-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8pIRR95ySZPucOaqKRF+tX9qrjP/PiLuYfyrJzbt5CcOFaOc5/c5jzzfvrY4bqX i4SWBKzRH5Me8sveV8tcDA== 0000277135-96-000004.txt : 19960326 0000277135-96-000004.hdr.sgml : 19960326 ACCESSION NUMBER: 0000277135-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAINGER W W INC CENTRAL INDEX KEY: 0000277135 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS [5000] IRS NUMBER: 361150280 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05684 FILM NUMBER: 96537857 BUSINESS ADDRESS: STREET 1: 455 KNIGHTSBRIDGE PARKWAY CITY: LINCOLNSHIRE STATE: IL ZIP: 60069-3620 BUSINESS PHONE: 7089829000 10-K 1 FORM 10-K FOR W.W. GRAINGER, INC. 61 PAGES COMPLETE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. Employer incorporation or organization) Identification No.) 455 Knightsbridge Parkway, Lincolnshire, Illinois 60069-3620 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 847/793-9030 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock $0.50 par value, and accompanying Preferred Stock Purchase Rights New York Stock Exchange Chicago Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by non-affiliates of the registrant was $2,835,465,170 as of the close of trading reported on the Consolidated Transaction Reporting System on March 4, 1996. APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock $0.50 par value 50,961,490 shares outstanding as of March 4, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 24, 1996 are incorporated by reference into Part III hereof. The Exhibit Index appears on pages 13 and 14 in the sequential numbering system. (The Securities and Exchange Commission has not approved or disapproved of this report nor has it passed on the accuracy or adequacy hereof.) (1) CONTENTS Page PART I Item 1: BUSINESS............................................. 3-6 THE COMPANY........................................ 3 GRAINGER........................................... 3-5 LAB SAFETY SUPPLY.................................. 5 PARTS COMPANY OF AMERICA........................... 5 INDUSTRY SEGMENTS.................................. 5 COMPETITION........................................ 5 EMPLOYEES.......................................... 6 Item 2: PROPERTIES........................................... 6 Item 3: LEGAL PROCEEDINGS.. ................................. 6 Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 7 Executive Officers Of The Company................................... 7-8 PART II Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................... 9 Item 6: SELECTED FINANCIAL DATA.............................. 9 Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS...................... 10-12 RESULTS OF OPERATIONS.............................. 10-11 FINANCIAL CONDITION................................ 11-12 INFLATION AND CHANGING PRICES. ................... 12 Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 12 Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 12 PART III Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT... 12 Item 11: EXECUTIVE COMPENSATION................................ 12 Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 12 Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 12 PART IV Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 13-14 Signatures.......................................................... 15 INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 16 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 17-36 (2) PART I ITEM 1: BUSINESS THE COMPANY The registrant, W.W. Grainger, Inc., was incorporated in the State of Illinois in 1928. It is a leader in the nationwide distribution of maintenance, repair, and operating supplies, and a provider of related information, serving the commercial, industrial, contractor, and institutional markets. W.W. Grainger, Inc. regards itself as a service business. As used herein, "Company" means W.W. Grainger, Inc. and/or its subsidiaries as the context may require. During 1995 the Company completed the integration of its Allied Safety (safety products) unit and continued the integration of its Bossert Industrial Supply (production consumable products) unit into the core branch-based business. The Company also completed the consolidation of its administrative support functions. With the completion of the integration of Bossert Industrial Supply, the Company will operate three business units: Grainger, the core branch-based business (a nationwide distributor of maintenance, repair, and operating (MRO) supplies, and a provider of related information), Lab Safety Supply (a direct marketer of safety equipment), and Parts Company of America (a distributor of spare and replacement parts). The Company utilizes a satellite communications network which substantially reduces its reliance on phone lines by linking branches and other facilities together via a network control center. This results in almost instantaneous transmittal of information, which expedites the completion of sales transactions and the initiation of stock replenishment. The Company does not engage in basic or substantive product research and development activity. New items are added regularly to its product line on the basis of market information as well as recommendations of its employees, customers, suppliers, and other factors. Before being added to the General Catalog, a new item must satisfy many evaluation tests and other rigid requirements. GRAINGER The Company's core branch-based business, Grainger, is a nationwide distributor of industrial and commercial equipment and supplies. It distributes motors, HVAC equipment, lighting, hand and power tools, pumps, electrical equipment, as well as many other items. Grainger now provides support functions and coordination and guidance to all business units in the areas of Accounting, Administrative Services, Aviation, Communications, Compensation and Benefits, Data Systems and Data Processing, Finance, Government Regulations, Human Resources, Industrial Relations, Insurance and Risk Management, Internal Audit, Legal, Planning, Real Estate and Construction Services, Security and Safety, Taxes, Employee Development, and Treasury Services. Grainger is an important resource for both product and procurement process information. Grainger provides technical information on products as well as information on historic usage of products to customers. Grainger also provides feedback to suppliers concerning their products. Grainger sells principally to contractors, service shops, industrial and commercial maintenance departments, manufacturers, hotels, and health care and educational facilities. Sales transactions during 1995 averaged $133 and were made to more than 1,300,000 customers. Sales to the largest single customer, General Motors Company, were 0.7% of sales. Grainger estimates that approximately 30% of 1995 sales consisted of items bearing the Company's registered trademarks, including "DAYTON(R)" (principally electric motors and ventilation equipment), "DEMCO(R)" (power transmission belts), "DEM-KOTE(R)" (spray paints), "SPEEDAIRE(R)" (air compressors), and "TEEL(R)" (liquid pumps) as well as other trademarks. The Company 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 other well recognized brands. (3) Grainger purchases from more than 1,900 product suppliers for its General Catalog, most of which are manufacturers, and numerous other suppliers in support of Grainger Integrated Supply Operations (GISO). The largest supplier in 1995, a diversified manufacturer through 23 of its divisions, accounted for 11.0% of purchases. No significant difficulty has been encountered with respect to sources of supply. Grainger offers its line of products at competitive prices through a nationwide network of branches (344 at December 31, 1995). An average branch has 15 employees and handles about 250 transactions per day. During 1995, Grainger completed the upgrade of the hardware that supports its branch computer systems. The new hardware has the capacity to accept enhancements to the Company's order processing capabilities. During 1995, an average of 89,600 sales transactions were completed daily. Each branch tailors its inventory to local customer preferences and actual product demand. In 1995, Grainger invested more than $53,000,000 in the continuation of its branch optimization program, which consists of new branches, relocated branches, and additions to branches. Grainger opened three additional Zone Distribution Centers (ZDCs) and now has six in operation. The ZDC logistics strategy provides a break-bulk function for faster branch stock replenishment. In addition, ZDCs handle shipped orders for their zone and also offer a logistical solution for integrated supply customers by coordinating complex orders and multiple receipts, and combining them into a single shipment. By reducing order and receipt complexity from the branch, greater scale within the distribution system is created. Large computer controlled stocks which are maintained at two Regional Distribution Centers (RDCs), located in Greenville County, South Carolina, and Kansas City, Missouri, and a National Distribution Center (NDC) in the Chicago area provide the branches and customers with protection against variable demand and delayed factory deliveries. During 1995, Grainger transformed the Chicago area RDC into a NDC. The NDC is a centralized storage and shipment facility for slower moving inventory items. During 1995, Grainger completed the integration of Allied Safety into the core branch-based business in order to enhance its position as a national full-line supplier of safety products. Similar integration efforts for Bossert Industrial Supply (production consumable products) are in process and are planned to be completed during 1996. In 1995 the Company continued to enhance the capabilities of GISO. As an integrated supplier, GISO provides access to over three million products and numerous services, thereby assisting its customers to reduce the number of MRO suppliers and streamline their procurement processes. GISO extends the product reach of the Grainger General Catalog by offering the full product lines of strategic suppliers. Grainger has agreements with "Best-in-Class" distributors, which provide depth in a particular product grouping. These distributors sell their products through GISO as the integrator, while continuing to provide technical assistance directly to the customer. In 1995, Grainger developed relationships which go beyond these supply agreements. "Alliance Partners" participate in the full integration of technical support, consolidated invoicing, and consolidated payment. These alliances between Grainger and their Alliance Partners marked a milestone in the development of the MRO supply marketplace. Integrated supply customers lower their MRO costs by reengineering internal business processes and adopting new materials management systems and practices. An important part of Grainger's solution is Grainger Consulting Services, which provides customers with expertise in process mapping, process reengineering, benchmarking, inventory management, supplier management, and systems analysis. During 1995, Grainger Consulting Services enhanced its capabilities, while working on numerous engagements with Fortune 500 companies. The Grainger National Accounts Program focuses on meeting the needs of large multi-site businesses by simplifying customers' MRO purchasing activities and providing consistent service and pricing to each customer location. Daily sales to National Account customers increased 22% on a comparable basis in 1995 over the prior year. National Account relationships have been established with about 400 of the nation's largest companies. Grainger employs sales representatives who call on existing and prospective customers. Sales representatives are paid a salary and commission. In addition, a sales force of market specialists and national account specialists has been developed to serve individualized markets and National Accounts. These specialists are paid a salary only. Grainger employed 1,488 sales representatives, market specialists, and national account specialists at December 31, 1995. (4) Grainger uses direct marketing for customers who are not called on by sales representatives. Grainger's capabilities provide these customers, who are usually small to medium-sized businesses, with a low cost solution for their MRO needs. An important selling tool is the General Catalog, which has been published continuously since 1927 and has grown to 3,588 pages listing over 67,000 items together with extensive technical and application data. For 1995, approximately 2,000,000 copies were published. The most current edition was issued in January 1996. The Grainger Electronic Catalog brings directly to the customer's place of business a fast, easy way to select and order products. It is a state-of-the-art system that uses PC-based software and CD-ROM technology. Through the Electronic Catalog, the customer can use a variety of ways to describe a needed product, and then review Grainger's offerings, complete with specifications, prices, and pictures. Other Electronic Catalog features include a cross-reference function that allows customers to retrieve product information using their own stock numbers. More than 50,000 copies of the Electronic Catalog are currently in use. The Electronic Catalog is also used at the branches as a training tool and a resource for identifying appropriate products for customers' applications. Grainger was one of the first MRO suppliers to establish a Web site on the internet. The Web site contains useful information about Grainger products and services. Customers can select products from Grainger's Web site catalog, "WebCat", a format that is similar to the Electronic Catalog. LAB SAFETY SUPPLY, INC. (LAB SAFETY) AND PARTS COMPANY OF AMERICA (PCA) Lab Safety is a leading national direct marketer of safety products, serving about 350,000 customers from its facilities in Janesville, Wisconsin. Lab Safety serves the safety products markets with such items as respiratory systems, protective clothing, and other equipment used in the workplace and in environmental clean-up operations. The current Lab Safety General Catalog, its primary selling tool, has over 1,100 pages, listing approximately 34,000 items. During 1995, an average of 4,000 sales transactions were completed daily. PCA continues to expand its distribution of spare and replacement parts. PCA distributes approximately 190,000 parts, takes orders 24 hours a day, 365 days per year, and ships stocked items within 24 hours of an order, most on the same business day. PCA gives value to customers by being a single source for many different spare and replacement parts and by offering valuable technical assistance. This provides the customer fast and easy access to name brand parts for most products found in the Grainger General Catalog, as well as for many other products. During 1995, an average of 2,300 sales transactions were completed daily. INDUSTRY SEGMENTS The Company has concluded that its business is within a single industry segment. For information as to the Company's consolidated revenue and operating earnings see Item 7, "Management's Discussion and Analysis of Financial Condition and the Results of Operations," and Item 8, "Financial Statements and Supplementary Data." The total assets of the Company for the last five years were: 1995, $1,669,243,000; 1994, $1,534,751,000; 1993, $1,376,664,000; 1992, $1,310,538,000; and 1991, $1,216,554,000. COMPETITION The Company faces competition in all the markets it serves, from manufacturers (including some of the Company's own suppliers) that sell directly to certain segments of the market, from wholesale distributors, and from certain retail enterprises. The principal means by which the Company competes with manufacturers and other distributors is by providing local stocks, efficient service, sales representatives, competitive prices, its several catalogs, which include product descriptions and in certain cases, extensive technical and application data, procurement process consulting services and other efforts to assist customers in lowering their total MRO costs. The Company believes that it can effectively compete on a price basis with its manufacturing competitors on small orders, but that such manufacturers may enjoy a cost advantage in filling large orders. The Company serves a number of diverse markets, and is able in some markets to reasonably estimate the Company's competitive position within that market. However, taken as a whole, the Company is unable to determine its market shares relative to others engaged in whole or in part in similar activities. (5) EMPLOYEES As of December 31, 1995, the Company had 11,853 employees, of whom 9,881 were full-time and 1,972 were part-time or temporary. The Company has never had a major work stoppage and believes that its employee relations are good. ITEM 2: PROPERTIES As of December 31, 1995, Grainger branch locations totaled 7,437,000 square feet, an increase of approximately 2.7% over 1994. Most branches are located in or near major metropolitan areas, many in industrial parks. Branches range in size from 5,800 to 58,000 square feet and average approximately 22,000 square feet. A typical owned branch is on one floor, is of masonry construction, consists primarily of warehouse space, contains an air conditioned office and sales area, and has off-the-street parking for customers and employees. The Company considers that its properties are generally in good condition and well maintained, and are suitable and adequate to carry on the Company's business. The significant facilities of the Company are briefly described below: Size in Location Facility and Use Square Feet - ------------- ---------------- ----------- Chicago Area (1) General Offices 513,000 Niles, IL (1) General Office & National Distribution Center 938,000 Kansas City, MO (1) Regional Distribution Center 1,435,000 Greenville County, SC (1) Regional Distribution Center 1,090,000 Nationwide (1) 6 Zone Distribution Centers 1,345,000 Nationwide (2) 344 Grainger branch locations 7,437,000 Nationwide (3) Other Facilities 1,605,000 ---------- Total square feet 14,363,000 ========== In addition, the Company plans to construct an office facility to house a large portion of the Company's Chicago-area office workforce on owned property in Lake County, Illinois. Construction of the facility is expected to be completed in 1999. - ------------------------------------------------------------------------------- (1) These facilities are either owned or leased with leases expiring between 1996 and 1999. The owned facilities are not subject to any mortgages. (2) Grainger branches consist of 271 owned and 73 leased properties. The owned facilities are not subject to any mortgages. (3) Other facilities represent leased and owned general offices, distribution centers, and branches. The owned facilities are not subject to any mortgages. ITEM 3: LEGAL PROCEEDINGS There are pending various legal and administrative proceedings involving the Company that are incidental to the business. It is not expected that the outcome of any such proceeding will have a material adverse effect upon the Company's consolidated financial position or its results of operations. (6) 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 1995. EXECUTIVE OFFICERS OF THE COMPANY Following is information about the Executive Officers of the Company. Executive Officers of the Company generally serve until the next annual election of officers, or until earlier resignation or removal. Positions and Offices Held and Principal Name and Age Occupations and Employment During the Past Five Years - ----------------------- ----------------------------------------------------- James M. Baisley (63) Senior Vice President (a position assumed in 1995 after serving as Vice President), General Counsel, and Secretary. Mr. Baisley assumed the position of Secretary in 1991. Donald E. Bielinski (46) Senior Vice President, Marketing and Sales, a position assumed in 1995 after serving as Senior Vice President, Organization and Planning. Mr. Bielinski has also served as Vice President and Chief Financial Officer. Wesley M. Clark (43) Vice President, Field Operations and Quality, a position assumed in 1995 after serving as President of the Sanitary Supply and Equipment businesses. Before joining the Company in 1992, Mr. Clark served as an executive with Granite Rock Company. Jere D. Fluno (54) Vice Chairman. Mr. Fluno is a member of the Office of the Chairman. Gary J. Goberville (49) Vice President, Human Resources. Before joining the Company in 1995, Mr. Goberville served as an executive with GenCorp, Inc. David W. Grainger (68) Chairman of the Board, and from 1992 to 1994, President. Mr. Grainger is a member of the Office of the Chairman. Richard H. Hantke (57) Vice President, Distribution Operations.Prior to assuming this position in 1995, Mr.Hantke served the Grainger Division in a similar capacity. Richard L. Keyser (53) President, a position assumed in 1994, and Chief Executive Officer, a position assumed in 1995. Other positions in which he served during the past five years were Chief Operating Officer of the Company, Executive Vice President of the Company, and President of the Grainger Division. Mr. Keyser is a member of the Office of the Chairman. (7) Michael R. Kight (47) Vice President and General Manager, Integrated Supply, positions assumed in 1995 after serving the Grainger Division as Vice President, National Accounts. Prior to assuming the last-mentioned position in 1992, Mr. Kight served as Director, National Accounts of the Grainger Division. P. Ogden Loux (53) Vice President, Finance, a position assumed in 1994 after serving the Grainger Division as Vice President, Business Support. Prior to assuming the last-mentioned position in 1992, Mr. Loux served as Vice President and Controller of the Grainger Division. Robert D. Pappano (53) Vice President, Financial Reporting and Investor Relations, a position assumed in 1995 after serving as Vice President and Treasurer. John J. Rozwat (57) Vice President and General Manager, Direct Sales, positions assumed in 1995 after serving the Grainger Division as Vice President, Sales. James T. Ryan (37) Vice President, Information Services, a position assumed in 1994 after serving as President, Parts Company of America. Prior to assuming the last-mentioned position in 1993, Mr. Ryan served as Director, Product Management of the Grainger Division. John A. Schweig (38) Vice President and General Manager, Direct Marketing, positions assumed in 1995 after serving the Grainger Division as Vice President, Marketing. John W. Slayton, Jr.(50) Senior Vice President, Product Management, a position assumed in 1995 after serving as Vice President, Product Management of the Grainger Division. (8) PART II ITEM 5: MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange and the Chicago Stock Exchange, with the ticker symbol GWW. The high and low sales prices for the common stock, and the dividends declared and paid for each calendar quarter during 1995 and 1994, are shown below. Prices Quarters High Low Dividends - ------------------------------------------------------------------------------- 1995 First $64 3/8 $55 3/4 $0.20 Second 63 7/8 56 1/8 0.23 Third 61 7/8 55 1/2 0.23 Fourth 67 5/8 58 3/8 0.23 - ------------------------------------------------------------------------------- Year $67 5/8 $55 1/2 $0.89 - ------------------------------------------------------------------------------- 1994 First $68 $56 1/2 $0.18 Second 69 1/8 58 7/8 0.20 Third 67 57 0.20 Fourth 59 3/8 51 1/2 0.20 - -------------------------------------------------------------------------------- Year $69 1/8 $51 1/2 $0.78 - ------------------------------------------------------------------------------- The approximate number of shareholders of record of the Company's common stock as of March 4, 1996 was 2,100. ITEM 6: SELECTED FINANCIAL DATA Years Ended December 31, (In thousands of dollars except for per share amounts) 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Net sales $3,276,910 $3,023,076 $2,628,398 $2,364,421 $2,077,235 Net earnings before cumulative effect of accounting changes 186,665 127,874 149,267 137,242 127,737 Cumulative effect of accounting changes -- -- (820) -- -- Net earnings 186,665 127,874 148,447 137,242 127,737 Net earnings per common and common equivalent share before cumulative effect of accounting changes 3.64 2.50 2.88 2.58 2.37 Cumulative effect of accounting changes -- -- (0.02) -- -- Net earnings per common and common equivalent share 3.64 2.50 2.86 2.58 2.37 Total assets 1,669,243 1,534,751 1,376,664 1,310,538 1,216,554 Long-term debt 8,713 1,023 6,214 6,936 11,327 Cash dividends paid per share $0.89 $0.78 $0.705 $0.65 $0.61 NOTE: 1994 and 1993 net earnings include restructuring charges of $49,779 ($0.97 on a per share basis) and $482 ($0.01 on a per share basis), respectively. (9) ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table, which is included as an aid to understanding changes in the Company's Consolidated Statements of Earnings, presents various items in the earnings statements expressed as a percentage of net sales for the years ended December 31, 1995, 1994, 1993, and 1992, and the percentage of increase (decrease) in such items in 1995, 1994, and 1993 from the prior year. Years Ended December 31, -------------------------------------------------------------- Items in Consolidated Statements Percent of Increase of Earnings as a Percentage of (Decrease) from Net Sales Prior Year ------------------------------- -------------------- 1995 1994 1993 1992 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- Net sales........ 100.0% 100.0% 100.0% 100.0% 8.4% 15.0% 11.2% Cost of merchandise sold 63.9 64.5 62.9 63.6 7.4 18.0 9.9 Operating expenses 26.5 27.9 27.6 26.7 3.0 16.3 14.5 Other deductions, net............. 0.1 0.1 0.1 0.1 48.9 30.5 76.3 Income taxes..... 3.8 3.3 3.8 3.8 24.4 0.1 12.0 Net earnings..... 5.7% 4.2% 5.6% 5.8% 46.0% (13.9)% 8.2% Note: Net earnings, excluding restructuring charges, as a percentage of net sales were 5.9% and 5.7% for 1994 and 1993, respectively. The percent of increase from the prior year for net earnings, excluding restructuring charges, was 5.1%, 19.3%, and 8.5% for 1995, 1994, and 1993, respectively. NET SALES The 1995 Company net sales increase of 8.4% was primarily volume related. This increase was affected by 1995 having one less sales day than 1994 (on a daily basis, net sales increased 8.8%). The volume increase can be explained primarily by the Company's market initiatives and the growth in the national economy. The Company's market initiatives included new product additions, the expansion of branch facilities, adding Zone Distribution Centers (ZDCs), and the National Accounts program. The core business' National Accounts program showed strong growth for the year. Daily sales to National Account customers increased about 22% on a comparable basis. The core business experienced selling price increases of about 1.5% when comparing 1995 with 1994. All geographic areas for the core business contributed to the sales growth, with the percent increases for regions east of the Mississippi being slightly higher than for regions in the west. The 1994 Company net sales increase of 15.0% was primarily volume related; the Grainger core branch-based business actually experienced selling price deflation of 0.6%. This increase was affected by 1994 having one more sales day than 1993 (on a daily basis, sales increased 14.6%). All geographic areas contributed to the sales growth, with the percent increases for regions east of the Mississippi being higher than for regions in the west. The volume increase primarily represented the continuing effects of Company market initiatives and the accelerated growth of the national economy. The Company's market initiatives included new product additions, pricing actions, the continuing effect of expanding branch and adding Zone Distribution facilities, and the continuing growth of the National Accounts Program. Daily sales to Grainger National Accounts increased 25% on a comparable basis over 1993 levels. NET EARNINGS Net earnings for 1995 increased 46.0% over 1994 including the effects of after tax restructuring charges recorded in 1994 (see 1994 Net earnings discussion below). Excluding the effect of these restructuring charges, net earnings increased 5.1% year over year. This increase was less than the sales increase primarily due to operating expenses increasing at a faster rate than net sales offset by slightly higher gross profit margins. Operating expenses increased faster than sales primarily due to the Company's continuing investment in the business infrastructure needed to support its market initiatives, increased employee benefits costs, and increased freight-out expenses. Increased freight-out expenses resulted from proportionally more shipments qualifying for prepaid freight and proportionally more orders being transferred within the Zone Distribution facilities/branch network. This partially resulted in orders being shipped longer distances. These incremental expenses, by policy, were not billed to customers. Partially offsetting these increases were lower bad debt expenses; payroll costs increasing somewhat slower than the rate of sales growth; (10) and decreased amortization of goodwill and other acquisition related costs associated with acquired and start-up businesses. The Company's gross profit margin increased by 0.06 percentage points when comparing the full years of 1995 and 1994, excluding the effects of a restructuring charge of $16,308,000 (0.54 percentage points of gross profit) associated with inventory write-downs taken during 1994. This slight increase was principally related to a favorable product mix as sales of non-seasonal products grew at a higher rate than the sales of seasonal products. The sales of seasonal products have historically had lower than average gross profit margins. Partially offsetting the favorable impacts was an unfavorable change in selling price category mix, which primarily resulted from the growth in sales to National Accounts. Net earnings for 1994 were $127,874,000, net of the after tax effect of a restructuring charge of $49,779,000. Excluding the effect of the restructuring charge of $49,779,000 and the 1993 restructuring charge of $482,000, net earnings increased 19.3% year over year. This increase was greater than the sales increase primarily due to operating expenses increasing at a slower rate than sales, partially offset by lower gross margins. The lower than sales increase for operating expenses was primarily the result of leveraging payroll and related benefit costs, lower amortization of goodwill and other acquisition related costs, and lower advertising expenses, partially offset by increased data processing expenses related to the ongoing significant upgrade of the Grainger branch computer systems. Excluding restructuring charges, operating expenses increased 9.0% on a year over year basis. The Company's 1994 gross margin was negatively affected by a restructuring charge of $16,308,000 associated with inventory write-downs. Excluding the effect of the restructuring charge, the Company's gross margins decreased by 1.1 percentage points in 1994 compared with 1993. The gross margin decrease primarily resulted from a change in the selling price category mix and the level of cost increases exceeding the level of selling price increases. The change in the selling price category mix was primarily the result of increased sales to Grainger National Accounts, and by a strategic repricing applicable to the contractor customer segment. FINANCIAL CONDITION Working capital was $618,524,000 at December 31, 1995 compared to $504,595,000 at December 31, 1994 and $442,525,000 at December 31, 1993. The ratio of current assets to current liabilities was 2.4, 2.1, and 2.2 at such dates. Net cash flows from operations of $126,285,000 in 1995, $191,382,000 in 1994, and $162,498,000 in 1993 have continued to improve the Company's financial position and serve as the primary source of funding for capital requirements. In each of the past three years, a portion of working capital has been used for additions to property, buildings, and equipment as summarized in the following table. 1995 1994 1993 ------ ------ ------ (In thousands of dollars) Land, buildings, structures, and improvements..$55,280 $73,342 $56,393 Furniture, fixtures, and other equipment....... 56,655 47,015 42,012 -------- -------- -------- Total........................................ $111,935 $120,357 $98,405 ======== ======== ======== The Company did not repurchase any shares of common stock during 1995 or 1994. The Company did repurchase 1,777,000 shares in 1993. Approximately 3,600,000 shares of common stock remain available for repurchase under the existing authorization. The Company may resume share repurchases at any time. Dividends paid to shareholders were $45,227,000 in 1995, $39,570,000 in 1994, and $36,272,000 in 1993. Internally generated funds have been the primary source of working capital and funds for expansion (including capital expenses relating to the facilities optimization program), supplemented by debt as circumstances dictated. In addition to continuing facilities optimization efforts and infrastructure development to support current initiatives, long-term cash requirements are anticipated for the consolidation of Chicago-area offices in the office facility to be constructed in Lake County, Illinois. The Company had no material financing commitments outstanding at December 31, 1995. (11) The Company continues to maintain a low debt ratio and strong liquidity position, which provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, the Company has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit and otherwise. Total debt as a percent of shareholders' equity was 5%, 4%, and 7%, at December 31, 1995, 1994, and 1993, respectively. INFLATION AND CHANGING PRICES Inflation during the last three years has not been a significant factor to operations. The 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 primary financial statements. The major impact of inflation is on buildings and improvements, where the gap between historic cost and replacement cost continues to be significant for these long lived assets. The related depreciation expense associated with these assets increases significantly when adjusting for the cumulative effect of inflation. The Company believes the most positive means to combat inflation and advance the interests of investors lies in continued application of basic business principles, which include improving productivity, increasing working capital turnover, and offering products and services which can command proper price levels in the marketplace. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are included on pages 17 to 36. See the Index to Financial Statements and Supplementary Data on page 16. ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III With respect to Items 10 through 13, the Company will file with the Securities and Exchange Commission, within 120 days of the close of its fiscal year, a definitive proxy statement pursuant to Regulation 14-A. ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company will be set forth in the Company's proxy statement relating to the annual meeting of shareholders to be held April 24, 1996, and, to the extent required, is incorporated herein by reference. Information regarding executive officers of the Company is set forth under the caption "Executive Officers." ITEM 11: EXECUTIVE COMPENSATION Information regarding executive compensation will be set forth in the Company's proxy statement relating to the annual meeting of shareholders to be held April 24, 1996, and, to the extent required, is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management will be set forth in the Company's proxy statement relating to the annual meeting of shareholders to be held April 24, 1996, and, to the extent required, is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions will be set forth in the Company's proxy statement relating to the annual meeting of shareholders to be held April 24, 1996, and, to the extent required, is incorporated herein by reference. (12) PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) 1. Financial Statements. See Index to Financial Statements and Supplementary Data. 2. Financial Statement Schedule. See Index to Financial Statements and Supplementary Data. 3. Exhibits: (3) (a) Restated Articles of Incorporation dated April 27, 1994, incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (b) By-laws as amended October 25, 1995, incorporated by reference to Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (10) Material Contracts: (a) No instruments which define the rights of holders of the Company's Industrial Development Revenue Bonds are filed herewith, pursuant to the exemption contained in Regulation S-K, Item 601(b)(4)(iii). The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any such instrument. (b) Shareholders rights agreement dated April 26, 1989, incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and a related Certificate of Adjustment, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. (c) Compensatory Plans or Arrangements (i) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive Plan, incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. (ii) W.W. Grainger, Inc. 1975 Non-Qualified Stock Option Plan as Amended and Restated March 3, 1988, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987. (13) Exhibit Index - ------------- 39-46 (iii) Executive Death Benefit Plan. (iv) Executive Deferred Compensation Plan dated December 30, 1983, incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. (v) 1985 Executive Deferred Compensation Plan dated December 31, 1984, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. (vi) Post-Service Benefits Plan for Non-Management Directors, incorporated by reference to Exhibit 10(e)(vi) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 47-51 (vii) Summary Description of Corporate Management Incentive Program Based on Improved Economic Earnings. 52-59 (viii)Supplemental Profit Sharing Plan. 60-61 (ix) Plan for Payment of Directors' Fees. 37 (11) Computations of Earnings Per Share. See Index to Financial Statements and Supplementary Data. (21) Subsidiaries of the Company. (23) Consent of Independent Certified Public Accountants. See Index to Financial Statements and Supplementary Data. 38 (27) Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of 1995. (14) SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: March 25, 1996 W.W. GRAINGER, INC. By:D. W. Grainger By:J. D. Fluno - ----------------- -------------- D. W. Grainger J. D. Fluno Chairman of the Board of Directors Vice Chairman (a Principal Executive Officer and a (a Principal Executive Officer, Director) a Principal Financial Officer and a Director) By:R. L. Keyser By:R. D. Pappano - --------------- ---------------- R. L. Keyser R. D. Pappano President and Chief Executive Officer Vice President, Financial Reporting (a Principal Executive Officer and and Investor Relations a Director) (Principal Accounting Officer) George R. Baker March 25, 1996 James D. Slavik March 25, 1996 - --------------- --------------- George R. Baker James D. Slavik Director Director Robert E. Elberson March 25, 1996 Harold B. Smith March 25, 1996 ------------------ --------------- Robert E. Elberson Harold B. Smith Director Director Wilbur H. Gantz March 25, 1996 Fred L. Turner March 25, 1996 --------------- -------------- Wilbur H. Gantz Fred L. Turner Director Director John W. McCarter, Jr. March 25, 1996 Janiece S. Webb March 25, 1996 - --------------------- --------------- John W. McCarter, Jr. Janiece S. Webb Director Director (15) INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA December 31, 1995, 1994, and 1993 Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..................... 17 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ASSETS.................................................. 18 LIABILITIES AND SHAREHOLDERS' EQUITY.................... 19 CONSOLIDATED STATEMENTS OF EARNINGS............................ 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY................ 21 CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... 22-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... 24-33 SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS.......................... 34 EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE........................ 35 EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....... 36 (16) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of W.W. Grainger, Inc. We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc. and Subsidiaries as of December 31, 1995, 1994, and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the years then ended. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of W.W. Grainger, Inc. and Subsidiaries as of December 31, 1995, 1994, and 1993, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. We have also audited Schedule II of W. W. Grainger, Inc. and Subsidiaries for the years ended December 31, 1995, 1994, and 1993. In our opinion, this Schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Chicago, Illinois February 2, 1996 (17) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) December 31, ------------------------------ ASSETS 1995 1994 1993 ---- ---- ---- CURRENT ASSETS Cash and cash equivalents .............. $ 11,460 $ 15,292 $ 2,572 Accounts receivable, less allowances for doubtful accounts of $14,229 for 1995, $15,333 for 1994, and $13,573 for 1993 369,576 345,793 299,856 Inventories ............................ 602,639 519,966 466,214 Prepaid expenses ....................... 11,746 14,233 10,832 Deferred income tax benefits ........... 67,239 68,362 44,408 ------ ------ ------ Total current assets ............. 1,062,660 963,646 823,882 PROPERTY, BUILDINGS, AND EQUIPMENT Land ................................... 123,431 115,497 100,903 Buildings, structures, and improvements 472,154 431,184 381,716 Machinery and equipment ................ 11,940 11,705 11,567 Furniture, fixtures, and other equipment 290,175 251,831 222,569 ------- ------- ------- 897,700 810,217 716,755 Less accumulated depreciation and amortization ..................... 379,349 341,075 307,372 ------- ------- ------- Property, buildings, and equipment--net ................... 518,351 469,142 409,383 OTHER ASSETS ............................. 88,232 101,963 143,399 ------ ------- ------- TOTAL ASSETS ............................. $1,669,243 $1,534,751 $1,376,664 ========== ========== ========== (18) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS--CONTINUED (In thousands of dollars) December 31, ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 1993 ---- ---- ---- CURRENT LIABILITIES Short-term debt ............................ $23,577 $11,134 $34,298 Current maturities of long-term debt ....... 23,241 26,449 21,662 Trade accounts payable ..................... 204,925 226,459 178,114 Accrued contributions to employees' profit sharing plans ..................... 53,618 50,020 44,587 Accrued expenses ........................... 115,310 122,339 83,923 Income taxes ............................... 23,465 22,650 18,773 ------ ------ ------ Total current liabilities ............ 444,136 459,051 381,357 LONG-TERM DEBT (less current maturities) ..... 8,713 1,023 6,214 DEFERRED INCOME TAXES ........................ 8,539 15,177 23,017 ACCRUED EMPLOYMENT RELATED BENEFITS COSTS .... 28,746 26,695 24,171 SHAREHOLDERS' EQUITY Cumulative Preferred Stock--1995, 1994, and 1993, $5 par value--authorized, 6,000,000 shares, issued and outstanding, none...................................... -- -- -- Common Stock--$0.50 par value--authorized, 150,000,000 shares, 1995, 1994, and 1993; issued and outstanding, 50,894,629 shares, 1995, 50,749,681 shares, 1994, and 50,684,983 shares, 1993 .................. 25,447 25,375 25,342 Additional contributed capital ............. 86,548 81,796 79,364 Unearned restricted stock compensation ..... (19) (61) (192) Retained earnings .......................... 1,067,133 925,695 837,391 --------- ------- ------- Total shareholders' equity ........... 1,179,109 1,032,805 941,905 --------- --------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................$1,669,243 $1,534,751 $1,376,664 ========== ========== ========== The accompanying notes are an integral part of these financial statements. (19) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars except for per share amounts) Years Ended December 31, ---------------------------- 1995 1994 1993 ---- ---- ---- Net sales ................................. $3,276,910 $3,023,076 $2,628,398 Cost of merchandise sold .................. 2,095,552 1,951,321 1,653,534 --------- --------- --------- Gross profit ....................... 1,181,358 1,071,755 974,864 Warehousing, marketing, and administrative expenses ................. 865,067 787,137 721,904 Restructuring charges ..................... -- 53,082 800 ------- ------ --- Total operating expenses ........... 865,067 840,219 722,704 ------- ------- ------- Operating earnings ................. 316,291 231,536 252,160 Other income or (deductions) Interest income ......................... 162 17 480 Interest expense ........................ (4,260) (1,870) (1,727) Unclassified--net ....................... (44) (928) (884) --- ---- ---- (4,142) (2,781) (2,131) ------ ------ ------ Earnings before income taxes ....... 312,149 228,755 250,029 Income taxes .............................. 125,484 100,881 100,762 ------- ------- ------- Net earnings before cumulative effect of accounting changes ..... 186,665 127,874 149,267 Cumulative effect of accounting changes ... -- -- (820) ------- ------- ---- Net earnings ....................... $186,665 $127,874 $148,447 ======== ======== ======== Net earnings per common and common equivalent share before cumulative effect of accounting changes ............ $3.64 $2.50 $2.88 Cumulative effect of accounting changes ... -- -- (0.02) ----- ----- ------ Net earnings per common and common equivalent share ........................ $3.64 $2.50 $2.86 ===== ===== ===== Average number of common and common equivalent shares outstanding .... 51,241,217 51,226,476 51,910,906 ========== ========== ========== The accompanying notes are an integral part of these financial statements. (20) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands of dollars except for per share amounts) Unearned Additional Restricted Common Contributed Stock Retained Stock Capital Compensation Earnings ----- ------- ------------ -------- Balance at January 1, 1993............. $26,188 $79,050 $(299) $826,270 Exercise of stock options.............. 41 2,821 -- -- Purchase of 1,776,700 shares of Common Stock......................... (888) (2,712) -- (101,054) Issuance of 2,700 shares of restricted Common Stock.............. 1 154 (155) -- Amortization of unearned restricted stock compensation........ -- 51 262 -- Net earnings........................... -- -- -- 148,447 Cash dividends paid ($0.705 per share). -- -- -- (36,272) ------ ------- ----- ------- Balance at December 31, 1993........... 25,342 79,364 (192) 837,391 Exercise of stock options.............. 33 2,420 -- -- Cancellation of 700 shares of restricted Common Stock.............. -- (35) 35 -- Amortization of unearned restricted stock compensation................... -- 47 96 -- Net earnings........................... -- -- -- 127,874 Cash dividends paid ($0.78 per share).. -- -- -- (39,570) ------ ------- ----- ------- Balance at December 31, 1994........... 25,375 81,796 (61) 925,695 Exercise of stock options.............. 72 4,746 -- -- Amortization of unearned restricted stock compensation................... -- 6 42 -- Net earnings........................... -- -- -- 186,665 Cash dividends paid ($0.89 per share).. -- -- -- (45,227) ------ ------- ----- ------- Balance at December 31, 1995........... $25,447 $86,548 $(19) $1,067,133 ======= ======= ==== ========== The accompanying notes are an integral part of these financial statements. (21) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) Years Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net earnings ....................................$186,665 $127,874 $148,447 Provision for losses on accounts receivable ..... 7,780 9,928 8,147 Depreciation and amortization: Property, buildings, and equipment ............ 57,760 49,795 40,576 Intangibles and goodwill ...................... 13,090 14,534 15,395 Restructuring charges--non-cash ................. -- 68,363 75 Change in operating assets and liabilities, net of effect of restructuring charges: (Increase) in accounts receivable ............. (31,563) (56,268) (42,593) (Increase) in inventories ..................... (82,673) (70,060) (33,981) Decrease (increase) in prepaid expenses ....... 2,487 (3,401) 1,024 (Decrease) increase in trade accounts payable . (21,534) 48,345 26,216 (Decrease) increase in other current liabilities................................... (3,431) 25,393 (554) Increase in current income taxes payable ...... 815 3,878 9,132 Increase in accrued employment related benefits cost................................. 2,051 2,524 8,268 (Decrease) in deferred income taxes ........... (5,515) (31,794) (22,441) Other--net ...................................... 353 2,271 4,787 --- ----- ----- Net cash provided by operating activities ......... 126,285 191,382 162,498 Cash flows from investing activities: Additions to property, buildings, and equipment .....................................(111,935) (120,357) (98,405) Proceeds from sale of property, buildings, and equipment ................................. 4,918 2,573 533 Other--net ...................................... 378 (240) 866 ------- -------- ------- Net cash (used in) investing activities ...........(106,639) (118,024) (97,006) (22) W.W. Grainger, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED (In thousands of dollars) Years Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Cash flows from financing activities: Net increase (decrease) in short-term debt... $12,443 $(23,164) $34,298 Proceeds from long-term debt................. 5,665 775 1,400 Long-term debt payments...................... (1,183) (1,179) (5,414) Stock options exercised...................... 2,147 1,155 1,178 Tax benefit of stock incentive plan.......... 2,677 1,345 1,735 Purchase of Common Stock..................... -- -- (104,654) Cash dividends paid.......................... (45,227) (39,570) (36,272) ------- ------- ------- Net cash (used in) financing activities........ (23,478) (60,638) (107,729) ------- ------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......................... (3,832) 12,720 (42,237) Cash and cash equivalents at beginning of year. 15,292 2,572 44,809 ------ ----- ------ Cash and cash equivalents at end of year....... $11,460 $15,292 $2,572 ======= ======= ====== The accompanying notes are an integral part of these financial statements. (23) W.W. Grainger, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994, and 1993 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INDUSTRY INFORMATION The Company is a leader in the nationwide distribution of maintenance, repair, and operating supplies, and a provider of related information, serving the commercial, industrial, contractor, and institutional markets. The Company operates within a single industry segment. 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. MANAGEMENT ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and estimates of revenues and expenses during the reporting periods. Actual results could differ from those estimates. ACCOUNTING CHANGES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (see Note 14) and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (see Note 9). In the fourth quarter of 1993, retroactive to January 1, 1993, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits" (see Note 9). INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) 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 used in determining depreciation are as follows: Buildings, structures, and improvements............. 10 to 45 years Machinery and equipment................. ........... 5 to 10 years Furniture, fixtures, and other equipment............ 3 to 10 years Improvements to leased property are being 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 $2,136,000, $1,929,000, and $1,258,000 in 1995, 1994, and 1993, respectively. PURCHASED TAX BENEFITS The Company purchased tax benefits through leases as provided by the Economic Recovery Tax Act of 1981. Realized tax benefits, net of repayments, are included in Deferred Income Taxes. INCOME TAXES The Company uses the maximum allowable accelerated depreciation methods. Deferred income taxes are provided to recognize the temporary differences between financial and tax reporting. (24) PURCHASE OF COMPANY COMMON STOCK Through December 31, 1993, the Company was required by its state of incorporation to retire any Common Stock it purchased. The excess of cost over par value was charged proportionately to Additional contributed capital and Retained earnings. Effective January 1, 1994, the Company is no longer required by its state of incorporation to retire Common Stock purchases. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share are computed based upon the weighted average number of shares outstanding during each year which includes outstanding options for Common Stock, when dilutive. NOTE 2--RESTRUCTURING CHARGES In December 1993, the Company announced its decision to integrate its sanitary supply business with the core business. Based on the results of that program, the Company announced in July 1994 its intention to similarly integrate its Allied Safety (safety products) and Bossert Industrial Supply (production consumable products) units. In conjunction with the integration of these business units, the Company also began the process of consolidating its financial, information services, and human resource functions. In the fourth quarter of 1994, the Company recorded a $67,097,000 pretax charge ($48,398,000 or 94 cents per share on an after tax basis) to recognize the expected costs associated with the above efforts. Total restructuring charges for 1994 and 1993 were: Years Ended December 31, ------------------------ 1994 1993 ---- ---- (In thousands of dollars except per share amounts) Inventory writedowns--charged to cost of merchandise sold... $16,308 $-- ------- ---- Operating expenses: Revaluation of goodwill and other intangibles............. 24,249 -- Non-inventory asset write-downs........................... 9,350 -- Severance and related benefits............................ 10,917 -- Lease payments and other facility expenses................ 7,862 152 Other..................................................... 704 648 ------ --- Charged to operating expenses............................. 53,082 800 ------ ---- Total....................................................... $69,390 $800 ======= ==== Total, net of tax........................................... $49,779 $482 ======= ==== Effect on earnings per common and common equivalent share... $0.97 $0.01 ===== ===== For 1995, amounts charged against expense accruals included in the 1994 restructuring charges were not material. NOTE 3--CASH FLOWS The Company considers investments in highly liquid debt instruments, purchased with an original maturity of ninety days or less, to be cash equivalents. For cash equivalents the carrying amount approximates fair value due to the short maturity of those instruments. Cash paid during the year for: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Interest (net of amount capitalized)....... $4,167 $1,836 $1,837 ====== ====== ====== Income taxes............................... $127,041 $127,039 $106,085 ======== ======== ======== (25) NOTE 4--CASH Checks outstanding of $40,027,000, $37,088,000, and $16,521,000 are included in Trade accounts payable at December 31, 1995, 1994, and 1993, respectively. NOTE 5--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. Consequently, in management's opinion, no significant concentration of credit risk exists for the Company. NOTE 6--INVENTORIES Inventories primarily consist of merchandise purchased for resale. Inventories would have been $194,854,000, $184,364,000, and $179,450,000 higher than reported at December 31, 1995, 1994, and 1993, respectively, if the first-in, first-out (FIFO) method of inventory accounting had been used. NOTE 7--OTHER ASSETS Included in other assets are intangibles such as customer lists and goodwill. Customer lists are amortized on a straight-line basis over periods of five to sixteen years. Goodwill represents the cost in excess of net assets of acquired companies and is amortized on a straight-line basis over forty years. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the present value of projected future cash flows is less than their carrying value. Effective January 1, 1996, impairments will be recognized in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," if applicable. Other assets at December 31, 1995, 1994, and 1993 were: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Customer lists.................... $93,857 $93,857 $102,015 Goodwill.......................... 25,635 25,635 46,283 Other intangibles................. 3,475 3,875 6,472 ----- ----- ----- 122,967 123,367 154,770 Less accumulated amortization..... 50,356 37,266 29,528 ------ ------ ------ 72,611 86,101 125,242 Sundry............................ 15,621 15,862 18,157 ------ ------ ------ Total............................. $88,232 $101,963 $143,399 ======= ======== ======== Other assets decreased in 1994 primarily due to the revaluation of goodwill and other intangibles that occurred in conjunction with the restructuring charges as described in Note 2. (26) NOTE 8--SHORT-TERM DEBT During 1995, 1994, and 1993, the Company borrowed funds to finance working capital needs. The following summarizes information concerning short-term debt: 1995 1994 1993 ---- ---- ---- Bank Notes (In thousands of dollars) - ---------- Outstanding at December 31........................ $3,186 $3,739 $22,316 Maximum month-end balance during the year......... $64,853 $27,170 $27,725 Average amount outstanding during the year........ $22,576 $9,973 $8,493 Weighted average interest rates during the year... 6.2% 4.6% 3.4% Weighted average interest rates at December 31.... 6.2% 8.0% 3.5% Commercial Paper - ---------------- Outstanding at December 31........................ $20,391 $7,395 $11,982 Maximum month-end balance during the year......... $79,734 $49,985 $28,581 Average amount outstanding during the year........ $43,357 $23,143 $7,935 Weighted average interest rates during the year... 6.0% 4.4% 3.2% Weighted average interest rates at December 31.... 5.8% 6.3% 3.3% The Company had available lines of credit of $54,500,000 at December 31, 1995, $54,000,000 at December 31, 1994, and $28,500,000 at December 31, 1993. Of the total available at December 31, 1995, $50,000,000 was in place to support commercial paper, and carried commitment fees of 1/8%. There were no borrowings under these credit lines. The remaining $4,500,000 credit line at December 31, 1995 was used to support working capital needs. This line carried a commitment fee of 1/8% and an additional fee of 1/8% on the unused portion. NOTE 9--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 based upon a formula related primarily to earnings before federal income taxes, limited to 15% of the total compensation paid to all eligible employees. The Company also sponsors additional profit sharing and defined contribution plans which cover most other employees. Provisions under all plans were $47,323,000, $46,117,000, and $42,056,000 for the years ended December 31, 1995, 1994, and 1993, respectively. POSTRETIREMENT BENEFITS. The Company has a health care benefits plan covering most of its retired employees and their dependents. A majority of the Company's employees become eligible for these benefits when they qualify for retirement while working for the Company. The amount charged to operating expense for Postretirement benefits was $3,488,000, $3,153,000, and $2,600,000 for the years ended December 31, 1995, 1994, and 1993, respectively. Components of the expense were: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Service cost........................ $1,973 $1,887 $1,566 Interest cost....................... 2,025 1,695 1,553 Actual return on assets............. (2,282) (17) (472) Amortization of transition asset (22 year amortization)............ (143) (143) (143) Deferred asset gain (loss).......... 1,913 (339) 96 Unrecognized (gain) loss............ (80) 29 -- Prior service cost.................. 82 41 -- ------ ------ ----- $3,488 $3,153 $2,600 ====== ====== ====== (27) Participation in the plan is voluntary at retirement and requires participants to make contributions, as determined by the Company, toward the cost of the plan. The accounting for the health plan anticipates future cost-sharing changes to retiree contributions that will maintain the current cost-sharing ratio between the Company and the retirees. A Group Benefit Trust has been established as the vehicle to process benefit payments. The assets of the trust are invested in a Standard & Poors 500 index fund. The assumed weighted average long-term rate of return is 6.1%, which is net of a 40.5% tax rate. 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, as amended, and was $2,409,000, $737,000, and $211,000 for the years ended December 31, 1995, 1994, and 1993, respectively. A reconciliation of funded status as of December 31, 1995, 1994, and 1993 is as follows: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Accumulated Postretirement Benefit Obligation (APBO): Retirees and their dependents.................. $(3,852) $(3,715) $(4,044) Fully eligible active plan participants........ (1,767) (1,331) (879) Other active plan participants................. (27,863) (17,299) (17,165) ------- ------- ------- Total APBO....................................... (33,482) (22,345) (22,088) Plan assets at fair value........................ 10,288 6,199 5,993 ------- ------- ------ Funded status.................................... (23,194) (16,146) (16,095) Unrecognized transition asset.................... (2,713) (2,856) (2,999) Unrecognized net loss (gain)..................... 2,464 (3,443) 823 Unrecognized prior service cost.................. 1,677 1,758 -- ------- ------- ------ Accrued postretirement benefits cost.............$(21,766) $(20,687) $(18,271) ======== ======== ======== In determining the APBO as of December 31, 1995, the assumed weighted average discount rate used was 7.5%. To determine the APBO as of December 31, 1994, the assumed weighted average discount rate was 8.5%. To determine the APBO as of December 31, 1993, the assumed weighted average discount rate was 7.3%. The assumed health care cost trend rate for 1996 through 1998 was 10.0%. Beginning in 1999, the assumed health care cost trend rate declines on a straight-line basis until 2008, when the ultimate trend rate of 5.6% will be achieved. If the assumed health care cost trend rate was increased by one percentage point for each year, the APBO as of December 31, 1995 would increase by $7,283,000. The aggregate of the service cost and interest cost components of the 1995 net periodic postretirement benefits expense would increase by $996,000. POSTEMPLOYMENT BENEFITS. In the fourth quarter of 1993, retroactive to January 1, 1993, the Company adopted SFAS No. 112, "Employer's Accounting for Postemployment Benefits." This statement requires the accrual of certain benefits provided to former or inactive employees, after employment but before retirement, if attributable to an employee's service already rendered. The Company's postemployment benefits accrued under SFAS No. 112 included long-term disability health care benefits, short-term disability salary continuation benefits, and COBRA benefits in excess of participant contributions. The cumulative effect at January 1, 1993 of adopting SFAS No. 112 reduced Net earnings by $4,033,000 or eight cents per share. The effect of this change on 1993 Net earnings before the cumulative effect of accounting changes was not material. (28) NOTE 10--LONG-TERM DEBT Long-term debt consisted of the following at December 31: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Industrial development revenue bonds.... $26,150 $26,150 $26,225 Other................................... 5,804 1,322 1,651 ----- ----- ----- 31,954 27,472 27,876 Less current maturities................. 23,241 26,449 21,662 ------ ------ ------ $8,713 $1,023 $6,214 ====== ====== ====== The industrial development revenue bonds include various issues that bear interest at a variable rate up to 15%, or variable rates up to 78.2% of the prime rate, and come due in various amounts from 2001 through 2011. 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, $12,045,000 of these bonds had an unsecured liquidity facility available at December 31, 1995 for which the Company compensated a bank through a commitment fee of .07%. There were no borrowings related to this facility at December 31, 1995. The Company classified $21,255,000, $26,150,000, and $21,255,000 of bonds currently subject to redemption options in current maturities of long-term debt at December 31, 1995, 1994, and 1993, respectively. The aggregate amounts of long-term debt maturing in each of the five years subsequent to December 31, 1995 are as follows: Amounts Amounts Payable Under Subject to Terms of Redemption Agreements Options ------------ ---------- (In thousands of dollars) 1996................................ $1,986 $21,255 1997................................ 2,096 -- 1998................................ 1,190 -- 1999................................ 204 -- 2000................................ 228 4,895 (29) NOTE 11--LEASES The Company leases various land, buildings, and equipment. The Company capitalizes all significant leases which qualify as capital leases. At December 31, 1995, the approximate future minimum aggregate payments for all leases were as follows: Operating Leases ---------------- Real Personal Capital Property Property Total Leases -------- -------- ----- ------ (In thousands of dollars) 1996...............................$14,480 $3,320 $17,800 $240 1997............................... 11,549 3,308 14,857 240 1998............................... 8,719 1,358 10,077 240 1999............................... 7,377 6 7,383 240 2000............................... 2,592 -- 2,592 240 2001-2034.......................... 5,656 -- 5,656 97 ----- ----- ----- -- Total minimum payments required.... 50,373 7,992 58,365 1,297 Less amounts representing sublease income............................. 1,997 -- 1,997 ----- ----- ----- $48,376 $7,992 $56,368 ======= ====== ======= Less imputed interest.............. 332 --- Present value of minimum lease payments (included in long-term debt) .............. $965 ==== Total rent expense, including both items under lease and items rented on a month-to-month basis, was $20,084,000, $20,935,000, and $22,264,000 for 1995, 1994, and 1993, respectively. NOTE 12--STOCK INCENTIVE PLAN The Company's Long-Term Stock Incentive Plan ("The Plan") allows the Company to grant a variety of incentive awards to key employees of the Company. These awards involve the use of a maximum of 4,028,414 shares of common stock, in connection with awards of non-qualified stock options, stock appreciation rights, restricted stock, phantom stock rights, and other stock-based awards. The Plan authorizes the granting of restricted stock which is held by the Company until certain terms and conditions as specified by the Company are satisfied. 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. Compensation expense related to restricted stock awards is based upon market price at date of grant and is charged to earnings on a straight-line basis over the period of restriction. The Plan authorizes the granting of options to purchase shares at a price of not less than 85% of the closing market price on the last trading day preceding the date of grant. The options expire within ten years after the date of grant. The Plan also permits the granting of stock appreciation rights, either alone or in tandem with options already granted and to be granted in the future. Stock appreciation rights permit the holder to receive stock, cash, or a combination thereof, equal to the amount by which the fair market value on the date of exercise exceeds the option price. Exercise of a stock option or a stock appreciation right automatically cancels any respective tandem stock appreciation right or stock option. Shares covered by terminated, surrendered or canceled options or stock appreciation rights that are unexercised, by forfeited restricted stock, or by the forfeiture of other awards that do not result in shares being issued, are again available for awards under the Plan. (30) There were no shares of restricted stock issued in 1995 or 1994. There were 2,650 shares of restricted stock issued in 1993. In 1995, 1,050 shares of restricted stock were released. In 1994 and 1993, 4,615 shares of restricted stock were released each year. There were 650 shares canceled in 1994. There was no activity relating to stock appreciation rights in 1995, 1994, or 1993, and at December 31, 1995, there were no stock appreciation rights outstanding. Transactions involving stock options are summarized as follows: Option Price Option Shares Per Share Exercisable ------------- --------- ----------- Outstanding at January 1, 1993...... 1,359,074 $12.84-$51.50 1,152,514 ========= Granted.......................... 193,510 $58.75 Exercised........................ (132,914) $12.84-$41.06 Canceled or expired.............. (4,400) $43.00-$58.75 ------- Outstanding at December 31, 1993.... 1,415,270 $13.31-$58.75 1,019,600 ========= Granted.......................... 202,360 $61.50 Exercised........................ (90,196) $13.31-$51.50 Canceled or expired.............. (13,230) $22.75-$61.50 -------- Outstanding at December 31, 1994.... 1,514,204 $15.31-$61.50 1,124,164 ========= Granted.......................... 221,620 $58.88-$62.13 Exercised........................ (207,402) $15.31-$51.50 Canceled or expired.............. (14,480) $58.75-$62.13 -------- Outstanding at December 31, 1995.... 1,513,942 $22.75-$62.13 916,762 ========= ========= Options available for grant were 2,964,869, 3,172,009, and 3,361,139 at December 31, 1995, 1994, and 1993, respectively. All options were issued at market price on the date of grant. In October, 1995, the Financial Accounting Standards Board issued SFAS No.123, "Accounting for Stock-Based Compensation." The effective date of this statement is for fiscal years beginning after December 15, 1995. The statement will require the Company either to adopt SFAS No. 123 and recognize an expense for stock compensation in the financial statements or continue accounting under Accounting Principles Board Opinion (APBO) No. 25, "Accounting for Stock Issued to Employees" with additional pro forma footnote disclosure regarding the impact on Net earnings and Net earnings per share had the Company adopted SFAS No. 123. It is the Company's intent to continue to account for stock compensation under APBO No. 25 with additional footnote disclosure regarding the impact on Net earnings and Net earnings per share had the Company adopted SFAS No. 123. The Company will provide the additional footnote disclosure in 1996. NOTE 13--ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS The Company has adopted 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 two-hundredth of a share of Series A Junior Participating Preferred Stock (intended to be the economic equivalent of one share of the Company's Common Stock) at a price of $125, subject to adjustment. The Rights become exercisable only after a person or a group, other than a person or group exempt under the plan, acquires or announces a tender offer for 20% or more of the Company's Common Stock. If a person or group, other than a person or group exempt under the plan, acquires 20% 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. (31) The Rights expire on May 15, 1999 unless earlier redeemed. They generally are redeemable at $.01 per Right until thirty days following announcement that a person or group, other than a person or group exempt under the plan, has acquired 20% or more of the Company's Common Stock. They are also automatically redeemable, at the redemption price, upon consummation of certain transactions approved by shareholders in accordance with procedures provided in the plan. 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 14--INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of this accounting change increased net earnings by $3,213,000 or six cents per share in 1993. The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. Previously the Company deferred the tax effects of timing differences between financial reporting income and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial bases and the tax bases of assets and liabilities. Income tax expense consisted of the following: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Current: Federal............................... $106,690 $108,053 $95,558 State................................. 24,309 24,622 21,766 ------ ------ ------ Total current ...................... 130,999 132,675 117,324 Deferred tax benefits................... (5,515) (31,794) (11,795) Net effect of the Omnibus Budget Reconciliation Act of 1993 ........... -- -- (4,767) -------- -------- ------- Total provision ........................ $125,484 $100,881 100,762 ======== ======== ======= The deferred tax benefits represent the net effect of the changes in the amounts of temporary differences. The income tax effects of temporary differences that gave rise to the net deferred tax asset as of December 31, 1995, 1994, and 1993 were: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Current deferred tax assets: Inventory valuations.......................... $26,896 $25,001 $21,263 Administrative and general expenses deducted on a paid basis for tax purposes... 25,004 25,117 21,651 Restructuring costs........................... 13,957 17,288 -- Other......................................... 1,382 956 1,494 ----- --- ----- Total net current deferred tax asset........ 67,239 68,362 44,408 ------ ------ ------ Noncurrent deferred tax (liabilities) assets: Purchased tax benefits........................ (32,781) (35,432) (37,515) Temporary differences related to property, building, and equipment..................... (1,013) (2,424) (3,368) Intangible amortization....................... 13,208 11,479 7,247 Employment related benefits expense........... 11,441 10,625 9,620 Other......................................... 606 575 999 --- --- --- Total net noncurrent deferred tax liability. (8,539) (15,177) (23,017) ------ ------- ------- Net deferred tax asset.......................... $58,700 $53,185 $21,391 ======= ======= ======= (32) The purchased tax benefits represent lease agreements acquired in prior years under the provisions of the Economic Recovery Act of 1981. A reconciliation of income tax expense with federal income taxes at the statutory rate follows: 1995 1994 1993 ---- ---- ---- (In thousands of dollars) Federal income taxes at the statutory rate.. $109,252 $80,064 $87,510 State income taxes, net of federal income tax benefits............................... 15,141 11,145 12,077 Effect of nondeductible restructuring costs. -- 8,189 -- Other-net................................... 1,091 1,483 1,175 ----- ----- ----- Income tax expense........................ $125,484 $100,881 $100,762 ======== ======== ======== Effective tax rate........................ 40.2% 44.1% 40.3% ==== ==== ==== NOTE 15--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly information for 1995 and 1994 is as follows: 1995 Quarter Ended --------------------------------------------------------- (In thousands of dollars except for per share amounts) March 31 June 30 September 30 December 31 Total -------- ------- ------------ ----------- ----- Net sales ......... $806,827 $813,518 $849,963 $806,602 $3,276,910 Gross profit ...... 291,705 286,421 301,012 302,220 1,181,358 Net earnings ...... $ 46,869 $ 39,484 $ 49,135 $ 51,177 $ 186,665 Net earnings per common and common equivalent share.. $ 0.92 $ 0.77 $ 0.96 $ 0.99 $ 3.64 ======== ======== ======== ======== ========== 1994 Quarter Ended ------------------ (In thousands of dollars except for per share amounts) March 31 June 30 September 30 December 31 Total -------- ------- ------------ ----------- ----- Net sales ......... $706,369 $768,554 $779,300 $768,853 $3,023,076 Gross profit ...... 255,626 268,792 273,536 273,801 1,071,755 Net earnings ...... $ 41,538 $ 42,324 $ 43,045 $ 967 $ 127,874 Net earnings per common and common equivalent share.. $ 0.81 $ 0.83 $ 0.84 $ 0.02 $ 2.50 ======== ======== ======== ======== ========== In 1994, the Company recorded pretax restructuring charges of $69,390,000. Selected quarterly information excluding these charges is as follows: 1994 Quarter Ended ------------------ (In thousands of dollars except for per share amounts) March 31 June 30 September 30 December 31 Total -------- ------- ------------ ----------- ----- Net earnings...............$41,741 $43,033 $43,514 $49,365 $177,653 ======= ======= ======= ======== ======= Net earnings per common and common equivalent share....$0.81 $0.85 $0.85 $0.96 $3.47 ===== ===== ===== ===== ===== (33) W.W. Grainger, Inc. and Subsidiaries SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions(a) of period - ----------- --------- -------- ------------- --------- (In thousands of dollars) Allowance for doubtful accounts 1995 ........................ $15,333 $7,780 $8,884 $14,229 1994 ........................ 13,573 10,331 8,571 15,333 1993 ........................ 13,810 8,147 8,384 13,573 (a) Accounts charged off as uncollectible, less recoveries. (34) W.W. Grainger, Inc. and Subsidiaries EXHIBIT 11 COMPUTATIONS OF EARNINGS PER SHARE 1995 1994 1993 ---- ---- ---- Average number of common shares outstanding during the year 50,818,162 50,732,625 51,410,228 Common equivalents (a) Shares issuable under outstanding options......................... 1,297,551 1,380,529 1,304,037 Shares which could have been purchased based on the average market value for the period ....... 883,851 891,933 809,773 ------- ------- ------- 413,700 488,596 494,264 Dilutive effect of exercised options prior to being exercised ..... 9,355 5,255 6,414 ----- ----- ----- Shares for the portion of the period that the options were outstanding ................... 423,055 493,851 500,678 ------- ------- ------- Average number of common and common equivalent shares outstanding during the year ............. 51,241,217 51,226,476 51,910,906 ========== ========== ========== Net earnings before cumulative effect of accounting changes ........$186,665,000 $127,874,000 $149,267,000 Cumulative effect of accounting changes .......... -- -- (820,000) ----------- ------------ ------------ Net earnings .........................$186,665,000 $127,874,000 $148,447,000 ============ ============ ============ Earnings per share before accounting changes........ $3.64 $2.50 $2.88 Cumulative effect of accounting changes per share. -- -- (0.02) ------ ------ ------ Earnings per share....................... $3.64 $2.50 $2.86 ===== ===== ===== (a) Does not include options which are not dilutive. Effect under fully diluted computation is the same. (35) EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation of our report on page 17 of this Form 10-K by reference in the prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 2-67983, 2-54995 and 33-43902) and on Form S-4 (No. 33-32091) of W.W. Grainger, Inc. GRANT THORNTON LLP Chicago, Illinois March 25, 1996 (36) EX-21 2 SUBSIDIARIES Exhibit 21 to the Annual Report on Form 10-K of W.W. Grainger, Inc. for the year ended December 31, 1995 W.W. GRAINGER, INC. Subsidiaries as of March 1, 1996 Bossert Industrial Supply, Inc. (Illinois) Dayton Electric Manufacturing Co. (Illinois) Grainger Caribe, Inc. (Illinois) Grainger FSC, Inc. (U.S. Virgin Islands) Grainger International, Inc. (Illinois) - WWG de Mexico, S.A. de C.V. (Mexico) - Grainger, S.A. de C.V. (Mexico) - WWG Servicios, S.A. de C.V. (Mexico) - Grainger Canada Inc. (Canada) Lab Safety Supply, Inc. (Wisconsin) WWG International, Inc. (Illinois) (37) EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 12-mos DEC-31-1995 DEC-31-1995 11,460 0 383,805 14,229 602,639 1,062,660 897,700 379,349 1,669,243 444,136 26,206 0 0 25,447 1,153,662 1,669,243 3,276,910 3,276,910 2,095,552 2,095,552 857,169 7,780 4,260 312,149 125,484 186,665 0 0 0 186,665 3.64 3.64
EX-10 4 EXECUTIVE DEATH BENEFIT PLAN Exhibit 10 (c) (iii) to the Annual Report on Form 10-K of W.W. Grainger, Inc. for the year ended December 31, 1995 W.W. GRAINGER, INC. EXECUTIVE DEATH BENEFIT PLAN ARTICLE I PURPOSE 1.1 Purpose. The purpose of this W.W. GRAINGER, INC. EXECUTIVE DEATH BENEFIT PLAN (the "Plan") is to improve and maintain relations with a select group of management employees (the "key employees"), to induce them to remain employed by W.W. Grainger, Inc., and to provide an incentive to them to not enter into competitive employment or engage in a competitive business by providing supplemental survivor security benefits. All benefits hereunder shall be paid solely from the general assets of the Company, and the right of any Participant or Beneficiary to receive payments under this Plan shall be as an unsecured general creditor of the Company. 1.2 Construction. In construing the terms of the Plan, the primary consideration shall be the Plan's stated purpose, i.e., to provide certain disability and survivors' benefits and to supplement certain benefits from the Company's Group Insurance Plans. ARTICLE II DEFINITIONS AND DESIGNATIONS 2.1 "Annual Compensation" shall mean the sum of: (a) the annual salary of the Participant determined by the Board of Directors of the Company in effect on the Date Creating an Entitlement, and (b) the Participant's target bonus under the Company's Management Incentive Program for the calendar year in which the Date Creating an Entitlement occurs. 2.2 "Average Monthly Earnings" shall mean Annual Compensation divided by twelve (12). (39) 2.3 "Committee" shall mean the Compensation Committee of Management described in Article VII hereof. 2.4 "Company" shall mean W.W. Grainger, Inc., an Illinois corporation, and its divisions and subsidiaries. 2.5 "Date Creating an Entitlement" shall mean the Participant's date of death for benefits described in Section 4.1 or date of Termination of Service for benefits described in Section 4.3. 2.6 "Disability" means a condition that totally and continuously prevents the Participant, for at least six (6) consecutive months, from engaging in an "occupation" for Compensation or profit. During the first twenty-four (24) months of total disability, "occupation" means the Participant's occupation at the time the disability began. After that period, "occupation" means any occupation for which the Participant is or becomes reasonably fitted by education, training or experience. Notwithstanding the foregoing, a disability shall not exist for purposes of this Plan if the Participant fails to qualify for disability benefits under the Social Security Act, unless the Committee determines, in its sole discretion, that a disability exists. 2.7 "Early Retirement Date" shall mean the earliest of the date on which the Participant: (a) attains age sixty (60), (b) attains age fifty-five (55) or older after completing ten (10) Years of Service, (c) completes twenty-five (25) Years of Service, or (d) incurs a Disability. 2.8 "Forfeiting Act" shall mean the Participant's fraud, dishonesty, willful destruction of Company property, revealing Company trade secrets, acts of competition against the Company or acts in aid of a competitor of the Company. 2.9 "Group Life Insurance Plan" shall mean the Company's Group Term Life and Accidental Death and Dismemberment Insurance Plan, as amended from time to time. 2.10 "Normal Retirement Date" shall mean the date on which the Participant attains age sixty-five (65). 2.11 "Participant" shall mean a person designated as such under Article III of the Plan. 2.12 "Plan" shall mean the W.W. Grainger, Inc. Executive Death Benefit Plan. (40) 2.13 "Termination of Service" shall mean the Participant's ceasing his Service with the Company for any reason whatsoever, whether voluntarily or involuntarily, including by reason of death or disability. 2.14 "Years of Service" shall mean a year that a Participant hereunder is "Eligible" under the W.W. Grainger, Inc. Employees Profit Sharing Plan. ARTICLE III PARTICIPATION 3.1 Eligibility to Participate. An Employee of the Company shall become eligible to be a Participant in the Plan by designation of the Committee. The Committee shall make such designation, specifying the effective date of the Participant's eligibility. The Committee shall notify each Participant of his eligibility date. Each designated Employee shall furnish such information and perform such acts as the Committee may require prior to becoming a Participant. 3.2 Re-Employment. Any Participant who terminates employment shall not be eligible to participate in the Plan on re-employment unless the Committee so determines. In such event, the Committee shall specify the effective date of the Participant's renewed eligibility. The Committee shall notify each re-employed former Participant of his eligibility, of the effective date and of the conditions of participation. ARTICLE IV DEATH BENEFITS 4.1 Death During Employment. If a Participant's death occurs while he is in the employ of the Company, his Beneficiary shall receive a monthly payment in an amount equal to: (a) fifty percent (50%) of the Participant's Average Monthly Earnings in effect on his date of death, which payments shall commence on the first day of the month following the Participant's death and end as of the date on which the 120th monthly payment is made; or (b) for a Participant who was a Participant on the effective date of the First Amendment of the Plan [May 8, 1995], and notwithstanding anything to the contrary in Section 8.2: (i) fifty percent (50%) of the Participant's Average Monthly Earnings in effect on his date of death, determined without regard to Section 2.1(b), (41) (ii) which payment shall commence on the first day of the month following the Participant's death and end as of the later of the date the Participant would have attained age 65 or the date on which the 120th monthly payment is made,if the benefit so calculated would have a greater present value on the date of the Participant's death than the benefit calculated under paragraph (a) next above. The Committee shall use reasonable and consistent assumptions to determine present values. 4.2 Additional Death Benefit. The Company will maintain death benefit coverage for each Participant in the amount of fifty thousand dollars ($50,000) under the Company's Group Life Insurance Plan. Payment of such benefit shall be made in accordance with the provisions of the Group Life Insurance Plan. 4.3 Death After Retirement. If a Participant incurs Termination of Service on or after an Early Retirement Date, or on or after his Normal Retirement Date, and dies after such Termination of Service, the Company will pay to his Beneficiary a lump sum death benefit equal to one hundred percent (100%) of his Annual Compensation as defined under the Plan on the Date Creating an Entitlement. Such death benefit amount shall be increased to reflect estimated federal income tax payable on such death benefit, based on the then maximum tax rate, determined in accordance with rules established from time to time by the Committee, provided that in no event shall the death benefit exceed two hundred percent (200%) of Annual Compensation. 4.4 Death After Termination of Employment. Except as provided in Section 4.3, no benefits shall be payable to or on behalf of a Participant whose death occurs subsequent to his Termination of Employment. ARTICLE V BENEFICIARIES 5.1 Designation by Participant. Each Participant may designate a Beneficiary or Beneficiaries who shall, upon his death, receive the death benefits, if any, payable pursuant to Sections 4.1 and 4.3. The Participant's Beneficiary under this Plan shall be the Beneficiary designated by the Participant in the Special Beneficiary Designation filed under the Company's Group Life Insurance Plan unless the Participant files a written notice of a different Beneficiary Designation in such form as the Committee requires. The form may include contingent Beneficiaries. A Beneficiary Designation shall be effective when filed with the Committee during the Participant's life and shall cancel and revoke all prior designations. 5.2 Payment of Benefits Upon Death - Other Beneficiary. If no primary or contingent Beneficiary survives a Participant or if no Beneficiary Designation is in effect upon his death, then the payments shall be made to the deceased Participant's spouse. If his spouse does not survive him, then payments shall be made to the Participant's descendants who survive him by right of (42) representation; or if no descendants of the Participant survive him, then to his estate. In the event any person entitled to receive benefits in accordance with this Section dies prior to his receipt of all of the benefits to which he is entitled, the balance of such benefits, if any, shall be payable to the next class of recipients. 5.3 Minors and Persons Under Legal Disability. Benefits payable to a minor or a person under a legal disability shall be paid in a manner determined appropriate by the Committee. ARTICLE VI CLAIMS PROCEDURE 6.1 Claim for Benefits. Any claim for benefits under the Plan shall be made in writing to any member of the Committee. If such claim for benefits is wholly or partially denied by the Committee Members, the Committee Members shall, within a reasonable period of time, but not later than sixty (60) days after receipt of the claim, notify the claimant of the denial of the claim. Such notice of denial shall be in writing and shall contain: (a) the specific reason or reasons for denial of the claim, (b) a reference to the relevant Plan provisions upon which the denial is based, (c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary, and (d) an explanation of the Plan's claim review procedure. 6.2 Request for Review of a Denial of a Claim for Benefits. Upon the receipt by the claimant of written notice of denial of the claim, the claimant may within ninety (90) days file a written request to the full Committee, requesting a review of the denial of the claim, which review shall include a hearing if deemed necessary by the Committee. In connection with the claimant's appeal of the denial of his claim, he may review relevant documents and may submit issues and comments in writing. 6.3 Decision Upon Review of Denial of Claim for Benefits. The Committee shall render a decision on the claim review promptly, but no more than sixty (60) days after the receipt of the claimant's request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case the sixty (60)-day period shall be extended to one hundred twenty (120) days. Such decision shall: (a) include specific reasons for the decision. (43) (b) be written in a manner calculated to be understood by the claimant, and (c) contain specific references to the relevant Plan provisions upon which the decision is based. ARTICLE VII COMMITTEE 7.1 General Rights, Powers and Duties of the Committee. The Compensation Committee of Management shall be the Named Fiduciary and Committee responsible for the management, operation and administration of the Plan. In addition to any powers, rights and duties set forth elsewhere in the Plan, it shall have the following powers and duties: (a) to adopt such rules and regulations consistent with the provisions of the Plan as it deems necessary for the proper and efficient administration of the Plan; (b) to enforce the Plan in accordance with its terms and any rules and regulations it establishes; (c) to maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law; (d) to construe and interpret the Plan and to resolve all questions arising under the Plan; (e) to direct the Company to pay benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan; (f) to employ or retain agents, attorneys, actuaries, accountants or other persons, who may also be employed by or represent the Company; and (g) to be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable federal or state law. 7.2 Information to be Furnished to Committee. The Company shall furnish the Committee such data and information as it may require. The records of the Company shall be determinative of each Participant's period of employment, termination of employment and the reason therefor, leave of absence, re-employment, Years of Service, personal data, and Compensation or bonus reductions. Participants and their Beneficiaries shall furnish to the (44) Committee such evidence, data or information, and execute such documents as the Committee requests. 7.3 Responsibility. No member of the Committee or of the Board of Directors of the Company shall be liable to any person for any action taken or omitted in connection with the administration of this Plan unless attributable to his own fraud or willful misconduct; nor shall the Company be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director, officer or employee of the Company. ARTICLE VIII AMENDMENT AND TERMINATION 8.1 Amendment. The Plan may be amended in whole or in part by the Company at any time by a resolution of the Board of Directors delivered to the Committee. 8.2 Right to Terminate Plan. The Company reserves the right to reduce or terminate benefits under the Plan with regard to any or all Participants at any time by a resolution of its Board of Directors delivered to the Committee; provided however, that a Beneficiary receiving benefits payable by the Plan shall continue to receive such benefits, and further provided, that the Company may not terminate its obligation to pay the death benefit to the Beneficiary of a Participant who: (a) already has incurred a Termination of Service after his Early or Normal Retirement Date, or (b) is still an active Employee but has attained an Early Retirement Date. The amount of the benefit payable in the event clause (b) above is applicable shall be determined as if the date of the reduction in benefits or termination of the Plan is a Date Creating an Entitlement. The Committee shall notify any Participant affected by such reduction or termination of such action and its effective date within thirty (30) days after it receives notice from the Company. ARTICLE IX MISCELLANEOUS 9.1 No Funding nor Guarantee. This Plan is unfunded. Nothing contained in the Plan shall be deemed to create a trust or fiduciary relationship of any kind. The rights of Participants and of any Beneficiary shall be no greater than the rights of unsecured general creditors of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company will be sufficient to pay any benefit to any person. 9.2 Inalienability of Benefits. The right of any Participant or Beneficiary to any benefit or payment under the Plan shall not be subject to voluntary or involuntary transfer, alienation, (45) pledge, assignment, garnishment, sequestration or other legal or equitable process. Any attempt to transfer, alienate, pledge, assign or otherwise dispose of such right or any attempt to subject such right to attachment, execution, garnishment, sequestration or other legal or equitable process shall be null and void. 9.3 No Implied Rights. Neither the establishment of the Plan nor any modification thereof shall be construed as giving any Participant, Beneficiary or other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by affirmative action of the Company in accordance with the terms and provisions of the Plan. 9.4 Forfeiture for Cause. Notwithstanding any other provisions of this Plan to the contrary, if the Participant commits one or more Forfeiting Acts during his employment with the Company, all benefits due the Participant or his Beneficiary shall be forfeited. This provision shall apply regardless of the date the Company first learns of the occurrence of a Forfeiting Act. 9.5 Binding Effect. The provisions of the Plan shall be binding on the Company, the Committee and all persons entitled to benefits under the Plan, together with their respective heirs, legal representatives and successors in interest. 9.6 Governing Laws. The Plan shall be construed and administered according to the laws of the State of Illinois. 9.7 Number and Gender. Wherever appropriate, the singular shall include the plural, the plural shall include the singular, and the masculine shall include the feminine or neuter. (46) EX-10 5 MANAGEMENT INCENTIVE PROGRAM Exhibit 10 (c)(vii) to the Annual Report on Form 10-K of W.W.Grainger, Inc. for the year ended December 31, 1995 SUMMARY DESCRIPTION OF THE 1995 MANAGEMENT INCENTIVE PROGRAM (MIP) BASED ON IMPROVED ECONOMIC EARNINGS INTRODUCTION The Company Management Incentive Program (MIP) was initiated January 1, 1993 with the first payout in March 1994. For eligible participants, this program replaced former participation in both the discontinued Team Achievement Bonus (TAB) and the Long-Term Incentive Program (LTIP). BACKGROUND The Company has adopted Economic Earnings (EE) as a key financial measurement. EE incorporates the attributes of growth, asset management, and earnings to evaluate financial performance. Conceptually, long-term improvements in EE should correspond to long-term improvements in shareholder value. The MIP is designed to encourage decision making that results in improvement in EE and to compensate executives appropriately for positive or negative performance resulting from business decisions. By linking EE to incentive compensation, the MIP should influence managers to make business decisions consistent with long-term shareholders' interests. ELIGIBILITY FOR PARTICIPATION Members of the Office of the Chairman (OOC) and all employees in Salary Grades 13-18 (officers and non-officer key managers) who are on the payroll on 1/1/96 are eligible to participate in this program, subject to the eligibility provisions below. These employees are most responsible for decisions affecting EE and/or major policy direction. Note: Target bonus for the president of Lab Safety Supply (LSS) is based 75% on the EE of LSS, 25% on Company-wide EE; target bonus for the president of Parts Company of America (PCA) is based 50% on Company-wide EE and 50% on the EE of PCA. Other eligible MIP participants at either LSS or PCA are on programs unique to those business units. (47) ADMINISTRATION OF PROGRAM The administration of the MIP is the responsibility of the Compensation Committee of Management (CCOM), subject to the review and approval of the Compensation Committee of the Board (CCOB). The CCOM shall have the sole and complete authority to interpret this Program, determine all questions relating to it, and to modify its provisions. All determinations, interpretations, or other actions, made or taken by the CCOM, in connection with it, shall be final and conclusive for all purposes and upon all persons. The following eligibility provisions shall apply to change of employment status: 1. Death - Any account balance vests immediately and, along with a pro-rata award for the current year, is paid as a lump sum on the next regular incentive payment date. 2. Retirement or Long Term Disability - A pro-rata award for the current year will be added to any participant account balance, and the employee will receive the account balance in a lump sum on the next regular incentive payment date. Retirement is defined the same as under the W.W. Grainger, Inc. or Lab Safety Supply, Inc. Profit Sharing Plan. 3. Involuntary Termination - For Misconduct or Performance Related Reasons - In these instances, a participant's account balance will be forfeited and no award will be granted for the current or prior year. "For Misconduct" means: The participant has engaged, or intends to engage, in competition with the Company, has induced any customer of the Company to breach any contract with the Company, has made any unauthorized disclosure of any of the secrets or confidential information of the Company, has committed an act of embezzlement, fraud, or theft with respect to the property of the Company, or has deliberately disregarded the rules of the Company in such a manner as to cause any loss, damage, or injury to, or otherwise endanger the property, reputation, or employees of the Company. 4. Voluntary Resignation - If a participant leaves after July 1, but before the end of a calendar year, the employee will be deemed to have earned that year's payment and will receive that year's payout on the next regular incentive payment date. The salary to be used in calculations will be the actual amount paid in the year rather than an annualized amount. Any remaining account balance will be forfeited except in the case of terminations resulting from the business support and business unit integration program announced May 2, 1994, applicable to terminations in the period July 1, 1994 to June 30, 1995 or as otherwise determined by management. (48) 5. Job Elimination or Downgrade - If a participant's job is eliminated or downgraded and the employee's new job is at a non-participating level, a pro-rata award for the current year will be made on the next regular incentive payment date. The employee also will receive any account balance on that date. In the event the participant does not continue employment, the provisions applicable to Voluntary Resignation apply. 6. Transfer to Other Business Units - A person who transfers to another Company business unit and no longer participates in the MIP will receive a pro-rata award for the period of time the person was in a participating position on the next regular incentive payment date, and also will receive any account balance on that date. 7. First Year Participation for Continuing Employees - Individuals who are hired into a position eligible for participation in the MIP and who are participants for 6 months or more, but less than a year, will receive a pro-rata award. Individuals who are promoted or transferred into an eligible position from another position eligible for incentive pay under another economic earnings based incentive program will receive an award prorated accordingly. 8. Promotions within MIP - Individuals who are promoted during the year from one MIP eligible position to another, shall have their target bonuses prorated accordingly. 9. Employees rated 1 or 2 are not eligible for participation. Exceptions to the above provisions can only be approved by the CCOM. OVERVIEW The MIP consists of 2 components - quantitative and qualitative. The quantitative component is built around target bonuses, which are established for each of Grades 13 through 18 and the Office of the Chairman. The target bonuses are stated as a percentage of annualized base salary as of December 31, 1995. (49) The target bonus for all participants is based solely on Company EE. The target bonus is adjusted upward or downward based on the relationship between Actual Company EE and Target Company EE for each year. The qualitative component consists of a discretionary bonus. The discretionary bonus, if any, begins as a pool, and can be plus or minus up to 10% of the base salaries of the bonus group. Once the amount of the pool is determined, it is allocated pro rata across the group according to the quantitative component earned by each participant. Target Company EE is based on a weighted average of the 3 prior years' Actual Company EE before MIP/TIP accrual plus a 10% improvement factor. The Target Company EE formula is: Target Company EE = [(50% x EE-1) + (30% x EE-2) + (20% x EE-3)] x 110% Where: EE-1 equals EE in prior year (year one) EE-2 equals EE in year prior to year one EE-3 equals EE in year prior to year two The bonus calculation includes a mechanism to identify significant strategic investments and adjust for their impact. The forecast short-term negative impact from such investments would be excluded from Target EE with corresponding increases in subsequent years' targets. The next step involves comparison of Actual to Target in order to calculate the bonus earned. Two factors are employed: the Bonus Interval and the Bonus Multiple. The Bonus Interval is the variance from Target required to double the bonus earned or result in no bonus earned. The Bonus Multiple can be expressed as: EE Bonus Multiple = [(Actual EE - Target EE) / Bonus Interval] + 1.00 The bonus earned is computed as: Bonus Earned = (Target EE Bonus $ x EE Bonus Multiple) The bonus earned constitutes the quantitative component of the MIP. The total bonus earned is equal to this quantitative component plus or minus any discretionary adjustment as recommended by the CCOM and approved by the CCOB. The total bonus earned for each year will be added to a MIP account for each participant. MIP accounts are not funded with actual cash amounts; they represent a paper record of unpaid earned bonuses for an individual. The beginning account balance, if any, will be adjusted annually by the Merit Program budget percentage for eligible employees. (50) Former LTIP participants had an opening MIP account balance. It was equal to LTIP amounts theoretically earned for 1991 and 1992 which had not been paid to eligible participants. Employees new to the MIP, either through promotion or as new hires, will have no beginning account balance. For 1995 and later years, the bonus paid will be equal to the target bonus times an average of that year's and the prior 2 years' bonus multiples, plus or minus any discretionary adjustment. The only condition imposed on these calculations is that payment of the bonus may not result in a negative ending account balance. The MIP does not consider the performance rating of an individual when determining bonuses earned other than to exclude individuals with a performance rating of 1 or 2. These individuals would earn no bonuses for the year. OTHER o 100% of incentive dollars paid out will be included in "admissible compensation" under the Profit Sharing Trust Plan. o Life insurance -- Payouts under the MIP will not have any effect on the level of life insurance or disability. Coverages will remain as at present under those programs as "compensation" is defined as base salary and commissions. o Notwithstanding anything herein to the contrary, payment of all or part of awards under the MIP that are subject to or otherwise result in disallowance as deductions for employee remuneration under Section 162(m) of the Internal Revenue Code of 1986, as amended, shall be deferred as and to the extent provided by the Board of Directors or the CCOB. THE COMPANY RESERVES THE RIGHT TO MODIFY, AMEND, OR TERMINATE THE PROGRAM. (51) EX-10 6 SUPPLEMENTAL PROFIT SHARING PLAN Exhibit 10(c)(viii) to the Annual Report on Form 10-K of W.W. Grainger, Inc. for the year ended December 31, 1995 W.W. Grainger, Inc. SUPPLEMENTAL PROFIT SHARING PLAN Article Page - ------- ---- 1 PURPOSE AND EFFECTIVE DATE....................53 2 DEFINITIONS...................................53 3 ADMINISTRATION................................54 4 ELIGIBILITY...................................55 5 BENEFITS AND ACCOUNTS.........................56 6 VESTING.......................................58 7 AMENDMENT AND TERMINATION.....................58 8 MISCELLANEOUS.................................58 (52) W.W. Grainger, Inc. SUPPLEMENTAL PROFIT SHARING PLAN ARTICLE ONE. PURPOSE AND EFFECTIVE DATE 1.1 Purpose of Plan. The purpose of this W.W. Grainger, Inc. Supplemental Profit Sharing Plan is to provide key executives with profit sharing and retirement benefits commensurate with their current compensation unaffected by limitations imposed by the Internal Revenue Code on qualified retirement plans. The Plan is intended to constitute an excess benefit plan, as defined in Section 3(36) of ERISA, and a "top hat" plan, as defined in Section 201(2) of ERISA. 1.2 Effective Date. This Plan was originally established effective as of January 1, 1983. It was subsequently amended and restated by action of the Board of Directors on April 29, 1992. The effective date of the Plan as amended and restated herein is January 1, 1992. ARTICLE TWO. DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below and, when intended, such terms shall be capitalized. (a) "Retirement" shall have the same meaning as defined in Section 1.36 of the Profit Sharing Plan. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (c) "Committee" shall mean the Profit Sharing Trust Committee. (53) (d) "Company" shall mean W.W. Grainger, Inc., a corporation organized under the laws of the State of Illinois, and subsidiaries thereof. (e) "Disability" shall have the same meaning as defined in Section 1.14 of the Profit Sharing Plan. (f) "Employee" shall mean any person who is employed by the Company. (g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. (h) "Participant" shall mean any Employee selected by the Committee to participate in this Plan pursuant to Article Four. (I) "Plan" shall mean this W.W. Granger, Inc. Supplemental Profit Sharing Plan. (j) "Profit Sharing Plan" shall mean the W.W. Grainger, Inc. Employees Profit Sharing Plan as amended from time to time. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine term used in this plan also shall include the feminine; the plural shall include the singular and the singular shall include the plural. ARTICLE THREE. ADMINISTRATION 3.1 Administration by Committee. The Plan shall be administered by the Committee, which is appointed by the Board of Directors of the Company to administer this Plan and the Profit Sharing Plan. (54) 3.2 Authority of Committee. The Committee shall have the authority to interpret the Plan, to establish and revise rules and regulations relating to the Plan, to designate Participants, and to make all determinations that it deems necessary or advisable for the administration of the Plan. ARTICLE FOUR. ELIGIBILITY 4.1 Participants. The Committee shall select the Employee or Employees who shall participate in this Plan, subject to the limitations set forth in Section 4.2. Once an Employee is designated a Participant, he shall remain a Participant for the purposes specified in Section 5.1 and/or Section 5.2 until the earlier of his death, retirement, disability, or termination of employment. 4.2 Limitations on Eligibility. The Committee may select as Participants in this Plan only those Employees who are "Eligible Employees" in the Profit Sharing Plan (as defined therein) and whose share of contribution are forfeitures under the Profit Sharing Plan are limited by: (a) Section 415 of the Code; or (b) Any other provision of the Code or ERISA, provided that the Employee is among "a select group of management or highly compensated Employees" of the Company, within the meaning of Sections 201, 301, and 401 of ERISA, such that the Plan with respect to benefits attributable to this subsection (b) qualifies for a "top hat" exemption from most of the substantive requirements of Title I of ERISA. (55) ARTICLE FIVE. BENEFITS AND ACCOUNTS 5.1 Accounts. An account shall be established for each Participant. Each year there shall be credited to each Participant's account the difference between (a) the aggregate amount of Company contributions and forfeitures which would have been allocated to the account of the Participant in the Profit Sharing Plan without regard to the contribution limitations described in Section 4.2 hereof; and (b) the amount of Company contribution and forfeitures actually allocated to the account of the Participant in the Profit Sharing Plan. 5.2 Earnings Factor. In addition to the credit under Section 5.1, if any, an earnings factor shall be credited to each Participant's account at the end of each calendar quarter. Such earnings factor shall be equal to the rate of return that the Participant's account earned under the Profit Sharing Plan for that calendar quarter; provided that the rate of return for a Participant who no longer has a Profit Sharing Plan account shall be based upon the Participant's Profit Sharing Plan investment allocation immediately prior to final distribution of his Profit Sharing Plan account. 5.3 Disability or Retirement. In the event of a Participant's termination of employment due to Disability or Retirement, the Participant's account balance under this Plan shall become payable to the Participant in the form of five annual installments, provided that an account balance less than $50,000 shall be paid in a lump sum within ninety (90) days after the end of the calendar quarter in which termination occurs. The amount of each annual installment shall be equal to the quotient obtained by dividing the value of the Participant's account balance on the effective date of the related employment termination (and on the date of each subsequent installment, as appropriate) by the number of years remaining in the distribution period including that installment. The Participant's account balance shall continue to accrue earnings, as specified in Section 5.2, until the entire account balance has been paid. (56) The first annual installment shall be paid to the Participant within ninety (90) days after the end of the calendar quarter in which termination of employment occurs. The remaining four installments shall be paid in the first calendar quarter of each subsequent year. 5.4 Termination Before Retirement. In the event of a Participant's termination of employment for any reason other than death, Disability, or Retirement, the Participant's vested account balance under this Plan shall become payable to the Participant in the form of five annual installments, in accordance with the payment provisions provided in Section 5.3, provided that an account balance less than $50,000 shall be paid in a lump sum within ninety (90) days after the end of the calendar quarter in which termination occurs. 5.5 Death Benefit. In the event of a Participant's death, the Participant's entire remaining account balance shall be paid in a lump sum, within ninety (90) days after the end of the calendar quarter in which such death occurs, to the Participant's beneficiary, as such beneficiary was designated by the Participant in accordance with the Company's beneficiary designation procedures. In the event a Participant dies without having designated a beneficiary, or with no surviving beneficiary, the Participant's account balance shall be paid in a lump sum to the Participant's estate within ninety (90) days after the end of the calendar quarter in which death occurs. 5.6 Alternative Payment Form. Notwithstanding the payment form provided in Sections 5.3 and 5.4, a Participant may at any time on or after his termination of employment petition the Committee to request that payment of his account balance be made in a form other than five annual installments. The Committee, at its sole discretion, shall make a binding determination as to whether such alternative form of payment will be allowed. (57) 5.7 Termination Before October 1, 1992. Notwithstanding the foregoing provisions of this Article Five, the account balance of a Participant who terminates employment for any reason before October 1, 1992 shall be paid at the same time and in the same method of payment as the Participant's account balance under the Profit Sharing Plan. ARTICLE SIX. VESTING Vesting. Subject to Section 8.1, each Participant shall become vested in his account balance under this Plan at the same rate and at the same time as he becomes vested in his account balance in the Profit Sharing Plan. ARTICLE SEVEN. AMENDMENT AND TERMINATION 7.1 Amendment. The Company shall have the power at any time and from time to time to amend this Plan by resolution of its Board of Directors, provided that no amendment shall be adopted the effect of which would be to deprive any Participant of his vested interest in his account under this Plan. 7.2 Termination. The Company reserves the right to terminate this Plan at any time by resolution of its Board of Directors. Subject to Section 8.1, upon termination of this Plan, each Participant shall become fully vested in his account balance and such account balance shall become payable at the same time and in the same manner as provided in Article Five. ARTICLE EIGHT. MISCELLANEOUS 8.1 Funding. This Plan shall be unfunded. No contributions shall be made to any separate funding vehicle. The Company may set up reserves on its books of account evidencing the liability under this Plan. To the extent that any person acquires an (58) account balance hereunder or a right to receive payments from the Company, such right shall be no greater than the right of a general unsecured creditor. 8.2 Limitation of Rights. Nothing in the Plan shall be construed to: (a) Give any Employee any right to participate in the Plan except in accordance with the provisions of the Plan; (b) Limit in any way the right of the Company to terminate an Employee's employment; or (c) Evidence any agreement or understanding, express or implied, that the Company will employ an Employee in any particular position or at any particular rate of remuneration. 8.3 Nonalienation. No benefits under this Plan shall be pledged, assigned, transferred, sold or in any manner whatsoever anticipated, charged, or encumbered by an Employee, former Employee, or their beneficiaries, or in any manner be liable for the debts, contracts, obligations, or engagements of any person having a possible interest in the Plan, voluntary or involuntary, or for any claims, legal or equitable, against any such person, including claims for alimony or the support of any spouse. 8.4 Controlling Law. This Plan shall be construed in accordance with the laws of the State of Illinois in every respect, including without limitation, validity, interpretation, and performance. 8.5 Text Controls. Article headings are included in the Plan for convenience of reference only, and the Plan is to be construed without any reference to such headings. If there is any conflict between such headings and the text of the Plan, the text shall control. (59) EX-10 7 PLAN FOR PAYMENT OF DIRECTOR FEES Exhibit 10(c)(ix) to the Annual Report on Form 10-K of W.W. Grainger, Inc for the year ended December 31, 1995 W.W. GRAINGER, INC. PLAN FOR PAYMENT OF DIRECTORS FEES Each Director entitled to be paid Director's fees for all or any part of any year in which such Director serves in a Director's capacity may elect to receive such fees under one of the following two methods: (a) One-quarter of the applicable annual and committee chairman retainer fees payable in advance on or about July 1, October 1, January 1, and April 1; and applicable Board and Committee attendance fees payable in arrears on or about July 1, October 1, December 20, and April 1; or (b) An irrevocable written election filed with the Secretary of the Corporation at least 30 days prior to any annual shareholders' meeting to defer receipt of all or a specified percentage of applicable fees until after he ceases to be a Director. In this election, the Director also shall specify whether payment is to be made in up to five annual installments, or in a lump sum. If any Director elects under (b) above to defer receipt of his fees until after he ceases to be a Director, such fees shall be paid to the Director in the form specified by the Director at the time of making the deferral election. However, at any time the Director may petition the Compensation Committee of the Board of Directors, excluding such Director if he is on the Compensation Committee, to request payment of his deferred fees in a form other than that specified in his deferral election. The Compensation Committee, at its sole discretion, shall make a binding determination as to whether such alternative form of payment will be allowed. (60) In all cases, payment shall begin or be made in full within ninety (90) days after the end of the calendar quarter in which the Director ceases to be a member of the Company's Board of Directors. Remaining installments, if any, will be paid in the first calendar quarter of each subsequent year. In the event of the death of the Director before receipt of all fees payable to such Director, the entire unpaid fees for the Director's services shall be paid to such beneficiary or beneficiaries as may be designated in writing by the Director or, in the absence of such designation, to the Director's spouse or estate, at the discretion of the Committee. In the event that a Director makes one or more deferral elections under (b) above, all deferred fees shall accrue earnings until paid out in full. Earnings shall be accrued at the end of each calendar quarter at the 10-year U.S. Treasury constant maturity yield (which is meant to be the equivalent of a 10-year AA corporate bond) plus 1/2 of 1 percentage point. This Corporation shall not be required to fund or otherwise provide for any unpaid fees under (b) above and the electing Director(s) shall have only a contractual right to the amounts payable hereunder, unsecured by any asset of this Corporation. Each Director shall be deemed to have elected to be paid in accordance with method (a) unless he files an election to receive such fees under method (b). Any election made hereunder shall continue to be effective for as long as the electing Director remains a Director of this Corporation unless rescinded by written notice to the Secretary of the Corporation at least 30 days prior to any subsequent annual shareholders' meeting, such notice to be effective upon his election as a Director at said meeting. (61) -----END PRIVACY-ENHANCED MESSAGE-----