form10k123108.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
_______
to _______
Commission
File Number 1-5684
W.W.
Grainger, Inc.
(Exact name of
registrant as specified in its charter)
Illinois
|
|
36-1150280
|
(State or
other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
100
Grainger Parkway, Lake Forest, Illinois
|
|
60045-5201
|
(Address of
principal executive offices)
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|
(Zip
Code)
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(847)
535-1000
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(Registrant’s
telephone number including area code)
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|
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
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|
Name of each exchange on which
registered
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Common Stock
$0.50 par value, and accompanying
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New York Stock
Exchange
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Preferred
Share Purchase Rights
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|
Chicago Stock
Exchange
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|
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|
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Yes
___X____ No
_______
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes ___
____ No
___X___
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes ___X____ No
_______
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
( )
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer T
|
Accelerated filer £
|
Non-accelerated filer £
|
Smaller reporting company £
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes
________ No
___X___
The
aggregate market value of the voting common equity held by nonaffiliates of the
registrant was $5,897,949,081 as of the close of trading as reported on the New
York Stock Exchange on June 30, 2008. The Company does not have nonvoting common
equity.
The
registrant had 74,855,074 shares of common stock outstanding as of January 31,
2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
proxy statement relating to the annual meeting of shareholders of the registrant
to be held on April 29, 2009, are incorporated by reference into Part III
hereof.
TABLE
OF CONTENTS
Page(s)
|
PART
I
|
Item
1: |
BUSINESS |
3-5
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|
|
THE
COMPANY
|
3
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|
GRAINGER
BRANCH-BASED
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3-4
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INDUSTRIAL
SUPPLY
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3-4
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MEXICO
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|
4
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|
CHINA
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4
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ACKLANDS –
GRAINGER BRANCH-BASED
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4
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LAB
SAFETY
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|
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4
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COMPETITION
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5
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|
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EMPLOYEES
|
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5
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WEB SITE
ACCESS TO COMPANY REPORTS
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5
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Item
1A:
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RISK
FACTORS
|
5-6
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Item
1B:
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UNRESOLVED
STAFF COMMENTS
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6
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Item
2:
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PROPERTIES
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6-7
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Item
3:
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LEGAL
PROCEEDINGS
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7
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Item
4:
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SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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8
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Executive
Officers
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|
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8
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PART
II
|
Item
5:
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MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
|
|
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MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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9-10
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Item
6:
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SELECTED
FINANCIAL DATA
|
10-11
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Item
7:
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND
RESULTS OF OPERATIONS
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11-22
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Item
7A:
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
22
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Item
8:
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
22
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Item 9: |
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS |
|
|
|
ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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22
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Item
9A:
|
CONTROLS AND
PROCEDURES
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22
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Item
9B:
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OTHER
INFORMATION
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22
|
PART
III
|
Item
10:
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
23
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Item
11:
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EXECUTIVE
COMPENSATION
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23
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Item
12:
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
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23
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Item
13:
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
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|
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DIRECTOR
INDEPENDENCE
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23
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Item
14:
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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23
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PART
IV
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Item
15:
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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23-24
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Signatures
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25
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Certifications
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|
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65-68
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PART
I
Item
1: Business
The
Company
W.W. Grainger, Inc.,
incorporated in the State of Illinois in 1928, distributes facilities
maintenance products and provides services and related information used by
businesses and institutions primarily in the United States, Canada and Mexico to
keep their facilities and equipment running. In this report, the words
“Grainger” or “Company” mean W.W. Grainger, Inc. and its
subsidiaries.
Grainger is the
leading broad-line supplier of facilities maintenance and other related products
in North America. Grainger uses a multichannel business model to provide
customers with a range of options for finding and purchasing products through a
network of branches, sales representatives, direct marketing including catalogs
and a variety of electronic and Internet channels. Grainger serves approximately
1.8 million customers through a network of 617 branches,
18 distribution centers and multiple Web sites.
Grainger’s three
reportable segments are Grainger Branch-based, Acklands – Grainger
Branch-based (Acklands – Grainger) and Lab Safety Supply, Inc. (Lab Safety).
Grainger Branch-based is an aggregation of the following business units:
Grainger Industrial Supply (Industrial Supply), Grainger, S.A. de C.V. (Mexico),
Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger
Panama S.A. (Panama). Acklands – Grainger is the Company’s Canadian branch-based
distribution business. Lab Safety is a direct marketer of safety and other
industrial products. Late in 2008, the Company announced plans to integrate Lab
Safety Supply with Grainger Industrial Supply. During 2009, Grainger will be
integrating the Lab Safety business into the Grainger Industrial Supply business
as well as reviewing the Company's current operating structure to ensure
that it will meet the current and future needs of the business. Grainger is also
evaluating the impact that this integration will have on reportable segments.
Any changes to reportable segments will include a restatement of prior periods
for consistency purposes. For segment and geographical information and
consolidated net sales and operating earnings see “Item
7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and Note 18 to the Consolidated Financial
Statements.
Grainger has
internal business support functions that provide coordination and guidance in
the areas of accounting and finance, business development, communications and
investor relations, compensation and benefits, information systems, health and
safety, human resources, insurance and risk management, internal audit, legal,
real estate, security, tax and treasury. These services are provided in varying
degrees to all business units.
Grainger does not
engage in product research and development activities. Items are regularly added
to and deleted from Grainger’s product lines on the basis of customer demand,
market research, recommendations of suppliers, sales volumes and other
factors.
Grainger
Branch-based
The
Grainger Branch-based businesses provide customers with solutions for facilities
maintenance and other product needs through logistics networks that are
configured for rapid product availability. Grainger offers a broad selection of
facilities maintenance and other products through local branches, catalogs and
the Internet. The more significant businesses in this segment are described
below.
Industrial
Supply
Industrial Supply
offers U.S. businesses and institutions a combination of product breadth, local
availability, speed of delivery, detailed product information and competitively
priced products. Industrial Supply distributes material handling equipment,
safety and security supplies, lighting and electrical products, power and hand
tools, pumps and plumbing supplies, cleaning and maintenance supplies and many
other items primarily focused on the facilities maintenance market. Its
customers range from small and medium-sized businesses to large corporations,
governmental entities and other institutions. During 2008, Industrial Supply
completed an average of 95,000 sales transactions daily.
Industrial Supply
operates 437 branches located in all 50 states. These branches are located
within 20 minutes of the majority of U.S. businesses and serve the immediate
needs of their local markets by allowing customers to pick up items directly
from the branches.
Branches range in
size from small, will-call branches to large master branches. Branches primarily
fulfill counter and will-call needs and provide customer service. An average
branch is 22,000 square feet in size, has 12 employees and handles about 125
transactions per day. In 2008, Industrial Supply opened 13 branches, relocated
13, expanded or remodeled 11 and closed 10 branches.
Industrial Supply’s
logistics network is comprised of nine distribution centers (DCs). Using
automated equipment and processes, the DCs handle the majority of the customer
shipping and replenish branch inventories.
Industrial Supply
has a sales force of approximately 2,200 professionals that help businesses and
institutions select the right products to reduce their operating expenses and
improve cash flow, and find immediate solutions to maintenance problems. Industrial Supply’s primary
customers work in facilities maintenance departments and service
shops across a wide
range of industries such as: manufacturing, hospitality, transportation,
government, retail, healthcare and education. Sales transactions during 2008
were made to approximately 1.3 million customers. Approximately 24% of 2008
sales consisted of private label items bearing Grainger’s registered trademarks,
including DAYTON® motors, SPEEDAIRE® air compressors, AIR HANDLER® air
filtration equipment, DEM-KOTE® spray paints, WESTWARD® tools, CONDOR™ safety
products and LUMAPRO® lighting products. 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 Industrial
Supply catalog, most recently issued in February 2009, offers approximately
237,000 facilities maintenance and other products and is used by customers,
sales representatives and branch personnel to assist in customer product
selection. Approximately 2.2 million copies of the catalog were
produced.
Customers can also
purchase products through grainger.com. With access to more than 475,000
products, this Web site serves as a prominent service channel for Industrial
Supply. Grainger.com provides real-time product availability and detailed
product information and offers advanced features such as product search and
compare capabilities. For customers with sophisticated electronic purchasing
platforms, Grainger utilizes technology that allows these systems to communicate
directly with grainger.com.
Industrial Supply
purchases products for sale from approximately 1,600 key suppliers, most of
which are manufacturers. No single supplier comprised more than 5% of Industrial
Supply’s purchases and no significant difficulty has been encountered with
respect to sources of supply.
Through a global
sourcing operation, Industrial Supply procures competitively priced,
high-quality products produced outside the United States from approximately
320 suppliers. Grainger businesses sell these items primarily under private
labels. Products obtained through the global sourcing operation include DAYTON®
motors, WESTWARD® tools, LUMAPRO® lighting products and CONDOR™ safety products,
as well as products bearing other trademarks.
Mexico
Grainger’s
operations in Mexico provide local businesses with facilities maintenance
products and other products from both Mexico and the United States. In 2008,
Mexico opened six branches and one master branch, bringing their total number of
locations to 22. The business ships products to customers as well as fulfills
counter and will-call needs. The largest facility, an 85,000 square foot DC, is
located outside of Monterrey, Mexico. During 2008, approximately 1,000 sales
transactions were completed daily. Customers have access to approximately 35,000
products through a Spanish-language catalog or through
grainger.com.mx.
China
Grainger operates in
China from a 126,000 square foot DC with a showroom located in Shanghai and has
10 sales offices that allow sales representatives to work remotely and meet with
customers. Customers have access to approximately 50,000 products through a
Chinese-language catalog or through grainger.com.cn.
Acklands
– Grainger Branch-based
Acklands – Grainger
is Canada’s leading broad-line distributor of industrial and safety supplies. It
serves customers through 154 branches and five DCs across Canada. Acklands –
Grainger distributes tools, fasteners, safety supplies, instruments, welding and
shop equipment, and many other items. During 2008, approximately 14,000 sales
transactions were completed daily. A comprehensive catalog, printed in both
English and French, showcases the product line to facilitate the customer’s
product selection. This catalog, with more than 61,000 products, is used by
customers, sales account managers and branch personnel to assist in customer
product selection. In addition, customers can purchase products through
acklandsgrainger.com, a fully bilingual Web site.
Lab
Safety
Lab
Safety is a direct marketer of safety and other industrial products to U.S. and
Canadian businesses. Lab Safety primarily reaches its customers through the
distribution of multiple branded catalogs and other marketing materials
distributed throughout the year to targeted markets. Brands include LSS, Ben
Meadows (forestry), Gempler’s (agriculture), AW Direct (service vehicle
accessories), Rand Materials (material handling), Professional Inspection
Equipment and Construction Book Express (building and home inspection),
McFeely’s Square Drive Screws (woodworking) and Highsmith (library equipment,
furniture and supplies). Customers can purchase products by telephone, fax or
through lss.com and other branded Web sites.
Lab Safety offers
extensive product depth, technical support and high service
levels. During 2008, Lab Safety issued 16 unique catalogs covering
safety supplies, material handling and facilities maintenance products, lab
supplies, security and other products targeted to specific customer groups. Lab
Safety provides access to approximately 258,000 products through its targeted
catalogs and distributes the majority of its products from a central
DC.
During 2009, the Lab
Safety business will be integrated into Grainger’s Branch-based Industrial
Supply business. As a result of this integration, Lab Safety will no longer be
reported as a separate segment.
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 retail enterprises.
Grainger provides
local product availability, a broad product line, sales representatives,
competitive pricing, catalogs (which include product descriptions and, in
certain cases, extensive technical and application data), electronic and
Internet commerce technology and other services to assist customers in lowering
their total facilities maintenance costs. Grainger believes that it can
effectively compete with manufacturers on small orders, but manufacturers may
have an advantage in filling large orders.
Grainger serves a
number of diverse markets. Based on available data, Grainger estimates the North
American market for facilities maintenance and related products to be more than
$150 billion, of which Grainger’s share is approximately 4 percent. There
are several large competitors, although most of the market is served by small
local and regional competitors.
Employees
As
of December 31, 2008, Grainger had 18,334 employees, of whom 16,374 were
full-time and 1,960
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, proxy statements
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
grainger.com/investor.
Item
1A: Risk Factors
The
following is a discussion of significant risk factors relevant to Grainger’s
business that could adversely affect its financial position or results of
operations.
Weakness
in the United States and International economies could negatively impact
Grainger’s sales growth. Economic and industry trends affect Grainger’s
business environments. Economic downturns can cause customers to idle or close
facilities, delay purchases and otherwise reduce their ability to purchase
Grainger’s products and services as well as their ability to make full and
timely payments. Thus, a significant or prolonged slowdown in economic activity
could negatively impact Grainger’s sales growth and results of operations. The
recent global economic crisis has had a negative effect on Grainger’s sales and
could continue to do so into the future, however, the duration of this or any
other economic downturn cannot be predicted.
The
facilities maintenance industry is highly fragmented, and changes in competition
could result in a decreased demand for Grainger’s products and services.
There are several large competitors in the industry, although most of the
market is served by small local and regional competitors. 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 retail enterprises. Competitive pressures could
adversely affect Grainger’s sales and profitability.
Volatility
in commodity prices may adversely affect operating margins. Some of
Grainger’s products contain significant amounts of commodity-priced materials,
such as steel, copper, or oil, and are subject to price changes based upon
fluctuations in the commodities market. Grainger’s ability to pass on increases
in costs depends on market conditions. The inability to pass along costs
increases could result in lower operating margins. In addition, higher prices
could impact demand for these products resulting in lower sales
volumes.
Unexpected
product shortages could negatively impact customer relationships, resulting in
an adverse impact on results of operations. Grainger’s competitive
strengths include product selection and availability. Products are purchased
from approximately 3,000 key suppliers, no one of which accounts for more than
5% of purchases. Historically, no significant difficulty has been encountered
with respect to sources of supply, however, economic downturns can adversely
affect a supplier’s ability to manufacture or deliver products. If Grainger were
to experience difficulty in obtaining products, there could be a short-term
adverse effect on results of operations and a longer-term adverse effect on
customer relationships and Grainger’s reputation. In addition, Grainger has
strategic relationships with key vendors. In the event Grainger was unable to
maintain those relations, there might be a loss of competitive pricing
advantages which could, in turn, adversely affect results of
operations.
The
addition of new product lines could impact future sales growth. Grainger,
from time to time, expands the breadth of its offerings by increasing the number
of products it distributes. In 2006, Grainger launched a multiyear product line
expansion program. The continued success of the expansion program is expected to
be a driver of growth in 2009 and beyond. The success of these expansions will
depend on Grainger’s ability to accurately forecast market demand, obtain
products from suppliers and effectively integrate these products into the supply
chain. As
such, there is a risk that the product line expansion program will not deliver
the expected results which could negatively impact anticipated future sales
growth.
Interruptions
in the proper functioning of information systems could disrupt operations and
cause unanticipated increases in costs and/or decreases in revenues. The
proper functioning of Grainger’s information systems is critical to the
successful operation of its business. Although Grainger’s information systems
are protected with robust backup systems, including physical and software
safeguards and remote processing capabilities, information systems are still
vulnerable to natural disasters, power losses, unauthorized access,
telecommunication failures and other problems. If critical information systems
fail or are otherwise unavailable, Grainger’s ability to process orders,
maintain proper levels of inventories, collect accounts receivable, pay expenses
and maintain the security of Company and customer data could be adversely
affected.
In
order to compete, Grainger must attract, retain and motivate key employees, and
the failure to do so could have an adverse effect on results of
operations. In order to compete and have continued growth,
Grainger must attract, retain and motivate executives and other key employees,
including those in managerial, technical, sales, marketing and support
positions. Grainger competes to hire employees and then must train them and
develop their skills and competencies. Grainger’s operating results could be
adversely affected by increased costs due to increased competition for
employees, higher employee turnover or increased employee benefit
costs.
Fluctuations
in foreign currency could have an adverse effect on reported results of
operations. Foreign currency exchange rates and fluctuations
may have an impact on sales, future costs or on future cash flows from
international operations, and could adversely affect reported financial
performance.
Item
1B: Unresolved Staff Comments
None.
Item
2: Properties
As
of December 31, 2008, Grainger’s owned and leased facilities totaled 20.7
million square feet, an increase of approximately 5% from December 31, 2007.
This increase primarily related to branch expansion programs in the United
States and Mexico. Industrial Supply and Acklands – Grainger accounted for the
majority of the total square footage. Industrial Supply facilities are located
throughout the United States and Acklands – Grainger facilities are located
throughout Canada.
Industrial Supply
branches range in size from 1,300 to 109,000 square feet. Most are located in or
near major metropolitan areas with many located in industrial parks. Typically,
a branch is on one floor, consists primarily of warehouse space, sales areas and
offices and has off-the-street parking for customers and employees. Grainger
believes that its properties are generally in good condition and well
maintained.
A brief description
of significant facilities follows:
Location
|
|
Facility and
Use (7)
|
|
Size in Square
Feet (in 000’s)
|
|
|
|
|
|
United States
(1)
|
|
437 Industrial
Supply branch locations
|
|
9,466
|
United States
(2)
|
|
Nine
Distribution Centers
|
|
5,100
|
United States
(3)
|
|
Other
facilities
|
|
879
|
United States
(4)
|
|
Four Lab
Safety facilities
|
|
833
|
International
(5)
|
|
Other
facilities
|
|
806
|
Canada
(6)
|
|
165 Acklands –
Grainger facilities
|
|
2,303
|
Chicago
Area
|
|
Headquarters
and General Offices
|
|
1,327
|
|
|
|
|
|
|
|
Total Square
Feet
|
|
20,714
|
(1)
|
Industrial
Supply branches consist of 290 owned and 147 leased properties. Most
leases expire
between 2009
and 2017.
|
(2)
|
These
facilities are all owned.
|
(3)
|
These
facilities primarily include leased locations, including storage
facilities and idle properties.
|
(4)
|
Lab Safety
facilities consist of general offices, distribution centers, and storage
facilities, of which
one is owned
and three are leased.
|
(5)
|
These
facilities include owned and leased locations for Puerto Rico, Mexico,
China and Panama.
|
(6)
|
Acklands –
Grainger facilities consist of general offices, distribution centers and
branches, of which
56 are owned
and 109 leased.
|
(7)
|
Owned facilities are not subject to any
mortgages.
|
Item
3: Legal Proceedings
Grainger has been
named, along with numerous other nonaffiliated companies, as a defendant in
litigation in various states involving asbestos and/or silica. These lawsuits
typically assert claims of personal injury arising from alleged exposure to
asbestos and/or silica as a consequence of products purportedly distributed by
Grainger. As of February 3, 2009, Grainger is named in cases filed on behalf of
approximately 2,200 plaintiffs in which there is an allegation of exposure to
asbestos and/or silica. Grainger has denied, or intends to deny, the
allegations in all of the above-described lawsuits.
In
2008, lawsuits relating to asbestos and/or silica and involving approximately
660 plaintiffs were dismissed with respect to Grainger, typically based on the
lack of product identification. If a specific product distributed by Grainger is
identified in any of these lawsuits, Grainger would attempt to exercise
indemnification remedies against the product manufacturer. In addition, Grainger
believes that a substantial number of these claims are covered by
insurance. Grainger has entered agreements with its major insurance
carriers relating to the scope, coverage and costs of defense. While
Grainger is unable to predict the outcome of these lawsuits, it believes that
the ultimate resolution will not have, either individually or in the aggregate,
a material adverse effect on Grainger’s consolidated financial position or
results of operations.
Grainger is a party
to a contract with the United States General Services Administration (the “GSA”)
first entered into in 1999 and subsequently extended in 2004. The GSA
contract had been the subject of an audit performed by the GSA’s Office of the
Inspector General. In December 2007, the Company received a letter
from the Commercial Litigation Branch of the Civil Division of the Department of
Justice (the “DOJ”) regarding the GSA contract. The letter suggested that the
Company had not complied with its disclosure obligations and the contract’s
pricing provisions, and had potentially overcharged government customers under
the contract.
Discussions relating
to the Company’s compliance with its disclosure obligations and the contract’s
pricing provisions are ongoing. The timing and outcome of these
discussions are uncertain and could include settlement or civil litigation by
the DOJ to recover, among other amounts, treble damages and penalties under the
False Claims Act. While this matter is not expected to have a
material adverse effect on the Company’s financial position, an unfavorable
resolution could result in significant payments by the
Company. The Company continues to believe that it has complied with
the GSA contract in all material respects.
In
addition to the foregoing, from time to time Grainger is involved in various
other legal and administrative proceedings that are incidental to its business,
including claims relating to product liability, general negligence,
environmental issues, employment, intellectual property and other matters. As a
government contractor, Grainger is also subject to governmental or regulatory
inquiries or audits or other proceedings, including those related to pricing
compliance. It is not expected that the ultimate resolution of any of these
matters will have, either individually or in the aggregate, a material adverse
effect on Grainger’s consolidated financial position or results of
operations.
Item
4: Submission of Matters to a Vote of Security Holders
No matters were
submitted to a vote of security holders during the fourth quarter of
2008.
Executive
Officers
Following is
information about the Executive Officers of Grainger including age as of
February 26, 2009. 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
Occupation
and Employment During the Past Five Years
|
Court D.
Carruthers (36)
|
|
Senior Vice
President of Grainger, a position assumed in 2007, and President of
Acklands –
Grainger Inc.,
a position assumed in 2006. Previously, Mr. Carruthers
served as Vice President, National Accounts and Sales of
Acklands –Grainger Inc., a position assumed in 2002 when he joined
that company.
|
Nancy A. Hobor
(62)
|
|
Senior Vice
President, Communications and Investor Relations, a position assumed in
1999.
|
John L. Howard
(51)
|
|
Senior Vice
President and General Counsel, a position assumed in 2000.
|
Gregory S.
Irving (50)
|
|
Vice President
and Controller, a position assumed in 2008. Previously,
Mr. Irving served as Vice President, Finance, for
Acklands - Grainger Inc. since 2004. After joining Grainger
in 1999 he served in various management positions including Vice
President, Financial Services and Director, Internal Audit.
|
Ronald L.
Jadin (48)
|
|
Senior Vice
President and Chief Financial Officer, a position assumed in 2008.
Previously, Mr. Jadin served as Vice President and Controller, a
position assumed in 2006 after serving as Vice President, Finance. Upon
joining Grainger in 1998, he served as Director, Financial Planning and
Analysis.
|
Richard L.
Keyser (66)
|
|
Chairman of
the Board, a position assumed in 1997. From 1995 through 2008,
Mr. Keyser served as Grainger's Chief Executive Officer. He joined
Grainger in 1986 and became a director in 1992.
|
Larry J.
Loizzo (54)
|
|
Vice
President, Specialty Brands, a position assumed in 2009 and President of
Lab Safety Supply, Inc., a position assumed in 1996. Previously, Mr.
Loizzo was Senior Vice President of Grainger, a position assumed in
2003.
|
Donald G.
Macpherson (41)
|
|
Senior Vice
President, Global Supply Chain, a position assumed in 2008.
Mr. Macpherson joined Grainger in 2008 as Senior Vice President,
Supply Chain. Before joining Grainger, he was Partner and Managing
Director of the Boston Consulting Group, a global management consulting
firm and advisor on business strategy.
|
Michael A.
Pulick (44)
|
|
Senior Vice
President and President, Grainger U.S., a position assumed in 2008 after
serving as Senior Vice President of Customer Service, a position assumed
in 2006. After joining Grainger in 1999, Mr. Pulick has held a number
of increasingly responsible positions in Grainger’s supplier and product
management areas including Vice President, Product Management and Vice
President, Merchandising.
|
James T. Ryan
(50)
|
|
President and
Chief Executive Officer of Grainger, a position assumed in 2008.
Mr. Ryan became a director in 2007. Previously he had been
Grainger’s President and Chief Operating Officer. Before assuming that
position in 2007, Mr. Ryan served as President, a position assumed in
2006, and served as Group President since 2004. Since joining Grainger in
1980, he has served in increasingly responsible roles, including Executive
Vice President, Marketing, Sales and Service; Vice President, Information
Services; President, grainger.com; and President, Grainger
Parts.
|
PART
II
Item
5: Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
Market
Information and Dividends
Grainger’s common
stock is listed 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 2008 and
2007 are shown
below.
|
|
|
Prices
|
|
|
|
|
|
Quarters
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
2008
|
First
|
|
$ |
87.92 |
|
|
$ |
69.00 |
|
|
$ |
0.35 |
|
|
Second
|
|
|
93.12 |
|
|
|
75.94 |
|
|
|
0.40 |
|
|
Third
|
|
|
93.99 |
|
|
|
79.66 |
|
|
|
0.40 |
|
|
Fourth
|
|
|
86.90 |
|
|
|
58.86 |
|
|
|
0.40 |
|
|
Year
|
|
$ |
93.99 |
|
|
$ |
58.86 |
|
|
$ |
1.55 |
|
2007
|
First
|
|
$ |
80.37 |
|
|
$ |
68.77 |
|
|
$ |
0.29 |
|
|
Second
|
|
|
94.75 |
|
|
|
76.00 |
|
|
|
0.35 |
|
|
Third
|
|
|
98.60 |
|
|
|
79.38 |
|
|
|
0.35 |
|
|
Fourth
|
|
|
96.00 |
|
|
|
84.40 |
|
|
|
0.35 |
|
|
Year
|
|
$ |
98.60 |
|
|
$ |
68.77 |
|
|
$ |
1.34 |
|
Grainger expects
that its practice of paying quarterly dividends on its Common Stock will
continue, although the payment of future dividends is at the discretion of
Grainger’s Board of Directors and will depend upon Grainger’s earnings, capital
requirements, financial condition and other factors.
Holders
The
approximate number of shareholders of record of Grainger’s common stock as of
January 31, 2009, was 1,050 with approximately 70,000 additional shareholders
holding stock through nominees.
Issuer
Purchases of Equity Securities – Fourth Quarter
Period
|
|
Total
Number
of Shares
Purchased (A)
|
|
Average Price
Paid
per Share
(B)
|
|
Total Number
of Shares Purchased as Part of Publicly Announced Plans or Programs
(C)
|
|
Maximum Number
of Shares that May Yet Be Purchased Under the Plans or
Programs
|
Oct. 1 –
Oct. 31
|
|
-
|
|
-
|
|
-
|
|
8,811,100
|
shares
|
|
|
|
|
|
|
|
|
|
|
Nov. 1 –
Nov. 30
|
|
-
|
|
-
|
|
-
|
|
8,811,100
|
shares
|
|
|
|
|
|
|
|
|
|
|
Dec. 1 –
Dec. 31
|
|
1,409,274
|
|
$73.47
|
|
1,409,274
|
|
7,401,826
|
shares
|
Total
|
|
1,409,274
|
|
$73.47
|
|
1,409,274
|
|
|
|
(A)
|
There were no
shares withheld to satisfy tax withholding obligations in connection with
the vesting of employee restricted stock
awards.
|
(B)
|
Average price
paid per share includes any commissions paid and includes only those
amounts related to purchases as part of publicly announced plans or
programs. Activity is reported on a trade date
basis.
|
(C)
|
Purchases were
made through a share repurchase program approved by Grainger’s Board of
Directors. On April 30, 2008, Grainger announced that its Board of
Directors granted authority to repurchase up to 10 million shares. The
program has no specified expiration date. No share repurchase plan or
program expired or was terminated during the period covered by this
report.
|
Company
Performance
The
following stock price performance graph compares the cumulative total return on
an investment in Grainger common stock with the cumulative total return of an
investment in each of the S&P 500 Stock Index and the Dow Jones Wilshire
5000 Industrial Supplier Index. It covers the period commencing December 31,
2003, and ending
December 31, 2008. The graph assumes
that the value for the investment in Grainger common stock and in each index was
$100 on December 31, 2003, and that all dividends were reinvested.
|
|
December
31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
W.W. Grainger,
Inc.
|
|
$ |
100 |
|
|
$ |
143 |
|
|
$ |
155 |
|
|
$ |
154 |
|
|
$ |
196 |
|
|
$ |
180 |
|
S&P 500
Stock Index
|
|
|
100 |
|
|
|
111 |
|
|
|
116 |
|
|
|
135 |
|
|
|
142 |
|
|
|
90 |
|
Dow Jones
Wilshire 5000
Industrial Supplier Index
|
|
|
100 |
|
|
|
135 |
|
|
|
152 |
|
|
|
157 |
|
|
|
180 |
|
|
|
140 |
|
Other
On
May 30, 2008, Grainger timely submitted to the New York Stock Exchange (NYSE) an
Annual CEO Certification, in which Grainger’s Chief Executive Officer certified
that he was not aware of any violation by Grainger of the NYSE’s corporate
governance listing standards as of the date of the
certification.
Item
6: Selected Financial Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands
of dollars, except for per share amounts)
|
|
Net
sales
|
|
$ |
6,850,032 |
|
|
$ |
6,418,014 |
|
|
$ |
5,883,654 |
|
|
$ |
5,526,636 |
|
|
$ |
5,049,785 |
|
Net
earnings
|
|
|
475,355 |
|
|
|
420,120 |
|
|
|
383,399 |
|
|
|
346,324 |
|
|
|
286,923 |
|
Net earnings
per basic share
|
|
|
6.21 |
|
|
|
5.10 |
|
|
|
4.36 |
|
|
|
3.87 |
|
|
|
3.18 |
|
Net earnings
per diluted share
|
|
|
6.04 |
|
|
|
4.94 |
|
|
|
4.24 |
|
|
|
3.78 |
|
|
|
3.13 |
|
Total
assets
|
|
|
3,515,417 |
|
|
|
3,094,028 |
|
|
|
3,046,088 |
|
|
|
3,107,921 |
|
|
|
2,809,573 |
|
Long-term debt
(less current maturities)
|
|
|
488,228 |
|
|
|
4,895 |
|
|
|
4,895 |
|
|
|
4,895 |
|
|
|
– |
|
Cash dividends
paid per share
|
|
$ |
1.550 |
|
|
$ |
1.340 |
|
|
$ |
1.110 |
|
|
$ |
0.920 |
|
|
$ |
0.785 |
|
The
results for 2006 included an effective tax rate, excluding the equity in net
income of unconsolidated entities, of 36.7%, compared to 38.5% in 2007. The 2006
rate included tax benefits from the resolution of uncertainties related to the
audit of the 2004 tax year and a tax benefit from a reduction of deferred tax
liabilities related to property, buildings and equipment. These benefits
increased diluted earnings per share by $0.15.
Effective January 1,
2006, Grainger adopted Statement of Financial Accounting Standards (SFAS) No.
123R, “Share-Based Payment,” for the accounting of employee stock-based
compensation using the modified prospective method. The effect of the adoption
was an approximately $0.14 earnings per share reduction for 2006. See
Note 12 to the Consolidated Financial Statements for further discussion of
information related to SFAS No. 123R.
The results for 2005
included an effective tax rate, excluding the equity in net income of
unconsolidated entities, of 35.2%. The 2005 rate included tax benefits related
to a favorable revision to the estimate of income taxes for various state taxing
jurisdictions and the resolution of certain federal and state tax contingencies.
These benefits increased diluted earnings per share by
$0.10.
The
results for 2004 included an effective tax rate, excluding the equity in net
income of unconsolidated entities, of 35.6%, which was down from 40.0% in the
prior year. The lower tax rate resulted in an increase of $0.21 per diluted
share. The tax rate reduction was primarily due to a lower tax rate in Canada,
the realization of tax benefits related to operations in Mexico and to capital
losses, the recognition of tax benefits from the “Medicare Prescription Drug,
Improvement and Modernization Act of 2003” and the resolution of certain federal
and state tax contingencies.
For
further information see “Item
7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Item
7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
General. Grainger
distributes facilities maintenance products and provides services and related
information used by businesses and institutions primarily in the United States,
Canada and Mexico to keep their facilities and equipment running. Grainger
reports its operating results in three segments: Grainger Branch-based, Acklands
– Grainger Branch-based (Acklands – Grainger) and Lab Safety Supply, Inc. (Lab
Safety). Grainger distributes a wide range of products used by businesses and
institutions to keep their facilities and equipment up and running. Grainger
uses a multichannel business model to provide customers with a range of options
for finding and purchasing products through a network of branches, sales
representatives, direct marketing including catalogs, and a variety of
electronic and Internet channels. Grainger serves customers through 617
branches, 18 distribution centers and multiple Web sites.
Business
Environment. Several economic factors and industry trends
shape Grainger’s business environment. The current overall economy and leading
economic indicators provide insight into anticipated economic factors for the
near term and help in forming the development of projections for the upcoming
year. In February 2009, Consensus Forecast-USA projected a 2009 GDP decline of
2.1% and an Industrial Production decline of 7.2% for the United States, as
compared to 2008 GDP growth of 1.3% and a 1.7% decline in Industrial Production.
In February 2009, Consensus Forecast-USA projected a GDP decline of 1.1% for
Canada, as compared to the 2008 growth estimate of 0.6%.
Historically,
Grainger’s sales trends have tended to correlate positively with industrial
production growth and non-farm payrolls. In more recent years, Grainger’s sales
growth in the United States has outperformed both economic indicators. For the
first five months of 2008, Grainger benefited from the growth in industrial
production and non-farm payrolls. Both economic indicators began to deteriorate
in May 2008, however, Grainger continued to outperform both until late 2008, at
which time Grainger’s sales began to be negatively affected by the economic
downturn.
The
light and heavy manufacturing customer sectors, which comprised
approximately 25% of Grainger’s total 2008 sales, have historically
correlated with manufacturing employment levels and manufacturing production.
Manufacturing employment levels in the United States declined approximately 5.7%
from December 2007 to December 2008, while manufacturing output decreased 9.9%
from December 2007 to December 2008. This decline in manufacturing employment
and output contributed to low single-digit sales growth in the light
manufacturing customer sector and flat sales growth in the heavy manufacturing
customer sector for Grainger in 2008.
Given the steep
decline in the economic trends in Grainger’s markets in the fourth quarter of
2008, it is difficult to project future results. During the fourth quarter,
Grainger began implementing contingency plans to deal with the changing
environment, which included a hiring freeze on all non-customer-facing
positions, a reduction in hours of part-time employees and a significant
reduction to travel, consulting and relocation expenses. In response to a
continuing decline in sales, on February 11, 2009, Grainger announced plans to
freeze salaries of all executives and salaried employees and indicated that the
payment of management incentive bonuses for 2009 would occur only
if Grainger meets aggressive sales targets. Additionally, Grainger
announced 300 to 400 jobs would be eliminated as a result of lower sales volume
and the combination of its Lab Safety Supply and Grainger Industrial Supply
businesses, resulting in annualized cost savings of between $25 million and $35
million. See Note 22 to the Consolidated Financial Statements.
In 2004, Grainger
launched a multiyear market expansion program in the United States to strengthen
its presence in top metropolitan markets and better position itself to serve the
local customer. The expansion program was completed in 2008, however, the
benefits realized from this initiative are expected to continue.
In
2006, Grainger launched a multiyear product line expansion program in the United
States. Over the past three years, Grainger has added over 150,000 new products
to supplement Industrial Supply’s plumbing, fastener, material handling and
security product lines. The product line expansion program contributed to the
sales growth in 2007 and 2008, and is expected to be a driver of growth in 2009
and beyond. In 2009, Grainger expects to add 50,000 new products to further
supplement Industrial Supply’s product lines.
Grainger’s financial
strength enables it to fund major initiatives, acquisitions and productivity
improvements. Capital spending in 2008 for the U.S. market expansion program was
approximately $40 million, with total capital expenditures of $196
million.
Capital expenditures
are expected to range from $175 million to $200 million in 2009. Projected
investments include improved infrastructure in distribution centers, both in the
U.S. and Canada, information technology, including
upgraded electronic
commerce platforms, and the normal recurring replacement of equipment. Grainger
expects to fund 2009 capital investments from operating cash flows, with
spending planned for the following major projects:
·
|
$90 million to
$105 million for supply chain
infrastructure;
|
·
|
$15 million to
$35 million for information
technology.
|
Matters
Affecting Comparability. There were 256 sales days in 2008,
compared to 255 sales days in 2007 and 254 sales days in
2006.
Since June 2008,
Grainger’s operating results have included the operating results of Excel F.I.G.
Inc. (Excel) in the Acklands – Grainger segment, and since July 2008 Grainger’s
operating results have included the operating results of Highsmith Inc.
(Highsmith) in the Lab Safety segment.
Since May 2007,
Grainger’s operating results have included the operating results of McFeely’s
Square Drive Screws (McFeely’s) in the Lab Safety segment.
See
Note 3 to the Consolidated Financial Statements for additional information
regarding business acquisitions.
Results
of Operations
The
following table is included as an aid to understanding changes in Grainger’s
Consolidated Statements of Earnings:
|
|
For the Years
Ended December 31,
|
|
|
|
As a Percent
of Net Sales
|
|
|
Percent
Increase/(Decrease)
from Prior
Year
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
6.7 |
% |
|
|
9.1 |
% |
Cost of
merchandise sold
|
|
|
59.0 |
|
|
|
59.4 |
|
|
|
60.0 |
|
|
|
6.0 |
|
|
|
8.1 |
|
Gross
profit
|
|
|
41.0 |
|
|
|
40.6 |
|
|
|
40.0 |
|
|
|
7.9 |
|
|
|
10.6 |
|
Operating
expenses
|
|
|
29.6 |
|
|
|
30.1 |
|
|
|
30.2 |
|
|
|
4.8 |
|
|
|
8.8 |
|
Operating
earnings
|
|
|
11.4 |
|
|
|
10.5 |
|
|
|
9.8 |
|
|
|
16.7 |
|
|
|
16.0 |
|
Other income
(expense) |
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
(184.3 |
) |
|
|
(55.1 |
) |
Income
taxes
|
|
|
4.4 |
|
|
|
4.1 |
|
|
|
3.7 |
|
|
|
13.8 |
|
|
|
19.2 |
|
Net
earnings
|
|
|
6.9 |
% |
|
|
6.6 |
% |
|
|
6.5 |
% |
|
|
13.1 |
% |
|
|
9.6 |
% |
2008
Compared to 2007
Grainger’s net sales
of $6,850.0 million for 2008 increased 6.7% when compared with net sales of
$6,418.0 million for 2007. There was one more selling day in 2008 versus 2007.
Daily sales were up 6.3%. The increase in net sales was led by high single-digit
sales growth in the government sector, and mid single-digit sales growth in the
commercial and reseller sectors. Approximately 1 percentage point of the sales
growth came from Grainger’s product line expansion initiative and approximately
5 percentage points came from price and volume. Refer to the Segment
Analysis below for further detail of Grainger’s ongoing strategic
initiatives.
The
gross profit margin for 2008 improved 0.4 percentage point to 41.0% from 40.6%
in 2007. The improvement in the gross profit margin was primarily driven by
positive inflation recovery, partially offset by unfavorable selling price
category mix.
Operating earnings
of $782.7 million for 2008 increased 16.7% over the $670.7 million for
2007. This earnings improvement exceeded the sales growth rate due to an
improved gross profit margin and positive operating expense
leverage.
Net
earnings for 2008 increased by 13.1% to $475.4 million from $420.1 million
in 2007. The growth in net earnings for 2008 primarily resulted from the
improvement in operating earnings, partially offset by lower interest income,
higher interest expense and the write-off of Grainger’s $6.0 million investment
in Asia Pacific Brands India Ltd. (Asia Pacific Brands). Diluted earnings per
share of $6.04 in 2008 were 22.3% higher than the $4.94 for 2007. This
improvement was higher than the percentage increase for net earnings due to the
effect of Grainger’s share repurchase program.
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
18 to the Consolidated Financial Statements.
Grainger
Branch-based
Net
sales were $5,678.8 million for 2008, an increase of $326.3 million, or 6.1%,
when compared with net sales of $5,352.5 million for 2007. Daily sales were up
5.7%. Daily sales in the United States were up 5.5%. Sales were led by high
single-digit sales growth in the government sector, and mid single-digit sales
growth in the commercial and
reseller sectors.
Approximately 2 percentage points of the sales growth came from Grainger’s
product line expansion initiative and approximately 4 percentage points came
from price and volume. Sales volume was negatively affected by approximately
1 percentage point due to a decline in sales of seasonal
products.
In
2004, Grainger launched a multiyear market expansion program to strengthen its
presence in top metropolitan markets and better position itself to serve local
customers. The market expansion program was completed in 2008,
however, the benefits realized from this initiative are expected to
continue.
Consistent with the
overall downturn in the economy, beginning in October most of these markets saw
negative sales growth, which significantly affected sales growth for 2008.
Results for the market expansion program were as
follows:
|
|
Daily
Sales
Increase
2008 vs.
2007
|
|
Phase 1
(Atlanta, Denver, Seattle)
|
|
|
7%
|
|
Phase 2 (Four
markets in Southern California)
|
|
|
5%
|
|
Phase 3
(Houston, St. Louis, Tampa)
|
|
|
10%
|
|
Phase 4
(Baltimore, Cincinnati, Kansas City, Miami,
Philadelphia, Washington, D.C.)
|
|
|
2%
|
|
Phase 5
(Dallas, Detroit, New York, Phoenix)
|
|
|
3%
|
|
Phase 6
(Chicago, Minneapolis, Pittsburgh, San
Francisco)
|
|
|
6%
|
|
Over the past three
years, Grainger has added over 150,000 new products to supplement Industrial
Supply’s plumbing, fastener, material handling and security product lines as
part of its ongoing product line expansion initiative. The most recent catalog,
issued in 2009, offers a total of 237,000 products, an increase of 50,000
products over the 2008 catalog.
Sales in Mexico
increased 11.9% in 2008 versus 2007. Daily sales were up 11.5%. In
local currency, daily sales were up 12.7%, driven primarily by increased market
share coming from the ongoing branch expansion program.
The segment gross
profit margin increased 0.5 percentage point in 2008 over 2007, driven primarily
by positive inflation recovery, partially offset by unfavorable selling price
category mix.
Operating expenses
in this segment were up 3.4% in 2008. Expenses grew at a slower rate than sales
primarily due to lower advertising expenses, bonus accruals, severance and lower
bad debt expense, the result of improved collection efficiency.
For
the segment, operating earnings of $782.7 million for 2008 increased 16.9% over
the $669.4 million for 2007. This earnings improvement exceeded the sales
growth rate due to an improved gross profit margin and positive operating
expense leverage.
Acklands
– Grainger
Branch-based
Net sales at Acklands – Grainger were $728.0 million for
2008, an increase of $91.5 million, or 14.4%, when compared with $636.5 million
for 2007. Daily sales were up 13.9%. In local currency, daily sales increased
13.1%. The
increase was led by sales growth in the contractor, agriculture and mining and
government sectors.
The
gross profit margin increased 0.3 percentage points in 2008 over 2007. The
improvement in the gross profit margin was primarily due to positive inflation
recovery.
Operating expenses
were up 13.7% in 2008. The increase in operating expenses was primarily due to
payroll and benefits as a result of increased headcount, merit increases and
commissions, and higher advertising and occupancy expenses, and expenses related
to the bankruptcy of a provider of freight payment services.
Operating earnings
of $54.3 million for 2008 were up $10.0 million, or 22.7%. This earnings
improvement exceeded the sales growth rate due to an improved gross profit
margin and operating expenses that grew at a slower rate than
sales.
Lab
Safety
Net
sales at Lab Safety were $450.7 million for 2008, an increase of
$16.0 million, or 3.7%, when compared with $434.7 million for 2007. Daily
sales were up 3.3%. Excluding sales from the Highsmith acquisition, sales
declined 3.3%.
The
gross profit margin decreased 0.6 percentage point in 2008 over 2007, driven
primarily by unfavorable selling price category mix and product
mix.
Operating expenses
were up 10.0% in 2008. Expenses grew at a faster rate than sales primarily due
to costs associated with the Highsmith acquisition.
Operating earnings
of $45.4 million for 2008 were down 16.4% over 2007. Operating earnings were
down as a result of lower gross profit margins and higher operating
expenses.
Other
Income and Expense
Other income and
expense was $9.5 million of expense in 2008, a decrease of $20.7 million as
compared with $11.2 million of income in 2007. The following table summarizes
the components of other income and expense (in thousands of
dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Other
income and (expense):
|
|
|
|
|
|
|
Interest
income (expense) – net
|
|
$ |
(9,416 |
) |
|
$ |
9,151 |
|
Equity in net
income of unconsolidated entities
|
|
|
3,642 |
|
|
|
2,016 |
|
Write-off of
investment in unconsolidated entity
|
|
|
(6,031 |
) |
|
|
– |
|
Unclassified –
net
|
|
|
2,351 |
|
|
|
41 |
|
|
|
$ |
(9,454 |
) |
|
$ |
11,208 |
|
The
change from net interest income to net interest expense was primarily
attributable to the four-year bank term loan obtained in May 2008. The write-off
of the investment relates to Asia Pacific Brands as described in Note 6 to the
Consolidated Financial Statements. Unclassified – net increased primarily due to
higher foreign exchange transaction gains.
Income
Taxes
Income taxes of
$297.9 million in 2008 increased 13.8% as compared with $261.7 million in
2007.
Grainger’s effective
tax rates were 38.5% and 38.4% in 2008 and 2007, respectively. Excluding the
effect of after tax items related to the write-off and the earnings of
unconsolidated entities, the effective income tax rates were 38.4% and 38.5% for
2008 and 2007, respectively.
For
2009, Grainger is projecting its estimated effective tax rate to be
approximately 38.9%, excluding equity in net income of unconsolidated
entities.
2007
Compared to 2006
Grainger’s net sales
of $6,418.0 million for 2007 increased 9.1% when compared with net sales of
$5,883.7 million for 2006. There was one more selling day in 2007 versus 2006.
Daily sales were up 8.7%. The increase in net sales was led by sales growth in
the upper teens in the government sector, high single-digit sales growth in the
commercial sector and mid single-digit sales growth in the manufacturing sector.
Approximately 3 percentage points of the sales growth came from Grainger’s
ongoing strategic initiatives, market expansion and product line expansion, with
another 1 percentage point from foreign exchange. Partially offsetting these
sales improvements was a negative 1 percentage point effect from the continued
wind-down of low margin integrated supply contracts. Refer to the Segment
Analysis below for further detail of Grainger’s ongoing strategic
initiatives.
The
gross profit margin for 2007 improved 0.6 percentage point to 40.6% from 40.0%
in 2006. The improvement in the gross profit margin was primarily driven by
positive inflation recovery, partially offset by unfavorable selling price
category mix.
Operating earnings
for 2007 totaled $670.7 million, an increase of 16.0% over 2006. This earnings
improvement exceeded the sales growth rate due to an improved gross profit
margin and operating expenses which grew at a slightly slower rate than
sales.
Net
earnings for 2007 increased by 9.6% to $420.1 million from $383.4 million
in 2006. The growth in net earnings for 2007 primarily resulted from the
improvement in operating earnings, partially offset by lower interest income, no
counterpart to a gain on the sale of Acklands – Grainger’s interest in the
USI-AGI Prairies joint venture in 2006, and a higher effective tax rate in 2007.
The results for 2006 included tax benefits from the resolution of uncertainties
related to the audit of the 2004 tax year and a tax benefit from a reduction of
deferred tax liabilities related to property, buildings and equipment. These
benefits increased diluted earnings per share by $0.15 in 2006. Diluted earnings
per share of $4.94 in 2007 were 16.5% higher than the $4.24 for 2006. This
improvement was higher than the percentage increase for net earnings due to the
effect of Grainger’s share repurchase program.
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 18 to the
Consolidated Financial Statements.
Grainger
Branch-based
Net
sales were $5,352.5 million for 2007, an increase of $441.7 million, or 9.0%,
when compared with net sales of $4,910.8 million for 2006. Daily sales were up
8.6%. Daily sales in the United States were up 8.5%, with growth in all customer
end markets, led by sales growth in the upper teens in the government sector and
high single-digit sales growth in the commercial sector. Approximately 4
percentage points of the sales growth came from Grainger’s ongoing strategic
initiatives, market expansion and product line expansion. The wind-down of
Grainger’s low margin integrated supply contracts reduced sales growth by
approximately 1 percentage point.
In
2004, Grainger launched a multiyear market expansion program to strengthen its
presence in top metropolitan markets and better position itself to serve local
customers. Market expansion
contributed approximately 2 percentage points to the sales growth for the
segment. Results for the market expansion program were as
follows:
|
|
Daily
Sales
Increase
2007 vs.
2006
|
|
Estimated
Percent
Complete
|
|
Phase 1
(Atlanta, Denver, Seattle)
|
|
15%
|
|
100%
|
|
Phase 2 (Four
markets in Southern California)
|
|
6%
|
|
100%
|
|
Phase 3
(Houston, St. Louis, Tampa)
|
|
13%
|
|
100%
|
|
Phase 4
(Baltimore, Cincinnati, Kansas City, Miami,
Philadelphia, Washington, D.C.)
|
|
10%
|
|
100%
|
|
Phase 5
(Dallas, Detroit, New York, Phoenix)
|
|
9%
|
|
75%
|
|
Phase 6
(Chicago, Minneapolis, Pittsburgh, San
Francisco)
|
|
9%
|
|
65%
|
|
Product line
expansion contributed approximately 2 percentage points to the growth
in the segment. Over the past two years, Grainger has added approximately 90,000
new products in the plumbing, fastener, material handling and security product
lines as part of its ongoing product line expansion initiative.
Daily sales in
Mexico increased 22.7% in 2007 versus 2006. In local currency, daily sales were
up 22.8%, driven primarily by the ongoing branch expansion program and an
improved economy.
The
segment gross profit margin increased 0.4 percentage point in 2007 over 2006,
driven primarily by positive inflation recovery, partially offset by unfavorable
selling price category mix.
Operating expenses
in this segment were up 9.0% in 2007. Expenses grew at the same rate as sales
with payroll and benefits growing at a slower rate than sales offset by other
operating expenses growing faster than sales, primarily due to increased bad
debt expense and provisions and higher facility costs related to market
expansion.
For
the segment, operating earnings of $669.4 million for 2007 increased 12.8% over
the $593.5 million for 2006. This earnings improvement exceeded the sales
growth rate due to an improved gross profit margin.
Acklands
– Grainger
Branch-based
Net
sales at Acklands – Grainger were $636.5 million for 2007, an increase of $71.4
million, or 12.6%, when compared with $565.1 million for 2006. Daily sales were
up 12.2%. In local currency, daily sales increased 5.8% due to a stronger
economy. This increase was led by the mining sector with sales growth in the low
twenties, high single-digit sales growth in the oil sector and mid single-digit
sales growth in the government sector. These increases were partially offset by
a mid-teens sales decline in the forestry sector.
The
gross profit margin increased 2.6 percentage points in 2007 over 2006. The
improvement in the gross profit margin was primarily due to positive inflation
recovery.
Operating expenses
were up 6.7% in 2007. Expenses grew at a slower rate than sales due to operating
expense leverage, the result of improved cost management and lower severance
costs.
Operating earnings
of $44.2 million for 2007 were up $29.0 million, or 190%. This earnings
improvement exceeded the sales growth rate due to an improved gross profit
margin and operating expenses that grew at a slower rate than
sales.
Lab
Safety
Net
sales at Lab Safety were $434.7 million for 2007, an increase of
$23.2 million, or 5.6%, when compared with $411.5 million for 2006. Daily
sales were up 5.2%. Sales from the acquisitions made during 2007 and late 2006
contributed 6.1 percentage points to the growth.
The
gross profit margin decreased 0.5 percentage point in 2007 over 2006. Gross
profit margin was down as a result of increased freight costs and unfavorable
selling price category mix and product mix, partially offset by positive
inflation recovery.
Operating expenses
were 4.6% higher in 2007 and grew at a slower rate than sales due to cost
management efforts.
Operating earnings
of $54.3 million for 2007 were up 3.8% over 2006. This earnings improvement was
less than the sales growth rate primarily due to a lower gross profit
margin.
Other
Income and Expense
Other income and
expense was $11.2 million of income in 2007, a decrease of $13.8 million as
compared with $25.0 million of income in 2006. The following table summarizes
the components of other income and expense (in thousands of
dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Other
income and (expense):
|
|
|
|
|
|
|
Interest
income (expense) – net
|
|
$ |
9,151 |
|
|
$ |
19,570 |
|
Equity in net
income of unconsolidated entities
|
|
|
2,016 |
|
|
|
2,960 |
|
Gain on sale
of unconsolidated entity
|
|
|
– |
|
|
|
2,291 |
|
Unclassified –
net
|
|
|
41 |
|
|
|
131 |
|
|
|
$ |
11,208 |
|
|
$ |
24,952 |
|
The
decrease in interest income was primarily attributable to lower average cash
balances due to working capital needs and share repurchases. There was a
decrease in equity in net income of unconsolidated entities in 2007 versus 2006
primarily driven by the absence of earnings related to the joint venture that
was sold.
Income
Taxes
Income taxes of
$261.7 million in 2007 increased 19.2% as compared with $219.6 million in
2006.
Grainger’s effective
tax rates were 38.4% and 36.4% in 2007 and 2006, respectively. Excluding the
equity in net income of unconsolidated entities, the effective income tax rates
were 38.5% for 2007 and 36.7% for 2006.
The
2006 tax rate benefited from resolution of uncertainties related to the audit of
the 2004 tax year and from a reduction of deferred tax liabilities related to
property, buildings and equipment.
Excluding the equity
in net income of unconsolidated entities and the tax benefits noted above, the
effective income tax rate for 2006 was 38.9%.
Financial
Condition
Grainger expects its
strong working capital position, cash flows from operations and borrowing
capacity to continue, allowing it to fund its operations, including growth
initiatives, capital expenditures, acquisitions and repurchase of shares, as
well as pay cash dividends.
Cash
Flow
Net
cash flows from operations of $530.1 million in 2008, $468.9 million in 2007 and
$436.8 million in 2006 continued to improve Grainger’s financial position and
serve as the primary source of funding. Net cash provided by operations
increased $61.2 million in 2008 over 2007, driven primarily by increased net
earnings. The Change in operating assets and liabilities – net of business
acquisitions used cash of $143.1 million in 2008. This use of cash was driven
primarily by an increase in inventory due to the product line expansion
initiative.
The
increase in net cash flows from operations from 2006 to 2007 of $32.1 million
was primarily attributable to increased net earnings. The Change in operating
assets and liabilities – net of business acquisitions used cash of $106.4
million in 2007. This use of cash was primarily driven by increases in inventory
and trade accounts receivable as well as a decrease in trade accounts payable
due to the timing of payments at year-end. The increases in inventory and trade
accounts receivable were due to product line expansion and increased sales.
These changes were partially offset by an increase in other current liabilities
due to higher compensation, benefit and profit sharing accruals, the result of
increased headcount and improved Company performance.
Net
cash flows used in investing activities were $202.6 million, $197.0 million and
$139.7 million in 2008, 2007 and 2006, respectively. Cash expended for property,
buildings, equipment and capitalized software was $195.0 million, $197.4 million
and $136.8 million in 2008, 2007 and 2006, respectively. Additional information
regarding capital spending is detailed in the Capital
Expenditures section below. In 2008, Grainger continued to fund the
Company’s market expansion initiative ($40 million) and acquired two companies,
Highsmith and Excel ($34.3 million). In 2007, Grainger funded the market
expansion initiative ($88 million), purchased McFeely’s ($4.7 million) and
purchased its distribution center in China ($6.7 million).
Net cash flows used in financing
activities for 2008, 2007 and 2006 were $36.8 million, $513.9 million and $492.9
million, respectively. Treasury stock purchases were $394.2 million in 2008 as
Grainger repurchased 5.5 million shares compared to purchases of $647.3 million
in 2007 to repurchase 7.2 million shares. As of December 31, 2008, approximately
7.4 million shares of common stock remained available under Grainger’s
repurchase authorization. Dividends paid to shareholders were $121.5 million in
2008 versus $113.1 million in 2007. Grainger also used cash in
financing activities
to pay off $81.4 million of short-term borrowings versus an increase in
short-term borrowings of $102.3 million in 2007. Partially offsetting these cash
outlays were proceeds of long-term borrowings of $500 million in 2008, as well
as proceeds and excess tax benefits realized from stock options exercised of
$60.4 million in 2008 versus $144.2 million in 2007.
Treasury stock
purchases were $472.8 million for 7.0 million shares and dividends paid to
shareholders were $97.9 million in 2006. Partially offsetting these cash outlays
was proceeds and excess tax benefits realized from stock options exercised of
$77.8 million for 2006.
Working
Capital
Internally generated
funds have been the primary source of working capital and of funds used in
business expansion, supplemented by debt as circumstances dictated. In addition,
funds were expended for facilities optimization and enhancements to support
growth initiatives, as well as for business and systems development and other
infrastructure improvements.
Working capital was
$1,382.4 million at December 31, 2008, compared with $974.4 million at December
31, 2007 and $1,155.8 million at December 31, 2006. At these dates, the ratio of
current assets to current liabilities was 2.8, 2.2 and 2.6. The increase in the
current ratio and working capital for 2008 primarily relates to increases in
cash and inventories and the replacement of short-term borrowings with long-term
borrowings.
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 (in thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Land,
buildings, structures and improvements
|
|
$ |
107,688 |
|
|
$ |
100,380 |
|
|
$ |
67,554 |
|
Furniture,
fixtures, machinery and equipment
|
|
|
76,163 |
|
|
|
87,389 |
|
|
|
62,233 |
|
Subtotal
|
|
|
183,851 |
|
|
|
187,769 |
|
|
|
129,787 |
|
Capitalized
software
|
|
|
12,297 |
|
|
|
8,556 |
|
|
|
8,950 |
|
Total
|
|
$ |
196,148 |
|
|
$ |
196,325 |
|
|
$ |
138,737 |
|
In
2008, Grainger completed its investments in the market expansion program in the
United States which realigned branches in the top 25 major metropolitan areas.
In addition, there was continued international investment, including branch
expansion in Mexico, as well as the normal recurring replacement of
equipment.
In
2007 and 2006, Grainger’s investments included the market expansion program,
Mexico and China expansion and the normal recurring replacement of
equipment.
Capital expenditures
are expected to range from $175 million to $200 million in 2009. Projected
investments include improved infrastructure in distribution centers, both in the
U.S. and Canada, information technology, including upgraded electronic commerce
platforms, and the normal recurring replacement of equipment. Grainger expects
to fund 2009 capital investments from operating cash flows.
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
bank borrowings under lines of credit. A four-year bank term loan of $500
million was obtained in May 2008. At December 31, 2008, Grainger’s long-term
debt rating by Standard & Poor’s was AA+. Grainger’s available lines of
credit, as further discussed in Note 8 to the Consolidated Financial Statements,
were $250.0 million at December 31, 2008, 2007 and 2006. Total debt as a percent
of total capitalization was 20.7%, 5.0% and 0.4% as of the same dates. The
increase in total debt as a percent of total capitalization in 2008 was
primarily the result of the $500 million bank term loan. 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 position.
Commitments
and Other Contractual Obligations
At
December 31, 2008, Grainger’s contractual obligations, including estimated
payments due by period, are as follows (in thousands of
dollars):
|
|
Payments Due
by Period
|
|
|
|
Total Amounts
Committed
|
|
|
Less than 1
Year
|
|
|
1 – 3
Years
|
|
|
4 – 5
Years
|
|
|
More than 5
Years
|
|
Long-term
debt obligations
|
|
$ |
509,485 |
|
|
$ |
21,257 |
|
|
$ |
100,728 |
|
|
$ |
387,500 |
|
|
$ |
– |
|
Interest on
long-term debt
|
|
|
18,538 |
|
|
|
6,130 |
|
|
|
10,782 |
|
|
|
1,626 |
|
|
|
– |
|
Operating
lease obligations
|
|
|
218,375 |
|
|
|
41,150 |
|
|
|
66,471 |
|
|
|
49,917 |
|
|
|
60,837 |
|
Purchase
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncompleted
additions to
property,
buildings and equipment
|
|
|
17,916 |
|
|
|
17,916 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Commitments
to purchase
inventory
|
|
|
187,526 |
|
|
|
187,498 |
|
|
|
28 |
|
|
|
– |
|
|
|
– |
|
Other
purchase obligations
|
|
|
80,938 |
|
|
|
68,665 |
|
|
|
11,181 |
|
|
|
1,092 |
|
|
|
– |
|
Other
liabilities
|
|
|
171,489 |
|
|
|
7,408 |
|
|
|
15,181 |
|
|
|
17,329 |
|
|
|
131,571 |
|
Total
|
|
$ |
1,204,267 |
|
|
$ |
350,024 |
|
|
$ |
204,371 |
|
|
$ |
457,464 |
|
|
$ |
192,408 |
|
Purchase obligations
for inventory are made in the normal course of business to meet operating needs.
While purchase orders for both inventory purchases and noninventory purchases
are generally cancelable without penalty, certain vendor agreements provide for
cancellation fees or penalties depending on the terms of the
contract.
Other liabilities
represent future benefit payments for postretirement benefit plans and
postemployment disability medical benefits as determined by actuarial
projections. Other employment-related benefits costs of $31.0 million have not
been included in this table as the timing of benefit payments is not
statistically predictable. See Note 10 to the Consolidated Financial
Statements.
See
also Notes 9 and 11 to the Consolidated Financial Statements for further detail
related to the interest on long-term debt and operating lease obligations,
respectively.
Grainger has
recorded a noncurrent liability of $26.3 million for tax uncertainties and
interest at December 31, 2008. This amount is excluded from the table above, as
Grainger cannot make reliable estimates of these cash flows by period. See Note
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 Estimates
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States of America, requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses in the financial statements. Management bases
its estimates on historical experience and other assumptions, which it believes
are reasonable. If actual amounts are ultimately different from these estimates,
the revisions are included in Grainger’s results of operations for the period in
which the actual amounts become known.
Accounting policies
are considered critical when they require management to make assumptions about
matters that are highly uncertain at the time the estimates are made and when
there are different estimates that management reasonably could have made, which
would have a material impact on the presentation of Grainger’s 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 management’s estimates under
different assumptions or conditions.
Allowance
for Doubtful Accounts. Grainger
uses several factors to estimate the allowance for uncollectible accounts
receivable including the age of the receivables and the historical ratio of
actual write-offs to the age of the receivables. 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.
Write-offs could be
materially different than the reserves provided if economic conditions change or
actual results deviate from historical trends.
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 Grainger’s 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 Grainger’s results of
operations.
Stock
Incentive Plans. Grainger maintains stock incentive plans
under which a variety of incentive grants may be awarded to employees and
directors. Grainger uses a binomial lattice option pricing model to estimate the
value of stock option grants. The model requires projections of the risk-free
interest rate, expected life, volatility, expected dividend yield and forfeiture
rate of the stock option grants. The fair value estimate of options granted used
the following assumptions:
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Risk-free
interest rate
|
|
|
3.2
|
% |
|
|
4.6 |
% |
|
|
4.9 |
% |
Expected
life
|
|
6
years
|
|
|
6
years
|
|
|
6
years
|
|
Expected
volatility
|
|
|
25.2 |
% |
|
|
24.3 |
% |
|
|
23.9 |
% |
Expected
dividend yield
|
|
|
1.8 |
% |
|
|
1.7 |
% |
|
|
1.5 |
% |
The risk-free
interest rate is selected based on yields from U.S. Treasury zero-coupon issues
with a remaining term approximately equal to the expected term of the options
being valued. The expected life selected for options granted during each year
presented represents the period of time that the options are expected to be
outstanding based on historical data of option holders exercise and termination
behavior. Expected volatility is based upon implied and historical volatility of
the closing price of Grainger’s stock over a period equal to the expected life
of each option grant. The dividend yield assumption is based on history and
expectation of dividend payouts. Because stock option compensation expense is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures, using historical forfeiture experience.
The
amount of stock option compensation expense is significantly affected by the
valuation model and these assumptions. If a different valuation model or
different assumptions were used, the stock option compensation expense could be
significantly different from what is recorded in the current
period.
Compensation expense
for other stock-based awards is based upon the closing market price on the last
trading date preceding the date of the grant.
For
additional information concerning stock incentive plans, see Note 12 to the
Consolidated Financial Statements.
Postretirement
Healthcare Benefits. Postretirement
healthcare obligations and net periodic costs 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
Grainger’s 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. A
lower discount rate increases the present value of benefit obligations and net
periodic postretirement benefit costs. As of December 31, 2008, Grainger
decreased the discount rate used in the calculation of its
postretirement plan obligation from 6.5% to 5.9% to reflect the decrease in
market interest rates. Grainger estimates that the decrease in the expected
discount rate will decrease 2009 pretax earnings by approximately $2.5 million,
although other changes in assumptions may increase, decrease or eliminate this
effect.
Grainger considers
the long-term historical actual return on plan assets and the historical
performance of the Standard & Poor’s 500 Index in developing its expected
long-term return on plan assets. In 2008, Grainger maintained the expected
long-term rate of return on plan assets of 6.0% (net of tax at 40%) based on the
historical average of long-term rates of return.
A 1
percentage point change in assumed healthcare cost trend rates would have had
the following effects on December 31, 2008 results (in thousands of
dollars):
|
|
1 Percentage
Point
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
Effect on
total of service and interest cost
|
|
$ |
4,206 |
|
|
$ |
(3,293 |
) |
Effect on
accumulated postretirement benefitobligation
|
|
|
37,268 |
|
|
|
(29,601 |
) |
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.
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 or new trends and,
therefore, may affect Grainger’s retirement plan obligations and future
expense.
For
additional information concerning postretirement healthcare benefits, see Note
10 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
high deductibles and self-insured retentions. There are also certain other risk
areas for which Grainger does not maintain insurance.
Grainger is
responsible for establishing accounting 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 levels.
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
period’s results of operations.
Income
Taxes. Grainger recognizes 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 tax
balances and income tax expense recognized by Grainger are based on management’s
interpretations of the tax laws of multiple jurisdictions. Income tax expense
reflects Grainger’s best estimates and assumptions regarding, among other items,
the level of future taxable income, interpretation of tax laws and tax planning
opportunities. Future rulings by tax authorities and future changes in tax laws
and their interpretation, changes in projected levels of taxable income and
future tax planning strategies could impact the actual effective tax rate and
tax balances recorded by Grainger.
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 such as revenue recognition,
depreciation, intangibles, long-lived assets 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 and the
Securities and Exchange Commission. 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.
New
Accounting Standards
The
following new accounting standards exclude those pronouncements that are
unlikely to have an effect on Grainger upon adoption.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS No. 141R). SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No.
141R also establishes disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. The statement is
effective for fiscal years beginning after December 15, 2008, and will be
applied to acquisitions after adoption by the Company.
In December 2007,
the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements – an amendment of Accounting Research Bulletin No. 51"
(SFAS No. 160). SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No.160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the
parent and the
interests of the noncontrolling owners. The statement is effective for fiscal
years beginning after December 15, 2008. The Company currently does not
have any noncontrolling interest in consolidated financial statements, therefore
does not expect the adoption of SFAS No. 160 to have a material effect on
its results of operations or financial position.
In
June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (FSP 03-6-1). FSP 03-6-1 states that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. Upon adoption, a company is required to retrospectively
adjust its earnings per share data presentation to conform with the FSP 03-6-1
provisions. FSP 03-6-1 is effective for fiscal years beginning after
December 15, 2008.
The
Company’s unvested share-based payment awards, such as Performance Shares,
Restricted Stock and Restricted Stock Units (see Note 12 to the Consolidated
Financial Statements) that contain nonforfeitable rights to dividends meet the
criteria of a participating security as defined by FSP 03-6-1. Accordingly, the
adoption of FSP 03-6-1 will change the methodology of computing the Company’s
earnings per share to the two-class method. This change will not affect
previously reported consolidated net earnings or net cash flows from operations.
Under the two-class method, earnings will be allocated between common stock and
participating securities, resulting in lower earnings per share. Refer to the
table below for further analysis of the impact adoption would have had on 2008
earnings per share.
|
|
2008 Quarter
Ended
|
|
|
|
|
|
|
|
Mar.
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
Total
|
|
Earnings Per
Share as previously reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.47 |
|
|
$ |
1.48 |
|
|
$ |
1.84 |
|
|
$ |
1.42 |
|
|
$ |
6.21 |
|
Diluted
|
|
$ |
1.43 |
|
|
$ |
1.43 |
|
|
$ |
1.79 |
|
|
$ |
1.39 |
|
|
$ |
6.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share Two-class method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
$ |
1.80 |
|
|
$ |
1.39 |
|
|
$ |
6.07 |
|
Diluted
|
|
$ |
1.41 |
|
|
$ |
1.42 |
|
|
$ |
1.77 |
|
|
$ |
1.37 |
|
|
$ |
5.97 |
|
See
Note 2 to the Consolidated Financial Statements for further discussion of new
accounting standards.
Inflation
and Changing Prices
Inflation during the
last three years has not had a significant effect on operations. The predominant
use of the last-in, first-out (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.
The
major impact of inflation is on buildings and improvements, where the gap
between historic cost and replacement cost accumulates for these long-lived
assets. The related depreciation expense associated with these assets would
likely increase if adjustments were to be made 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, maintaining working capital turnover and
offering products and services which can command appropriate prices in the
marketplace.
Forward-Looking
Statements
This Form 10-K
contains statements that are not historical in nature but concern future results
and business plans, strategies and objectives and other matters that may be
deemed to be “forward-looking statements” under the federal securities laws.
Grainger has generally identified such forward-looking statements by using words
such as “anticipate, anticipated, assumed, assumes, assumption, assumptions,
believe, believes, contingency, continue, continued, continues, could, estimate,
estimated, estimates, expect, expectation, expected, expects, forecasts,
intended, intends, may, might, percent complete, planned, predict, predictable,
predicted, presumption, project, projected, projecting, projection, projections,
potential, reasonably likely, scheduled, should, unlikely, will, and would” or
similar expressions.
Grainger cannot
guarantee that any forward-looking statement will be realized, although Grainger
does believe that its assumptions underlying its forward-looking statements are
reasonable. Achievement of future results is subject to risks and uncertainties
which could cause Grainger’s results to differ materially from those which are
presented.
Factors that could
cause actual results to differ materially from those presented or implied in a
forward-looking statement include, without limitation: higher product
costs or other expenses; a major loss of customers; loss or disruption of source
of supply; increased competitive pricing pressures; failure to develop or
implement new technologies or business strategies; the outcome of pending and
future litigation or governmental or regulatory proceedings; investigations,
inquiries, audits and changes in laws and regulations; disruption of information
technology or data security systems; general industry or market conditions;
general global economic conditions; currency exchange rate fluctuations; market
volatility; commodity price volatility; labor shortages; facilities disruptions
or shutdowns; higher fuel costs or disruptions in transportation services;
natural and other catastrophes; unanticipated weather conditions; and the
factors identified in Item 1A, Risk Factors.
Caution should be
taken not to place undue reliance on Grainger’s forward-looking statements and
Grainger undertakes no obligation to publicly update the forward-looking
statements, whether as a result of new information, future events or
otherwise.
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. For 2008, 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 $2.6 million decrease
in net earnings. Comparatively, in 2007 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 $2.1 million decrease in net earnings. A
uniform 10% weakening of the U.S. dollar would have resulted in a $3.1 million
increase in net earnings for 2008, as compared with an increase in net earnings
of $2.6 million for 2007. 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 or costs. Grainger does not hold derivatives for
trading purposes.
Grainger is also
exposed to interest rate risk in its debt portfolio. During 2008 and 2007, all
of its long-term debt was variable rate debt. A 1 percentage point increase in
interest rates paid by Grainger would have resulted in a decrease to net
earnings of approximately $2.5 million for 2008 and $0.3 million for 2007. A 1
percentage point decrease in interest rates would have resulted in an increase
to net earnings of approximately $2.5 million for 2008 and $0.3 million for
2007. This sensitivity analysis of the effects of changes in interest rates on
long-term debt does not factor in potential changes in long-term debt
levels.
Grainger has limited
primary exposure to commodity price risk on certain products for resale, but
does not purchase commodities directly.
Item
8: Financial Statements and Supplementary Data
The financial
statements and supplementary data are included on pages 27 to 64. See the
Index to Financial Statements and Supplementary Data on page 26.
Item
9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item
9A: Controls and Procedures
Disclosure
Controls and Procedures
Grainger carried out
an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of Grainger’s
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that Grainger’s disclosure controls and procedures were
effective as of the end of the period covered by this report.
Internal
Control Over Financial Reporting
(A)
|
Management’s
Annual Report on Internal Control Over Financial
Reporting
|
Management’s report
on the Company’s internal control over financial reporting is included on page
27 of this Report under the heading Management’s Annual Report on Internal
Control Over Financial Reporting.
(B)
|
Attestation
Report of the Registered Public Accounting
Firm
|
The
report from Ernst & Young LLP on its audit of the effectiveness of
Grainger’s internal control over financial reporting as of December 31, 2008, is
included on page 28 of this Report under the heading Report of Independent
Registered Public Accounting Firm.
(C)
|
Changes in
Internal Control Over Financial
Reporting
|
There have been no
changes in Grainger’s internal control over financial reporting during the last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, Grainger’s internal control over financial
reporting.
Item
9B: Other Information
None.
PART
III
Item
10: Directors, Executive Officers and Corporate
Governance
The
information required by this item is incorporated by reference to Grainger’s
proxy statement relating to the annual meeting of shareholders to be held April
29, 2009, 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 principal executive officer, principal
financial officer and principal accounting officer. This code of ethics is
incorporated into Grainger’s business conduct guidelines for directors, officers
and employees. Grainger intends to satisfy the disclosure requirement under Item
5.05 of Form 8-K relating to its code of ethics by posting such information on
its Web site at www.grainger.com/investor. A copy of the code of ethics
incorporated into Grainger’s business conduct guidelines is also available in
print without charge to any person upon request to Grainger’s Corporate
Secretary. Grainger has also adopted Operating Principles for the Board of
Directors, which are available on its Web site and are available in print to any
person who requests them.
Item
11: Executive Compensation
The information
required by this item is incorporated by reference to Grainger’s proxy statement
relating to the annual meeting of shareholders to be held April 29, 2009, under
the captions “Board of Directors and Board Committees,” “Director Compensation,”
“Report of the Compensation Committee of the Board” and “Compensation Discussion
and Analysis.”
Item
12: Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information
required by this item is incorporated by reference to Grainger’s proxy statement
relating to the annual meeting of shareholders to be held April 29, 2009, under
the captions “Ownership of Grainger Stock” and “Equity Compensation
Plans.”
Item
13: Certain Relationships and Related Transactions, and Director
Independence
The information
required by this item is incorporated by reference to Grainger’s proxy statement
relating to the annual meeting of shareholders to be held April 29, 2009, under
the captions "Election of Directors" and "Transactions with Related
Persons."
Item
14: Principal Accounting Fees and Services
The information
required by this item is incorporated by reference to Grainger’s proxy statement
relating to the annual meeting of shareholders to be held April 29, 2009, under
the caption “Audit Fees and Audit Committee Pre-Approval Policies and
Procedures.”
PART
IV
Item
15: Exhibits and Financial Statement
Schedules
(a)
|
1.
|
Financial
Statements. See Index to Financial Statements and Supplementary
Data.
|
|
|
|
|
|
|
2.
|
Financial
Statement Schedules. The schedules listed in Reg. 210.5-04 have been
omitted because they are either not applicable or the required information
is shown in the consolidated financial statements or notes
thereto.
|
|
|
|
|
|
|
3.
|
Exhibits
|
|
|
|
|
(3)
|
(a)
|
Restated
Articles of Incorporation, incorporated by reference to Exhibit 3(i) to
Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
|
|
|
|
(b)
|
Bylaws, as
amended March 31, 2008, incorporated by reference to Exhibit 3 to
Grainger's Quarterly Report on Form 10-Q for the quarter ended March 31,
2008.
|
|
|
|
|
|
|
|
|
|
(4)
|
Instruments
Defining the Rights of Security Holders, Including
Indentures
|
|
|
|
(a)
|
Agreement
dated as of April 28, 1999, between Grainger and Fleet National Bank
(formerly Bank Boston, NA), as rights agent, incorporated by reference to
Exhibit 4 to Grainger’s Current Report on Form 8-K dated April 28, 1999,
and related letter concerning the appointment of EquiServe Trust
Company, N.A. (now Computershare Trust Company, N.A.), as successor rights
agent, effective August 1, 2002, incorporated by reference to Exhibit 4 to
Grainger’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.
|
|
|
|
(b)
|
No instruments
which define the rights of holders of Grainger’s Industrial Development
Revenue Bonds are filed herewith, pursuant to the exemption contained in
Regulation S-K, Item 601(b)(4)(iii). Grainger hereby agrees to furnish to
the Securities and Exchange Commission, upon request, a copy of any such
instrument.
|
|
|
|
|
|
|
|
|
(10)
|
Material
Contracts
|
|
|
|
|
(a)
|
(i)
|
Accelerated
share repurchase agreement, incorporated by reference to Exhibit 10 to
Grainger's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007.
|
|
|
|
|
(ii)
|
A Credit
Agreement with Wachovia Bank, National Association, as administrative
agent, and other lenders incorporated by reference to Exhibit 10 to
Grainger's Quarterly Report on Form 10-Q for the quarter ended March 31,
2008.
|
|
|
|
(b)
|
Compensatory
Plans or Arrangements
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Director Stock
Plan, as amended, incorporated by reference to Exhibit 10(c) to Grainger’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.
|
|
|
|
|
(ii)
|
Office of the
Chairman Incentive Plan, incorporated by reference to Appendix B of
Grainger’s Proxy Statement dated March 26, 1997.
|
|
|
|
|
(iii)
|
1990 Long-Term
Stock Incentive Plan, as amended, incorporated by reference to Exhibit
10(a) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006.
|
|
|
|
|
(iv)
|
2001 Long-Term
Stock Incentive Plan, as amended, incorporated by reference to Exhibit
10(b) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006.
|
|
|
|
|
(v)
|
Executive
Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(v)
to Grainger's Annual Report on Form 10-K for the year ended December 31,
2007.
|
|
|
|
|
|
(1)
First amendment to the Executive Death Benefit Plan.
|
|
|
|
|
(vi)
|
Executive
Deferred Compensation Plan, incorporated by reference to Exhibit 10(e) to
Grainger’s Annual Report on Form 10-K for the year ended December 31,
1989.
|
|
|
|
|
(vii)
|
1985 Executive
Deferred Compensation Plan, as amended, incorporated by reference to
Exhibit 10(d)(vii) to Grainger’s Annual Report on Form 10-K for the year
ended December 31, 1998.
|
|
|
|
|
(viii)
|
Supplemental
Profit Sharing Plan, as amended, incorporated by reference to Exhibit
10(viii) to Grainger’s Annual Report on Form 10-K for the year ended
December 31, 2003.
|
|
|
|
|
(ix)
|
Supplemental
Profit Sharing Plan II, as amended, incorporated by reference to Exhibit
10(ix) to Grainger's Annual Report on Form 10-K for the year ended
December 31, 2007.
|
|
|
|
|
(x)
|
Form of Change
in Control Employment Agreement between Grainger and certain of its
executive officers, as amended, incorporated by reference to Exhibit 10(x)
to Grainger's Annual Report on Form 10-K for the year ended December 31,
2007.
|
|
|
|
|
(xi)
|
Voluntary
Salary and Incentive Deferral Plan, as amended, incorporated by reference
to Exhibit 10(xi) to Grainger's Annual Report on Form 10-K for the year
ended December 31, 2007.
|
|
|
|
|
(xii) |
Summary
Description of Directors Compensation Program effective April 30, 2008,
incorporated by reference to Exhibit 10 to Grainger’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007.
|
|
|
|
|
(xiii)
|
Summary
Description of Directors Compensation Program effective April 29,
2009.
|
|
|
|
|
(xiv)
|
2005 Incentive
Plan, as amended, incorporated by reference to Exhibit 10(d) to Grainger's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.
|
|
|
|
|
(xv)
|
Form of Stock
Option Award Agreement between Grainger and certain of its executive
officers, incorporated by reference to Exhibit 10(xiv) to Grainger's
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
|
|
(xvi)
|
Form of Stock
Option and Restricted Stock Unit Agreement between Grainger and certain of
its executive officers, incorporated by reference to Exhibit 10(xv) to
Grainger's Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
|
|
(xvii)
|
Form of
Performance Share Award Agreement between Grainger and certain of its
executive officers, incorporated by reference to Exhibit 10(xvi) to
Grainger's Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
|
|
(xviii)
|
Form of
Performance Share Award Agreement (non-dividend equivalent) between
Grainger and certain of its executive officers. |
|
|
|
|
(xix)
|
Summary
Description of 2007 Management Incentive Program, incorporated by
reference to Exhibit 10(xvii) to Grainger's Annual Report on Form 10-K for
the year ended December 31, 2006.
|
|
|
|
|
(xx)
|
Summary
Description of 2008 Management Incentive Program, incorporated by
reference to Exhibit 10(xviii) to Grainger's Annual Report on Form 10-K
for the year ended December 31, 2007.
|
|
|
|
|
(xxi)
|
Summary
Description of 2009 Management Incentive Program.
|
|
|
|
|
|
|
|
(21)
|
Subsidiaries
of Grainger.
|
|
|
|
|
|
|
|
|
|
|
(23)
|
Consent of
Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
|
|
|
(31)
|
Rule 13a –
14(a)/15d – 14(a) Certifications
|
|
|
|
|
|
|
|
|
|
(a)
|
Chief
Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
(b)
|
Chief
Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
(32)
|
Section 1350
Certifications
|
|
|
|
|
|
|
|
|
|
(a)
|
Chief
Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
(b)
|
Chief
Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
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: February
26, 2009
W.W.
GRAINGER, INC.
|
|
|
By:
|
/s/
James T. Ryan
|
|
James T. Ryan
President 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 February 26, 2009,
in the capacities indicated.
|
|
|
/s/
James T. Ryan
|
|
/s/
William K. Hall
|
James T.
Ryan
|
|
William K.
Hall
|
President and
Chief Executive Officer
|
|
Director
|
(Principal
Executive Officer and Director)
|
|
|
|
|
/s/
Stuart L. Levenick
|
/s/
Ronald L. Jadin
|
|
Stuart L.
Levenick
|
Ronald L.
Jadin
|
|
Director
|
Senior Vice
President
|
|
|
and Chief
Financial Officer
|
|
/s/
John W. McCarter, Jr.
|
(Principal
Financial Officer)
|
|
John W.
McCarter, Jr.
|
|
|
Director
|
/s/
Gregory S. Irving
|
|
|
Gregory S.
Irving
|
|
/s/
Neil S. Novich
|
Vice
President and Controller
|
|
Neil S.
Novich
|
(Principal
Accounting Officer)
|
|
Director
|
|
|
|
/s/
Richard L. Keyser
|
|
/s/
Michael J. Roberts
|
Richard L.
Keyser
|
|
Michael J.
Roberts
|
Chairman of
the Board
|
|
Director
|
|
|
|
|
|
|
/s/
Brian P. Anderson
|
|
/s/
Gary L. Rogers
|
Brian P.
Anderson
|
|
Gary L.
Rogers
|
Director
|
|
Director
|
|
|
|
/s/
Wilbur H. Gantz
|
|
/s/
James D. Slavik
|
Wilbur H.
Gantz
|
|
James D.
Slavik
|
Director
|
|
Director
|
|
|
|
/s/
V. Ann Hailey
|
|
/s/
Harold B. Smith
|
V. Ann
Hailey
|
|
Harold B.
Smith
|
Director
|
|
Director
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 2008,
2007 and 2006
Page(s)
|
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
|
27
|
|
|
REPORTS OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
28-29
|
|
|
FINANCIAL
STATEMENTS
|
|
|
|
CONSOLIDATED
STATEMENTS OF EARNINGS
|
30
|
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE EARNINGS
|
31
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
32-33
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
34-35
|
|
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
36-37
|
|
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
38-63
|
|
|
EXHIBIT 23 –
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
|
64
|
|
|
|
|
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of
W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining
adequate internal control over financial reporting. Grainger’s internal control
system was designed to provide reasonable assurance to Grainger’s management and
Board of Directors regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements under all potential conditions. Therefore, effective
internal control over financial reporting provides only reasonable, and not
absolute, assurance with respect to the preparation and presentation of
financial statements.
Grainger’s
management assessed the effectiveness of Grainger’s internal control over
financial reporting as of December 31, 2008, based on the framework set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control – Integrated Framework. Based on its assessment
under that framework and the criteria established therein, Grainger’s management
concluded that Grainger’s internal control over financial reporting was
effective as of December 31, 2008.
Ernst & Young
LLP, an independent registered public accounting firm, has audited management’s
effectiveness of Grainger’s internal control over financial reporting as of
December 31, 2008, as stated in their report which is included
herein.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders
W.W. Grainger,
Inc.
We have audited
W.W. Grainger, Inc.’s internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). W.W. Grainger, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our opinion, W.W. Grainger, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the
COSO criteria.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
W.W. Grainger, Inc. and subsidiaries as of December 31, 2008, 2007 and 2006, and
the related consolidated statements of earnings, comprehensive earnings,
shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008 of W.W. Grainger, Inc., and our report dated February
25, 2009, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago,
Illinois
February 25,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders
W.W. Grainger,
Inc.
We have audited the
accompanying consolidated balance sheets of W.W. Grainger, Inc. and subsidiaries
as of December 31, 2008, 2007, and 2006, and the related consolidated statements
of earnings, comprehensive earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 at
December 31, 2008, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As
described in Note 15 to the consolidated financial statements, effective January
1, 2007, the Company changed its method of accounting for uncertain tax
positions to conform with FIN 48, “Accounting for Uncertainty in Income
Taxes.”
As
described in Note 12 to the consolidated financial statements, effective January
1, 2006, the Company changed its method of accounting for share-based payments
to conform with FASB Statement No. 123(R).
As
described in Note 14 to the consolidated financial statements, effective
December 31, 2006, the Company changed its method of accounting for other
postretirement plans to conform with FASB Statement No. 158.
We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), W.W. Grainger, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 25, 2009
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago,
Illinois
February 25,
2009
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
6,850,032 |
|
|
$ |
6,418,014 |
|
|
$ |
5,883,654 |
|
Cost of
merchandise sold
|
|
|
4,041,810 |
|
|
|
3,814,391 |
|
|
|
3,529,504 |
|
Gross
profit
|
|
|
2,808,222 |
|
|
|
2,603,623 |
|
|
|
2,354,150 |
|
Warehousing,
marketing and
administrative expenses
|
|
|
2,025,550 |
|
|
|
1,932,970 |
|
|
|
1,776,079 |
|
Operating
earnings
|
|
|
782,672 |
|
|
|
670,653 |
|
|
|
578,071 |
|
Other income
and (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,069 |
|
|
|
12,125 |
|
|
|
21,496 |
|
Interest expense
|
|
|
(14,485 |
) |
|
|
(2,974 |
) |
|
|
(1,926 |
) |
Equity in net income of unconsolidated
entities
|
|
|
3,642 |
|
|
|
2,016 |
|
|
|
2,960 |
|
Write-off of investment in
unconsolidated entity
|
|
|
(6,031 |
) |
|
|
– |
|
|
|
– |
|
Gain on sale of unconsolidated
entity
|
|
|
– |
|
|
|
– |
|
|
|
2,291 |
|
Unclassified – net
|
|
|
2,351 |
|
|
|
41 |
|
|
|
131 |
|
Total other income and
(expense)
|
|
|
(9,454 |
) |
|
|
11,208 |
|
|
|
24,952 |
|
Earnings before income
taxes
|
|
|
773,218 |
|
|
|
681,861 |
|
|
|
603,023 |
|
Income
taxes
|
|
|
297,863 |
|
|
|
261,741 |
|
|
|
219,624 |
|
Net earnings
|
|
$ |
475,355 |
|
|
$ |
420,120 |
|
|
$ |
383,399 |
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
6.21 |
|
|
$ |
5.10 |
|
|
$ |
4.36 |
|
Diluted
|
|
$ |
6.04 |
|
|
$ |
4.94 |
|
|
$ |
4.24 |
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76,579,856 |
|
|
|
82,403,958 |
|
|
|
87,838,723 |
|
Diluted
|
|
|
78,750,328 |
|
|
|
85,044,963 |
|
|
|
90,523,774 |
|
The accompanying
notes are an integral part of these financial statements.
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of
dollars)
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
475,355 |
|
|
$ |
420,120 |
|
|
$ |
383,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive earnings (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments, net of
tax benefit
(expense) of $11,454, $(9,279) and $147, respectively
|
|
|
(79,287 |
) |
|
|
53,545 |
|
|
|
(1,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
postretirement benefit plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service
credit arising during period
|
|
|
– |
|
|
|
9,433 |
|
|
|
– |
|
Amortization
of prior service credit
|
|
|
(1,215 |
) |
|
|
(437 |
) |
|
|
– |
|
Amortization
of transition asset
|
|
|
(143 |
) |
|
|
(143 |
) |
|
|
– |
|
Net gain
(loss) arising during period
|
|
|
(49,872 |
) |
|
|
11,620 |
|
|
|
– |
|
Amortization
of net loss
|
|
|
1,312 |
|
|
|
2,094 |
|
|
|
– |
|
Income tax
benefit (expense)
|
|
|
19,368 |
|
|
|
(8,756 |
) |
|
|
– |
|
|
|
|
(30,550 |
) |
|
|
13,811 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
on other employment-related benefit plans, net of tax benefit (expense) of
$544, $(878) and $(21), respectively
|
|
|
(859 |
) |
|
|
1,384 |
|
|
|
33 |
|
|
|
|
(110,696 |
) |
|
|
68,740 |
|
|
|
(1,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
earnings, net of tax
|
|
$ |
364,659 |
|
|
$ |
488,860 |
|
|
$ |
382,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these financial statements.
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
(In thousands of
dollars, except for per share amounts)
|
|
As of
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
396,290 |
|
|
$ |
113,437 |
|
|
$ |
348,471 |
|
Marketable
securities at cost, which approximates market value
|
|
|
– |
|
|
|
20,074 |
|
|
|
12,827 |
|
Accounts
receivable (less allowances for doubtful accounts of $26,481, $25,830 and
$18,801, respectively)
|
|
|
589,416 |
|
|
|
602,650 |
|
|
|
566,607 |
|
Inventories
|
|
|
1,009,932 |
|
|
|
946,327 |
|
|
|
827,254 |
|
Prepaid
expenses and other assets
|
|
|
73,359 |
|
|
|
61,666 |
|
|
|
58,804 |
|
Deferred
income taxes
|
|
|
52,556 |
|
|
|
56,663 |
|
|
|
48,123 |
|
Prepaid
income taxes
|
|
|
22,556 |
|
|
|
– |
|
|
|
– |
|
Total current assets
|
|
|
2,144,109 |
|
|
|
1,800,817 |
|
|
|
1,862,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
BUILDINGS AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
192,916 |
|
|
|
178,321 |
|
|
|
167,218 |
|
Buildings,
structures and improvements
|
|
|
1,048,440 |
|
|
|
977,837 |
|
|
|
890,380 |
|
Furniture,
fixtures, machinery and equipment
|
|
|
890,507 |
|
|
|
848,118 |
|
|
|
769,506 |
|
|
|
|
2,131,863 |
|
|
|
2,004,276 |
|
|
|
1,827,104 |
|
Less
accumulated depreciation and amortization
|
|
|
1,201,552 |
|
|
|
1,125,931 |
|
|
|
1,034,169 |
|
Property,
buildings and equipment – net
|
|
|
930,311 |
|
|
|
878,345 |
|
|
|
792,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES
|
|
|
97,442 |
|
|
|
54,658 |
|
|
|
48,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
IN UNCONSOLIDATED ENTITIES
|
|
|
20,830 |
|
|
|
14,759 |
|
|
|
8,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
213,159 |
|
|
|
233,028 |
|
|
|
210,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
AND INTANGIBLES – NET
|
|
|
109,566 |
|
|
|
112,421 |
|
|
|
123,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
3,515,417 |
|
|
$ |
3,094,028 |
|
|
$ |
3,046,088 |
|
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS – CONTINUED
(In thousands of
dollars, except for per share amounts)
|
|
As of
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
19,960 |
|
|
$ |
102,060 |
|
|
$ |
– |
|
Current
maturities of long-term debt
|
|
|
21,257 |
|
|
|
4,590 |
|
|
|
4,590 |
|
Trade
accounts payable
|
|
|
290,802 |
|
|
|
297,929 |
|
|
|
334,820 |
|
Accrued
compensation and benefits
|
|
|
162,380 |
|
|
|
182,275 |
|
|
|
140,141 |
|
Accrued
contributions to employees’ profit sharing plans
|
|
|
146,922 |
|
|
|
126,483 |
|
|
|
113,014 |
|
Accrued
expenses
|
|
|
118,633 |
|
|
|
102,607 |
|
|
|
106,681 |
|
Income
taxes payable
|
|
|
1,780 |
|
|
|
10,459 |
|
|
|
7,077 |
|
Total current liabilities
|
|
|
761,734 |
|
|
|
826,403 |
|
|
|
706,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT (less
current maturities)
|
|
|
488,228 |
|
|
|
4,895 |
|
|
|
4,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES AND TAX UNCERTAINTIES
|
|
|
33,219 |
|
|
|
20,727 |
|
|
|
6,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCRUED
EMPLOYMENT-RELATED BENEFITS
COSTS
|
|
|
198,431 |
|
|
|
143,895 |
|
|
|
151,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Preferred Stock –
$5 par value
– 12,000,000 shares authorized;
none issued
nor outstanding
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Common
Stock – $0.50 par value –
300,000,000
shares authorized;
issued,
109,659,219, 109,659,219 and
109,657,938
shares, respectively
|
|
|
54,830 |
|
|
|
54,830 |
|
|
|
54,829 |
|
Additional
contributed capital
|
|
|
564,728 |
|
|
|
475,350 |
|
|
|
478,454 |
|
Retained
earnings
|
|
|
3,670,726 |
|
|
|
3,316,875 |
|
|
|
3,007,606 |
|
Accumulated
other comprehensive earnings
|
|
|
(38,525 |
) |
|
|
72,171 |
|
|
|
3,431 |
|
Treasury
stock, at cost –
34,878,190,
30,199,804 and
25,590,311
shares, respectively
|
|
|
(2,217,954 |
) |
|
|
(1,821,118 |
) |
|
|
(1,366,705 |
) |
Total
shareholders’ equity
|
|
|
2,033,805 |
|
|
|
2,098,108 |
|
|
|
2,177,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
3,515,417 |
|
|
$ |
3,094,028 |
|
|
$ |
3,046,088 |
|
The accompanying
notes are an integral part of these financial statements.
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands of
dollars)
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
CASH FLOWS
FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
475,355 |
|
|
$ |
420,120 |
|
|
$ |
383,399 |
|
Provision for losses on accounts
receivable
|
|
|
12,924 |
|
|
|
15,436 |
|
|
|
6,057 |
|
Deferred income taxes and tax
uncertainties
|
|
|
5,182 |
|
|
|
(18,632 |
) |
|
|
9,858 |
|
Depreciation and
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, buildings and
equipment
|
|
|
112,443 |
|
|
|
106,839 |
|
|
|
100,975 |
|
Capitalized software and other
intangibles
|
|
|
27,127 |
|
|
|
25,160 |
|
|
|
17,593 |
|
Stock-based compensation |
|
|
45,945 |
|
|
|
35,551 |
|
|
|
33,741 |
|
Tax benefit of stock incentive
plans
|
|
|
1,925 |
|
|
|
3,193 |
|
|
|
1,563 |
|
Net gains on sales of property,
buildings and equipment
|
|
|
(9,232 |
) |
|
|
(7,254 |
) |
|
|
(11,035 |
) |
Income from unconsolidated
entities
|
|
|
(3,642 |
) |
|
|
(2,016 |
) |
|
|
(2,960 |
) |
Gain on sale of unconsolidated
entity
|
|
|
– |
|
|
|
– |
|
|
|
(2,291 |
) |
Write-off of unconsolidated
entity
|
|
|
6,031 |
|
|
|
– |
|
|
|
– |
|
Change in operating assets and
liabilities –
net of business acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in accounts
receivable
|
|
|
(5,592 |
) |
|
|
(41,814 |
) |
|
|
(53,056 |
) |
(Increase) in
inventories
|
|
|
(92,518 |
) |
|
|
(97,234 |
) |
|
|
(33,839 |
) |
(Increase) in prepaid
income taxes
|
|
|
(22,556 |
) |
|
|
– |
|
|
|
– |
|
(Increase) in prepaid
expenses
|
|
|
(11,073 |
) |
|
|
(2,342 |
) |
|
|
(3,918 |
) |
Increase (decrease) in
trade accounts payable
|
|
|
(6,960 |
) |
|
|
(39,436 |
) |
|
|
10,888 |
|
Increase (decrease) in
other current liabilities
|
|
|
199 |
|
|
|
54,457 |
|
|
|
(2,558 |
) |
Increase (decrease) in
current income
taxes payable
|
|
|
(7,784 |
) |
|
|
2,304 |
|
|
|
(17,395 |
) |
Increase in accrued employment-related
benefits costs
|
|
|
3,216 |
|
|
|
17,705 |
|
|
|
2,634 |
|
Other – net
|
|
|
(924 |
) |
|
|
(3,162 |
) |
|
|
(2,903 |
) |
Net cash
provided by operating activities
|
|
|
530,066 |
|
|
|
468,875 |
|
|
|
436,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, buildings and
equipment
|
|
|
(182,678 |
) |
|
|
(188,867 |
) |
|
|
(127,814 |
) |
Proceeds from sales of property,
buildings and equipment
|
|
|
13,620 |
|
|
|
12,084 |
|
|
|
17,314 |
|
Additions to capitalized
software
|
|
|
(12,297 |
) |
|
|
(8,556 |
) |
|
|
(8,950 |
) |
Proceeds from sale of marketable
securities
|
|
|
19,848 |
|
|
|
12,765 |
|
|
|
– |
|
Purchase of marketable
securities
|
|
|
– |
|
|
|
(17,079 |
) |
|
|
(13,187 |
) |
Proceeds from sale of unconsolidated
entity
|
|
|
– |
|
|
|
– |
|
|
|
27,843 |
|
Net cash paid for business
acquisitions
|
|
|
(34,290 |
) |
|
|
(4,698 |
) |
|
|
(34,390 |
) |
Investments in unconsolidated
entities
|
|
|
(6,487 |
) |
|
|
(2,138 |
) |
|
|
(3,988 |
) |
Other – net
|
|
|
(351 |
) |
|
|
(468 |
) |
|
|
3,426 |
|
Net cash used
in investing activities
|
|
|
(202,635 |
) |
|
|
(196,957 |
) |
|
|
(139,746 |
) |
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS – CONTINUED
(In thousands of
dollars)
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in commercial paper
|
|
$ |
(95,947 |
) |
|
$ |
95,947 |
|
|
$ |
– |
|
Borrowings
under line of credit
|
|
|
29,959 |
|
|
|
14,107 |
|
|
|
– |
|
Payments
against line of credit
|
|
|
(15,437 |
) |
|
|
(7,751 |
) |
|
|
– |
|
Proceeds
from issuance of long-term debt
|
|
|
500,000 |
|
|
|
– |
|
|
|
– |
|
Proceeds
from stock options exercised
|
|
|
46,833 |
|
|
|
113,500 |
|
|
|
64,437 |
|
Excess tax
benefits from stock-based compensation
|
|
|
13,533 |
|
|
|
30,696 |
|
|
|
13,373 |
|
Purchase
of treasury stock
|
|
|
(394,247 |
) |
|
|
(647,293 |
) |
|
|
(472,787 |
) |
Cash
dividends paid
|
|
|
(121,504 |
) |
|
|
(113,093 |
) |
|
|
(97,896 |
) |
Net cash used
in financing activities
|
|
|
(36,810 |
) |
|
|
(513,887 |
) |
|
|
(492,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate
effect on cash and cash equivalents
|
|
|
(7,768 |
) |
|
|
6,935 |
|
|
|
(557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
|
282,853 |
|
|
|
(235,034 |
) |
|
|
(196,423 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of year
|
|
|
113,437 |
|
|
|
348,471 |
|
|
|
544,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of year
|
|
$ |
396,290 |
|
|
$ |
113,437 |
|
|
$ |
348,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
payments for interest (net of amounts capitalized)
|
|
$ |
14,508 |
|
|
$ |
4,409 |
|
|
$ |
1,413 |
|
Cash
payments for income taxes
|
|
|
306,960 |
|
|
|
244,541 |
|
|
|
212,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of noncash assets acquired in business acquisitions
|
|
$ |
41,068 |
|
|
$ |
5,039 |
|
|
$ |
38,430 |
|
Liabilities
assumed in business acquisitions
|
|
|
(6,778 |
) |
|
|
(341 |
) |
|
|
(4,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these financial statements.
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of
dollars, except for per share amounts)
|
|
Common
Stock
|
|
|
Additional
Contributed Capital
|
|
|
Retained
Earnings
|
|
|
Unearned
Restricted Stock Compensation
|
|
|
Accumulated
Other Comprehensive Earnings (Losses)
|
|
|
Treasury
Stock
|
|
Balance at
January 1, 2006
|
|
$ |
54,834 |
|
|
$ |
451,578 |
|
|
$ |
2,722,103 |
|
|
$ |
(17,280 |
) |
|
$ |
27,082 |
|
|
$ |
(949,341 |
) |
Exercise of
stock options
|
|
|
– |
|
|
|
(3,984 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
68,421 |
|
Tax benefits
on stock-based
compensation
awards
|
|
|
– |
|
|
|
14,936 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Stock option
expense
|
|
|
– |
|
|
|
19,904 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Cancellation
of other stock-
based
compensation awards
|
|
|
(5 |
) |
|
|
5 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Amortization
of other stock-
based
compensation awards
|
|
|
– |
|
|
|
13,845 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Vesting of
restricted stock
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(4,263 |
) |
Settlement of
other stock- based compensation awards
|
|
|
– |
|
|
|
(1,003 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
592 |
|
Purchase of
treasury stock
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(482,114 |
) |
Other
comprehensive earnings
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,148 |
) |
|
|
– |
|
Adjustment to
initially apply
SFAS No.
158 to
postretirement benefit plans,
net of tax
benefit of $14,280
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(22,503 |
) |
|
|
– |
|
Reclassification
of unearned restricted stock compensation
|
|
|
– |
|
|
|
(17,280 |
) |
|
|
– |
|
|
|
17,280 |
|
|
|
– |
|
|
|
– |
|
Change in
interest – joint
venture
|
|
|
– |
|
|
|
453 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Net
earnings
|
|
|
– |
|
|
|
– |
|
|
|
383,399 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Cash dividends
paid ($1.11
per
share)
|
|
|
– |
|
|
|
– |
|
|
|
(97,896 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Balance at
December 31, 2006
|
|
$ |
54,829 |
|
|
$ |
478,454 |
|
|
$ |
3,007,606 |
|
|
$ |
– |
|
|
$ |
3,431 |
|
|
$ |
(1,366,705 |
) |
Adoption of
FIN 48
|
|
|
– |
|
|
|
– |
|
|
|
870 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Reinstatement
of equity method
|
|
|
– |
|
|
|
– |
|
|
|
1,372 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Exercise of
stock options
|
|
|
– |
|
|
|
(19,991 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
133,491 |
|
Tax benefits
on stock-based
compensation
awards
|
|
|
– |
|
|
|
33,889 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Stock option
expense
|
|
|
– |
|
|
|
16,888 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Amortization
of other stock-
based
compensation awards
|
|
|
– |
|
|
|
18,667 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Vesting of
restricted stock
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,126 |
) |
Settlement of
other stock-based compensation awards
|
|
|
1 |
|
|
|
(2,557 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,189 |
|
Purchase of
treasury stock
|
|
|
– |
|
|
|
(50,000 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(587,967 |
) |
Other
comprehensive earnings
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
68,740 |
|
|
|
– |
|
Net
earnings
|
|
|
– |
|
|
|
– |
|
|
|
420,120 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Cash dividends
paid ($1.34
per
share)
|
|
|
– |
|
|
|
– |
|
|
|
(113,093 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Balance at
December 31, 2007
|
|
$ |
54,830 |
|
|
$ |
475,350 |
|
|
$ |
3,316,875 |
|
|
$ |
– |
|
|
$ |
72,171 |
|
|
$ |
(1,821,118 |
) |
W.W.
Grainger, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY – CONTINUED
(In thousands of
dollars, except for per share amounts)
|
|
Common
Stock
|
|
|
Additional
Contributed Capital
|
|
|
Retained
Earnings
|
|
|
Unearned
Restricted Stock Compensation
|
|
|
Accumulated
Other Comprehensive Earnings (Losses)
|
|
|
Treasury
Stock
|
|
Balance at
December 31, 2007
|
|
$ |
54,830 |
|
|
$ |
475,350 |
|
|
$ |
3,316,875 |
|
|
$ |
– |
|
|
$ |
72,171 |
|
|
$ |
(1,821,118 |
) |
Exercise of
stock options
|
|
|
– |
|
|
|
(12,663 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
59,460 |
|
Tax benefits
on stock-based
compensation
awards
|
|
|
– |
|
|
|
15,458 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Stock option
expense
|
|
|
– |
|
|
|
19,868 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Amortization
of other stock-
based
compensation awards
|
|
|
– |
|
|
|
26,077 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Vesting of
restricted stock
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(417 |
) |
Settlement of
other stock-based compensation awards
|
|
|
– |
|
|
|
(9,362 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
5,209 |
|
Purchase of
treasury stock
|
|
|
– |
|
|
|
50,000 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(461,088 |
) |
Other
comprehensive earnings
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(110,696 |
) |
|
|
– |
|
Net
earnings
|
|
|
– |
|
|
|
– |
|
|
|
475,355 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Cash dividends
paid ($1.55
per
share)
|
|
|
– |
|
|
|
– |
|
|
|
(121,504 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
Balance at
December 31, 2008
|
|
$ |
54,830 |
|
|
$ |
564,728 |
|
|
$ |
3,670,726 |
|
|
$ |
– |
|
|
$ |
(38,525 |
) |
|
$ |
(2,217,954 |
) |
The accompanying
notes are an integral part of these financial statements.
W.W.
Grainger, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008,
2007 and 2006
NOTE
1 – BACKGROUND AND BASIS OF PRESENTATION
INDUSTRY
INFORMATION
W.W. Grainger, Inc.
is the leading broad-line supplier of facilities maintenance and other related
products in North America, with operations primarily in the United States,
Canada and Mexico. In this report, the words “Company” or “Grainger” mean
W.W. Grainger, Inc. and its subsidiaries.
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.
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. Changes in interest arising
from the issuance of stock by an investee is accounted for as additional
contributed capital. See Note 6 to the Consolidated Financial
Statements.
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 liabilities, and revenues and
expenses. Actual results could differ from those estimates.
FOREIGN CURRENCY
TRANSLATION
The
financial statements of the Company’s foreign subsidiaries are 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 other
comprehensive earnings. See Notes 2 and 14 to the Consolidated Financial
Statements.
NOTE
2 – SUMMARY 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 Company’s 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.
COST OF MERCHANDISE
SOLD
Cost of merchandise
sold includes product and product-related costs, vendor consideration,
freight-out costs and handling costs. The Company defines handling costs as
those costs incurred to fulfill a shipped sales order.
VENDOR
CONSIDERATION
The
Company receives rebates from its vendors to promote their products. The Company
utilizes 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, and
would require numerous assumptions and judgments. Based on the inexact nature of
trying to track reimbursements to the exact advertising expenditure for each
vendor, the Company treats most vendor advertising allowances as a reduction of
cost of merchandise sold rather than a reduction of operating (advertising)
expenses. Rebates earned from vendors that are based on product purchases are
capitalized into inventory as part of product purchase price. These rebates are
credited to cost of merchandise sold based on sales. Vendor rebates that are
earned based on products sold are credited directly to cost of merchandise
sold.
ADVERTISING
Advertising costs
are expensed in the year the related advertisement is first presented.
Advertising expense was $120.7 million, $122.4 million and $115.4 million for
2008, 2007 and 2006, respectively. Most vendor-provided allowances are
classified as an offset to cost of merchandise sold. For additional information
see 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 distributed by year-end are capitalized as Prepaid expenses.
Amounts included in Prepaid expenses at December 31, 2008, 2007 and 2006 were
$39.5 million, $32.1 million and $30.2 million, respectively.
WAREHOUSING,
MARKETING AND ADMINISTRATIVE EXPENSES
Included in this
category are purchasing, branch operations, information services, and marketing
and selling expenses, as well as other types of general and administrative
costs.
STOCK INCENTIVE
PLANS
The Company measures
all share-based payments using fair-value-based methods and records compensation
expense related to these payments in the consolidated financial statements. The
Company values stock option compensation using a binomial lattice option-pricing
model. See Note 12 to the Consolidated Financial
Statements.
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
Company’s Other comprehensive earnings (losses) include foreign currency
translation adjustments and unrecognized gains (losses) on postretirement and
other employment-related benefit plans. See Note 14 to the Consolidated
Financial Statements.
CASH AND MARKETABLE
SECURITIES
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.
The Company’s
investments in marketable securities consist of commercial paper to be held to
maturity. These investments have an original maturity date of more than 90 days.
The investments are issued from high credit quality issuers. The marketable
securities are recorded at cost, which approximates fair value.
CONCENTRATION OF
CREDIT RISK
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, Canada, Mexico, Panama, and China. Consequently,
no significant concentration of credit risk is considered to exist.
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
The
Company establishes reserves for customer accounts that are potentially
uncollectible. The method used to estimate the allowances is based on several
factors, including the age of the receivables and the historical ratio of actual
write-offs to the age of the receivables. These analyses also take into
consideration economic conditions that may have an impact on a specific
industry, group of customers or a specific customer.
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 77% of total
inventory. For the remaining inventory, cost is determined by the first-in,
first-out (FIFO) method.
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 for determining depreciation are as follows:
Buildings,
structures and improvements
|
10 to 45
years
|
Furniture,
fixtures, machinery and equipment
|
3 to 10
years
|
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 $1.3 million, $1.4 million and $0.3 million in
2008, 2007 and 2006, 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
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.
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
certain losses related to workers’ compensation, general liability and property
losses through the utilization of high deductibles and self-insured retentions.
Reserves for these potential losses are based on an external analysis of the
Company’s 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 of the product is
responsible for expenses. 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 (in thousands of
dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
3,442 |
|
|
$ |
4,651 |
|
|
$ |
3,763 |
|
Returns
|
|
|
(12,917 |
) |
|
|
(12,781 |
) |
|
|
(9,579 |
) |
Provisions
|
|
|
12,693 |
|
|
|
11,572 |
|
|
|
10,467 |
|
Ending
balance
|
|
$ |
3,218 |
|
|
$ |
3,442 |
|
|
$ |
4,651 |
|
NEW ACCOUNTING
STANDARDS
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 (revised 2007), "Business Combinations" (SFAS No. 141R).
SFAS No. 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. The statement is effective for fiscal years beginning
after December 15, 2008, and will be applied to acquisitions after adoption
by the Company.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51" (SFAS No. 160). SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No.160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. The statement is
effective for fiscal years beginning after December 15, 2008. The Company
currently does not have any noncontrolling interest in consolidated financial
statements, therefore does not expect the adoption of SFAS No. 160 to have
a material effect on its results of operations or financial
position.
In
March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 amends and
expands the disclosure requirements related to derivative instruments and
hedging activities which will enable investors to better understand the effects
on an entity’s financial statements, financial position and cash
flows. The statement is effective for fiscal years beginning after
November 15, 2008. The Company does not expect the adoption of
SFAS No. 161 to have a material effect on its results of operations or
financial position.
In
April 2008, the FASB issued Staff Position FSP 142-3, “Determination of the
Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3
is effective for fiscal years beginning after December 15, 2008. The
Company does not expect the adoption of FSP 142-3 to have a material effect on
its results of operations or financial position.
In
May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,
“The Hierarchy of Generally Accepted Accounting Principles” (SFAS No.
162). SFAS No. 162 is intended to improve financial reporting by
identifying a
consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with
GAAP. The FASB believes that the GAAP hierarchy should be directed to entities
because it is the entity (not its auditor) that is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. The Company does not expect the adoption of SFAS
No. 162 to have a material effect on its results of operations or financial
position.
In
June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (FSP 03-6-1). FSP 03-6-1 states that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. Upon adoption, a company is required to retrospectively
adjust its earnings per share data presentation to conform with the FSP 03-6-1
provisions. FSP 03-6-1 is effective for fiscal years beginning after
December 15, 2008.
The Company’s
unvested share-based payment awards, such as Performance Shares, Restricted
Stock and Restricted Stock Units (see Note 12 to the Consolidated Financial
Statements) that contain nonforfeitable rights to dividends meet the criteria of
a participating security as defined by FSP 03-6-1. Accordingly, the adoption of
FSP 03-6-1 will change the methodology of computing the Company’s earnings per
share to the two-class method. This change will not affect previously reported
consolidated net earnings or net cash flows from operations. Under the two-class
method, earnings will be allocated between common stock and participating
securities, resulting in lower earnings per share. Refer to the table below for
further analysis of the impact adoption would have had on 2008 earnings per
share.
|
|
2008 Quarter
Ended
|
|
|
|
|
|
|
|
Mar.
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share as previously reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.47 |
|
|
$ |
1.48 |
|
|
$ |
1.84 |
|
|
$ |
1.42 |
|
|
$ |
6.21 |
|
Diluted
|
|
$ |
1.43 |
|
|
$ |
1.43 |
|
|
$ |
1.79 |
|
|
$ |
1.39 |
|
|
$ |
6.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share Two-class method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
$ |
1.80 |
|
|
$ |
1.39 |
|
|
$ |
6.07 |
|
Diluted
|
|
$ |
1.41 |
|
|
$ |
1.42 |
|
|
$ |
1.77 |
|
|
$ |
1.37 |
|
|
$ |
5.97 |
|
In
November 2008, the Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue No. 08-7, “Accounting for Defensive Intangible Assets” (Issue 08-7). The
FASB Statement No. 141(R), “Business Combinations,” and FASB Statement No. 157,
“Fair Value Measurements,” require that assets acquired in a business
combination be measured at fair value using market participant (not entity
specific) assumptions. The measurement requirement includes intangible assets
that the acquirer does not intend to use in the same manner as a market
participant, such as those it intends to hold for defensive purposes (intangible
assets that the acquirer does not intend to actively use). Defensive intangible
assets generally were allocated little or no value in business combinations or
asset acquisitions completed prior to the effective date of Statement No. 157.
Issue 08-7 concluded that intangible assets that an acquirer intends to use as
defensive assets are a separate unit of account from existing intangible assets
of the acquirer. Also, Issue 08-7 concluded that a defensive intangible asset
should be amortized over the period that the defensive intangible asset directly
or indirectly contributes to the future cash flows of the entity. Issue 08-7 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted. The
Company does not expect the adoption of EITF 08-7 to have a material effect
on its results of operations or financial position.
In
November 2008, the EITF reached a consensus with respect to EITF Issue No. 08-6,
“Accounting for Equity Method Investments” (Issue 08-6). Under Issue
08-6, the initial carrying value of an equity method investment should be based
on the cost accumulation model. The equity method investment as a
whole should be assessed for other-than-temporary impairment in accordance with
APB 18, “The Equity Method of Accounting for Investments in Common
Stock.” However, the individual indefinite-lived intangible assets
underlying the equity method investment should not be individually assessed for
impairment at the investor level. An equity method investor should
account for an investee’s issuance of shares as if the investor sold a portion
of its investment with any resulting gain or loss reflected in the income
statement. No changes were made to how an equity method investor
should account for a change from the equity method to the cost
method. Issue 08-6 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. The Company
does not expect adoption of Issue 08-6 to have a material effect on its results
of operations or financial position.
In December 2008,
the FASB issued FSP FAS 132(R)-1, "Employer’s Disclosures about Postretirement
Benefit Plan Assets." This FSP amends FASB Statement No. 132 (Revised 2003),
"Employers’ Disclosures about Pensions and Other Postretirement Benefits," to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. The disclosures about plan assets
required by this FSP shall be provided for fiscal years ending after December
15, 2009. Earlier application of the provisions of this FSP is permitted. The
Company does not expect adoption of FSP FAS 132(R)-1 to have a material effect
on its results of operations or financial position.
NOTE
3 – BUSINESS ACQUISITIONS
On July 21, 2008,
the Company acquired a 49.9% interest in Asia Pacific Brands India Ltd. (Asia
Pacific Brands) from its sole shareholder. Asia Pacific Brands, one of India's
largest industrial and electrical wholesale distributors, is headquartered in
Mumbai, India. With 27 locations and more than 6,200 dealer relationships across
India, Asia Pacific Brands had revenue of US$47 million for its fiscal year
ended March 31, 2008. The Company paid $5.4 million for its ownership interest.
In addition, the Company and its joint venture partner each made a $1.1 million
capital infusion that was intended to help grow the business. In the fourth
quarter of 2008, the Company wrote-off its investment in this joint venture due
to the economic slowdown in India and the loss of a major supplier which
accounted for approximately 25% of the joint venture’s annual revenue. These
conditions severely affect Asia Pacific Brand’s ability to secure additional
financing to meet its current obligations and continue as a going concern. Until
the investment was written-off, the Company used the equity method to account
for this investment. See Note 6 to the Consolidated Financial
Statements.
On
July 10, 2008, Lab Safety Supply, Inc. (Lab Safety), the direct marketing
subsidiary of the Company, acquired substantially all of the assets and assumed
certain liabilities of Highsmith Inc. (Highsmith). Highsmith is a direct
marketing leader in the library equipment, furniture and supplies market and had
sales of $64 million in 2007. The purchase price and costs of the acquisition
were $27.5 million in cash and $6.1 million in assumed liabilities. The
estimated goodwill recognized in the transaction amounted to $2.4 million and is
deductible for tax purposes. The integration of Highsmith into operations was
completed in 2008. As part of the integration, Lab Safety discontinued the
contract sales group of Highsmith, which represented approximately $19 million
of sales in 2007.
On
June 6, 2008, Acklands - Grainger Inc. acquired substantially all of the assets
and assumed certain liabilities of Excel F.I.G. Inc. (Excel). Excel is a
business-to-business broad-line distributor of maintenance, repair and operating
supplies. In 2007, Excel had sales of approximately US$12 million. The purchase
price and costs of the acquisition were US$6.8 million in cash and US$0.7
million in assumed liabilities. The goodwill recognized in the transaction
amounted to US$4.4 million and is partially deductible for tax
purposes.
On
May 31, 2007, Lab Safety acquired substantially all of the assets and assumed
certain liabilities of McFeely’s Square Drive Screws (McFeely’s). McFeely’s is a
direct marketer of specialty fasteners, hardware and tools for the professional
woodworking industry. McFeely’s had more than $9 million in sales in 2006. The
purchase price and costs of acquisition were $4.7 million in cash and $0.3
million in assumed liabilities. The goodwill recognized in the transaction
amounted to $1.2 million and is fully deductible for tax purposes.
On
November 17, 2006, Lab Safety acquired substantially all of the assets and
assumed certain liabilities of Professional Inspection Equipment, Inc. and
Construction Book Express, Inc. The companies are direct marketers of tools,
instruments and reference materials to the building and home inspection markets.
The companies had annual sales in 2005 of more than $18 million. The aggregate
purchase price for the two companies was $20.9 million in cash and $1.7 million
in assumed liabilities. The goodwill recognized in the transaction amounted to
$18.7 million and is fully deductible for tax purposes.
On
January 31, 2006, Lab Safety acquired substantially all of the assets and
assumed certain liabilities of Rand Materials Handling Equipment Co. (Rand).
Rand is a national catalog distributor of warehouse, storage and packaging
supplies. Rand had more than $16 million in sales in 2005. The aggregate
purchase price for Rand was $13.9 million in cash and $2.3 million in assumed
liabilities. The goodwill recognized in the transaction amounted to $9.9 million
and is fully deductible for tax purposes.
The
results of these acquisitions are included in the Company’s consolidated results
from the respective dates of acquisition. Due to the immaterial nature of these
transactions, disclosures of amounts assigned to the acquired assets and assumed
liabilities and pro forma results of operations were not considered
necessary.
NOTE
4 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
following table shows the activity in the allowance for doubtful accounts (in
thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance at
beginning of period
|
|
$ |
25,830 |
|
|
$ |
18,801 |
|
|
$ |
18,401 |
|
Provision for
uncollectible accounts
|
|
|
12,924 |
|
|
|
15,436 |
|
|
|
6,057 |
|
Write-off of
uncollectible accounts, less recoveries
|
|
|
(11,501 |
) |
|
|
(8,755 |
) |
|
|
(5,660 |
) |
Foreign
currency or translation impact
|
|
|
(772 |
) |
|
|
348 |
|
|
|
3 |
|
Balance at end
of period
|
|
$ |
26,481 |
|
|
$ |
25,830 |
|
|
$ |
18,801 |
|
NOTE
5 – INVENTORIES
Inventories
primarily consist of merchandise purchased for resale.
Inventories would
have been $317.0 million, $287.7 million and $270.0 million higher than reported
at December 31, 2008, 2007 and 2006, respectively, if the FIFO method of
inventory accounting had been used for all Company
inventories. Net
earnings would have increased by $18.1 million, $10.8 million and $14.5 million
for the years ended December 31, 2008, 2007 and 2006, respectively, using the
FIFO method of accounting. Inventory values using the FIFO method of accounting
approximate replacement cost.
NOTE
6 – INVESTMENTS IN UNCONSOLIDATED ENTITIES
The table below
summarizes the activity in the investments in unconsolidated entities (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
Pacific
|
|
|
|
|
|
|
|
|
|
MonotaRO
|
|
|
MRO
Korea
|
|
|
Brands
|
|
|
USI-AGI
|
|
|
|
|
|
|
Co.,
Ltd.
|
|
|
Co.,
Ltd.
|
|
|
India
Ltd.
|
|
|
Prairies
Inc.
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2006
|
|
$ |
2,434 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
22,721 |
|
|
$ |
25,155 |
|
Cash
investments
|
|
|
3,988 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,988 |
|
Equity
earnings
|
|
|
1,826 |
|
|
|
– |
|
|
|
– |
|
|
|
1,134 |
|
|
|
2,960 |
|
Divestiture
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(24,967 |
) |
|
|
(24,967 |
) |
Change in
interest due to
issuance of stock by joint
venture
|
|
|
453 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
453 |
|
Foreign
currency gain (loss)
|
|
|
(209 |
) |
|
|
– |
|
|
|
– |
|
|
|
1,112 |
|
|
|
903 |
|
Balance at
December 31, 2006
|
|
|
8,492 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
8,492 |
|
Cash
investments
|
|
|
– |
|
|
|
2,138 |
|
|
|
– |
|
|
|
– |
|
|
|
2,138 |
|
Equity
earnings
|
|
|
1,401 |
|
|
|
615 |
|
|
|
– |
|
|
|
– |
|
|
|
2,016 |
|
Reinstatement
to equity
method of accounting
|
|
|
– |
|
|
|
1,372 |
|
|
|
– |
|
|
|
– |
|
|
|
1,372 |
|
Foreign
currency gain
|
|
|
620 |
|
|
|
121 |
|
|
|
– |
|
|
|
– |
|
|
|
741 |
|
Balance at
December 31, 2007
|
|
$ |
10,513 |
|
|
$ |
4,246 |
|
|
|
– |
|
|
$ |
– |
|
|
$ |
14,759 |
|
Cash
investments
|
|
|
– |
|
|
|
– |
|
|
|
6,487 |
|
|
|
– |
|
|
|
6,487 |
|
Equity
earnings (losses)
|
|
|
4,303 |
|
|
|
(205 |
) |
|
|
(456 |
) |
|
|
– |
|
|
|
3,642 |
|
Write-off
|
|
|
– |
|
|
|
– |
|
|
|
(6,031 |
) |
|
|
– |
|
|
|
(6,031 |
) |
Foreign
currency gain (loss)
|
|
|
3,008 |
|
|
|
(1,035 |
) |
|
|
– |
|
|
|
– |
|
|
|
1,973 |
|
Balance at
December 31, 2008
|
|
$ |
17,824 |
|
|
$ |
3,006 |
|
|
|
– |
|
|
$ |
– |
|
|
$ |
20,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
interest at December 31, 2008
|
|
|
38.3 |
% |
|
|
49.0 |
% |
|
|
49.9 |
% |
|
|
0.0 |
% |
|
|
|
|
On
July 21, 2008, the Company acquired a 49.9% interest in Asia Pacific Brands
India Ltd. (Asia Pacific Brands) from its sole shareholder for $5.4
million. In addition, the Company and the joint venture partner each
made a $1.1 million capital infusion intended to help grow the
business. In the fourth quarter 2008, the Company wrote-off its
investment due to the economic slowdown in India and the loss of a major
supplier which accounted for approximately 25% of the joint venture’s annual
revenue. These conditions severely affect Asia Pacific Brand’s ability to secure
additional financing to meet its current obligations and continue as a going
concern. The Company accounted for this investment using the equity method until
it was written-off.
In
2003, the Company wrote-off its investment in MRO Korea Co., Ltd. and suspended
the equity method of accounting even though the business was marginally
profitable and self-funding. At that time, the market value of the business was
limited because the business had only one significant customer (the other party
in the joint venture) and the prospects for growth were dependent upon securing
sufficient capital funding. In 2007, the Company and the other business partner
in the joint venture agreed to significantly change the business model and fund
the expansion of this business. The Company contributed $2.1 million to MRO
Korea Co., Ltd., maintaining its 49% ownership, and resumed the equity method of
accounting. In conjunction with the reinstatement of the equity accounting
method, a credit was recorded to retained earnings for $1.4 million, which
represented the accumulated unrecognized equity earnings during the period the
equity method was suspended and the write-down recognized in 2003.
In
the first quarter of 2006, the Company contributed $4.0 million to MonotaRO Co.,
Ltd., its 38.3% owned company in Japan. In the fourth quarter of 2006, an
initial public offering by this company resulted in a change of interest of $0.5
million, recorded as additional contributed capital. The market value of this
investment, based on the closing stock price on January 28, 2009, was $50.7
million.
On
February 23, 2006, Acklands – Grainger Inc. (Acklands –
Grainger), the Company’s Canadian subsidiary, received a Notice of Purchase
advising Acklands – Grainger that Uni-Select Inc., a Canadian company, was
exercising its contractual option to purchase all of Acklands – Grainger’s
shares in the USI-AGI Prairies Inc. joint venture. The transaction closed on May
31, 2006, for Canadian $30.9 million (US$27.8 million), resulting in a US$2.3
million pre-tax gain for the Company. The Company’s 50% ownership investment in
this joint venture was previously accounted for under the equity method of
accounting. The carrying value of this investment included US$5.1 million of
allocated goodwill. The joint venture was managed by Uni-Select
Inc.
NOTE
7 – CAPITALIZED SOFTWARE
Amortization of
capitalized software is on a straight-line basis over three and five years.
Amortization begins when the software is available for its intended use.
Amortization expense was $22.7 million, $21.0 million and $13.9 million for the
years ended December 31, 2008, 2007 and 2006, 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.
NOTE
8 – SHORT-TERM DEBT
The following
summarizes information concerning short-term debt (in thousands of
dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Line
of Credit
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31
|
|
$ |
19,960 |
|
|
$ |
6,113 |
|
|
$ |
– |
|
Maximum
month-end balance during the year
|
|
$ |
19,960 |
|
|
$ |
11,234 |
|
|
$ |
– |
|
Average amount
outstanding during the year
|
|
$ |
13,022 |
|
|
$ |
7,756 |
|
|
$ |
– |
|
Weighted
average interest rate during the year
|
|
|
6.23 |
% |
|
|
6.48 |
% |
|
|
– |
% |
Weighted
average interest rate at December 31
|
|
|
4.86 |
% |
|
|
6.57 |
% |
|
|
– |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Paper
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31
|
|
$ |
– |
|
|
$ |
95,947 |
|
|
$ |
– |
|
Maximum
month-end balance during the year
|
|
$ |
319,860 |
|
|
$ |
139,104 |
|
|
$ |
– |
|
Average amount
outstanding during the year
|
|
$ |
54,589 |
|
|
$ |
28,030 |
|
|
$ |
– |
|
Weighted
average interest rate during the year
|
|
|
3.08 |
% |
|
|
5.38 |
% |
|
|
– |
% |
Weighted
average interest rate at December 31
|
|
|
– |
|
|
|
4.30 |
% |
|
|
– |
% |
The
Company had $29.2 million, $31.1 million and $8.6 million of uncommitted lines
of credit denominated in foreign currencies at December 31, 2008, 2007 and 2006,
respectively. At December 31, 2008, there was $20.0 million outstanding under
these lines of credit relating to Grainger China LLC. Grainger China LLC
utilizes a line of credit to meet its business growth and operating
needs.
Commercial paper was
used to fund periodic working capital requirements and the accelerated share
repurchase program. Refer to Note 13 for further discussion of the
Company’s share repurchase program. A portion of the proceeds from the $500
million term loan were used to refinance $311 million in outstanding commercial
paper in May of 2008. Refer to Note 9 for further discussion on the use of
proceeds from the term loan.
For
2008, 2007 and 2006, the Company had a committed line of credit totaling $250.0
million for which the Company pays a commitment fee of 0.04% for each year.
There were no borrowings under the committed line of credit.
The
Company had $18.8 million of letters of credit at December 31, 2008, and $15.8
million of letters of credit at December 31, 2007 and 2006, primarily related to
the Company’s casualty insurance program. The Company also had $6.0 million,
$3.2 million and $3.3 million at December 31, 2008, 2007 and 2006, respectively,
in letters of credit to facilitate the purchase of product from foreign
sources.
NOTE
9 – LONG-TERM DEBT
Long-term debt
consisted of the following (in thousands of dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Bank term
loan
|
|
$ |
500,000 |
|
|
$ |
– |
|
|
$ |
– |
|
Industrial
development revenue and private activity
bonds
|
|
|
9,485 |
|
|
|
9,485 |
|
|
|
9,485 |
|
Less current
maturities
|
|
|
(21,257 |
) |
|
|
(4,590 |
) |
|
|
(4,590 |
) |
|
|
$ |
488,228 |
|
|
$ |
4,895 |
|
|
$ |
4,895 |
|
On
May 6, 2008, the Company entered into a $500 million, unsecured four-year bank
term loan. Proceeds were used to pay down short-term debt and for general
corporate purposes. The weighted average interest rate paid on the term loan
during 2008 was 3.33%. The Company at its option may prepay the term loan in
whole or in part.
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. The weighted average interest rate paid on the
bonds during the year was 2.47%. 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, 2008, 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, 2008. The Company classified $4.6 million of bonds currently
subject to redemption options in current maturities of long-term debt at
December 31, 2008, 2007 and 2006.
The scheduled
aggregate principal payments are due as follows (in thousands of
dollars):
|
Year
|
|
Payment
Amount
|
|
|
2009
|
|
$ |
18,900 |
|
|
|
2010
|
|
$ |
50,700 |
|
|
|
2011
|
|
$ |
50,900 |
|
|
|
2012
|
|
$ |
387,500 |
|
|
|
2013 and after
|
|
$ |
1,500 |
|
|
The
Company’s debt instruments include only standard affirmative and negative
covenants that are normal in debt instruments of similar amounts and structure.
The Company’s 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, 2008.
NOTE
10 – EMPLOYEE BENEFITS
Retirement
Plans
A
majority of the Company’s employees are covered by a noncontributory profit
sharing plan. This plan provides for annual employer contributions
generally based upon a formula related primarily to earnings before federal
income taxes, limited to a percentage of the total eligible compensation paid to
all eligible employees. The plan was amended on July 30, 2008, to establish a
minimum contribution of 8% and a maximum contribution of 18% of total eligible
compensation paid to all eligible employees. This change was retroactive to
January 1, 2008. Previously, there was no minimum percentage and the maximum
percentage was 25%. The Company also sponsors additional defined
contribution plans, which cover most of the other employees. Provisions under
all plans were $145.4 million, $130.2 million and $114.3 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
Postretirement
Benefits
The
Company has a postretirement healthcare benefits plan that provides coverage for
a majority of its employees and their dependents should they elect to maintain
such coverage upon retirement. Covered employees become eligible for
participation when they qualify for retirement while working for the Company.
Participation in the plan is voluntary and requires participants to make
contributions toward the cost of the plan, as determined by the
Company.
The
Company’s accumulated postretirement benefit obligation (APBO) and net periodic
benefit costs include the effect of the federal subsidy provided by the
“Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the
Medicare Act). The Medicare Act provides a federal subsidy to retiree healthcare
benefit plan sponsors that provide a prescription drug benefit that is at least
actuarially equivalent to that provided by Medicare. As a result of the subsidy,
the APBO has been reduced by $45.4 million, $40.4 million and $33.4 million as
of December 31, 2008, 2007 and 2006, respectively. The subsidy has reduced net
periodic benefits costs by approximately $5.2 million, $6.4 million and
$5.6 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
The
net periodic benefits costs charged to operating expenses, which were valued
with a measurement date of January 1 for each year, consisted of the following
components (in thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
9,699 |
|
|
$ |
10,856 |
|
|
$ |
9,737 |
|
Interest
cost
|
|
|
9,490 |
|
|
|
8,973 |
|
|
|
7,599 |
|
Expected
return on assets
|
|
|
(4,466 |
) |
|
|
(4,049 |
) |
|
|
(2,790 |
) |
Amortization
of prior service credit
|
|
|
(1,215 |
) |
|
|
(437 |
) |
|
|
(858 |
) |
Amortization
of transition asset
|
|
|
(143 |
) |
|
|
(143 |
) |
|
|
(143 |
) |
Amortization
of unrecognized losses
|
|
|
1,312 |
|
|
|
2,094 |
|
|
|
2,903 |
|
Net periodic
benefits costs
|
|
$ |
14,677 |
|
|
$ |
17,294 |
|
|
$ |
16,448 |
|
The Company has
elected to amortize the amount of net unrecognized losses over a period equal to
the average remaining service period for active plan participants expected to
retire and receive benefits, or approximately 16.9 years for
2008.
Reconciliations of
the beginning and ending balances of the APBO, which is calculated using a
December 31 measurement date, the fair value of assets and the funded status of
the benefit obligation follow (in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
150,910 |
|
|
$ |
155,353 |
|
|
$ |
127,598 |
|
Service
cost
|
|
|
9,699 |
|
|
|
10,856 |
|
|
|
9,737 |
|
Interest
cost
|
|
|
9,490 |
|
|
|
8,973 |
|
|
|
7,599 |
|
Plan
participants’ contributions
|
|
|
1,751 |
|
|
|
1,575 |
|
|
|
1,670 |
|
Amendments
|
|
|
– |
|
|
|
(9,433 |
) |
|
|
5,559 |
|
Actuarial
(gain) loss
|
|
|
21,443 |
|
|
|
(12,754 |
) |
|
|
7,359 |
|
Benefits
paid
|
|
|
(4,924 |
) |
|
|
(3,929 |
) |
|
|
(4,277 |
) |
Medicare Part
D Subsidy received
|
|
|
270 |
|
|
|
269 |
|
|
|
108 |
|
Benefit
obligation at end of year
|
|
|
188,639 |
|
|
|
150,910 |
|
|
|
155,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
plan assets at beginning of year
|
|
|
74,432 |
|
|
|
67,486 |
|
|
|
46,503 |
|
Actual
returns on plan assets
|
|
|
(23,963 |
) |
|
|
2,915 |
|
|
|
6,192 |
|
Employer
contributions
|
|
|
9,407 |
|
|
|
6,385 |
|
|
|
17,398 |
|
Plan
participants’ contributions
|
|
|
1,751 |
|
|
|
1,575 |
|
|
|
1,670 |
|
Benefits
paid
|
|
|
(4,924 |
) |
|
|
(3,929 |
) |
|
|
(4,277 |
) |
Fair value of
plan assets at end of year
|
|
|
56,703 |
|
|
|
74,432 |
|
|
|
67,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
postretirement benefit costs
|
|
$ |
131,936 |
|
|
$ |
76,478 |
|
|
$ |
87,867 |
|
The
amounts recognized in Accumulated other comprehensive earnings consisted of the
following components (in thousands of dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Prior service
credit
|
|
$ |
9,377 |
|
|
$ |
10,592 |
|
|
$ |
1,596 |
|
Transition
asset
|
|
|
857 |
|
|
|
1,000 |
|
|
|
1,143 |
|
Unrecognized
losses
|
|
|
(73,966 |
) |
|
|
(25,405 |
) |
|
|
(39,119 |
) |
Deferred tax
asset
|
|
|
24,800 |
|
|
|
5,432 |
|
|
|
14,188 |
|
Net
losses
|
|
$ |
(38,932 |
) |
|
$ |
(8,381 |
) |
|
$ |
(22,192 |
) |
The
components of Accumulated other comprehensive earnings (AOCE) related to the
postretirement benefit costs that will be amortized into net periodic
postretirement benefit cost in 2009 are as follows (in thousands of
dollars):
|
|
2009
|
|
Amortization
of prior service credit
|
|
$ |
(1,215 |
) |
Amortization
of transition asset
|
|
|
(143 |
) |
Amortization of unrecognized
losses
|
|
|
4,377 |
|
Estimated
amount to be amortized from AOCE into
net periodic
postretirement benefit costs
|
|
$ |
3,019 |
|
The
benefit obligation was determined by applying the terms of the plan and
actuarial models. 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 and historical experience.
The plan amendment
effective January 1, 2008 (reflected in the 2007 valuation above), changed the
out-of-pocket maximums, co-payments and coinsurance amounts for retirees. The
plan amendment effective January 1, 2007 (reflected in the 2006 valuation
above), changed the retiree contribution percentages for certain age
groups.
The following
assumptions were used to determine net periodic benefit cost at January
1:
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
6.50 |
% |
|
|
5.90 |
% |
|
|
5.50 |
% |
Expected
long-term rate of return on plan assets,
net of tax
at 40%
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Initial
healthcare cost trend rate
|
|
|
10.00 |
% |
|
|
10.00 |
% |
|
|
10.00 |
% |
Ultimate
healthcare cost trend rate
|
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
Year ultimate
healthcare cost trend rate reached
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
The following
assumptions were used to determine benefit obligations at December
31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
5.90 |
% |
|
|
6.50 |
% |
|
|
5.90 |
% |
Expected
long-term rate of return on plan assets,
net of tax
at 40%
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Initial
healthcare cost trend rate
|
|
|
10.00 |
% |
|
|
10.00 |
% |
|
|
10.00 |
% |
Ultimate
healthcare cost trend rate
|
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
Year ultimate
healthcare cost trend rate reached
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
The
discount rate assumptions reflect the rates available on high-quality fixed
income debt instruments. These rates have been selected due to their similarity
to the projected cash flows of the postretirement healthcare benefit
plan.
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 1 percentage point change in assumed healthcare cost trend rates would
have the following effects on December 31, 2008 results (in thousands of
dollars):
|
|
1 Percentage
Point
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
Effect on
total service and interest cost
|
|
$ |
4,206 |
|
|
$ |
(3,293 |
) |
Effect on
accumulated postretirement benefit obligation
|
|
|
37,268 |
|
|
|
(29,601 |
) |
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 & Poor’s 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
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 $9.4 million, $6.4 million and $17.4 million for the years
ended December 31, 2008, 2007 and 2006, 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 include a projection for
expected future employee service) and subsidy receipts (in thousands of
dollars):
|
|
Estimated gross
benefit payments
|
|
|
Estimated
Medicare subsidy receipts
|
|
2009
|
|
$ |
3,852 |
|
|
$ |
(414 |
) |
2010
|
|
|
4,436 |
|
|
|
(497 |
) |
2011
|
|
|
5,173 |
|
|
|
(587 |
) |
2012
|
|
|
5,989 |
|
|
|
(694 |
) |
2013
|
|
|
7,017 |
|
|
|
(809 |
) |
2014 –
2018
|
|
|
56,046 |
|
|
|
(6,507 |
) |
Executive
Death Benefit Plan
The
Executive Death Benefit Plan provides one of three potential benefits: a
supplemental income benefit (SIB), an executive death benefit (EDB) or a
postretirement payment. The SIB provides income continuation at 50% of total
compensation, payable for ten years to the beneficiary of a participant if that
participant dies while employed by the Company. Alternatively, the EDB provides
an after-tax lump sum payment of one times final total compensation to the
beneficiary of a participant who dies after retirement. In addition, a
participant may elect to receive a reduced postretirement payment instead of the
EDB. Effective October 29, 2008, new participants to the plan will not be
eligible for the reduced postretirement payment option. Plan participation is
determined by a committee of management. There are no plan assets. Benefits are
paid as they come due from the general assets of the Company.
The net periodic
benefits costs charged to operating expenses, which were valued with a
measurement date of January 1 for each year, consisted of the following
components (in thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$ |
247 |
|
|
$ |
298 |
|
|
$ |
361 |
|
Interest
cost
|
|
|
880 |
|
|
|
883 |
|
|
|
850 |
|
Amortization
of unrecognized (gains) losses
|
|
|
(153 |
) |
|
|
127 |
|
|
|
154 |
|
Net periodic
benefits costs
|
|
$ |
974 |
|
|
$ |
1,308 |
|
|
$ |
1,365 |
|
Reconciliations of
the beginning and ending balances of the projected benefit obligation, which are
calculated using a December 31 measurement date follow (in thousands of
dollars):
|
|
2008
|
|
|
2007
|
|
2006
|
|
Benefit
obligation at beginning of year
|
|
$ |
14,115 |
|
|
$ |
14,906 |
|
|
$ |
15,222 |
|
Service
cost
|
|
|
247 |
|
|
|
298 |
|
|
|
361 |
|
Interest
cost
|
|
|
880 |
|
|
|
883 |
|
|
|
850 |
|
Actuarial
(gains) losses
|
|
|
1,425 |
|
|
|
(1,972 |
) |
|
|
(1,095 |
) |
Benefits
paid
|
|
|
(579 |
) |
|
|
– |
|
|
|
(432 |
) |
Benefit
obligation at end of year
|
|
$ |
16,088 |
|
|
$ |
14,115 |
|
|
$ |
14,906 |
|
As
there are no plan assets, the benefits were paid from the general assets of the
Company.
The amounts
recognized as the current and long-term portions of the benefit obligation
follow (in thousands of dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
liabilities
|
|
$ |
552 |
|
|
$ |
739 |
|
|
$ |
454 |
|
Noncurrent
liabilities
|
|
|
15,536 |
|
|
|
13,376 |
|
|
|
14,452 |
|
Net amounts
recognized
|
|
$ |
16,088 |
|
|
$ |
14,115 |
|
|
$ |
14,906 |
|
Net
gains and losses recognized in Accumulated other comprehensive earnings were
gains of $0.3 million and $1.9 million and losses of $0.2 million as of December
31, 2008, 2007 and 2006, respectively.
The
net gain that will be amortized from Accumulated other comprehensive earnings
into net periodic benefit cost in 2009 is $24.5 thousand.
The
benefit obligation was determined by applying the terms of the plan and
actuarial models. These models include various actuarial assumptions, including
discount rates, mortality and salary progression. The Company evaluates its
actuarial assumptions on an annual basis and considers changes in these
long-term factors based upon market conditions and historical
experience.
The following
assumptions were used to determine benefit obligations at December
31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount rate
used to determine net periodic benefit cost
(January 1 valuation)
|
|
|
6.40 |
% |
|
|
5.90 |
% |
|
|
5.50 |
% |
Discount rate
used to determine benefit obligation
(December 31
valuation)
|
|
|
6.10 |
% |
|
|
6.40 |
% |
|
|
5.90 |
% |
Compensation
increase used to determine obligation and
cost
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
The
discount rate assumptions reflect the rates available on high-quality fixed
income debt instruments. These rates have been selected due to their similarity
to the projected cash flows of the Executive Death Benefit Plan.
Actuarially
projected future benefit payments are as follows (in thousands of
dollars):
|
|
Benefit
Payments
|
|
2009
|
|
$ |
553 |
|
2010
|
|
|
608 |
|
2011
|
|
|
665 |
|
2012
|
|
|
729 |
|
2013
|
|
|
803 |
|
2014 –
2018
|
|
|
5,269 |
|
Deferred
Compensation Plans
The
Executive Deferred Compensation Plans are money purchase defined benefit plans.
Plan participation was limited to Company executives during the years 1984 to
1986; no new executives have been added since that time. Participants were
allowed to defer a portion of their compensation for the years 1984 through
1990. In return, under the plan, each participant receives an individually
specified benefit at age 65. Benefits are reduced when the participant
elects early retirement. There are no plan assets. Benefits are paid as they
come due from the general assets of the Company.
The net periodic
benefits costs charged to operating expenses, which were valued with a
measurement date of January 1 for each year, consisted of the following
components (in thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
Interest
cost
|
|
$ |
543 |
|
|
$ |
568 |
|
|
$ |
573 |
|
Amortization
of unrecognized losses
|
|
|
40 |
|
|
|
59 |
|
|
|
184 |
|
Net periodic
benefits costs
|
|
$ |
583 |
|
|
$ |
627 |
|
|
$ |
757 |
|
Reconciliations of
the beginning and ending balances of the projected benefit obligation, which is
calculated using a December 31 measurement date, and the status of the benefit
obligation follow (in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Benefit
obligation at beginning of year
|
|
$ |
10,151 |
|
|
$ |
10,945 |
|
|
$ |
11,419 |
|
Interest
cost
|
|
|
543 |
|
|
|
568 |
|
|
|
573 |
|
Actuarial
(gains) losses
|
|
|
(135 |
) |
|
|
(104 |
) |
|
|
129 |
|
Benefits
paid
|
|
|
(1,226 |
) |
|
|
(1,258 |
) |
|
|
(1,176 |
) |
Benefit
obligation at end of year
|
|
$ |
9,333 |
|
|
$ |
10,151 |
|
|
$ |
10,945 |
|
As
there are no plan assets, the benefits were paid from the general assets of the
Company.
The amounts
recognized as the current and long-term portions of the benefit obligation
follow (in thousands of dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
liabilities
|
|
$ |
1,226 |
|
|
$ |
1,226 |
|
|
$ |
1,229 |
|
Noncurrent
liabilities
|
|
|
8,107 |
|
|
|
8,925 |
|
|
|
9,716 |
|
Net amounts
recognized
|
|
$ |
9,333 |
|
|
$ |
10,151 |
|
|
$ |
10,945 |
|
Net
losses recognized in Accumulated other comprehensive earnings were $0.2 million,
$0.4 million and $0.3 million as of December 31, 2008, 2007 and 2006,
respectively.
The
net loss that will be amortized from Accumulated other comprehensive earnings
into net periodic benefit cost in 2009 is $22.9 thousand.
The
benefit obligation was determined by applying the terms of the plan and
actuarial models. These models include various actuarial assumptions, including
discount rates, mortality and retirement age. The Company evaluates its
actuarial assumptions on an annual basis and considers changes in these
long-term factors based upon market conditions and historical
experience.
The following
assumptions were used to determine benefit obligations at December
31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount rate
used to determine net periodic benefit cost
(January 1
valuation)
|
|
|
5.70% |
|
|
|
5.50% |
|
|
|
5.25% |
|
Discount rate
used to determine benefit obligation
(December 31
valuation)
|
|
|
6.00% |
|
|
|
5.70% |
|
|
|
5.50% |
|
The
discount rate assumptions reflect the rates available on high-quality fixed
income debt instruments. These rates have been selected due to their similarity
to the projected cash flows of the Executive Deferred Compensation
Plans.
Actuarially
projected future benefit payments are as follows (in thousands of
dollars):
|
|
Benefit
Payments
|
|
2009
|
|
$ |
1,226 |
|
2010
|
|
|
1,196 |
|
2011
|
|
|
1,162 |
|
2012
|
|
|
1,154 |
|
2013
|
|
|
1,155 |
|
2014 –
2018
|
|
|
4,858 |
|
Other
Employment-Related Benefit Plans
Certain of the
Company’s non-U.S. subsidiaries provide limited non-pension benefits to retirees
in addition to government-mandated programs. The cost of these programs is not
significant to the Company. Most retirees outside the United States are covered
by government-sponsored and -administered programs.
NOTE
11 – LEASES
The
Company leases certain land, buildings and equipment under noncancellable
operating leases that expire at various dates through 2036. The Company
capitalizes all significant leases that qualify for capitalization, of which
there were none at December 31, 2008. Many of the building leases obligate the
Company to pay real estate taxes, insurance and certain maintenance costs, and
contain multiple renewal provisions, exercisable at the Company’s option. Leases
that contain predetermined fixed escalations of the minimum rentals are
recognized in rental expense on a straight-line basis over the lease term. Cash
or rent abatements received upon entering into certain operating leases are also
recognized on a straight-line basis over the lease term.
At December 31,
2008, the approximate future minimum lease payments for all operating leases
were as follows (in thousands of dollars):
|
|
Future Minimum
Lease Payments
|
|
2009
|
|
$ |
41,150 |
|
2010
|
|
|
35,718 |
|
2011
|
|
|
30,753 |
|
2012
|
|
|
26,658 |
|
2013
|
|
|
23,259 |
|
Thereafter
|
|
|
60,837 |
|
Total minimum
payments required
|
|
$ |
218,375 |
|
Less amounts
representing sublease income
|
|
|
(227 |
) |
|
|
$ |
218,148 |
|
Rent expense,
including items under lease and items rented on a month-to-month basis, was
$44.8 million, $42.1 million and $33.4 million for 2008, 2007 and 2006,
respectively. These amounts are net of sublease income of $0.6 million, $0.5
million and $0.5 million for 2008, 2007 and 2006, respectively.
NOTE
12 – STOCK INCENTIVE PLANS
The
Company maintains stock incentive plans under which the Company may grant a
variety of incentive awards to employees and directors. Shares of common stock
were authorized for issuance under the plans in connection with awards of
non-qualified stock options, stock appreciation rights, restricted stock,
restricted stock units and other stock-based awards. As of December 31, 2008,
restricted stock, restricted stock units, performance shares, stock units and
non-qualified stock options have been granted.
In
2005, the shareholders of the Company approved the 2005 Incentive
Plan (“Plan”), which replaced all prior active plans (“Prior Plans”).
Awards previously granted under Prior Plans will remain outstanding in
accordance with their
terms. The Plan
authorizes 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. All options expire no later than ten years after the date of grant. A
total of 9.5 million shares of common stock have been reserved for issuance
under the Plan. As of December 31, 2008, there were 2,548,950 shares available
for grant under the Plan.
Effective
January 1, 2006, the Company adopted the Financial Accounting
Standards Board’s Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) using the
modified prospective method. Under this transition method, compensation cost
recognized in 2008, 2007 and 2006 includes: (a) compensation costs for all
share-based payments granted prior to, but not fully vested as of January 1,
2006, based on the grant date fair value as calculated under the pro forma
disclosure-only expense provisions of SFAS No. 123 and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant date fair value estimated in accordance with provisions of SFAS No.
123R.
Pre-tax stock-based
compensation expense was $46.1 million, $35.7 million and $34.8 million in 2008,
2007 and 2006, respectively. Related income tax benefits recognized
in earnings were $18.2 million, $11.8 million and $11.8 million in 2008, 2007
and 2006, respectively.
Options
In
2008, 2007 and 2006, the Company provided broad-based stock option grants of
161,400, 162,100 and 187,900 shares, respectively, to those employees who
reached major service milestones and were not participants in other stock option
programs.
In
2008, 2007 and 2006, the Company issued stock option grants to participating
employees as part of their incentive compensation. Stock option grants were
721,600, 578,120 and 1,234,400 for the years 2008, 2007 and 2006,
respectively.
Option awards are
granted with an exercise price equal to the closing market price of the
Company’s stock on the last trading day preceding the date of grant. The options
generally vest over three years, although accelerated vesting is provided in
certain circumstances. Awards generally expire ten years from the grant
date.
Transactions
involving stock options are summarized as follows:
|
|
Shares Subject
to Option
|
|
|
Weighted
Average Price Per Share
|
|
|
Options
Exercisable
|
|
Outstanding at
January 1, 2006
|
|
|
8,691,840 |
|
|
$ |
48.37 |
|
|
|
4,572,250 |
|
Granted
|
|
|
1,422,300 |
|
|
$ |
75.87 |
|
|
|
|
|
Exercised
|
|
|
(1,390,461 |
) |
|
$ |
46.35 |
|
|
|
|
|
Canceled or
expired
|
|
|
(268,810 |
) |
|
$ |
57.88 |
|
|
|
|
|
Outstanding at
December 31, 2006
|
|
|
8,454,869 |
|
|
$ |
53.00 |
|
|
|
4,627,249 |
|
Granted
|
|
|
740,220 |
|
|
$ |
82.21 |
|
|
|
|
|
Exercised
|
|
|
(2,430,523 |
) |
|
$ |
47.74 |
|
|
|
|
|
Canceled or
expired
|
|
|
(236,580 |
) |
|
$ |
67.29 |
|
|
|
|
|
Outstanding at
December 31, 2007
|
|
|
6,527,986 |
|
|
$ |
58.19 |
|
|
|
3,447,856 |
|
Granted
|
|
|
883,000 |
|
|
$ |
84.58 |
|
|
|
|
|
Exercised
|
|
|
(953,199 |
) |
|
$ |
50.07 |
|
|
|
|
|
Canceled or
expired
|
|
|
(103,920 |
) |
|
$ |
73.14 |
|
|
|
|
|
Outstanding at
December 31, 2008
|
|
|
6,353,867 |
|
|
$ |
62.95 |
|
|
|
3,633,612 |
|
At
December 31, 2008, there was $13.2 million of total unrecognized compensation
expense related to nonvested option awards, which the Company expects to
recognize over a weighted average period of 1.7 years.
The following table
summarizes information about stock options exercised (in thousands of
dollars):
|
|
For the years
ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Fair value of
options exercised
|
|
$ |
12,752 |
|
|
$ |
31,736 |
|
|
$ |
18,152 |
|
Total
intrinsic value of options exercised
|
|
$ |
35,095 |
|
|
$ |
88,921 |
|
|
$ |
38,906 |
|
Fair value of
options vested
|
|
$ |
15,510 |
|
|
$ |
15,996 |
|
|
$ |
15,295 |
|
Settlements of
options exercised
|
|
$ |
47,016 |
|
|
$ |
113,752 |
|
|
$ |
64,437 |
|
Information about
stock options outstanding and exercisable as of December 31, 2008, is as
follows:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Range
of
Exercise
Prices
|
|
|
Number
|
|
Remaining
Contractual
Life
|
|
Exercise
Price
|
|
|
Intrinsic
Value
(000’s)
|
|
|
Number
|
|
Remaining
Contractual
Life
|
|
Exercise
Price
|
|
|
Intrinsic
Value
(000’s)
|
|
$ |
37.50
- $44.05 |
|
|
|
742,155 |
|
2.0
Years
|
|
$ |
40.55 |
|
|
$ |
28,419 |
|
|
|
742,155 |
|
2.0
Years
|
|
$ |
40.55 |
|
|
$ |
28,419 |
|
$ |
45.50
- $54.85 |
|
|
|
2,707,052 |
|
4.6
Years
|
|
$ |
51.49 |
|
|
|
74,051 |
|
|
|
2,705,992 |
|
4.6
Years
|
|
$ |
51.49 |
|
|
|
74,019 |
|
$ |
56.03 -
$70.67 |
|
|
|
139,815 |
|
6.1
Years
|
|
$ |
62.08 |
|
|
|
2,343 |
|
|
|
138,815 |
|
6.1
Years
|
|
$ |
62.02 |
|
|
|
2,335 |
|
$ |
71.21 -
$93.05 |
|
|
|
2,764,845 |
|
8.2
Years
|
|
$ |
80.24 |
|
|
|
(3,875 |
) |
|
|
46,650 |
|
7.7
Years
|
|
$ |
77.69 |
|
|
|
54 |
|
|
|
|
|
|
6,353,867 |
|
5.9
Years
|
|
$ |
62.95 |
|
|
$ |
100,938 |
|
|
|
3,633,612 |
|
4.2
Years
|
|
$ |
49.99 |
|
|
$ |
104,827 |
|
The Company uses a
binomial lattice model for the valuation of stock options. The weighted average
fair value of options granted in 2008, 2007 and 2006 was $20.82, $22.92 and
$18.91, respectively. The fair value of each option granted used the following
assumptions:
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Risk-free
interest rate
|
|
|
3.2 |
% |
|
|
4.6 |
% |
|
|
4.9 |
% |
Expected
life
|
|
6
years
|
|
|
6
years
|
|
|
6
years
|
|
Expected
volatility
|
|
|
25.2 |
% |
|
|
24.3 |
% |
|
|
23.9 |
% |
Expected
dividend yield
|
|
|
1.8 |
% |
|
|
1.7 |
% |
|
|
1.5 |
% |
The
risk-free interest rate is selected based on yields from U.S. Treasury
zero-coupon issues with a remaining term approximately equal to the expected
term of the options being valued. The expected life selected for options granted
during each year presented represents the period of time that the options are
expected to be outstanding based on historical data of option holders exercise
and termination behavior. Expected volatility is based upon implied and
historical volatility of the closing price of the Company’s stock over a period
equal to the expected life of each option grant. Historical company information
is also the primary basis for selection of expected dividend yield
assumptions.
Performance
Shares
In
2008, 2007 and 2006, the Company awarded performance-based shares to certain
executives. Receipt of Company stock is contingent upon the Company meeting
sales growth and return on invested capital (ROIC) performance goals. Each
participant was granted a base number of shares. At the end of the first year
performance period, the number of shares granted will be increased, decreased or
remain the same based upon actual Company-wide sales growth versus target sales
growth. The shares, as determined at the end of the performance year, will be
issued at the end of the third year if the Company’s average target ROIC is
achieved during the vesting period.
Performance share
value is based upon closing market prices on the last trading day preceding the
date of award and is charged to earnings on a straight-line basis over the three
year period. Holders of performance shares are entitled to receive cash payments
equivalent to cash dividends after the end of the first year performance period.
If the performance shares vest, they will be settled by the issuance of Company
common stock in exchange for the performance shares on a one-for-one
basis.
The following table
summarizes the transactions involving performance-based share
awards:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Shares
|
|
|
Weighted
Average
|
|
Beginning nonvested
shares outstanding
|
|
|
116,796 |
|
|
$ |
69.49 |
|
|
|
37,812 |
|
|
$ |
71.23 |
|
|
|
– |
|
|
$ |
– |
|
Issuances
|
|
|
38,360 |
|
|
$ |
86.00 |
|
|
|
83,089 |
|
|
$ |
68.64 |
|
|
|
37,812 |
|
|
$ |
71.23 |
|
Cancellations
|
|
|
– |
|
|
$ |
– |
|
|
|
(4,105 |
) |
|
$ |
69.00 |
|
|
|
– |
|
|
$ |
– |
|
Vestings
|
|
|
(37,260 |
) |
|
$ |
71.23 |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
Ending nonvested
shares
outstanding
|
|
|
117,896 |
|
|
$ |
75.13 |
|
|
|
116,796 |
|
|
$ |
69.49 |
|
|
|
37,812 |
|
|
$ |
71.23 |
|
At December 31,
2008, the unearned compensation related to performance-based share awards
outstanding was $3.8 million, which the Company expects to recognize over a
weighted average period of 1.7 years.
Restricted
Stock
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. Restricted stock grants have original vesting periods of
six to ten years.
Compensation expense
related to restricted stock awards is based upon the closing market price on the
last trading day preceding the date of grant and is charged to earnings on a
straight-line basis over the vesting period. The following table summarizes the
transactions involving restricted stock granted to
employees:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Shares
|
|
|
Weighted
Average
|
|
Beginning nonvested
shares outstanding
|
|
|
65,000 |
|
|
$ |
52.37 |
|
|
|
105,000 |
|
|
$ |
51.05 |
|
|
|
270,000 |
|
|
$ |
44.75 |
|
Cancellations
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
(10,000 |
) |
|
$ |
57.07 |
|
Vesting
|
|
|
(15,000 |
) |
|
$ |
48.15 |
|
|
|
(40,000 |
) |
|
$ |
48.73 |
|
|
|
(155,000 |
) |
|
$ |
37.91 |
|
Ending nonvested
shares outstanding
|
|
|
50,000 |
|
|
$ |
53.50 |
|
|
|
65,000 |
|
|
$ |
52.37 |
|
|
|
105,000 |
|
|
$ |
51.05 |
|
Fair value of
shares
vested
|
|
$1.3 million
|
|
|
|
|
|
|
$3.0
million
|
|
|
|
|
|
|
$11.1
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008, there was $0.1 million of total unrecognized compensation
expense related to nonvested restricted stock, which the Company expects to
recognize over a weighted average period of 0.7 years.
Restricted
Stock Units (RSUs)
Awards of RSUs are
provided for under the stock compensation plans. RSUs granted vest over periods
from two to seven years from issuance, although accelerated vesting is provided
in certain instances. Holders of RSUs are entitled to receive cash payments
equivalent to cash dividends and other distributions paid with respect to common
stock. At various times after vesting, RSUs will be settled by the issuance of
stock evidencing the conversion of the RSUs into shares of the Company common
stock on a one-for-one basis. Compensation expense related to RSUs is based upon
the closing market prices on the last trading day preceding the date of award
and is charged to earnings on a straight-line basis over the vesting
period.
The following table
summarizes RSUs activity:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Shares
|
|
|
Weighted
Average
|
|
Beginning nonvested
units
|
|
|
982,568 |
|
|
$ |
72.91 |
|
|
|
740,200 |
|
|
$ |
65.24 |
|
|
|
517,000 |
|
|
$ |
49.74 |
|
Issuances
|
|
|
460,423 |
|
|
$ |
84.35 |
|
|
|
421,003 |
|
|
$ |
83.53 |
|
|
|
408,300 |
|
|
$ |
75.54 |
|
Cancellations
|
|
|
(33,490 |
) |
|
$ |
78.72 |
|
|
|
(74,030 |
) |
|
$ |
71.99 |
|
|
|
(26,750 |
) |
|
$ |
66.84 |
|
Vestings
|
|
|
(172,255 |
) |
|
$ |
64.37 |
|
|
|
(104,605 |
) |
|
$ |
75.85 |
|
|
|
(158,350 |
) |
|
$ |
58.68 |
|
Ending nonvested
units
|
|
|
1,237,246 |
|
|
$ |
77.88 |
|
|
|
982,568 |
|
|
$ |
72.91 |
|
|
|
740,200 |
|
|
$ |
65.24 |
|
Fair value
of
shares vested
|
|
$11.1 million
|
|
|
|
|
|
|
$7.5
million
|
|
|
|
|
|
|
$8.4
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008, there was $47.3 million of total unrecognized compensation
expense related to nonvested RSUs which the Company expects to recognize over a
weighted average period of 3.0 years.
Director
Stock Awards
The Company provides
members of the Board of Directors with deferred stock unit grants. A stock unit
is the economic equivalent of a share of common stock. Beginning in April 2008,
the number of units covered by each grant is equal to $100,000 divided by the
fair market value of a share of common stock at the time of the grant, rounded
up to the next ten-unit increment. Prior to April 2008, the number of units
covered by each grant was equal to $60,000 divided by the fair market value of a
share of common stock at the time of the grant, rounded up to the next ten-unit
increment. The Company also awards stock units in connection with elective
deferrals of director fees and dividend equivalents on existing stock units.
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, 2008, 2007 and 2006,
there were eleven nonemployee directors who held stock
units.
The Company
recognizes income (expense) for the change in value of equivalent stock units.
The following table summarizes activity for stock units related to deferred
director fees (dollars in thousands):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Units
|
|
|
Dollars
|
|
|
Units
|
|
|
Dollars
|
|
|
Units
|
|
|
Dollars
|
|
Beginning balance
|
|
|
74,522 |
|
|
$ |
6,522 |
|
|
|
61,242 |
|
|
$ |
4,283 |
|
|
|
51,977 |
|
|
$ |
3,696 |
|
Dividends
|
|
|
1,692 |
|
|
|
137 |
|
|
|
1,099 |
|
|
|
95 |
|
|
|
902 |
|
|
|
64 |
|
Deferred fees
|
|
|
17,007 |
|
|
|
1,460 |
|
|
|
12,181 |
|
|
|
1,012 |
|
|
|
14,844 |
|
|
|
1,128 |
|
Retirement
distributions
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(6,481 |
) |
|
|
(461 |
) |
Unit
appreciation
(depreciation)
|
|
|
– |
|
|
|
(769 |
) |
|
|
– |
|
|
|
1,132 |
|
|
|
– |
|
|
|
(144 |
) |
Ending balance
|
|
|
93,221 |
|
|
$ |
7,350 |
|
|
|
74,522 |
|
|
$ |
6,522 |
|
|
|
61,242 |
|
|
$ |
4,283 |
|
NOTE
13– CAPITAL STOCK
The
Company had no shares of preferred stock outstanding as of December 31, 2008,
2007 and 2006. The activity related to outstanding common stock and common stock
held in treasury was as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Outstanding
Common Stock
|
|
|
Treasury
Stock
|
|
|
Outstanding
Common Stock
|
|
|
Treasury
Stock
|
|
|
Outstanding
Common Stock
|
|
|
Treasury
Stock
|
|
Balance at
beginning of period
|
|
|
79,459,415 |
|
|
|
30,199,804 |
|
|
|
84,067,627 |
|
|
|
25,590,311 |
|
|
|
89,715,641 |
|
|
|
19,952,297 |
|
Exercise of
stock options, net of 2,725, 3,318 and 0 shares swapped in stock-for-stock
exchange
|
|
|
950,474 |
|
|
|
(950,474 |
) |
|
|
2,427,205 |
|
|
|
(2,427,205 |
) |
|
|
1,390,461 |
|
|
|
(1,390,461 |
) |
Cancellation
of shares related to tax withholdings on restricted stock
vesting
|
|
|
(4,874 |
) |
|
|
4,874 |
|
|
|
(14,867 |
) |
|
|
14,867 |
|
|
|
(59,297 |
) |
|
|
59,297 |
|
Settlement of
restricted stock units, net of 48,488, 16,739 and 6,228 shares retained,
respectively
|
|
|
101,962 |
|
|
|
(101,962 |
) |
|
|
31,057 |
|
|
|
(29,776 |
) |
|
|
13,822 |
|
|
|
(13,822 |
) |
Cancellation
of restricted shares
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(10,000 |
) |
|
|
– |
|
Purchase of
treasury shares
|
|
|
(5,725,948 |
) |
|
|
5,725,948 |
|
|
|
(7,051,607 |
) |
|
|
7,051,607 |
|
|
|
(6,983,000 |
) |
|
|
6,983,000 |
|
Balance at end
of period
|
|
|
74,781,029 |
|
|
|
34,878,190 |
|
|
|
79,459,415 |
|
|
|
30,199,804 |
|
|
|
84,067,627 |
|
|
|
25,590,311 |
|
On August 20, 2007,
the Company entered into an accelerated share repurchase agreement (ASR) with
Goldman, Sachs & Co. (Goldman) to purchase $500 million of its
outstanding common stock. The Company paid Goldman $500 million on August 23,
2007, in exchange for an initial delivery of 5,316,007 shares. The ASR was
treated as an equity transaction. At settlement, the Company was to receive or
pay additional shares of its common stock or cash (at Grainger’s option), based
upon the volume weighted average price during the term of the
agreement. Accordingly, on January 4, 2008, the Company received
415,274 shares of its common stock from Goldman as final settlement of the ASR.
A total of 5,731,281 shares were repurchased under the
ASR.
NOTE
14 – ACCUMULATED OTHER COMPREHENSIVE EARNINGS
The
following table sets forth the components of Accumulated other
comprehensive earnings (losses) (in thousands of
dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Foreign
currency translation adjustments
|
|
$ |
3,943 |
|
|
$ |
94,683 |
|
|
$ |
31,859 |
|
Effect of
adopting SFAS No. 158 related to postretirement benefit plans and
other employment-related benefit plans
|
|
|
– |
|
|
|
– |
|
|
|
(36,783 |
) |
Postretirement
benefit plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
|
9,377 |
|
|
|
10,592 |
|
|
|
– |
|
Transition
asset
|
|
|
857 |
|
|
|
1,000 |
|
|
|
– |
|
Unrecognized
(losses)
|
|
|
(73,966 |
) |
|
|
(25,405 |
) |
|
|
– |
|
Unrecognized
gains (losses) on other employment-related benefit
plans
|
|
|
(68 |
) |
|
|
1,335 |
|
|
|
(524 |
) |
Deferred tax
asset (liability)
|
|
|
21,332 |
|
|
|
(10,034 |
) |
|
|
8,879 |
|
Total
accumulated other comprehensive earnings (losses)
|
|
$ |
(38,525 |
) |
|
$ |
72,171 |
|
|
$ |
3,431 |
|
Foreign currency
translation adjustments result from the translation of assets and liabilities of
foreign subsidiaries. The decrease in foreign currency translation adjustments
in 2008 is primarily due to the strengthening of the U.S. dollar versus the
Canadian dollar and Mexican peso.
In
2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132R” (SFAS No. 158). SFAS No. 158 requires an
employer to recognize in its statement of financial position an asset for a
plan’s overfunded status or a liability for a plan’s underfunded status, measure
a plan’s assets and its obligations that determine its funded status as of the
end of the employer’s fiscal year (with limited exceptions), and recognize
changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur. SFAS No. 158 requires recognition of funded
status changes of a defined benefit postretirement and other employment-related
benefit plans within accumulated other comprehensive earnings, net of tax, to
the extent such changes are not recognized in earnings as components of net
periodic benefit costs. The Company adopted SFAS No. 158 in 2006 and recorded an
additional liability of $36.8 million to Accrued employment-related benefit
costs offset by $14.3 million of deferred income taxes and a reduction of
Accumulated other comprehensive earnings. The increase in unrecognized losses in
2008 is primarily due to the impact of a reduction in discount rates and losses
on plan assets.
NOTE
15 – INCOME TAXES
The Company
recognizes 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.
Income tax expense
consisted of the following (in thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
246,731 |
|
|
$ |
238,220 |
|
|
$ |
172,961 |
|
State
|
|
|
39,673 |
|
|
|
42,401 |
|
|
|
31,725 |
|
Foreign
|
|
|
18,044 |
|
|
|
15,329 |
|
|
|
5,080 |
|
Total
current
|
|
|
304,448 |
|
|
|
295,950 |
|
|
|
209,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,968 |
) |
|
|
(28,520 |
) |
|
|
8,996 |
|
State
|
|
|
(1,049 |
) |
|
|
(5,013 |
) |
|
|
1,636 |
|
Foreign
|
|
|
432 |
|
|
|
(676 |
) |
|
|
(774 |
) |
Total
deferred
|
|
|
(6,585 |
) |
|
|
(34,209 |
) |
|
|
9,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision
|
|
$ |
297,863 |
|
|
$ |
261,741 |
|
|
$ |
219,624 |
|
Earnings before
income taxes by geographical area consisted of the following (in thousands of
dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
United
States
|
|
$ |
731,315 |
|
|
$ |
646,762 |
|
|
$ |
588,322 |
|
Foreign
|
|
|
41,903 |
|
|
|
35,099 |
|
|
|
14,701 |
|
|
|
$ |
773,218 |
|
|
$ |
681,861 |
|
|
$ |
603,023 |
|
The
income tax effects of temporary differences that gave rise to the net deferred
tax asset were (in thousands of dollars):
|
|
As of December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$ |
22,674 |
|
|
$ |
19,577 |
|
|
$ |
13,809 |
|
Accrued
expenses
|
|
|
29,966 |
|
|
|
30,295 |
|
|
|
28,606 |
|
Accrued
employment-related benefits
|
|
|
144,125 |
|
|
|
111,147 |
|
|
|
99,006 |
|
Foreign
operating loss carryforwards
|
|
|
10,833 |
|
|
|
10,239 |
|
|
|
9,530 |
|
Property,
buildings and equipment
|
|
|
921 |
|
|
|
3,189 |
|
|
|
– |
|
Other
|
|
|
11,352 |
|
|
|
8,064 |
|
|
|
8,582 |
|
Deferred
tax assets
|
|
|
219,871 |
|
|
|
182,511 |
|
|
|
159,533 |
|
Less
valuation allowance
|
|
|
(15,977 |
) |
|
|
(13,551 |
) |
|
|
(13,461 |
) |
Deferred
tax assets, net of valuation allowance
|
|
$ |
203,894 |
|
|
$ |
168,960 |
|
|
$ |
146,072 |
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased tax
benefits
|
|
$ |
(5,812 |
) |
|
$ |
(6,779 |
) |
|
$ |
(7,715 |
) |
Property,
buildings and equipment
|
|
|
- |
|
|
|
– |
|
|
|
(4,303 |
) |
Intangibles
|
|
|
(17,083 |
) |
|
|
(16,884 |
) |
|
|
(14,182 |
) |
Software
|
|
|
(12,774 |
) |
|
|
(9,710 |
) |
|
|
(10,627 |
) |
Prepaids
|
|
|
(21,893 |
) |
|
|
(16,625 |
) |
|
|
(14,111 |
) |
Foreign
currency gain
|
|
|
(2,206 |
) |
|
|
(13,661 |
) |
|
|
(4,453 |
) |
Deferred
tax liabilities
|
|
|
(59,768 |
) |
|
|
(63,659 |
) |
|
|
(55,391 |
) |
Net deferred
tax asset
|
|
$ |
144,126 |
|
|
$ |
105,301 |
|
|
$ |
90,681 |
|
The net
deferred tax asset is classified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
52,556 |
|
|
$ |
56,663 |
|
|
$ |
48,123 |
|
Noncurrent
assets
|
|
|
97,442 |
|
|
|
54,658 |
|
|
|
48,793 |
|
Noncurrent
liabilities (foreign)
|
|
|
(5,872 |
) |
|
|
(6,020 |
) |
|
|
(6,235 |
) |
Net deferred
tax asset
|
|
$ |
144,126 |
|
|
$ |
105,301 |
|
|
$ |
90,681 |
|
At December 31,
2008, the Company had $34.8 million of foreign operating loss carryforwards
related to foreign operations, some of which begin to expire in 2009. The
valuation allowance represents a provision for uncertainty as to the realization
of the tax benefits 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.
The changes in the
valuation allowance were as follows (in thousands of
dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Beginning
balance
|
|
$ |
13,551 |
|
|
$ |
13,461 |
|
|
$ |
10,872 |
|
Increase
(decrease) related to foreign net operating loss
carryforwards
|
|
|
86 |
|
|
|
1,329 |
|
|
|
(70 |
) |
Increase
(decrease) related to capital losses and other
|
|
|
2,340 |
|
|
|
(1,239 |
) |
|
|
2,659 |
|
Ending
balance
|
|
$ |
15,977 |
|
|
$ |
13,551 |
|
|
$ |
13,461 |
|
A
reconciliation of income tax expense with federal income taxes at the statutory
rate follows (in thousands of dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Federal income
tax at the 35% statutory rate
|
|
$ |
270,626 |
|
|
$ |
238,651 |
|
|
$ |
211,058 |
|
State income
taxes, net of federal income tax
benefit
|
|
|
25,105 |
|
|
|
24,302 |
|
|
|
22,795 |
|
Resolution of
prior year tax contingencies
|
|
|
– |
|
|
|
– |
|
|
|
(12,200 |
) |
Other –
net
|
|
|
2,132 |
|
|
|
(1,212 |
) |
|
|
(2,029 |
) |
Income tax
expense
|
|
$ |
297,863 |
|
|
$ |
261,741 |
|
|
$ |
219,624 |
|
Effective
tax rate
|
|
|
38.5 |
% |
|
|
38.4 |
% |
|
|
36.4 |
% |
Undistributed
earnings of foreign subsidiaries at December 31, 2008, amounted to $31.5
million. No provision for deferred U.S. income taxes has been made for these
subsidiaries because the Company intends to permanently reinvest such earnings
in those foreign operations.
On
January 1, 2007, the Company adopted the provisions of FIN 48. As a result, the
Company recognized a decrease of approximately $0.9 million in the liability for
tax uncertainties, which resulted in an increase to the January 1, 2007, balance
of Retained earnings.
The
changes in the liability for tax uncertainties, excluding interest, are as
follows (in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
Balance at
beginning of year
|
|
$ |
13,568 |
|
|
$ |
15,274 |
|
Additions
based on tax positions related to the current year
|
|
|
13,016 |
|
|
|
3,060 |
|
Additions for
tax positions of prior years
|
|
|
735 |
|
|
|
– |
|
Reductions for
tax positions of prior years
|
|
|
(2,900 |
) |
|
|
(4,729 |
) |
Settlements
(audit payments) refunds – net
|
|
|
(55 |
) |
|
|
(37 |
) |
Balance at end
of year
|
|
$ |
24,364 |
|
|
$ |
13,568 |
|
The
Company classifies the liability for tax uncertainties in Deferred income taxes
and tax uncertainties. Included in this amount is $7.4 million and $3.3 million
at December 31, 2008 and 2007, respectively, of tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Any changes in the timing of
deductibility of these items would not affect the annual effective tax rate but
would accelerate the payment of cash to the taxing authorities to an earlier
period.
The
Company regularly undergoes examination of its federal income tax returns by the
Internal Revenue Service (IRS). The Company and the IRS have settled tax years
through 2004. The Company is not currently under examination by the IRS nor
under notice of a pending examination. The Company is also subject to state and
local income tax audits and foreign jurisdiction tax audits. The Company’s tax
years 2002 – 2008 remain subject to state and local audits. Tax years 2003 –
2008 remain open to foreign audits. The Company’s estimated amount of liability
associated with the Company’s uncertain tax positions may decrease within the
next twelve months due to expiring statutes, tax payments or audit
activity.
The Company recognizes interest expense
in the provision for income taxes. During 2008 and 2007, the Company recognized
interest of $0.8 million and $0.7 million, respectively. As of December 31, 2008
and 2007, respectively, the Company accrued $1.9 million and $1.1 million for
interest.
NOTE
16 – EARNINGS PER SHARE
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
outstanding stock options of 2.6 million, 0.01 million and 1.36 million for the
years ended December 31, 2008, 2007 and 2006, respectively, that were excluded
from the computation of diluted earnings per share because the options’ exercise
price 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 (in thousands, except for per share amounts):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
earnings
|
|
$ |
475,355 |
|
|
$ |
420,120 |
|
|
$ |
383,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share – weighted average shares
|
|
|
76,580 |
|
|
|
82,404 |
|
|
|
87,839 |
|
Effect of
dilutive securities – stock-based compensation
|
|
|
2,170 |
|
|
|
2,641 |
|
|
|
2,685 |
|
Denominator
for diluted earnings per share – weighted average shares
adjusted for dilutive securities
|
|
|
78,750 |
|
|
|
85,045 |
|
|
|
90,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per common share
|
|
$ |
6.21 |
|
|
$ |
5.10 |
|
|
$ |
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
6.04 |
|
|
$ |
4.94 |
|
|
$ |
4.24 |
|
NOTE
17 – PREFERRED SHARE PURCHASE RIGHTS
The Company has a
shareholder rights plan, under which there is outstanding one preferred share
purchase right (Right) for each outstanding share of the Company’s 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 Company’s common
stock) at a price of $250.00, subject to adjustment. The Rights become
exercisable only after a person or group, other than a person or group exempt
under the plan, acquires or announces a tender offer for 15% or more of the
Company’s common stock. If a person or group, other than a person or group
exempt under the plan, acquires 15% or more of the Company’s 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.
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 Company’s 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.
NOTE
18 – SEGMENT INFORMATION
The
Company has three reportable segments: Grainger Branch-based, Acklands – Grainger Branch-based and Lab
Safety. Grainger Branch-based is an aggregation of the following business units
which offer similar services and products: Grainger Industrial Supply, Grainger,
S.A. de C.V. (Mexico), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC
(China) and Grainger Panama S.A. (Panama). Acklands – Grainger is the Company’s
Canadian branch-based distribution business. Lab Safety is a direct marketer of
safety and other industrial products. During 2009, Grainger will be integrating
the Lab Safety business into the Grainger Industrial Supply business as well as
reviewing the Company's current operating structure to ensure that it will
meet the current and future needs of the business. The Company is also
evaluating the impact that this integration will have on reportable segments.
Any changes to reportable segments will include a restatement of prior periods
for consistency purposes.
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 a related party
sale.
The following is the
segment information (in thousands of dollars):
|
|
2008
|
|
|
|
Grainger
Branch-based
|
|
|
Acklands – Grainger
Branch-based
|
|
|
Lab
Safety
|
|
|
Total
|
|
Total net
sales
|
|
$ |
5,678,823 |
|
|
$ |
727,989 |
|
|
$ |
450,725 |
|
|
$ |
6,857,537 |
|
Intersegment
net sales
|
|
|
(3,556 |
) |
|
|
(127 |
) |
|
|
(3,822 |
) |
|
|
(7,505 |
) |
Net sales to
external customers
|
|
|
5,675,267 |
|
|
|
727,862 |
|
|
|
446,903 |
|
|
|
6,850,032 |
|
Segment
operating earnings
|
|
|
782,747 |
|
|
|
54,263 |
|
|
|
45,386 |
|
|
|
882,396 |
|
Segment
assets
|
|
|
2,216,282 |
|
|
|
448,660 |
|
|
|
225,494 |
|
|
|
2,890,436 |
|
Depreciation
and amortization
|
|
|
107,367 |
|
|
|
10,506 |
|
|
|
9,333 |
|
|
|
127,206 |
|
Additions to
long-lived assets
|
|
$ |
166,807 |
|
|
$ |
24,337 |
|
|
$ |
15,337 |
|
|
$ |
206,481 |
|
|
|
2007
|
|
|
|
Grainger
Branch-based
|
|
|
Acklands –
Grainger
Branch-based
|
|
|
Lab
Safety
|
|
|
Total
|
|
Total net
sales
|
|
$ |
5,352,520 |
|
|
$ |
636,524 |
|
|
$ |
434,663 |
|
|
$ |
6,423,707 |
|
Intersegment
net sales
|
|
|
(1,997 |
) |
|
|
– |
|
|
|
(3,696 |
) |
|
|
(5,693 |
) |
Net sales to
external customers
|
|
|
5,350,523 |
|
|
|
636,524 |
|
|
|
430,967 |
|
|
|
6,418,014 |
|
Segment
operating earnings
|
|
|
669,441 |
|
|
|
44,218 |
|
|
|
54,287 |
|
|
|
767,946 |
|
Segment
assets
|
|
|
2,107,408 |
|
|
|
502,414 |
|
|
|
212,627 |
|
|
|
2,822,449 |
|
Depreciation
and amortization
|
|
|
100,082 |
|
|
|
10,786 |
|
|
|
9,126 |
|
|
|
119,994 |
|
Additions to
long-lived assets
|
|
$ |
155,936 |
|
|
$ |
10,794 |
|
|
$ |
7,844 |
|
|
$ |
174,574 |
|
|
|
2006
|
|
|
|
Grainger
Branch-based
|
|
|
Acklands – Grainger
Branch-based
|
|
|
Lab
Safety
|
|
|
Total
|
|
Total net
sales
|
|
$ |
4,910,836 |
|
|
$ |
565,098 |
|
|
$ |
411,511 |
|
|
$ |
5,887,445 |
|
Intersegment
net sales
|
|
|
(1,214 |
) |
|
|
– |
|
|
|
(2,577 |
) |
|
|
(3,791 |
) |
Net sales to
external customers
|
|
|
4,909,622 |
|
|
|
565,098 |
|
|
|
408,934 |
|
|
|
5,883,654 |
|
Segment
operating earnings
|
|
|
593,455 |
|
|
|
15,242 |
|
|
|
52,283 |
|
|
|
660,980 |
|
Segment
assets
|
|
|
1,938,270 |
|
|
|
394,707 |
|
|
|
215,515 |
|
|
|
2,548,492 |
|
Depreciation
and amortization
|
|
|
88,753 |
|
|
|
9,505 |
|
|
|
8,099 |
|
|
|
106,357 |
|
Additions to
long-lived assets
|
|
$ |
112,414 |
|
|
$ |
8,238 |
|
|
$ |
37,733 |
|
|
$ |
158,385 |
|
Following are
reconciliations of the segment information with the consolidated totals per the
financial statements (in thousands of dollars):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
earnings:
|
|
|
|
|
|
|
|
|
|
Total
operating earnings for reportable segments
|
|
$ |
882,396 |
|
|
$ |
767,946 |
|
|
$ |
660,980 |
|
Unallocated
expenses
|
|
|
(99,724 |
) |
|
|
(97,293 |
) |
|
|
(82,909 |
) |
Total
consolidated operating earnings
|
|
$ |
782,672 |
|
|
$ |
670,653 |
|
|
$ |
578,071 |
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
for reportable segments
|
|
$ |
2,890,436 |
|
|
$ |
2,822,449 |
|
|
$ |
2,548,492 |
|
Unallocated
assets
|
|
|
624,981 |
|
|
|
271,579 |
|
|
|
497,596 |
|
Total
consolidated assets
|
|
$ |
3,515,417 |
|
|
$ |
3,094,028 |
|
|
$ |
3,046,088 |
|
|
|
2008
|
|
|
|
Segment
Totals
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
127,206 |
|
|
$ |
12,364 |
|
|
$ |
139,570 |
|
Additions to
long-lived assets
|
|
$ |
206,481 |
|
|
$ |
7,508 |
|
|
$ |
213,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Long-lived
Assets
|
|
Geographic
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
|
|
|
$ |
5,953,205 |
|
|
$ |
998,529 |
|
Canada
|
|
|
|
|
|
|
731,131 |
|
|
|
176,174 |
|
Other foreign
countries
|
|
|
|
|
|
|
165,696 |
|
|
|
41,217 |
|
|
|
|
|
|
|
$ |
6,850,032 |
|
|
$ |
1,215,920 |
|
|
|
2007
|
|
|
|
Segment
Totals
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
119,994 |
|
|
$ |
12,005 |
|
|
$ |
131,999 |
|
Additions to
long-lived assets
|
|
$ |
174,574 |
|
|
$ |
25,558 |
|
|
$ |
200,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Long-lived
Assets
|
|
Geographic
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
|
|
|
$ |
5,643,500 |
|
|
$ |
961,624 |
|
Canada
|
|
|
|
|
|
|
640,121 |
|
|
|
206,133 |
|
Other foreign
countries
|
|
|
|
|
|
|
134,393 |
|
|
|
20,135 |
|
|
|
|
|
|
|
$ |
6,418,014 |
|
|
$ |
1,187,892 |
|
|
|
2006
|
|
|
|
Segment
Totals
|
|
|
Unallocated
|
|
|
Consolidated
Total
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
106,357 |
|
|
$ |
12,211 |
|
|
$ |
118,568 |
|
Additions to
long-lived assets
|
|
$ |
158,385 |
|
|
$ |
14,268 |
|
|
$ |
172,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
|
|
|
$ |
5,197,240 |
|
|
$ |
909,188 |
|
Canada
|
|
|
|
|
|
|
567,626 |
|
|
|
176,097 |
|
Other foreign
countries
|
|
|
|
|
|
|
118,788 |
|
|
|
8,784 |
|
|
|
|
|
|
|
$ |
5,883,654 |
|
|
$ |
1,094,069 |
|
Long-lived assets
consist of property, buildings, equipment, capitalized software, goodwill and
other intangibles.
Revenues are
attributed to countries based on the ship-to 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, certain prepaid expenses and property, buildings and
equipment – net.
Unallocated assets
increased $353.4 million in the year ended December 31, 2008, when compared with
the prior year primarily driven by an increase in non-operating cash and cash
equivalents and an increase in deferred tax assets. In 2007, the Company used
cash to repurchase shares. In 2008, fewer shares were repurchased, and in
addition, a $500 million term loan was obtained, resulting in higher cash
balances.
The
change in the carrying amount of goodwill by segment from January 1, 2006 to
December 31, 2008, is as follows (in thousands of dollars):
|
|
Acklands – Grainger
Branch-based
|
|
|
Lab
Safety
|
|
|
Total
|
|
Balance at
January 1, 2006
|
|
$ |
120,779 |
|
|
$ |
61,947 |
|
|
$ |
182,726 |
|
Acquisitions
|
|
|
– |
|
|
|
28,276 |
|
|
|
28,276 |
|
Translation
|
|
|
(331 |
) |
|
|
– |
|
|
|
(331 |
) |
Balance at
December 31, 2006
|
|
|
120,448 |
|
|
|
90,223 |
|
|
|
210,671 |
|
Acquisition
|
|
|
– |
|
|
|
1,473 |
|
|
|
1,473 |
|
Translation
|
|
|
20,884 |
|
|
|
– |
|
|
|
20,884 |
|
Balance at
December 31, 2007
|
|
|
141,332 |
|
|
|
91,696 |
|
|
|
233,028 |
|
Acquisitions
|
|
|
4,381 |
|
|
|
2,372 |
|
|
|
6,753 |
|
Translation
|
|
|
(26,622 |
) |
|
|
– |
|
|
|
(26,622 |
) |
Balance at
December 31, 2008
|
|
$ |
119,091 |
|
|
$ |
94,068 |
|
|
$ |
213,159 |
|
NOTE
19 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A
summary of selected quarterly information for 2008 and 2007 is as follows (in thousands of dollars, except for per
share amounts):
|
|
2008 Quarter
Ended
|
|
|
|
March
31
|
|
|
June
30
|
|
|
September
30
|
|
|
December
31
|
|
|
Total
|
|
Net sales
|
|
$ |
1,661,046 |
|
|
$ |
1,756,856 |
|
|
$ |
1,839,475 |
|
|
$ |
1,592,655 |
|
|
$ |
6,850,032 |
|
Cost of merchandise sold
|
|
|
981,112 |
|
|
|
1,050,979 |
|
|
|
1,097,127 |
|
|
|
912,592 |
|
|
|
4,041,810 |
|
Gross profit
|
|
|
679,934 |
|
|
|
705,877 |
|
|
|
742,348 |
|
|
|
680,063 |
|
|
|
2,808,222 |
|
Warehousing, marketing and
administrative expenses
|
|
|
494,111 |
|
|
|
521,042 |
|
|
|
510,891 |
|
|
|
499,506 |
|
|
|
2,025,550 |
|
Operating earnings
|
|
|
185,823 |
|
|
|
184,835 |
|
|
|
231,457 |
|
|
|
180,557 |
|
|
|
782,672 |
|
Net earnings
|
|
|
114,238 |
|
|
|
113,179 |
|
|
|
140,023 |
|
|
|
107,915 |
|
|
|
475,355 |
|
Earnings per share - basic
|
|
|
1.47 |
|
|
|
1.48 |
|
|
|
1.84 |
|
|
|
1.42 |
|
|
|
6.21 |
|
Earnings per share - diluted
|
|
$ |
1.43 |
|
|
$ |
1.43 |
|
|
$ |
1.79 |
|
|
$ |
1.39 |
|
|
$ |
6.04 |
|
|
|
2007 Quarter
Ended
|
|
|
|
March
31
|
|
|
June
30
|
|
|
September
30
|
|
|
December
31
|
|
|
Total
|
|
Net sales
|
|
$ |
1,546,658 |
|
|
$ |
1,601,011 |
|
|
$ |
1,658,592 |
|
|
$ |
1,611,753 |
|
|
$ |
6,418,014 |
|
Cost of merchandise sold
|
|
|
914,570 |
|
|
|
960,546 |
|
|
|
999,003 |
|
|
|
940,272 |
|
|
|
3,814,391 |
|
Gross profit
|
|
|
632,088 |
|
|
|
640,465 |
|
|
|
659,589 |
|
|
|
671,481 |
|
|
|
2,603,623 |
|
Warehousing, marketing and
administrative expenses
|
|
|
469,503 |
|
|
|
473,890 |
|
|
|
485,257 |
|
|
|
504,320 |
|
|
|
1,932,970 |
|
Operating earnings
|
|
|
162,585 |
|
|
|
166,575 |
|
|
|
174,332 |
|
|
|
167,161 |
|
|
|
670,653 |
|
Net earnings
|
|
|
101,787 |
|
|
|
104,791 |
|
|
|
109,150 |
|
|
|
104,392 |
|
|
|
420,120 |
|
Earnings per share - basic
|
|
|
1.21 |
|
|
|
1.25 |
|
|
|
1.33 |
|
|
|
1.32 |
|
|
|
5.10 |
|
Earnings per share - diluted
|
|
$ |
1.17 |
|
|
$ |
1.21 |
|
|
$ |
1.29 |
|
|
$ |
1.28 |
|
|
$ |
4.94 |
|
NOTE
20 – UNCLASSIFIED – NET
The
components of Unclassified – net were as follows (in thousands of
dollars):
|
|
For the Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Foreign
currency gains – net
|
|
$ |
2,404 |
|
|
$ |
54 |
|
|
$ |
31 |
|
Income
items
|
|
|
242 |
|
|
|
350 |
|
|
|
328 |
|
Expense
items
|
|
|
(295 |
) |
|
|
(363 |
) |
|
|
(228 |
) |
Unclassified –
net
|
|
$ |
2,351 |
|
|
$ |
41 |
|
|
$ |
131 |
|
NOTE
21 – CONTINGENCIES AND LEGAL MATTERS
Grainger has been
named, along with numerous other nonaffiliated companies, as a defendant in
litigation in various states involving asbestos and/or silica. These lawsuits
typically assert claims of personal injury arising from alleged exposure to
asbestos and/or silica as a consequence of products purportedly distributed by
Grainger. As of February 3, 2009, Grainger is named in cases filed on behalf of
approximately 2,200 plaintiffs in which there is an allegation of exposure to
asbestos and/or silica. Grainger has denied, or intends to deny, the
allegations in all of the above-described lawsuits.
In
2008, lawsuits relating to asbestos and/or silica and involving approximately
660 plaintiffs were dismissed with respect to Grainger, typically based on the
lack of product identification. If a specific product distributed by Grainger is
identified in any of these lawsuits, Grainger would attempt to exercise
indemnification remedies against the product manufacturer. In addition, Grainger
believes that a substantial number of these claims are covered by
insurance. Grainger has entered agreements with its major insurance
carriers relating to the scope, coverage and costs of defense. While
Grainger is unable to predict the outcome of these lawsuits, it believes that
the ultimate resolution will not have, either individually or in the aggregate,
a material adverse effect on Grainger’s consolidated financial position or
results of operations.
Grainger is a party
to a contract with the United States General Services Administration (the “GSA”)
first entered into in 1999 and subsequently extended in 2004. The GSA
contract had been the subject of an audit performed by the GSA’s Office of the
Inspector General. In December 2007, the Company received a letter
from the Commercial Litigation Branch of the Civil Division of the Department of
Justice (the “DOJ”) regarding the GSA contract. The letter suggested that the
Company had not complied with its disclosure obligations and the contract’s
pricing provisions, and had potentially overcharged government customers under
the contract.
Discussions relating
to the Company’s compliance with its disclosure obligations and the contract’s
pricing provisions are ongoing. The timing and outcome of these
discussions are uncertain and could include settlement or civil litigation by
the DOJ to recover, among other amounts, treble damages and penalties under the
False Claims Act. While this matter is not expected to have a
material adverse effect on the Company’s financial position, an unfavorable
resolution could result in significant payments by the
Company. The Company continues to believe that it has complied with
the GSA contract in all material respects.
In addition to the
foregoing, from time to time Grainger is involved in various other legal and
administrative proceedings that are incidental to its business, including claims
relating to product liability, general negligence, environmental issues,
employment, intellectual property and other matters. As a government contractor,
Grainger is also subject to governmental or regulatory inquiries or audits or
other proceedings, including those related to pricing compliance. It is not
expected that the ultimate resolution of any of these matters will have, either
individually or in the aggregate, a material adverse effect on Grainger’s
consolidated financial position or results of operations.
NOTE
22 – SUBSEQUENT EVENTS
On
February 11, 2009, the Company announced the elimination of 300 to 400 jobs
across the Company’s work force as a result of lower sales volume and the
combination of its Lab Safety Supply and Grainger Industrial Supply businesses.
One-time cash severance charges of approximately $15 million to $20 million are
expected to be recognized between now and the end of the calendar year.
Severance payments will be paid out over varying periods.
63