W.W. GRAINGER, INC. - Interim / Quarterly Report 2003

10-Q 1 form10q2q2003.htm FORM 10Q, 06/30/2003 MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

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FORM 10-Q

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[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003

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[ ] 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

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I.R.S. Employer Identification Number 36-1150280

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W.W. Grainger, Inc. (An Illinois Corporation)

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100 Grainger Parkway Lake Forest, Illinois 60045-5201 Telephone: (847) 535-1000

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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 ___ MARKER FORMAT-SHEET="Para Flush" FSL="Default"

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes X No ___

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APPLICABLE ONLY TO CORPORATE ISSUERS:

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Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 91,315,324 shares of the Companys Common Stock were outstanding as of July 31, 2003.

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TABLE OF CONTENTS
		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 2003 and June 30, 2002	3 - 4
	Condensed Consolidated Statements of Comprehensive Earnings for the Three Months and Six Months Ended June 30, 2003 and
June 30, 2002	5
	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002	6 - 7
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and June
30, 2002	8 - 9
	Notes to Condensed Consolidated Financial Statements	10 - 17
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18 - 27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
PART II	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	29
Signatures		30

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PART I FINANCIAL INFORMATION

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Item 1. Financial Statements (Unaudited)

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W.W. Grainger, Inc., and Subsidiaries

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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

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(In thousands of dollars except for per share amounts)

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(Unaudited)

	Three Months Ended June 30, — 2003		2002		Six Months Ended June 30, — 2003		2002
Net sales	$ 1,172,661		$ 1,194,792		$ 2,311,930		$ 2,320,057
Cost of merchandise sold	768,589		795,230		1,514,002		1,537,466
Gross profit	404,072		399,562		797,928		782,591
Warehousing, marketing, and
administrative expenses	311,292		305,298		613,741		598,367
Operating earnings	92,780		94,264		184,187		184,224
Other income and (expense)
Interest income	729		917		1,502		1,896
Interest expense	(1,574	)	(1,407	)	(3,009	)	(2,941	)
Equity in loss of unconsolidated
entities	(769	)	(541	)	(1,824	)	(1,261	)
Gains on sales of investment
securities	5		--		5		7,308
Unclassified-net	2,663		(1,268	)	1,017		1,477
Net other income and
(expense)	1,054		(2,299	)	(2,309	)	6,479
Earnings before income taxes and
cumulative effect of accounting
change	93,834		91,965		181,878		190,703
Income taxes	37,841		37,466		73,481		77,746
Earnings before cumulative
effect of accounting change	$ 55,993		$ 54,499		$ 108,397		$ 112,957
Cumulative effect of accounting
change	--		--		--		(23,921	)
Net earnings	$ 55,993		$ 54,499		$ 108,397		$ 89,036

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

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W.W. Grainger, Inc., and Subsidiaries

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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Continued)

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(In thousands of dollars except for per share amounts)

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(Unaudited)

	Three Months Ended June 30, — 2003	2002	Six Months Ended June 30, — 2003	2002
Earnings per
share before cumulative
effect of accounting change:
Basic	$
0.61	$
0.59	$
1.19	$
1.22
Diluted	$
0.60	$
0.57	$
1.17	$
1.18
Cumulative effect of accounting
change:
Basic	$
--	$
--	$
--	$
(0.26	)
Diluted	$
--	$
--	$
--	$
(0.25	)
Earnings per share:
Basic	$
0.61	$
0.59	$
1.19	$
0.96
Diluted	$
0.60	$
0.57	$
1.17	$
0.93
Weighted average number of
shares outstanding:
Basic	90,834,004	92,751,999	90,849,675	92,685,427
Diluted	92,369,529	95,384,343	92,477,141	95,406,237
Cash dividends paid per share	$
0.185	$
0.180	$
0.365	$
0.355

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

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W.W. Grainger, Inc., and Subsidiaries

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

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(In thousands of dollars)

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(Unaudited)

	Three Months Ended June 30, — 2003		2002		Six Months Ended June 30, — 2003		2002
Net earnings	$ 55,993		$ 54,499		$ 108,397		$ 89,036
Other comprehensive earnings
(losses):
Foreign currency translation
adjustments, net of tax benefit
related to designated hedge
of
$4,348, $2,291, $7,466,
and $2,189, respectively	14,629		7,380		26,978		7,537
Gains (losses) on investment
securities:
Unrealized holding gains
(losses), net of tax
(expense) benefit of $(340),
$359, $455, and $1,548,
respectively	532		(561	)	(711	)	(2,421	)
Reclassifications for net
(gains) losses included in
earnings, net of tax expense
(benefit) of $2, $0, $(627),
and $2,850, respectively	(3	)	--		982		(4,458	)
Comprehensive earnings	$ 71,151		$ 61,318		$ 135,646		$ 89,694

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

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W.W. Grainger, Inc., and Subsidiaries

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CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars except for per share amounts)

ASSETS	(Unaudited) June 30, 2003	Dec. 31, 2002
CURRENT ASSETS
Cash and cash equivalents	$ 186,698	$ 208,528
Accounts receivable (less allowances for doubtful
accounts of $26,030 and $26,868, respectively)	464,462	423,240
Inventories	747,116	721,178
Prepaid expenses
and other assets	50,780	36,665
Deferred income tax benefits	101,063	95,336
Total current assets	1,550,119	1,484,947
PROPERTY, BUILDINGS, AND EQUIPMENT	1,526,028	1,492,858
Less accumulated depreciation and amortization	794,910	756,051
Property, buildings, and equipment-net	731,118	736,807
DEFERRED INCOME TAXES	24,737	20,541
INVESTMENTS IN UNCONSOLIDATED ENTITIES	19,762	15,988
GOODWILL	152,164	114,428
OTHER ASSETS AND INTANGIBLES, NET	65,945	64,737
TOTAL ASSETS	$2,543,845	$2,437,448

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

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W.W. Grainger, Inc., and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands of dollars except for per share amounts)

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| LIABILITIES AND
SHAREHOLDERS' EQUITY | (Unaudited) June 30, 2003 | | Dec. 31, 2002 | |
| --- | --- | --- | --- | --- |
| CURRENT LIABILITIES | | | | |
| Short-term debt | $ 1,135 | | $ 2,967 | |
| Current maturities of long-term debt | 5,320 | | 6,505 | |
| Trade accounts payable | 314,542 | | 290,807 | |
| Accrued expenses | 220,769 | | 248,085 | |
| Income taxes | 34,819 | | 37,902 | |
| Total current liabilities | 576,585 | | 586,266 | |
| LONG-TERM DEBT (less current maturities) | 139,163 | | 119,693 | |
| ACCRUED EMPLOYMENT-RELATED BENEFITS COSTS | 70,974 | | 63,791 | |
| SHAREHOLDERS' EQUITY | | | | |
| Cumulative Preferred Stock - $5 par value - 12,000,000 | | | | |
| shares authorized; none issued or outstanding | -- | | -- | |
| Common Stock - $0.50 par value - 300,000,000 shares | | | | |
| authorized; issued 109,154,283 and 109,017,642 | | | | |
| shares, respectively | 54,576 | | 54,509 | |
| Additional contributed capital | 385,080 | | 379,942 | |
| Retained earnings | 2,158,000 | | 2,083,072 | |
| Unearned restricted stock compensation | (14,166 | ) | (17,144 | ) |
| Accumulated other comprehensive losses | (8,493 | ) | (35,742 | ) |
| Treasury stock, at cost - 17,910,127 and 17,449,587 | | | | |
| shares, respectively | (817,874 | ) | (796,939 | ) |
| Total shareholders' equity | 1,757,123 | | 1,667,698 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 2,543,845 | | $ 2,437,448 | |

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

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W.W. Grainger, Inc., and Subsidiaries

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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(In thousands of dollars)

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(Unaudited)

| | Six Months Ended June
30, — 2003 | | 2002 | |
| --- | --- | --- | --- | --- |
| Cash flows from operating activities: | | | | |
| Net earnings | $ 108,397 | | $ 89,036 | |
| Provision for losses on accounts receivable | 3,908 | | 9,151 | |
| Deferred income taxes | (2,629 | ) | (8,908 | ) |
| Depreciation and amortization: | | | | |
| Property, buildings, and equipment | 39,182 | | 38,827 | |
| Other intangibles | 649 | | 355 | |
| Amortization of capitalized software | 9,642 | | 8,598 | |
| Gains on sales of investment securities | (5 | ) | (7,308 | ) |
| Net gains on sales of property, buildings and equipment | (2,948 | ) | (3,211 | ) |
| Write-down of investments | 1,614 | | 1,844 | |
| Losses on unconsolidated entities | 1,824 | | 1,261 | |
| Cumulative effect of accounting change | -- | | 23,921 | |
| Change in operating assets and liabilities-net of business | | | | |
| acquisition and joint venture contributions: | | | | |
| Increase in accounts receivable | (36,720 | ) | (56,882 | ) |
| Increase in inventories | (7,921 | ) | (14,905 | ) |
| Increase in prepaid expenses | (12,787 | ) | (660 | ) |
| Increase in trade accounts payable | 19,281 | | 29,646 | |
| Decrease in other current liabilities | (30,914 | ) | (22,697 | ) |
| (Decrease) increase in current income taxes payable | (5,606 | ) | 6,804 | |
| Increase in accrued employment-related | | | | |
| benefits costs | 7,183 | | 4,445 | |
| Other-net | 2,547 | | 5,926 | |
| Net cash provided by operating activities | $ 94,697 | | $ 105,243 | |
| Cash flows from investing activities: | | | | |
| Additions to property, buildings, and | | | | |
| equipment-net of dispositions | $(26,048 | ) | $(46,140 | ) |
| Additions to capitalized software | (3,773 | ) | (4,368 | ) |
| Proceeds from sales of investment securities | 675 | | 15,957 | |
| Net cash paid for business acquisition | (36,725 | ) | -- | |
| Investments in unconsolidated entities | (3,564 | ) | (3,211 | ) |
| Other-net | 319 | | 702 | |
| Net cash used in investing activities | $(69,116 | ) | $(37,060 | ) |

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

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W.W. Grainger, Inc., and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands of dollars)

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(Unaudited)

| | Six Months Ended June
30, — 2003 | | 2002 | |
| --- | --- | --- | --- | --- |
| Cash flows from financing activities: | | | | |
| Net decrease in short-term debt | $ (1,832 | ) | $ (2,230 | ) |
| Long-term debt issuance | 329 | | -- | |
| Long-term debt payments | (1,185 | ) | (1,900 | ) |
| Stock options exercised | 6,008 | | 13,221 | |
| Purchase of treasury stock-net | (21,071 | ) | (16,125 | ) |
| Cash dividends paid | (33,469 | ) | (33,244 | ) |
| Net cash used in financing activities | $(51,220 | ) | $(40,278 | ) |
| Exchange rate effect on cash and cash equivalents | 3,809 | | 2,538 | |
| Net (decrease) increase in cash and cash equivalents | (21,830 | ) | 30,443 | |
| Cash and cash equivalents at beginning of year | 208,528 | | 168,846 | |
| Cash and cash equivalents at end of period | $ 186,698 | | $ 199,289 | |

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

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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(Unaudited)

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BACKGROUND AND BASIS OF STATEMENT PRESENTATION

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W.W. Grainger, Inc., the Company, is engaged in the distribution of facilities maintenance products, services, and related information to businesses and institutions in North America.

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The Condensed Consolidated Financial Statements of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2002, included in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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The Condensed Consolidated Balance Sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

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The unaudited financial information reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.

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RECENT ACCOUNTING PRONOUNCEMENTS

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In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. It is an interpretation of FASB Statement of Financial Accounting Standards No. (SFAS) 5, 57, and 107 and rescission of FIN 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize at the inception of a guarantee a liability for the fair value of the obligation undertaken in issuing the guarantee. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. Disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of this interpretation did not have a material effect on the Companys results of operations or financial position. See Note 9 to the Condensed Consolidated Financial Statements for information regarding the Companys warranty reserves. The Company has certain other guarantees as disclosed in Note 9 to the Condensed Consolidated Financial Statements.

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of SFAS 149 that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. Adoption of SFAS 149 has not and is not expected to have a material effect on the Companys results of operations or financial position.

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In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Adoption of SFAS 150 is not expected to have a material effect on the Companys results of operations or financial position.

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GEMPLERS ACQUISITION

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On April 14, 2003, Lab Safety Supply, Inc. (Lab Safety), the Companys wholly owned subsidiary, acquired substantially all of the assets and assumed certain liabilities of Gemplers, a direct marketing division of Gemplers, Inc., located in Wisconsin. The results of Gemplers operations have been included in the Companys consolidated financial statements since that date. Gemplers, with annual sales in 2002 of approximately $32 million, serves agricultural, horticultural, grounds maintenance and contractor markets with tools, safety supplies, clothing and other equipment.

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The aggregate purchase price was $36.7 million in cash and $0.7 million in assumed liabilities. Goodwill recognized in this transaction amounted to approximately $22.8 million and is expected to be fully deductible for tax purposes. Due to the immaterial nature of this transaction disclosures of amounts assigned to the acquired assets and liabilities and pro forma results of operations are not considered necessary.

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

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STOCK INCENTIVE PLANS

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The Company maintains various stock incentive plans. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company recognizes compensation cost for restricted shares and restricted stock units granted to employees. No compensation cost is recognized for stock option grants. All options granted under the Companys plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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The following tables illustrate the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-based Compensation, to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net earnings as reported.

	Three Months Ended June 30, — 2003		2002		Six Months Ended June 30, — 2003		2002
	(In thousands of
dollars, except for per share amounts)
Net earnings as reported	$ 55,993		$ 54,499		$ 108,397		$ 89,036
Deduct:
Total stock-based employee
compensation expense
determined under the fair value
based method for all awards,
net of related tax	(3,624	)	(3,904	)	(7,066	)	(7,246	)
Pro forma net earnings	$ 52,369		$ 50,595		$ 101,331		$ 81,790

Earnings per share: — Basic - as reported	$ 0	.61	$ 0	.59	$ 1	.19	$ 0	.96
Basic - pro forma	$ 0	.58	$ 0	.54	$ 1	.12	$ 0	.88
Diluted - as reported	$ 0	.60	$ 0	.57	$ 1	.17	$ 0	.93
Diluted - pro forma	$ 0	.57	$ 0	.53	$ 1	.10	$ 0	.86

Stock-based employee
compensation cost,
net of related tax,
included in net
earnings as reported	$
(108	)	$
1,036	$
967	$
1,953

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

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Effective January 1, 2002, the Company adopted SFAS 142, Goodwill and Other Intangible Assets. As a result of the application of the new impairment methodology introduced by SFAS 142, the Company recorded a non-cash charge to earnings of $32.3 million ($23.9 million after-tax, or $0.25 per diluted share) related to the write-down of goodwill of its Canadian subsidiary, AcklandsGrainger, Inc. (Acklands).

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SPECIAL CHARGES

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In 2001, the Company announced plans to shut down the operations of Material Logic, with the exception of FindMRO, and write down its investment in other digital activities. In connection with this shut down, the Company took a pretax charge against operating earnings of $39.1 million (after-tax $23.2 million) in 2001. The Company provided a comprehensive separation package, including outplacement services, to the employees whose jobs were eliminated. As part of the shut down, 166 employees were severed. Severance payments began in July 2001 and will continue until June 2004, when the last severance package expires. Other shut down costs include lease obligations, which, if not settled earlier, will continue until 2004.

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The following table displays the activity and balance of the Material Logic restructuring reserve from December 31, 2002 through June 30, 2003. Deductions reflect cash payments.

| Restructuring
Reserve (operating expenses) | Balance Dec. 31, 2002 | Deductions | | Balance June 30, 2003 |
| --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | |
| Workforce reductions | $ 1,644 | $ (730 | ) | $ 914 |
| Other shut down costs | 850 | (180 | ) | 670 |
| | $ 2,494 | $ (910 | ) | $1,584 |

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JOINT VENTURE

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On February 1, 2002, the Company finalized the creation of a joint venture named USI-AGI Prairies Inc. The joint venture was between Acklands, Graingers Canadian subsidiary, and Uni-Select Inc. (Uni-Select), a Canadian company. The joint venture combined Uni-Selects Western Division with the automotive after-market parts division of Acklands, which operated as Bumper to Bumper. Acklands contribution of net assets was approximately U.S. $15 million. Additionally, Acklands carrying value of its investment in this joint venture includes U.S. $5.1 million of allocated goodwill. The Company has a 50% stake in the new entity, which is managed by Uni-Select.

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No gain or loss was recognized when this transaction was finalized. Through February 1, 2002, the results of the automotive after-market parts division were consolidated with the Company. Beginning February 2, 2002, the Company has accounted for its joint venture investment using the equity method.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

DIVIDEND

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On July 30, 2003, the Board of Directors declared a quarterly dividend of 18 ½ cents per share, payable September 1, 2003 to shareholders of record on August 11, 2003.

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GUARANTEES

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As discussed in Note 2 to the Condensed Consolidated Financial Statements, in November 2002, the FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies that a guarantor is required to recognize at the inception of a guarantee a liability for the fair value of the obligation undertaken in issuing the guarantee. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. As stated in Note 2 to the Condensed Consolidated Financial Statements, adoption of this interpretation did not have a material effect on the Companys results of operations or financial position.

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The Company has an outstanding guarantee related to an industrial revenue bond assumed by the buyer of one of the Companys formerly owned facilities prior to December 31, 2002. The maximum exposure under this guarantee was $8.5 million as of June 30, 2003. The Company has not recorded any liability relating to this guarantee and believes it is unlikely that material payments will be required.

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Warranty Reserves

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The Company generally warrants the products it sells against defects for one year. For a significant portion of warranty claims, the manufacturer is responsible for the expenses associated with this warranty. For warranty expenses not covered by the manufacturer, the Company provides a reserve for costs based on historical experience. The reserve activity was as follows:

| | Six Months Ended June
30, | | | |
| --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | |
| | 2003 | | 2002 | |
| Beginning balance | $ 3,000 | | $ 2,368 | |
| Returns | (4,714 | ) | (4,425 | ) |
| Provision | 4,360 | | 4,633 | |
| Ending balance | $ 2,646 | | $ 2,576 | |

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

SEGMENT INFORMATION

| | Three Months Ended June
30, 2003 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | | | | |
| | Branch-based Distribution | | Lab Safety | | Integrated
Supply | Total | |
| Total net sales | $ 1,044,732 | | $ 79,387 | | $52,829 | $ 1,176,948 | |
| Intersegment net sales | (3,900 | ) | (387 | ) | -- | (4,287 | ) |
| Net sales to external customers | $ 1,040,832 | | $ 79,000 | | $52,829 | $ 1,172,661 | |
| Segment operating earnings | $ 92,163 | | $ 11,216 | | $ 786 | $ 104,165 | |

| | Three Months Ended June
30, 2002 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | | | | |
| | Branch-based Distribution | | Lab Safety | | Integrated
Supply | Total | |
| Total net sales | $ 1,066,554 | | $ 73,959 | | $58,691 | $ 1,199,204 | |
| Intersegment net sales | (4,076 | ) | (336 | ) | -- | (4,412 | ) |
| Net sales to external customers | $ 1,062,478 | | $ 73,623 | | $58,691 | $ 1,194,792 | |
| Segment operating earnings | $ 97,717 | | $ 12,170 | | $ 1,333 | $ 111,220 | |

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

| | Six Months Ended
June 30, 2003 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | | | | |
| | Branch-based Distribution | | Lab Safety | | Integrated
Supply | Total | |
| Total net sales | $ 2,059,604 | | $ 150,876 | | $110,101 | $ 2,320,581 | |
| Intersegment net sales | (7,829 | ) | (822 | ) | -- | (8,651 | ) |
| Net sales to external customers | $ 2,051,775 | | $ 150,054 | | $110,101 | $ 2,311,930 | |
| Segment operating earnings | $ 183,188 | | $ 22,069 | | $ 1,920 | $ 207,177 | |

| | Six Months Ended
June 30, 2002 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | | | | |
| | Branch-based Distribution | | Lab Safety | | Integrated
Supply | Total | |
| Total net sales | $ 2,065,865 | | $ 146,891 | | $115,905 | $ 2,328,661 | |
| Intersegment net sales | (7,927 | ) | (677 | ) | -- | (8,604 | ) |
| Net sales to external customers | $ 2,057,938 | | $ 146,214 | | $115,905 | $ 2,320,057 | |
| Segment operating earnings | $ 186,952 | | $ 25,149 | | $ 2,900 | $ 215,001 | |

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W.W. Grainger, Inc., and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

| Segment
assets: | Branch-based Distribution | Lab
Safety | Integrated
Supply | Total |
| --- | --- | --- | --- | --- |
| | (In thousands of
dollars) | | | |
| At June 30, 2003 | $1,956,146 | $146,357 | $39,978 | $2,142,481 |
| At December 31, 2002 | $1,872,471 | $104,372 | $29,539 | $2,006,382 |

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A reconciliation of segment information to consolidated information is as follows:

	Three Months Ended June 30, — 2003		2002		Six Months Ended June 30, — 2003		2002
Operating
Earnings:
	(In thousands of
dollars)
Total operating earnings for
reportable segments	$ 104,165		$ 111,220		$ 207,177		$ 215,001
Unallocated expenses	(11,392	)	(16,948	)	(22,997	)	(30,763	)
Elimination of intersegment profits	7		(8	)	7		(14	)
Total consolidated operating earnings	$ 92,780		$ 94,264		$ 184,187		$ 184,224

	June 30, 2003	December 31, 2002
	(In
thousands of dollars)
Assets:
Total assets for reportable segments	$2,142,481	$2,006,382
Unallocated assets	401,364	431,066
Total consolidated assets	$2,543,845	$2,437,448

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Unallocated expenses and unallocated assets primarily relate to the Company headquarters support services, which are not part of any business segment. Unallocated expenses include payroll and benefits, depreciation, and other costs associated with headquarters-related support services. Unallocated assets include non-operating cash, cash equivalents, prepaid expenses, and property, buildings and equipment, net.

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Item 2.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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CRITICAL ACCOUNTING POLICIES

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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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 the Companys results of operations for the period in which the actual amounts become known.

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Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and when different estimates than management reasonably could have used have a material impact on the presentation of the Companys financial condition, changes in financial condition, or results of operations. For a description of the Companys critical accounting policies, see the Companys Annual Report on Form 10-K for the year ended December 31, 2002.

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RESULTS OF OPERATIONS

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THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002:

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Company Net Sales

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The Companys net sales of $1,172.7 million in the 2003 second quarter were down 2% compared with sales of $1,194.8 million for the comparable 2002 period. Sales performance in the second quarter of 2003 was affected by the continuing general weakness in the U.S. economy and lower seasonal sales due to unseasonably cool weather. These effects were partially offset by increased sales at Lab Safety as a result of the Gemplers acquisition.

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There were 64 sales days in both the 2003 and 2002 second quarters. The full year 2003 will have 255 sales days, the same number of sales days as the full year 2002.

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Segment Net Sales

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The following comments at the segment level refer to external and intersegment net sales. Comments at the business unit level include external and inter- and intrasegment net sales. For segment information, see Note 10 to the Condensed Consolidated Financial Statements included in this report.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

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Branch-based Distribution Businesses

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Net sales of $1,044.7 million for the second quarter of 2003 were down 2% as compared to net sales of $1,066.6 million in the second quarter of 2002.

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Net sales in the United States declined approximately 4% for the second quarter versus the same period in 2002. Unseasonably cool weather in certain parts of the United States resulted in a 19% decline in the sales of seasonal products. All customer segments were down except for government accounts, which were up 7%. National accounts were down 1% for the quarter.

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Sales processed through the grainger.com web site were $115 million for the second quarter 2003, an 8% increase over second quarter 2002 sales of $106 million.

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Net sales in Canada increased 18% during the second quarter of 2003 including the effect of a favorable Canadian exchange rate. In local currency, this business experienced a 6% increase primarily due to higher sales related to the SARS outbreak in Ontario and increased sales to national accounts.

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Net sales in Mexico were down 6% for the second quarter of 2003 when compared with the same period of the prior year. This reflects the continuing softness of Mexicos economy.

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Lab Safety

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Second quarter 2003 net sales for Lab Safety were $79.4 million, an increase of 7% when compared with $74.0 million for the same period in 2002. The sales increase in this segment was attributable to the acquisition of Gemplers on April 14, 2003. Excluding the impact of this acquisition, sales decreased 2%. This was primarily attributable to the continuing weakness in the manufacturing sector of the economy, which is a major source of sales for Lab Safety.

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Integrated Supply

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Net sales for the second quarter of 2003 for Graingers Integrated Supply division were $52.8 million, a decrease of 10% when compared with $58.7 million for the same period in 2002. Sales decreased for the quarter due to fewer customer locations and the weak economy. Sales for this business unit include product sales and management fees.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

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Company Net Earnings

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The Companys net earnings of $56.0 million in the second quarter of 2003 increased 3% compared with $54.5 million for the comparable 2002 period. The increase in net earnings was primarily the result of higher other income and the impact of a lower effective income tax rate, partially offset by weaker operating earnings.

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Operating earnings of $92.8 million for the second quarter of 2003 decreased 2% compared with the same 2002 period. The decline in operating earnings was primarily attributable to weaker performance at all three of the Companys business segments, partially offset by a reduction in headquarters expenses. The second quarter of 2002 included $5.8 million of expense related to severance and other costs.

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Segment Operating Earnings

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The following comments at the segment level include external and intersegment operating earnings. Comments at the business unit level include external and inter- and intrasegment operating earnings. For segment information, see Note 10 to the Condensed Consolidated Financial Statements included in this report.

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Branch-based Distribution Businesses

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Operating earnings of $92.2 million for the second quarter decreased 6% compared with operating earnings of $97.7 million in the second quarter of 2002, primarily the result of lower sales volume. The United States was down 12%, while Canada and Mexico reflected improved operating performance.

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The gross profit margin increased 1.0 percentage point from the comparable 2002 quarter. The improvement in the gross profit margin was primarily attributable to selected pricing actions intended to cover freight and supplier cost increases, certain one-time benefits relating to line reviews completed in the second quarter, and to favorable product mix. The favorable change in product mix was partially the result of lower sales of seasonal products, which have lower than average gross profit margins. Partially offsetting these improvements were higher freight costs related to both the logistics project and increased fuel costs.

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Operating expenses were up 3% for the quarter primarily the result of incremental costs related to the expansion and renovation of the U.S. distribution centers and increases in other payroll and benefits costs including increased health care costs.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

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Lab Safety

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Lab Safety had operating earnings of $11.2 million for the second quarter of 2003, a decrease of 8% compared with operating earnings of $12.2 million for the second quarter of 2002. The operating earnings decrease was the result of lower gross profit margins and higher operating expenses. Gross profit margins were affected by higher freight costs and an unfavorable product mix. The operating expense increase was primarily due to increases in distribution of catalog media and integration costs associated with the Gemplers acquisition.

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Integrated Supply

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Graingers Integrated Supply division had operating earnings of $0.8 million in the second quarter of 2003 compared with operating earnings of $1.3 million in the comparable period of 2002. The operating earnings decrease was due to lower revenue and higher operating expenses. Operating expenses increased due to higher data processing expenses associated with a systems upgrade, higher marketing and development expenses, and start-up costs at two of six new customer sites.

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Other Income and Expense

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Other income and expense was $1.1 million of income in the second quarter of 2003 compared with $2.3 million of expense in the second quarter of 2002. The following table provides an analysis of the components of other income and expense:

	Three Months Ended June 30,
	(In thousands of
dollars)
	2003		2002
Other income and (expense):
Interest (expense), net of interest income	$ (845	)	$ (490	)
Equity in losses of unconsolidated entities	(769	)	(541	)
Gains on sales of investment securities	5		--
Unclassified-net:
Gains on sales of fixed assets, net	2,811		391
Write-down of investments	--		(1,844	)
Other	(148	)	185
Net other income and (expense)	$ 1,054		$(2,299	)

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Income Taxes

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The Companys effective income tax rate was 40.3% for the second quarter of 2003 and 40.7% for the same period in 2002. Excluding the effect of equity losses in unconsolidated entities, which are recorded net of tax, the effective income tax rate was 40.0% for 2003 and 40.5% for 2002. This change in the effective tax rate was primarily driven by lower non-deductible losses in Mexico and a lower tax rate in Canada.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

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SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002:

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Company Net Sales

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The Companys net sales of $2,311.9 million in the first six months of 2003 were essentially flat compared with sales of $2,320.1 million for the comparable 2002 period. Sales performance in the first half of 2003 was affected by the continuing general weakness in the U.S. economy.

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There were 127 sales days in both the first six months of 2003 and 2002. The full year 2003 will have 255 sales days, the same number of sales days as the full year 2002.

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Segment Net Sales

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Branch-based Distribution Businesses

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Net sales of $2,059.6 million for the first six months of 2003 were flat as compared to net sales of $2,065.9 million in the first six months of 2002.

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Net sales in the United States declined approximately 2% for the first six months versus the same period of 2002, primarily due to the continued weakness in the U.S. economy. Sales to government accounts increased by 10% and sales to national accounts were up 1% for the first six months versus the same period of 2002. Sales to all other customer segments declined.

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Net sales processed through the grainger.com web site were $230 million for the first six months of 2003, a 14% increase over sales of $201 million for the first six months of 2002.

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Net sales in Canada increased 15% during the first half of 2003 which included the impact of a favorable Canadian exchange rate. In local currency, this business experienced a 6% increase due to higher sales related to the SARS outbreak in Ontario and higher sales to national accounts.

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The operation in Mexico experienced a 3% decline in net sales in the first half of 2003 when compared with the same period of the prior year. This reflects the continuing softness of Mexicos economy.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

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Lab Safety

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First half 2003 net sales for Lab Safety were $150.9 million, an increase of 3% when compared with $146.9 million for the same period in 2002. The increase in sales is attributable to the acquisition of Gemplers on April 14, 2003. Excluding the impact of the Gemplers acquisition, year-to-date net sales would have declined 2% when compared with the same period in the prior year. This was primarily attributable to the weakness in the manufacturing sector of the economy, which is a major source of sales for Lab Safety.

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Integrated Supply

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Net sales for the first six months of 2003 for Integrated Supply were $110.1 million, a decrease of 5% when compared with $115.9 million for the same period in 2002. Sales decreased due to fewer customer locations and the weak economy. Sales for this business unit include product sales and management fees.

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Company Net Earnings

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The Companys net earnings of $108.4 million in the first six months of 2003 increased 22% compared with $89.0 million for the comparable 2002 period. The results for 2002 included the cumulative effect of a change in accounting principle of $23.9 million and after-tax gains on the sales of investment securities of $4.5 million. Excluding those items, net earnings were $108.4 million for the first six months of 2003 compared to $108.5 million for 2002, and diluted earnings per share were $1.17 and $1.14, respectively.

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Operating earnings were flat for the first half of 2003 compared with the same 2002 period. Weaker operating earnings at all three of the Companys business segments were offset by lower headquarters expenses. The first half of 2002 included $5.8 million of expense recorded in the second quarter of 2002 related to severance and other costs.

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Segment Operating Earnings

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

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Branch-based Distribution Businesses

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Operating earnings of $183.2 million for the first six months of 2003 declined 2% compared with operating earnings of $187.0 million in the first six months of 2002. Weak operating performance in the U.S. was partially offset by stronger operating earnings in Canada and Mexico.

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The gross profit margin increased 0.9 percentage point from the comparable 2002 period. The improvement in gross profit margins was primarily attributable to selected pricing actions intended to cover freight and supplier cost increases, and to favorable product mix. Partially offsetting these improvements were higher freight costs related to both the logistics project and increased fuel costs.

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Operating expenses were up 4% for the six months as a result of start up and incremental costs related to the expansion and renovation of the U.S. distribution centers and increased payroll and benefits expenses.

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Lab Safety

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Lab Safety had operating earnings of $22.1 million for the first six months of 2003, a decrease of 12% compared with operating earnings of $25.1 million for the first six months of 2002. The operating earnings decline was the result of lower gross profit margins and increased operating expenses. Gross profit margins were affected by higher freight costs and an unfavorable product mix. The operating expense increase was primarily the result of increases in distribution of catalog media and integration costs associated with the Gemplers acquisition.

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Integrated Supply

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Graingers Integrated Supply division had operating earnings of $1.9 million for the first six months of 2003 compared with operating earnings of $2.9 million in the comparable period of 2002. The decline in operating performance for the first six months of 2003 was the result of lower gross profit, driven by lower fee revenue. Operating expenses increased due to higher payroll and benefits and higher data processing expenses associated with a systems upgrade.

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W.W. Grainger, Inc., and Subsidiaries

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

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CONDITION AND RESULTS OF OPERATIONS

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RESULTS OF OPERATIONS (Continued)

MARKER FORMAT-SHEET="Head Left" FSL="Default"

Other Income and Expense

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Other income and expense was $2.3 million of expense for the first six months of 2003 compared with $6.5 million of income in the first half of 2002. The following table provides an analysis of the components of other income and expense:

	Six Months Ended June 30,
	(In thousands of
dollars)
	2003		2002
Other income and (expense):
Interest (expense), net of interest income	$(1,507	)	$(1,045	)
Equity in losses of unconsolidated entities	(1,824	)	(1,261	)
Gains on sales of investment securities	5		7,308
Unclassified-net:
Gains on sales of fixed assets, net	2,948		3,211
Write-down of investments	(1,614	)	(1,844	)
Other	(317	)	110
Net other income and (expense)	$(2,309	)	$ 6,479

MARKER FORMAT-SHEET="Head Left" FSL="Default"

Income Taxes

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The Companys effective income tax rate was 40.4% for the first six months of 2003 and 40.8% for the same period in 2002. Excluding the effect of equity losses in unconsolidated entities, which are recorded net of tax, the effective income tax rate was 40.0% for 2003 and 40.5% for 2002. This change in the effective tax rate was primarily driven by lower non-deductible losses in Mexico and a lower tax rate in Canada.

MARKER PAGE="sheet: 60; page: 60" MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

W.W. Grainger, Inc., and Subsidiaries

MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

CONDITION AND RESULTS OF OPERATIONS

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LIQUIDITY AND CAPITAL RESOURCES

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For the six months ended June 30, 2003, working capital increased by $74.9 million. The ratio of current assets to current liabilities was 2.7 at June 30, 2003 and 2.5 at December 31, 2002. The Condensed Consolidated Statements of Cash Flows, included in this report, detail the sources and uses of cash and cash equivalents.

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The Company maintains a debt ratio and liquidity position that provide flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, the Company has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit and otherwise. Total debt as a percent of total capitalization was 7.7% and 7.2% at June 30, 2003 and December 31, 2002, respectively. For the first six months of 2003, $36.6 million was expended for property, buildings, and equipment, and $3.8 million was expended for capitalized software, for a total of $40.4 million.

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On April 14, 2003, Lab Safety acquired substantially all of the assets and assumed certain liabilities of Gemplers, a direct marketing division of Gemplers, Inc., located in Wisconsin. The results of Gemplers operations have been included in the Companys consolidated financial statements since that date. Gemplers, with annual sales in 2002 of approximately $32 million, serves agricultural, horticultural, grounds maintenance and contractor markets with tools, safety supplies, clothing and other equipment. The aggregate purchase price was $36.7 million in cash and $0.7 million in assumed liabilities. Goodwill recognized in this transaction amounted to approximately $22.8 million, and it is expected to be fully deductible for tax purposes.

MARKER FORMAT-SHEET="Para Flush" FSL="Default"

As of June 30, 2003, 9.5 million shares of common stock remained under the Companys repurchase authorization, after the repurchase of approximately 0.5 million shares in the first half of 2003.

MARKER PAGE="sheet: 61; page: 61" MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

W.W. Grainger, Inc., and Subsidiaries

MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

CONDITION AND RESULTS OF OPERATIONS

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FORWARD-LOOKING STATEMENTS

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This document contains forward-looking statements under the federal securities laws. The forward-looking statements relate to the Companys expected future financial results and business plans, strategies, and objectives and are not historical facts. They are often identified by qualifiers such as: expected to, unlikely that, or similar expressions. There are risks and uncertainties the outcome of which could cause the Companys results to differ materially from what is projected.

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Factors that may affect forward-looking statements include the following: higher product costs or other expenses; a major loss of customers; increased competitive pricing pressure on the Companys businesses; failure to develop or implement new technologies or other business strategies; the outcome of pending and future litigation and governmental proceedings; changes in laws and regulations; facilities disruptions or shutdowns; disruption in transportation services; natural and other catastrophes; unanticipated weather conditions; and other difficulties in achieving or improving margins or financial performance.

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Trends and projections could also be affected by general industry and market conditions, gross domestic product growth rates, general economic conditions, including interest rate and currency rate fluctuations, global and other conflicts, and other factors.

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W.W. Grainger, Inc., and Subsidiaries

MARKER FORMAT-SHEET="Head Minor Center" FSL="Default"

PART I FINANCIAL INFORMATION (Continued)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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For a description of market risks of the Company, see Item 7A Quantitative and Qualitative Disclosures about Market Risk in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

MARKER FORMAT-SHEET="Head Left" FSL="Default" Item 4. Controls and Procedures MARKER FORMAT-SHEET="Para (List) Flush" FSL="Default"

(a) Disclosure controls and procedures

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The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companys 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 the Companys disclosure controls and procedures were effective as of the end of the period covered by this report.

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(b) Internal control over financial reporting

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There were no changes in the Companys internal control over financial reporting that occurred during the period covered by this report that have materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

28 MARKER PAGE="sheet: 63; page: 63"

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W.W. Grainger, Inc., and Subsidiaries

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PART II OTHER INFORMATION

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Items 1, 2, 3, 4 and 5 not applicable.

Item 6. Exhibits and Reports on Form 8-K MARKER FORMAT-SHEET="Para (List) Indent"

(a) Exhibits (numbered in accordance with Item 601 of regulation S-K)

(11) Computations of Earnings per Share MARKER FORMAT-SHEET="Para (List) Flush" FSL="Default"

(31) Rule 13a 14(a)/15d 14(a) Certifications

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| (1) | Chief Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| --- | --- |
| (2) | Chief Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |

MARKER FORMAT-SHEET="Para (List) Flush" (32) Section 1350 Certifications

(1) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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(2) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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(b) Reports on Form 8-K

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The Company filed a report on Form 8-K, dated July 17, 2003, reporting under Item 9 thereof information included as exhibits to the report, consisting of a press release announcing financial results for the quarter ended June 30, 2003, and supplemental financial information for the quarter ended June 30, 2003.

29 MARKER PAGE="sheet: 64; page: 64"

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 thereunto duly authorized.

W.W. Grainger, Inc. (Registrant)

Date: August 11, 2003 By: /s/ P.O. Loux P.O. Loux, Senior Vice President, Finance and Chief Financial Officer

Date: August 11, 2003 By: /s/ J.E. Andringa J.E. Andringa, Vice President and Controller

MARKER PAGE="sheet: 65; page: 65"

Exhibit 11.1

W.W. Grainger, Inc. and Subsidiaries COMPUTATIONS OF EARNINGS PER SHARE

| | Six Months Ended June
30, — 2003 | | 2002 | |
| --- | --- | --- | --- | --- |
| BASIC: | | | | |
| Weighted average number of shares outstanding | 90,849,675 | | 92,685,427 | |
| Earnings before cumulative effect of accounting | | | | |
| change | $ 108,397,000 | | $ 112,957,000 | |
| Cumulative effect of accounting change | -- | | (23,921,000 | ) |
| Net earnings | $ 108,397,000 | | $ 89,036,000 | |
| Earnings per share before cumulative effect of | | | | |
| accounting change | $ 1.19 | | $ 1.22 | |
| Cumulative effect of accounting change per share | -- | | (0.26 | ) |
| Earnings per share | $ 1.19 | | $ 0.96 | |
| DILUTED: | | | | |
| Weighted average number of shares | | | | |
| outstanding | 90,849,675 | | 92,685,427 | |
| Potential Shares: | | | | |
| Shares issuable under outstanding options | 6,355,508 | | 7,862,679 | |
| Shares which could have been purchased using | | | | |
| the proceeds from the options exercised, | | | | |
| based on the average market value for the | | | | |
| period | (5,493,954 | ) | (6,087,004 | ) |
| | 861,554 | | 1,775,675 | |
| Dilutive effect of exercised options prior | | | | |
| to being exercised | 10,552 | | 41,182 | |
| Shares for the portion of the period that the | | | | |
| options were outstanding | 872,106 | | 1,816,857 | |
| Contingently issuable shares | 755,360 | | 903,953 | |
| | 1,627,466 | | 2,720,810 | |
| Adjusted weighted average number of shares | | | | |
| outstanding | 92,477,141 | | 95,406,237 | |
| Earnings before cumulative effect of accounting | | | | |
| change | $ 108,397,000 | | $ 112,957,000 | |
| Cumulative effect of accounting change | -- | | (23,921,000 | ) |
| Net earnings | $ 108,397,000 | | $ 89,036,000 | |
| Earnings per share before cumulative | | | | |
| effect of accounting change | $ 1.17 | | $ 1.18 | |
| Cumulative effect of accounting change per share | -- | | (0.25 | ) |
| Earnings per share | $ 1.17 | | $ 0.93 | |

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Exhibit 11.2

W.W. Grainger, Inc. and Subsidiaries COMPUTATIONS OF EARNINGS PER SHARE

	2003		2002
BASIC:
Three months ended June 30:
Six months ended June 30, as reported in
Exhibit 11.1	$ 1	.19	$ 0	.96
Three months ended
March 31, as previously
reported	$ 0	.58	$ 0	.37
Earnings per share for the three months ended
June 30	$ 0	.61	$ 0	.59
DILUTED:
Three months ended June 30:
Six months ended June 30, as reported in
Exhibit 11.1	$ 1	.17	$ 0	.93
Three months ended
March 31, as previously
reported	$ 0	.57	$ 0	.36
Earnings per share for the three months ended June 30	$ 0	.60	$ 0	.57

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W.W. GRAINGER, INC. Interim / Quarterly Report 2003

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W.W. GRAINGER, INC. — Interim / Quarterly Report 2003

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W.W. GRAINGER, INC. Interim / Quarterly Report 2003