UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to_______
 
Commission File Number 1-5684

W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
 
Illinois
 
36-1150280
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
100 Grainger Parkway, Lake Forest, Illinois
 
60045-5201
(Address of principal executive offices)
 
(Zip Code)
(847) 535-1000
(Registrant’s telephone number including area code)
 
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                                                                           New York Stock Exchange
                                                                             Chicago Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [X]  No [   ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes [   ]  No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [X]  No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes [  ]  No [X]
 
The aggregate market value of the voting common equity held by nonaffiliates of the registrant was $6,660,203,495 as of the close of trading as reported on the New York Stock Exchange on June 30, 2010. The Company does not have nonvoting common equity.
 
The registrant had 69,445,444 shares of common stock outstanding as of January 31, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 27, 2011, are incorporated by reference into Part III hereof.
 
 
 
1

 

TABLE OF CONTENTS
 
Page(s)
PART I
Item 1:
BUSINESS
3-5
   
THE COMPANY
3
   
UNITED STATES
 
3-4
   
CANADA
4
   
OTHER BUSINESSES
   
4-5
   
SEASONALITY
   
5
   
COMPETITION
   
5
   
EMPLOYEES
   
5
   
WEBSITE ACCESS TO COMPANY REPORTS
5
Item 1A:
RISK FACTORS
5-6
Item 1B:
UNRESOLVED STAFF COMMENTS
6
Item 2:
PROPERTIES
7
Item 3:
LEGAL PROCEEDINGS
7-8
Item 4:
REMOVED AND RESERVED
8
 
 
       
PART II
Item 5:
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
 
   
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
9-10
Item 6:
SELECTED FINANCIAL DATA
10
Item 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
 
   
CONDITION AND RESULTS OF OPERATIONS
11-20
Item 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
Item 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
21
Item 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
 
   
ON ACCOUNTING AND FINANCIAL DISCLOSURE
21
Item 9A:
CONTROLS AND PROCEDURES
21
Item 9B:
OTHER INFORMATION
21
 
PART III
Item 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
22
Item 11:
EXECUTIVE COMPENSATION
23
Item 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
 
       RELATED STOCKHOLDER MATTERS 23
Item 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
 
   
DIRECTOR INDEPENDENCE
23
Item 14:
PRINCIPAL ACCOUNTING FEES AND SERVICES
23
 
PART IV
Item 15:
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
23-25
Signatures
       
60
         
 

 
2

 
PART I
Item 1:  Business
 
The Company
W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, is a broad-line distributor of maintenance, repair and operating supplies and other related products and services used by businesses and institutions primarily in the United States and Canada, with an expanding presence in Asia and Latin America.  In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries.
 
Grainger uses a multichannel business model to provide customers with a range of options for finding and purchasing products utilizing sales representatives, direct marketing materials and catalogs.  Grainger serves approximately 2.0 million customers worldwide through a network of highly integrated branches, distribution centers, multiple websites and export services.
 
During 2010, Grainger acquired one business in the United States, three in Canada and an 80% ownership of a joint venture in Colombia.  Their results are consolidated with Grainger from the respective acquisition dates.
 
Grainger’s two reportable segments are the United States and Canada.  The United States segment reflects the results of Grainger’s U.S. business.  The Canada segment reflects the results for Acklands – Grainger Inc., Grainger’s Canadian business.  Other businesses include the following:  MonotaRO Co., Ltd. (Japan), Grainger, S.A. de C.V. (Mexico), Grainger Industrial Supply India Private Limited (India), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China), Grainger Colombia SAS (Colombia) and Grainger Panama S.A. (Panama).  These businesses generate revenue through the distribution of maintenance, repair and operating supplies and products and provide related services.  For segment and geographical information and consolidated net sales and operating earnings see “Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 19 to the Consolidated Financial Statements.
 
Grainger has centralized business support functions that provide coordination and guidance in the areas of accounting and finance, business development, communications and investor relations, compensation and benefits, information systems, health and safety, global supply chain functions, human resources, risk management, internal audit, legal, real estate, security, tax and treasury. These services are provided in varying degrees to all business units.
 
Grainger does not engage in product research and development activities. Items are regularly added to and deleted from Grainger’s product lines on the basis of customer demand, market research, recommendations of suppliers, sales volumes and other factors.
 
United States
The United States business offers a broad selection of maintenance, repair and operating supplies and other related products and services through local branches, catalogs and the Internet.  In 2010, one business was acquired, SafetyCertified, Inc. (SafetyCertified), further broadening the offering of the United States business.  SafetyCertified offers online programs and tools to assist organizations in their efforts to comply with various workplace safety requirements.
 
Grainger’s United States business offers a combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services. Products offered include material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components and many other items primarily focused on the facilities maintenance market. Services offered include inventory management and energy efficiency solutions.
 
The United States business operates more than 400 branches located in all 50 states. These branches are located in close proximity to the majority of U.S. businesses and serve the immediate needs of customers in their local markets by allowing them to pick up items directly from the branches.  Branches range in size from small branches to large master branches. The branch network has approximately 5,000 employees who primarily fulfill counter and will-call product needs and provide customer service. An average branch is 22,000 square feet in size, has 12 employees and handles about 160 transactions per day.  In the normal course of business, Grainger continually reviews the effectiveness of its branch network.  In 2010, two branches were opened and 23 branches were closed.
 
The logistics network is comprised of a network of 14 distribution centers (DCs) of various sizes. Automated equipment and processes in the larger DCs allow them to handle the majority of the customer shipping for next day availability and replenish more than 400 branches that provide same day availability.
 
The business has a sales force of over 2,000 professionals who help businesses and institutions select the right products to find immediate solutions to maintenance problems and to reduce operating expenses and improve cash flows.  Customers range from small and medium-sized businesses to large corporations, government entities and other institutions. They are primarily represented by purchasing managers or workers in facilities maintenance departments and service shops across a wide range of industries such as manufacturing, hospitality, transportation, government, retail, healthcare and education. Sales transactions during 2010 were made to approximately 1.7 million customers averaging 96,000 daily transactions. No single customer accounted for more than 5% of total sales.
 
 
3

 
The majority of the products sold by the United States business are well recognized national branded products, including private label items bearing Grainger’s registered trademarks, such as DAYTON® motors, SPEEDAIRE® air compressors, AIR HANDLER® air filtration equipment, DEM-KOTE® spray paints, WESTWARD® tools, CONDOR™ safety products and LUMAPRO® lighting products. Grainger has taken steps to protect these trademarks against infringement and believes that they will remain available for future use in its business.
 
The Grainger catalog, most recently issued in February 2011, offers approximately 350,000 facilities maintenance and other products and is used by customers, sales representatives and branch personnel to assist in customer product selection. Approximately 2.1 million copies of the catalog were produced. In addition, Grainger’s United States business issues targeted catalogs for its multiple branded products, as well as other marketing materials.
 
Customers can also purchase products through grainger.com. With access to more than 700,000 products, grainger.com serves as a prominent channel for the United States business.  Grainger.com provides real-time price and product availability and detailed product information, and offers advanced features such as product search and compare capabilities. For customers with sophisticated electronic purchasing platforms, Grainger utilizes technology that allows these systems to communicate directly with grainger.com.  Customers can also purchase products through several other branded websites.
 
The United States business purchases products for sale from more than 2,000 key suppliers, most of which are manufacturers. Through a global sourcing operation, the business procures competitively priced, high-quality products produced outside the United States from approximately 400 suppliers. Grainger sells these items primarily under private label brands. Products obtained through the global sourcing operation include DAYTON® motors, WESTWARD® tools, LUMAPRO® lighting products and CONDOR™ safety products, as well as products bearing other trademarks.  No single supplier comprised more than 5% of total purchases and no significant difficulty has been encountered with respect to sources of supply.
 
Canada
Acklands – Grainger is Canada’s leading broad-line distributor of industrial and safety supplies. In 2010, Acklands – Grainger acquired three businesses, Ranson Industrial and Safety Supplies Inc., Solus Securite Inc. and Wolseley Industrial Products Group (Nova Scotia and New Brunswick).
 
The Canadian business serves customers through more than 170 branches and six DCs across Canada. Acklands – Grainger distributes tools, fasteners, safety supplies, instruments, welding and shop equipment, and many other items. During 2010, approximately 14,000 sales transactions were completed daily. A comprehensive catalog, printed in both English and French, showcases the product line to facilitate the customer’s product selection.  The February 2011 catalog, with more than 106,000 products, is used by customers, sales account managers and branch personnel to assist in customer product selection. In addition, customers can purchase products through acklandsgrainger.com, a fully bilingual website.
 
Other Businesses
Included in the other businesses are the operations in Japan, Mexico, India, Puerto Rico, China, Colombia and Panama.  The more significant businesses in this group are described below.
 
Japan
Grainger operates in Japan through a 53% interest in MonotaRO Co., Ltd. (MonotaRO).  MonotaRO provides small and mid-sized domestic businesses with products that help them operate and maintain their facilities.  MonotaRO is a catalog and a web-based direct marketer with approximately 70 percent of orders being conducted through the company’s website, monotaro.com.
 
Mexico
Grainger’s operations in Mexico provide local businesses with maintenance, repair and operating supplies and other related products primarily from Mexico and the United States. Mexico distributes products through a network of branches and one DC where customers have access to approximately 75,000 products through a Spanish-language catalog and through grainger.com.mx.
 
China
Grainger operates in China from a DC in Shanghai and a small regional warehouse in southern China.  In addition, there are five sales offices in eastern China that allow sales representatives to work remotely and meet with customers. Customers have access to approximately 59,000 products through a Chinese-language catalog and through grainger.com.cn.
 
 
4

 
Colombia
In 2010, Grainger formed a joint venture with an affiliate of Torhefe S.A., THF International SAS (Colombia).  Grainger owns an 80% majority position in the joint venture.  Grainger’s operations in Colombia provide businesses with facilities maintenance supplies and other products, with an emphasis on fastener products.  Customers have access to approximately 15,000 products through torhefe.com.
 
Seasonality
Grainger’s business in general is not seasonal, however, there are some products that typically sell more often during the winter or summer season.  In any given month, unusual weather patterns, i.e., unusually hot or cold weather, could impact the sales volumes of these products, either positively or negatively.
 
Competition
Grainger faces competition in all markets it serves, from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-based businesses.
 
Grainger provides local product availability, a broad product line, sales representatives, competitive pricing, catalogs (which include product descriptions and, in certain cases, extensive technical and application data), and electronic and Internet commerce technology.  Other services such as inventory management and energy efficiency solutions to assist customers in lowering their total facilities maintenance costs are also offered. Grainger believes that it can effectively compete with manufacturers on small orders, but manufacturers may have an advantage in filling large orders.
 
Grainger serves a number of diverse markets. Based on available data, Grainger estimates the North American market for facilities maintenance and related products to be approximately $130 billion, of which Grainger’s share is approximately 5 percent. There are several large competitors, although the majority of the market is served by small local and regional competitors.
 
Employees
As of December 31, 2010, Grainger had approximately 18,500 employees, of whom approximately 17,000 were full-time and 1,500 were part-time or temporary. Grainger has never had a major work stoppage and considers employee relations to be good.
 
Website Access to Company Reports
Grainger makes available, through its website, free of charge, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports, as soon as reasonably practicable after this material is electronically filed with or furnished to the Securities and Exchange Commission. This material may be accessed by visiting grainger.com/investor.
 
Item 1A:  Risk Factors
The following is a discussion of significant risk factors relevant to Grainger’s business that could adversely affect its financial position or results of operations.
 
Weakness in the economy could negatively impact Grainger’s sales growth. Economic and industry trends affect Grainger’s business environments.  Economic downturns can cause customers, both commercial and government, to idle or close facilities, delay purchases and otherwise reduce their ability to purchase Grainger’s products and services as well as their ability to make full and timely payments. Thus, a significant or prolonged slowdown in economic activity could negatively impact Grainger’s sales growth and results of operations.
 
The facilities maintenance industry is highly fragmented, and changes in competition could result in a decreased demand for Grainger’s products and services. There are several large competitors in the industry, although most of the market is served by small local and regional competitors. Grainger faces competition in all markets it serves, from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-based businesses. Competitive pressures could adversely affect Grainger’s sales and profitability.
 
Volatility in commodity prices may adversely affect operating margins. Some of Grainger’s products contain significant amounts of commodity-priced materials, such as steel, copper, or oil, and are subject to price changes based upon fluctuations in the commodities market. Increases in the price of fuel could also drive up transportation costs. Grainger’s ability to pass on increases in costs depends on market conditions. The inability to pass along costs increases could result in lower operating margins. In addition, higher prices could impact demand for these products resulting in lower sales volumes.
 
5

 
Unexpected product shortages could negatively impact customer relationships, resulting in an adverse impact on results of operations. Grainger’s competitive strengths include product selection and availability. Products are purchased from more than 3,000 key suppliers, no one of which accounted for more than 5% of total purchases. Historically, no significant difficulty has been encountered with respect to sources of supply; however, economic downturns can adversely affect a supplier’s ability to manufacture or deliver products. If Grainger were to experience difficulty in obtaining products, there could be a short-term adverse effect on results of operations and a longer-term adverse effect on customer relationships and Grainger’s reputation. In addition, Grainger has strategic relationships with key vendors. In the event Grainger was unable to maintain those relations, there might be a loss of competitive pricing advantages which could, in turn, adversely affect results of operations.
 
The addition of new product lines could impact future sales growth. Grainger, from time to time, expands the breadth of its offerings by increasing the number of products it distributes. In 2006, Grainger launched a multiyear product line expansion program. The continued success of this program is expected to be a driver of growth in 2011 and beyond. Its success will depend on Grainger’s ability to accurately forecast market demand, obtain products from suppliers and effectively integrate these products into the supply chain. As such, there is a risk that the product line expansion program will not deliver the expected results which could negatively impact anticipated future sales growth.
 
Interruptions in the proper functioning of information systems or breaches of information systems security could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues. The proper functioning of Grainger’s information systems is critical to the successful operation of its business. Although Grainger’s information systems are protected with robust backup and security systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to natural disasters, power losses, unauthorized access, telecommunication failures and other problems. If critical information systems fail, are breached or are otherwise unavailable, Grainger’s ability to process orders, maintain proper levels of inventories, collect accounts receivable, pay expenses and maintain the security of Company, customer and employee data could be adversely affected.
 
In order to compete, Grainger must attract, retain and motivate key employees, and the failure to do so could have an adverse effect on results of operations.  In order to compete and have continued growth, Grainger must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Grainger competes to hire employees and then must train them and develop their skills and competencies. Grainger’s operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.
 
Fluctuations in foreign currency have an effect on reported results of operations.  Foreign currency exchange rates and fluctuations have an impact on sales, costs and cash flows from international operations, and could affect reported financial performance.
 
Acquisitions involve a number of inherent risks, any of which could result in the benefits anticipated not being realized and have an adverse effect on results of operations.  Acquisitions, both foreign and domestic, involve various inherent risks, such as uncertainties in assessing the value, strengths, weaknesses, liabilities and potential profitability of acquired companies. There is a risk of potential losses of key employees of an acquired business and an ability to achieve identified operating and financial synergies anticipated to result from an acquisition.  Additionally, problems could arise from the integration of the acquired business including unanticipated changes in the business or industry, or general economic conditions that affect the assumptions underlying the acquisition.  Any one or more of these factors could cause Grainger not to realize the benefits anticipated to result from the acquisitions or have a negative impact on the fair value of the reporting units. Accordingly, goodwill and intangible assets recorded as a result of acquisitions could become impaired.
 
The Company’s business is subject to the risks of international operations.  Grainger derives a growing portion of its revenue and earnings from its international operations. Compliance with U.S. and foreign laws and regulations that apply to Grainger’s international operations, including without limitation import and export requirements, the Foreign Corrupt Practices Act, tax laws (including U.S. taxes on foreign subsidiaries), foreign exchange controls and cash repatriation restrictions, data privacy requirements, labor laws, and anti-competition regulations, increases the costs of doing business in foreign jurisdictions, and such costs may rise in the future as a result of changes in these laws and regulations or in their interpretation. Furthermore, Grainger has implemented policies and procedures designed to facilitate compliance with these laws and regulations, but there can be no assurance that employees, contractors, or agents will not violate such laws and regulations or Grainger’s policies. Any such violations could individually or in the aggregate materially adversely affect Grainger’s financial condition or operating results.
 
Item 1B:  Unresolved Staff Comments
 
None.
 
6

 
Item 2:  Properties
 
As of December 31, 2010, Grainger’s owned and leased facilities totaled approximately 23.3 million square feet, an increase of approximately 4% from December 31, 2009. This increase is primarily the result of business acquisitions.  The United States business and Acklands  Grainger accounted for the majority of the total square footage.  Branches in the United States range in size from approximately 1,400 to 109,000 square feet. Most are located in or near major metropolitan areas with many located in industrial parks. Typically, a branch is on one floor, consists primarily of warehouse space, sales areas and offices and has off-the-street parking for customers and employees. Distribution centers in the United States range in size from approximately 39,000 to 1,300,000 square feet. Grainger believes that its properties are generally in excellent condition and well maintained.  Acklands Grainger facilities are located throughout Canada.
 
A brief description of significant facilities follows:
 
Location
 
 
Facility and Use (6)
 
Size in Square
Feet (in 000’s)
United States (1)
 
402 United States branch locations
 
8,974
United States (2)
 
14 Distribution Centers
 
5,822
United States (3)
 
Other facilities
 
2,914
Canada (4)
 
185 Acklands – Grainger facilities
 
2,678
Other Businesses (5)
 
Other facilities
 
1,538
Chicago Area (2)
 
Headquarters and General Offices
 
1,327
   
Total Square Feet
 
23,253
 

 
(1)  
United States branches consist of 277 owned and 125 leased properties. Most leases expire between 2011 and 2018.
(2)  
These facilities are primarily owned.
(3)  
These facilities include both owned and leased locations, consisting of storage facilities, office space, and idle properties including a one million square foot facility for a new distribution center in Illinois to be opened in 2012.
(4)  
Acklands – Grainger facilities consist of general offices, distribution centers and branches, of which 62 are owned and 123 leased.
(5)  
These facilities include owned and leased locations in Japan, Mexico, India, Puerto Rico, China, Colombia and Panama.
(6)  
Owned facilities are not subject to any mortgages.
 
Item 3:  Legal Proceedings
 
Grainger has been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products purportedly distributed by Grainger. In 2010, Grainger was named in lawsuits relating to asbestos and/or silica involving approximately 190 new plaintiffs, and lawsuits relating to asbestos and/or silica involving approximately 150 plaintiffs were dismissed with respect to Grainger, typically based on the lack of product identification.
 
As of January 24, 2011, Grainger is named in cases filed on behalf of approximately 1,900 plaintiffs in which there is an allegation of exposure to asbestos and/or silica. Grainger has denied, or intends to deny, the allegations in all of the above-described lawsuits.  If a specific product distributed by Grainger is identified in any of these lawsuits, Grainger would attempt to exercise indemnification remedies against the product manufacturer. In addition, Grainger believes that a substantial number of these claims are covered by insurance.  Grainger has entered into agreements with its major insurance carriers relating to the scope, coverage and costs of defense of lawsuits involving claims of exposure to asbestos.  While Grainger is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on Grainger’s consolidated financial position or results of operations.
 
Grainger is a party to a contract with the United States General Services Administration (the GSA) first entered into in 1999 and subsequently extended in 2004.  The GSA contract had been the subject of an audit performed by the GSA’s Office of the Inspector General.  In December 2007, the Company received a letter from the Commercial Litigation Branch of the Civil Division of the Department of Justice (the DOJ) regarding the GSA contract. The letter suggested that the Company had not complied with its disclosure obligations and the contract’s pricing provisions, and had potentially overcharged government customers under the contract. 
 
 
7

 
Discussions relating to the Company’s compliance with its disclosure obligations and the contract’s pricing provisions are ongoing; the Company last met with the DOJ in December 2010.  The timing and outcome of these discussions are uncertain and could include settlement or civil litigation by the DOJ to recover, among other amounts, treble damages and penalties under the False Claims Act.  Due to the uncertainties surrounding this matter, an estimate of possible loss cannot be determined.   While this matter is not expected to have a material adverse effect on the Company’s financial position, an unfavorable resolution could result in significant payments by the Company.  The Company continues to believe that it has complied with the GSA contract in all material respects.
 
Grainger is a party to a contract with the United States Postal Service (the USPS) entered into in 2003 covering the sale of certain Maintenance Repair and Operating Supplies (the MRO Contract).  The Company received a subpoena dated August 29, 2008, from the USPS Office of Inspector General seeking information about the Company’s pricing compliance under the MRO Contract.  The Company has provided responsive information to the USPS and to the DOJ.  The Company last met with the DOJ in December 2010.
 
Grainger is also a party to a contract with the USPS entered into in 2001 covering the sale of certain janitorial and custodial items (the Custodial Contract).  The Company received a subpoena dated June 30, 2009, from the USPS Office of Inspector General seeking information about the Company’s pricing practices and compliance under the Custodial Contract.  The Company has provided responsive information to the USPS and to the DOJ.  The Company last met with the DOJ in December 2010.
 
The timing and outcome of the USPS investigations of the MRO Contract and the Custodial Contract are uncertain and could include settlement or civil litigation by the USPS to recover, among other amounts, treble damages and penalties under the False Claims Act.  Due to the uncertainties surrounding these matters, an estimate of possible loss cannot be determined.  While these matters are not expected to have a material adverse effect on the Company’s financial position, an unfavorable resolution could result in significant payments by the Company.  The Company continues to believe that it has complied with each of the MRO Contract and the Custodial Contract in all material respects.
 
In addition to the foregoing, from time to time Grainger is involved in various other legal and administrative proceedings that are incidental to its business, including claims relating to product liability, premises liability, general negligence, environmental issues, employment, intellectual property and other matters. As a government contractor selling to federal, state and local governmental entities, Grainger is also subject to governmental or regulatory inquiries or audits or other proceedings, including those related to pricing compliance. It is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on Grainger’s consolidated financial position or results of operations.
 
Item 4:  [Removed and Reserved]
 
 
8

 

PART II
 
Item 5:  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
Market Information and Dividends
Grainger’s common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange, with the ticker symbol GWW. The high and low sales prices for the common stock and the dividends declared and paid for each calendar quarter during 2010 and 2009 are shown below.
 
     
Prices
       
 
Quarters
 
High
   
Low
   
Dividends
 
2010
First
  $ 109.98     $ 96.13     $ 0.46  
 
Second
    116.07       96.50       0.54  
 
Third
    121.84       96.81       0.54  
 
Fourth
    139.09       117.25       0.54  
 
Year
  $ 139.09     $ 96.13     $ 2.08  
2009
First
  $ 81.18     $ 59.95     $ 0.40  
 
Second
    86.36       68.61       0.46  
 
Third
    91.55       77.67       0.46  
 
Fourth
    102.54       85.24       0.46  
 
Year
  $ 102.54     $ 59.95     $ 1.78  
 
Grainger expects that its practice of paying quarterly dividends on its common stock will continue, although the payment of future dividends is at the discretion of Grainger’s Board of Directors and will depend upon Grainger’s earnings, capital requirements, financial condition and other factors.
 
Holders
The approximate number of shareholders of record of Grainger’s common stock as of January 31, 2011, was 930 with approximately 69,000 additional shareholders holding stock through nominees.
 
Issuer Purchases of Equity Securities – Fourth Quarter
 Period
 
Total Number
of Shares Purchased (A)
   
Average Price Paid per Share (B)
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C)
   
Maximum Number of Shares That May
Yet Be Purchased Under the
Plans or Programs
 Oct. 1 – Oct. 31
   
-
     
-
     
-
     
8,081,385
 
shares
                                   
 Nov. 1 – Nov. 30
   
-
     
-
     
-
     
8,081,385
 
shares
                                   
 Dec. 1 – Dec. 31
   
-
     
-
     
-
     
8,081,385
 
shares
 Total
   
-
     
-
     
-
           
 
 
(A)  
There were no shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock awards.
 
(B)  
Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs.
 
(C)  
Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors on July 28, 2010.  Effective July 28, 2010, the Board of Directors granted authority to repurchase up to 10 million shares, which replaced the previous authorization of April 30, 2008.  The program has no specified expiration date.  Activity is reported on a trade date basis.
 
 
9

 
Company Performance
The following stock price performance graph compares the cumulative total return on an investment in Grainger common stock with the cumulative total return of an investment in each of the Dow Jones US Industrial Suppliers Total Stock Market Index and the S&P 500 Stock Index.  It covers the period commencing December 31, 2005, and ending December 31, 2010. The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31, 2005, and that all dividends were reinvested.
 
 
 
 
   
December 31,
 
   
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
W.W. Grainger, Inc.
  $ 100     $ 100     $ 127     $ 117     $ 146     $ 213  
Dow Jones US Industrial Suppliers
  Total Stock Market Index
    100       103       118       92       116       163  
S&P 500 Stock Index
    100       116       122       77       97       112  
 

Item 6:  Selected Financial Data
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(In thousands of dollars, except for per share amounts)
 
Net sales
  $ 7,182,158     $ 6,221,991     $ 6,850,032     $ 6,418,014     $ 5,883,654  
Net earnings attributable to W.W. Grainger, Inc.
    510,865       430,466       475,355       420,120       383,399  
Net earnings per basic share*
    7.05       5.70       6.07       5.01       4.36  
Net earnings per diluted share*
    6.93       5.62       5.97       4.91       4.24  
Total assets
    3,904,377       3,726,332       3,515,417       3,094,028       3,046,088  
Long-term debt (less current maturities)
    420,446       437,500       488,228       4,895       4,895  
Cash dividends paid per share
  $ 2.08     $ 1.78     $ 1.55     $ 1.34     $ 1.11  
 
There were two unusual non-cash items included in 2010 earnings, a $0.28 per share benefit from a change to the 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, which resulted in a net benefit of $0.13 per share.  Results for 2009 included a $0.37 per share non-cash gain from the MonotaRO transaction in September 2009.
 
*In the first quarter of 2009, Grainger adopted authoritative guidance on “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” As a result, earnings per share were calculated under the new accounting guidance for 2009, and restated for 2008 and 2007.  Earnings per share for 2006 were calculated using the treasury stock method and not restated because it was not practical and the impact is not considered material.
 
For further information see Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
10

Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
  General. Grainger is a broad-line distributor of maintenance, repair and operating supplies, and other related products and services used by businesses and institutions.  Grainger’s operations are primarily in the United States and Canada, with an expanding presence in Asia and Latin America.  Grainger uses a multichannel business model to provide customers with a range of options for finding and purchasing products utilizing sales representatives, direct marketing materials and catalogs.  Grainger serves approximately 2.0 million customers worldwide through a network of highly integrated branches, distribution centers, multiple websites and export services.
 
Grainger’s two reportable segments are the United States and Canada.  The United States segment reflects the results of Grainger’s U.S. operating segment.  The Canada segment reflects the results for Acklands – Grainger Inc., Grainger’s Canadian operating segment.  Other Businesses include the following operating segments which are not material individually and in the aggregate:  MonotaRO Co., Ltd. (Japan), Grainger, S.A. de C.V. (Mexico), Grainger Industrial Supply India Private Limited (India), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China), Grainger Colombia SAS (Colombia), and Grainger Panama S.A. (Panama).
 
  Business Environment. Several economic factors and industry trends tend to shape Grainger’s business environment.  The overall economy and leading economic indicators provide general insight into projecting Grainger’s growth.  Historically, Grainger’s sales trends have tended to correlate with industrial production and non-farm payrolls.  According to the Federal Reserve, overall industrial production increased 5.9% from December 2009 to December 2010.  Both the United States’ and Canada’s GDP grew an estimated 2.9% in 2010.  The improvement in the economy has positively affected Grainger’s sales growth for the twelve months of 2010.
 
In February 2011, Consensus Forecasts-USA projected 2011 Industrial Production and GDP growth for the United States of 4.6% and 3.2%, respectively, and GDP growth of 2.6% for Canada.
 
The light and heavy manufacturing customer sectors, which comprised approximately 25% of Grainger’s total 2010 sales, have historically correlated with manufacturing employment levels and manufacturing production. Manufacturing employment levels in the United States increased approximately 1.2% from December 2009 to December 2010, while manufacturing output increased 0.9% from December 2009 to December 2010. This increase in manufacturing employment and output contributed to an upper teen percent increase in the heavy manufacturing customer sector and a low double-digit percent increase in the light manufacturing customer sector for Grainger in 2010.
 
  Outlook. Grainger intends to take advantage of its strong financial position by continuing to make investments in growth such as hiring additional sales representatives and on-site inventory services managers, and expanding product breadth and availability, and e-commerce capabilities, as well as the Company’s global presence.  These investments should contribute to continued market share growth by helping businesses and institutions streamline their purchasing processes and reduce costs.  As of January 25, 2011, Grainger forecasts 5 to 9 percent in sales growth and $7.15 to $7.90 of earnings per share for the full year of 2011.
 
The sales growth for 2011, while still strong, is expected to be at a lower rate than 2010 primarily due to more difficult comparisons.  The 2010 results reflect the effect of economic recovery as well as a one percentage point contribution from sales of products used to assist in the oil spill cleanup that will not repeat in 2011.
 
Matters Affecting Comparability.  There were 254 sales days in 2010, 255 in 2009 and 256 in 2008.
 
Grainger completed several acquisitions throughout 2010 and 2009, all of which were immaterial individually, and in the aggregate.  Grainger’s operating results have included the results of each business acquired since the respective acquisition dates.
 
 
11

 
Results of Operations
The following table is included as an aid to understanding changes in Grainger’s Consolidated Statements of Earnings:
 
   
For the Years Ended December 31,
 
   
 
As a Percent of Net Sales
   
Percent Increase/(Decrease) from Prior Year
 
   
2010
   
2009
   
2008
   
2010
   
2009
 
Net sales
    100.0 %     100.0 %     100.0 %     15.4 %     (9.2 )%
Cost of merchandise sold
     58.2        58.2        59.0        15.3       (10.4 )
Gross profit
    41.8       41.8       41.0       15.7       (7.5 )
Operating expenses
    29.9       31.1       29.6       11.0       (4.6 )
Operating earnings
    11.9       10.7       11.4       29.4       (15.0 )
Other income (expense)
    (0.1 )      0.7       (0.1 )     (115.9 )     (545.5 )
Income taxes
    4.7       4.5       4.4       23.0       (7.2 )
Noncontrolling interest
     0.0        0.0        0.0        –        –  
Net earnings attributable to W.W. Grainger, Inc.
    7.1 %     6.9 %     6.9 %     18.7 %     (9.4 )%
 
 
2010 Compared to 2009
Grainger’s net sales of $7,182.2 million for 2010 increased 15.4% when compared with net sales of $6,222.0 million for 2009. There was one less selling day in 2010 versus 2009.  Daily sales were up 15.9%.  For 2010, approximately 10 percentage points of the sales growth came from an increase in volume, 4 percentage points came from business acquisitions, and 2 percentage points due to foreign exchange.  Sales of products used to assist with the oil spill cleanup in the Gulf of Mexico and sales of seasonal products each contributed approximately 1 percentage point to the volume growth for 2010.   Sales to all customer end-markets increased for 2010.  The overall increase in net sales was led by a 30 percent increase to reseller customers, driven by sales of products used in the oil spill cleanup, a high teen percent increase to heavy manufacturing customers, followed by a low double-digit increase in light manufacturing.  Refer to the Segment Analysis below for further details.
 
Gross profit of $3,005.7 million for 2010 increased 15.7%.  The gross profit margin for 2010 was 41.8%, flat versus 2009.  The gross profit margin was favorably affected by flat prices while product costs decreased, offset by faster sales growth from the lower margin international businesses and by an increase in sales to large customers which are generally at lower margins.
 
Operating expenses of $2,145.2 million for 2010 increased 11.0% from $1,933.3 million for 2009. Operating expenses increased primarily due to higher commissions, bonuses and profit sharing costs due to improved performance, partially offset by a $33.1 million benefit that resulted from a paid time off policy change, which reduced the related liability.
 
Operating earnings of $860.5 million for 2010 increased 29.4% from $665.2 million for 2009.  The increase in operating earnings was primarily due to the strong sales growth and operating expenses which increased at a slower rate than sales.
 
Net earnings attributable to Grainger for 2010 increased by 18.7% to $510.9 million from $430.5 million in 2009. The increase in net earnings for 2010 primarily resulted from an increase in operating earnings.  Diluted earnings per share of $6.93 in 2010 were 23.3% higher than $5.62 for 2009, due to increased net earnings and fewer shares outstanding.  There were two unusual non-cash items included in 2010 earnings, a $0.28 per share benefit from a change to a 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, which resulted in a net benefit of $0.13 per share.  Results for 2009 included a $0.37 per share non-cash gain from the MonotaRO transaction in September 2009.  Excluding these unusual items from both years, net earnings increased 29.4% and earnings per share increased 29.5% in 2010 versus 2009.
 
Segment Analysis
The following comments at the reportable segment and other business unit level include external and intersegment net sales and operating earnings. See Note 19 to the Consolidated Financial Statements.
 
United States
Net sales were $6,020.1 million for 2010, an increase of $574.7 million, or 10.6%, when compared with net sales of $5,445.4 million for 2009.  Daily sales in the United States were up 11.0%.  Approximately 9 percentage points of the sales growth came from an increase in volume.  In addition, acquisitions and price each added 1 percentage point.  Sales to all customer end-markets except contractor customers increased for 2010.  The overall increase in net sales was led by a mid 20 percent increase to reseller customers driven by the sales of products used to assist in the oil spill cleanup, a high teen percent increase to heavy manufacturing customers and a low double-digit increase to light manufacturing customers.
 
 
12

 
The segment gross profit margin increased 0.6 percentage point in 2010 over 2009.  The gross profit margin benefited from price increases exceeding product cost increases, partially offset by an increase in sales to large customers which are generally at lower margins.
 
Operating expenses were up 6.0% for 2010 versus 2009.  Operating expenses increased primarily due to higher commissions, bonus expense and profit sharing costs due to improved performance, partially offset by a $29.7 million benefit that resulted from a paid time off policy change, which reduced the related liability.
 
For the segment, operating earnings of $920.2 million for 2010 increased 25.1% over $735.6 million in 2009.  The improvement in operating earnings for 2010 was primarily due to an increase in net sales and gross profit margin, and operating expenses increasing at a slower rate than sales.

Canada
Net sales were $820.9 million for 2010, an increase of $169.7 million, or 26.1%, when compared with $651.2 million for 2009.  Daily sales were up 26.6% and in local currency, daily sales increased 14.9% for 2010.  Contributing to the sales growth was 3 percentage points for acquisitions.  The increase in net sales was led by growth to oil and gas, construction, and agriculture and mining customers.
 
The gross profit margin increased 0.4 percentage point in 2010 over 2009, primarily driven by lower product costs including the positive effect of foreign currency exchange on buying products in U.S. dollars.
 
Operating expenses increased 32.0% in 2010.  In local currency, operating expenses increased 19.7% primarily due to increased payroll and benefits costs including higher commissions and bonus expense, increased volume-related headcount and incremental costs for acquisitions made over the last year.  Non-payroll related expenses also increased driven by higher travel, entertainment and advertising due to the sponsorship of the 2010 Winter Olympic Games, and increased occupancy and warehouse costs driven in part by the incremental costs for a distribution center opened in the 2010 second quarter.
 
Operating earnings of $46.8 million for 2010 were up $3.1 million, or 7.1%, versus 2009 due to the foreign exchange rate impact. In local currency, operating earnings decreased 1% primarily due to increased operating expenses as discussed above.
 
Other Businesses
Net sales for other businesses, which include Japan, Mexico, India, Puerto Rico, China, Colombia and Panama, were up 136.1% for 2010.  Daily sales increased 137.0%.  The increase in net sales was due primarily to the inclusion of a full year of results for Japan after obtaining controlling interest in September 2009 and Colombia, acquired in June 2010, along with strong growth from all the other international businesses.  Operating earnings for other businesses were $11.7 million for 2010 compared to operating losses of $11.6 million for 2009.
 
Other Income and Expense
Other income and expense was $6.7 million of expense in 2010 compared with $42.1 million of income in 2009.  The following table summarizes the components of other income and expense (in thousands of dollars):
 
 
   
For the Years Ended December 31,
 
   
2010
   
2009
 
Other income and (expense):
           
Interest income (expense) – net
  $ (6,972 )   $ (7,408 )
Equity in net (loss) income of unconsolidated entities
    (182 )     1,497  
Gain on previously held equity interest – net
          47,343  
Other non-operating income
    1,608       964  
Other non-operating expense
    (1,151 )     (283 )
    $ (6,697 )   $ 42,113  
 
The change from net income to net expense was primarily attributable to the one-time non-cash gain of $47.4 million in 2009 from the step-up of the investment in MonotaRO after Grainger became a majority owner.
 
Income Taxes
Income taxes of $340.2 million in 2010 increased 23.0% as compared with $276.6 million in 2009.  Grainger’s effective tax rates were 39.8% and 39.1% in 2010 and 2009, respectively. The increase in the tax rate in 2010 was primarily driven by a one-time tax expense related to the U.S. healthcare legislation passed in the first quarter of 2010.  Excluding this one-time tax expense, the 2010 effective tax rate was 39.1%.
 
For 2011, Grainger is estimating its effective tax rate to be approximately 39.2%.  The increase is primarily due to a higher income tax rate adopted in the state of Illinois in the first quarter of 2011.
 
 
13

 
2009 Compared to 2008
Grainger’s net sales of $6,222.0 million for 2009 decreased 9.2% when compared with net sales of $6,850.0 million for 2008. There was one less selling day in 2009 versus 2008. Daily sales were down 8.8%.  Sales were negatively affected by a decline in volume of approximately 14 percentage points, partially offset by price increases of approximately 5 percentage points.  In addition, sales were negatively affected by 1 percentage point due to foreign exchange, while sales from acquisitions contributed approximately 1 percentage point.  The overall decrease in net sales was led by a mid 20 percent decline in the heavy manufacturing customer sector, followed by a low 20 percent decline in the reseller customer sector and a mid teen percent decline in the contractor customer sector.  The government customer sector performed the strongest as sales were flat for 2009, followed by a mid single-digit decline in the commercial customer sector.  Refer to the Segment Analysis below for further details.
 
Gross profit of $2,598.5 million for 2009 decreased 7.5%.  The gross profit margin for 2009 increased 0.8 percentage point to 41.8% from 41.0% in 2008.  The improvement in the gross profit margin was primarily driven by price increases exceeding product cost increases, partially offset by an increase in the mix of sales to large customers which are generally at lower margins.
 
Operating expenses of $1,933.3 million for 2009 decreased 4.6% from $2,025.6 million for 2008. Operating expenses decreased primarily due to lower payroll and benefits as a result of lower headcount, profit sharing and incentive compensation.  Non-payroll related expenses also decreased due to cost containment efforts.
 
Operating earnings of $665.2 million for 2009 decreased 15.0% from $782.7 million for 2008.  The decrease in operating earnings was primarily due to the decline in sales combined with operating expenses, which declined at a lower rate than sales. These declines were partially offset by an increase in gross profit margin.
 
Net earnings for 2009 decreased by 9.4% to $430.5 million from $475.4 million in 2008. The decline in net earnings for 2009 primarily resulted from the decline in operating earnings, partially offset by the one-time non-cash pretax gain of $47.4 million ($28 million after tax) from the step-up of the investment in MonotaRO after Grainger became a majority owner in September 2009.  Diluted earnings per share of $5.62 in 2009 were 5.9% lower than $5.97 for 2008, primarily due to the decline in net earnings, partially offset by lower shares outstanding.  In the first quarter of 2009, Grainger adopted authoritative guidance regarding “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” resulting in a seven cent reduction to the previously reported 2008 diluted earnings per share.
 
Segment Analysis
The following comments at the reportable segment and other business unit level include external and intersegment net sales and operating earnings. See Note 19 to the Consolidated Financial Statements.
 
United States
Net sales were $5,445.4 million for 2009, a decrease of $612.4 million, or 10.1%, when compared with net sales of $6,057.8 million for 2008.  Daily sales in the United States were down 9.8%.  All customer sectors were negatively impacted by economic conditions.  The overall decrease in net sales was led by a mid 20 percent decline in the heavy manufacturing customer sector and in the reseller customer sector.  The contractor and light manufacturing customer sectors declined in the mid teens and high single digits, respectively, while the government customer sector performed the strongest with flat sales for 2009.
 
Beginning in 2006, Grainger has added approximately 234,000 new products to supplement the plumbing, fastener, material handling and security product lines as part of the business’ ongoing product line expansion initiative. The catalog issued in February 2010 offered a total of 307,000 products, an increase of 70,000 products over the 2009 catalog.
 
The segment gross profit margin increased 1.3 percentage points in 2009 over 2008.  The improvement in gross profit margin was primarily driven by price increases exceeding product cost increases, partially offset by an increase in the mix of lower margin sales to large customers.
 
Operating expenses in this segment were down 4.6% for 2009.  Operating expenses decreased primarily due to lower payroll and benefits as a result of reduced headcount, lower profit sharing and no incentive compensation, partially offset by an increase in severance costs.  Non-payroll related expenses also decreased due to cost containment efforts.
 
For the segment, operating earnings of $735.6 million for 2009 decreased 12.5% over $840.4 million for 2008.  This decrease in operating earnings for 2009 was primarily due to the decline in net sales and operating expenses which declined at a lower rate than sales, partially offset by an increase in gross profit margin.
 
Canada
Net sales were $651.2 million for 2009, a decrease of $76.8 million, or 10.6%, when compared with $728.0 million for 2008.  Daily sales were down 10.2% and in local currency, daily sales decreased 3.9% for 2009.  The decrease in net sales was led by declines in the heavy manufacturing and contractor customer sectors driven by economic conditions.  Partially offsetting these declines were strong sales to the utilities customer sector driven by special projects, and to higher sales to the government.
 
 
14

 
The gross profit margin decreased 1.1 percentage points in 2009 over 2008.  The decline in the gross profit margin was primarily due to cost increases exceeding price increases and an increase in the mix of lower margin sales, particularly to large customers.
 
Operating expenses decreased 11.5% in 2009.  In local currency, operating expenses decreased 5.6% primarily due to lower commissions and incentive compensation accruals, and non-payroll related expenses including lower travel and advertising costs.  In addition, 2008 included expenses related to the bankruptcy of a provider of freight payment services.
 
Operating earnings of $43.7 million for 2009 were down $10.5 million, or 19.4%, versus 2008. In local currency, operating earnings decreased 15.6% primarily due to the decline in net sales and gross profit margin.
 
Other Businesses
Net sales for other businesses, which include Japan, Mexico, India, Puerto Rico, China and Panama, were up 47.7% for 2009.  Daily sales increased 48.3%.  The increase in net sales was due primarily to the inclusion of results from the acquisitions of the businesses in India and Japan, along with a positive contribution from China. Operating losses for other businesses were $11.6 million for 2009, a 1.6% improvement compared to operating losses of $11.8 million for 2008.
 
Other Income and Expense
Other income and expense was $42.1 million of income in 2009, an increase of $51.6 million as compared with $9.5 million of expense in 2008.  The following table summarizes the components of other income and expense (in thousands of dollars):
 
 
   
For the Years Ended December 31,
 
   
2009
   
2008
 
Other income and (expense):
           
Interest income (expense) – net
  $ (7,408 )   $ (9,416 )
Equity in net income of unconsolidated entities
    1,497       3,642  
Gain (write-off) of investment in unconsolidated entities
    47,343       (6,031 )
Other non-operating income
    964       2,668  
Other non-operating expense
    (283 )     (317 )
    $ 42,113     $ (9,454 )
 
 
The change from net expense to net income was primarily attributable to the one-time non-cash gain of $47.4 million from the step-up of the investment in MonotaRO after Grainger became a majority owner in September 2009.  In addition, 2008 included the write-off of a joint venture investment in India as described in Note 6 to the Consolidated Financial Statements. Other operating income is lower primarily due to lower foreign currency transactions gains versus 2008.
 
Income Taxes
Income taxes of $276.6 million in 2009 decreased 7.2% as compared with $297.9 million in 2008.  Grainger’s effective tax rates were 39.1% and 38.5% in 2009 and 2008, respectively. The increase in the tax rate in 2009 was primarily driven by increased U.S. state tax rates.
 
Financial Condition
Grainger expects its strong working capital position, cash flows from operations and borrowing capacity to continue, allowing it to fund its operations, including growth initiatives, capital expenditures, acquisitions and repurchase of shares, as well as to pay cash dividends.
 
Cash Flow
 
Fiscal year 2010 compared with fiscal year 2009
Cash from operating activities continues to serve as Grainger’s primary source of liquidity.  Net cash flows from operations of $596.4 million in 2010 decreased $136.0 million from $732.4 million in 2009.  Excluding business acquisitions, the decrease was primarily due to increases in accounts receivable of $127.8 million and inventories of $80.5 million, driven by the higher sales volumes.  The decrease was partially offset by an increase in net earnings.
 
Net cash used in investing activities of $169.2 million in 2010 decreased $93.4 million versus $262.6 million in 2009.  Net cash expended for property, buildings, equipment and software of $120.6 million decreased $20.1 million from $140.7 million in 2009. Additional information regarding capital spending is detailed in the Capital Expenditures section below. In addition, net cash paid for business acquisitions decreased $61.0 million versus 2009.
 
 
15

 
Net cash used in financing activities of $578.6 million in 2010 increased $165.1 million from $413.5 million in 2009.  Grainger repaid $239.1 million of long-term debt in 2010 and issued $200.0 million of commercial paper, resulting in a net use of cash.  Cash paid for treasury share purchases of $504.8 million was $132.1 million higher than $372.7 million in 2009. Grainger repurchased 4.6 million shares in 2010 compared to 4.5 million shares in 2009.  In 2011, treasury share repurchases are expected to be $210 million to $265 million.
 
Fiscal year 2009 compared with fiscal year 2008
Net cash provided by operations of $732.4 million increased $202.3 million in 2009 versus $530.1 million in 2008.  The increase was primarily driven by a decrease in inventories due to lower purchases in response to the slowdown in the economy and lower sales volumes.  Partially offsetting the increase were lower net earnings of $44.6 million in 2009 versus 2008.
 
Net cash used in investing activities of $262.6 million in 2009 increased $59.9 million versus 2008.  The increase was primarily due to $123.1 million paid for business acquisitions, net of cash acquired, $88.8 million higher than in 2008.  Net cash expended for property, buildings, equipment and capitalized software was $140.7 million, $40.7 million lower than $181.4 million in 2008.
 
Net cash used in financing activities of $413.5 million in 2009 was $376.7 million higher than $36.8 million in 2008. Proceeds from a four-year bank term loan of $500.0 million were included in 2008 and used to pay off $95.9 million in commercial paper. Cash paid for treasury stock purchases of $372.7 million was $21.5 million lower than $394.2 million in 2008. Grainger repurchased 4.5 million shares in 2009 compared to 5.5 million shares in 2008.
 
Working Capital
Internally generated funds are the primary source of working capital and funds used in business expansion, supplemented by debt. In addition, funds are expended on facilities to support growth initiatives, as well as for business and systems development and other infrastructure improvements.
 
Working capital was $1,368.8 million at December 31, 2010, compared with $1,354.7 million at December 31, 2009 and $1,382.4 million at December 31, 2008. At these dates, the ratio of current assets to current liabilities was 2.6, 2.7 and 2.8.  Working capital and the current ratio were essentially flat over this three-year period.
 
Capital Expenditures
In each of the past three years, a portion of operating cash flow has been used for additions to property, buildings, equipment and capitalized software as summarized in the following table (in thousands of dollars):
 
   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
Land, buildings, structures and improvements
  $ 63,358     $ 67,917     $ 107,688  
Furniture, fixtures, machinery and equipment
     51,965        63,667        76,163  
Subtotal
    115,323       131,584       183,851  
Capitalized software
    16,217       8,367       12,297  
Total
  $ 131,540     $ 139,951     $ 196,148  
 
In 2010 and 2009, significant capital expenditures included investments in the distribution center network in the U.S. and Canada.  Additional expenditures were for normal recurring replacement of equipment.
 
In 2008, Grainger substantially completed its investments in the market expansion program in the United States that realigned branches in the top 25 major metropolitan areas. In addition, there was continued international investment, including branch expansion in Mexico, as well as the normal recurring replacement of equipment.
 
Capital expenditures are expected to range from $175 million to $200 million in 2011. Projected investments include continued investments in distribution centers, information technology, and the normal recurring replacement of equipment. Grainger expects to fund 2011 capital investments from operating cash flows.
 
Debt
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit.  A four-year bank term loan of $500.0 million obtained in May 2008 was partially prepaid by proceeds from $200.0 million of commercial paper issued in 2010.  Grainger’s available lines of credit were $400.0 million at December 31, 2010 and $250.0 million at December 31, 2009 and 2008, respectively. Total debt as a percent of total capitalization was 17.8%, 19.1% and 20.7% as of the same dates. The reduction in total debt as a percent of total capitalization was primarily the result of the reduction in long-term debt. Grainger believes any circumstances that would trigger early payment or acceleration with respect to any outstanding debt obligations would not have a material impact on its results of operations or financial position.
 
 
16

 
Commitments and Other Contractual Obligations
At December 31, 2010, Grainger’s contractual obligations, including estimated payments due by period, are as follows (in thousands of dollars):
 
   
Payments Due by Period
 
   
Total Amounts Committed
   
Less than 1 Year
   
1 – 3 Years
   
4 – 5 Years
   
More than 5 Years
 
Long-term debt obligations
  $ 451,505     $ 31,059     $ 220,138     $ 200,055     $ 253  
Interest on long-term debt
     3,372        2,411        815        46        100  
Operating lease obligations
     201,563        45,461        72,787        48,471        34,844  
Purchase obligations:
                                       
Uncompleted additions to
property, buildings and equipment
         54,323            53,923            192            208            –  
Commitments to purchase inventory
       272,052          271,720          332          –          –  
Other purchase obligations
     146,618        62,740        49,480        34,398        –  
Other liabilities
    346,540       154,009       19,091       21,405       152,035  
Total
  $ 1,475,973     $ 621,323     $ 362,835     $ 304,583     $ 187,232  
 
Purchase obligations for inventory are made in the normal course of business to meet operating needs. While purchase orders for both inventory purchases and non-inventory purchases are generally cancelable without penalty, certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.
 
Other liabilities represent future benefit payments for postretirement benefit plans and postemployment disability medical benefits as determined by actuarial projections, and other employee benefit plans. Other employment-related benefits costs of $48.8 million have not been included in this table as the timing of benefit payments is not statistically predictable. See Note 11 to the Consolidated Financial Statements.
 
See also Notes 9 and 12 to the Consolidated Financial Statements for further detail related to the interest on long-term debt and operating lease obligations, respectively.
 
Grainger has recorded a noncurrent liability of $36.0 million for tax uncertainties and interest at December 31, 2010. This amount is excluded from the table above, as Grainger cannot make reliable estimates of these cash flows by period. See Note 17 to the Consolidated Financial Statements.
 
Off-Balance Sheet Arrangements
Grainger does not have any material exposures to off-balance sheet arrangements.  Grainger does not have any variable interest entities or activities that include non-exchange-traded contracts accounted for at fair value.
 
Critical Accounting Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in Grainger’s results of operations for the period in which the actual amounts become known.
 
Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of Grainger’s financial condition, changes in financial condition or results of operations.
 
Note 2 to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the Consolidated Financial Statements. The most significant areas involving management judgments and estimates follow. Actual results in these areas could differ materially from management’s estimates under different assumptions or conditions.
 
 
17

 
Allowance for Doubtful Accounts.  Grainger considers several factors to estimate the allowance for uncollectible accounts receivable including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables. The analyses performed also take into consideration economic conditions that may have an impact on a specific industry, group of customers or a specific customer.  Based on analysis of actual historical write-offs of uncollectible accounts receivable, Grainger’s estimates and assumptions have been materially accurate in regards to the valuation of its allowance for doubtful accounts.  However, write-offs could be materially different than the reserves established if business or economic conditions change or actual results deviate from historical trends, and Grainger’s estimates and assumptions may be revised as appropriate to reflect these changes.  For years 2010, 2009 and 2008, actual results did not vary materially from estimated amounts.
 
Inventory Reserves.  Grainger establishes inventory reserves for shrinkage and excess and obsolete inventory.
 
Provisions for inventory shrinkage are based on historical experience to account for unmeasured usage or loss.  For fiscal years 2010, 2009 and 2008, actual results did not vary materially from estimated amounts.
 
Grainger regularly reviews inventory to evaluate continued demand and identify any obsolete or excess quantities.  Grainger records provisions for the difference between excess and obsolete inventory and its estimated realizable value.  Estimated realizable value is based on anticipated future product demand, market conditions and liquidation values.  As Grainger’s inventory consists of approximately 800,000 stocked products, it is not practical to quantify the actual disposition of excess and obsolete inventory against estimated amounts at a SKU level and no individual SKU is material.   There were no material differences noted between reserve levels compared to the level of write-offs historically.  Grainger’s methodology for estimating reserves is continually evaluated based on current experience and the methodology provides for a materially accurate level of reserves at any reporting date.  Actual results could differ materially from projections and require changes to reserves which could have a material effect on Grainger’s results of operations based on significant changes in product demand, market conditions or liquidation value.  If business or economic conditions change, Grainger’s estimates and assumptions may be revised as appropriate.  For fiscal years 2010, 2009 and 2008, actual results did not vary materially from estimated amounts.
 
Goodwill and Indefinite Lived Intangible Assets. Grainger’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that Grainger may incur in future periods.  Grainger annually reviews goodwill and intangible assets that have indefinite lives for impairment in the fourth quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values.  Grainger tests for goodwill impairment at the reporting unit level.  Grainger’s tests indicated that the fair values were substantially in excess of carrying values and thus did not fail step one of the goodwill impairment test.  Grainger’s determination of fair value requires certain assumptions and estimates regarding future profitability and cash flows of acquired businesses and market conditions.  However, due to the inherent uncertainties associated with using these assumptions, impairment charges could occur in future periods.
 
Stock Incentive Plans.  Grainger maintains stock incentive plans under which a variety of incentive grants may be awarded to employees and directors. Grainger uses a binomial lattice option pricing model to estimate the value of stock option grants. The model requires projections of the risk-free interest rate, expected life, volatility, expected dividend yield and forfeiture rate of the stock option grants. The fair value of options granted in 2010, 2009 and 2008 used the following assumptions:
 
     For the Years Ended December 31
      2010        2009        2008   
Risk-free interest rate
    2.9 %     2.4 %     3.2 %
Expected life
 
6 years
   
6 years
   
6 years
 
Expected volatility
    24.7 %     28.8 %     25.2 %
Expected dividend yield
    2.0 %     2.3 %     1.8 %
 
The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected term of the options being valued. The expected life selected for options granted during each year presented represents the period of time that the options are expected to be outstanding based on historical data of option holders’ exercise and termination behavior. Expected volatility is based upon implied and historical volatility of the closing price of Grainger’s stock over a period equal to the expected life of each option grant. Historical information is also the primary basis for selection of the expected dividend yield assumptions.  Because stock option compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures, using historical forfeiture experience.
 
The amount of stock option compensation expense is significantly affected by the valuation model and these assumptions. If a different valuation model or different assumptions were used, the stock option compensation expense could be significantly different from what is recorded in the current period.
 
 
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Compensation expense for other stock-based awards is based upon the closing market price on the last trading date preceding the date of the grant.
 
For additional information concerning stock incentive plans, see Note 13 to the Consolidated Financial Statements.
 
Postretirement Healthcare Benefits.  Postretirement healthcare obligations and net periodic costs are dependent on assumptions and estimates used in calculating such amounts.  The assumptions used include, among others, discount rates, assumed rates of return on plan assets and healthcare cost trend rates, and certain employee-related factors, such as turnover, retirement age and mortality rates. Changes in these and other assumptions (caused by conditions in equity markets or plan experience, for example) could have a material effect on Grainger’s postretirement benefit obligations and expense, and could affect its results of operations and financial condition. These changes in assumptions may also affect voluntary decisions to make additional contributions to the trust established for funding the postretirement benefit obligation.
 
The discount rate assumptions used by management reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date, of each year. A lower discount rate increases the present value of benefit obligations and net periodic postretirement benefit costs. As of December 31, 2010, Grainger decreased the discount rate used in the calculation of its postretirement plan obligation from 6.0% to 5.6% to reflect the decrease in market interest rates. Grainger estimates that this decrease in the discount rate will decrease 2011 pretax earnings by approximately $2.7 million, although other changes in assumptions may increase, decrease or eliminate this effect.
 
Grainger considers the long-term historical actual return on plan assets and the historical performance of the Standard & Poor’s 500 Index and, beginning in 2010, the Total International Composite Index, in developing its expected long-term return on plan assets. In 2010, Grainger maintained the expected long-term rate of return on plan assets of 6.0% (net of tax at 40%) based on the historical average of long-term rates of return.
 
A 1 percentage point change in assumed healthcare cost trend rates would have had the following effects on December 31, 2010 results (in thousands of dollars):
   
1 Percentage Point
 
   
Increase
   
(Decrease)
 
Effect on total of service and interest cost
  $ 6,638     $ (5,071 )
Effect on accumulated postretirement benefit obligation
    54,257       (42,320 )
 
Grainger may terminate or modify the postretirement plan at any time, subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, as amended. In the event the postretirement plan is terminated, all assets of the Group Benefit Trust inure to the benefit of the participants. The foregoing assumptions are based on the presumption that the postretirement plan will continue. Were the postretirement plan to terminate, different actuarial assumptions and other factors might be applicable.
 
Grainger has used its best judgment in making assumptions and estimates and believes such assumptions and estimates used are appropriate. Changes to the assumptions may be required in future years as a result of actual experience or new trends and, therefore, may affect Grainger’s retirement plan obligations and future expense.
 
For additional information concerning postretirement healthcare benefits, see Note 11 to the Consolidated Financial Statements.
 
Insurance Reserves.  Grainger retains a significant portion of the risk of certain losses related to workers’ compensation, general liability and property losses through the utilization of high deductibles and self-insured retentions.  There are also certain other risk areas for which Grainger does not maintain insurance.
 
Grainger is responsible for establishing accounting policies on insurance reserves.  Although it relies on outside parties to project future claims costs, it retains control over actuarial assumptions, including loss development factors and claim payment patterns.  Grainger performs ongoing reviews of its insured and uninsured risks, which it uses to establish the appropriate reserve levels.  In calculating the liability, historical trends, claims experience and loss development patterns are analyzed and appropriate loss development factors are applied to the incurred costs associated with the claims made.
 
The use of assumptions in the analysis leads to fluctuations in required reserves over time.  Any change in the required reserve balance is reflected in the current period’s results of operations.  Grainger believes its estimates are reasonable based on the information currently available and the methodology used to estimate these reserves has been consistently applied.  There were no material adjustments based on Grainger’s historical experience in 2010, 2009 and 2008.  If actual trends, including the nature, severity or frequency of claims differ from our estimates, or if business or economic conditions change, Grainger’s estimates and assumptions may be revised as appropriate and the results of operations could be materially impacted.
 
 
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Income Taxes.  Grainger recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by Grainger are based on management’s interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects Grainger’s best estimates and assumptions regarding, among other items, the level of future taxable income, interpretation of tax laws and tax planning opportunities and uncertain tax positions. Future rulings by tax authorities and future changes in tax laws and their interpretation, changes in projected levels of taxable income and future tax planning strategies could impact the actual effective tax rate and tax balances recorded by Grainger.
 
Other.  Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, long-lived assets, fair value measurements and valuations, and warranties require judgments on complex matters that are often subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of Grainger. More information on these additional accounting policies can be found in Note 2 to the Consolidated Financial Statements.
 
Inflation
Inflation during the last three years has not had a significant effect on operations. The predominant use of the last-in, first-out (LIFO) method of accounting for inventories and accelerated depreciation methods for financial reporting and income tax purposes result in a substantial recognition of the effects of inflation in the financial statements.
 
Some of Grainger’s products contain significant amounts of commodity-priced materials, such as steel, copper or oil, and are subject to price changes based upon fluctuations in the commodities market. Grainger has been able to successfully pass on cost increases to its customers minimizing the effect of inflation on results of operations.
 
Grainger believes the most positive means to combat inflation and advance the interests of investors lie in the continued application of basic business principles, which include improving productivity, maintaining working capital turnover and offering products and services that can command appropriate prices in the marketplace.

Forward-Looking Statements
This Form 10-K contains statements that are not historical in nature but concern future results and business plans, strategies and objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Grainger has generally identified such forward-looking statements by using words such as “anticipate, anticipated, assumed, assumes, assumption, assumptions, believe, believes, continue, continued, continues to believe it has complied, continuing, could, estimate, estimated, estimates, expectation, expected, expects, forecast, forecasts, intended, intends, may, might, plans, predict, predictable, presumption, project, projected, projecting, projection, projections, potential, potentially, reasonably likely, scheduled, should, tended, timing and outcome are uncertain, unanticipated, will, will be realized, and would” or similar expressions.
 
Grainger cannot guarantee that any forward-looking statement will be realized, although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievement of future results is subject to risks and uncertainties that could cause Grainger’s results to differ materially from those which are presented.
 
Factors that could cause actual results to differ materially from those presented or implied in a forward-looking statement include, without limitation:  higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the outcome of pending and future litigation or governmental or regulatory proceedings; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; litigation involving appropriate payment for wages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; and the factors identified in Item 1A, Risk Factors.
 
Caution should be taken not to place undue reliance on Grainger’s forward-looking statements and Grainger undertakes no obligation to publicly update the forward-looking statements, whether as a result of new information, future events or otherwise.
 
 
20

 
Item 7A:  Quantitative and Qualitative Disclosures About Market Risk
 
Grainger is exposed to foreign currency exchange risk related to its transactions, and assets and liabilities denominated in foreign currencies.  Grainger may use financial instruments to hedge certain exposures as part of its overall risk management strategy.  In 2010, Grainger entered into a series of foreign currency forward contracts to minimize the foreign exchange rate effect on its net investment in its Canadian subsidiary.  These foreign currency forward contracts are designated and qualify as a hedge of a net investment in a foreign subsidiary and therefore, the effective portion of the gain or loss is reported in other comprehensive income. Grainger does not enter into derivative financial instruments for trading or speculative purposes.
 
The net losses on Grainger’s net investment hedges reported in other comprehensive income were $3.6 million, net of tax effects, in 2010.  See Notes 10 and 15 to the Consolidated Financial Statements for additional information on Grainger’s derivative activities.
 
For 2010, a uniform 10% strengthening of the U.S. dollar relative to foreign currencies that affect Grainger and its joint ventures would have resulted in a $2.7 million decrease in net earnings. Comparatively, in 2009 a uniform 10% strengthening of the U.S. dollar relative to foreign currencies that affect Grainger and its joint ventures would have resulted in a $0.9 million decrease in net earnings. A uniform 10% weakening of the U.S. dollar would have resulted in a $3.3 million increase in net earnings for 2010, as compared with an increase in net earnings of $1.1 million for 2009. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in potential changes in sales levels or local currency prices or costs.
 
Grainger is also exposed to interest rate risk in its debt portfolio. During 2010 and 2009, all of its long-term debt was variable rate debt. A 1 percentage point increase in interest rates paid by Grainger would have resulted in a decrease to net earnings of approximately $3.1 million for 2010 and $3.3 million for 2009.  A 1 percentage point decrease in interest rates would have resulted in an increase to net earnings of approximately $3.1 million for 2010 and $3.3 million for 2009. This sensitivity analysis of the effects of changes in interest rates on long-term debt does not factor in potential changes in long-term debt levels.
 
Grainger has limited primary exposure to commodity price risk on certain products for resale, but does not purchase commodities directly.
 
Item 8:  Financial Statements and Supplementary Data
 
The financial statements and supplementary data are included on pages 27 to 59. See the Index to Financial Statements and Supplementary Data on page 26.
 
Item 9:  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A:  Controls and Procedures
 
Disclosure Controls and Procedures
 
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Internal Control Over Financial Reporting
 
(A)  
Management’s Annual Report on Internal Control Over Financial Reporting
 
Management’s report on the Company’s internal control over financial reporting is included on page 27 of this Report under the heading Management’s Annual Report on Internal Control Over Financial Reporting.
 
(B)  
Attestation Report of the Registered Public Accounting Firm
 
The report from Ernst & Young LLP on its audit of the effectiveness of Grainger’s internal control over financial reporting as of December 31, 2010, is included on page 28 of this Report under the heading Report of Independent Registered Public Accounting Firm.
 
(C)  
Changes in Internal Control Over Financial Reporting
 
There have been no changes in Grainger’s internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.
 
Item 9B:  Other Information
 
None.
 
 
21

 
PART III
 
Item 10:  Directors, Executive Officers and Corporate Governance
 
The information required by this item is incorporated by reference to Grainger’s proxy statement relating to the annual meeting of shareholders to be held April 27, 2011, under the captions “Election of Directors,” “Board of Directors and Board Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance.”  Information required by this item regarding executive officers of Grainger is set forth below under the caption “Executive Officers.”
 
Grainger has adopted a code of ethics that applies to the principal executive officer, principal financial officer and principal accounting officer.  This code of ethics is incorporated into Grainger’s business conduct guidelines for directors, officers and employees. Grainger intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to its code of ethics by posting such information on its website at www.grainger.com/investor.  A copy of the code of ethics incorporated into Grainger’s business conduct guidelines is also available in print without charge to any person upon request to Grainger’s Corporate Secretary.  Grainger has also adopted Operating Principles for the Board of Directors, which are available on its website and are available in print to any person who requests them.
 
Executive Officers
Following is information about the Executive Officers of Grainger including age as of February 25, 2011. Executive Officers of Grainger generally serve until the next annual election of officers, or until earlier resignation or removal.
 
Name and Age
 
Positions and Offices Held and Principal
Occupation and Employment During the Past Five Years
Laura D. Brown (47)
 
Senior Vice President, Communications and Investor Relations, a position assumed in 2010 after serving as Vice President, Global Business Communications, a position assumed in 2009 and Vice President, Investor Relations, a position assumed in 2008.  Previously, Ms. Brown served as Vice President, Marketing, a position assumed in 2005.  After joining Grainger in 2000, she served in various management positions including Vice President, Finance and Vice President, Internet Business Analysis and Supplier Management.
 
Court D. Carruthers (38)
 
President, Grainger International, a position assumed in 2009, and Senior Vice President of Grainger, a position assumed in 2007.  Previously, Mr. Carruthers served as President of Acklands – Grainger Inc., a position assumed in 2006.  Prior to assuming the last-mentioned position, he served as Vice President, National Accounts and Sales of Acklands – Grainger Inc., a position assumed in 2002 when he joined that company.
 
John L. Howard (53)
 
Senior Vice President and General Counsel, a position assumed in 2000.
 
Gregory S. Irving (52)
 
Vice President and Controller, a position assumed in 2008.  Previously, Mr. Irving served as Vice President, Finance, for Acklands – Grainger Inc. since 2004.  After joining Grainger in 1999 he served in various management positions including Vice President, Financial Services and Director, Internal Audit.
 
Ronald L. Jadin (50)
 
Senior Vice President and Chief Financial Officer, a position assumed in 2008.  Previously, Mr. Jadin served as Vice President and Controller, a position assumed in 2006 after serving as Vice President, Finance.  Upon joining Grainger in 1998, he served as Director, Financial Planning and Analysis.
 
Donald G. Macpherson (43)
 
Senior Vice President, Global Supply Chain, a position assumed in 2008.  Mr. Macpherson joined Grainger in 2008 as Senior Vice President, Supply Chain.  Before joining Grainger, he was Partner and Director of the Boston Consulting Group, a global management consulting firm and advisor on business strategy.
 
Michael A. Pulick (46)
 
Senior Vice President and President, Grainger U.S., a position assumed in 2008 after serving as Senior Vice President of Customer Service, a position assumed in 2006.  After joining Grainger in 1999, Mr. Pulick has held a number of increasingly responsible positions in Grainger’s supplier and product management areas including Vice President, Product Management and Vice President, Merchandising.
 
James T. Ryan (52)
 
Chairman of the Board, President and Chief Executive Officer of Grainger, positions assumed in 2009, 2006 and 2008, respectively.  Mr. Ryan became Chief Operating Officer and was appointed to Grainger’s Board of Directors in 2007.  Prior to that, Mr. Ryan served as Group President, a position assumed in 2004.  He has served Grainger in increasingly responsible roles since 1980, including Executive Vice President, Marketing, Sales and Service; Vice President, Information Services; President, Grainger.com; and President, Grainger Parts.
 
22

 
Item 11:  Executive Compensation
 
The information required by this item is incorporated by reference to Grainger’s proxy statement relating to the annual meeting of shareholders to be held April 27, 2011, under the captions “Board of Directors and Board Committees,” “Director Compensation,” “Report of the Compensation Committee of the Board” and “Compensation Discussion and Analysis.”
 
Item 12:  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated by reference to Grainger’s proxy statement relating to the annual meeting of shareholders to be held April 27, 2011, under the captions “Ownership of Grainger Stock” and “Equity Compensation Plans.”
 
Item 13:  Certain Relationships and Related Transactions, and Director Independence
 
The information required by this item is incorporated by reference to Grainger’s proxy statement relating to the annual meeting of shareholders to be held April 27, 2011, under the captions "Election of Directors" and "Transactions with Related Persons."
 
Item 14:  Principal Accounting Fees and Services
 
The information required by this item is incorporated by reference to Grainger’s proxy statement relating to the annual meeting of shareholders to be held April 27, 2011, under the caption “Audit Fees and Audit Committee Pre-Approval Policies and Procedures.”
 
 
PART IV
Item 15:  Exhibits and Financial Statement Schedules
 
(a)
1.
Financial Statements.  See Index to Financial Statements and Supplementary Data.
 
2.
Financial Statement Schedules. The schedules listed in Reg. 210.5-04 have been omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.
 
3.
Exhibits
 
(3)
(a)
Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
 
(b)
Bylaws, as amended February 17, 2010, incorporated by reference to Exhibit 3(b) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
(4)
Instruments Defining the Rights of Security Holders, Including Indentures
 
(a)
No instruments which define the rights of holders of Grainger’s Industrial Development Revenue Bonds are filed herewith, pursuant to the exemption contained in Regulation S-K, Item 601(b)(4)(iii). Grainger hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any such instrument.
 
(10)
Material Contracts
 
(a)
(i)
A Credit Agreement with Wachovia Bank, National Association, as administrative agent, and other lenders, incorporated by reference to Exhibit 10 to Grainger's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.
 
(b)
Compensatory Plans or Arrangements
 
(i)
Director Stock Plan, as amended, incorporated by reference to Exhibit 10(c) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
 
(ii)
1990 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(a) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
 
(iii)
2001 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(b) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
 
(iv)
Form of Indemnification Agreement between Grainger and each of its directors and certain of its executive officers, incorporated by reference to Exhibit 10(b)(i) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
 
(v)
Executive Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(b)(v) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(1)
First amendment to the Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(v)(1) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2008.
 
(2)
Second amendment to the Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(iv)(2) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
 
23

 
 
(vi)
Supplemental Profit Sharing Plan, as amended, incorporated by reference to Exhibit 10(viii) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
(vii)
Supplemental Profit Sharing Plan II, as amended, incorporated by reference to Exhibit 10(b)(ix) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(viii)
Voluntary Salary and Incentive Deferral Plan, as amended, incorporated by reference to Exhibit 10(b)(xi) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(ix)
Summary Description of Directors Compensation Program effective April 29, 2009, incorporated by reference to Exhibit 10(b)(xiii) to Grainger’s Annual Report on Form10-K for the year ended December 31, 2008.
 
(x)
Summary Description of Directors Compensation Program effective April 28, 2010, incorporated by reference to Exhibit 10(b)(xii) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xi)
Summary Description of Directors Compensation Program effective April 27, 2011.
 
(xii)
2005 Incentive Plan, as amended, incorporated by reference to Exhibit 10(d) to Grainger's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
 
(xiii)
2010 Incentive Plan, incorporated by reference to Exhibit B of Grainger’s Proxy Statement dated March 12, 2010.
 
(xiv)
Form of Stock Option Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(xiv) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2005.
 
(xv)
Form of Stock Option Award and Restricted Stock Unit Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(xv) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2005.
 
(xvi)
Form of Stock Option Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvi) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xvii)
Form of Stock Option and Restricted Stock Unit Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xviii)
Form of Restricted Stock Unit Agreement between Grainger and certain of its executive officers.
 
(xix)
Form of Performance Share Award Agreement between Grainger and certain of its international executive officers, incorporated by reference to Exhibit 10(xvi) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2005.
 
(xx)
Form of Performance Share Award Agreement (non-dividend equivalent) between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xviii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2008.
 
(xxi)
Form of Performance Share Award Agreement (non-dividend equivalent and recoupment) between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xx) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xxii)
Offer of Employment Letter to Mr. D.G. Macpherson dated December 14, 2007, incorporated by reference to Exhibit 10(b)(xxi) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xxiii)
Summary Description of 2009 Management Incentive Program, incorporated by reference to Exhibit 10(b)(xxi) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2008.
 
(xxiv)
Summary Description of 2010 Management Incentive Program, incorporated by reference to Exhibit 10(b)(xxiv) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xxv)
Summary Description of the 2011 Management Incentive Program.
 
(xxvi)
Incentive Program Recoupment Agreement, incorporated by reference to Exhibit 10(b)(xxv) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
(xxvii)
Form of Change in Control Employment Agreement between Grainger and certain of its executive officers.
 
 
24

 
 
(21)
Subsidiaries of Grainger.
 
(23)
Consent of Independent Registered Public Accounting Firm.
 
(31)
Rule 13a – 14(a)/15d – 14(a) Certifications
 
(a)
Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
(b)
Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
(32)
Section 1350 Certifications
 
(a)
Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
(b)
Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
25

 
 
 
 
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 2010, 2009 and 2008
 
 
Page(s)
   
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
27
   
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
28-29
   
FINANCIAL STATEMENTS
 
   
CONSOLIDATED STATEMENTS OF EARNINGS
30
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
31
   
CONSOLIDATED BALANCE SHEETS
32-33
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
34-35
   
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
36
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37-59
   
 
 
 
26

 
 
 
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The management of W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining adequate internal control over financial reporting. Grainger’s internal control system was designed to provide reasonable assurance to Grainger’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance with respect to the preparation and presentation of financial statements.
 
Grainger’s management assessed the effectiveness of Grainger’s internal control over financial reporting as of December 31, 2010, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on its assessment under that framework and the criteria established therein, Grainger’s management concluded that Grainger’s internal control over financial reporting was effective as of December 31, 2010.
 
Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger’s internal control over financial reporting as of December 31, 2010, as stated in their report which is included herein.

 
 
27

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
W.W. Grainger, Inc.
 
 
We have audited W.W. Grainger, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). W.W. Grainger, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, W.W. Grainger, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of W.W. Grainger, Inc. and subsidiaries as of December 31, 2010, 2009 and 2008 and the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 of W.W. Grainger, Inc. and subsidiaries and our report dated February 25, 2011 expressed an unqualified opinion thereon.
 
 
 /s/ Ernst & Young LLP
 
 
Chicago, Illinois
February 25, 2011


 
28

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
The Board of Directors and Shareholders
W.W. Grainger, Inc.
 
 
We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc. and subsidiaries as of December 31, 2010, 2009 and 2008, and the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of W.W. Grainger, Inc. and subsidiaries at December 31, 2010, 2009, and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), W.W. Grainger, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2011, expressed an unqualified opinion thereon.

 
 /s/ Ernst & Young LLP
 
 
Chicago, Illinois
February 25, 2011
 
 
29

 
 
 
 
 
W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for per share amounts)
 
   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
Net sales
  $ 7,182,158     $ 6,221,991     $ 6,850,032  
Cost of merchandise sold
    4,176,474       3,623,465       4,041,810  
Gross profit
    3,005,684       2,598,526       2,808,222  
Warehousing, marketing and administrative expenses
    2,145,209       1,933,302       2,025,550  
Operating earnings
    860,475       665,224       782,672  
Other income and (expense):
                       
Interest income
    1,215       1,358       5,069  
Interest expense
    (8,187 )     (8,766 )     (14,485 )
Equity in net (loss) income of unconsolidated entities
    (182 )     1,497       3,642  
Gain (write-off) of investment in unconsolidated entities – net
          47,343       (6,031 )
Other non-operating income
    1,608       964       2,668  
Other non-operating expense
    (1,151 )     (283 )     (317 )
Total other income and (expense)
    (6,697 )     42,113       (9,454 )
Earnings before income taxes
    853,778       707,337       773,218  
Income taxes
    340,196       276,565       297,863  
Net earnings
    513,582       430,772       475,355  
Less: Net earnings attributable to noncontrolling interest
    2,717       306        
Net earnings attributable to W.W. Grainger, Inc.
  $ 510,865     $ 430,466     $ 475,355  
Earnings per share:
                       
Basic
  $ 7.05     $ 5.70     $ 6.07  
Diluted
  $ 6.93     $ 5.62     $ 5.97  
Weighted average number of shares outstanding:
                       
Basic
    70,836,945       73,786,346       76,579,856  
Diluted                                                                               
    72,138,858       74,891,852       77,887,620  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
30

 
 

W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
 
 
   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
Net earnings
  $ 513,582     $ 430,772     $ 475,355  
                         
Other comprehensive earnings (losses):
                       
                         
Foreign currency translation adjustments, net of tax (expense) benefit
  of $(3,397), $(7,813) and $11,454, respectively
    46,450       54,693       (79,287 )
                         
Derivative instruments, net of tax benefit of $2,257
    (3,559 )            
                         
Reclassification of cumulative currency translation gain
          (3,145 )      
                         
Defined postretirement benefit plan, net of tax benefit
  of $1,821, $984 and $19,368, respectively
    (2,874 )     (1,552 )     (30,550 )
                         
Other employment-related benefit plans, net of tax benefit
  of $64, $205 and $544, respectively
    (728 )     (554 )     (859 )
Total other comprehensive earnings (losses)
    39,289       49,442       (110,696 )
                         
Comprehensive earnings, net of tax
    552,871       480,214       364,659  
                         
Less: Comprehensive earnings attributable to noncontrolling interest:
                       
Net earnings                                                                              
    2,717       306        
Foreign currency translation adjustments
    8,712       (1,457 )      
Comprehensive earnings attributable to W.W. Grainger, Inc.
  $ 541,442     $ 481,365     $ 364,659  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
31

 

W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for per share amounts)
 
   
As of December 31,
 
   
2010
   
2009
   
2008
 
ASSETS
                 
CURRENT ASSETS
                 
   Cash and cash equivalents
  $ 313,454     $ 459,871     $ 396,290  
   Accounts receivable (less allowances for doubtful accounts
   of $24,552, $25,850 and $26,481, respectively)
    762,895       624,910       589,416  
   Inventories – net
    991,577       889,679       1,009,932  
   Prepaid expenses and other assets
    87,125       88,364       73,359  
   Deferred income taxes
    44,627       42,023       52,556  
   Prepaid income taxes
    38,393       26,668       22,556  
     Total current assets
    2,238,071       2,131,515       2,144,109  
                         
PROPERTY, BUILDINGS AND EQUIPMENT
                       
   Land
    249,119       237,867       192,916  
   Buildings, structures and improvements
    1,133,392       1,078,439       1,048,440  
   Furniture, fixtures, machinery and equipment
    995,249       950,187       890,507  
      2,377,760       2,266,493       2,131,863  
   Less accumulated depreciation and amortization
    1,414,088       1,313,222       1,201,552  
     Property, buildings and equipment – net
    963,672       953,271       930,311  
                         
DEFERRED INCOME TAXES
    87,244       79,472       97,442  
                         
INVESTMENTS IN UNCONSOLIDATED ENTITIES
    3,461       3,508       20,830  
                         
GOODWILL
    387,232       351,182       213,159  
                         
OTHER ASSETS AND INTANGIBLES – NET
    224,697       207,384       109,566  
                         
                         
TOTAL ASSETS
  $ 3,904,377     $ 3,726,332     $ 3,515,417  
 
32

 

W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS – CONTINUED
(In thousands of dollars, except for per share amounts)
 
   
As of December 31,
 
   
2010
   
2009
   
2008
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
CURRENT LIABILITIES
                 
   Short-term debt
  $ 42,769     $ 34,780     $ 19,960  
   Current maturities of long-term debt
    31,059       53,128       21,257  
   Trade accounts payable
    344,295       300,791       290,802  
   Accrued compensation and benefits
    169,343       135,323       162,380  
   Accrued contributions to employees’ profit sharing plans
    145,119       121,895       146,922  
   Accrued expenses
    130,836       124,150       118,633  
   Income taxes payable
    5,882       6,732       1,780  
     Total current liabilities
    869,303       776,799       761,734  
                         
LONG-TERM DEBT (less current maturities) 
    420,446       437,500       488,228  
                         
DEFERRED INCOME TAXES, TAX UNCERTAINTIES AND DERIVATIVE
  INSTRUMENTS
    82,502       62,215       33,219  
                         
ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS
    244,456       222,619       198,431  
                         
SHAREHOLDERS’ EQUITY
                       
   Cumulative preferred stock –
$5 par value – 12,000,000 shares authorized;
none issued nor outstanding
                 
   Common stock – $0.50 par value –
300,000,000 shares authorized;
109,659,219 shares issued
    54,830       54,830       54,830  
   Additional contributed capital
    637,686       596,358       564,728  
   Retained earnings
    4,326,761       3,966,508       3,670,726  
   Accumulated other comprehensive earnings (losses)
    42,951       12,374       (38,525 )
   Treasury stock, at cost –
40,281,417, 37,382,703 and
34,878,190 shares, respectively
    (2,857,012 )     (2,466,350 )     (2,217,954 )
     Total W.W. Grainger, Inc. shareholders’ equity
    2,205,216       2,163,720       2,033,805  
   Noncontrolling interest
    82,454       63,479        
   Total shareholders’ equity
    2,287,670       2,227,199       2,033,805  
                         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 3,904,377     $ 3,726,332     $ 3,515,417  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
33

 

W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
 
   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net earnings
  $ 513,582     $ 430,772     $ 475,355  
Provision for losses on accounts receivable 
    6,718       10,748       12,924  
Deferred income taxes and tax uncertainties
    (5,553     21,683       5,182  
Depreciation and amortization
    149,678       147,531       139,570  
Stock-based compensation
    49,796       43,301       47,870  
(Gain) write-off of unconsolidated entities
          (47,343 )     6,031  
Change in operating assets and liabilities –
   net of business acquisitions: 
                       
Accounts receivable
    (127,790     2,794       (5,592 )
Inventories         
    (80,545     175,286       (92,518 )
Prepaid expenses
    (8,806 )     (11,180 )     (33,629 )
Trade accounts payable
    36,219       (16,736 )     (6,960 )
Other current liabilities
    49,576       (52,944 )     199  
Current income taxes payable
    (1,503 )     2,472       (7,784 )
Accrued employment-related benefits costs
    18,128       22,080       3,216  
Other – net                                                                                
    (3,055 )     3,932       (13,798 )
                         
Net cash provided by operating activities
    596,445       732,396       530,066  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Additions to property, buildings and equipment –
   net of dispositions                                                                             
    (120,616 )     (140,730 )     (181,355 )
Cash paid for business acquisitions, net of cash acquired
    (62,072 )     (123,093 )     (34,290 )
Other – net 
    13,529       1,260       13,010  
                         
Net cash used in investing activities
  $ (169,159 )   $ (262,563 )   $ (202,635 )

 
 
34

 
W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
(In thousands of dollars)
 
   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                 
   Net increase (decrease) in commercial paper
  $ 200,000     $     $ (95,947 )
   Borrowings under lines of credit
    35,297       46,125       29,959  
   Payments against lines of credit
    (29,799 )     (43,583 )     (15,437 )
   Proceeds from issuance of long-term debt
                500,000  
   Payments of long-term debt
    (239,122 )     (18,856 )      
   Proceeds from stock options exercised
    86,528       91,165       46,833  
Excess tax benefits from stock-based compensation
    25,650       19,030       13,533  
   Purchase of treasury stock
    (504,803 )     (372,727 )     (394,247 )
   Cash dividends paid
    (152,338 )     (134,684 )     (121,504 )
Net cash used in financing activities
    (578,587 )     (413,530 )     (36,810 )
                         
Exchange rate effect on cash and cash equivalents
    4,884       7,278       (7,768 )
                         
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (146,417 )     63,581       282,853  
                         
Cash and cash equivalents at beginning of year
    459,871       396,290       113,437  
                         
Cash and cash equivalents at end of year
  $ 313,454     $ 459,871     $ 396,290  
                         
Supplemental cash flow information:
                       
   Cash payments for interest (net of amounts capitalized)
  $ 8,188     $ 8,766     $ 14,508  
   Cash payments for income taxes
    319,754       235,043       306,960  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.
 
35

 

 W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of dollars, except for per share amounts)
 
 
 
   
W.W. Grainger, Inc. Shareholders’ Equity
       
   
 
Common Stock
   
Additional Contributed Capital
   
 
Retained Earnings
   
Accumulated Other Comprehensive Earnings (Losses)
   
 
Treasury Stock
   
Noncontrolling
Interest
 
Balance at January 1, 2008
  $ 54,830     $ 475,350     $ 3,316,875     $ 72,171     $ (1,821,118 )   $  
Exercise of stock options
          (12,663 )                 59,460        
Tax benefits on stock-based
  compensation awards
          15,458                          
Stock option expense
          19,868                          
Amortization of other stock-based
  compensation awards
          26,077                          
Settlement and vesting of other stock-
  based compensation awards
          (9,362 )                 4,792        
Purchase of treasury stock
          50,000                   (461,088 )      
Net earnings
                475,355                    
Other comprehensive earnings
                      (110,696 )            
Cash dividends paid
  ($1.55 per share)
                (121,504 )                  
Balance at December 31, 2008
  $ 54,830     $ 564,728     $ 3,670,726     $ (38,525 )   $ (2,217,954 )   $  
Exercise of stock options
          (15,614 )                 106,255       96  
Tax benefits on stock-based 
  compensation awards
          21,924                          
Stock option expense    
          16,100                         98  
Amortization of other stock-based
  compensation awards
          24,307                          
Settlement and vesting of other stock-
  based compensation awards
          (15,087 )                 7,599        
Purchase of treasury stock
                            (362,250 )      
Net earnings
                430,466                   306  
Other comprehensive earnings
                      50,899             (1,457 )
Cash dividends paid
  ($1.78 per share)
                (134,684 )                  
Fair value at acquisition
                                  64,436  
Balance at December 31, 2009
  $ 54,830     $ 596,358     $ 3,966,508     $ 12,374     $ (2,466,350 )   $ 63,479  
Exercise of stock options
          (11,211 )                 98,052       171  
Tax benefits on stock-based
  compensation awards
          28,225                          
Stock option expense    
          17,163                         333  
Amortization of other stock-based
  compensation awards
          29,725                          
Settlement and vesting of other stock-
  based compensation awards
          (22,090 )                 9,297        
Purchase of treasury stock
          (484 )                 (498,011 )     (428 )
Net earnings
                510,865                   2,717  
Other comprehensive earnings
                      30,577             8,712  
Cash dividends paid
  ($2.08 per share)