Grainger Reports Second Quarter 2010 Earnings Per Share of $1.73, Including $0.08 Contribution from Unusual Item

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Raises 2010 EPS guidance to $6.10 to $6.40
Quarterly Highlights
- Sales of $1.8 billion, up 16 percent
- Operating earnings of $215 million, up 40 percent
- EPS of $1.73, up 43 percent
- Operating cash flow of $173 million
- Pretax ROIC* of 27.9 percent

CHICAGO, July 15, 2010 /PRNewswire via COMTEX/ -- Grainger (NYSE: GWW) today reported results for the second quarter and six months ended June 30, 2010. Second quarter sales of $1.8 billion increased 16 percent versus the 2009 second quarter. Both quarters had the same number of selling days (64). Net earnings for the quarter increased 40 percent to $129 million versus $92 million in 2009. Earnings per share increased 43 percent to $1.73 versus $1.21 for the second quarter of 2009. Similar to the 2010 first quarter, results included an unusual item related to a policy change for employee paid time off, which benefitted the quarter by approximately $0.08 per share.

"We are very encouraged by the strong organic growth in the quarter and the resulting earnings power demonstrated by our business," said Chairman, President and Chief Executive Officer Jim Ryan. "Performance this quarter was the result of a complete team effort. Our businesses in the United States and Canada, along with the majority of our international operations, contributed to a solid quarter for both sales and earnings."

*The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is calculated using annualized operating earnings based on year-to-date operating earnings divided by a 7 point average for net assets less cash equivalents (non operating cash), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve. Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.

Ryan concluded, "Although there continues to be uncertainty as to the extent and duration of the economic recovery, our strong execution and results in the first half of the year give us confidence to raise and narrow our 2010 sales growth guidance to a range of 12 to 14 percent and our earnings per share guidance to a range of $6.10 to $6.40, excluding unusual items." Previous guidance, issued by Grainger in April 2010, forecasted sales growth of 9 to 12 percent and earnings per share of $5.70 to $6.10 for the full year 2010.

Beginning January 1, 2010, the company implemented a change to the employee paid time off policy resulting in an unusual item that will be in place for the entire year. Both the 2010 first and second quarters included about an $0.08 per share benefit from this policy change. The company expects $0.08 to $0.09 per share of benefit for the remaining quarters in 2010 for a total impact of approximately $0.34 per share. This benefit will not repeat in 2011.

Daily sales for the company increased 16 percent in April, 16 percent in May and 18 percent in June. For the quarter, foreign exchange contributed 2 percentage points to the increase. Acquisitions added another 5 percentage points to the growth in the quarter. Pricing was flat while volume increased 9 percent. Sales of products used to assist with the oil spill clean up in the Gulf of Mexico contributed approximately 1 percentage point to sales growth in the quarter. This growth was, however, essentially offset by sales in the 2009 second quarter of H1N1-related product that did not repeat.

The company has two reportable business segments, the United States and Canada, which represent approximately 96 percent of company sales. The remaining operating units (Japan, Mexico, India, Puerto Rico, China and Panama) are included in Other Businesses and are not considered a reportable segment. In June of 2010, Grainger announced its investment in a joint venture in Colombia. Results of operations for the Colombian business will be included in the Other Businesses beginning in the 2010 third quarter.

United States

Sales for the United States segment increased 11 percent, 9 percent excluding acquisitions, in the 2010 second quarter. Daily sales increased 8 percent in April, 10 percent in May and 14 percent in June. Sales of products used for the oil spill clean up contributed approximately 1 percentage point to growth in the quarter, although this contribution was essentially offset by the strong sales of H1N1-related product in the 2009 quarter that did not repeat in 2010. There was no material effect in the quarter from the sale of seasonal products. All customer end markets within the United States posted sales growth versus the 2009 second quarter with the exception of the contractor and government sectors, which were down slightly. Growth was led by the heavy manufacturing sector, which was up more than 20 percent versus the prior year.

The Lab Safety Supply / Grainger Industrial Supply integration also contributed to segment performance. When the integration was announced in late 2008, the company forecasted total integration benefits of $70-$100 million in incremental revenue and $20-$30 million in cost savings over an 18 month period. The integration is now substantially complete and has generated more than $88 million of additional revenue and $40 million of cost savings.

Operating earnings for the United States segment increased 31 percent, up 26 percent excluding the change in the paid time off policy. The increase in operating earnings was the result of the 11 percent sales increase, higher gross margins and operating expenses, which grew at a slower rate than sales. Gross profit margins for the quarter were up 180 basis points. Approximately one-third of the year-over-year increase in gross profit margins resulted from a three month, free freight promotion in the 2009 second quarter, which had a negative impact on margins last year. Payroll-related expenses tied to volume and performance, such as commissions, profit sharing and bonus, grew at a faster rate than sales while all other operating expenses declined slightly due to continued efforts to control costs.

Canada

Sales for the Acklands-Grainger business in the quarter were up 29 percent in U.S. dollars versus the 2009 second quarter. In local currency, sales were up 14 percent for the quarter and on a daily basis were up 17 percent in April, up 12 percent in May and up 14 percent in June. Comparisons were more difficult in May and June due to strong sales of H1N1-related product in 2009, which did not repeat in 2010. The sales increase in Canada was led by strong growth to customers in the agriculture and mining, oil and gas, heavy manufacturing and forestry sectors of the economy, partially offset by a decline in sales to the government.

Operating earnings in Canada increased 30 percent in the quarter; up 16 percent in local currency. The increase in operating earnings was due to a 200 basis point improvement in gross margin, partially offset by operating expenses, which increased faster than the growth in sales. The improvement in gross margin was primarily driven by lower product costs, due to the positive effect of foreign currency exchange rates, and improved mix tied to an increase in sales to small and medium size customers. The increase in operating expenses was driven by increased payroll and benefits costs due to higher commissions and bonus on higher sales, increased volume related headcount and incremental costs for two acquisitions made during the last 12 months.

Other Businesses

Sales for the Other Businesses, which include Japan, Mexico, India, Puerto Rico, China and Panama, increased 226 percent in the quarter versus prior year, due primarily to incremental sales from the acquired businesses in Japan and India, along with strong growth in Mexico, China and Puerto Rico.

Operating earnings for the Other Businesses were $2 million for the second quarter 2010 compared to a $3 million loss a year ago. In addition to the earnings contribution from Japan, the business in Mexico returned to profitability and the business in China reduced its loss versus the prior year.

Other

Interest expense, net of interest income, was $2 million and flat versus the prior year quarter. The effective tax rate was 39.1 and 39.0 percent in the 2010 and 2009 second quarters, respectively.

Cash Flow

Operating cash flow was $173 million for the 2010 second quarter. The company used cash from operations along with existing cash to return approximately $250 million to shareholders through the repurchase of nearly 2.4 million shares of common stock during the quarter. In addition, the company paid dividends of approximately $41 million, reflecting the 17 percent increase in the quarterly dividend announced in April of 2010. Capital expenditures were $14 million in the quarter versus $25 million in the second quarter of 2009.

Year to Date

For the six months ended June 30, 2010, sales of $3.5 billion increased 15 percent versus the six months ended June 30, 2009. Net earnings increased 21 percent to $228 million versus $189 million in the first half of 2009. Earnings per share for the six months increased 24 percent to $3.04 versus $2.46 for 2009, before unusual items. Two unusual non-cash items, a $0.17 per share benefit from changes to the company's paid time off policy and a $0.15 per share tax expense related to the tax treatment of retiree healthcare benefits following the passage of the Patient Protection and Affordable Care Act, resulted in a net benefit of $0.02 per share for the six months ended June 30, 2010.

W.W. Grainger, Inc. with 2009 sales of $6.2 billion is North America's leading broad line supplier of maintenance, repair and operating products with an expanding presence in Asia and Latin America.

Visit www.grainger.com/investor to access a podcast describing Grainger's performance in more detail.

Forward-Looking Statements

This document contains forward-looking statements under the federal securities law. Forward-looking statements relate to the company's expected future financial results and business plans, strategies and objectives and are not historical facts. They are generally identified by qualifiers such as "earnings per share guidance", "expects", "sales growth guidance", "range", "substantially complete", or similar expressions. There are risks and uncertainties, the outcome of which could cause the company's results to differ materially from what is projected. The forward-looking statements should be read in conjunction with the company's most recent annual report, as well as the company's Form 10-K, Form 10-Q and other reports filed with the Securities & Exchange Commission, containing a discussion of the company's business and various factors that may affect it.

                      CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
                       (In thousands, except for per share amounts)

                            Three Months Ended            Six Months Ended
                                 June 30,                     June 30,
                            ------------------           ----------------
                             2010           2009          2010           2009
                             ----           ----          ----           ----
    Net sales          $1,783,696     $1,533,263    $3,456,050     $2,998,511
    Cost of
     merchandise
     sold               1,036,610        908,295     2,003,222      1,744,128
                        ---------        -------     ---------      ---------
       Gross profit       747,086        624,968     1,452,828      1,254,383


    Warehousing,
     marketing and        532,171        471,039     1,055,028        941,240
       administrative
        expenses          -------        -------     ---------        -------
       Operating
        earnings          214,915        153,929       397,800        313,143

    Other income
     and (expense)
       Interest
        income                280            273           521            674
       Interest
        expense            (2,220)        (2,318)       (4,250)        (4,536)
       Equity in net
        income (loss)
        of
        unconsolidated       (171)           707          (251)           783
        entities
       Other non-
        operating
        income
        (expense)              (8)          (965)          (34)            30
                              ---           ----           ---            ---
        Total other
         income and
         (expense)         (2,119)        (2,303)       (4,014)        (3,049)
                           ------         ------        ------         ------

       Earnings
        before income
        taxes             212,796        151,626       393,786        310,094

    Income taxes           83,129         59,160       164,702        121,250
                           ------         ------       -------        -------

       Net earnings       129,667         92,466       229,084        188,844
                          -------         ------       -------        -------

    Less: Net
     earnings
     attributable
     to
     noncontrolling
     interest                 590            -         834            -
                              ---            ---           ---            ---

       Net earnings
        attributable
        to W.W.
        Grainger,
        Inc.             $129,077      $92,466    $228,250     $188,844
                         ========        =======      ========       ========

    Earnings per
     share                  $1.76          $1.23         $3.10          $2.50
      -Basic                =====          =====         =====          =====
      -Diluted              $1.73          $1.21         $3.04          $2.46
                            =====          =====         =====          =====

    Average number
     of shares
     outstanding           71,692         73,443        72,128         73,853
      -Basic               ======         ======        ======         ======
      -Diluted             72,931         74,559        73,386         74,853
                           ======         ======        ======         ======


    Diluted
     Earnings Per
     Share
    -------------
    Net Earnings
     as reported         $129,077        $92,466      $228,250       $188,844
    Less: earnings
     allocated to
     participating
     securities            (2,696)        (2,142)       (4,866)        (4,370)
                           ------         ------        ------         ------
    Net earnings
     available to
     common
     shareholders        $126,381        $90,324      $223,384       $184,474
                         ========        =======      ========       ========

    Weighted
     average
     shares
     adjusted for
     dilutive
     securities            72,931       74,559      73,386       74,853
                           ======         ======        ======         ======
    Diluted
     earnings per
     share                  $1.73          $1.21         $3.04          $2.46
                            =====          =====         =====          =====





                                 SEGMENT RESULTS (Unaudited)
                   (In thousands of dollars, except for per share amounts)


                       Three Months Ended June         Six Months Ended June
                                 30,                          30,
                      ------------------------     ----------------------
                           2010            2009        2010            2009
                           ----            ----        ----            ----
    Sales
       United States $1,497,424      $1,353,795  $2,905,565      $2,662,532
       Canada           207,852         160,724     401,991         304,519
       Other
        Businesses       90,818          27,901     171,739          50,433
       Intersegment
        sales           (12,398)         (9,157)    (23,245)        (18,973)
                        -------          ------     -------         -------
    Net sales to
     external
     customers       $1,783,696      $1,533,263  $3,456,050      $2,998,511
                     ----------      ----------  ----------      ----------

    Operating
     earnings
       United States   $231,027        $176,533    $432,642        $349,718
       Canada            12,698           9,740      19,012          15,694
       Other
        Businesses        1,934          (3,284)      1,852          (6,218)
       Unallocated
        expense         (30,744)        (29,060)    (55,706)        (46,051)
                        -------         -------     -------         -------
    Operating
     earnings          $214,915        $153,929    $397,800        $313,143
                       --------        --------    --------        --------

    Company
     operating
     margin                12.1%           10.0%       11.5%           10.4%
    ROIC* for
     Company                                           27.9%           23.8%
    ROIC* for
     United States                                     40.4%           32.8%
    ROIC* for
     Canada                                             9.0%            8.6%


    * See page 1 for a definition of ROIC


              CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
                                 Preliminary
                          (In thousands of dollars)

                                                        At June 30,
                                                        -----------
    Assets                                            2010                2009
                                                      ----                ----
    Cash and cash equivalents                     $388,057            $416,291
    Accounts receivable - net (1)                  725,196             582,431
    Inventories                                    867,303             899,843
    Prepaid expenses and other assets               98,864              72,479
    Deferred income taxes                           43,028              53,981
       Total current assets                      2,122,448           2,025,025
    Property, buildings and equipment
     -net                                          934,655             928,796
    Deferred income taxes                           84,343             110,723
    Investment in unconsolidated
     entities (2)                                    3,110              19,645
    Goodwill (3)                                   379,146             218,841
    Other assets and intangibles - net
     (3)                                           208,226             102,735
                                                   -------             -------
       Total assets                             $3,731,928          $3,405,765
                                                ==========          ==========

    Liabilities and Shareholders'
     Equity
    Short-term debt                                $38,329             $25,499
    Current maturities of long-term
     debt                                           57,311              42,090
    Trade accounts payable                         347,505             255,373
    Accrued compensation and benefits              174,217             119,887
    Accrued contributions to
     employees' profit sharing plans                66,867              55,421
    Accrued expenses                               112,515              80,778
    Income taxes payable                             1,766               2,564
                                                     -----               -----
       Total current liabilities                   798,510             581,612
    Long-term debt                                 412,711             467,395
    Deferred income taxes and tax
     uncertainties                                  64,263              35,872
    Accrued employment-related
     benefits                                      236,228             210,208
    Shareholders' equity (4)                     2,220,216           2,110,678
                                                 ---------           ---------
       Total liabilities and
        shareholders' equity                    $3,731,928          $3,405,765
                                                ==========          ==========


    (1) Accounts receivable increased $143 million, or 25%, due to strong
    sales growth in June.
    (2) Investment in unconsolidated entities decreased $17 million, or
    84%, due to acquiring the majority ownership
     of MonotaRo Co. Ltd. which was previously held as an investment in
     unconsolidated entities.
    (3) Goodwill and intangibles increased $266 million, or 83%, due to
    acquisitions in the second half of 2009 and
    first half of 2010.
    (4) Common stock outstanding as of June 30, 2010 was 70,959,604
    shares as compared with 73,623,181 shares at June 30, 2009.


            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                                    Preliminary
                             (In thousands of dollars)


                                                Six Months Ended June 30,
                                                -------------------------
                                                    2010              2009
                                                    ----              ----
    Cash flows from operating activities:
      Net earnings                              $229,084          $188,844
      Provision for losses on accounts
       receivable                                  3,437             8,237
      Deferred income taxes and tax
       uncertainties                              (5,713)          (14,404)
      Depreciation and amortization               71,901            68,505
      Stock-based compensation                    25,964            24,841
      Change in operating assets and
       liabilities - net of business
       acquisitions
       (Increase) decrease in accounts
        receivable                               (99,770)            6,618
       (Increase) decrease in inventories         28,396           120,528
       (Increase) decrease in prepaid
        expenses and other assets                 17,596            24,004
       Increase (decrease) in trade accounts
        payable                                   47,332           (41,776)
       Increase (decrease) in other current
        liabilities                              (40,252)         (163,188)
       Increase (decrease) in current income
        taxes payable                             (5,173)              878
       Increase (decrease) in accrued
        employment-related benefits cost          13,373            11,730
      Other - net                                    109            (2,207)
                                                     ---            ------
          Net cash provided by operating
           activities                            286,284           232,610
                                                 -------           -------
    Cash flows from investing activities:
      Additions to property, buildings and
       equipment - net                           (26,942)          (51,904)
      Net cash paid for business
       acquisitions, and other investments       (41,046)            2,293
                                                 -------             -----
          Net cash used in investing activities  (67,988)          (49,611)
                                                 -------           -------
    Cash flows from financing activities:
      Net increase in short-term debt              4,232             2,180
      Long-term debt payments                    (20,606)                -
      Stock options exercised                     46,112            21,476
      Excess tax benefits from stock-based
       compensation                               14,317             5,412
      Purchase of treasury stock                (256,503)         (127,696)
      Cash dividends paid                        (74,628)          (65,174)
                                                 -------           -------
         Net cash used in financing activities  (287,076)         (163,802)
                                                --------          --------
    Exchange rate effect on cash and cash
     equivalents                                  (3,034)              804
                                                  ------               ---
         Net increase (decrease) in cash and
          cash equivalents                       (71,814)           20,001
    Cash and cash equivalents at beginning
     of year                                     459,871           396,290
                                                 -------           -------
    Cash and cash equivalents at end of
     period                                     $388,057          $416,291
                                                ========          ========



SOURCE W.W. Grainger, Inc.


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GWW (Common Stock)
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