8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):

October 14, 2010

W.W. Grainger, Inc.

(Exact name of Registrant as Specified in its Charter)

Illinois	1-5684	36-1150280
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

100 Grainger Parkway, Lake Forest, Illinois  60045

(Address of Principal Executive Offices and Zip Code)

(847) 535-1000

(Registrant's Telephone Number, Including Area Code)

Not applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.   Results of Operations and Financial Condition

On October 14, 2010 the registrant issued a press release announcing financial results for the quarter ended September 30, 2010.  A copy is provided as Exhibit 99.1 to this report.

Item 9.01.   Financial Statements and Exhibits

(c)  Exhibits (numbered in accordance with Item 601 of Regulation S-K).

Exhibit No.	Document Description
99.1	Press release announcing financial results for the quarter ended September 30, 2010

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated:  October 14, 2010

W.W. GRAINGER, INC.
By:	/s/ R. L. Jadin
	R. L. Jadin Senior Vice President and Chief Financial Officer

EX-99.1

GRAINGER REPORTS THIRD QUARTER 2010 EARNINGS PER SHARE OF $2.06,

 INCLUDING $0.07 CONTRIBUTION FROM UNUSUAL ITEM

Raises 2010 EPS guidance to $6.40 to $6.70

Quarterly Highlights

·   Sales of $1.9 billion, up 19 percent

·   Operating earnings of $251 million, up 35 percent

·   Operating cash flow of $217 million

·   Pretax ROIC* of 30.2 percent

CHICAGO, October 14, 2010 – Grainger (NYSE: GWW) today reported results for the third quarter and nine months ended September 30, 2010.  Third quarter sales of $1.9 billion increased 19 percent versus the 2009 third quarter.  Both quarters had the same number of selling days (64).  Net earnings for the quarter increased 4 percent to $150 million versus $145 million in 2009.  Earnings per share increased 10 percent to $2.06 versus $1.88 for the third quarter of 2009.  In the third quarter of 2009, Grainger obtained a majority ownership of MonotaRO Co., Ltd. in Japan, and recognized a one-time, non-operating gain of $47 million pre-tax, or $0.37 per share, from th e revaluation of this investment.The third quarter of 2010, similar to the first two quarters of the year, benefitted from a policy change for employee paid time off that contributed $0.07 per share.  Excluding these unusual items from both periods, net earnings increased 25 percent and earnings per share were up 32 percent for the quarter.

“Our focus on the foundational elements of our business, including industry-leading product availability, outstanding customer service and our ability to leverage economies of scale, was responsible for our strong performance in the quarter,” said Chairman, President and Chief Executive Officer Jim Ryan.

* *The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is

calculated using annualized operating earnings based on year-to-date operating earnings divided by a 10 point average for net

working assets. Net working assets are working assets minus working liabilities defined as follows: working assets equal total

assets less cash equivalents (non operating cash), deferred taxes, and investments in unconsolidated entities, plus the LIFO

reserve. Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees’

profit sharing plans, and accrued expenses.

1

Ryan added, “We’re taking advantage of our strong financial position by accelerating our investment in growth by hiring another 150 sales representatives and onsite inventory services managers, expanding our eCommerce capabilities and further developing services that complement our broad product offering.  We expect that these investments will contribute to continued market share growth by helping our customers improve their productivity.  In the near term however, we expect fourth quarter organic revenue growth to moderate given increasingly tougher comparisons, lower sales contribution from products used to clean up the Gulf of Mexico oil spill and the slowing of the inventory build cycle with our customers.  Our strong performance in the first nine months of the year, combined with our expectations for t he fourth quarter, gives us confidence to raise our 2010 sales growth guidance to a range of 14 to 15 percent and increase our earnings per share guidance to a range of $6.40 to $6.70, excluding unusual items.”  Previous guidance, issued by Grainger in July 2010, forecasted sales growth of 12 to 14 percent and earnings per share of $6.10 to $6.40 for the full year 2010.

Beginning January 1, 2010, the company implemented a change to the employee paid time off policy resulting in an unusual item that will be in place for the entire year.  The first three quarters included a combined $0.24 per share benefit from this policy change.  The company expects approximately $0.06 per share of benefit in the 2010 fourth quarter for a total impact for the year of approximately $0.30 per share.  This benefit will not repeat in 2011.

Daily sales for the company increased 21 percent in July, 20 percent in August and 18 percent in September.  For the quarter, acquisitions contributed 5 percentage points, while sales of oil spill related products contributed 3 percentage points.  Sales of seasonal products and foreign exchange added 1 percentage point each to sales growth in the quarter.  Pricing was flat while volume increased 9 percent.

2

Company operating earnings of $251 million increased 35 percent in the quarter versus $187 million in the third quarter of 2009.  Excluding the benefit from the paid time off policy change, operating earnings increased 30 percent versus the prior year.  The improvement in operating earnings was primarily the result of positive operating leverage from the 19 percent sales growth in the quarter.

The company has two reportable segments, the United States and Canada, which represent approximately 95 percent of company sales.  The remaining operating units (Japan, Mexico, India, Puerto Rico, China, Panama and Colombia) are included in Other Businesses and are not considered a reportable segment.

United States

Sales for the quarter in the United States segment increased 15 percent, 13 percent excluding acquisitions.  Daily sales increased 17 percent in July, 15 percent in August and 13 percent in September.  Sales of products related to the oil spill clean up contributed 3 percentage points to growth in the quarter.  Sales of seasonal products added 1 percentage point due to the hot weather experienced across much of the United States in July and August.  All customer end markets within the United States posted sales growth versus the 2009 third quarter.

Gross profit margins for the U.S. increased 20 basis points, primarily the result of price increases exceeding product cost increases.  The improvement in gross profit margin was partially offset by negative selling price mix driven by stronger growth with larger customers.  Gross profit margins in the 2009 third quarter benefitted from a $10 million reduction in the LIFO reserve due to lower inflation on inventory purchases and lower inventory levels than previously estimated.  This benefit in the prior year made for a more difficult comparison in 2010.

Operating earnings for the United States segment increased 29 percent, up 25 percent excluding the change in the paid time off policy.  The strong growth in operating earnings was primarily driven by positive cost leverage.  Operating expenses increased 9 percent on a reported basis, 11 percent after excluding the benefit for the paid time off policy change.

3

Canada

Sales for the Acklands-Grainger business increased 22 percent in U.S. dollars and 15 percent in local currency versus the 2009 third quarter. Acquisitions completed during the last 12 months contributed 3 percentage points to the growth in the quarter. Local currency sales on a daily basis were up 13 percent in July, up 14 percent in August and up 19 percent in September.  The sales increase in Canada was led by strong growth to customers in the heavy manufacturing, forestry, mining, and oil and gas sectors of the economy, partially offset by a decline in sales to the government and contractors.

Operating earnings in Canada increased 74 percent in the quarter, 64 percent in local currency.  This increase was due to a 340 basis point improvement in gross profit margin, partially offset by operating expenses, which increased at a faster rate than the sales growth.  The improvement in gross margin was primarily driven by lower product costs, due to the positive effect of foreign exchange on buying products in U.S. dollars, and improved mix driven by an increase in sales of private label products.  Higher operating expenses were the result of increased payroll and benefits costs due to higher commissions and bonuses on higher sales, increased volume-related headcount, start-up costs for a new distribution center in Vancouver, British Columbia and incremental costs for acquisitions made during the last 12  ;months.

Other Businesses

Sales for the Other Businesses, which include Japan, Mexico, India, Puerto Rico, China, Panama and Colombia, increased 191 percent in the quarter versus prior year. This growth was primarily due to incremental sales from the Japanese and Colombian businesses acquired in the last 12 months, combined with strong sales growth in Mexico, India, China and Panama.

Operating earnings for the Other Businesses were $4 million for the 2010 third quarter compared to a $2 million loss a year ago.  This improvement was the result of incremental earnings from the acquired businesses, strong earnings performance in Mexico and Panama, and lower operating losses in India and China.

4

Other

Interest expense, net of interest income, was $1.6 million versus $1.8 million in the 2009 third quarter.  The effective tax rate was 39.4 and 38.1 percent in the 2010 and 2009 third quarters, respectively.  The third quarter 2009 tax rate benefitted from the expiration of a statute related to a prior tax year.  Excluding the effect of this one time benefit, the effective tax rate for the 2009 third quarter was 39.1 percent.

Cash Flow

Operating cash flow was $217 million for the 2010 third quarter.  The company used cash from operations along with existing cash to return approximately $248 million to shareholders through the repurchase of 2.3 million shares of common stock during the quarter.  In addition, the company paid dividends of approximately $39 million, reflecting the 17 percent increase in the quarterly dividend announced in April of 2010.  Capital expenditures were $46 million in the quarter versus $36 million in the third quarter of 2009.

Year-to-Date

For the nine months ended September 30, 2010, sales of $5.4 billion increased 17 percent versus the nine months ended September 30, 2009.  Net earnings increased 14 percent to $379 million versus $333 million in the first three quarters of 2009.  Earnings per share year-to-date increased 18 percent to $5.10 versus $4.34 for 2009, before unusual items.  Two unusual non-cash items, a $0.24 per share benefit from changes to the company’s paid time off policy and a $0.15 per share tax expense related to the tax treatment of retiree healthcare benefits following the passage of the Patient Protection and Affordable Care Act, resulted in a net benefit of $0.09 per share for the nine months ended September 30, 2010.  The nine months of 2009 included a $0.37 per share gain from the MonotaRO transaction in September 2009.  Excluding these unusual items from both periods, net earnings increased 22 percent and earnings per share were up 26 percent for the first three quarters of 2010 versus 2009.

5

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

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

Forward-Looking Statements

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

 

Contacts:
Media:	Investors:
Jan Tratnik	Laura Brown
Director, Corporate Communications and Public Affairs	Senior Vice President, Communications and Investor Relations
847/535-4339	847/535-0409
Erin Ptacek	William Chapman
Director, Corporate Brand & Reputation	Director, Investor Relations
847/535-1543	847/535-0881

6

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands, except for per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	1,899,412		$	1,589,665		$	5,355,462		$	4,588,176
Cost of merchandise sold		1,109,688			929,720			3,112,910			2,673,848
Gross profit		789,724			659,945			2,242,552			1,914,328
Warehousing, marketing and  administrative expenses		538,451			473,225			1,593,479			1,414,465
Operating earnings		251,273			186,720			649,073			499,863
Other income and (expense)
Interest income		324			374			845			1,048
Interest expense		(1,954	)		(2,198	)		(6,204	)		(6,734	)
Equity in net income (loss) of unconsolidated entities		(6	)		578			(257	)		1,361
Gain on previously held equity interest - net		–			47,420			–			47,343
Other non-operating income (expense) - net		207			526			173			633
Total other income and (expense)		(1,429	)		46,700			(5,443	)		43,651
Earnings before income taxes		249,844			233,420			643,630			543,514
Income taxes		98,547			88,856			263,249			210,106
Net earnings		151,297			144,564			380,381			333,408
Less: Net earnings attributable to noncontrolling interest		892			–			1,726			–
Net earnings attributable to W.W. Grainger, Inc.	$	150,405		$	144,564		$	378,655		$	333,408
Earnings per share   -Basic	$	2.10		$	1.91		$	5.19		$	4.41
-Diluted	$	2.06		$	1.88		$	5.10		$	4.34
Average number of shares outstanding   -Basic		69,924			74,048			71,384			73,920
-Diluted		71,168			75,203			72,638			74,972
Diluted Earnings Per Share
Net Earnings as reported	$	150,405		$	144,564		$	378,655		$	333,408
Less: earnings allocated to participating securities		(3,447	)		(3,321	)		(8,294	)		(7,700	)
Net earnings available to common shareholders	$	146,958		$	141,243		$	370,361		$	325,708
Weighted average shares adjusted for dilutive securities		71,168			75,203			72,638			74,972
Diluted earnings per share	$	2.06		$	1.88		$	5.10		$	4.34

7

SEGMENT RESULTS (Unaudited)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Sales
United States	$	1,608,058		$	1,398,576		$	4,513,623		$	4,061,108
Canada		202,162			166,262			604,153			470,781
Other Businesses		101,603			34,901			273,342			85,334
Intersegment sales		(12,411	)		(10,074	)		(35,656	)		(29,047	)
Net sales to external customers	$	1,899,412		$	1,589,665		$	5,355,462		$	4,588,176
Operating earnings
United States	$	262,803		$	204,439		$	695,445		$	554,157
Canada		14,522			8,361			33,534			24,055
Other Businesses		4,412			(1,958	)		6,264			(8,176	)
Unallocated expense		(30,464	)		(24,122	)		(86,170	)		(70,173	)
Operating earnings	$	251,273		$	186,720		$	649,073		$	499,863
Company operating margin		13.2	%		11.7	%		12.1	%		10.9	%
ROIC* for Company								30.2	%		25.2	%
ROIC* for United States								43.2	%		34.9	%
ROIC* for Canada								10.4	%		8.6	%
* See page 1 for a definition of ROIC

8

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Preliminary

(In thousands of dollars)

	At September 30,
Assets	2010		2009
Cash and cash equivalents (1)	$	286,508	$	672,035
Accounts receivable – net (2)		784,922		638,531
Inventories		935,219		851,478
Prepaid expenses and other assets		81,048		75,064
Deferred income taxes		59,860		47,686
Total current assets		2,147,557		2,284,794
Property, buildings and equipment - net		942,354		938,285
Deferred income taxes		89,632		87,213
Investment in unconsolidated entities		3,332		3,341
Goodwill (3)		374,785		328,131
Other assets and intangibles – net (3)		231,577		103,285
Total assets	$	3,789,237	$	3,745,049
Liabilities and Shareholders’ Equity
Short-term debt	$	41,877	$	33,650
Current maturities of long-term debt		35,775		46,257
Trade accounts payable (4)		402,568		279,660
Accrued compensation and benefits		168,305		124,033
Accrued contributions to employees’ profit sharing plans		109,912		91,151
Accrued expenses		120,711		96,302
Income taxes payable		16,112		2,791
Total current liabilities		895,260		673,844
Long-term debt		427,495		454,895
Deferred income taxes and tax uncertainties		71,324		34,211
Accrued employment-related benefits		246,629		218,874
Shareholders' equity (5)		2,148,529		2,363,225
Total liabilities and shareholders’ equity	$	3,789,237	$	3,745,049

(1)   Cash and cash equivalents decreased $386 million, or 57%, due primarily to cash paid for share repurchases, dividends and acquisitions during the past 12 months.

(2)   Accounts receivable increased $146 million, or 23%, due to higher sales.

(3)   Goodwill and other assets and intangibles increased $175 million, or 41%, due to acquisitions.

(4)   Trade accounts payable increased $123 million, or 44%, due primarily to higher inventory purchases driven by higher sales volumes.

(5)   Common stock outstanding as of September 30, 2010 was 69,061,513 shares as compared with 74,315,435 shares at September 30, 2009.

9

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Preliminary

(In thousands of dollars)

	Nine Months Ended Sept. 30,
	2010			2009
Cash flows from operating activities:
Net earnings	$	380,381		$	333,408
Provision for losses on accounts receivable		5,912			11,165
Deferred income taxes and tax uncertainties		(20,575	)		9,131
Depreciation and amortization		109,223			104,093
Stock-based compensation		36,997			33,170
Change in operating assets and liabilities – net of business acquisitions
Accounts receivable		(152,944	)		(23,390	)
Inventories		(29,427	)		194,396
Prepaid expenses and other assets		36,150			24,991
Trade accounts payable		98,083			(33,064	)
Other current liabilities		8,650			(112,810	)
Current income taxes payable		9,026			(1,056	)
Accrued employment-related benefits cost		23,775			20,395
Other – net		(2,671	)		(50,690	)
Net cash provided by operating activities		502,580			509,739
Cash flows from investing activities:
Additions to property, buildings and equipment – net		(66,610	)		(88,152	)
Net cash paid for business acquisitions, and other investments		(67,592	)		11,254
Net cash used in investing activities		(134,202	)		(76,898	)
Cash flows from financing activities:
Net increase in short-term debt		8,836			1,604
Net decrease in long-term debt		(27,359	)		(8,333	)
Stock options exercised		68,325			59,940
Excess tax benefits from stock-based compensation		19,249			12,588
Purchase of treasury stock		(504,375	)		(127,696	)
Cash dividends paid		(114,128	)		(100,049	)
Net cash used in financing activities		(549,452	)		(161,946	)
Exchange rate effect on cash and cash equivalents		7,711			4,850
Net (decrease) increase in cash and cash equivalents		(173,363	)		275,745
Cash and cash equivalents at beginning of year		459,871			396,290
Cash and cash equivalents at end of period	$	286,508		$	672,035

###

10