GWW

W.W. Grainger, Inc. - 10-Q Summary (Period Ended June 30, 1999)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 1999, for W.W. Grainger, Inc., an Illinois corporation. The company operates primarily through two segments: Branch-based Distribution Businesses (including Grainger Industrial Supply, Acklands-Grainger in Canada, and Grainger in Mexico) and Other Businesses (including Grainger Custom Solutions, Grainger Integrated Supply, and Lab Safety Supply). As of July 30, 1999, there were 93,356,200 shares of common stock outstanding.

Key Financial Metrics

Liquidity & Margins: The current ratio was 1.7 at June 30, 1999 (down from 1.8 at year-end 1998). Total debt as a percent of shareholders' equity rose to 29.4% from 18.3%. Gross profit margin increased 0.38 percentage points in Q2 and 0.44 percentage points for the six-month period.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.4% in Q2 and 2.8% for the six months ended June 30, 1999, compared to 1998. Growth was volume-driven, aided by Internet transactions and new marketing initiatives.
• Profitability Decline: Operating earnings decreased 13.2% in Q2 and 7.4% for the six-month period. Net earnings fell 14.7% in Q2 and 8.3% for the six months.
• Expense Increases: Operating expenses rose 9.1% in Q2 and 7.9% for the six months. This was driven by a $8.5 million increase in data processing expenses in Q2 (and $10.5 million for the six months) due to Year 2000 compliance, Internet commerce, and new enterprise system installation.
• Debt Levels: Short-term debt increased significantly from $88.1 million to $247.3 million, reflecting higher borrowings to fund working capital and capital expenditures.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the decline in operating earnings primarily to customer service issues during the rollout of a new business enterprise system, estimating a $10 million loss in sales and an $11 million reduction in operating earnings for the quarter. Despite a weak North American industrial economy, the company saw strong growth in specific segments: Grainger Integrated Supply (37% sales growth in Q2) and Grainger in Mexico (20% sales growth in Q2). Online sales through Grainger.com grew 526% in Q2 compared to the prior year.

Year 2000 (Y2K) Status: The company is in Phase II of its Y2K project. Remediation of mission-critical systems is complete, with final testing scheduled for Q3 1999. Remaining project expenses for 1999 are estimated between $34 million and $39 million. Total data processing expenses for 1999 are expected to be $25 million to $30 million higher than 1998.

Risks: Forward-looking statements are subject to risks including the effectiveness of new business strategies, the successful implementation of the new enterprise system, and potential disruptions from Year 2000 issues affecting suppliers or customers.

Investor Verification Checklist

• System Rollout Impact: Verify the timeline for full resolution of the new enterprise system issues and the extent of the estimated $10 million sales loss.
• Y2K Costs: Monitor actual Year 2000 compliance expenses against the $34-$39 million estimate for the remainder of 1999.
• Debt Utilization: Review the purpose and repayment schedule for the significant increase in short-term debt ($159 million net increase in six months).
• Internet Growth Sustainability: Assess whether the rapid growth in online sales (526% YoY in Q2) is sustainable and its impact on overall margins.
• Segment Performance: Track the performance of the "Other Businesses" segment, which saw a decline in operating earnings despite sales growth in specific sub-units.