10-QPeriod: Q2 FY2002

W.W. GRAINGER, INC. Quarterly Report for Q2 Ended Jun 30, 2002

Filed August 13, 2002For Securities:GWW

Summary

W.W. Grainger, Inc. (GWW) reported its financial results for the quarter and six months ended June 30, 2002. For the second quarter, net sales decreased by 2% to $1,194.8 million compared to the prior year, reflecting the challenging North American economic environment. However, net earnings saw a significant increase of 268% to $54.5 million, largely due to the absence of significant non-recurring charges that impacted the prior year's results. Excluding these charges, net earnings grew by 3% year-over-year. For the first six months of 2002, net sales decreased by 5% to $2,320.1 million. Net earnings for this period increased by 56% to $89.0 million. This increase was influenced by a non-cash goodwill impairment charge of $23.9 million after-tax related to the adoption of SFAS No. 142, and the absence of significant non-recurring charges from the prior year. Excluding these items, net earnings grew by 14%. The company demonstrated improved operating earnings across key segments and managed its liquidity effectively, ending the period with a strong cash position.

Key Highlights

  • 1Net sales for the second quarter of 2002 decreased 2% to $1,194.8 million, attributed to a weak North American economy.
  • 2Net earnings for the second quarter of 2002 significantly increased by 268% to $54.5 million, primarily due to the absence of a $38.0 million after-tax non-recurring charge recorded in the second quarter of 2001.
  • 3For the six months ended June 30, 2002, net sales declined 5% to $2,320.1 million.
  • 4Net earnings for the six months ended June 30, 2002, increased 56% to $89.0 million, which included a $23.9 million after-tax goodwill impairment charge related to SFAS No. 142.
  • 5The Branch-based Distribution segment, the largest segment, experienced a 3% decrease in net sales for the quarter but showed a 4% increase in operating earnings.
  • 6Sales processed through grainger.com increased by 25% for both the quarter and the six-month period, indicating a positive trend in online sales.
  • 7The company's liquidity remained strong, with total debt representing only 8% of total capitalization at June 30, 2002.

Frequently Asked Questions

The significant increase in net earnings for Q2 2002 was primarily due to the absence of large non-recurring charges that were recorded in the second quarter of 2001. Specifically, the prior year included a $40.0 million pre-tax charge for the shutdown of Material Logic operations and a $26.5 million charge for the write-down of investments in digital enterprises, totaling $38.0 million after-tax. The current quarter did not have comparable charges, leading to a substantial year-over-year increase in reported net earnings.

The adoption of SFAS No. 142, which changed accounting for goodwill, resulted in a non-cash, after-tax charge of $23.9 million (or $0.25 per diluted share) in the first half of 2002. This charge was related to the impairment write-down of goodwill for its Canadian subsidiary, Acklands-Grainger Inc. This charge is classified as a cumulative effect of an accounting change and impacted the reported net earnings for the six-month period.

The Branch-based Distribution segment, which represents the majority of sales, saw a 3% decrease in net sales for the quarter and a 6% decrease for the first six months, largely due to economic weakness. However, operating earnings for this segment increased by 4% in the quarter due to improved gross profit margins. The Lab Safety Supply segment experienced a decline in sales (11% quarterly, 14% year-to-date) due to its exposure to the weak manufacturing sector. Grainger Integrated Supply showed strong growth, with net sales increasing by 27% in the quarter and 31% year-to-date, driven by customer penetration.

The company maintains a strong liquidity position. For the six months ended June 30, 2002, net cash provided by operating activities was $108.5 million. The ratio of current assets to current liabilities was healthy at 2.6. Furthermore, total debt represented only 8% of total capitalization, indicating a low level of financial leverage and significant flexibility to meet its financial obligations.