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GRAINGER W W INC 10-K 2010
form10k123109.htm


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, 2009
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 Web site, 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. [X]
 
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 $5,681,567,963 as of the close of trading as reported on the New York Stock Exchange on June 30, 2009. The Company does not have nonvoting common equity.
 
The registrant had 72,424,927 shares of common stock outstanding as of January 31, 2010.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 28, 2010, are incorporated by reference into Part III hereof.
 
1

 
TABLE OF CONTENTS
 
Page(s)
PART I
Item 1:
BUSINESS
3
   
THE COMPANY
3
   
UNITED STATES
 
3-4
   
CANADA
4
   
OTHER BUSINESSES
   
4-5
   
SEASONALITY
   
5
   
COMPETITION
   
5
   
EMPLOYEES
   
5
   
WEB SITE ACCESS TO COMPANY REPORTS
5
Item 1A:
RISK FACTORS
5-6
Item 1B:
UNRESOLVED STAFF COMMENTS
6
Item 2:
PROPERTIES
6-7
Item 3:
LEGAL PROCEEDINGS
7-8
Item 4:
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
8
Executive Officers
     
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
  11-21
Item 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
22
Item 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
22
Item 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
 
   
ON ACCOUNTING AND FINANCIAL DISCLOSURE
22
Item 9A:
CONTROLS AND PROCEDURES
22
Item 9B:
OTHER INFORMATION
22
 
PART III
Item 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
23
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
24-25
Signatures
       
63
Certifications
       
65-68

 
2

 
PART I
Item 1:  Business
 
The Company
W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, distributes facilities maintenance products and provides related services and information used by businesses and institutions primarily in the United States, Canada, Japan and Mexico to keep their facilities and equipment running. In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries.
 
Grainger is the leading broad-line supplier of facilities maintenance and other related products and services in North 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 through a network of highly integrated branches, distribution centers and multiple Web sites.
 
During 2009, Grainger acquired two businesses in the United States and one in Canada.  Grainger also obtained a controlling interest in a business in India at 100% and in Japan at 53%.  Their results are consolidated with Grainger from the acquisition dates.
 
Grainger’s two reportable segments are the United States and Canada.  In the first quarter of 2009, Grainger integrated the Lab Safety business into the Grainger Industrial Supply business and results are now reported under the United States segment.  The Canada segment reflects the results for Acklands – Grainger Inc. 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) and Grainger Panama S.A. (Panama).  These businesses generate revenue through the distribution of facilities maintenance products and provide related services and information.  Prior year segment amounts have been restated in a consistent manner.  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 18 to the Consolidated Financial Statements.
 
Grainger has internal 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, 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 facilities maintenance and other products and provides related services and information through local branches, catalogs and the Internet. In the first quarter of 2009, the Lab Safety business was integrated into the U.S. branch-based business. In addition, two companies were acquired in 2009, Imperial Supplies LLC (Imperial) and Alliance Energy Solutions (Alliance), further broadening the product offering of the United States business. Imperial is a national distributor of quality maintenance products and aftermarket components for the vehicle and fleet industry; Alliance offers value-added services that help customers drive energy efficiency and productivity, with particular expertise in the area of lighting retrofits.
 
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 110 transactions per day. In 2009, three branches were opened and 17 branches were closed.
 
The logistics network is comprised of a network of 14 distribution centers (DCs) of various sizes, four of which were acquired in a business acquisition during 2009. Automated equipment and processes in the larger DCs allow them to handle the majority of the customer shipping for next day availability and replenish over 400 branches that provide same day availability.
 
3

 
The business has a sales force of approximately 2,400 professionals who help businesses and institutions select the right products to reduce operating expenses and improve cash flow, and find immediate solutions to maintenance problems. Customers range from small and medium-sized businesses to large corporations, governmental entities and other institutions and 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 2009 were made to approximately 1.7 million customers averaging 95,000 daily transactions. No single customer accounted for more than 5% of total sales.
 
The majority of the products sold by the United States business are national branded products.  Approximately 24% of 2009 sales consisted of private label items bearing Grainger’s registered trademarks, including 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. Sales of the remaining items generally consisted of products carrying the names of other well-recognized brands.
 
The Grainger catalog, most recently issued in February 2010, offers approximately 307,000 facilities maintenance and other products and is used by customers, sales representatives and branch personnel to assist in customer product selection. Approximately 2.4 million copies of the catalog were produced. In addition, Grainger’s United States business issues target 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 600,000 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 Web sites.
 
The United States business purchases products for sale from approximately 2,300 key suppliers, most of which are manufacturers. No single supplier comprised more than 2% of total purchases and no significant difficulty has been encountered with respect to sources of supply.
 
Through a global sourcing operation, the business procures competitively priced, high-quality products produced outside the United States from approximately 340 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.
 
Canada
Acklands – Grainger is Canada’s leading broad-line distributor of industrial and safety supplies. In 2009, Acklands – Grainger acquired substantially all of the assets of the K&D Pratt Industrial Division, a distributor of industrial and safety products located in eastern Canada.  The Canadian business serves customers through more than 160 branches and five DCs across Canada. Acklands – Grainger distributes tools, fasteners, safety supplies, instruments, welding and shop equipment, and many other items. During 2009, approximately 13,000 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. This catalog, with more than 75,000 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, 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 Web site, monotaro.com.
 
Mexico
Grainger’s operations in Mexico provide local businesses with facilities maintenance products and other products from both Mexico and the United States. Mexico distributes products through a network of DCs and branches where customers have access to approximately 59,000 products through a Spanish-language catalog and through grainger.com.mx.
 
4

 
China
Grainger operates in China from a DC in Shanghai and has 10 sales offices throughout 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.
 
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), electronic and Internet commerce technology and other services such as inventory management and energy efficiency solutions to assist customers in lowering their total facilities maintenance costs. 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 more than $160 billion, of which Grainger’s share is approximately 4 percent. There are several large competitors, although most of the market is served by small local and regional competitors.
 
Employees
As of December 31, 2009, Grainger had 18,000 employees, of whom 16,500 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.
 
Web Site Access to Company Reports
Grainger makes available, free of charge, through its Web site, 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 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 recent global economic crisis has had a negative effect on Grainger’s sales.
 
 
 
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.
 
 
Interruptions in the proper functioning of information systems 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 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 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 and customer data, could be adversely affected.
 
 
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.
 
Item 1B:  Unresolved Staff Comments
None.
 
Item 2:  Properties
As of December 31, 2009, Grainger’s owned and leased facilities totaled 22.4 million square feet, an increase of approximately 8% from December 31, 2008. This increase is primarily the result of business acquisitions.  Additionally, in 2009 Grainger purchased a facility of approximately one million square feet for a new distribution center in Illinois to be opened in 2012.  Land was also purchased in California for a new distribution center to be opened in 2011.  The United States business and Acklands – Grainger accounted for the majority of the total square footage. Acklands – Grainger facilities are located throughout Canada.
 
Branches in the United States range in size from 1,300 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 45,000 to 1,300,000 square feet. Grainger believes that its properties are generally in excellent condition and well maintained.
 
6

 
A brief description of significant facilities follows:
 
Location
 
 
Facility and Use (6)
 
Size in Square Feet (in 000’s)
United States (1)
 
423 United States branch locations
 
9,371
United States (2)
 
14 Distribution Centers
 
5,821
United States (3)
 
Other facilities
 
2,028
Canada (4)
 
173 Acklands – Grainger facilities
 
2,401
Other Businesses (5)
 
Other facilities
 
1,409
Chicago Area
 
Headquarters and General Offices
 
1,327
   
Total Square Feet
 
22,357
         
 
(1)  
United States branches consist of 288 owned and 135 leased properties. Most leases expire between 2010 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 the one million square foot facility for a new distribution center in Illinois.
(4)  
Acklands – Grainger facilities consist of general offices, distribution centers and branches, of which 58 are owned and 115 leased.
(5)  
These facilities include owned and leased locations in Japan, Mexico, India, Puerto Rico, China 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. As of February 2, 2010, 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.
 
In 2009, lawsuits relating to asbestos and/or silica and involving approximately 470 plaintiffs were dismissed with respect to Grainger, typically based on the lack of product identification. 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 agreements with its major insurance carriers relating to the scope, coverage and costs of defense.  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. 
 
Discussions relating to the Company’s compliance with its disclosure obligations and the contract’s pricing provisions are ongoing.  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.  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 but no substantive discussions have yet begun.
 
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 but no substantive discussions have yet begun.
 
7

 
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.  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:  Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2009.
 
Executive Officers
Following is information about the Executive Officers of Grainger including age as of February 25, 2010. 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
Court D. Carruthers (37)
 
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.
 
Nancy A. Hobor (63)
 
Senior Vice President, Communications and Investor Relations, a position assumed in 1999.
 
John L. Howard (52)
 
Senior Vice President and General Counsel, a position assumed in 2000.
 
Gregory S. Irving (51)
 
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 (49)
 
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 (42)
 
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 Managing Director of the Boston Consulting Group, a global management consulting firm and advisor on business strategy.
 
Michael A. Pulick (45)
 
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 (51)
 
Chairman of the Board, President, and Chief Executive Officer, 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.
 
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 2009 and 2008 are shown below.
 
     
Prices
       
 
Quarters
 
High
   
Low
   
Dividends
 
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  
2008
First
  $ 87.92     $ 69.00     $ 0.35  
 
Second
    93.12       75.94       0.40  
 
Third
    93.99       79.66       0.40  
 
Fourth
    86.90       58.86       0.40  
 
Year
  $ 93.99     $ 58.86     $ 1.55  
 
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 26, 2010, was 1,000 with approximately 52,000 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
    747,603     $ 95.19       747,603       4,935,977  
shares
                                   
 Nov. 1 – Nov. 30
    1,085,665     $ 95.49       1,085,665       3,850,312  
shares
                                   
 Dec. 1 – Dec. 31
    769,840     $ 98.04       769,840       3,080,472  
shares
 Total
    2,603,108     $ 96.58       2,603,108            
 
(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 April 30, 2008.  The Board of Directors granted authority to repurchase up to 10 million shares.  The program has no specified expiration date.  No share repurchase plan or program expired or was terminated during the period covered by this report.  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, 2004, and ending December 31, 2009. The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31, 2004, and that all dividends were reinvested.
 
COMPANY PERFORMANCE GRAPH
 
   
December 31,
 
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
 
W.W. Grainger, Inc.
  $ 100     $ 108     $ 108     $ 138     $ 126     $ 159  
Dow Jones US Industrial Suppliers
   Total Stock Market Index
    100       113       117       134       104       131  
S&P 500 Stock Index
    100       105       121       128       81       102  
 
Item 6:  Selected Financial Data
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(In thousands of dollars, except for per share amounts)
 
Net sales
  $ 6,221,991     $ 6,850,032     $ 6,418,014     $ 5,883,654     $ 5,526,636  
Net earnings attributable to W.W. Grainger, Inc.
    430,466       475,355       420,120       383,399       346,324  
Net earnings per basic share*
    5.70       6.07       5.01       4.36       3.87  
Net earnings per diluted share*
    5.62       5.97       4.91       4.24       3.78  
Total assets
    3,726,332       3,515,417       3,094,028       3,046,088       3,107,921  
Long-term debt (less current maturities)
    437,500       488,228       4,895       4,895       4,895  
Cash dividends paid per share
  $ 1.780     $ 1.550     $ 1.340     $ 1.110     $ 0.920  
 
*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 and 2005 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 distributes facilities maintenance products and provides related services and information used by businesses and institutions primarily in the United States, Canada, Japan and Mexico to keep their facilities and equipment running. Grainger has two reportable segments: the United States and Canada.  Grainger integrated the Lab Safety Supply business into the Grainger Industrial Supply business in 2009 and results are now reported under the United States segment.  The Canada segment reflects the results for Acklands – Grainger Inc.  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) and Grainger Panama S.A. (Panama). 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 through a network of highly integrated branches, distribution centers and multiple Web sites.
 
Business Environment. Several economic factors and industry trends shape Grainger’s business environment and projections for the coming year. Historically, Grainger’s sales trends have tended to correlate positively with industrial production and non-farm payrolls.  In February 2010, Consensus Forecast-USA reported a 2009 decline of 9.7% and 2.4% for Industrial Production and GDP, respectively.  According to the Federal Reserve, non-farm payrolls decreased 3.1% from December 2008 to December 2009.  The continued decline in the economy affected Grainger’s sales growth for 2009, which declined 9 percent.
 
In February 2010, Consensus Forecast-USA projected 2010 GDP growth of 3.1% and Industrial Production growth of 4.9% for the United States. In February 2010, Consensus Forecast-USA projected GDP growth of 2.7% for Canada, as compared with a 2.5% estimated decline in 2009.
 
The light and heavy manufacturing customer sectors, which comprised approximately 24% of Grainger’s total 2009 sales, have historically correlated with manufacturing employment levels and manufacturing production. Manufacturing employment levels in the United States declined approximately 9.9% from December 2008 to December 2009, while manufacturing output decreased 1.3% from December 2008 to December 2009. This decline in manufacturing employment and output contributed to a mid 20 percent decline in the heavy manufacturing customer sector and a high single-digit decline in the light manufacturing customer sector for Grainger in 2009.
 
Outlook. While in early 2010 there are some initial signs of improvement in the overall economy, job growth is expected to lag the economic recovery.  Grainger expects positive sales growth in 2010 of 6 to 10 percent which will be realized through the impact of acquisitions made in 2009, favorable foreign exchange rates and organic growth.  Beginning in 2006, Grainger has added approximately 234,000 new products as part of its multiyear product line expansion program in the United States, of which 70,000 were added to the 2010 catalog, issued in February.  Products were added to supplement the plumbing, fastener, material handling and security product lines. The product line expansion program has been a positive contributor to sales since being launched, and is expected to continue to be a driver of growth in 2010 and beyond. Grainger plans to continue to invest in the business and may choose to fund some additional sales and marketing programs to increase market share if sales trends accelerate in 2010.
 
Operating expenses are expected to increase in 2010 compared to 2009, due in part to incremental expenses from the businesses acquired in 2009.  In addition, part of the expenses eliminated in 2009 as a result of lowering the cost structure will return, such as merit increases and incentive compensation.  Grainger expects some reduction in operating expenses in 2010 from changes in its paid time off program, partially offsetting these increases.
 
Capital expenditures are expected to range from $150 million to $175 million in 2010. Projected investments include continued investments in distribution centers, information technology, and the normal recurring replacement of equipment. Grainger expects to fund 2010 capital investments from operating cash flows.
 
Matters Affecting Comparability.  There were 255 sales days in 2009 and 2007, compared to 256 sales days in 2008.
 
Grainger completed several acquisitions throughout 2008 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 date.
 
Effective January 1, 2009, Grainger revised its segment disclosure.  Prior year amounts have been restated in a consistent manner.
 
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
 
   
2009
   
2008
   
2007
   
2009
   
2008
 
Net sales
    100.0 %     100.0 %     100.0 %     (9.2 )%     6.7 %
Cost of merchandise sold
    58.2       59.0       59.4       (10.4 )     6.0  
Gross profit
    41.8       41.0       40.6       (7.5 )     7.9  
Operating expenses
    31.1       29.6       30.1       (4.6 )     4.8  
Operating earnings
    10.7       11.4       10.5       (15.0 )     16.7  
Other income (expense)
    0.7       (0.1 )     0.2       (545.5 )     (184.3 )
Income taxes
    4.5       4.4       4.1       (7.2 )     13.8  
Noncontrolling interest
    0.0       0.0       0.0              
Net earnings attributable to W.W. Grainger, Inc.
    6.9 %     6.9 %     6.6 %     (9.4 )%     13.1 %
 
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 noncash pre-tax 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 segment and business unit level include external and intersegment net sales and operating earnings. See Note 18 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
 
12

 
performed the strongest with flat sales for 2009.  Due to the impact of acquisitions made in 2009, favorable foreign exchange rates and organic growth, sales are expected to improve in 2010.
 
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 most recent catalog, issued in February 2010, offers 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.
 
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% for 2009. 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 noncash 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.
 
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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.
 
For 2010, Grainger is projecting its estimated effective tax rate to be approximately 39.3%.  The increase is primarily due to current estimates of the U.S. state tax rates and unfavorable impacts of non-U.S. tax jurisdictions.
 
2008 Compared to 2007
Grainger’s net sales of $6,850.0 million for 2008 increased 6.7% when compared with net sales of $6,418.0 million for 2007. There was one more selling day in 2008 versus 2007. Daily sales were up 6.3%. The increase in net sales was led by high single-digit sales growth in the government sector, and mid single-digit sales growth in the commercial and reseller sectors. Approximately 1 percentage point of the sales growth came from Grainger’s product line expansion initiative and approximately 5 percentage points came from price and volume. Refer to the Segment Analysis below for further detail of Grainger’s ongoing strategic initiatives.
 
The gross profit margin for 2008 improved 0.4 percentage point to 41.0% from 40.6% in 2007. The improvement in the gross profit margin was primarily driven by price increases exceeding cost increases, partially offset by an increase in the mix of sales to large customers which are generally at lower margins.
 
Operating earnings of $782.7 million for 2008 increased 16.7% over the $670.7 million for 2007. This earnings improvement exceeded the sales growth rate due to an improved gross profit margin and positive operating expense leverage.
 
Net earnings for 2008 increased by 13.1% to $475.4 million from $420.1 million in 2007. The growth in net earnings for 2008 primarily resulted from the improvement in operating earnings, partially offset by lower interest income, higher interest expense and the write-off of Grainger’s $6.0 million investment in Grainger Industrial Supply India Private Limited, formerly known as Asia Pacific Brands India Private Limited. Diluted earnings per share of $5.97 in 2008 were 21.6% higher than the $4.91 for 2007. This improvement was higher than the percentage increase for net earnings due to the effect of Grainger’s share repurchase program.
 
Segment Analysis
The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 18 to the Consolidated Financial Statements.
 
United States
Net sales were $6,057.8 million for 2008, an increase of $328.5 million, or 5.7%, when compared with net sales of $5,729.3 million for 2007. Daily sales were up 5.3%. Sales were led by high single-digit sales growth in the government sector, and mid single-digit sales growth in the commercial and reseller sectors. Approximately 2 percentage points of the sales growth came from the product line expansion initiative and approximately 4 percentage points came from price and volume. Sales volume was negatively affected by approximately 1 percentage point due to a decline in sales of seasonal products.
 
In 2004, a multiyear market expansion program was launched to strengthen Grainger’s presence in top metropolitan markets and better position it to serve local customers.  The market expansion program was completed in 2008, however, the benefits realized from this initiative are expected to continue.
 
Consistent with the overall downturn in the economy, beginning in October most of these markets saw negative sales growth, which significantly affected sales growth for 2008. Results for the market expansion program were as follows:
   
Daily Sales Increase
2008 vs. 2007
 
Phase 1 (Atlanta, Denver, Seattle)
 
 7%
 
Phase 2 (Four markets in Southern California)
 
 5%
 
Phase 3 (Houston, St. Louis, Tampa)
 
10%
 
Phase 4 (Baltimore, Cincinnati, Kansas City, Miami, Philadelphia, Washington, D.C.)
 
  2%
 
Phase 5 (Dallas, Detroit, New York, Phoenix)
 
  3%
 
Phase 6 (Chicago, Minneapolis, Pittsburgh, San Francisco)
 
  6%
 
 
Over the past three years, over 150,000 new products have been added 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 2009, offered a total of 237,000 products, an increase of 50,000 products over the 2008 catalog.
 
The segment gross profit margin increased 0.4 percentage point in 2008 over 2007, driven primarily by price increases exceeding cost increases, partially offset by an increase in the mix of lower margin sales to large customers.
 
14

 
Operating expenses in this segment were up 3.3% in 2008. Expenses grew at a slower rate than sales primarily due to lower advertising expenses, incentive compensation, severance and lower bad debt expense, the result of improved collection efficiency.
 
For the segment, operating earnings of $840.4 million for 2008 increased 14.9% over the $731.6 million for 2007. This earnings improvement exceeded the sales growth rate due to an improved gross profit margin and positive operating expense leverage.
 
Canada
Net sales were $728.0 million for 2008, an increase of $91.5 million, or 14.4%, when compared with $636.5 million for 2007. Daily sales were up 13.9%. In local currency, daily sales increased 13.1%. The increase was led by sales growth in the contractor, agriculture and mining and government sectors.  Macro economic factors such as higher commodity prices for oil, gas and mineral products drove a significant portion of this growth due to an increase in customer demand in these sectors.  Sales to new customers and increased sales penetration to existing customers was also a contributing factor to these increases.
 
The gross profit margin increased 0.3 percentage points in 2008 over 2007. The improvement in the gross profit margin was primarily due to price increases exceeding cost increases.
 
Operating expenses were up 13.7% in 2008. The increase in operating expenses was primarily due to payroll and benefits as a result of increased headcount, merit increases and commissions, and higher advertising and occupancy expenses, and expenses related to the bankruptcy of a provider of freight payment services.
 
Operating earnings of $54.3 million for 2008 were up $10.0 million, or 22.7%. This earnings improvement exceeded the sales growth rate due to an improved gross profit margin and operating expenses that grew at a slower rate than sales.
 
Other Businesses
Net sales for other businesses, which include Mexico, Puerto Rico, China and Panama, were up 19.5% for 2008.  Daily sales increased 19.0%. The increase in net sales was due primarily to Mexico as sales increased 11.9% in 2008 versus 2007. Daily sales were up 11.5%.  In local currency, daily sales were up 12.7%, driven primarily by increased market share coming from the ongoing branch expansion program. Operating losses for other businesses were $11.8 million for 2008, a 57.8% increase over operating losses of $7.5 million for 2007.
 
Other Income and Expense
Other income and expense was $9.5 million of expense in 2008, compared with $11.2 million of income in 2007. The following table summarizes the components of other income and expense (in thousands of dollars):
   
For the Years Ended December 31,
 
   
2008
   
2007
 
Other income and (expense):
           
Interest income (expense) – net
  $ (9,416 )   $ 9,151  
Equity in net income of unconsolidated entities
     3,642        2,016  
Write-off of investment in unconsolidated entity
    (6,031 )      
Other non-operating income
    2,668       404  
Other non-operating expense
    (317 )     (363 )
    $ (9,454 )   $ 11,208  
 
The change from net interest income to net interest expense was primarily attributable to the four-year bank term loan obtained in May 2008. The write-off of the investment relates to Grainger Industrial Supply India Private Limited, formerly known as Asia Pacific Brands India Private Limited as described in Note 6 to the Consolidated Financial Statements. Other non-operating income increased primarily due to higher foreign exchange transaction gains.
 
Income Taxes
Income taxes of $297.9 million in 2008 increased 13.8% as compared with $261.7 million in 2007. Grainger’s effective tax rates were 38.5% and 38.4% in 2008 and 2007, respectively.
 
15

 
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 pay cash dividends.
 
Cash Flow
Net cash flows from operations of $732.4 million in 2009, $530.1 million in 2008 and $468.9 million in 2007 continued to improve Grainger’s financial position and serve as the primary source of funding. Contributing to cash flows from operations were net earnings for 2009 of $430.8 million and the effect of noncash expenses such as stock-based compensation, depreciation and amortization, partially offset by the noncash pre-tax gain of $47.3 million from unconsolidated entities after Grainger became a majority owner.  Also contributing to net cash provided by operating activities were changes in operating assets and liabilities, which resulted in a net source of cash of $121.8 million for 2009.  The principal operating source of cash was a decrease in inventory due to lower purchases. Other current liabilities declined primarily due to reduced profit sharing and incentive compensation accruals.
 
Net cash provided by operations increased $61.2 million in 2008 over 2007, driven primarily by increased net earnings. The Change in operating assets and liabilities – net of business acquisitions reduced cash by $143.1 million in 2008. This use of cash was driven primarily by an increase in inventory due to the product line expansion initiative.
 
Net cash flows used in investing activities were $262.6 million, $202.6 million and $197.0 million in 2009, 2008 and 2007, respectively. Cash expended for property, buildings, equipment and capitalized software was $142.4 million, $195.0 million and $197.4 million in 2009, 2008 and 2007, respectively. Additional information regarding capital spending is detailed in the Capital Expenditures section below. In 2009, Grainger funded infrastructure improvement projects in the distribution centers in the United States, Canada and Mexico, and paid $121.8 million for business acquisitions and other investments, net of cash received. In 2008, Grainger continued to fund the Company’s market expansion initiative.
 
Net cash flows used in financing activities for 2009, 2008 and 2007 were $413.5 million, $36.8 million and $513.9 million, respectively. Proceeds from the four-year bank term loan of $500 million were included in 2008.  Treasury stock purchases were $372.7 million in 2009 as Grainger repurchased 4.5 million shares compared to purchases of $394.2 million in 2008 to repurchase 5.5 million shares. As of December 31, 2009, approximately 3.1 million shares of common stock remained available under Grainger’s repurchase authorization. Dividends paid to shareholders were $134.7 million in 2009 versus $121.5 million in 2008. Grainger also used cash in financing activities to repay $18.9 million of long-term debt borrowings in 2009 and $81.4 million to repay short-term borrowings in 2008. In 2007, treasury stock purchases were $647.3 million for 7.2 million shares and dividends paid to shareholders were $113.1 million.

 
Working Capital
Internally generated funds have been the primary source of working capital and of funds used in business expansion, supplemented by debt as circumstances dictated. In addition, funds were expended for facilities optimization and enhancements to support growth initiatives, as well as for business and systems development and other infrastructure improvements.
 
Working capital was $1,354.7 million at December 31, 2009, compared with $1,382.4 million at December 31, 2008 and $974.4 million at December 31, 2007. At these dates, the ratio of current assets to current liabilities was 2.7, 2.8 and 2.2. Working capital and the current ratio were essentially flat in 2009 compared to 2008.  The increase in the current ratio and working capital from 2007 to 2008 primarily related to increases in cash and inventories and the replacement of short-term borrowings with long-term borrowings.
 
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,
 
   
2009
   
2008
   
2007
 
Land, buildings, structures and improvements
  $  67,917     $  107,688     $  100,380  
Furniture, fixtures, machinery and equipment
     63,667        76,163        87,389  
Subtotal
    131,584       183,851       187,769  
Capitalized software
    8,367       12,297       8,556  
Total
  $ 139,951     $ 196,148     $ 196,325  
 
In 2009, significant capital expenditures included investments in the United States distribution center network.  In addition, there was continued investment in Canada and other international branches and distribution centers, as well as the normal recurring replacement of equipment.
 
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In 2008, Grainger substantially completed its investments in the market expansion program in the United States which 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.
 
In 2007, Grainger’s investments included the market expansion program, Mexico and China expansion and the normal recurring replacement of equipment.
 
Capital expenditures are expected to range from $150 million to $175 million in 2010. Projected investments include continued investments in distribution centers, information technology, and the normal recurring replacement of equipment. Grainger expects to fund 2010 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 million was obtained in May 2008. Proceeds were used to pay down short-term debt and for general corporate purposes. At December 31, 2009, Grainger’s long-term debt rating by Standard & Poor’s was AA+. Grainger’s available lines of credit, as further discussed in Note 8 to the Consolidated Financial Statements, were $250.0 million at December 31, 2009, 2008 and 2007, respectively. Total debt as a percent of total capitalization was 19.1%, 20.7% and 5.0% as of the same dates. The increase in total debt as a percent of total capitalization in 2008 was primarily the result of the $500 million bank term loan. Grainger believes any circumstances that would trigger early payment or acceleration with respect to any outstanding debt securities would not have a material impact on its results of operations or financial position.
 
Commitments and Other Contractual Obligations
At December 31, 2009, 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
  $  490,628     $  53,128     $  437,500     $       $    
Interest on long-term debt
     10,214        4,668        5,453        93          
Operating lease obligations
     216,924        42,832        69,741        52,900        51,451  
Purchase obligations:
                                       
Uncompleted additions to
property, buildings and equipment
     42,025        24,215        17,810                  
Commitments to purchase inventory
     212,700        212,694        6                  
Other purchase obligations
     135,694        64,836        35,659        31,146        4,053  
Other liabilities
    191,346       10,726       17,264       20,343       143,013  
Total
  $ 1,299,531     $ 413,099     $ 583,433     $ 104,482     $ 198,517  
 
Purchase obligations for inventory are made in the normal course of business to meet operating needs. While purchase orders for both inventory purchases and noninventory 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. Other employment-related benefits costs of $39.1 million have not been included in this table as the timing of benefit payments is not statistically predictable. See Note 10 to the Consolidated Financial Statements.
 
See also Notes 9 and 11 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 $27.9 million for tax uncertainties and interest at December 31, 2009. This amount is excluded from the table above, as Grainger cannot make reliable estimates of these cash flows by period. See Note 16 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.
 
17

 
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.
 
Allowance for Doubtful Accounts.  Grainger uses 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. Write-offs could be materially different than the reserves provided if economic conditions change or actual results deviate from historical trends.
 
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. Actual inventory shrinkage could be materially different from these estimates, affecting Grainger’s inventory values and cost of merchandise sold.
 
Grainger regularly reviews inventory to evaluate continued demand and identify any obsolete or excess quantities of inventory. 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. Actual results differing from these projections could have a material effect on Grainger’s results of operations.
 
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 and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Grainger determines fair value using an income approach, in conjunction with relevant market information which requires certain assumptions and estimates regarding future profitability of acquired businesses. Grainger believes that it does not have a material amount of goodwill at risk of failing the goodwill impairment test; however, due to the inherent uncertainties associated with these factors and market conditions, 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 2009, 2008 and 2007 used the following assumptions:
 
   
For the years ended December 31,
 
   
2009
   
2008
   
2007
 
Risk-free interest rate
    2.4 %     3.2 %     4.6 %
Expected life
 
6 years
   
6 years
   
6 years
 
Expected volatility
    28.8 %     25.2 %     24.3 %
Expected dividend yield
    2.3 %     1.8 %     1.7 %

 
18

 
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. The dividend yield assumption is based on history and expectation of dividend payouts. 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.
 
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 12 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 higher discount rate decreases the present value of benefit obligations and net periodic postretirement benefit costs. As of December 31, 2009, Grainger increased the discount rate used in the calculation of its postretirement plan obligation from 5.9% to 6.0% to reflect the increase in market interest rates. Grainger estimates that this increase in the discount rate will increase 2010 pretax earnings by approximately $0.6 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 in developing its expected long-term return on plan assets. In 2009, 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, 2009 results (in thousands of dollars):
   
1 Percentage Point
 
   
Increase
   
(Decrease)
 
Effect on total of service and interest cost
  $ 5,278     $ (4,100 )
Effect on accumulated postretirement benefit obligation
    44,290       (34,925 )
 
In 2009, Grainger changed the mortality table used in the postretirement valuation from RP2000 to the IRS 2008 Fully Generational Mortality Table which builds in future increases in healthcare rates and expenses due to improved mortality rates.  This change resulted in a $13.9 million increase of the postretirement healthcare obligation as of December 31, 2009, and is estimated to decrease 2010 pretax earnings by approximately $2.5 million.  Other changes in assumptions may increase, decrease or eliminate this effect.
 
19

 
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 10 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.
 
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.
 
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 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.
 
20

 
New Accounting Standards
The following new accounting standards exclude those pronouncements that are unlikely to have an effect on Grainger upon adoption.
 
In December 2008, the FASB issued authoritative guidance regarding employer’s disclosures about postretirement benefit plan assets, codified primarily in ASC 715.  ASC 715 requires expanded disclosures about investment policies and strategies for the plan assets of a defined benefit pension or other postretirement plan, including information regarding major categories of assets, input and valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within the plans.  The Company has applied the provision of ASC 715 and the adoption did not have a material effect on the Company’s results of operations or financial position.
 
In June 2009, the FASB issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” codified in ASC 105, which established the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles to be applied by non-governmental entities.  The Accounting Standards Codification superseded all existing non-SEC accounting and reporting standards.  ASC 105 was effective for interim or annual financial periods ending after September 15, 2009.  The Company has applied this statement and the adoption did not have a material effect on its results of operations or financial position.
 
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 which 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, continues to believe it complies, could, estimate, estimated, estimates, expectation, expected, expects, forecast, forecasts, had potentially, intended, intends, likely, may, might, plans, predict, predictable, presumption, project, projected, projecting, projection, projections, potential, reasonably likely, scheduled, should, tended, timing and outcome are uncertain, unanticipated, unlikely, 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 which 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; 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.
 
21

 
Item 7A:  Quantitative and Qualitative Disclosures About Market Risk
Grainger is exposed to foreign currency exchange risk related to its transactions, assets and liabilities denominated in foreign currencies.  For 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. Comparatively, in 2008 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 $2.6 million decrease in net earnings. A uniform 10% weakening of the U.S. dollar would have resulted in a $1.1 million increase in net earnings for 2009, as compared with an increase in net earnings of $3.1 million for 2008. 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 does not hold derivatives for trading purposes.
 
Grainger is also exposed to interest rate risk in its debt portfolio. During 2009 and 2008, 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 $3.3 million for 2009 and $2.5 million for 2008.  A 1 percentage point decrease in interest rates would have resulted in an increase to net earnings of approximately $3.3 million for 2009 and $2.5 million for 2008. 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 62. 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, 2009, 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.
 
22

 
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 28, 2010, 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 in Part I of this report 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 Web site 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 Web site and are available in print to any person who requests them.
 
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 28, 2010, 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 28, 2010, 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 28, 2010, 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 28, 2010, under the caption “Audit Fees and Audit Committee Pre-Approval Policies and Procedures.”
 
23

 
PART IV
Item 15:  Exhibits and Financial Statement Schedules
 
  (a)
1.  
Financial Statements.  See Index to Financial Statements and Supplementary Data.
 
 
2.  
 
3.  
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.
Exhibits
                             (3)
(a)  
 
(b)  
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.
Bylaws, as amended February 17, 2010.
 
(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)
 
(ii)
Accelerated share repurchase agreement, incorporated by reference to Exhibit 10 to Grainger's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
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)
Executive Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(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.
 
(v)
1985 Executive Deferred Compensation Plan, as amended, incorporated by reference to Exhibit 10(d)(vii) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 1998. 
 
(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(ix) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(viii)
Form of Change in Control Employment Agreement between Grainger and certain of its executive officers, as amended, incorporated by reference to Exhibit 10(x) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(ix)
Form of Change in Control Employment Agreement between Grainger and certain of its executive officers.
 
(x)
Voluntary Salary and Incentive Deferral Plan, as amended, incorporated by reference to Exhibit 10(xi) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(xi)
Summary Description of Directors Compensation Program effective April 29, 2009, incorporated by reference to Exhibit 10(xiii) to Grainger’s Annual Report on Form10-K for the year ended December 31, 2008.
 
(xii)
Summary Description of Directors Compensation Program effective April 28, 2010.
 
(xiii)
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.
 
 
 
24

 

 
(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 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)
 
(xvii)
Form of Stock Option Award Agreement between Grainger and certain of its executive
officers.
Form of Stock Option and Restricted Stock Unit Agreement between Grainger and certain of its international executive officers.
 
(xviii)
Form of Performance Share Award Agreement between Grainger and certain of its 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.
 
(xix)
Form of Performance Share Award Agreement (non-dividend equivalent) between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(xviii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2008.
 
(xx)
 
(xxi)
Form of Performance Share Award Agreement (non-dividend equivalent and recoupment) between Grainger and certain of its executive officers. 
Offer of Employment Letter to Mr. D.G. Macpherson dated December 14, 2007.
 
(xxii)
Summary Description of 2008 Management Incentive Program, incorporated by reference to Exhibit 10(xviii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
 
(xxiii)
Summary Description of 2009 Management Incentive Program, incorporated by reference to Exhibit 10(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.
 
(xxv)
Incentive Program Recoupment Agreement.
 
(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, 2009, 2008 and 2007
 
 
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
36-37
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38-62
   
EXHIBIT 23 – CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
64
   
   
 
 
 

 
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, 2009, 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, 2009.
 
Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger’s internal control over financial reporting as of December 31, 2009, 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.’s internal control over financial reporting as of December 31, 2009, 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. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, 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, 2009, 2008 and 2007, 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, 2009 of W.W. Grainger, Inc., and our report dated February 25, 2010, expressed an unqualified opinion thereon.
 
 
 /s/ Ernst & Young LLP
 
 
Chicago, Illinois
February 25, 2010
 

 
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, 2009, 2008, and 2007, 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, 2009.  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, 2009, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
As described in Note 16 to the consolidated financial statements, effective January 1, 2007, the Company changed its method of accounting for uncertain tax positions to conform with ASC 740.
 
As described in Note 17 to the consolidated financial statements, effective January 1, 2009, the Company changed its method of computing earnings per share to the two-class method from the treasury stock method to conform with ASC 260.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), W.W. Grainger, Inc.’s internal control over financial reporting as of December 31, 2009, 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, 2010, expressed an unqualified opinion thereon.
 
 
 /s/ Ernst & Young LLP
 
 
Chicago, Illinois
February 25, 2010

 
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,
 
   
2009
   
2008
   
2007
 
Net sales
  $ 6,221,991     $ 6,850,032     $ 6,418,014  
Cost of merchandise sold
    3,623,465       4,041,810       3,814,391  
Gross profit
    2,598,526       2,808,222       2,603,623  
Warehousing, marketing and administrative expenses
    1,933,302       2,025,550       1,932,970  
Operating earnings
    665,224       782,672       670,653  
Other income and (expense):
                       
Interest income
    1,358       5,069       12,125  
Interest expense
    (8,766 )     (14,485 )     (2,974 )
Equity in net income of unconsolidated entities
    1,497       3,642       2,016  
Gain (write-off) of investment in unconsolidated entities
    47,343       (6,031 )      
Other non-operating income
    964       2,668       404  
Other non-operating expense
    (283 )     (317 )     (363 )
Total other income and (expense)
    42,113       (9,454 )     11,208  
Earnings before income taxes
    707,337       773,218       681,861  
Income taxes
    276,565       297,863       261,741  
Net earnings
    430,772       475,355       420,120  
Less: Net earnings attributable to noncontrolling interest
    306              
Net earnings attributable to W.W. Grainger, Inc.
  $ 430,466     $ 475,355     $ 420,120  
Earnings per share:
                       
Basic
  $ 5.70     $ 6.07     $ 5.01  
Diluted
  $ 5.62     $ 5.97     $ 4.91  
Weighted average number of shares outstanding:
                       
Basic
    73,786,346       76,579,856       82,403,958  
Diluted                                                                               
    74,891,852       77,887,620       84,173,381  

The accompanying notes are an integral part of these financial statements.

 
30

 

W.W. Grainger, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Net earnings
  $ 430,772     $ 475,355     $ 420,120  
                         
Other comprehensive earnings (losses):
                       
                         
Foreign currency translation adjustments, net of tax (expense)
benefit of $(7,813), $11,454 and $(9,279), respectively
    54,693       (79,287 )     53,545  
                         
Reclassification of cumulative currency translation gain
    (3,145 )            
                         
Defined postretirement benefit plan:
                       
Prior service (cost) credit arising during period
    (8,715 )           9,433  
Amortization of prior service credit
    (1,215 )     (1,215 )     (437 )
Amortization of transition asset
    (143 )     (143 )     (143 )
Net gain (loss) arising during period
    3,402       (49,872 )     11,620  
Amortization of unrecognized losses
    4,135       1,312       2,094  
Income tax benefit (expense)
    984       19,368       (8,756 )
Net defined postretirement benefit plan adjustments
    (1,552 )     (30,550 )     13,811  
                         
Gain (loss) on other employment-related benefit plans, net of tax benefit (expense) of $205, $544 and $(878), respectively
    (554 )     (859 )     1,384  
Total other comprehensive earnings (losses)
    49,442       (110,696 )     68,740  
                         
Comprehensive earnings, net of tax
    480,214       364,659       488,860  
                         
Comprehensive earnings attributable to noncontrolling interest:
                       
Net earnings
    (306 )            
Foreign currency translation adjustments
    1,457              
Comprehensive earnings attributable to W.W. Grainger, Inc.
  $ 481,365     $ 364,659     $ 488,860  
 
The accompanying notes are an integral part of these 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,
 
   
2009
   
2008
   
2007
 
ASSETS
                 
CURRENT ASSETS
                 
   Cash and cash equivalents
  $ 459,871     $ 396,290     $ 113,437  
   Marketable securities at cost, which approximates market value
                20,074  
   Accounts receivable (less allowances for doubtful accounts of $25,850, $26,481 and $25,830, respectively)
    624,910       589,416       602,650  
   Inventories
    889,679       1,009,932       946,327  
   Prepaid expenses and other assets
    88,364       73,359       61,666  
   Deferred income taxes
    42,023       52,556       56,663  
   Prepaid income taxes
    26,668       22,556        
     Total current assets
    2,131,515       2,144,109       1,800,817  
                         
PROPERTY, BUILDINGS AND EQUIPMENT
                       
   Land
    237,867       192,916       178,321  
   Buildings, structures and improvements
    1,078,439       1,048,440       977,837  
   Furniture, fixtures, machinery and equipment
    950,187       890,507       848,118  
      2,266,493       2,131,863       2,004,276  
   Less accumulated depreciation and amortization
    1,313,222       1,201,552       1,125,931  
     Property, buildings and equipment – net
    953,271       930,311       878,345  
                         
DEFERRED INCOME TAXES
    79,472       97,442       54,658  
                         
INVESTMENTS IN UNCONSOLIDATED ENTITIES
    3,508       20,830       14,759  
                         
GOODWILL
    351,182       213,159       233,028  
                         
OTHER ASSETS AND INTANGIBLES – NET
    207,384       109,566       112,421  
                         
TOTAL ASSETS
  $ 3,726,332     $ 3,515,417     $ 3,094,028  

 
32

 

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS – CONTINUED
(In thousands of dollars, except for per share amounts)

   
As of December 31,
 
   
2009
   
2008
   
2007
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
CURRENT LIABILITIES
                 
   Short-term debt
  $ 34,780     $ 19,960     $ 102,060  
   Current maturities of long-term debt
    53,128       21,257       4,590  
   Trade accounts payable
    300,791       290,802       297,929  
   Accrued compensation and benefits
    135,323       162,380       182,275  
   Accrued contributions to employees’ profit sharing plans
    121,895       146,922       126,483  
   Accrued expenses
    124,150       118,633       102,607  
   Income taxes payable
    6,732       1,780       10,459  
     Total current liabilities
    776,799       761,734       826,403  
                         
LONG-TERM DEBT (less current maturities) 
    437,500       488,228       4,895  
                         
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES
    62,215       33,219       20,727  
                         
ACCRUED EMPLOYMENT-RELATED  BENEFITS COSTS
    222,619       198,431       143,895  
                         
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
    596,358       564,728       475,350  
   Retained earnings
    3,966,508       3,670,726       3,316,875  
   Accumulated other comprehensive earnings (losses)
    12,374       (38,525 )     72,171  
   Treasury stock, at cost – 37,382,703, 34,878,190 and
30,199,804 shares, respectively
    (2,466,350 )     (2,217,954 )     (1,821,118 )
      Total W.W. Grainger, Inc. shareholders’ equity
    2,163,720       2,033,805       2,098,108  
   Noncontrolling interest
    63,479              
   Total shareholders’ equity
    2,227,199       2,033,805       2,098,108  
                         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 3,726,332     $ 3,515,417     $ 3,094,028  

The accompanying notes are an integral part of these financial statements.

 
33

 

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net earnings
  $ 430,772     $ 475,355     $ 420,120  
Provision for losses on accounts receivable
    10,748       12,924       15,436  
Deferred income taxes and tax uncertainties
    21,683       5,182       (18,632 )
Depreciation and amortization
    147,531       139,570       131,999  
Stock-based compensation
    40,407       45,945       35,551  
Tax benefit of stock incentive plans
    2,894       1,925       3,193  
Net losses (gains) on property, buildings and equipment
    8,642       (9,232 )     (7,254 )
Income from unconsolidated entities – net
    (1,497 )     (3,642 )     (2,016 )
(Gain) write-off of unconsolidated entities
    (47,343 )     6,031        
Change in operating assets and liabilities – net of business acquisitions
                       
(Increase) decrease in accounts receivable
    2,794       (5,592 )     (41,814 )
(Increase) decrease in inventories
    175,286       (92,518 )     (97,234 )
(Increase) decrease in prepaid expenses
    (11,180 )     (33,629 )     (2,342 )
Increase (decrease) in trade accounts payable
    (16,736 )     (6,960 )     (39,436 )
Increase (decrease) in other current liabilities
    (52,944 )     199       54,457  
Increase (decrease) in current income taxes payable
    2,472       (7,784 )     2,304  
Increase (decrease) in accrued employment-related benefits costs
    22,080       3,216       17,705  
Other – net
    (3,213 )     (924 )     (3,162 )
                         
Net cash provided by operating activities
    732,396       530,066       468,875  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Additions to property, buildings and equipment
    (142,414 )     (194,975 )