does not have non-voting common equity.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
Common Stock $0.50 par value 90,946,878 shares outstanding as of March 1, 2004Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 28, 2004, 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 | |
DIGITAL | 5 | |
INDUSTRY SEGMENTS | 5 | |
COMPETITION |
5 | |
EMPLOYEES |
5 | |
WEB SITE ACCESS TO COMPANY REPORTS |
5 | |
Item 2: |
PROPERTIES |
6 |
Item 3: | LEGAL PROCEEDINGS | 6 |
Item 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 6 |
Executive Officers | 6-7 | |
PART II | ||
Item 5: |
MARKET FOR
REGISTRANT
S COMMON
EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
7 |
Item 6: | SELECTED FINANCIAL DATA | 8 |
Item 7: |
MANAGEMENT
S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
8-18 |
Item 7A: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 18 |
Item 8: | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 18 |
Item 9: |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE |
19 |
Item 9A: | CONTROLS AND PROCEDURES | 19 |
PART III | ||
Item 10: | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 19 |
Item 11: | EXECUTIVE COMPENSATION | 19 |
Item 12: |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
19 |
Item 13: | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 19 |
Item 14: | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 19 |
PART IV | ||
Item 15: | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K |
20-21 |
Signatures | 22 | |
Certifications | 23-25 | |
PART I
The Company
Grainger uses a multichannel business model to serve more than 1.6 million customers of all sizes with multiple ways to find and purchase products through a network of branches, field sales forces, direct marketing through catalogs and Internet channels. Orders can be placed via telephone, fax, Internet or in person. Products are available for immediate pick-up or for shipment.
Grainger reports its operating results 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 also 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 Graingers product lines on the basis of market information, recommendations of customers and suppliers and other factors.
Branch-based Distribution
The Branch-based Distribution
businesses provide North American customers with product solutions for their 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) and Grainger Caribe Inc. (Puerto Rico). 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, simplicity of ordering and competitively priced products. Industrial Supply
distributes tools, lighting products, test instruments, cleaning supplies, material
handling equipment, pumps and plumbing supplies, motors and many other items. Its
customers range from small and medium-sized businesses to large corporations and
governmental organizations. During 2003, Industrial Supply completed an average of 88,000
sales transactions daily.
Industrial Supply operates 394 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 allowing customers to pick up items directly from the branches.
Industrial Supplys branches range in size from small branches to large master branches. Branches are used to fulfill will-call needs and customer service. Master branches handle a higher volume of counter/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 10 employees and handles about 220 transactions per day. Also in 2003, Industrial Supply invested approximately $1.4 million in plant and equipment related to one new branch, three branch relocations and several branch additions and remodelings. No branches were closed in 2003.
In 2000, Industrial Supply began the process of reconfiguring its distribution network to remove a warehousing step from its distribution system. When completed, the new network will comprise nine distribution centers (DCs) five new and four redesigned facilities that will take over most of the shipping previously handled by the branches. Eight of the nine distribution centers have been completed. The ninth, a DC located in New Jersey, is expected to be completed in April 2004. The DCs average more than 300,000 square feet in size and employ automated equipment and processes. DCs ship orders, including Internet orders, directly to customers for all branches located in their service area and replenish branch inventories. 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 which include industrial and commercial maintenance departments, service shops, manufacturers, hotels, government, retail organizations, transportation businesses, contractors, and healthcare and educational facilities. Sales transactions during 2003 were made to approximately 1.3 million customers. Approximately 24% of 2003 sales consisted of items bearing the Companys 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), as well as other Company trademarks. 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 2004, offers more than 82,000 facility maintenance and other products. Approximately 1.5 million copies of the catalog were produced. A CD-ROM version of the catalog supplements the paper version. Approximately 550,000 copies of the CD-ROM catalog were produced.
Customers can 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 information from these systems to be fed directly into Industrial Supplys operating platform. Orders processed through grainger.com resulted in sales of $478.6 million in 2003, $419.5 million in 2002 and $332.5 million in 2001.
Industrial Supply purchases products for sale from approximately 1,200 suppliers, most of which are manufacturers. No single supplier comprised more than 10% of Industrial Supplys purchases and no significant difficulty has been encountered with respect to sources of supply.
Acklands-Grainger Inc.
(Acklands)
Acklands is Canadas leading
broad-line distributor of industrial, automotive fleet and safety supplies. It serves
customers through 174 branches and five distribution centers across Canada. Acklands
distributes tools, lighting products, safety supplies, pneumatics, instruments, welding
equipment and supplies, motors and shop equipment, and many other items. During 2003,
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 77,000 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 1.6 million customer calls in 2003 through its
call centers in Northbrook, Illinois, and Waterloo, Iowa.
Mexico
Graingers operations in Mexico
provide local businesses with facility maintenance and other products from both Mexico and
the United States. From its five locations in Mexico and U.S. branches along the border,
the business provides delivery of approximately 63,000 products throughout Mexico. 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. Located 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.labsafety.com, www.benmeadows.com and www.gemplers.com.
Lab Safety offers extensive product depth, technical support and high service levels. It is a primary supplier for many small and medium-sized companies and a backup supplier for many larger companies. During 2003, Lab Safety issued 11 unique catalogs covering safety supplies, material handling, security and other products, targeted to specific customer groups. Lab Safety provides access to more than 130,000 products through its catalogs.
In April 2003, Lab Safety acquired substantially all of the assets and assumed certain liabilities of Gemplers, a direct marketing division of Gemplers, Inc. Gemplers is a $32 million direct marketing business serving agricultural, horticultural, grounds maintenance and contractor markets with tools, safety supplies, clothing and other items.
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.
Digital
In April 2001, Grainger announced it
was discontinuing the operations of Material Logic. All of Material Logics branded
e-commerce sites were shut down with the exception of FindMRO, which remains in the
Branch-based Distribution segment.
Industry Segments
For 2003, Grainger is reporting three
industry segments: Branch-based Distribution, Lab Safety and Integrated Supply. For
segment and geographical information and consolidated net sales and operating earnings see
Item 7: Managements 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 competes with manufacturers and other distributors primarily through local product availability, efficient service, 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 efforts 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. In some markets, Grainger can reasonably estimate its competitive position. However, taken as a whole, Grainger is unable to determine with certainty its market share relative to others engaged in whole or in part in each of the markets where it competes.
Employees
As of December 31, 2003, Grainger had
14,701 employees, of whom 12,881 were full-time and 1,820 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
As of December 31, 2003, Graingers owned and leased facilities totaled 17,991,000 square feet, an increase of approximately 2% from 2002. 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 | 1,136,000 | ||
United States (1) | Nine Distribution Centers | 5,212,000 | ||
United States (2) | 394 Industrial Supply branch locations | 7,713,000 | ||
United States and Mexico (3) | All other facilities | 1,837,000 | ||
Canada (4) | 174 Acklands facilities | 2,093,000 | ||
|
||||
Total Square Feet |
17,991,000 |
|||
|
|
|
(1) | These facilities are either owned or leased with most leases expiring between 2004 and 2009. The owned facilities are not subject to any mortgages. |
(2) | Industrial Supply branches consist of 286 owned and 108 leased properties. The owned facilities are not subject to any mortgages. |
(3) | Other facilities primarily include locations for Lab Safety and other business units and properties under construction. Two facilities are located in Puerto Rico and five 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 61 are owned and 113 leased. The owned facilities are not subject to any mortgages. |
As of January 28, 2004, Grainger is named, along with numerous other nonaffiliated companies, as a defendant in litigation involving asbestos and/or silica filed on behalf of approximately 3,300 plaintiffs in various states. These lawsuits typically involve claims of personal injury arising from the alleged exposure to asbestos and/or silica as a consequence of products purportedly distributed by Grainger. In 2003, lawsuits involving approximately 275 plaintiffs were dismissed with respect to Grainger based on the lack of product identification. Grainger has denied, or intends to deny, the allegations in the remaining lawsuits. 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 Graingers consolidated financial position or results of operations.
No matters were submitted to a vote of security holders during the fourth quarter of 2003.
Following is information about the Executive Officers of Grainger including age in March 2004. 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 (43) | Vice President and Controller. Before joining Grainger in 2002, Ms. Andringa 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. Her prior positions at Kraft included Controller, Sales and Customer Service, and Director, Financial Planning and Analysis, of the Meals Division. |
6
Name and Age |
Positions and Offices Held and Principal
|
|
|
Yang C. Chen (56) | Senior Vice President, Supply Chain Management, a position assumed in 2003 after serving as Vice President, Supply Chain Services. Before assuming the last-mentioned position in 2002, Mr. Chen served as Vice President, International Internet Commerce. Previously, he served as Vice President, Asia Pacific. |
Wesley M. Clark (52) | President and Chief Operating Officer, a position assumed in 2001 after serving as Group President. Before assuming the last-mentioned position in 1997, Mr. Clark served as Senior Vice President, Operations and Quality. |
Timothy M. Ferrarell (47) | Senior Vice President, Enterprise Systems, a position assumed in 2001 after serving as Vice President, Quality and Business Planning. Before assuming the last-mentioned position in 1998, Mr. Ferrarell served as Vice President, Marketing. Previously, he served as Vice President, Product Management. |
Nancy A. Hobor (57) | Senior Vice President (formerly Vice President), Communications and Investor Relations. Before joining Grainger in 1999, Ms. Hobor was Vice President, Corporate Communications and Investor Relations of Morton International, Inc. |
John L. Howard (46) | Senior Vice President and General Counsel. Before joining Grainger in 2000, Mr. Howard was Vice President and General Counsel of Tenneco Automotive, a position assumed after serving as Vice President, Law and Assistant General Counsel of Tenneco, Inc. |
Richard L. Keyser (61) | Chairman of the Board, a position assumed in 1997, and Chief Executive Officer, a position assumed in 1995. Previously, Mr. Keyser served as Grainger s President and Chief Operating Officer. |
Larry J. Loizzo (49) | Senior Vice President (formerly Vice President) of Grainger and President of Lab Safety Supply, Inc. |
P. Ogden Loux (62) | Senior Vice President, Finance and Chief Financial Officer, positions assumed in 1997 after serving as Vice President, Finance. |
James T. Ryan (45) | Executive Vice President, Marketing, Sales and Service, a position assumed in 2001, after serving as Vice President of Grainger and President of grainger.com. Previously, he served as Vice President, Information Services. |
John A. Schweig (46) | Senior Vice President, Strategy and Development, a position assumed in 2003 after serving as Senior Vice President, Business Development and International. |
PART II
Graingers 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 2003 and 2002 are shown below.
Prices |
|||||||
|
|||||||
Quarters | High | Low | Dividends | ||||
|
|||||||
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 | ||||
|
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2002 First | $59.40 | $46.60 | $0.175 | ||||
Second | 59.00 | 47.09 | 0.180 | ||||
Third | 50.74 | 40.40 | 0.180 | ||||
Fourth | 55.20 | 39.20 | 0.180 | ||||
|
|||||||
Year | $59.40 | $39.20 | $0.715 | ||||
|
The approximate number of shareholders of record of Graingers common stock as of March 1, 2004 was 1,400.
7
Item 6: Selected Financial Data
2003 | 2002 | 2001 | 2000 | 1999 | |||||||
|
|
|
|
|
|||||||
(In thousands of dollars, except for per share amounts) |
|||||||||||
Net sales | $4,667,014 | $4,643,898 | $4,754,317 | $4,977,044 | $4,636,275 | ||||||
Net earnings | 226,971 | 211,567 | 174,530 | 192,903 | 180,731 | ||||||
Net earnings per basic share | 2.50 | 2.30 | 1.87 | 2.07 | 1.95 | ||||||
Net earnings per diluted share | 2.46 | 2.24 | 1.84 | 2.05 | 1.92 | ||||||
Total assets | 2,624,678 | 2,437,448 | 2,331,246 | 2,459,601 | 2,564,826 | ||||||
Long-term debt | |||||||||||
(less current maturities) | 4,895 | 119,693 | 118,219 | 125,258 | 124,928 | ||||||
Cash dividends paid per share | $ 0.735 | $ 0.715 | $ 0.695 | $ 0.670 | $ 0.630 |
The results for 2003 included an after-tax gain on the reduction of restructuring reserves established for the shutdown of Material Logic of $0.3 million.
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 Material Logic 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.
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 Material Logic 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: Managements Discussion and Analysis of Financial Condition and Results of Operations, and Notes 3 and 5 to the Consolidated Financial Statements.
Overview
General.
Grainger is the leading broad-line supplier of facilities
maintenance products in North America. Grainger reports 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 575 branches, 17 distribution centers and multiple Web sites.
Business Environment. Several economic factors and industry trends shape Graingers 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 2004, the Consensus Forecast-USA is predicting GDP and Industrial Production growth of 4 to 5 percent for 2004. Graingers sales to manufacturers tend to correlate more with employment levels than with manufacturing output, so job creation, in addition to manufacturing production, is an indicator for potential sales growth. Most recently, declining employment in the manufacturing sector, due to increased productivity and production moving offshore, has adversely affected the operating results of Grainger.
This trend is likely to continue, and could adversely affect employment levels in one of Graingers largest sectors. To address this trend, Grainger has been focusing on government and commercial customers and healthcare institutions. To reach more customer groups, Graingers market expansion program will increase branch coverage, expand local availability of products and add local sales professionals in high potential markets through a multi-year program focused on local customers.
The customers buying behavior also affects Graingers business environment. In 2004, Grainger will continue to target large, multi-site customers including government and national accounts. Sales from government accounts grew from 13% of total sales in 2001 to 17% in 2003. Grainger believes that customers will increasingly focus on reducing their cost to procure facilities maintenance products. Grainger is addressing this anticipated shift in focus by expanding its market coverage and increasing product information available to branch employees for improved service to local customers by accelerating replacement of its legacy information systems. Graingers financial strength, including its low debt and strong cash flow, leaves it well positioned to fund initiatives to accelerate top line growth.
8
In 2004, Grainger will be investing in the branch network and information technology including the following major items:
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|
|
|
In 2004, total capital expenditures of $200 to $225 million are anticipated, more than double that of recent years. Capital spending for the market expansion program may be affected by decisions to lease, rather than purchase, the related facilities and/or equipment.
Matters Affecting Comparability. The Emerging Issues Task Force (EITF) issued Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, (Issue 02-16) in November 2002 with transition provisions subsequently issued in January 2003. For more detailed information regarding this change in accounting, see Note 2 to the Consolidated Financial Statements. Graingers accounting treatment for vendor provided funds was consistent with Issue 02-16, with the exception of vendor funded advertising allowances, which had been accounted for as an offset to operating (advertising) expenses. This accounting treatment is only allowable under Issue 02-16 in certain specific circumstances. As a result of Issue 02-16, Grainger will classify the majority of its vendor provided allowances as an offset to cost of merchandise sold rather than operating (advertising) expenses. Application of Issue 02-16 is on a prospective basis as contracts are either modified or renewed. Since a majority of the 2003 contracts with provisions for advertising allowances were entered into prior to December 31, 2002, the amounts classified as a reduction of cost of merchandise sold of $7.9 million were not material to 2003. This change does not have any effect on net earnings.
Graingers operating results for 2003 include the operating results of Gemplers, a direct marketing division of Gemplers, Inc., from the acquisition date of April 14, 2003. Gemplers results are included in the Lab Safety segment.
Effective January 1, 2002, Grainger adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. As a result of the application of the new impairment methodology introduced by SFAS No. 142, Grainger recorded a noncash charge to earnings in 2002 of $32.3 million ($23.9 million after-tax, or $0.26 per diluted share) related to the write-down of Acklands goodwill. See Note 3 to the Consolidated Financial Statements.
In 2002, Acklands sales declined as automotive aftermarket parts sales were eliminated due to the creation of the joint venture with Uni-Select Inc. in Canada. See Note 9 to the Consolidated Financial Statements.
Results of Operations
The following table is included as an
aid to understanding changes in Graingers Consolidated Statements of Earnings.
For the Years Ended December 31, |
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|
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Items in Consolidated Statements | Percent Increase/ | ||||||||||
of Earnings as a Percent of | (Decrease) | ||||||||||
Net Sales | from Prior Year | ||||||||||
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|
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2003 |
2002 |
2001 |
2003 |
2002 |
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|
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Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 0.5 | % | (2.3 | )% | |
Cost of merchandise sold | 64.9 | 65.6 | 66.6 | (0.6 | ) | (3.8 | ) | ||||
Operating expenses | 26.8 | 25.9 | 26.3 | 3.8 | (3.7 | ) | |||||
Operating earnings | 8.3 | 8.5 | 7.1 | (1.5 | ) | 16.1 | |||||
Other income (expense) | (0.1 | ) | 0.1 | (0.8 | ) | (231.8 | ) | 111.3 | |||
Income taxes | 3.3 | 3.5 | 2.6 | (5.1 | ) | 32.3 | |||||
Cumulative effect of | |||||||||||
accounting change-expense | -- | 0.5 | -- | 100.0 | N/A | ||||||
Net earnings | 4.9 | % | 4.6 | % | 3.7 | % | 7.3 | % | 21.2 | % |
2003 Compared to 2002
Graingers net sales of $4,667.0
million for 2003 were essentially flat compared to 2002. Full year results were affected
by the general weakness in the U.S. economy. Sales in the Branch-based Distribution
business segment increased $19.2 million over 2002, generally unchanged year-over-year.
Revenue increased in the Lab Safety segment, while sales for Integrated Supply declined.
9
Despite the limited sales growth experienced during the year, gross profit margins improved in 2003 to 35.1% from 34.4% principally due to favorable changes in product mix and selected price increases designed to offset increased freight and other costs. Graingers operating earnings of $387.3 million in 2003 decreased 1.5% from the prior year. Operating margins declined to 8.3% in 2003 from 8.5% in 2002 reflecting higher operating expenses year-over-year. The principal driver of the operating expense increase was higher severance and healthcare expenses. Advertising expenses increased as a result of the classification of $7.9 million of vendor provided allowances in cost of merchandise sold rather than in operating (advertising) expenses.
Graingers net earnings of $227.0 million in 2003 increased $15.4 million or 7.3% as compared with 2002 net earnings of $211.6 million. Diluted earnings per share for the year increased to $2.46 in 2003 from $2.24 in 2002. In 2002, Grainger recorded a $23.9 million after-tax charge for the cumulative effect of a change in accounting principle. The results for 2002 also included an after-tax gain of $1.2 million, or $0.01 per diluted share, on the reduction of restructuring reserves established for the shutdown of Material Logic.
Segment Analysis
The following comments at the segment
level include external and intersegment net sales and operating earnings. Comments at the
business unit level include external and inter- and intrasegment net sales and operating
earnings. See Note 21 to the Consolidated Financial Statements.
Branch-based Distribution
Net sales at the Branch-based
Distribution businesses totaled $4,167.2 million in 2003 and were essentially flat when
compared with 2002 sales of $4,148.0 million. Sales in the United States declined
approximately 1% in 2003 as compared with 2002. Government account sales were up nearly
11% in 2003, while all other customer segments, including light and heavy manufacturing,
were down when compared with 2002. The declines noted in the other customer segments were
primarily due to the weakness in the U.S. economy, particularly in manufacturing. Within
these customer segments, sales to national accounts increased approximately 2% over 2002.
Sales growth through Internet channels continued in 2003, increasing 15.9% over 2002 and representing 12.6% of segment sales. Grainger will continue to invest in procurement technology to encourage online purchases by its customers and expects sales growth from Internet channels to continue in 2004.
Sales in Canada increased 15.4% in 2003, principally due to a favorable exchange rate. In local currency, sales grew 2.7%, primarily in Ontario and national accounts. In Mexico, sales declined 3.7% in 2003 as compared with 2002, principally due to a weak economy in Mexico.
Cost of merchandise sold of $2,682.6 million for 2003 in the Branch-based Distribution businesses was essentially flat compared to $2,699.4 million in 2002. Gross profit margins increased 0.7 percentage points to 35.6% in 2003 from 34.9% in 2002. Selected price increases designed to offset increased freight and other costs both in the United States and Canada, combined with a favorable change in product mix, contributed to the margin increase. The classification of vendor provided allowances from operating (advertising) expenses to cost of merchandise sold also increased gross profit margin by 0.2 percentage points.
Branch-based Distribution operating expenses increased 3.9% in 2003, primarily due to higher severance and healthcare expenses and increased occupancy costs. The classification of vendor provided allowances from operating (advertising) expenses to cost of merchandise sold also contributed to the increase.
Operating earnings of $390.2 million in 2003 declined by $4.7 million or 1.2% as compared with 2002. The increase in operating expenses year-over-year more than offset the improvement in gross profit margin.
Lab Safety
Net sales at Lab Safety increased by
$18.7 million to $305.5 million in 2003, a 6.5% increase over 2002. The sales growth was
attributable to incremental sales from Gemplers, acquired on April 14, 2003.
Excluding the results of Gemplers, year-over-year net sales decreased 2.0% as a
result of weakness in the manufacturing sector of the U.S. economy. A major portion of Lab
Safetys sales are to manufacturers. The overall decline in the manufacturing sector
was partially offset by increased sales to customers in the forestry and public safety
markets.
The gross profit margin of 42.0% decreased 0.8 percentage points due to incremental sales of Gemplers products, which have lower gross margins than the rest of Lab Safetys products. In addition, in 2003 there was a shift in sales mix to lower margin new product sales.
Lab Safety operating expenses of $86.5 million increased 14.5% in 2003, when compared with $75.5 million for 2002. The primary driver of the year-over-year increase was the incremental costs associated with the addition of Gemplers during the year and higher spending on catalog media.
As a result, operating earnings of $41.9 million for Lab Safety in 2003 declined 11.1% from operating earnings of $47.1 million in 2002.
10
Integrated Supply
Integrated Supply net sales of $211.7
million in 2003 were $14.3 million lower than $226.0 million of net sales in 2002. The
6.3% decrease in net sales resulted from six site disengagements, as well as lower volumes
from existing customers. The decrease in sales was partially offset by incremental sales
at seven new customer sites. Sales include both product sales, which are passed through to
the customer at cost, and management fees.
Gross profit declined $1.9 million in 2003 due to lower management fees. Operating expenses of $22.1 million increased 5.4% in 2003, when compared with $21.0 million for 2002. The increase of $1.1 million was principally due to a higher provision for bad debts, combined with incremental costs associated with a systems upgrade.
Operating earnings of $3.2 million in 2003 for Integrated Supply declined $3.0 million from operating earnings of $6.2 million in 2002.
Other Income and Expense
Other income and expense was $6.2
million of expense in 2003, an unfavorable change of $10.9 million as compared with $4.7
million of income in 2002. The following table summarizes the components of other income
and expense:
For the Years Ended |
|||||
December 31, |
|||||
|
|||||
2003 |
2002 |
||||
|
|
||||
(In thousands of dollars) |
|||||
Other income and (expense) | |||||
Interest (expense), net of interest income | $(2,668 | ) | $(1,590 | ) | |
Equity in loss of unconsolidated entities, net | (2,288 | ) | (3,025 | ) | |
Write-down of investments in unconsolidated entities | (1,921 | ) | -- | ||
Unclassified-net: | |||||
Gains on sales of investment securities | 1,208 | 7,308 | |||
Write-down of investments | (1,614 | ) | (3,192 | ) | |
Gains on sales of fixed assets, net | 1,607 | 5,219 | |||
Other | (495 | ) | (38 | ) | |
|
|
||||
$(6,171 | ) | $ 4,682 | |||
|
|
In the fourth quarter of 2003, Grainger wrote off its investment in two Asian joint ventures resulting in an after-tax charge to earnings of $1.9 million. See Note 9 to the Consolidated Financial Statements. The reduction in gains on sales of fixed assets resulted from the sale of one facility in 2003 versus two in 2002.
Income Taxes
Income taxes of $154.1 million in
2003 declined 5.1% as compared with $162.3 million in 2002.
Graingers effective tax rates were 40.4% and 40.8% in 2003 and 2002, respectively. Excluding the effect of the equity losses in unconsolidated entities and the write-down of these investments, which did not result in tax benefits, the effective income tax rates were 40.0% for 2003 and 40.5% for 2002. This change in effective tax rate was primarily driven by lower nondeductible losses in Mexico and a lower tax rate in Canada.
2002 Compared to 2001
Graingers net sales of $4,643.9
million for 2002 decreased 2.3% from net sales of $4,754.3 million in 2001. This decline
resulted principally from decreases in the Branch-based Distribution and Lab Safety
segments and the elimination of the Digital segment. The decrease was partially offset by
an 18.4% increase at Integrated Supply. The general weakness in the North American economy
affected overall sales performance.
Graingers cost of merchandise sold of $3,045.7 million for 2002 decreased 3.8% from the cost of merchandise sold of $3,165.0 million for 2001. This decrease was primarily volume related due to the decline in net sales and supply chain efficiencies. Operating expenses of $1,205.1 million for 2002 decreased 3.7% from operating expenses of $1,250.7 million for 2001. Operating expenses for 2002 included a pretax benefit related to a $1.9 million reduction of a portion of the Material Logic shutdown reserve established in 2001. Operating expenses for 2001 included a pretax restructuring charge of $39.1 million related to the shutdown of Material Logic. Despite tight expense controls in 2002, Grainger was unable to decrease expenses in line with the sales decline. Graingers operating earnings of $393.2 million for 2002 increased 16.1% from operating earnings of $338.6 million for 2001. Operating earnings were affected by a $1.9 million benefit and a $39.1 million expense for 2002 and 2001, respectively, related to the restructuring charge established for Material Logic. The results for 2001 included operating losses for the Digital segment totaling $10.2 million.
11
Graingers net earnings of $211.6 million for 2002 increased 21.2% compared with 2001 net earnings of $174.5 million. Graingers diluted earnings per share for the year increased 21.7% to $2.24 in 2002 from $1.84 in 2001. The results for 2002 included an after-tax charge of $23.9 million ($0.26 per diluted share) related to the cumulative effect of a change in accounting principle. The results for 2002 also included an after-tax gain of $4.5 million ($0.04 per diluted share) from the sales of investment securities and an after-tax gain of $1.2 million ($0.01 per diluted share) related to the reduction of restructuring reserves. The results for 2001 included an after-tax charge of $36.6 million, or $0.39 per diluted share, related to the digital businesses described earlier. Excluding all of these items from both periods and excluding the cumulative effect of the change in accounting principle from 2002 results, net earnings increased 8.8% to $229.8 million in 2002 from $211.2 million in 2001, and earnings per share increased 9.4% to $2.44 in 2002 from $2.23 in 2001.
Segment Analysis
The following comments at the segment
level include external and intersegment net sales and operating earnings. Comments at the
business unit level include external and inter- and intrasegment net sales and operating
earnings. See Note 21 to the Consolidated Financial Statements.
Branch-based Distribution
Net sales at the Branch-based
Distribution businesses amounted to $4,148.0 million in 2002, a 2.4% decrease as compared
with 2001 sales of $4,251.6 million. Sales in the United States decreased slightly in 2002
as compared with 2001 primarily due to weakness in the North American economy. While 2002
sales to government and national accounts increased 13% and 6%, respectively, when
compared with the prior year, sales declines in other categories offset those increases.
The increased sales to government and national accounts were primarily due to sales and
marketing programs focused on developing these markets.
Sales were favorably affected by continued momentum in Graingers Internet programs. For 2002, Internet channels processed sales of $419.5 million, a 26% increase from the $332.5 million processed in 2001. Grainger continued to focus on converting its customers to purchasing online. Grainger has experienced incremental revenue across all channels from customers who convert to online purchasing.
In Canada, sales decreased 12.6% in 2002 as compared with 2001. This decrease was primarily due to the elimination of automotive aftermarket parts sales as a result of the joint venture with Uni-Select Inc., established on February 1, 2002. See Note 9 to the Consolidated Financial Statements. Excluding the impact of the joint venture, sales were down 5.2% for the year due to the weakness in the natural resources sector and the loss of a few major accounts. In Mexico, sales decreased 5.0% in 2002 as compared with 2001. This decrease was attributable to the weak economy in Mexico, partially offset by selected price increases intended to offset the declining value of the peso.
Gross profit margins improved due to selected pricing actions in 2002 intended to cover freight and supplier cost increases and to favorable product mix. Partially offsetting these improvements were an unfavorable change in selling price category mix and higher freight costs related to the logistics project.
Operating expenses increased 1.7% in 2002 versus 2001. Operating expenses increased due to higher payroll and benefits expenses, partially offset by lower advertising from fewer catalogs being printed and lower bad debt expenses from fewer bankruptcies of large customers.
Operating earnings of $394.9 million increased 2.2% in 2002 as compared with $386.3 million for 2001. The effect of higher gross profit margins was partially offset by lower sales and an increase in operating expenses.
Lab Safety
Net sales at Lab Safety amounted to
$286.8 million in 2002, an 11.7% decrease compared with 2001 sales of $324.8 million.
Sales at Lab Safety included the results of The Ben Meadows Co., a company acquired on
February 26, 2001. The sales decrease was primarily the result of weak sales in the U.S.
manufacturing sector.
Cost of merchandise sold of $164.2 million for 2002 at Lab Safety decreased by $24.3 million as compared with $188.5 million in 2001. This decrease was primarily volume related due to the sales decline.
Lab Safety operating expenses declined $9.7 million in 2002, primarily the result of second quarter 2002 workforce reductions and other cost control measures, including lower advertising expenditures.
Operating earnings of $47.1 million at Lab Safety decreased 7.8% in 2002 as compared with $51.1 million for 2001. The decrease in operating earnings was primarily the result of lower sales, partially offset by lower operating expenses.
Integrated Supply
Net sales at Integrated Supply
amounted to $226.0 million in 2002, an 18.4% increase over 2001 sales of $190.8 million.
Sales growth for this business was primarily the result of increased penetration of
existing customers and includes both product sales and management fees.
Integrated Supply had operating income of $6.2 million in 2002 compared with $0.4 million in 2001. This improvement in operating performance for 2002 was the result of eliminating or restructuring unprofitable contracts throughout 2001 and productivity gains attained by leveraging the existing cost structure. Operating income for 2002 also benefited from lower bad debt expense compared with 2001, where provisions were made for losses related to two large customer bankruptcies.
12
Digital
In April 2001, Grainger announced
that it would shut down the operations of Material Logic, with the exception of FindMRO.
Material Logic was launched in January 2001 as a utility for large customers to facilitate
the purchase of facilities maintenance products over the Internet. Material Logic would
have allowed large customers to access a single, networked catalog containing easily
searchable and detailed product information, pre-negotiated prices and availability
information for indirect materials from major distributors. In order for Material Logic to
grow, it needed broad industry support and funding from other equity participants.
Grainger closed Material Logic because economic and market conditions made it difficult to
find funding partners and the market developed more slowly than anticipated. In connection
with this announcement, Grainger took a pretax charge of $39.1 million in 2001. Beginning
with the 2001 third quarter, the Digital segment ceased operations. See Note 5 to the
Consolidated Financial Statements. Effective June 1, 2001, FindMRO was added to the
Branch-based Distribution segment. Consequently, no results were reported for the Digital
segment in 2002, but $30.0 million of net sales were reported in 2001.
Other Income and Expense
Other income and expense was $4.7
million of income in 2002, an improvement of $46.0 million as compared with $41.3 million
of expense in 2001. The following table summarizes the components of other income and
expense:
For the Years Ended |
|||||
December 31, |
|||||
|
|||||
2002 |
2001 |
||||
|
|
||||
(In thousands of dollars) |
|||||
Other income and (expense) | |||||
Interest (expense), net of interest income | $ (1,590 | ) | $ (7,847 | ) | |
Equity in loss of unconsolidated entities, net | (3,025 | ) | (7,205 | ) | |
Loss on liquidation of investment in unconsolidated entity | -- | (20,123 | ) | ||
Unclassified-net: | |||||
Gains on sales of investment securities | 7,308 | 138 | |||
Write-down of investments | (3,192 | ) | (7,400 | ) | |
Gains on sales of fixed assets, net | 5,219 | 1,613 | |||
Other | (38 | ) | (469 | ) | |
|
|
||||
$ 4,682 | $ (41,293 | ) | |||
|
|
||||
In April 2001, Grainger wrote down its investment in other digital businesses and took a pretax charge of $25.1 million. This included the loss on the divestiture of Graingers 40% investment in Works.com, Inc. (Works.com). Grainger acquired its ownership in Works.com, an unrelated third party, on August 1, 2000, when Graingers OrderZone.com business unit was combined with Works.com. Of this pretax charge, $20.1 million related to the divestiture of Works.com and was reported on the income statement as Loss on liquidation of investment in unconsolidated entity. Additionally, a loss of $5.0 million was included in Unclassifiednet relating to the write-down to net realizable value of investments in other digital businesses. See Note 5 to the Consolidated Financial Statements.
Income Taxes
Income taxes of $162.3 million in
2002 increased 32.3% as compared with $122.8 million in 2001.
Graingers effective tax rates were 40.8% and 41.3% in 2002 and 2001, respectively. The rate decrease in 2002 as compared with 2001 was primarily due to a reduction of losses in unconsolidated entities. The effective tax rate for 2001 was also higher due to the write-down of investments which did not result in tax benefits. Partially offsetting these items, which increased the 2001 tax rate, was the tax effect of the write-off of investment in unconsolidated entity that had tax benefits disproportionate to the write-off.
Excluding the effect of these items, the effective tax rate was 40.5% for both 2002 and 2001.
Cumulative Effect of
Accounting Change
Effective January 1, 2002, Grainger
adopted SFAS No. 142, Goodwill and Other Intangible Assets.
In the second quarter of 2002, Grainger completed the initial process of evaluating goodwill for impairment under SFAS No. 142. Fair values of reporting units were estimated using a present value method that discounted future cash flows. When available and as appropriate, comparative market multiples were used to corroborate results of the discounted cash flows. As a result of the application of the impairment methodology introduced by SFAS No. 142, Grainger recorded a noncash charge to earnings of $32.3 million ($23.9 million after-tax, or $0.26 per diluted share) related to the write-down of goodwill of its Canadian subsidiary, Acklands. Previous accounting rules required a comparison of book value to undiscounted cash flows, whereas new rules require a comparison of book value to discounted cash flows, which are lower. See Note 3 to the Consolidated Financial Statements.
13
Financial Condition
Grainger expects its strong working
capital position and cash flows from operations to continue, allowing it to fund its
operations including growth initiatives, capital expenditures and payment of cash
dividends.
Cash Flow
Net cash flows from operations of
$394.1 million in 2003, $303.5 million in 2002 and $509.2 million in 2001 continued to
improve Graingers financial position and serve as the primary source of funding for
capital requirements. Net cash provided by operations in 2003 increased $90.6 million over
2002. The change in operating assets and liabilities generated cash of $55.8 million in
2003, primarily from a decrease in inventory partially offset by a decrease in trade
accounts payable. The reduced inventory resulted from efficiencies realized from the
redesigned logistics network, and the decrease in trade accounts payable was due to lower
inventory purchases during the fourth quarter. The majority of the decrease in net cash
flows from operations from 2001 to 2002 was attributable to the 2002 inventory infusion to
improve service levels and position the Branch-based Distribution segment to gain share in
an economic recovery.
Net cash flows used in investing activities were $105.3 million, $105.8 million and $114.1 million for 2003, 2002 and 2001, respectively. Capital expenditures for additions to property, buildings, equipment and capitalized software were $80.5 million, $144.0 million and $107.2 million in 2003, 2002 and 2001, respectively. Additional information regarding capital spending is detailed in the Capital Expenditures section below. Grainger also funded $36.7 million in 2003 to purchase Gemplers, and $14.4 million in 2001 to purchase Ben Meadows, both of which are part of the Lab Safety segment.
Net cash used in financing activities for 2003, 2002 and 2001 was $97.9 million, $158.1 million and $287.1 million, respectively. Graingers funding of treasury stock purchases decreased $58.7 million in 2003 as Grainger repurchased 918,300 shares in 2003 as compared with 2,221,500 shares in 2002. Treasury stock purchases were 1,820,000 in 2001. As of December 31, 2003, approximately 9.1 million shares of common stock remained available under Graingers repurchase authorization. Dividends paid to shareholders were $67.3 million in 2003, $66.5 million in 2002 and $65.4 million in 2001. In 2001, more cash from financing activities was required to pay off a higher level of short-term debt than in 2002.
Working Capital
Internally generated funds have been
the primary source of working capital and for funds used in business expansion,
supplemented by debt as circumstances dictated. In addition, funds were expended for
facilities optimization and enhancements, business development and systems and other
infrastructure improvements.
Working capital was $926.8 million at December 31, 2003, compared with $898.7 million at December 31, 2002, and $838.8 million at December 31, 2001. The ratio of current assets to current liabilities was 2.3, 2.5 and 2.5, respectively, at such dates. The current ratio decreased slightly in 2003 due to Graingers cross-currency swap debt being reclassified from long-term debt to current maturities of long-term debt in 2003, which increased current liabilities at a higher rate than current assets.
Capital Expenditures
In each of the past three years, a
portion of operating cash flow has been used for additions to property, buildings, equipment
and capitalized software as summarized in the following table:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Land, buildings, structures and improvements | $ 24,960 | $ 61,083 | $ 26,534 | ||||
Furniture, fixtures, machinery and equipment | 49,104 | 72,895 | 73,917 | ||||
|
|
|
|||||
Subtotal | 74,064 | 133,978 | 100,451 | ||||
Capitalized software | 6,422 | 10,047 | 6,717 | ||||
|
|
|
|||||
Total | $ 80,486 | $144,025 | $107,168 | ||||
|
|
|
In 2003, Grainger continued to invest in the logistics network and information technology upgrades, as well as normal, recurring replacement of equipment. Higher capital spending in prior years reflects incremental spending for the logistics network project, which began in 2000.
Capital expenditures are expected to be $200 to $225 million in 2004 and include investments for branches, information technology, replacement of the branch phone system and completion of the logistics network. The level of investment in branches may be influenced by decisions to lease, rather than purchase, the related facilities and/or equipment. Grainger believes that cash flows from operations will remain strong and expects to fund the 2004 capital investments from existing working capital.
14
Restructuring
In 2001, Grainger shut down the
operations of Material Logic, with the exception of FindMRO, and as a result took a pretax
charge of $39.1 million. Grainger has charged $35.9 million against the reserve, of which
$23.0 million represented cash payments. Grainger has also reduced its estimate of expense
by $2.5 million since 2001. As of December 31, 2003, $0.6 million of the reserve remains
for future severance payments and, if not settled early, lease payments. All expenditures
will be finalized in 2004. See Note 5 to the Consolidated Financial Statements.
Debt
Grainger maintains a debt ratio and
liquidity position that provides 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. At December 31, 2003, Graingers long-term debt was
rated AA+ by Standard & Poors, a rating it has held since 1987. Graingers
available lines of credit, as further discussed in Note 12 to the Consolidated Financial
Statements, were $265.4 million, $264.7 million and $413.1 million, as of December 31,
2003, 2002 and 2001, respectively. Total debt as a percent of total capitalization was
7.5%, 7.2% and 7.8% as of the same dates.
In September 2002, Grainger received net proceeds of $113.7 million from the issuance of commercial paper. The proceeds were used to repay outstanding long-term debt in the amount of C$180.4 million. The long-term debt that was repaid with the proceeds of the commercial paper issuance had been designated by Grainger as a nonderivative hedge of Graingers net investment in its Canadian subsidiary. Grainger entered into a two-year cross-currency swap on September 25, 2002, which replaced the Canadian dollar long-term debt as a hedge of the net investment in Graingers Canadian subsidiary. The counterparty to the financial instrument is an investment grade financial institution. Grainger does not expect any loss from nonperformance by this counterparty. Since Grainger has the ability to refinance the commercial paper with debt having a longer maturity, and its intent is to keep the debt outstanding for the two-year period of the cross-currency swap, the commercial paper has been classified as long-term debt. As of December 31, 2003, Grainger had not determined if it will renew the cross-currency swap when it comes due in 2004. As a result, this commercial paper debt has been classified as current maturities of long-term debt at December 31, 2003. See Note 14 to the Consolidated Financial Statements.
Grainger believes any circumstances that would trigger early payment or acceleration with respect to any outstanding debt securities would not have a material impact on its results of operations or financial condition. Holders of industrial revenue bonds may require Grainger to redeem certain of the bonds, such as in response to changes in interest rates.
Commitments and Other
Contractual Obligations
At December 31, 2003, Graingers
contractual obligations, including estimated payments due by period, are as follows:
Payments Due by Period |
|||||||||||
|
|||||||||||
Total | |||||||||||
Amounts | Less than | 1 - 3 | 4 - 5 | More than | |||||||
Committed | 1 Year | Years | Years | 5 Years | |||||||
|
|
|
|
|
|||||||
(In thousands of dollars) |
|||||||||||
Long-term debt obligations | $ 149,030 | $144,135 | $ 4,895 | $ -- | $ -- | ||||||
Capital lease obligations | -- | -- | -- | -- | -- | ||||||
Operating lease obligations | 60,045 | 18,192 | 22,585 | 11,885 | 7,383 | ||||||
Purchase obligations: | |||||||||||
Uncompleted additions | |||||||||||
to property, buildings | |||||||||||
and equipment | 9,247 | 9,247 | -- | -- | -- | ||||||
Commitments to | |||||||||||
purchase inventory | 166,567 | 166,567 | -- | -- | -- | ||||||
Other purchase obligations | 41,824 | 33,498 | 7,538 | 788 | -- | ||||||
Other long-term liabilities | |||||||||||
reflected on the balance sheet | -- | -- | -- | -- | -- | ||||||
|
|
|
|
|
|||||||
Total | $ 426,713 | $371,639 | $35,018 | $12,673 | $ 7,383 | ||||||
|
|
|
|
|
15
Purchase obligations consist primarily of inventory purchases made in the normal course of business to meet operating needs. While purchase orders for both inventory purchases and non-inventory purchases are generally cancelable without penalty, certain vendor agreements provide for minimum restocking charges based on the nature of the product.
The above table does not include $68.0 million of accrued employment-related benefits costs, of which $42.1 million is related to Graingers postretirement benefits, because it is not certain when these liabilities will come due. See Note 13 to the Consolidated Financial Statements.
See also Notes 14 and 15 to the Consolidated Financial Statements.
Off-Balance Sheet
Arrangements
Grainger does not have any material
exposures to off-balance sheet arrangements. Grainger does not have any variable interest
entities or activities that include non-exchange-traded contracts accounted for at fair
value.
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 Graingers 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 highly 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 Graingers financial condition, changes in financial condition or results of operations.
Note 2 to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the Consolidated Financial Statements. The most significant areas involving management judgments and estimates follow. Actual results in these areas could differ materially from managements estimates under different assumptions or conditions.
Postretirement Healthcare Benefits . Postretirement obligation and net periodic cost are dependent on assumptions and estimates used in calculating such amounts. The assumptions used include, among others, discount rates, assumed rates of return on plan assets and healthcare cost trend rates. Changes in assumptions (caused by conditions in equity markets or plan experience, for example) could have a material effect on Graingers postretirement benefit obligations and expense, and could affect its results of operations and financial condition. These changes in assumptions may also affect voluntary decisions to make additional contributions to the trust established for funding the postretirement benefit obligation.
The discount rate assumptions used by management reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date, of each year in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions. A lower discount rate increases the present value of benefit obligations and net periodic postretirement benefit costs. On December 31, 2003, Grainger reduced the discount rate used in the calculation of its postretirement plan obligation from 6.5% to 6.0%. Grainger estimates that the noted reduction in the expected discount rate will decrease 2004 pretax earnings by approximately $1.4 million.
Grainger considers the long-term historical actual return on plan assets and the historical performance of the S&P 500 to develop its expected long-term return on plan assets. In 2003, Grainger increased the expected long-term rate of return on plan assets (net of tax at 40%) from 5.4% to 6.0% based on the improved performance of the postretirement trust funds and the historical average long-term rates of return. The increase in the expected return on plan assets in 2003 is not anticipated to have a material affect on 2004 pretax earnings.
Grainger may terminate or modify the postretirement plan at any time, subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, as amended. In the event the postretirement plan is terminated, all assets of the Group Benefit Trust inure to the benefit of the participants. The foregoing assumptions are based on the presumption that the postretirement plan will continue. Were the postretirement plan to terminate, different actuarial assumptions and other factors might be applicable.
16
While Grainger has used its best judgment in making assumptions and estimates, and believes such assumptions and estimates used are appropriate, changes to the assumptions may be required in future years as a result of actual experience and new trends and therefore, may affect Graingers retirement plan obligations and future expense. Further, the benefit obligation and net periodic cost may be significantly affected by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Act) enacted in December 2003. The plan may also need to be amended in order to benefit from the Act.
For additional information concerning postretirement healthcare benefits, see Note 13 to the Consolidated Financial Statements.
Insurance Reserves. Grainger retains a significant portion of the risk of certain losses related to workers compensation, general liability and property losses through the utilization of deductibles and self-insured retentions. There are also certain other risk areas for which Grainger does not maintain insurance.
Grainger is responsible for establishing policies on insurance reserves. Although it relies on outside parties to project future claims costs, it retains control over actuarial assumptions, including loss development factors and claim payment patterns. Grainger performs ongoing reviews of its insured and uninsured risks, which it uses to establish the appropriate reserve level.
The use of assumptions in the analysis leads to fluctuations in required reserves over time. Any change in the required reserve balance is reflected in the current periods results of operations.
Allowance for Doubtful Accounts . Grainger uses several factors to estimate the allowance for uncollectible accounts receivable including: age of the receivable, the historical ratio of actual write-offs to the age of the receivable and publicly available default rates. The analyses performed also take into consideration economic conditions that may have an impact on a specific industry, group of customers or a specific customer. In 2001, reserves were increased in anticipation of adverse economic conditions. The economic downturn that followed did not result in the incremental write-offs expected and as a result, the reserve requirement declined.
Write-offs could be materially different than the reserves provided if economic conditions change or actual results deviate from historical trends or published default rates. Historically, the allowance established for doubtful accounts has been adequate without requiring material adjustment.
Inventory Reserves. Grainger establishes inventory reserves for shrinkage and excess and obsolete inventory. Provisions for inventory shrinkage are based on historical experience to account for unmeasured usage or loss. Actual inventory shrinkage could be materially different from these estimates affecting Graingers inventory values and cost of merchandise sold.
Grainger regularly reviews inventory to evaluate continued demand and identify any obsolete or excess quantities of inventory. Grainger records provisions for the difference between excess and obsolete inventory and its estimated realizable value. Estimated realizable value is based on anticipated future product demand, market conditions and liquidation values. Actual results differing from these projections could have a material effect on Graingers results of operations.
Historically, the reserves established for shrinkage and excess and obsolete inventory have been adequate without material adjustments.
Other. Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies relating to revenue recognition, depreciation, intangibles, long-lived assets, income taxes and warranties require judgments on complex matters that are often subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board, the Securities and Exchange Commission, etc. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of Grainger. More information on these additional accounting policies can be found in Note 2 to the Consolidated Financial Statements.
Inflation and Changing
Prices
Inflation during the last three years
has not had a significant effect on operations. The predominant use of the LIFO method of
accounting for inventories and accelerated depreciation methods for financial reporting
and income tax purposes result in a substantial recognition of the effects of inflation in
the financial statements.
17
The major impact of inflation is on buildings and improvements, where the gap between historic cost and replacement cost continues for these long-lived assets. The related depreciation expense associated with these assets increases when adjusting for the cumulative effect of inflation.
Grainger believes the most positive means to combat inflation and advance the interests of investors lies in the continued application of basic business principles, which include improving productivity, increasing working capital turnover and offering products and services which can command appropriate prices in the marketplace.
Forward-Looking
Statements
This document contains
forward-looking statements under the federal securities laws. The forward-looking
statements relate to Graingers expected future financial results and business plans,
strategies and objectives and are not historical facts. They are often identified by
qualifiers such as will, expects, intends, is
likely, when completed, anticipates, believes,
positioned to, continue, estimates or similar
expressions. There are risks and uncertainties the outcome of which could cause
Graingers results to differ materially from what is projected.
Factors that may affect forward-looking statements include the following: higher product costs or other expenses; a major loss of customers; increased competitive pricing pressure on Graingers businesses; failure to develop or implement new technologies or other business strategies; the outcome of pending and future litigation and governmental proceedings; changes in laws and regulations; facilities disruptions or shutdowns; disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; and other difficulties in achieving or improving margins or financial performance.
Trends and projections could also be affected by general industry and market conditions, gross domestic product growth rates, general economic conditions, including interest rate and currency rate fluctuations, global and other conflicts, job creation and employment levels, and other factors.
Item 7A: Quantitative
and Qualitative Disclosures About Market Risk
Grainger is exposed to foreign
currency exchange risk related to its transactions, assets and liabilities denominated in
foreign currencies. During 2003 and 2002, Grainger partially hedged the net Canadian
dollar investment in Acklands with either borrowings denominated in Canadian dollars or
with a cross-currency swap agreement. See Note 14 to the Consolidated Financial
Statements. For 2003, a uniform 10% strengthening of the U.S. dollar relative to foreign
currencies that affect Grainger and its joint ventures would have resulted in a $0.3
million decrease in net income. Comparatively, a uniform 10% strengthening of the U.S.
dollar relative to foreign currencies that affect Grainger and its joint ventures would
have resulted in a $1.8 million increase in net income in 2002. A uniform 10% weakening of
the U.S. dollar would have resulted in a $0.3 million increase in income for 2003, as
compared with a decrease in net income of $2.3 million for 2002. This sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in potential
changes in sales levels or local currency prices. Grainger does not hold derivatives for
trading purposes.
Grainger is also exposed to interest rate risk in its debt portfolio. All of its long-term debt at December 31, 2003, is variable rate debt. See Note 14 to the Consolidated Financial Statements for the maturity schedule of the debt outstanding as of December 31, 2003. A one percentage point increase in interest rates paid by Grainger would have resulted in a decrease to income of approximately $0.9 million for 2003 and $0.8 million for 2002. A corresponding increase in net income for the noted periods would have resulted had the interest rates paid decreased by one percentage point. This sensitivity analysis of the effects of changes in interest rates on long-term debt does not factor in potential changes in exchange rates or long-term debt levels.
Grainger is not exposed to commodity price risk since it purchases its goods for resale and does not purchase commodities directly.
Item 8: Financial
Statements and Supplementary Data
The financial statements and
supplementary data are included on pages 27 to 58. See the Index to Financial Statements
and Supplementary Data on page 26.
18
Item 9: Changes in and
Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
(a) | Evaluation of 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 Graingers 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 Graingers disclosure controls and procedures were effective as of the end of the period covered by this report. |
(b) | Internal control over financial reporting |
There were no changes in Graingers internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Graingers internal control over financial reporting. |
Item 10: Directors and
Executive Officers of the Registrant
The information required by this item
is incorporated by reference to Graingers proxy statement relating to the annual
meeting of shareholders to be held April 28, 2004, under the captions Election of
Directors, Board of Directors and Board Committees and Section
16(a) Beneficial Ownership Reporting Compliance. Information required by this item
regarding executive officers of Grainger is set forth in Part I of this report under the
caption Executive Officers.
Grainger has adopted a code of ethics that applies to the chief executive officer, chief financial officer and chief accounting officer. This code of ethics is incorporated into Graingers business conduct guidelines for directors, officers and employees. A copy of the business conduct guidelines is available at www.grainger.com/investor and is also available in print without charge to any person upon request to Graingers Corporate Secretary. Similarly available is a copy of the Operating Principles for the Board of Directors, Graingers corporate governance guidelines. Grainger intends to satisfy the disclosure requirement under Item 10 of Form 8-K relating to its code of ethics by posting such information on its Web site.
Item 11: Executive
Compensation
The information required by this item
is incorporated by reference to Graingers proxy statement relating to the annual
meeting of shareholders to be held April 28, 2004, under the captions Director
Compensation and Executive Compensation.
Item 12: Security
Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item
is incorporated by reference to Graingers proxy statement relating to the annual
meeting of shareholders to be held April 28, 2004, under the captions Ownership of
Grainger Stock and Equity Compensation Plans.
Item 13: Certain
Relationships and Related Transactions
The information required by this item
is incorporated by reference to Graingers proxy statement relating to the annual
meeting of shareholders to be held April 28, 2004, under the caption Director
Compensation.
Item 14: Principal
Accountant Fees and Services
The information required by this item
is incorporated by reference to Graingers proxy statement relating to the annual
meeting of shareholders to be held April 28, 2004, under the caption Proposal to
Ratify the Appointment of Independent Auditors.
19
20
21
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Grainger has duly issued this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: March 9, 2004W.W. GRAINGER, INC. | ||
By: |
/s/ Richard L. Keyser |
|
|
||
Richard L. Keyser
Chairman of the Board and Chief Executive Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of Grainger on March 9, 2004, in the capacities indicated.
/s/ Richard L. Keyser |
/s/ Frederick A. Krehbiel |
|
|
|
|
Richard L. Keyser
|
Frederick A. Krehbiel
Director |
|
/s/ P. Ogden Loux | /s/ John W. McCarter, Jr. | |
|
|
|
P.
Ogden Loux
Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) |
John W. McCarter, Jr.
Director |
|
/s/ Judith E. Andringa | /s/ Neil S. Novich | |
|
|
|
Judith
E. Andringa
Vice President and Controller (Principal Accounting Officer) |
Neil S. Novich
Director |
|
/s/ Brian P. Anderson | /s/ James D. Slavik | |
|
|
|
Brian P. Anderson
Director |
James D. Slavik
Director |
|
/s/ Wesley M. Clark | /s/ Harold B. Smith | |
|
|
|
Wesley M. Clark
Director |
Harold B. Smith
Director |
|
/s/ Wilbur H. Gantz | /s/ Janiece S. Webb | |
|
|
|
Wilbur H. Gantz
Director |
Janiece S. Webb
Director |
|
/s/ David W. Grainger | ||
|
||
David W. Grainger
Director |
22
Exhibit 31(a) |
CERTIFICATION |
I, R. L. Keyser, certify that: | ||
1. | I have reviewed this annual report on Form 10-K of W.W. Grainger, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: | |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
c) | Disclosed in this report any change in the registrant s internal control over financial reporting that occurred in the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and | |
5. | The registrant s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): | |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. | |
Date: March 9, 2004
By:
/s/ R. L. Keyser
Name: R. L. Keyser
Title: Chairman and Chief Executive Officer
23
Exhibit 31(b) |
CERTIFICATION |
I, P. O. Loux, certify that: | ||
1. | I have reviewed this annual report on Form 10-K of W.W. Grainger, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: | |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
c) | Disclosed in this report any change in the registrant s internal control over financial reporting that occurred in the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and | |
5. | The registrant s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): | |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. | |
Date: March 9, 2004
By:
/s/ P. O. Loux
Name: P. O. Loux
Title: Senior Vice President, Finance
and Chief Financial
Officer
24
Exhibit 32(a) |
CERTIFICATION PURSUANT TO
|
I, R. L. Keyser, Chairman and Chief Executive Officer of W.W. Grainger, Inc. (
Grainger
),
certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. | The Annual Report on Form 10-K of Grainger for the annual period ended December 31, 2003 (the Report ) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger. |
/s/ R. L. Keyser
R. L. Keyser
Chairman and Chief Executive Officer
March 9, 2004
Exhibit 32(b) |
CERTIFICATION PURSUANT TO
|
I, P. O. Loux, Senior Vice President, Finance and Chief Financial Officer of W.W.
Grainger, Inc. (
Grainger
),
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of
2002, that:
1. | The Annual Report on Form 10-K of Grainger for the annual period ended December 31, 2003 (the Report ) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger. |
/s/ P. O. Loux
P. O. Loux
Senior Vice President, Finance
and Chief Financial Officer
March 9, 2004
25
INDEX TO FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
December 31, 2003, 2002
and 2001
Page(s) |
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS |
27 |
FINANCIAL STATEMENTS |
|
CONSOLIDATED STATEMENTS OF EARNINGS |
28 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS |
29 |
CONSOLIDATED BALANCE SHEETS |
30-31 |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
32-33 |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY |
34-35 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
36-56 |
EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE |
57 |
|
EXHIBIT 23 - CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS |
58 |
|
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
W.W. Grainger, Inc.
We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc., and Subsidiaries (the Company) as of December 31, 2003, 2002 and 2001, and the related consolidated statements of earnings, comprehensive earnings, shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of W.W. Grainger, Inc., and Subsidiaries as of December 31, 2003, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
GRANT THORNTON LLP
Chicago,
Illinois
January 28, 2004
27
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
EARNINGS
(In thousands of
dollars, except for per share amounts)
For the Years Ended December 31, |
|||||||
|
|||||||
2003 |
2002 |
2001 |
|||||
|
|
|
|||||
Net sales | $4,667,014 | $4,643,898 | $4,754,317 | ||||
Cost of merchandise sold | 3,028,937 | 3,045,686 | 3,165,030 | ||||
|
|
|
|||||
Gross profit | 1,638,077 | 1,598,212 | 1,589,287 | ||||
Warehousing, marketing and administrative expenses | 1,251,380 | 1,206,996 | 1,211,644 | ||||
Restructuring (credit) charge | (564 | ) | (1,939 | ) | 39,070 | ||
|
|
|
|||||
Total operating expenses | 1,250,816 | 1,205,057 | 1,250,714 | ||||
|
|
|
|||||
Operating earnings | 387,261 | 393,155 | 338,573 | ||||
Other income (expense): | |||||||
Interest income | 3,347 | 4,573 | 2,827 | ||||
Interest expense | (6,015 | ) | (6,163 | ) | (10,674 | ) | |
Equity in loss of unconsolidated entities - net | (2,288 | ) | (3,025 | ) | (7,205 | ) | |
Write-down of investments in unconsolidated entities | (1,921 | ) | -- | -- | |||
Loss on liquidation of investment in unconsolidated entity | -- | -- | (20,123 | ) | |||
Unclassified - net | 706 | 9,297 | (6,118 | ) | |||
|
|
|
|||||
Total other income (expense) | (6,171 | ) | 4,682 | (41,293 | ) | ||
|
|
|
|||||
Earnings before income taxes and | |||||||
cumulative effect of accounting change | 381,090 | 397,837 | 297,280 | ||||
Income taxes | 154,119 | 162,349 | 122,750 | ||||
|
|
|
|||||
Earnings before cumulative effect | |||||||
of accounting change | 226,971 | 235,488 | 174,530 | ||||
Cumulative effect of accounting change | -- | (23,921 | ) | -- | |||
|
|
|
|||||
Net earnings | $ 226,971 | $ 211,567 | $ 174,530 | ||||
|
|
|
|||||
Earnings per share before cumulative effect | |||||||
of accounting change: | |||||||
Basic | $ 2.50 | $ 2.56 | $ 1.87 | ||||
|
|
|
|||||
Diluted | $ 2.46 | $ 2.50 | $ 1.84 | ||||
|
|
|
|||||
Cumulative effect of accounting change: | |||||||
Basic | $ -- | $ (0.26 | ) | $ -- | |||
|
|
|
|||||
Diluted | $ -- | $ (0.26 | ) | $ -- | |||
|
|
|
|||||
Earnings per share: | |||||||
Basic | $ 2.50 | $ 2.30 | $ 1.87 | ||||
|
|
|
|||||
Diluted | $ 2.46 | $ 2.24 | $ 1.84 | ||||
|
|
|
|||||
Weighted average number of shares outstanding: | |||||||
Basic | 90,731,013 | 91,982,430 | 93,189,132 | ||||
|
|
|
|||||
Diluted | 92,394,085 | 94,303,497 | 94,727,868 | ||||
|
|
|
The accompanying notes are an integral part of these financial statements.
28
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE EARNINGS
(In thousands of
dollars)
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
Net earnings | $226,971 | $211,567 | $174,530 | ||||
Other comprehensive earnings (losses) net of income taxes: | |||||||
Foreign currency translation adjustments, | |||||||
net of tax benefit (expense) on a designated | |||||||
hedge of $9,527, $551 and $(5,455), respectively | 37,600 | (170 | ) | (15,457 | ) | ||
Gains (losses) on investment securities: | |||||||
Unrealized holding gains (losses), net of tax (expense) | |||||||
benefit of $(312), $1,523 and $(3,069), respectively | 488 | (2,383 | ) | 4,820 | |||
Reclassifications for net losses (gains) included | |||||||
in earnings, net of tax (benefit) expense of | |||||||
$(158), $2,325 and $54, respectively | 248 | (3,636 | ) | (84 | ) | ||
|
|
|
|||||
38,336 | (6,189 | ) | (10,721 | ) | |||
|
|
|
|||||
Comprehensive earnings | $265,307 | $205,378 | $163,809 | ||||
|
|
|
The accompanying notes are an integral part of these financial statements.
29
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
(In thousands of dollars, except for per share amounts)
As of December 31, |
|||||||
|
|||||||
ASSETS |
2003 | 2002 | 2001 | ||||
|
|
|
|||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ 402,824 | $ 208,528 | $ 168,846 | ||||
Accounts receivable (less allowances for | |||||||
doubtful accounts of $24,736, $26,868 | |||||||
and $30,552, respectively) | 431,896 | 423,240 | 454,180 | ||||
Inventories | 661,247 | 721,178 | 634,654 | ||||
Prepaid expenses and other assets | 37,947 | 36,665 | 37,477 | ||||
Deferred income taxes | 99,499 | 95,336 | 97,454 | ||||
|
|
|
|||||
Total current assets | 1,633,413 | 1,484,947 | 1,392,611 | ||||
PROPERTY, BUILDINGS AND EQUIPMENT | |||||||
Land | 153,357 | 154,065 | 150,335 | ||||
Buildings, structures and improvements | 785,890 | 769,124 | 722,043 | ||||
Furniture, fixtures, machinery and equipment | 605,903 | 569,669 | 514,046 | ||||
|
|
|
|||||
1,545,150 | 1,492,858 | 1,386,424 | |||||
Less accumulated depreciation and amortization | 813,158 | 756,051 | 696,706 | ||||
|
|
|
|||||
Property, buildings and equipment - net | 731,992 | 736,807 | 689,718 | ||||
DEFERRED INCOME TAXES | 20,296 | 20,541 | -- | ||||
INVESTMENTS IN UNCONSOLIDATED ENTITIES | 22,822 | 15,988 | 4,776 | ||||
OTHER ASSETS | |||||||
Goodwill | 188,147 | 142,140 | 177,753 | ||||
Customer lists and other intangibles | 102,635 | 93,644 | 93,622 | ||||
|
|
|
|||||
290,782 | 235,784 | 271,375 | |||||
Less accumulated amortization | 123,076 | 117,089 | 115,892 | ||||
|
|
|
|||||
167,706 | 118,695 | 155,483 | |||||
Investments | -- | 5,315 | 27,023 | ||||
Capitalized software - net | 20,772 | 30,247 | 39,207 | ||||
Sundry | 27,677 | 24,908 | 22,428 | ||||
|
|
|
|||||
Other assets - net | 216,155 | 179,165 | 244,141 | ||||
|
|
|
|||||
TOTAL ASSETS | $2,624,678 | $2,437,448 | $2,331,246 | ||||
|
|
|
30
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS-CONTINUED
(In thousands of dollars, except for per share amounts)
As of December 31, |
|||||||
|
|||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
2003 | 2002 | 2001 | ||||
|
|
|
|||||
CURRENT LIABILITIES | |||||||
Short-term debt | $ -- | $ 2,967 | $ 4,526 | ||||
Current maturities of long-term debt | 144,135 | 6,505 | 12,520 | ||||
Trade accounts payable | 257,806 | 290,807 | 275,893 | ||||
Accrued compensation and benefits | 75,412 | 67,114 | 64,549 | ||||
Accrued contributions to employees | |||||||
profit sharing plans | 58,100 | 62,982 | 60,103 | ||||
Accrued expenses | 127,497 | 117,989 | 127,108 | ||||
Income taxes | 43,690 | 37,902 | 9,112 | ||||
|
|
|
|||||
Total current liabilities | 706,640 | 586,266 | 553,811 | ||||
LONG-TERM DEBT (less current maturities) | 4,895 | 119,693 | 118,219 | ||||
DEFERRED INCOME TAXES | -- | -- | 1,239 | ||||
ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS | 68,008 | 63,791 | 54,649 | ||||
MINORITY INTEREST | -- | -- | 139 | ||||
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, 109,377,216, 109,017,642 and | |||||||
108,473,703 shares, respectively | 54,689 | 54,509 | 54,237 | ||||
Additional contributed capital | 394,409 | 379,942 | 289,201 | ||||
Retained earnings | 2,242,762 | 2,083,072 | 1,937,972 | ||||
Unearned restricted stock compensation | (11,471 | ) | (17,144 | ) | (17,722 | ) | |
Accumulated other comprehensive earnings (losses) | 2,594 | (35,742 | ) | (29,553 | ) | ||
Treasury stock, at cost - | |||||||
18,356,227, 17,449,587 and | |||||||
15,129,062 shares, respectively | (837,848 | ) | (796,939 | ) | (630,946 | ) | |
|
|
|
|||||
Total shareholders equity | 1,845,135 | 1,667,698 | 1,603,189 | ||||
|
|
|
|||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY | $2,624,678 | $2,437,448 | $2,331,246 | ||||
|
|
|
The accompanying notes are an integral part of these financial statements.
31
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands of
dollars)
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net earnings | $ 226,971 | $ 211,567 | $ 174,530 | ||||
Provision for losses on accounts receivable | 9,263 | 13,328 | 21,483 | ||||
Deferred income taxes | 5,382 | (6,480 | ) | (8,938 | ) | ||
Depreciation and amortization: | |||||||
Property, buildings and equipment | 74,583 | 75,226 | 77,737 | ||||
Goodwill and other intangibles | 1,624 | 677 | 5,989 | ||||
Capitalized software | 14,046 | 17,585 | 19,483 | ||||
Tax benefit of stock incentive plans | 2,091 | 5,897 | 1,814 | ||||
Gains on sales of investment securities | (1,208 | ) | (7,308 | ) | (138 | ) | |
Net gains on sales of property, | |||||||
buildings and equipment | (1,607 | ) | (5,219 | ) | (1,613 | ) | |
Noncash restructuring (credit) charge | (564 | ) | (1,939 | ) | 11,996 | ||
Write-downs of investments | 1,614 | 3,192 | 7,400 | ||||
Losses and write-downs of unconsolidated entities | 4,209 | 3,025 | 25,228 | ||||
Cumulative effect of accounting change | -- | 23,921 | -- | ||||
Change in operating assets and liabilities - | |||||||
net of business acquisitions and | |||||||
joint venture contributions: | |||||||
(Increase) decrease in accounts receivable | (7,194 | ) | 14,514 | 130,521 | |||
(Increase) decrease in inventories | 83,530 | (97,297 | ) | 66,446 | |||
(Increase) in prepaid expenses | (7 | ) | (72 | ) | (13,286 | ) | |
Increase (decrease) in trade accounts payable | (37,420 | ) | 14,801 | (7,168 | ) | ||
Increase (decrease) in other current liabilities | 9,307 | (867 | ) | 12,773 | |||
Increase (decrease) in current | |||||||
income taxes payable | 3,333 | 27,824 | (24,158 | ) | |||
Increase in accrued | |||||||
employment-related benefits costs | 4,217 | 7,086 | 5,112 | ||||
Other - net | 1,938 | 4,009 | 3,970 | ||||
|
|
|
|||||
Net cash provided by operating activities | 394,108 | 303,470 | 509,181 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Additions to property, buildings and equipment | (74,064 | ) | (133,978 | ) | (100,451 | ) | |
Proceeds from sales of property, | |||||||
buildings and equipment - net | 12,144 | 16,158 | 12,080 | ||||
Additions to capitalized software | (6,422 | ) | (10,047 | ) | (6,717 | ) | |
Proceeds from sales of investment securities | 6,115 | 15,957 | 1,015 | ||||
Net cash paid for business acquisitions | (36,713 | ) | -- | (14,407 | ) | ||
Investments in and loans to unconsolidated entities | (8,241 | ) | (3,211 | ) | (5,764 | ) | |
Distributions from unconsolidated entities | -- | 8,959 | -- | ||||
Other - net | 1,900 | 404 | 180 | ||||
|
|
|
|||||
Net cash used in investing activities | (105,281 | ) | (105,758 | ) | (114,064 | ) |
32
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
CASH FLOWS-CONTINUED
(In thousands of
dollars)
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Net decrease in short-term debt | $ (2,967 | ) | $ (2,830 | ) | $ (169,012 | ) | |
Long-term debt payments | (1,915 | ) | (119,760 | ) | (10,250 | ) | |
Long-term debt issuance | 318 | 113,810 | -- | ||||
Stock options exercised | 15,171 | 17,076 | 7,981 | ||||
Proceeds from sale of treasury stock | -- | -- | 24,366 | ||||
Purchase of treasury stock - net | (41,204 | ) | (99,882 | ) | (74,631 | ) | |
Distributions to minority interest | -- | -- | (91 | ) | |||
Cash dividends paid | (67,281 | ) | (66,467 | ) | (65,445 | ) | |
|
|
|
|||||
Net cash used in financing activities | (97,878 | ) | (158,053 | ) | (287,082 | ) | |
Exchange rate effect on cash and cash equivalents | 3,347 | 23 | (2,573 | ) | |||
|
|
|
|||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 194,296 | 39,682 | 105,462 | ||||
Cash and cash equivalents at beginning of year | 208,528 | 168,846 | 63,384 | ||||
|
|
|
|||||
Cash and cash equivalents at end of year | $ 402,824 | $ 208,528 | $ 168,846 | ||||
|
|
|
|||||
Supplemental cash flow information: | |||||||
Cash payments for interest | |||||||
(net of amounts capitalized) | $ 6,082 | $ 7,197 | $ 10,501 | ||||
Cash payments for income taxes | 144,025 | 133,975 | 154,228 | ||||
Noncash investing activities: | |||||||
Fair value of noncash assets | |||||||
acquired in business acquisitions | $ 37,381 | $ -- | $ 17,175 | ||||
Liabilities assumed in business acquisitions | (668 | ) | -- | (2,768 | ) | ||
Increase (decrease) in fair value of | |||||||
investment securities, net of tax | 736 | (6,019 | ) | 4,736 | |||
Investment in unconsolidated entity | -- | 19,618 | -- |
The accompanying notes are an integral part of these financial statements.
33
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS
EQUITY
(In thousands of dollars, except for per share amounts)
Unearned | Accumulated | ||||||||||||
Additional | Restricted | Other | |||||||||||
Common | Contributed | Retained | Stock | Comprehensive | Treasury | ||||||||
Stock | Capital | Earnings | Compensation | Earnings (Loss) | Stock | ||||||||
|
|
|
|
|
|
||||||||
Balance at January 1, 2001 | $54,019 | $276,817 | $1,837,298 | $(22,720 | ) | $(18,832 | ) | $(589,196 | ) | ||||
Exercise of stock options, net of tax | 166 | 9,476 | -- | -- | -- | -- | |||||||
Issuance of 55,000 shares of restricted | |||||||||||||
stock, net of 28,216 shares retained | 13 | (849 | ) | -- | (2,807 | ) | -- | -- | |||||
Issuance of 192,275 shares of | |||||||||||||
restricted stock related to | |||||||||||||
executive stock purchase | 96 | 5,857 | -- | (5,953 | ) | -- | -- | ||||||
Cancellation of 114,655 shares | |||||||||||||
of restricted stock | (57 | ) | (2,785 | ) | -- | 4,842 | -- | -- | |||||
Issuance of 787,020 shares of | |||||||||||||
treasury stock related to | |||||||||||||
executive stock purchase | -- | (72 | ) | (8,411 | ) | -- | -- | 32,849 | |||||
Remeasurement of restricted stock | -- | 526 | -- | -- | -- | -- | |||||||
Amortization of unearned restricted | |||||||||||||
stock compensation and tax effect of | |||||||||||||
dividends paid on restricted stock | -- | 263 | -- | 8,916 | -- | -- | |||||||
Purchase of 1,820,000 shares of | |||||||||||||
treasury stock; 8,130 shares issued | -- | (32 | ) | -- | -- | -- | (74,599 | ) | |||||
Cumulative translation adjustments | -- | -- | -- | -- | (15,457 | ) | -- | ||||||
Unrealized holding gain on | |||||||||||||
investments, net of tax | -- | -- | -- | -- | 4,820 | -- | |||||||
Reclassification adjustments for realized | |||||||||||||
gains included in net earnings | -- | -- | -- | -- | (84 | ) | -- | ||||||
Net earnings | -- | -- | 174,530 | -- | -- | -- | |||||||
Cash dividends paid | |||||||||||||
($0.695 per share) | -- | -- | (65,445 | ) | -- | -- | -- | ||||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2001 | $54,237 | $289,201 | $1,937,972 | $(17,722 | ) | $(29,553 | ) | $(630,946 | ) | ||||
Exercise of stock options, net of tax | 291 | 22,386 | -- | -- | -- | 46 | |||||||
Issuance of 110,000 shares of restricted | |||||||||||||
stock, net of 35,224 shares retained | 37 | 4,631 | -- | (6,327 | ) | -- | -- | ||||||
Remeasurement of restricted stock | -- | 132 | -- | -- | -- | -- | |||||||
Cancellation of 16,360 shares | |||||||||||||
of restricted stock | (8 | ) | (1,017 | ) | -- | 507 | -- | -- | |||||
Conversion of restricted stock | |||||||||||||
to restricted stock units | (48 | ) | 48 | -- | -- | -- | -- | ||||||
Amortization of unearned restricted | |||||||||||||
stock compensation and tax effect of | |||||||||||||
dividends paid on restricted stock | -- | 250 | -- | 6,398 | -- | -- | |||||||
Purchase of 4,801,600 shares of | |||||||||||||
stock, net of 4,695,725 shares | |||||||||||||
transferred in connection with | |||||||||||||
related party transaction | -- | 64,267 | -- | -- | -- | (66,113 | ) | ||||||
Purchase of 2,221,500 shares of | |||||||||||||
treasury stock; 5,850 shares issued | -- | 44 | -- | -- | -- | (99,926 | ) | ||||||
Cumulative translation adjustments | -- | -- | -- | -- | (170 | ) | -- | ||||||
Unrealized holding losses on | |||||||||||||
investments, net of tax | -- | -- | -- | -- | (2,383 | ) | -- | ||||||
Reclassification adjustments for realized | |||||||||||||
gains included in net earnings | -- | -- | -- | -- | (3,636 | ) | -- | ||||||
Net earnings | -- | -- | 211,567 | -- | -- | -- | |||||||
Cash dividends paid | |||||||||||||
($0.715 per share) | -- | -- | (66,467 | ) | -- | -- | -- | ||||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2002 | $54,509 | $379,942 | $2,083,072 | $(17,144 | ) | $(35,742 | ) | $(796,939 | ) | ||||
34
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS
EQUITY-CONTINUED
(In thousands of dollars, except for per share amounts)
Unearned | Accumulated | ||||||||||||
Additional | Restricted | Other | |||||||||||
Common | Contributed | Retained | Stock | Comprehensive | Treasury | ||||||||
Stock | Capital | Earnings | Compensation | Earnings (Loss) | Stock | ||||||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2002 | $54,509 | $379,942 | $2,083,072 | $(17,144 | ) | $(35,742 | ) | $(796,939 | ) | ||||
Exercise of stock options, net of tax | 205 | 16,581 | -- | -- | -- | 250 | |||||||
Issuance of 20,000 shares of restricted | |||||||||||||
stock, net of 30,920 shares retained | (5 | ) | (448 | ) | -- | (1,083 | ) | -- | -- | ||||
Remeasurement of restricted stock | -- | 129 | -- | -- | -- | -- | |||||||
Cancellation of 39,250 shares | |||||||||||||
of restricted stock | (20 | ) | (1,986 | ) | -- | 2,005 | -- | -- | |||||
Amortization of unearned restricted | |||||||||||||
stock compensation and tax effect of | |||||||||||||
dividends paid on restricted stock | -- | 236 | -- | 4,751 | -- | -- | |||||||
Purchase of 918,300 shares of | |||||||||||||
treasury stock; 6,160 shares issued | -- | (45 | ) | -- | -- | -- | (41,159 | ) | |||||
Cumulative translation adjustments | -- | -- | -- | -- | 37,600 | -- | |||||||
Unrealized holding losses on | |||||||||||||
investments, net of tax | -- | -- | -- | -- | 488 | -- | |||||||
Reclassification adjustments for realized | |||||||||||||
gains included in net earnings | -- | -- | -- | -- | 248 | -- | |||||||
Net earnings | -- | -- | 226,971 | -- | -- | -- | |||||||
Cash dividends paid | |||||||||||||
($0.735 per share) | -- | -- | (67,281 | ) | -- | -- | -- | ||||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2003 | $54,689 | $394,409 | $2,242,762 | $(11,471 | ) | $ 2,594 | $(837,848 | ) | |||||
|
|
|
|
|
|
||||||||
The accompanying notes are an integral part of these financial statements.
35
W.W. Grainger, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2003, 2002 and 2001
NOTE 1BACKGROUND
AND BASIS OF PRESENTATION
INDUSTRY INFORMATION
The Company is the leading broad-line
supplier of facilities maintenance products in North America.
MANAGEMENT ESTIMATES
In preparing financial statements in
conformity with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities, and
revenues and expenses. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 2002 and 2001
financial statements, as previously reported, have been reclassified to conform to the
2003 presentation.
PRINCIPLES OF
CONSOLIDATION
The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant intercompany
transactions are eliminated from the consolidated financial statements.
FOREIGN CURRENCY
TRANSLATION
The financial statements of the
Companys foreign subsidiaries are generally measured using the local currency as the
functional currency. Net exchange gains or losses resulting from the translation of
financial statements of foreign operations and related long-term debt are recorded as a
separate component of shareholders equity. See Note 2 to the Consolidated Financial
Statements.
INVESTMENTS IN
UNCONSOLIDATED ENTITIES
For investments in which the Company
owns or controls from 20% to 50% of the voting shares, the equity method of accounting is
used. The Company also accounts for investments below 20% using the equity method when
significant influence can be exercised over the operating and financial policies of the
investee company. See Note 9 to the Consolidated Financial Statements.
NOTE 2SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues recognized include product
sales, billings for freight and handling charges and fees earned for services provided.
The Company recognizes product sales and billings for freight and handling charges
primarily on the date products are shipped to, or picked up by, the customer. The
Companys standard shipping terms are FOB shipping point. On occasion, the Company
will negotiate FOB destination terms. These sales are recognized upon delivery to the
customer. Fee revenues, which account for less than 1% of total revenues, are recognized
after services are completed.
VENDOR CONSIDERATION
Issue 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a Vendor,
was issued by the EITF in November 2002 with transition provisions subsequently issued in
January 2003. The January 2003 transition rules stated that Issue 02-16 would apply to all
agreements entered into or significantly modified after December 31, 2002. The
Companys accounting treatment for vendor provided funds is consistent with Issue
02-16, with the exception of vendor funded advertising allowances. The Company has
accounted for these allowances as an offset to operating (advertising) expenses. Under
Issue 02-16, this method is allowable if the allowances are for specific, identifiable and
incremental costs incurred by the Company in marketing its vendors products. The
Company provides numerous advertising programs to promote its vendors
products, including catalogs
and other printed media, Internet and other marketing programs. Most of these programs
relate to multiple vendors, which makes supporting the specific, identifiable and
incremental criteria difficult, requiring numerous assumptions and judgments. Based on the
inexact nature of trying to track reimbursements to the exact advertising expenditure for
each vendor, the Company will treat most vendor advertising allowances as a reduction of
cost of merchandise sold rather than a reduction of operating (advertising) expenses. This
change does not have any effect on net earnings.
Since a majority of the 2003
contracts with provisions for advertising allowances were entered into prior to December
31, 2002, the amounts classified as a reduction of cost of merchandise sold in 2003 were
not material. In 2003, $7.9 million was classified as cost of merchandise sold rather than
operating (advertising) expenses.
36
For 2004, as new vendor contracts become effective, most vendor allowances will be classified in cost of merchandise sold rather than in operating (advertising) expenses. The Company will reclassify prior periods to maintain comparability. The Company estimates that cost of merchandise sold in 2003 will be reduced by $55.2 million as a result of this reclassification.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes
product and product related costs, freight-out costs and handling costs. The Company
defines handling costs as those costs incurred to fulfill a shipped sales order.
Beginning in 2003, the Company began recording vendor funded advertising allowances as an offset to cost of merchandise sold rather than operating (advertising) expenses as required by Issue 02-16. See subsection VENDOR CONSIDERATION above for additional information.
WAREHOUSING, MARKETING
AND ADMINISTRATIVE EXPENSES
Included in this category are
purchasing, branch operations, information services and marketing and selling, as well as
other types of general and administrative costs.
STOCK INCENTIVE PLANS
The Company maintains various stock
incentive plans. See Note 16 to the Consolidated Financial Statements. 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 Companys plans had an exercise
price equal to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of Financial Accounting Standards Board
(FASB) SFAS No. 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.
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
except for per share amounts) |
|||||||
Net earnings, as reported | $226,971 | $211,567 | $174,530 | ||||
Less: Total stock-based employee compensation | |||||||
expense determined under the fair value based | |||||||
method for all awards, net of related tax | (17,740 | ) | (18,790 | ) | (17,815 | ) | |
Plus: Stock-based employee compensation cost, | |||||||
net of related tax, included in net earnings, as reported | 3,479 | 4,083 | 5,554 | ||||
|
|
|
|||||
Net earnings, pro forma | $212,710 | $196,860 | $162,269 | ||||
|
|
|
|||||
Earnings per share: | |||||||
Basic-as reported | $ 2.50 | $ 2.30 | $ 1.87 | ||||
Basic-pro forma | $ 2.34 | $ 2.14 | $ 1.74 | ||||
Diluted-as reported | $ 2.46 | $ 2.24 | $ 1.84 | ||||
Diluted-pro forma | $ 2.31 | $ 2.10 | $ 1.72 | ||||
ADVERTISING
Advertising costs are expensed in the
year the related advertisement is first presented. Cooperative reimbursements from
vendors, which offset operating (advertising) costs, are recorded when the related
advertising is expensed. Advertising expense was $41.7 million, $26.6 million and $55.1
million for 2003, 2002 and 2001, respectively. Historically, vendor provided allowances
were recorded as an offset to operating (advertising) expenses. In accordance with Issue
02-16, $7.9 million of vendor provided allowances were classified as an offset to cost of
merchandise sold rather than operating (advertising) expenses in 2003. For additional
information see subsection VENDOR CONSIDERATION above.
For interim reporting purposes, advertising expense is amortized equally over each period, based on estimated expenses for the full year. Advertising costs for media that have not been presented by year-end are capitalized in prepaid expenses. Amounts included in prepaid expenses at December 31, 2003, 2002 and 2001 were $12.9 million, $13.7 million and $13.6 million, respectively.
SOFTWARE COSTS
The Company does not sell, lease or
market software. The CD-ROM used by the Companys customers is a version of the
catalog and is distributed at no charge. Costs associated with the CD-ROM are expensed in
the year incurred.
37
INCOME TAXES
The Company accounts for income taxes
in accordance with SFAS No. 109, Accounting for Income Taxes. Income taxes are
recognized during the year in which transactions enter into the determination of financial
statement income, with deferred taxes being provided for temporary differences between
financial and tax reporting.
OTHER COMPREHENSIVE
EARNINGS (LOSSES)
The Companys other
comprehensive earnings (losses) include unrealized gains and losses on investments, net of
tax. Also included are foreign currency translation adjustments, with no related income
tax effects, offset by a designated hedge, net of tax. The cumulative amounts of other
comprehensive earnings (losses) were $2.6 million, $(35.7) million and $(29.6) million, at
December 31, 2003, 2002 and 2001, respectively.
The following table sets forth the components of accumulated other comprehensive earnings (losses): |
As of December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Foreign currency translation adjustment | $ 2,594 | $(35,006 | ) | $(34,836 | ) | ||
Unrealized (losses) gains on investments, net of tax | -- | (736 | ) | 5,283 | |||
|
|
|
|||||
Total accumulated other comprehensive earnings (losses) | $ 2,594 | $(35,742 | ) | $(29,553 | ) | ||
|
|
|
CASH FLOWS
The Company considers investments in
highly liquid debt instruments, purchased with an original maturity of ninety days or
less, to be cash equivalents. For cash equivalents, the carrying amount approximates fair
value due to the short maturity of these instruments.
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
The Company establishes reserves for customer accounts that are
potentially uncollectible. The methods used to estimate the allowances are based on
several factors including the age of the receivable, the historical ratio of actual
write-offs to the age of the receivable and publicly available default rates. These
analyses take into consideration economic conditions that may have an impact on a specific
industry, group of customers or a specific customer. Write-offs could be materially
different than the reserves provided if economic conditions change or actual results
deviate from historical trends or published default rates.
INVENTORIES
Inventories are valued at the lower
of cost or market. Cost is determined primarily by the last-in, first-out (LIFO) method,
which accounts for approximately 78% of total inventory. For foreign operations, cost is
determined by the first-in, first-out (FIFO) method.
PURCHASED TAX BENEFITS
The Company purchased tax benefits
through leases as provided by the Economic Recovery Tax Act of 1981. Realized tax
benefits, net of repayments, are included in Deferred Income Taxes.
PROPERTY, BUILDINGS AND
EQUIPMENT
Property, buildings and equipment are
valued at cost. For financial statement purposes, depreciation and amortization are
provided in amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on the declining-balance and
sum-of-the-years-digits methods. The principal estimated useful lives used in determining
depreciation are as follows:
Improvements to leased property are amortized over the initial terms of the respective leases or the estimated service lives of the improvements, whichever is shorter. The Company capitalized interest costs of $0.2 million, $0.4 million and $1.3 million in 2003, 2002 and 2001, respectively.
LONG-LIVED ASSETS
The carrying value of long-lived
assets is evaluated whenever events or changes in circumstances indicate that the carrying
value of the asset may be impaired. An impairment loss is recognized when estimated
undiscounted future cash flows resulting from use of the asset, including disposition, is
less than the carrying value of the asset. Impairment is measured as the amount by which
the carrying amount exceeds the fair value.
GOODWILL AND OTHER
INTANGIBLES
The Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets effective January 1, 2002. Under SFAS No.
142, goodwill is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but rather
tested for impairment on an annual basis and more often if circumstances require.
Impairment losses are recognized whenever the implied fair value of goodwill is less than
its carrying value. Prior to January 1, 2002, goodwill was amortized over periods of up to
40 years.
38
The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their estimated useful lives unless the estimated useful life is determined to be indefinite. Amortizable intangible assets are being amortized over useful lives of three to 17 years. Impairment losses are recognized if the carrying amount of an intangible, subject to amortization, is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.
The Company also maintains intangible assets with indefinite lives, which are not amortized. These intangibles are tested for impairment on an annual basis and more often if circumstances require, similar to the treatment for goodwill. Impairment losses are recognized whenever the implied fair value of these assets is less than their carrying value.
INSURANCE RESERVES
The Company purchases insurance for
catastrophic exposures and those risks required to be insured by law. It also retains a
significant portion of the risk of losses related to workers compensation, general
liability and property. Reserves for these potential losses are based on an external
analysis of the Companys historical claims results and other actuarial assumptions.
WARRANTY RESERVES
The Company generally warrants the
products it sells against defects for one year. For a significant portion of warranty
claims, the manufacturer is responsible for the expenses associated with this warranty.
For warranty expenses not covered by the manufacturer, the Company provides a reserve for
future costs based primarily on historical experience. The reserve activity was as
follows:
As of December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Beginning balance | $ 3,000 | $ 2,368 | $ 2,597 | ||||
Returns | (8,143 | ) | (8,415 | ) | (7,730 | ) | |
Provisions | 8,006 | 9,047 | 7,501 | ||||
|
|
|
|||||
Ending balance | $ 2,863 | $ 3,000 | $ 2,368 | ||||
|
|
|
NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS
No. 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 No. 133. SFAS No. 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 will be applied prospectively. The provisions
of SFAS No. 149 relating to SFAS No. 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 No. 149 did not have a material effect on the
Companys results of operations or financial position.
In May 2003, the FASB issued SFAS No. 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. 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 No. 150 did not have a material effect on the Companys results of operations or financial position.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of Variable Interest Entities. It is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, which replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, and revises the requirements for consolidation by business enterprises of variable interest entities with specific characteristics. The new consolidation requirements related to variable interest entities are required to be adopted no later than the first reporting period that ends after March 15, 2004 (as of March 31, 2004, for calendar-year enterprises). The Company does not expect adoption of this revised interpretation to have a material effect on its results of operations or financial position.
39
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and the transition provisions of SFAS No. 141, Business Combinations. As a result of the application of the new impairment methodology introduced by SFAS No. 142, the Company completed its initial process of evaluating goodwill for impairment and recorded a noncash charge to earnings in 2002 of $32.3 million ($23.9 million after-tax, or $0.26 per diluted share) related to the write-down of goodwill of its Canadian subsidiary, Acklands. In performing the initial and periodic impairment reviews, the fair value of the reporting units acquired were estimated using a present value method that discounted future cash flows. When available and as appropriate, comparative market multiples were used to corroborate the results of the discounted cash flows. The Company performs its annual evaluation of goodwill and indefinite lived intangible assets for impairment in the fourth quarter of each year and no further write-downs have been required after the initial write-down noted above.
Previous accounting rules incorporated a comparison of book value to undiscounted cash flows, whereas the new rules require a comparison of book value to discounted cash flows, which are lower. There were no material adjustments relating to the classification of the Companys intangible assets or amortization periods as a result of adopting SFAS No. 142.
If SFAS No. 142 had been in effect for the year ended December 31, 2001, reported net earnings would have increased by $3.3 million as a result of excluding the amortization expense, net of tax, of goodwill and intangible assets with indefinite lives. Basic earnings per share would have increased to $1.90 from $1.87 and diluted earnings per share would have increased to $1.87 from $1.84.
On April 14, 2003, Lab Safety acquired substantially all of the assets and assumed certain liabilities of Gemplers, a direct marketing division of Gemplers, Inc., located in Wisconsin. The results of Gemplers operations have been included in the Companys consolidated financial statements since that date. Gemplers, 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 was $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.
On February 26, 2001, Lab Safety acquired The Ben Meadows Co., Inc. (Ben Meadows) for approximately $14.4 million, including costs associated with the acquisition. Ben Meadows, a privately held U.S. corporation with annual sales of $20 million, was a business-to-business direct marketer specializing in equipment and supplies for the environmental and forestry management markets. Results for Ben Meadows are included in the Companys results since the date of its acquisition. Due to the immaterial nature of this transaction, disclosures of amounts assigned to the acquired assets and liabilities and pro forma disclosures are not considered necessary.
On April 23, 2001, the Company announced plans to shut down the operations of Material Logic, with the exception of FindMRO, and to write down its investment in other digital activities. The Company launched Material Logic in January 2001 as a utility for large customers to facilitate the purchase of facilities maintenance products over the Internet. In order for Material Logic to grow, it needed broad industry support and funding from other equity participants. The Company closed Material Logic in April 2001 because economic and market conditions made it difficult to find funding partners and the market developed slower than anticipated. The Company shut down all of Material Logics branded e-commerce sites except FindMRO, which was added to the Branch-based Distribution segment.
In connection with the closing of Material Logic, the Company took a pretax charge of $39.1 million (after-tax $23.2 million) in 2001. The Company provided a comprehensive separation package, including outplacement services, to 166 employees whose jobs were eliminated. Severance payments began in July 2001 and will continue until June 2004, when the last severance package expires. Other shutdown costs include lease obligations which, if not settled earlier, will continue until 2004. The Company reduced the reserve by $0.6 million and $1.9 million in 2003 and 2002, respectively, to reflect managements revised estimate of costs.
In addition, in 2001, as part of other income and expense, the Company wrote down its investment in other digital enterprises and took a pretax charge of $25.1 million (after-tax $13.4 million). This included a $20.1 million pretax loss on the divestiture of the Companys 40% investment in Works.com, Inc. (Works.com), which was recorded as Loss on liquidation of investment in unconsolidated entity. Also included was a $5.0 million write-down to net realizable value of investments in certain other digital businesses, which was recorded in Unclassifiednet.
The total effect of these charges amounted to an after-tax cost of $36.6 million, or $0.39 per diluted share, in 2001.
40
The following tables show the activity from April 23, 2001 to December 31, 2003 and balances of the Material Logic restructuring reserve (in thousands of dollars):
April 23, | Dec. 31, | ||||||||||
2001 |
Deductions | Adjustments | 2001 | ||||||||
|
|
|
|
||||||||
Restructuring reserve (Operating expenses): | |||||||||||
Workforce reductions | $17,200 | $ (9,264 | ) | $(3,056 | ) | $4,880 | |||||
Asset and equipment write-offs and disposals | 5,800 | (4,277 | ) | (587 | ) | 936 | |||||
Contractual obligations | 5,000 | (7,482 | ) | 2,482 | -- | ||||||
Other shutdown costs | 12,000 | (8,570 | ) | 231 | 3,661 | ||||||
|
|
|
|
||||||||
$40,000 | $(29,593 | ) | $ (930 | ) | $9,477 | ||||||
|
|
|
|
Dec. 31, |
Dec. 31, | ||||||||||
2001 | Deductions | Adjustments | 2002 | ||||||||
|
|
|
|
||||||||
Restructuring reserve (Operating expenses): | |||||||||||
Workforce reductions | $ 4,880 | $ (2,737 | ) | $ (499 | ) | $1,644 | |||||
Asset and equipment write-offs and disposals | 936 | (936 | ) | -- | -- | ||||||
Other shutdown costs | 3,661 | (1,371 | ) | (1,440 | ) | 850 | |||||
|
|
|
|
||||||||
$ 9,477 | $ (5,044 | ) | $(1,939 | ) | $2,494 | ||||||
|
|
|
|
Dec. 31, |
Dec. 31, | ||||||||||
2002 | Deductions | Adjustments | 2003 | ||||||||
|
|
|
|
||||||||
Restructuring reserve (Operating expenses): | |||||||||||
Workforce reductions | $ 1,644 | $ (1,100 | ) | $ (122 | ) | $ 422 | |||||
Other shutdown costs | 850 | (202 | ) | (442 | ) | 206 | |||||
|
|
|
|
||||||||
$ 2,494 | $ (1,302 | ) | $ (564 | ) | $ 628 | ||||||
|
|
|
|
Deductions in 2001 reflect cash payments of $17.6 million and noncash charges of $12.0 million. Deductions in 2002 reflect cash payments of $4.1 million and noncash charges of $0.9 million. Deductions in 2003 reflect cash payments of $1.3 million. The amounts in the adjustments column are reclassifications and reductions to reflect the Companys revised estimate of costs by expense category.
The Company places temporary cash investments with institutions of high credit quality and, by policy, limits the amount of credit exposure to any one institution.
The Company has a broad customer base representing many diverse industries doing business in all regions of the United States as well as other areas of North America. Consequently, no significant concentration of credit risk is considered to exist.
The following table shows the activity in the allowance for doubtful accounts:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Balance at beginning of period | $ 26,868 | $ 30,552 | $ 23,436 | ||||
Provision for uncollectible accounts | 9,263 | 13,328 | 21,483 | ||||
Write-off of uncollectible accounts, less recoveries | (11,713 | ) | (17,054 | ) | (14,290 | ) | |
Foreign currency exchange impact | 318 | 42 | (77 | ) | |||
|
|
|
|||||
Balance at end of period | $ 24,736 | $ 26,868 | $ 30,552 | ||||
|
|
|
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $234.4 million, $227.3 million and $224.3 million higher than reported at December 31, 2003, 2002 and 2001, respectively, if the first-in, first-out (FIFO) method of inventory accounting had been used for all Company inventories. Net earnings would have increased (decreased) by $4.3 million, $1.9 million and $(1.6) million for the years ended December 31, 2003, 2002 and 2001, respectively, using the FIFO method of accounting. Inventories under FIFO approximate replacement cost.
41
NOTE 9INVESTMENTS IN UNCONSOLIDATED ENTITIES
In 2001, the Company wrote off its equity investment in Works.com. See Note 5 to the Consolidated Financial Statements.On February 1, 2002, the Company finalized an agreement creating the joint venture USI-AGI Prairies Inc. The joint venture was between Acklands and Uni-Select Inc. (Uni-Select), a Canadian company. The joint venture combined Uni-Selects Western Division with the automotive aftermarket division of Acklands, which operated as Bumper to Bumper. Acklands contribution of net assets was approximately U.S.$14.6 million. Additionally, Acklands carrying value of its investment in this joint venture includes U.S.$5.1 million of allocated goodwill. The Company has a 50% stake in the new entity, which Uni-Select manages. Net sales for the automotive aftermarket parts division of Acklands were approximately U.S.$33 million in 2001.
No gain or loss was recognized when this transaction was finalized. Through February 1, 2002, the results of the Companys automotive aftermarket parts division were consolidated with Acklands. Beginning February 2, 2002, the Company accounted for its joint venture investment using the equity method. In 2003, Acklands made a loan denominated in Canadian dollars to USI-AGI Prairies Inc., of U.S.$3.7 million bearing interest at market rates. The loan is due and payable on demand.
The Company also has investments in three Asian joint ventures, with ownership percentages ranging from 11% to 49%. The Company accounts for these joint ventures using the equity method of accounting. As start-up businesses, the time frame, or the ultimate ability, to achieve profitability is uncertain. Reaching profitability is also dependent upon the entities securing sufficient capital funding to support developmental activities. The losses reflect the start-up nature of these businesses. In the fourth quarter of 2003, the Company wrote off its investment in two of these Asian joint ventures due to their questionable market value and uncertainty regarding future profitability and capital funding.
The table below summarizes the activity of these investments.
Investment Cost | Loan |
Cumulative
After-Tax Equity Income (Losses) |
Divestiture/
Write-down |
Foreign Currency Translation Adjustment | Total | ||||||||
|
|
|
|
|
|
||||||||
(In thousands of dollars) |
|||||||||||||
Balance at January 1, 2001 | $ 34,693 | $ -- | $ (10,855 | ) | $ -- | $ -- | $ 23,838 | ||||||
Works.com | -- | -- | (4,608 | ) | (17,621 | ) | -- | (22,229 | ) | ||||
Other equity investments | 5,764 | -- | (2,597 | ) | -- | -- | 3,167 | ||||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2001 | 40,457 | -- | (18,060 | ) | (17,621 | ) | -- | 4,776 | |||||
USI-AGI Prairies Inc. | 20,580 | -- | 970 | -- | (595 | ) | 20,955 | ||||||
Cash distribution from | |||||||||||||
USI-AGI Prairies Inc. | (8,959 | ) | -- | -- | -- | -- | (8,959 | ) | |||||
Other equity investments | 3,211 | -- | (3,995 | ) | -- | -- | (784 | ) | |||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2002 | 55,289 | -- | (21,085 | ) | (17,621 | ) | (595 | ) | 15,988 | ||||
USI-AGI Prairies Inc. | -- | 3,706 | 1,442 | -- | 2,802 | 7,950 | |||||||
Other equity investments | 4,535 | -- | (3,730 | ) | (1,921 | ) | -- | (1,116 | ) | ||||
|
|
|
|
|
|
||||||||
Balance at December 31, 2003 | $ 59,824 | $ 3,706 | $ (23,373 | ) | $ (19,542 | ) | $ 2,207 | $ 22,822 | |||||
|
|
|
|
|
|
||||||||
Investments consist of marketable securities and non-publicly traded equity securities for which a market value is not readily determinable. Marketable securities are all classified as available-for-sale and are reported at fair value, with unrealized gains or losses on such securities reflected, net of taxes, in the Accumulated other comprehensive earnings (losses) component of shareholders equity. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company evaluates whether a decline in fair value below cost is other than temporary based on the amount of unrealized losses and their duration. Other-than-temporary impairments are recognized in earnings. Non-publicly traded equity securities are reported at the lower of cost or estimated net realizable value. Adjustments to net realizable value are recognized in earnings. There have been no dividends earned on these investments. During 2003, the Company completed the sale of its investments in marketable securities. At December 31, 2002 and 2001, the Company held marketable securities investments of $5.3 million and $27.0 million, respectively, selling a portion of the original investments during each of those years. The gains on these sales were calculated using the specific identification method and were reported in Unclassifiednet.
42
The original cost, pretax realized and unrealized (losses) gains, reductions to net realizable value and fair value of investments are as follows:
As of December 31, | |||||||||||||
|
|||||||||||||
2003 | 2002 | 2001 | |||||||||||
|
|
|
|||||||||||
(In thousands of dollars) |
|||||||||||||
Marketable securities | |||||||||||||
Cost | $ -- | $ 6,521 | $ 16,517 | ||||||||||
Unrealized (losses) gains, net | -- | (1,206 | ) | 8,661 | |||||||||
|
|
|
|||||||||||
Fair value | -- | 5,315 | 25,178 | ||||||||||
|
|
|
|||||||||||
Non-publicly traded equity securities, | |||||||||||||
at estimated net realizable value | -- | -- | 1,845 | ||||||||||
|
|
|
|||||||||||
Investments | $ -- | $ 5,315 | $ 27,023 | ||||||||||
|
|
|
|||||||||||
For the Years Ended December 31, | |||||||||||||
|
|||||||||||||
2003 | 2002 | 2001 | |||||||||||
|
|
|
|||||||||||
(In thousands of dollars) | |||||||||||||
Proceeds from sales | $ 6,115 | $ 15,957 | $ 1,015 | ||||||||||
|
|
|
|||||||||||
Realized gains on sales | $ 1,208 | $ 7,308 | $ 138 | ||||||||||
|
|
|
|||||||||||
Reductions to net realizable value | $ -- | $ (1,845 | ) | $ (8,155 | ) | ||||||||
|
|
|
|||||||||||
Amortization of capitalized software is predominately on a straight-line basis over three and five years. Amortization expense was $14.0 million, $17.6 million and $19.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In 2003, the Company determined certain capitalized amounts were no longer recoverable and wrote down the carrying cost by $1.0 million.
The following summarizes information concerning short-term debt:
As of December 31, | |||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) | |||||||
Bank Debt | |||||||
Outstanding at December 31 | $ -- | $ 2,967 | $ 4,526 | ||||
Maximum month-end balance during the year | $ 2,967 | $ 4,194 | $ 4,559 | ||||
Average amount outstanding during the year | $ 1,382 | $ 3,611 | $ 3,645 | ||||
Weighted average interest rate during the year | 2.6 | % | 3.4 | % | 5.3 | % | |
Weighted average interest rate at December 31 | -- | % | 2.9 | % | 3.4 | % | |
Commercial Paper | |||||||
Outstanding at December 31 | $ -- | $ -- | $ -- | ||||
Maximum month-end balance during the year | $ -- | $ -- | $128,632 | ||||
Average amount outstanding during the year | $ -- | $ -- | $ 64,438 | ||||
Weighted average interest rate during the year | -- | % | -- | % | 5.3 | % | |
Weighted average interest rate at December 31 | -- | % | -- | % | -- | % |
The Company and its subsidiaries had committed lines of credit totalling $265.4 million, $267.7 million and $417.6 million at December 31, 2003, 2002 and 2001, respectively, including $15.4 million, $12.7 million and $12.6 million, respectively, denominated in Canadian dollars. At December 31, 2003, there were no borrowings under the committed lines of credit. At December 31, 2002 and 2001, borrowings under Company committed lines of credit were $3.0 million and $4.5 million, respectively. The Company had committed lines of credit available of $265.4 million, $264.7 million and $413.1 million at December 31, 2003, 2002 and 2001, respectively.
The Company also had a $7.7 million, $15.9 million and $15.7 million uncommitted line of credit denominated in Canadian dollars at December 31, 2003, 2002 and 2001, respectively.
43
Retirement Plans. A majority of the Companys employees are covered by a noncontributory profit sharing plan. This plan provides for annual employer contributions generally based upon a formula related primarily to earnings before federal income taxes, limited to 25% of the total compensation paid to all eligible employees. The Company also sponsors additional defined contribution plans, which cover most of the other employees. Provisions under all plans were $45.9 million, $50.0 million and $47.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Postretirement Benefits. The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its retired employees and their dependents should they elect to maintain such coverage. 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 Company uses a December 31 measurement date for its postretirement plan.
The net periodic benefits costs charged to operating expenses included the following components:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Service cost | $ 6,462 | $ 5,332 | $ 3,442 | ||||
Interest cost | 5,662 | 5,097 | 3,689 | ||||
Expected return on assets | (1,081 | ) | (1,192 | ) | (1,421 | ) | |
Amortization of transition asset (22-year amortization) | (143 | ) | (143 | ) | (143 | ) | |
Amortization of unrecognized losses (gains) | 2,002 | 1,079 | (144 | ) | |||
Amortization of prior service cost | (641 | ) | (75 | ) | (75 | ) | |
|
|
|
|||||
Net periodic benefits costs | $ 12,261 | $ 10,098 | $ 5,348 | ||||
|
|
|
Reconciliations of the beginning and ending balances of the accumulated postretirement benefit obligation (APBO), the fair value of assets and the funded status of the benefit obligation follow:
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Benefit obligation at the beginning of the year | $ 90,141 | $ 62,811 | $ 49,044 | ||||
Service cost | 6,462 | 5,332 | 3,442 | ||||
Interest cost | 5,662 | 5,097 | 3,689 | ||||
Plan participant contributions | 1,070 | 929 | 882 | ||||
Amendment | (6,903 | ) | -- | -- | |||
Actuarial loss | 14,172 | 18,956 | 7,960 | ||||
Benefits paid | (2,894 | ) | (2,984 | ) | (2,206 | ) | |
|
|
|
|||||
Benefit obligation at the end of the year | 107,710 | 90,141 | 62,811 | ||||
|
|
|
|||||
Fair value of plan assets at the beginning of the year | 20,013 | 19,866 | 20,505 | ||||
Actual return (loss) on plan assets | 5,235 | (3,738 | ) | (2,785 | ) | ||
Employer contributions | 10,980 | 5,940 | 3,470 | ||||
Plan participant contributions | 1,071 | 929 | 882 | ||||
Benefits paid | (2,894 | ) | (2,984 | ) | (2,206 | ) | |
|
|
|
|||||
Fair value of plan assets at the end of the year | 34,405 | 20,013 | 19,866 | ||||
|
|
|
|||||
Funded status | (73,305 | ) | (70,128 | ) | (42,945 | ) | |
Unrecognized transition asset | (1,571 | ) | (1,714 | ) | (1,856 | ) | |
Unrecognized net actuarial losses | 39,685 | 31,669 | 8,863 | ||||
Unrecognized prior service cost | (6,887 | ) | (625 | ) | (702 | ) | |
|
|
|
|||||
Accrued postretirement benefits cost | $(42,078 | ) | $(40,798 | ) | $(36,640 | ) | |
|
|
|
The benefit obligation was determined by applying the terms of the plan and actuarial models required by SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. These models include various actuarial assumptions, including discount rates, assumed rates of return on plan assets and healthcare cost trend rates. The actuarial assumptions also anticipate future cost-sharing changes to retiree contributions that will maintain the current cost-sharing ratio between the Company and the retirees. The Company evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions, historical experience and the requirements of SFAS No. 106.
44
The plan amendment, which changed the prescription drug benefits, was effective January 1, 2003.
The following assumptions were used to determine benefit obligations at December 31:
2003 | 2002 | 2001 | |||||
|
|
|
|||||
Discount rate | 6.0 | % | 6.5 | % | 7.0 | % | |
Expected long-term rate of return on plan assets, net of tax at 40% | 6.0 | % | 5.4 | % | 6.0 | % | |
Initial healthcare cost trend rate | 10.5 | % | 10.0 | % | 8.1 | % | |
Ultimate healthcare cost trend rate | 5.0 | % | 5.0 | % | 5.0 | % | |
Year ultimate healthcare cost trend rate reached | 2016 | 2014 | 2010 |
The following assumptions were used to determine net periodic benefit cost for years ended December 31:
2003 | 2002 | 2001 | |||||
|
|
|
|||||
Discount rate | 6.5 | % | 7.0 | % | 7.5 | % | |
Expected long-term rate of return on plan assets, net of tax at 40% | 5.4 | % | 6.0 | % | 6.0 | % | |
Initial healthcare cost trend rate | 10.5 | % | 10.5 | % | 8.1 | % | |
Ultimate healthcare cost trend rate | 5.0 | % | 5.0 | % | 5.0 | % | |
Year ultimate healthcare cost trend rate reached | 2016 | 2014 | 2010 |
The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments on December 31 of each year.
The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects on December 31, 2003 results:
1-Percent-Point | 1-Percent-Point | ||||
Increase | Decrease | ||||
|
|
||||
(In thousands of dollars) |
|||||
Effect on total of service and interest cost | $ 2,884 | $ (2,230) | |||
Effect on accumulated postretirement benefit obligation | 21,128 | (16,787) |
The Company has established a Group Benefit Trust to fund the plan and process benefit payments. The assets of the trust are invested entirely in funds designed to track the Standard & Poors 500 Index (S&P 500). This investment strategy reflects the long-term nature of the plan obligation and seeks to take advantage of the superior earnings potential of equity securities. The Company uses the long-term historical return on the plan assets and the historical performance of the S&P 500 to develop its expected return on plan assets. The required use of an expected long-term rate of return on plan assets may result in recognizing income that is greater or less than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees. The change in the expected long-term rate of return on plan assets did not have a material effect on the net periodic benefit cost for the year ended December 31, 2003. The expected long-term rate of return on plan assets was unchanged in 2002.
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, and was $11.0 million, $5.9 million and $3.5 million, for the years ended December 31, 2003, 2002 and 2001, respectively. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.
The Company forecasts the following benefit payments, which includes a projection for expected future employee service: $1.6 million in 2004, $1.9 million in 2005, $2.2 million in 2006, $2.7 million in 2007, $3.2 million in 2008 and $26.2 million over the five-year period covering 2009 through 2013.
On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Act) was signed into law. In accordance with FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company has elected to defer recognizing the effects of the Act. Therefore, the benefit obligation and net periodic postretirement benefit cost in the Companys financial statements and accompanying notes do not reflect the effects of the Act on the plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and such guidance, when issued, could require the Company to change previously reported information. Also, the Company may need to amend the plan to benefit from the Act.
45
Long-term debt consisted of the following:
As of December 31, |
|||||||
|
|||||||
2003 |
2002 |
2001 |
|||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Commercial paper | $114,127 | $113,807 | $ -- | ||||
Derivative instrument | 25,418 | 991 | -- | ||||
Uncommitted revolving credit facility | -- | -- | 113,324 | ||||
Industrial development revenue and private activity bonds | 9,485 | 11,400 | 17,415 | ||||
|
|
|
|||||
149,030 | 126,198 | 130,739 | |||||
Less current maturities | 144,135 | 6,505 | 12,520 | ||||
|
|
|
|||||
$ 4,895 | $119,693 | $118,219 | |||||
|
|
|
During the third quarter of 2002, the Company refinanced a C$180.4 million bank loan that had been designated as a nonderivative hedge of the net investment in the Companys Canadian subsidiary. The bank loan was replaced with commercial paper in support of a cross-currency swap (derivative instrument). This derivative instrument was designated as a hedge of the net investment in the Companys Canadian subsidiary and is recognized on the balance sheet at its fair value.
The two-year cross-currency swap matures on September 27, 2004. The cross-currency swap is based on notional principal amounts of C$180.4 million and U.S.$113.7 million, respectively. Initially, the Company gave the counterparty U.S.$113.7 million and received from the counterparty C$180.4 million. The Company receives interest based on the 30-day U.S. commercial paper rate. At December 31, 2003, this rate was 1.02%. The Company pays interest to the counterparty based on the 30-day Canadian Bankers Acceptances rate plus 19 basis points. At December 31, 2003 this rate was 2.94%. The outstanding underlying commercial paper was U.S.$114.1 million with an interest rate of 1.10% at December 31, 2003. The fair value of the derivative instrument was a liability of U.S.$25.4 million as of December 31, 2003. The Company has the ability and the intent to refinance the underlying commercial paper issued in connection with the two-year cross-currency swap with its credit lines through the swaps maturity, therefore the commercial paper has been classified as long-term debt. The Company is determining whether or not it will renew the cross-currency swap when it comes due on September 27, 2004. As a result, the commercial paper debt and related derivative instrument have been classified as current maturities of long-term debt at December 31, 2003. When the cross-currency swap matures, the Company will pay the counterparty C$180.4 million and will receive U.S.$113.7 million.
The Company formally assesses, on a quarterly basis, whether the cross-currency swap is effective at offsetting changes in the fair value of the underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, exchange rate changes in the value of the cross-currency swap are generally offset by changes in the value of the net investment. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, changes in the fair value of this instrument are recognized in foreign currency translation adjustments, a component of Accumulated other comprehensive earnings (losses), to offset the change in the value of the net investment of the Canadian investment being hedged. During 2003, the Company included a U.S.$14.9 million, net of tax, loss in Accumulated other comprehensive earnings (losses) related to this hedge. The impact to 2003 and 2002 earnings resulting from the ineffective portion of the hedge was immaterial. The cross-currency swap is an over-the-counter instrument with a liquid market. The Company has established strict counterparty credit guidelines and entered into the transaction with an investment grade financial institution. The Company does not enter into derivative financial instruments for trading purposes.
The industrial development revenue and private activity bonds include various issues that bear interest at variable rates capped at 15%, and come due in various amounts from 2009 through 2021. At December 31, 2003, the weighted average interest rate was 1.58%. Interest rates on some of the issues are subject to change at certain dates in the future. The bondholders may require the Company to redeem certain bonds concurrent with a change in interest rates and certain other bonds annually. In addition, $4.6 million of these bonds had an unsecured liquidity facility available at December 31, 2003, for which the Company compensated a bank through a commitment fee of 0.07%. There were no borrowings related to this facility at December 31, 2003. The Company classified $4.6 million, $6.5 million and $12.5 million of bonds currently subject to redemption options in current maturities of long-term debt at December 31, 2003, 2002 and 2001, respectively.
46
The aggregate amounts of long-term debt maturing in each of the five years subsequent to December 31, 2003, are as follows:
Amounts | ||||
Amounts Payable | Subject to | |||
Under Terms of | Redemption | |||
Agreements | Options | |||
|
|
|||
(In thousands of dollars) | ||||
2004 | $139,545 | $4,590 | ||
2005 | $ -- | $4,895 | ||
2006 | $ -- | $ -- | ||
2007 | $ -- | $ -- | ||
2008 | $ -- | $ -- | ||
The Companys debt instruments include only standard affirmative and negative covenants that are normal in debt instruments of similar amounts and structure. The Companys debt instruments do not contain financial or performance covenants restrictive to the business of the Company, reflecting its strong financial position.
The Company is in compliance with all debt covenants for the year ended December 31, 2003.
The Company leases certain land, buildings and equipment. The Company capitalizes all significant leases that qualify for capitalization, of which there were none at December 31, 2003.
At December 31, 2003, the approximate future minimum aggregate payments for all operating leases were as follows (in thousands of dollars):
Rent | ||||
Expense | ||||
|
||||
2004 | $ 18,192 | |||
2005 | 13,454 | |||
2006 | 9,131 | |||
2007 | 7,213 | |||
2008 | 4,672 | |||
Thereafter | 7,383 | |||
|
||||
Total minimum payments required | $60,045 | |||
Less amounts representing sublease income | 455 | |||
|
||||
$59,590 | ||||
|
Total rent expense, including both items under lease and items rented on a month-to-month basis, was $19.5 million, $18.8 million and $16.6 million for 2003, 2002 and 2001, respectively. Rent expense is net of sublease income of $0.5 million, $0.4 million and $0.5 million for 2003, 2002 and 2001, respectively.
The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees. Shares of common stock were authorized for issuance under the plans in connection with awards of nonqualified stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards.
The plans authorize the granting of options to purchase shares at a price of not less than 100% of the closing market price on the last trading day preceding the date of grant. The options expire no later than ten years after the date of grant.
Shares relating to terminated, surrendered or canceled options and stock appreciation rights, to forfeited restricted stock or other awards, or to transactions that result in fewer shares being issued under the plans, are again available for awards under the plans.
In 2001, a broad-based stock option grant covering 774,500 shares was made to employees who had a minimum of five years of service and who were not participants in other stock option programs. In 2003 and 2002, the Company continued to give broad-based stock option grants by granting options covering 161,300 and 89,600 shares, respectively, to those employees who reached major service milestones.
The plans authorize the granting of restricted stock, which is held by the Company pursuant to the terms and conditions related to the applicable grants. Except for the right of disposal, holders of restricted stock have full shareholders rights during the period of restriction, including voting rights and the right to receive dividends.
On March 26, 2001, a group of 83 executive officers and other key managers bought 787,020 treasury shares from the Company at the then-current market price of the shares. Cash proceeds from the sale, which amounted to $24.4 million, were used by the Company to repurchase shares of the Companys stock on the open market.
47
Most employees financed their purchases through loans arranged with a local bank. As of December 31, 2003, all loans payable were settled between each employee and the bank. Executives who met a threshold purchase requirement of one times their annual base salary received a 25% matching grant of restricted stock that vested if they remained with the Company and held their purchased shares for a minimum of two years. The grant totaled 192,275 shares of restricted stock. In 2002, 95,720 of these shares were converted from restricted stock into a like number of restricted stock units, which are subject to the same vesting provisions as the original restricted stock. These restricted stock units are to be settled, at various times after vesting, by the delivery of unrestricted shares of Company common stock on a one for one basis. In March 2003, 95,720 restricted stock units vested.
There were 20,000 shares of restricted stock issued in 2003 with a weighted average fair market value of $47.72 per share. There were 110,000 shares of restricted stock issued in 2002 with a weighted average fair market value of $56.31 per share. There were 247,275 shares of restricted stock issued in 2001 with a weighted average fair market value of $33.30 per share. The shares vest over periods from two to ten years from issuance, although accelerated vesting is provided in certain instances. Restricted stock vested was 96,790, 112,000 and 87,000 shares in 2003, 2002 and 2001, respectively. Compensation expense related to restricted stock awards is based upon market prices at the date of grant and is charged to earnings on a straight-line basis over the period of restriction. Total compensation expense related to restricted stock was $4.8 million, $6.4 million and $8.9 million in 2003, 2002 and 2001, respectively. In 2001, $2.2 million of restricted stock compensation expense related to the 2001 digital business restructuring was included in restructuring charges.
Nonemployee directors participate in the Companys Director Stock Plan. A total of 346,630 shares of common stock are available for issuance under the plan as of December 31, 2003.
A retainer fee for board service is paid to nonemployee directors in the form of an annual award of unrestricted shares of common stock under the Director Stock Plan. The number of shares awarded is equal to the retainer fee divided by the fair market value of a share of common stock at the time of the award, rounded up to the next ten-share increment. Total shares granted were 6,160, 5,850 and 8,130 in 2003, 2002 and 2001, respectively.
In addition, nonemployee directors receive an annual grant under the Director Stock Plan, denominated in dollars, of options to purchase shares of common stock. The number of shares covered by each option is equal to the dollar amount of the grant divided by the fair market value of a share of common stock at the time of the award, rounded to the next ten-share increment. The options are issued at market price at date of grant. The options are fully exercisable upon award and have a ten-year term. Total option awards were 15,840, 14,850 and 19,200 shares in 2003, 2002 and 2001, respectively.
The Company awards stock units under the Director Stock Plan in connection with deferrals of director fees and dividend equivalents on existing stock units. A stock unit is the economic equivalent of a share of common stock. Deferred fees and dividend equivalents on existing stock units are converted into stock units on the basis of the market value of the stock at the relevant times. Payment of the value of stock units is scheduled to be made after termination of service as a director. As of December 31, 2003, nine directors held stock units. As of both December 31, 2002 and 2001, ten directors held stock units. The Company recognized expense for the appreciation in equivalent value of stock units of $1.0 million, $0.5 million and $0.4 million for 2003, 2002 and 2001, respectively. Total stock units outstanding were 39,506, 45,556 and 45,844 as of December 31, 2003, 2002 and 2001, respectively.
Transactions involving stock options are summarized as follows:
Shares Subject to Option | Weighted Average Price Per Share | Options Exercisable | |||||
|
|
|
|||||
Outstanding at January 1, 2001 | 5,953,410 | $40.96 | 2,363,810 | ||||
|
|||||||
Granted | 3,080,780 | $39.26 | |||||
Exercised | (385,567 | ) | $26.13 | ||||
Cancelled or expired | (259,036 | ) | $42.78 | ||||
|
|||||||
Outstanding at December 31, 2001 | 8,389,587 | $40.96 | 2,826,979 | ||||
|
|||||||
Granted | 2,080,005 | $54.50 | |||||
Exercised | (706,102 | ) | $33.68 | ||||
Cancelled or expired | (298,652 | ) | $42.19 | ||||
|
|||||||
Outstanding at December 31, 2002 | 9,464,838 | $44.44 | 3,320,888 | ||||
|
|||||||
Granted | 1,856,590 | $45.69 | |||||
Exercised | (427,857 | ) | $36.72 | ||||
Cancelled or expired | (479,639 | ) | $45.90 | ||||
|
|||||||
Outstanding at December 31, 2003 | 10,413,932 | $44.91 | 4,148,846 | ||||
|
|
48
All options were issued at market price on the date of grant. Options were issued with initial vesting periods ranging from immediate to six years.
Information about stock options outstanding and exercisable as of December 31, 2003, is as follows:
Options Outstanding |
|||||||||
|
|||||||||
Weighted Average |
|||||||||
|
|||||||||
Range of
Exercise
Prices |
Number
Outstanding |
Remaining
Contractual Life |
Exercise
Price |
||||||
|
|
|
|
||||||
$30.74 - $37.51 | 2,928,803 | 5.7 years | $36.46 | ||||||
$37.52 - $47.26 | 3,999,214 | 7.9 | $44.62 | ||||||
$47.27 - $57.08 | 3,485,915 | 6.8 | $52.36 | ||||||
|
|||||||||
10,413,932 | 6.9 years | $44.91 |
Options Exercisable | |||||||||
|
|||||||||
Range of
Exercise
Prices |
Number
Exercisable |
Weighted
Average
Exercise Price |
|||||||
|
|
|
|||||||
$30.74 - $37.51 | 1,117,240 | $34.80 | |||||||
$37.52 - $47.26 | 1,461,161 | $43.75 | |||||||
$47.27 - $57.08 | 1,570,445 | $49.74 | |||||||
|
|||||||||
4,148,846 | $43.61 |
Shares available for issuance in connection with awards of stock options, stock appreciation rights, stock units, shares of common stock, restricted shares of common stock and other stock-based awards to employees and directors were 2,016,160, 2,161,563 and 3,805,674 at December 31, 2003, 2002 and 2001, respectively.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to account for stock compensation under Accounting Principles Board Opinion No. 25. Pro forma net earnings and earnings per share, as calculated under SFAS No. 123, are as follows:
For the Years Ended December 31, | |||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars, | |||||||
except for per share amounts) | |||||||
Net earnings, pro forma | $212,710 | $196,860 | $162,269 | ||||
Earnings per share, pro forma: | |||||||
Basic | $ 2.34 | $ 2.14 | $ 1.74 | ||||
Diluted | $ 2.31 | $ 2.10 | $ 1.72 |
The weighted average fair value of the stock options granted during 2003, 2002 and 2001 was $10.43, $14.77 and $10.89, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model based on the date of the grant and the following weighted average assumptions:
2003 | 2002 | 2001 | |||||
|
|
|
|||||
Risk-free interest rate | 3.4 | % | 4.9 | % | 5.1 | % | |
Expected life | 7 years | 7 years | 7 years | ||||
Expected volatility | 20.1 | % | 20.1 | % | 20.1 | % | |
Expected dividend yield | 1.8 | % | 1.8 | % | 1.8 | % |
The Company had no shares of preferred stock outstanding as of December 31, 2003, 2002 and 2001. The activity of outstanding common stock and common stock held in treasury was as follows:
2003 |
2002 |
2001 |
|||||||||||
|
|
|
|||||||||||
Outstanding Common Stock | Treasury Stock | Outstanding Common Stock | Treasury Stock | Outstanding Common Stock | Treasury Stock | ||||||||
|
|
|
|
|
|
||||||||
Balance at beginning of period | 91,568,055 | 17,449,587 | 93,344,641 | 15,129,062 | 93,932,870 | 14,104,212 | |||||||
Exercise of stock options | 415,244 | (5,500 | ) | 582,243 | (1,000 | ) | 332,217 | -- | |||||
Issuance and vesting of restricted | |||||||||||||
stock, net of 30,920, 35,224 | |||||||||||||
and 28,216 shares retained, | |||||||||||||
respectively | (10,920 | ) | -- | 74,776 | -- | 219,059 | -- | ||||||
Cancellation of restricted shares | (39,250 | ) | -- | (16,360 | ) | -- | (114,655 | ) | -- | ||||
Conversion of restricted stock | |||||||||||||
to restricted stock units | -- | -- | (95,720 | ) | -- | -- | -- | ||||||
Purchase of 4,801,600 shares | |||||||||||||
of stock, net of 4,695,725 | |||||||||||||
treasury shares transferred in | |||||||||||||
connection with related | |||||||||||||
party transaction | -- | -- | (105,875 | ) | 105,875 | -- | -- | ||||||
Purchase of treasury shares, | |||||||||||||
net of 6,160, 5,850 and | |||||||||||||
8,130 shares issued, | |||||||||||||
respectively | (912,140 | ) | 912,140 | (2,215,650 | ) | 2,215,650 | (1,811,870 | ) | 1,811,870 | ||||
Issuance of treasury shares | |||||||||||||
related to executive | |||||||||||||
stock purchase | -- | -- | -- | -- | 787,020 | (787,020 | ) | ||||||
|
|
|
|
|
|
||||||||
Balance at end of period | 91,020,989 | 18,356,227 | 91,568,055 | 17,449,587 | 93,344,641 | 15,129,062 | |||||||
|
|
|
|
|
|
The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company does not provide for a U.S. income tax liability on undistributed earnings of its foreign subsidiaries. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in those non-U.S. operations or will be remitted substantially free of additional tax.
Income tax expense consisted of:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Current provision: | |||||||
Federal | $121,671 | $140,453 | $107,667 | ||||
State | 22,307 | 24,696 | 18,998 | ||||
Foreign | 4,759 | 3,680 | 5,023 | ||||
|
|
|
|||||
Total current | 148,737 | 168,829 | 131,688 | ||||
Deferred tax provision (benefit) | 5,382 | (6,480 | ) | (8,938 | ) | ||
|
|
|
|||||
Total provision | $154,119 | $162,349 | $122,750 | ||||
|
|
|
50
The income tax effects of temporary differences that gave rise to the net deferred tax asset were:
As of December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Deferred tax assets: | |||||||
Inventory valuation | $ 42,365 | $ 38,583 | $ 37,810 | ||||
Administrative and general expenses deducted | |||||||
on a paid basis for tax purposes | 52,820 | 52,090 | 55,850 | ||||
Employment-related benefits expense | 32,470 | 32,391 | 29,321 | ||||
Intangibles amortization | 987 | 6,723 | 3,623 | ||||
Foreign net operating loss carryforwards | 10,248 | 10,032 | 10,618 | ||||
Unrealized capital losses | 4,671 | 1,950 | 3,316 | ||||
Tax benefit (expense) related to designated hedge | 9,914 | 387 | (607 | ) | |||
Other | 1,401 | 2,830 | 2,824 | ||||
|
|
|
|||||
Deferred tax assets | 154,876 | 144,986 | 142,755 | ||||
Less valuation allowance | (14,919 | ) | (11,982 | ) | (13,934 | ) | |
|
|
|
|||||
Deferred tax assets, net of valuation allowance | $139,957 | $133,004 | $128,821 | ||||
|
|
|
|||||
Deferred tax liabilities: | |||||||
Purchased tax benefits | $(11,008 | ) | $(11,854 | ) | $ (12,540 | ) | |
Temporary differences related to | |||||||
property, buildings and equipment | (9,154 | ) | (5,273 | ) | (5,329 | ) | |
Unrealized gain on investments | -- | -- | (3,378 | ) | |||
Deferred tax liability of foreign investment | |||||||
corporation | -- | -- | (11,359 | ) | |||
|
|
|
|||||
Deferred tax liabilities | (20,162 | ) | (17,127 | ) | (32,606 | ) | |
|
|
|
|||||
Net deferred tax asset | $119,795 | $115,877 | $ 96,215 | ||||
|
|
|
|||||
The net deferred tax asset is classified as follows: | |||||||
Current assets | $ 99,499 | $ 95,336 | $ 97,454 | ||||
Noncurrent assets (liabilities) | 20,296 | 20,541 | (1,239 | ) | |||
|
|
|
|||||
Net deferred tax asset | $119,795 | $115,877 | $ 96,215 | ||||
|
|
|
The purchased tax benefits represent lease agreements acquired in prior years under the provisions of the Economic Recovery Act of 1981.
At December 31, 2003, the Company has $30.6 million of foreign operating loss carryforwards related to a foreign operation, which begin to expire in 2006. The valuation allowance represents a provision for uncertainty as to the realization of these carryforwards.
In addition, the Company recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to capital loss carryforward limitations. The changes in the valuation allowance were as follows:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Beginning balance | $ 11,982 | $ 13,934 | $ 8,217 | ||||
Foreign net operating loss carryforwards | 216 | (586 | ) | 2,401 | |||
Unrealized capital losses | 2,721 | (1,366 | ) | 3,316 | |||
|
|
|
|||||
Ending balance | $ 14,919 | $ 11,982 | $ 13,934 | ||||
|
|
|
51
A reconciliation of income tax expense with federal income taxes at the statutory rate follows:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Federal income taxes at the statutory rate | $133,382 | $139,243 | $104,048 | ||||
Foreign rate differences | 1,025 | 1,631 | 1,725 | ||||
State income taxes, net of federal income tax benefits | 14,500 | 15,404 | 12,349 | ||||
Other-net | 5,212 | 6,071 | 4,628 | ||||
|
|
|
|||||
Income tax expense | $154,119 | $162,349 | $122,750 | ||||
|
|
|
|||||
Effective tax rate | 40.4 | % | 40.8 | % | 41.3 | % | |
|
|
|
Basic earnings per share is based on the weighted average number of shares outstanding during the year. Diluted earnings per share is based on the combination of weighted average number of shares outstanding and dilutive potential shares. The Company had additional outstanding stock options of 3.6 million, 2.7 million and 1.7 million for the years ended December 31, 2003, 2002 and 2001, respectively, that were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the common stock.
The following table sets forth the computation of basic and diluted earnings per share:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands, except for | |||||||
per share amounts) | |||||||
Earnings before cumulative effect of accounting change | $226,971 | $235,488 | $174,530 | ||||
Cumulative effect of accounting change | -- | (23,921 | ) | -- | |||
|
|
|
|||||
Net earnings | $226,971 | $211,567 | $174,530 | ||||
|
|
|
|||||
Denominator for basic earnings per share- | |||||||
weighted average shares | 90,731 | 91,982 | 93,189 | ||||
Effect of dilutive securities stock-based compensation | 1,663 | 2,321 | 1,539 | ||||
|
|
|
|||||
Denominator for diluted earnings per share- | |||||||
weighted average shares adjusted for dilutive securities | 92,394 | 94,303 | 94,728 | ||||
|
|
|
|||||
Basic earnings per share before | |||||||
cumulative effect of accounting change | $ 2.50 | $ 2.56 | $ 1.87 | ||||
Cumulative effect of accounting change | -- | (0.26 | ) | -- | |||
|
|
|
|||||
Basic earnings per common share | $ 2.50 | $ 2.30 | $ 1.87 | ||||
|
|
|
|||||
Dilutive earnings per share before | |||||||
cumulative effect of accounting change | $ 2.46 | $ 2.50 | $ 1.84 | ||||
Cumulative effect of accounting change | -- | (0.26 | ) | -- | |||
|
|
|
|||||
Dilutive earnings per common share | $ 2.46 | $ 2.24 | $ 1.84 | ||||
|
|
|
The Company has a Shareholder Rights Plan, under which there is outstanding one preferred share purchase right (Right) for each outstanding share of the Companys common stock. Each Right, under certain circumstances, may be exercised to purchase one one-hundredth of a share of Series A-1999 Junior Participating Preferred Stock (intended to be the economic equivalent of one share of the Companys common stock) at a price of $250.00, subject to adjustment. The Rights become exercisable only after a person or a group, other than a person or group exempt under the plan, acquires or announces a tender offer for 15% or more of the Companys common stock. If a person or group, other than a person or group exempt under the plan, acquires 15% or more of the Companys common stock or if the Company is acquired in a merger or other business combination transaction, each Right generally entitles the holder, other than such person or group, to purchase, at the then-current exercise price, stock and/or other securities or assets of the Company or the acquiring company having a market value of twice the exercise price.
52
The Rights expire on May 15, 2009, unless earlier redeemed. They generally are redeemable at $.001 per Right until thirty days following announcement that a person or group, other than a person or group exempt under the plan, has acquired 15% or more of the Companys common stock. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of the Company.
The Company reports three segments: Branch-based Distribution, Lab Safety and Integrated Supply. The Branch-based Distribution segment provides customers with solutions to their immediate facilities maintenance and other needs. Branch-based Distribution is an aggregation of the following: Industrial Supply, Acklands (Canada), FindMRO, Export, Global Sourcing, Parts, Grainger, S.A. de C.V. (Mexico) and Grainger Caribe Inc. (Puerto Rico). Lab Safety is a direct marketer of safety and other industrial products. Integrated Supply serves customers who have chosen to outsource a portion or all of their indirect materials management processes. In April 2001, the Company discontinued its Digital segment except FindMRO, which became part of Branch-based Distribution. See Note 5 to the Consolidated Financial Statements.
The Companys segments offer differing ranges of services and products and require different resources and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to the related party sale.
2003 |
|||||||||||
|
|||||||||||
Branch-based Distribution |
Lab
Safety |
Integrated Supply |
Digital |
Total | |||||||
|
|
|
|
|
|||||||
(In thousands of dollars) |
|||||||||||
Total net sales | $4,167,164 | $305,480 | $211,679 | $ -- | $4,684,323 | ||||||
Intersegment net sales | (15,496 | ) | (1,813 | ) | -- | -- | (17,309 | ) | |||
|
|
|
|
|
|||||||
Net sales to external customers | $4,151,668 | $303,667 | $211,679 | $ -- | $4,667,014 | ||||||
Segment operating earnings | $ 390,183 | $ 41,885 | $ 3,201 | $ -- | $ 435,269 | ||||||
Segment assets | $1,851,640 | $142,466 | $ 40,094 | $ -- | $2,034,200 | ||||||
Depreciation and amortization | 65,744 | 7,239 | 1,286 | -- | 74,269 | ||||||
Additions to long-lived assets | 73,287 | 33,123 | 1,839 | -- | 108,249 |
2002 |
|||||||||||
|
|||||||||||
Branch-based Distribution |
Lab
Safety |
Integrated Supply |
Digital |
Total |
|||||||
|
|
|
|
|
|||||||
(In thousands of dollars) |
|||||||||||
Total net sales | $4,147,955 | $286,797 | $225,967 | $ -- | $4,660,719 | ||||||
Intersegment net sales | (15,411 | ) | (1,410 | ) | -- | -- | (16,821 | ) | |||
|
|
|
|
|
|||||||
Net sales to external customers | $4,132,544 | $285,387 | $225,967 | $ -- | $4,643,898 | ||||||
Segment operating earnings | $ 394,861 | $ 47,105 | $ 6,231 | $ -- | $ 448,197 | ||||||
Segment assets | $1,872,471 | $104,372 | $ 29,539 | $ -- | $2,006,382 | ||||||
Depreciation and amortization | 68,966 | 6,421 | 1,214 | -- | 76,601 | ||||||
Additions to long-lived assets | 123,039 | 2,127 | 1,581 | -- | 126,747 | ||||||
2001 |
|||||||||||
|
|||||||||||
Branch-based Distribution |
Lab
Safety |
Integrated Supply |
Digital |
Total |
|||||||
|
|
|
|
|
|||||||
(In thousands of dollars) |
|||||||||||
Total net sales | $4,251,596 | $324,797 | $190,811 | $ 29,979 | $4,797,183 | ||||||
Intersegment net sales | (13,436 | ) | (1,292 | ) | -- |
(28,138 |
) | (42,866 | ) | ||
|
|
|
|
|
|||||||
Net sales to external customers | $4,238,160 | $323,505 | $190,811 | $ 1,841 | $4,754,317 | ||||||
Segment operating earnings | $ 386,331 | $ 51,114 | $ 449 | $(49,227 | ) | $ 388,667 | |||||
Segment assets | $1,804,216 | $114,030 | $ 27,401 | $ -- | $1,945,647 | ||||||
Depreciation and amortization | 75,686 | 8,012 | 617 | 1,383 | 85,698 | ||||||
Additions to long-lived assets | 71,281 | 12,448 | 185 | 639 | 84,553 |
53
Following are reconciliations of the segment information with the consolidated totals per the financial statements:
2003 |
|||||||
|
|||||||
Segment | Consolidated | ||||||
Totals | Unallocated | Total | |||||
|
|
|
|||||
Other significant items: |
(In thousands of dollars) |
||||||
Depreciation and amortization | $ 74,269 | $ 15,984 | $ 90,253 | ||||
Additions to long-lived assets | $ 108,249 | $ 3,680 | $ 111,929 | ||||
Long-lived | |||||||
Geographic Information: | Revenues | Assets | |||||
|
|
||||||
United States | $4,183,321 | $ 773,411 | |||||
Canada | 393,938 | 143,007 | |||||
Other foreign countries | 89,755 | 4,052 | |||||
|
|
||||||
$4,667,014 | $ 920,470 | ||||||
|
|
Long-lived assets consist of property, buildings, equipment, capitalized software, goodwill and other intangibles.
Revenues are attributed to countries based on the location of the customer.
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 include non-operating cash and cash equivalents, and certain prepaid expenses and property, buildings and equipment, net.
The change in the carrying amount of goodwill by segment from December 31, 2001 to December 31, 2003 is as follows:
|
Branch-
|
Lab Safety |
Integrated Supply |
Total |
|||||
|
|
|
|
||||||
(In thousand of dollars) |
|||||||||
Balance at December 31, 2001 | $125,443 | $25,002 | $ -- | $150,445 | |||||
Transition impairment | (32,265 | ) | -- | -- | (32,265 | ) | |||
Transfer to investment in unconsolidated entity | (5,063 | ) | -- | -- | (5,063 | ) | |||
Translation and other | 1,208 | 103 | -- | 1,311 | |||||
|
|
|
|
||||||
Balance at December 31, 2002 | $ 89,323 | $25,105 | $ -- | $114,428 | |||||
Acquisition | -- | 22,823 | -- | 22,823 | |||||
Translation and other | 19,018 | -- | -- | 19,018 | |||||
|
|
|
|
||||||
Balance at December 31, 2003 | $108,341 | $47,928 | $ -- | $156,269 | |||||
|
|
|
|
A summary of selected quarterly information for 2003 and 2002 is as follows:
2003 Quarter Ended |
|||||||||||
|
|||||||||||
(In thousands of dollars, except for per share amounts) |
|||||||||||
March 31 | June 30 | September 30 | December 31 | Total | |||||||
|
|
|
|
|
|||||||
Net sales | $1,139,269 | $1,172,661 | $1,200,669 | $1,154,415 | $4,667,014 | ||||||
Cost of merchandise sold | 745,413 | 768,589 | 786,530 | 728,405 | 3,028,937 | ||||||
Gross profit | 393,856 | 404,072 | 414,139 | 426,010 | 1,638,077 | ||||||
Warehousing, marketing and | |||||||||||
administrative expenses | 302,449 | 311,292 | 319,818 | 317,821 | 1,251,380 | ||||||
Restructuring credits | -- | -- | -- | (564 | ) | (564 | ) | ||||
Operating earnings | 91,407 | 92,780 | 94,321 | 108,753 | 387,261 | ||||||
Net earnings | 52,404 | 55,993 | 56,836 | 61,738 | 226,971 | ||||||
Earnings per share-basic | 0.58 | 0.61 | 0.63 | 0.68 | 2.50 | ||||||
Earnings per share-diluted | $ 0.57 | $ 0.60 | $ 0.62 | $ 0.67 | $ 2.46 |
2002 Quarter Ended |
|||||||||||
|
|||||||||||
(In thousands of dollars, except for per share amounts) |
|||||||||||
March 31 | June 30 | September 30 | December 31 | Total | |||||||
|
|
|
|
|
|||||||
Net sales | $1,125,265 | $1,194,792 | $1,203,400 | $1,120,441 | $4,643,898 | ||||||
Cost of merchandise sold | 742,236 | 795,230 | 800,840 | 707,380 | 3,045,686 | ||||||
Gross profit | 383,029 | 399,562 | 402,560 | 413,061 | 1,598,212 | ||||||
Warehousing, marketing and | |||||||||||
administrative expenses | 293,069 | 305,298 | 302,370 | 306,259 | 1,206,996 | ||||||
Restructuring credits | -- | -- | -- | (1,939 | ) | (1,939 | ) | ||||
Operating earnings | 89,960 | 94,264 | 100,190 | 108,741 | 393,155 | ||||||
Net earnings | 34,537 | 54,499 | 59,953 | 62,578 | 211,567 | ||||||
Earnings per share-basic | 0.37 | 0.59 | 0.65 | 0.69 | 2.30 | ||||||
Earnings per share-diluted | $ 0.36 | $ 0.57 | $ 0.64 | $ 0.67 | $ 2.24 |
In 2003 and 2002, the Company reduced the restructuring reserve related to the shutdown of Material Logic by $0.6 million and $1.9 million, respectively, to reflect managements revised estimates of costs. See Note 5 to the Consolidated Financial Statements.
In the 2002 first quarter, the Company recorded an expense for a cumulative effect of a change in accounting of $23.9 million after-tax. See Note 3 to the Consolidated Financial Statements.
55
On February 28, 2002, the Company purchased substantially all of the assets, consisting of 4,801,600 shares of Company common stock and cash, of Mountain Capital Corporation, a Nevada corporation (MCC). In exchange, the Company transferred to MCC 4,695,725 shares of Company common stock. The number of shares transferred reflected a 1.5% discount (72,024 shares) from the number of shares received, and additionally reflected other adjustments designed to reimburse the Company for its direct transaction expenses of $0.6 million (10,549 shares) and for the Companys payment of indebtedness of MCC of $1.3 million (23,302 shares). The effect on the Company of this transaction was to increase the number of shares held as Treasury stock, thereby reducing the number of shares outstanding by 105,875 shares. The shares received by MCC from the Company were subsequently distributed to the MCC shareholders pursuant to a plan of complete liquidation of MCC.
The transaction documentation includes:
(i) | a Purchase Agreement containing the terms and conditions of the transaction; |
(ii) | an Escrow Agreement providing for the pledge by MCC of 10% of the shares received in the transaction, and the |
pledge by the MCC shareholders of the escrowed shares, as security for the indemnification obligations | |
and liabilities of MCC and the MCC shareholders and | |
(iii) | a Share Transfer Restriction Agreement providing for certain restrictions on the transfer of Company common |
stock received by or otherwise held by the MCC shareholders and certain other parties to that agreement. |
Prior to the transaction, James D. Slavik, a Company director, was the president and a director of MCC. In addition, Mr. Slavik and certain members of his family owned all of the outstanding stock of MCC either directly or indirectly, including through family trusts of which Mr. Slavik served as trustee. Mr. Slavik was not present and did not participate in any of the deliberations of the Board of Directors or any of its committees relating to the review, consideration or approval of the transaction.
The components of Unclassifiednet were as follows:
For the Years Ended December 31, |
|||||||
|
|||||||
2003 | 2002 | 2001 | |||||
|
|
|
|||||
(In thousands of dollars) |
|||||||
Gains on sales of investment securities | $ 1,208 | $ 7,308 | $ 138 | ||||
Gains on sales of fixed assets | 3,110 | 6,409 | 1,613 | ||||
Other income | 198 | 1,106 | 48 | ||||
|
|
|
|||||
Total income | 4,516 | 14,823 | 1,799 | ||||
|
|
|
|||||
Write-down of investments | (1,614 | ) | (3,192 | ) | (7,400 | ) | |
Losses on sales of fixed assets | (1,503 | ) | (1,190 | ) | -- | ||
Other expense | (693 | ) | (1,144 | ) | (517 | ) | |
|
|
|
|||||
Total expense | (3,810 | ) | (5,526 | ) | (7,917 | ) | |
|
|
|
|||||
Unclassified-net | $ 706 | $ 9,297 | $ (6,118 | ) | |||
|
|
|
The Company has an outstanding guarantee relating to an industrial revenue bond assumed by the buyer of one of the Companys formerly owned facilities. The maximum exposure under this guarantee is $8.5 million. The Company has not recorded any liability relating to this guarantee and believes it is unlikely that material payments will be required.
As of January 28, 2004, the Company is named, along with numerous other nonaffiliated companies, as a defendant in litigation involving asbestos and/or silica filed on behalf of approximately 3,300 plaintiffs in various states. These lawsuits typically involve claims of personal injury arising from the alleged exposure to asbestos and/or silica as a consequence of products purportedly distributed by the Company. In 2003, lawsuits involving approximately 275 plaintiffs were dismissed with respect to the Company based on the lack of product identification. The Company has denied, or intends to deny, the allegations in the remaining lawsuits. If a specific product distributed by the Company is identified in any of these lawsuits, the Company would attempt to exercise indemnification remedies against the product manufacturer. In addition, the Company believes that a substantial portion of these claims are covered by insurance. The Company is engaged in active discussions with its insurance carriers regarding the scope and amount of coverage. While the Company 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 the Companys consolidated financial position or results of operations.
56
EXHIBIT 11
W.W. Grainger, Inc. and Subsidiaries |
|||||||
---|---|---|---|---|---|---|---|
COMPUTATIONS OF EARNINGS PER SHARE | |||||||
2003 | 2002 | 2001 | |||||
BASIC: |
|
|
|
||||
Weighted average number of shares outstanding during the year | 90,731,013 | 91,982,430 | 93,189,132 | ||||
|
|
|
|||||
Earnings before cumulative effect of accounting change | $ 226,971,000 | $ 235,488,000 | $ 174,530,000 | ||||
Cumulative effect of accounting change | -- | (23,921,000 | ) | -- | |||
|
|
|
|||||
Net earnings | $ 226,971,000 | $ 211,567,000 | $ 174,530,000 | ||||
|
|
|
|||||
Earnings per share before cumulative | |||||||
effect of accounting change | $ 2.50 | $ 2.56 | $ 1.87 | ||||
Cumulative effect of accounting change per share | -- | (0.26 | ) | -- | |||
|
|
|
|||||
Earnings per share | $ 2.50 | $ 2.30 | $ 1.87 | ||||
|
|
|
|||||
DILUTED: | |||||||
Weighted average number of shares outstanding during the year | 90,731,013 | 91,982,430 | 93,189,132 | ||||
Potential shares: | |||||||
Shares issuable under outstanding options | 6,849,373 | 7,115,270 | 4,155,999 | ||||
Shares which could have been purchased based on | |||||||
the average market value for the period | (5,920,171 | ) | (5,721,423 | ) | (3,625,281 | ) | |
|
|
|
|||||
929,202 | 1,393,847 | 530,718 | |||||
Dilutive effect of exercised options prior to being exercised | 11,815 | 29,738 | 16,696 | ||||
|
|
|
|||||
Shares for the portion of the period | |||||||
that the options were outstanding | 941,017 | 1,423,585 | 547,414 | ||||
Contingently issuable shares | 722,055 | 897,482 | 991,322 | ||||
|
|
|
|||||
1,663,072 | 2,321,067 | 1,538,736 | |||||
|
|
|
|||||
Adjusted weighted average number of shares | |||||||
outstanding during the year | 92,394,085 | 94,303,497 | 94,727,868 | ||||
|
|
|
|||||
Earnings before cumulative effect of accounting change | $ 226,971,000 | $ 235,488,000 | $ 174,530,000 | ||||
Cumulative effect of accounting change | -- | (23,921,000 | ) | -- | |||
|
|
|
|||||
Net earnings | $ 226,971,000 | $ 211,567,000 | $ 174,530,000 | ||||
|
|
|
|||||
Earnings per share before | |||||||
cumulative effect of accounting change | $ 2.46 | $ 2.50 | $ 1.84 | ||||
Cumulative effect of accounting change per share | -- | (0.26 | ) | -- | |||
|
|
|
|||||
Earnings per share | $ 2.46 | $ 2.24 | $ 1.84 | ||||
|
|
|
|||||
57
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS |
EXHIBIT 23 |
|
We hereby consent to the incorporation of our report
dated January 28, 2004 on page 27 of the Annual
Report
for the year ended December 31, 2003 by reference in the prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-43902, 333-24215, 333-61980 and 333-105185) and on Form S-4 (No. 33-32091) of W.W. Grainger, Inc. |
GRANT THORNTON LLP |
Chicago, Illinois
March 9, 2004 |
58
Exhibit 10 (viii) |
W. W. GRAINGER, INC.
SUPPLEMENTAL PROFIT SHARING PLAN
(As Amended and Restated Effective January 1, 1992)
(Conformed Copy as of March 3, 2004, Including
First through Seventh Amendments)
ArticlePage
1 PURPOSE AND EFFECTIVE DATE............................................1 2 DEFINITIONS...........................................................1 3 ADMINISTRATION........................................................2 4 ELIGIBILITY...........................................................2 5 BENEFITS AND ACCOUNTS.................................................3 6 VESTING...............................................................4 7 AMENDMENT AND TERMINATION.............................................4 8 MISCELLANEOUS.........................................................5
W. W. GRAINGER, INC.
SUPPLEMENTAL PROFIT SHARING PLAN
(As Amended and Restated Effective January 1, 1992)
(Conformed Copy as of March 3, 2004, Including
First through Seventh Amendments)
ARTICLE ONE. PURPOSE AND EFFECTIVE DATE
1.1
Purpose of Plan
. The purpose of this W.W. Grainger, Inc. Supplemental Profit Sharing Plan is to provide key
executives with profit sharing and retirement benefits commensurate with their current compensation unaffected by
limitations imposed by the Internal Revenue Code on qualified retirement plans. The Plan is intended to constitute an
excess benefit plan, as defined in Section 3(36) of ERISA, and a "top hat" plan, as defined in Section 201(2) of
ERISA.
1.2
Effective Date
. This Plan was originally established effective as of January 1, 1983. It was subsequently
amended and restated by action of the Board of Directors on April 29, 1992. The effective date of the Plan as amended and
restated herein is January 1, 1992.
ARTICLE TWO.
DEFINITIONS
2.1
Definitions
. Whenever used herein, the following terms shall have the respective meanings set forth below and,
when intended, such terms shall be capitalized.
(a) "Retirement" shall have the same meaning as defined in Section1.36 of the Profit Sharing Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(c) "Committee" shall mean the Profit Sharing Trust Committee.
(d) "Company" shall mean W.W. Grainger, Inc., a corporation organized under the laws of the State of Illinois, and
subsidiaries thereof.
(e) "Disability" shall have the same meaning as defined in Section 1.14 of the Profit Sharing Plan.
(f) "Employee" shall mean any person who is employed by the Company.
(g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.
(h) "Participant" shall mean any Employee selected by the Committee to participate in this Plan pursuant to Article
Four.
(i) "Plan" shall mean this W.W. Granger, Inc. Supplemental Profit Sharing Plan.
(j) "Profit Sharing Plan" shall mean the W.W. Grainger, Inc. Employees Profit Sharing Plan as amended
from time
to
time.
2.2
Gender and Number
. Except when otherwise indicated by the context, any masculine term used in this plan also
shall include the feminine; the plural shall include the singular and the singular shall include the plural.
ARTICLE THREE.
ADMINISTRATION
3.1
Administration by
Committee
. The Plan shall be administered by the Committee, which is appointed by the Board
of Directors of the Company to administer this Plan and the Profit Sharing Plan.
3.2
Authority of
Committee
. The Committee shall have the authority to interpret the Plan, to establish and revise
rules and regulations relating to the Plan, to designate Participants, and to make all determinations that it deems
necessary or advisable for the administration of the Plan.
ARTICLE FOUR.
ELIGIBILITY
4.1
Participants
. The Committee shall select the Employee or Employees who shall participate in this Plan, subject
to the limitations set forth in Section 4.2. Once an Employee is designated a Participant, he shall remain a Participant
for the purposes specified in Section 5.1 and/or Section 5.2 until the earlier of his death, retirement, disability, or
termination of employment.
4.2
Limitations on
Eligibility
. The Committee may select as Participants in this Plan only those Employees who are
"Eligible Employees" in the Profit Sharing Plan (as defined therein) and whose share of contribution are forfeitures
under the Profit Sharing Plan are limited by:
(a) Section 415 of the Code; or
(b) Any other provision of the Code or ERISA, provided that the Employee is among "a select group of
management or
highly compensated Employees" of
the Company, within the meaning of Sections 201,
301, and 401
of ERISA, such that the Plan with respect to benefits attributable to this subsection
(b)
qualifies for a
2
"top hat" exemption from most of the substantive requirements of Title I of
ERISA.
ARTICLE FIVE.
BENEFITS AND ACCOUNTS
5.1
Accounts
. An account shall be established for each Participant. Each year there shall be credited to each
Participant's account the difference between (a) the aggregate amount of Company contributions and forfeitures which
would have been allocated to the account of the Participant in the Profit Sharing Plan without regard to the contribution
limitations described in Section 4.2 hereof; and (b) the amount of Company contribution and forfeitures actually
allocated to the account of the Participant in the Profit Sharing Plan.
5.2
Earnings
. For periods after March 31, 2004, in addition to the credit under Section 5.1, if any, earnings
shall be credited each Participant's account based on the applicable earnings factor. For purposes of the Plan, the
applicable earnings factor for any Participant shall be the rate of return on the investment alternatives that are
offered under the Plan and in which the Participant has elected to have his Plan account deemed to be invested. Unless
otherwise specified by the Committee, the investment alternatives offered under the Plan shall be the same investment
alternatives that are available for investment of participants' accounts under the Profit Sharing Plan. The Committee
shall establish uniform and nondiscriminatory rules and procedures pursuant to which Participants may elect among the
applicable investment alternatives; provided, however, that if a Grainger stock fund is offered as an investment
alternative under the Plan, such investment alternative shall be subject to the same restrictions as apply to an
investment in the Grainger Stock Fund under the Profit Sharing Plan. Adjustments to Participants' accounts under the
Plan to reflect the earnings factor shall be made at the same time and in the same manner as earnings are credited to
participants' accounts under the Profit Sharing Plan. Notwithstanding any other provisions of this Section 5.2, any
investment elections in effect under the Profit Sharing Plan on March 31, 2004 shall apply for purposes of the Plan
thereafter unless and until changed by the Participant. Notwithstanding a Participant's election with respect to the
investment of his or her account under the Plan, any such investment election shall be hypothetical, neither the Company
nor the Committee shall have any obligation to purchase any investment to provide benefits under the Plan and, in the
event the Company does purchase an investment, such investment shall be for the sole benefit of the Company and Plan
Participants shall have no rights under or with respect to such investment.
5.3
Distribution Upon Termination of
Employment
. In the event of a Participant's termination of employment for any
reason other than death, the Participant's vested account balance under this Plan shall become payable to the Participant
in the form of five annual installments, provided that a vested account balance less than $100,000 shall be paid in a
lump sum within ninety (90) days after the end of the calendar quarter in which termination occurs.
Notwithstanding, a Participant whose vested account balance is $100,000 or greater may elect, on a form approved
by the Committee, to receive distribution of his or
3
her vested account balance in the form of a lump sum payment or in
the form of annual installments paid over a period not to exceed the lesser of 15 years or the Participant's remaining
life expectancy. Such election shall not be given effect unless it is submitted to the Committee or its designee at least
12 months prior to the Participant's termination of employment. Life expectancy shall be calculated as of the end of the
calendar year during which the Participant's employment is terminated, and shall not thereafter be recalculated.
The first annual installment, or a lump sum payment, if properly elected, shall be paid to the Participant within
ninety (90) days after the end of the calendar quarter in which termination of employment occurs. The remaining
installments shall be paid in the first calendar quarter of each subsequent year.
The amount of each annual installment shall be equal to the quotient obtained by dividing the value of the
Participant's vested account balance on the effective date of the related employment termination (and on the date of each
subsequent installment, as appropriate) by the number of years remaining in the distribution period including that
installment. The Participant's vested account balance shall continue to accrue earnings, as specified in Section 5.2,
until the entire vested account balance has been paid.
5.4
Death Benefit
. In the event of a Participant's death, the Participant's entire remaining account balance shall
be paid in a lump sum, within ninety (90) days after the end of the calendar quarter in which such death occurs, to the
Participant's beneficiary, as such beneficiary was designated by the Participant in accordance with the Company's
beneficiary designation procedures.
In the event a Participant dies without having designated a beneficiary, or with no surviving beneficiary, the
Participant's account balance shall be paid in a lump sum to the Participant's estate within ninety (90) days after the
end of the calendar quarter in which death occurs.
5.5
Alternative Payment Form
. Notwithstanding the terms and conditions of Section 5.3, a Participant may at any
time on or after his termination of employment petition the Committee to request that payment of his remaining vested
account balance be made in a lump sum due to circumstances of compelling personal hardship. The Committee, at its sole
discretion, shall make a binding determination as to whether such alternative form of payment will be allowed.
ARTICLE SIX.
VESTING
6.1
Vesting
. Subject to Section 8.1, each Participant shall become vested in his account balance under this Plan
at the same rate and at the same time as he becomes vested in his account balance in the Profit Sharing Plan.
ARTICLE SEVEN.
AMENDMENT AND TERMINATION
7.1
Amendment
. The Company shall have the power at any time and from time to time to amend this Plan by resolution
of its Board of Directors, provided that no
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amendment shall be adopted the effect of which would be to deprive any
Participant of his vested interest in his account under this Plan.
7.2
Termination
. The Company reserves the right to terminate this Plan at any time by resolution of its Board of
Directors. Subject to Section 8.1, upon termination of this Plan, each Participant shall become fully vested in his
account balance and such account balance shall become payable at the same time and in the same manner as provided in
Article Five.
7.3
Former Employees
. Notwithstanding any provision of the Plan to the contrary, in the event of any amendment of
the Plan with respect to the payment of vested account balances or the termination of the Plan pursuant to this Article,
former employees for whom accounts are then maintained under the Plan will be treated no less favorably with respect to
such amendment or termination than active employees for whom accounts are then maintained under the Plan.
ARTICLE EIGHT.
MISCELLANEOUS
8.1
Funding
. This Plan shall be unfunded. No contributions shall be made to any separate funding vehicle. The
Company may set up reserves on its books of account evidencing the liability under this Plan. To the extent that any
person acquires an account balance hereunder or a right to receive payments from the Company, such right shall be no
greater than the right of a general unsecured creditor.
8.2
Limitation of Rights
. Nothing in the Plan shall be construed to:
(a) Give any Employee any right to participate in the Plan except in accordance with the provisions of the Plan;
(b) Limit in any way the right of the Company to terminate an Employee's employment; or
(c) Evidence any agreement or understanding, express or implied, that the Company will employ an Employee in
any
particular position or at any particular
rate of remuneration.
8.3
Nonalienation
. No benefits under this Plan shall be pledged, assigned, transferred, sold or in any manner
whatsoever anticipated, charged, or encumbered by an Employee, former Employee, or their beneficiaries, or in any manner
be liable for the debts, contracts, obligations, or engagements of any person having a possible interest in the Plan,
voluntary or involuntary, or for any claims, legal or equitable, against any such person, including claims for alimony or
the support of any spouse.
8.4
Controlling Law
. This Plan shall be construed in accordance with the laws of the State of Illinois in every
respect, including without limitation, validity, interpretation, and performance.
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8.5 Text Controls . Article headings are included in the Plan for convenience of reference only, and the Plan is to be construed without any reference to such headings. If there is any conflict between such headings and the text of the Plan, the text shall control.
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Exhibit 10 (x) |
TABLE OF CONTENTS |
Page |
ARTICLE 1 DEFINITIONS |
1 |
ARTICLE 2 SELECTION, ENROLLMENT, ELIGIBILITY |
6 |
2.1 Selection by Committee |
6 |
2.2 Enrollment Requirements |
6 |
2.3 Eligibility; Commencement of Participation |
6 |
2.4 Termination of Participation and/or Deferrals |
6 |
ARTICLE 3 CONTRIBUTIONS/CREDITING/TAXES |
7 |
3.1 Minimum and Maximum Deferrals |
7 |
3.2 Election Form |
7 |
3.3 Withholding of Annual Deferral Amounts |
8 |
3.4 Profit Sharing Allocation |
8 |
3.5 Vesting |
8 |
3.6 Allocation of Funds |
8 |
3.7 FICA and Other Taxes |
9 |
3.8 Distributions |
10 |
ARTICLE 4 HARDSHIP WITHDRAWAL | 11 |
ARTICLE 5 DISTRIBUTION OF BENEFITS |
12 |
5.1 Distribution Election |
12 |
5.2 Retirement/Disability Distributions |
12 |
5.3 Date Certain Distributions |
13 |
|
5.4 Death Before Commencement of Distributions |
14 |
5.5 Death After Commencement of Distributions |
14 |
5.6 Other Terminations of Employment |
14 |
5.7 Hardship Withdrawals |
14 |
ARTICLE 6 DISABILITY WAIVER AND BENEFIT |
15 |
6.1 Disability Waiver |
15 |
6.2 Continued Eligibility; Disability Benefit |
15 |
ARTICLE 7 BENEFICIARY DESIGNATION |
16 |
7.1 Beneficiary |
16 |
7.2 Beneficiary Designation and Change of Beneficiary |
16 |
TABLE OF CONTENTS
|
Page |
7.3 Acknowledgment |
16 |
7.4 No Beneficiary Designation |
16 |
7.5 Doubt as to Beneficiary |
16 |
ARTICLE 8 LEAVE OF ABSENCE |
17 |
8.1 Paid Leave of Absence |
17 |
8.2 Unpaid Leave of Absence |
17 |
ARTICLE 9 TERMINATION, AMENDMENT OR MODIFICATION |
18 |
9.1 Termination |
18 |
9.2 Amendment |
18 |
ARTICLE 10 ADMINISTRATION |
19 |
10.1 Committee Duties |
19 |
10.2 Administration Upon Change In Control |
19 |
10.3 Agents |
19 |
10.4 Binding Effect of Decisions |
19 |
10.5 Indemnity of Committee |
20 |
10.6 Employer Information |
20 |
ARTICLE 11 OTHER BENEFITS AND AGREEMENTS |
21 |
11.1 Coordination with Other Benefits |
21 |
ARTICLE 12 CLAIMS PROCEDURES |
22 |
12.1 Presentation of Claim |
22 |
12.2 Notification of Decision |
22 |
12.3 Review of a Denied Claim |
22 |
12.4 Decision on Review |
23 |
12.5 Legal Action |
23 |
ARTICLE 13 STATUS OF THE PLAN |
24 |
13.1 Plan To Be Unfunded |
24 |
13.2 Unsecured General Creditor |
24 |
ARTICLE 14 MISCELLANEOUS |
25 |
14.1 Employer s Liability |
25 |
14.2 Nonassignability |
25 |
-ii-
TABLE OF CONTENTS
|
Page |
14.3 Not a Contract of Employment |
25 |
14.4 Furnishing Information |
25 |
14.5 Terms |
25 |
14.6 Captions |
25 |
14.7 Governing Law |
26 |
14.8 Notice |
26 |
14.9 Successors |
26 |
14.10 Validity |
26 |
14.11 Incompetent |
26 |
14.12 Court Order |
26 |
14.13 Distribution in the Event of Taxation |
27 |
14.14 Discharge of Obligations |
27 |
14.15 Legal Fees to Enforce Rights After Change in Control |
27 |
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For purposes of the Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: |
1.1 | Administrator shall mean the Committee at all times prior to the occurrence of a Change in Control. Upon and after the occurrence of a Change in Control, the Administrator shall be an independent third party approved by the individual who, immediately prior to such event, was the Companys Chief Executive Officer or, if not so identified, the Companys highest ranking officer. |
1.2 | Affiliate shall mean (i) a corporation that is a member of a controlled group of corporations (as determined pursuant to Section 414(b) of the Code) which includes the Company and (ii) a trade or business (whether or not incorporated) which is under common control (as determined pursuant to Section 414(c) of the Code) with the Company. |
1.3 | Annual Account Balance shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of the Annual Deferral Account balance and the Annual Profit Sharing Account balance. The Annual Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to the Plan. |
1.4 | Annual Base Salary shall mean the annual cash compensation relating to services performed during any Plan Year, whether or not paid in such Plan Year or included on the Federal Income Tax Form W-2 for such Plan Year, excluding bonuses, commissions, royalties, overtime, fringe benefits, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employees gross income). Annual Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all |
qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participants gross income under Code Sections 125, 402(e)(3), 402(h), 403(b) or any other Code Sections which allow pre-tax contributions pursuant to plans established by the Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. |
1.5 | Annual Deferral Account shall mean (i) the sum of all of a Participants Annual Deferral Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of the Plan that relate to the Participants Annual Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to the Plan that relate to his or her Annual Deferral Account. |
1.6 | Annual Deferral Amount shall mean that portion of a Participants Annual Base Salary and Bonus that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participants Retirement, Disability (if deferrals cease in accordance with Section 6.1), death or other termination of employment prior to the end of a Plan Year, such years Annual Deferral Amount shall be the actual amount withheld prior to such event. |
1.7 | Annual Profit Sharing Account shall mean (i) the sum of all of a Participants Annual Profit Sharing Allocations, plus (ii) amounts credited in accordance with all the applicable crediting provisions of the Plan that relate to the Participants Annual Profit Sharing Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to the Plan that relate to the Participants Annual Profit Sharing Account. |
1.8 | Annual Profit Sharing Allocation for a Plan Year shall be the amount determined in accordance with Section 3.4. |
1.9 | Beneficiary shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 7, that are entitled to receive benefits under the Plan upon the death of a Participant. |
1.10 | Beneficiary Designation Form shall mean the form, established from time to time by the Committee, that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. |
1.11 | Board shall mean the Board of Directors of the Company. |
1.12 | Bonus shall mean any cash compensation, in addition to Annual Base Salary relating to services performed during any Plan Year, whether or not paid in such Plan Year or included on the Federal Income Tax Form W-2, payable to a Participant as an Employee under the Employers annual incentive plans. |
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1.13 | Change in Control shall have the meaning set forth in Section 2.1(d) of the W.W. Grainger, Inc. 2001 Long Term Stock Incentive Plan, as may be amended from time to time. |
1.14 | Claimant shall have the meaning set forth in Section 12.1. |
1.15 | Code shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. |
1.16 | Committee shall mean the committee described in Article 10. |
1.17 | Company shall mean W.W. Grainger, Inc., an Illinois corporation and any successor to such corporation that adopts the Plan. |
1.18 | Date Certain Distribution shall mean a distribution from the Plan of the vested Annual Account Balance elected by the Participant to be paid in a single-sum or installments pursuant to Section 5.3 of the Plan at a date specified in the Deferral Election Form other than as a result of the Participants Retirement or Disability. |
1.19 | Deduction Limitation shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of the Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are subject to the Deduction Limitation under the Plan. If the Company determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Company would not be deductible by the Company solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Company to ensure that the entire amount of any distribution to the Participant pursuant to the Plan prior to the Change in Control is deductible, the Company may defer all or any portion of a distribution under the Plan. Any amounts deferred pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Section 3.6(a) below. The amounts so deferred and amounts credited/debited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participants death) at the earliest possible date, as determined by the Company in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Company during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in the Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. |
1.20 | Deferral Election Form shall mean the form established by the Committee that a Participant completes, signs and returns to the Committee to make his or her deferral election under the Plan in accordance with Section 3.2 of the Plan. |
1.21 | Disability shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the long-term disability plan of the Employer in which the Participant participates, or, if a Participant does not |
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participate in such a plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Employer does not sponsor such a plan, or discontinues sponsoring such a plan, Disability shall be determined by the Committee in its sole discretion. Notwithstanding any language within Article 6 or Article 12 to the contrary, disability claims shall be administered in accordance with the disability requirements of the Department of Labor claims procedure regulations under 29 CFR 2560.503-1, as may be amended from time to time, which are hereby incorporated by reference. |
1.22 | Disability Benefit shall mean the benefit set forth in Article 6. |
1.23 | Employee shall mean an individual whose relationship with an Employer is, under common law, that of an employee. |
1.24 | Employer shall mean the Company and/or any Affiliate selected by the Committee to participate in the Plan and any successor. If any such entity withdraws, is excluded from participation in the Plan or terminates its participation in the Plan, such entity shall thereupon cease to be an Employer. |
1.25 | ERISA shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. |
1.26 | Hardship shall, if permitted by law, mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participants property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. Such circumstances and the Committees determination will depend on the facts of each case, but, in any case, an occurrence or event will not be determined to be a Hardship to the extent that such hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the Participants assets, to the extent liquidation of such assets would not itself cause severe financial hardship, or (iii) by cessation of his elective deferrals under the Plan for the remainder of the Plan Year. |
1.27 | Participant shall mean (i) any individual selected by the Committee to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who properly completes and submits a Deferral Election Form, (iv) who commences participation in the Plan, and (v) whose participation has not terminated. |
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1.28 | Plan shall mean the W.W. Grainger, Inc. Voluntary Salary and Incentive Deferral Plan, which shall be evidenced by this instrument, as may be amended from time to time. |
1.29 | Plan Year shall mean the 12-month period commencing January 1. |
1.30 | Profit Sharing Plan shall mean the W.W. Grainger, Inc. Employees Profit Sharing Plan or a comparable plan which covers Employees of an Affiliate. |
1.31 | Retirement shall mean the voluntary severance of employment with the Employer as a retirement as such term, or comparable applicable term, is defined under the Profit Sharing Plan. |
1.32 | Year of Service shall have the same meaning as the term Vesting Service under the Profit Sharing Plan. |
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2.1 | Selection by Committee . Participation in the Plan shall be limited to a select group of management and highly compensated Employees of the Company who are situated in the United States, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees to participate in the Plan. |
2.2 | Enrollment Requirements . As a condition to participation, each selected Employee shall complete, execute and return to the Committee a Deferral Election Form within the time prescribed by the Committee. The Committee may establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. |
2.3 | Eligibility; Commencement of Participation . Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in the Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee shall commence participation in the Plan on the first day of the month following the month in which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the proper completion and delivery to the Committee of the required documents. |
2.4 | Termination of Participation and/or Deferrals . If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election for both Annual Base Salary and/or Bonus which the Participant has made for the remainder of the Plan Year in which the Participants membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the total vested portion of the Participants Annual Account Balances and terminate the Participants participation in the Plan. If a Participant terminates employment after the end of a Plan Year but prior to the payment of a bonus for such Plan Year, the deferral election will be terminated. |
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3.1 Minimum and Maximum Deferrals .
(a) |
Annual Deferral Amount, Annual Base Salary, and Bonus . For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Annual Base Salary and/or Bonus multiplied by percentages which are not less than the following minimum percentages or more than the following maximum percentages. |
Minimum | Maximum | |||
Annual Base Salary | 5% | 50% | ||
Bonus | 10% | 85% | ||
If an election is made for less than the stated minimum, or if no election is made, the amount deferred shall be zero. If an election is made for more than the stated maximum, then the election shall be for the maximum amount. |
(b) |
Short Plan Year . Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the minimum and maximum percentage of Annual Base Salary and/or Bonus shall be applied to the amount of Annual Base Salary and/or the amount of Bonus not yet earned for such Plan Year by the Participant as of the effective date of the Participants Deferral Election Form which is submitted to the Committee. |
3.2 | Election Form . |
(a) |
Filing of Election Forms . In connection with a Participants commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Deferral Election Form must be properly completed and signed by the Participant and delivered to the Committee (in accordance with Section 2.2 above). |
(b) |
Effect of Election Forms . A Participants Deferral Election Form shall only be effective for the Plan Year for which it is submitted and shall not continue in effect for subsequent Plan Years. The Committee shall maintain an open enrollment period preceding each Plan Year in order to allow Participants to submit new Deferral Election Forms. |
(c) |
Timing of Election Forms . To be effective for any Plan Year, a Deferral Election Form must be received by the Committee prior to January 1 of |
7
the Plan Year to which it relates. However, if an individual first becomes eligible to participate in the Plan on or after the effective date of the Plan and on a date other than January 1, the individual may submit a Deferral Election Form for the remainder of the Plan Year in which he or she becomes a Participant if the Deferral Election Form is submitted within the time prescribed by the Committee; provided, however, that the Deferral Election Form shall apply only to Annual Base Salary and/or Bonus not yet earned, in accordance with Section 3.1(b). |
3.3 | Withholding of Annual Deferral Amounts . For each Plan Year, the Annual Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled payroll in equal amounts, as adjusted from time to time for increases and decreases in Annual Base Salary. The Bonus portion of the Annual Deferral Amount shall be withheld at the time the Bonus is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. |
3.4 | Profit Sharing Allocation . For any Participant, the Annual Profit Sharing Allocation for a Plan Year will be limited to the amount that is the excess of (i) the amount, but for the Annual Deferral Amounts, that would have been allocable to such Participants profit sharing account under the Profit Sharing Plan for the Plan Year, and without regard to any limitations on such profit sharing contributions contained in the Code or in the Profit Sharing Plan in furtherance of such Code limitations, over (ii) the actual profit sharing contribution allocated to such Participants Profit Sharing Plan profit sharing account for the Plan Year; provided, however, that the amount determined by the application of clauses (i) and (ii) of this sentence shall be further reduced by the amount of any profit sharing contributions, if any, allocated for such Plan Year to the Participants account under the W.W. Grainger, Inc. Supplemental Profit Sharing Plan or a comparable supplemental profit sharing plan which covers Employees of an Affiliate. |
3.5 | Vesting . A Participant shall at all times be 100% vested in his or her Annual Deferral Account. A Participant shall be vested in his or her Annual Profit Sharing Account in accordance with the vesting provisions of the Profit Sharing Plan. |
3.6 | Allocation of Funds |
(a) |
Crediting/Debiting of Account Balances . In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participants Annual Account Balance. |
(b) |
Election of Investment Options . A Participant, in connection with his or her Deferral Election Form in accordance with Section 2 above, shall elect one or more investment funds (the Investment Option(s)) to be used to |
8
determine the additional amounts to be credited to his or her Annual Account Balance. Participants will be permitted to modify their elected Investment Options in a manner prescribed by the Committee. |
(c) |
Proportionate Allocation . In making any election described in Section 3.6(b) above, the Participant shall specify in increments of one percentage point (1%), the percentage of his or her Annual Account Balance to be allocated to a Investment Option (as if the Participant was making an investment in that Investment Option with that portion of his or her Annual Account Balance). |
(d) |
No Actual Investment . Notwithstanding any other provision of the Plan that may be interpreted to the contrary, the Investment Options are to be used for measurement purposes only, and a Participants election of any Investment Option(s), the allocation to his or her Annual Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participants Annual Account Balance shall not be considered or construed in any manner as an actual investment of his or her Annual Account Balance in any such Investment Option. In the event that the Company, in its own discretion, decides to invest funds in any or all of the Investment Options, no Participant shall have any rights in or to such investment themselves. Without limiting the foregoing, a Participants Annual Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company, and the Participant shall at all times remain an unsecured creditor of the Company. |
3.7 FICA and Other Taxes .
(a) |
Annual Deferral Amounts . For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participants Employer(s) shall withhold from that portion of the Participants Annual Base Salary and/or Bonus that is not being deferred, in a manner determined by the Employer, the Participants share of contributions under the Federal Insurance Contributions Act (FICA) and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Account in order to comply with this Section 3.7. |
(b) |
Profit Sharing Account . When a Participant becomes vested in a portion of his or her Annual Profit Sharing Account, the Employer shall withhold from the Participants Annual Base Salary and/or Bonus that is not deferred, in a manner determined by the Employer, the Participants share of FICA and other employment taxes on such vested portions of his or her Annual Profit Sharing Account. If necessary, the Committee may reduce the vested portion of the Participants Annual Profit Sharing Account, as the case may be, in order to comply with this Section 3.7. |
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3.8 | Distributions . The Employer shall withhold from any distributions made to a Participant under the Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer in connection with such distributions, in amounts and in a manner to be determined in the sole discretion of the Employer. |
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If the Participant experiences a Hardship, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan as permitted by law (Hardship Withdrawal). The Hardship Withdrawal shall not exceed the lesser of the total of the Participants Annual Account Balances, calculated as if such Participant were receiving a single-sum distribution upon termination of employment, or the amount reasonably needed to satisfy the Hardship. If, subject to the sole discretion of the Committee, the petition for a suspension is approved, suspension shall take effect upon the date of approval. If a Hardship Withdrawal is approved any distribution shall be made within 60 days of the date of approval. The payment of any amount under this Article 4 shall not be subject to the Deduction Limitation. Any suspension of deferrals pursuant to this Article 4 shall continue for the remainder of the Plan Year in which the suspension is approved. |
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5.1 Distribution Election .
(a) |
A Participant may elect to receive a distribution of the vested portion of his or her Annual Account Balance which will commence upon one of the following events: (i) the Participants Retirement or Disability and/or (ii) a date or dates certain. |
(a) |
A Participant may elect one or more of the following forms of distribution for the vested portion of his or her Annual Account Balance distributable by reason of the Participants Retirement or Disability: (i) a single-sum distribution, (ii) a distribution in annual installments payable over a period of up to 15 years; provided, however, that if the total of the Participants Annual Account Balances are less than $50,000, such amount shall be paid in a single-sum; and/or (iii) a single-sum distribution followed by a distribution in annual installments payable over a period of up to 15 years; provided, however, that if the total vested portion of the Participants Annual Account Balances is less than $50,000, such amount shall be paid in a single-sum. For purposes of determining whether a single-sum payment shall be required, the Committee may select a valuation date that occurs no earlier than 90 days prior to the date distributions are to otherwise commence. The decision of the Committee that a single-sum payment is required shall be final on all parties. |
(b) |
A Participant may change his or her distribution election for a distribution of a Participant Annual Account Balance if such change is made in writing at least one year prior to the Participants Retirement or Disability, whichever applies, and so long as such change is not prohibited by law. In the event that the Participants most recent form of distribution election was made within one year of the Participants Retirement or Disability (whichever applies), the next most recent election made at least one year prior to the Participants Retirement or Disability (or if none, the Participants initial election) shall be used. |
(c) |
A distribution payable by reason of the Participants Retirement or Disability shall be paid (in the case of a single-sum) or commence to be paid (in the case of annual installments) following the Participants Retirement or Disability, but not later than one year following such date. |
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5.3 Date Certain Distributions .
(a) |
A Participant may elect one of the following forms of distribution for all or a portion of the vested portion of his or her Annual Account Balances distributable as a Date Certain Distribution: (i) a single-sum distribution, or (ii) a distribution in annual installments payable over a period of up to 15 years; provided, however, that if the total vested portion of the Participants distributable Annual Account Balances is less than $50,000, such amount shall be paid in a single-sum. For purposes of determining whether a single-sum payment shall be required, the Committee may select a valuation date that occurs no earlier than 90 days prior to the date distributions are to otherwise commence. The decision of the Committee that a single-sum payment is required shall be final on all parties. |
(b) |
A Participant may change his or her distribution election if such change is made in writing at least one year prior to the Participants Date Certain Distribution and so long as such change is not prohibited by law. In the event that the Participants most recent form of distribution election was made within one year of the Participants Date Certain Distribution, the next most recent election made at least one year prior to the Date Certain Distribution (or if none, the Participants initial election) shall be used. |
(c) |
A Date Certain Distribution shall be paid (in the case of a single-sum) or commence to be paid (in the case of annual installments) in the January of the year elected by the Participant to receive or begin receiving such Date Certain Distribution. |
(d) |
If a Participant has elected a Date Certain Distribution for all or a portion of the vested portion of his or her Annual Account Balances, but terminates employment by reason of Retirement or Disability prior to the year specified by the Participant for such Date Certain Distribution to commence, the vested portion of the Participants Annual Account Balances which would have been distributable shall instead be paid to him or her in the same manner that the Participant elected to receive the Date Certain Distribution but beginning as of the date of Retirement or Disability; provided, however, that if the vested portion of such Participants distributable Annual Account Balances is less than $50,000, such amount shall be paid in a single-sum. For purposes of determining whether a single-sum payment shall be required, the Committee may select a valuation date that occurs no earlier than 90 days prior to the date distributions are to otherwise commence. The decision of the Committee that a single-sum payment is required shall be final on all parties. |
(e) |
If a Participant terminates employment by reason of Retirement or Disability while receiving installment distributions of a Date Certain Distribution, the remaining portion of the Date Certain Distribution shall continue to be distributed as elected by the Participant. |
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5.4 | Death Before Commencement of Distributions . If a Participant dies before a distribution of the vested portion of his or her Annual Account Balance under the Plan has begun, the vested portion of the Participants Annual Account Balance shall be distributed to his or her Beneficiary in a single-sum as soon as administratively practicable following receipt by the Committee of satisfactory notice and confirmation of the Participants death. |
5.5 | Death After Commencement of Distributions . If a Participant dies after a distribution of the vested portion of his or her Annual Account Balance under the Plan has begun, the vested portion of the Participants Annual Account Balance, including those amounts not yet distributable, shall be distributed to his or her Beneficiary in a single-sum as soon as administratively practicable following receipt by the Committee of satisfactory notice and confirmation of the Participants death. |
5.6 | Other Terminations of Employment . If a Participant terminates employment for any reason other than Retirement, Disability, or death, the vested portion of the Participants Annual Account Balance shall be distributed to such Participant as soon as administratively practicable after such termination. |
5.7 | Hardship Withdrawals . Upon petition to and approval by the Committee in accordance with Article 4, a Participant shall be permitted a Hardship Withdrawal, if permitted by law. A Hardship Withdrawal shall be distributed in a single-sum as soon as administratively practicable after the Committee has determined the amount of the Hardship Withdrawal. |
14
6.1 Disability Waiver .
(a) |
Waiver of Deferral . A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participants Annual Base Salary or Bonus for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of the Plan. |
(b) |
Return to Work . If a Participant returns to employment with the Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and a Deferral Election Form is delivered to the Committee for each such election in accordance with Section 3.2 above. |
6.2 | Continued Eligibility; Disability Benefit . A Participant suffering a Disability shall, for benefit purposes under the Plan, continue to be considered to be employed, and shall be eligible for the benefits provided for in Articles 4 or 5 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of the Plan only, deem such Participant to have experienced a termination of employment under Section 5.6 of the Plan, in which case such Participant shall receive a payment of his or her Annual Account Balance at the time of the Committees determination in accordance with Section 5.6. Any payment made shall be subject to the Deduction Limitation. |
15
7.1 | Beneficiary . Each Participant shall have the right, at any time, to designate his or her Beneficiary (both primary as well as contingent) to receive any benefits payable under the Plan upon the death of the Participant. The Beneficiary designated under the Plan may be the same as or different from the Beneficiary designated under any other plan of an Employer in which the Participant participates. |
7.2 | Beneficiary Designation and Change of Beneficiary . A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committees rules and procedures, as in effect from time to time. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. |
7.3 | Acknowledgment . No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee. |
7.4 | No Beneficiary Designation . If a Participant fails to designate a Beneficiary as provided in Sections 7.1, 7.2 and 7.3 above, the Beneficiary shall first be deemed to be his or her spouse if his or her spouse resides with the Participant at the time of such Participants death. If a Participant fails to designate a Beneficiary as provided in Sections 7.1, 7.2 and 7.3 above and such spouse has predeceased the Participant or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participants benefits, then the Participants designated Beneficiary shall be deemed to be his or her estate. |
7.5 | Doubt as to Beneficiary . If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to the Plan, the Committee shall have the right, exercisable in its discretion, to cause the Employer to withhold such payments until this matter is resolved to the Committees satisfaction. |
16
8.1 | Paid Leave of Absence . If a Participant is authorized by the Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.2. |
8.2 | Unpaid Leave of Absence . If a Participant is authorized by the Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election applicable for that Plan Year. |
17
9.1 | Termination . Although the Company anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that the Company will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, the Company reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of its participating Employees, by action of its Board. Upon the termination of the Plan, the affected Participants shall terminate their participation in the Plan and their vested Annual Account Balances, determined as if they had experienced a termination of employment under Section 5.6 of the Plan on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, the Company shall pay such benefits as soon as administratively practicable. Upon a Change in Control, the Annual Account Balances of all participants shall be administered in accordance with Section 10.2 of the Plan. |
9.2 | Amendment . The Company may, at any time, amend or modify the Plan in whole or in part by the action of the Board; provided, however, that: (i) no amendment or modification shall be effective to decrease or restrict the value of a Participants vested Annual Account Balance in existence at the time the amendment or modification is made, as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 9.2 or Section 10.2 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification. |
18
10.1 | Committee Duties . Except as otherwise provided in this Article 10, the Plan shall be administered by a Committee which shall be the Compensation Committee of Management, or such other committee as the Board shall appoint. Members of the Committee may be Participants in the Plan. The Committee shall have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of the Plan and (ii) decide or resolve any and all questions including interpretations of the Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Employer. |
10.2 | Administration Upon Change In Control . The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan including, but not limited to, benefit entitlement determinations. Upon and after the occurrence of a Change in Control, the Company must: (i) pay all reasonable administrative expenses and fees of the Administrator; (ii) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorneys fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; (iii) supply full and timely information to the Administrator on all matters relating to the Plan, the Participants and their Beneficiaries, the Annual Account Balances of the Participants, the date of the Retirement, Disability, death or other termination of employment of the Participants, and such other pertinent information as the Administrator may reasonably require; and (iv) fully vest all Annual Account Balances of the Participants and pay such benefits in a lump sum within five (5) business days of such Change in Control. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) only with the Administrators approval. |
10.3 | Agents . In the administration of the Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. |
10.4 | Binding Effect of Decisions . The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. |
19
10.5 | Indemnity of Committee . The Company shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated, against any and all claims, losses, damages, expenses or liabilities including, without limitation, attorneys fees and expenses arising from any action or failure to act with respect to the Plan, except in the case of gross negligence or willful misconduct by the Committee, any of its members, and any such Employee. |
10.6 | Employer Information . To enable the Committee and/or Administrator to perform its functions, the Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or other termination of employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require. |
20
11.1 | Coordination with Other Benefits . The benefits provided for a Participant and Participants Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. |
21
12.1 | Presentation of Claim . Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a Claimant) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. |
12.2 | Notification of Decision . The Committee shall consider a Claimant s claim within a reasonable time, and shall notify the Claimant in writing: |
(a) |
that the Claimants requested determination has been made, and that the claim has been allowed in full; or |
(b) |
that the Committee has reached a conclusion contrary, in whole or in part, to the Claimants requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: |
(i) |
the specific reason(s) for the denial of the claim, or any part of it; |
(ii) |
specific reference(s) to pertinent provisions of the Plan upon which such denial was based; |
(iii) |
a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and |
(iv) |
an explanation of the claim review procedure set forth in Section 12.3 below. |
12.3 | Review of a Denied Claim . Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimants duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimants duly authorized representative): |
(a) |
may review pertinent documents; |
(b) |
may submit written comments or other documents; and/or |
22
(c) |
may request a hearing, which the Committee, in its sole discretion, may grant. |
12.4 | Decision on Review . The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committees decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: |
(a) |
specific reasons for the decision; |
(b) |
specific reference(s) to the pertinent Plan provisions upon which the decision was based; and |
(c) |
such other matters as the Committee deems relevant. |
12.5 | Legal Action . A Claimants compliance with the foregoing provisions of this Article 12 is a mandatory prerequisite to a Claimants right to commence any legal action with respect to any claim for benefits under the Plan. |
23
13.1 | Plan To Be Unfunded . The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. |
13.2 | Unsecured General Creditor . Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Employer. For purposes of the payment of benefits under the Plan, any and all of the Employers assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. The Employers obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. |
24
14.1 | Employer s Liability . The Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan. |
14.2 | Nonassignability . A Participant shall not have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant directly or indirectly, be transferable by operation of law in the event of a Participants bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. |
14.3 | Not a Contract of Employment . The terms and conditions of the Plan shall not be deemed to constitute a contract of employment between the Employer and the Participant. Such employment is hereby acknowledged to be an at will employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly otherwise provided in a written employment agreement. Nothing in the Plan shall be deemed to give a Participant the right to be retained in the service of the Employer, either as an Employee or a director, or to interfere with the right of the Employer to discipline or discharge the Participant at any time. |
14.4 | Furnishing Information . A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. |
14.5 | Terms . Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. |
14.6 | Captions . The captions of the articles, sections and paragraphs of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. |
25
14.7 | Governing Law . Subject to ERISA, the provisions of the Plan shall be construed and interpreted according to the internal laws of the State of Illinois. |
14.8 | Notice . Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: |
W.W. Grainger, Inc.
Attn: Corporate Secretary
100 Grainger Parkway
Lake Forest, IL 60045-5201
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. |
Any notice or filing required or permitted to be given to a Participant under the Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. |
14.9 | Successors . The provisions of the Plan shall bind and inure to the benefit of the Company and its successors and assigns and the Participant and the Participant's designated Beneficiaries. |
14.10 | Validity . In case any provision of the Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. |
14.11 | Incompetent . If the Committee determines in its discretion that a benefit under the Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that persons property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participants Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. |
14.12 | Court Order . The Committee is authorized to make any payments when due as directed by court order in any action in which the Employer, Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participants benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouses or former |
26
spouses interest in the Participants benefits under the Plan to that spouse or former spouse. |
14.13 | Distribution in the Event of Taxation . If, for any reason, all or any portion of a Participants benefits under the Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the Administrator after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), the Company shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed the vested portion of a Participants Annual Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participants petition is granted. Such a distribution shall affect and reduce the benefits to be paid under the Plan. |
14.14 | Discharge of Obligations . The full payment of the applicable benefit under Articles 4, 5 or 6 of the Plan to a Participant or Beneficiary shall fully and completely discharge all obligations to a Participant and his or her designated Beneficiaries under the Plan and the Participants participation in the Plan shall terminate. |
14.15 | Legal Fees to Enforce Rights After Change in Control . The Company is aware that upon the occurrence of a Change in Control, the Board (which might then be composed of new members), a shareholder of the Company or of any successor might then cause or attempt to cause the Company or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company or its successor has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, its successor, or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company or its successor irrevocably authorizes such Participant to retain counsel of his or her choice at the expense of the Company or its successor to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, its successor, or any director, officer, shareholder or other person affiliated with the Company or its successor thereto in any jurisdiction. |
27
Exhibit 10 (xi) |
SUMMARY DESCRIPTION OF
THE
2004 COMPANY MANAGEMENT
INCENTIVE PROGRAM
I. | Introduction |
The 2004 Company Management Incentive Program (MIP) was designed to focus on two key factors that drive improvements in shareholder value: return on invested capital (ROIC) and sales growth. |
II. | Objectives |
The MIP is designed to: |
|
III. | Eligibility |
Positions that participate in this program are those that have significant impact on the Company. Eligibility for participation in this program is based on the determination of management. Criteria for inclusion are market practice, impact of the role on overall Company results and internal practice. Participation in this program is subject to the Terms and Conditions. |
IV. | Performance Measures |
Shareholder value will improve most dramatically if the Company can achieve two goals simultaneously: |
1. | Produce a constantly improving rate of ROIC, and |
2. | Grow the business rapidly. |
The 2004 MIP will be based on ROIC, sales growth and individual performance. The payout earned for ROIC will be multiplied by a factor based on sales growth. A separate amount attributable to individual performance will then be added to the result. This can be represented algebraically as follows: |
Total Payout = (ROIC Payout x Sales Growth Multiplier) + Individual Performance |
2
ROIC is defined as operating earnings divided by net working assets: |
ROIC |
= | Operating Earnings | |
Net Working Assets |
The ROIC component will range from 0% to 50% of a participants total Target Incentive. |
Sales growth is defined as year-over-year performance: |
Sales growth |
= | Total Company Sales, Current Year | - 1 |
Total Company Sales, Prior Year |
The sales growth component will not account for a specific portion of a participants total Target Incentive. Instead, it will serve as a multiplier of the ROIC payout. |
The individual performance component is based on the individual participants performance against strategic objectives. Payouts under this portion of the program would be paid only if the Company achieved an actual ROIC result greater than 10%. |
The individual performance component will range from 0% to 30% of a participants total Target Incentive. |
V. | Target Award Opportunity |
Target awards are established for each position based on the competitive market practice and internal considerations and are stated as a percentage of the employees base salary. |
VI. | Determination Of Payment Amounts |
The following process is used to determine the payment amount for each participant. |
Step 1: Determine the performance results for ROIC and the resultant performance to goal. Compute the appropriate percentage of target award earned. |
Step 2: Determine the performance results for sales growth and the resultant sales growth multiplier based on these results. Apply the sales growth multiplier to the ROIC payout. |
Step 3 : As long as ROIC is greater than 10%, add the individual performance component to determine the total percentage payout. |
3
Step 4 : Calculate each participants incentive amount earned as follows: |
Incentive Amount Earned = |
(Annualized Base Salary (as of 12/31) X Target Award %) X Total % Payout |
Those employees who are eligible to participate for only part of the year will have their incentive amount adjusted accordingly, based on the eligibility provisions of the Terms and Conditions. |
Step 5 : The Compensation Committee of Management and the Compensation Committee of the Board must approve final incentive amounts. |
Step 6: Once approved, final incentive amounts are forwarded to the Employee Systems Manager for payment. |
Exhibit 21 |
W.W. GRAINGER, INC.
Subsidiaries as of March 8, 2004
Acklands - Grainger Inc. (Canada)
- USI - AGI Prairies Inc. (Canada) (50% owned)
Dayton Electric Manufacturing Co. (Illinois)
Grainger Caribe, Inc. (Illinois)
Grainger FSC, Inc. (U.S. Virgin Islands)
Grainger International, Inc. (Illinois)
- WWG de Mexico, S.A. de C.V. (Mexico)
- Grainger, S.A. de C.V. (Mexico)
- WWG Servicios, S.A. de C.V. (Mexico)
- ProQuest Brands, Inc. (Illinois)
- SC Grainger Co., Ltd. (Japan) (38.6% owned)
- MRO Korea Co., Ltd. (Korea) (49% owned)
- Grainger Global Holdings, Inc.
- Grainger Global Trading (Shanghai) Co., Ltd.
Lab Safety Supply, Inc. (Wisconsin)
Exhibit 31(a) |
CERTIFICATION |
I, R. L. Keyser, certify that: | ||
1. | I have reviewed this annual report on Form 10-K of W.W. Grainger, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: | |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
c) | Disclosed in this report any change in the registrant s internal control over financial reporting that occurred in the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and | |
5. | The registrant s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): | |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. | |
Date: March 9, 2004
By:
/s/ R. L. Keyser
Name: R. L. Keyser
Title: Chairman and Chief Executive Officer
23
Exhibit 31(b) |
CERTIFICATION |
I, P. O. Loux, certify that: | ||
1. | I have reviewed this annual report on Form 10-K of W.W. Grainger, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: | |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
c) | Disclosed in this report any change in the registrant s internal control over financial reporting that occurred in the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and | |
5. | The registrant s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions): | |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. | |
Date: March 9, 2004
By:
/s/ P. O. Loux
Name: P. O. Loux
Title: Senior Vice President, Finance
and Chief Financial
Officer
24
Exhibit 32(a) |
CERTIFICATION PURSUANT TO
|
I, R. L. Keyser, Chairman and Chief Executive Officer of W.W. Grainger, Inc. (
Grainger
),
certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. | The Annual Report on Form 10-K of Grainger for the annual period ended December 31, 2003 (the Report ) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger. |
/s/ R. L. Keyser
R. L. Keyser
Chairman and Chief Executive Officer
March 9, 2004
25
Exhibit 32(b) |
CERTIFICATION PURSUANT TO
|
I, P. O. Loux, Senior Vice President, Finance and Chief Financial Officer of W.W.
Grainger, Inc. (
Grainger
),
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of
2002, that:
1. | The Annual Report on Form 10-K of Grainger for the annual period ended December 31, 2003 (the Report ) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger. |
/s/ P. O. Loux
P. O. Loux
Senior Vice President, Finance
and Chief Financial Officer
March 9, 2004
25