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

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 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)
 
Not Applicable
(Former name, former address and former fiscal year; if changed since last report)

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
   
No
 

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 T
 
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 Exchange Act).
Yes
   
No
X

There were 73,211,484 shares of the Company’s Common Stock outstanding as of March 31, 2009.
1
TABLE OF CONTENTS
 
Page No.
PART I
FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements (Unaudited)
   
       
 
Condensed Consolidated Statements of Earnings 
for the Three Months Ended March 31, 2009 and 
March 31, 2008
 
3
       
 
Condensed Consolidated Statements of Comprehensive
Earnings for the Three Months Ended March 31, 2009 
and March 31, 2008
 
4
       
 
Condensed Consolidated Balance Sheets
as of March 31, 2009 and December 31, 2008
 
5 - 6
       
 
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2009 and 
March 31, 2008
 
7 - 8
       
 
Notes to Condensed Consolidated Financial Statements
 
9 - 15
       
Item 2.
Management’s Discussion and Analysis of Financial
   
 
Condition and Results of Operations
 
16 – 21
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
22
       
Item 4.
Controls and Procedures
 
22
       
PART II
OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
22
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
23
       
Item 4.
Submission of Matters to a Vote of Security Holders
 
23 – 24
       
Item 6.
Exhibits
 
24
       
Signatures
   
25
       
EXHIBITS
     
       
Exhibits 31 & 32
Certifications
   


 
2
 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for per share amounts)
(Unaudited)

   
Three Months Ended
March 31,
 
   
2009
   
2008
 
             
Net sales
  $ 1,465,248     $ 1,661,046  
                 
Cost of merchandise sold
    835,833       981,112  
                 
Gross profit
    629,415       679,934  
                 
Warehousing, marketing and administrative expenses
    470,201       494,111  
                 
Operating earnings
    159,214       185,823  
                 
Other income and (expense):
               
Interest income
    401       804  
Interest expense
    (2,218 )     (1,433 )
Equity in net income of unconsolidated entities
    76       737  
Unclassified – net
    995       569  
Total other income and (expense)
    (746 )     677  
                 
Earnings before income taxes
    158,468       186,500  
                 
Income taxes
    62,090       72,262  
                 
Net earnings
  $ 96,378     $ 114,238  
                 
                 
Earnings per share:
               
Basic
  $ 1.27     $ 1.44  
                 
Diluted
  $ 1.25     $ 1.41  
                 
Weighted average number of shares outstanding:
               
Basic
    74,260,401       77,933,996  
                 
Diluted
    75,142,460       79,245,391  
                 
Cash dividends paid per share
  $ 0.40     $ 0.35  
 
 
The accompanying notes are an integral part of these financial statements.

 
3
 

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

   
Three Months Ended
March 31,
 
   
2009
   
2008
 
             
Net earnings
  $ 96,378     $ 114,238  
                 
Other comprehensive earnings (losses):
               
                 
Foreign currency translation adjustments, net of tax
benefit (expense) of $1,784 and $2,008, respectively
    (16,065 )     (9,898 )
                 
Comprehensive earnings
  $ 80,313     $ 104,340  


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

 
4
 

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for per share amounts)
(Unaudited)


ASSETS
 
March 31, 2009
   
Dec. 31, 2008
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 257,570     $ 396,290  
Accounts receivable (less allowances for doubtful
               
accounts of $26,432 and $26,481, respectively)
    559,315       589,416  
Inventories
    956,565       1,009,932  
Prepaid expenses and other assets
    76,241       73,359  
Deferred income taxes
    54,600       52,556  
Prepaid income taxes
    –       22,556  
Total current assets
    1,904,291       2,144,109  
                 
PROPERTY, BUILDINGS AND EQUIPMENT
    2,150,461       2,131,863  
Less accumulated depreciation and amortization
    1,222,787       1,201,552  
Property, buildings and equipment – net
    927,674       930,311  
                 
DEFERRED INCOME TAXES
    105,674       97,442  
                 
INVESTMENT IN UNCONSOLIDATED ENTITIES
    19,181       20,830  
                 
GOODWILL
    209,188       213,159  
                 
OTHER ASSETS AND INTANGIBLES – NET
    104,497       109,566  
                 
TOTAL ASSETS
  $ 3,270,505     $ 3,515,417  



 
5
 

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for per share amounts)
(Unaudited)


LIABILITIES AND SHAREHOLDERS' EQUITY
 
March 31, 2009
   
Dec. 31, 2008
 
CURRENT LIABILITIES
           
Short-term debt
  $ 20,827     $ 19,960  
Current maturities of long-term debt
    29,590       21,257  
Trade accounts payable
    254,337       290,802  
Accrued compensation and benefits
    117,912       162,380  
Accrued contributions to employees’ profit sharing plans
    28,591       146,922  
Accrued expenses
    82,703       118,633  
Income taxes payable
    36,823       1,780  
Total current liabilities
    570,783       761,734  
                 
LONG-TERM DEBT (less current maturities)
    479,895       488,228  
                 
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES
    33,971       33,219  
                 
ACCRUED EMPLOYMENT-RELATED BENEFITS
    198,975       198,431  
                 
SHAREHOLDERS' EQUITY
               
Cumulative Preferred Stock – $5 par value –
12,000,000 shares authorized; none issued
nor outstanding
    –       –  
Common Stock – $0.50 par value –
300,000,000 shares authorized;
issued 109,659,219 shares
    54,830       54,830  
Additional contributed capital
    569,718       564,728  
Retained earnings
    3,736,490       3,670,726  
Accumulated other comprehensive earnings (losses)
    (54,590 )     (38,525 )
Treasury stock, at cost –
36,447,735 and 34,878,190 shares, respectively
    (2,319,567 )     (2,217,954 )
                 
Total shareholders' equity
    1,986,881       2,033,805  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 3,270,505     $ 3,515,417  


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

 
6
 

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)

   
Three Months Ended March 31,
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings
  $ 96,378     $ 114,238  
Provision for losses on accounts receivable
    4,082       4,706  
Deferred income taxes and tax uncertainties
    (7,739 )     (6,370 )
Depreciation and amortization:
               
Property, buildings and equipment
    26,547       25,333  
Capitalized software and other intangibles
    7,086       6,223  
Stock-based compensation
    9,207       8,084  
Tax benefit of stock incentive plans
    301       54  
Net gains on sales of property, buildings and equipment
    50       (1,316 )
(Income) from unconsolidated entities – net
    (76 )     (737 )
Change in operating assets and liabilities – net of business acquisitions
               
(Increase) decrease in accounts receivable
    23,310       (48,937 )
(Increase) decrease in inventories
    47,243       (23,619 )
(Increase) decrease in prepaid income taxes
    22,556       –  
(Increase) decrease in prepaid expenses
    (3,124 )     (5,355 )
Increase (decrease) in trade accounts payable
    (34,990 )     41,468  
Increase (decrease) in other current liabilities
    (181,657 )     (162,485 )
Increase (decrease) in current income taxes payable
    35,054       60,932  
Increase (decrease) in accrued employment-related benefits cost
    496       1,867  
Other – net
    (2,208 )     (778 )
                 
Net cash provided by operating activities
    42,516       13,308  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Additions to property, buildings and equipment – net of dispositions
    (27,305 )     (31,062 )
Additions to capitalized software
    (1,102 )     (2,313 )
Proceeds from sale of marketable securities
    –       19,848  
Other – net
    24       23  
                 
Net cash used in investing activities
  $ (28,383 )   $ (13,504 )



 
7
 

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands of dollars)
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2009
   
2008
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase in commercial paper
  $ –     $ 223,913  
Borrowings under line of credit
    1,707       3,921  
Payments against line of credit
    (869 )     (54 )
Stock options exercised
    5,689       3,559  
Excess tax benefits from stock-based compensation
    797       907  
Purchase of treasury stock
    (127,696 )     (196,437 )
Cash dividends paid
    (30,615 )     (28,064 )
                 
Net cash (used in) provided by financing activities
    (150,987 )     7,745  
                 
Exchange rate effect on cash and cash equivalents
    (1,866 )     (3,557 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (138,720 )     3,992  
                 
Cash and cash equivalents at beginning of year
    396,290       113,437  
                 
Cash and cash equivalents at end of period
  $ 257,570     $ 117,429  
 
 
The accompanying notes are an integral part of these financial statements.

 
8
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.  BACKGROUND AND BASIS OF PRESENTATION

W.W. Grainger, Inc. distributes facilities maintenance products and provides services used by businesses and institutions primarily in the United States, Canada and Mexico to keep their facilities and equipment running.  In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.

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, 2008, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).

The Condensed Consolidated Balance Sheet as of December 31, 2008, has been derived from the audited consolidated 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.

The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.
 
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING STANDARDS

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP 141(R)-1).  FSP 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated.  If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB Statement No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss.”   This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company does not expect the adoption of FSP 141(R)-1 to have a material effect on its results of operations or financial position.


 
9
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.  DIVIDEND

On April 29, 2009, the Company’s Board of Directors declared a quarterly dividend of 46 cents per share, payable June 1, 2009, to shareholders of record on May 11, 2009.  This represents a 15% increase from the prior quarterly rate of 40 cents per share.

 
4.  WARRANTY RESERVES
 
The Company generally warrants the products it sells against defects for one year.  For a significant portion of warranty claims, the manufacturer of the product is responsible for the expenses associated with this warranty program.  For warranty expenses not covered by the manufacturer, the Company provides a reserve for future costs based on historical experience.  The warranty reserve activity was as follows (in thousands of dollars):
 
   
Three Months Ended March 31,
 
   
2009
   
2008
 
Beginning balance
  $ 3,218     $ 3,443  
Returns
    (2,684 )     (3,308 )
Provision
    2,643       3,112  
Ending balance
  $ 3,177     $ 3,247  
 
 
5.  EMPLOYEE BENEFITS
 
Retirement Plans
A majority of the Company’s employees are covered by a noncontributory profit sharing plan.  This plan provides for annual employer contributions based upon a formula related primarily to earnings before federal income taxes with a minimum contribution of 8% and a maximum contribution of 18% of total eligible compensation paid to all eligible employees.

Postretirement Benefits
The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its employees and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company.  Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.



 
10
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The net periodic benefit costs charged to operating expenses, which are valued at the measurement date of January 1 and recognized evenly throughout the year, consisted of the following components (in thousands of dollars):

   
Three Months Ended March 31,
 
   
2009
   
2008
 
Service cost
  $ 3,076     $ 2,425  
Interest cost
    2,683       2,373  
Expected return on assets
    (850 )     (1,116 )
Amortization of transition asset
    (36 )     (36 )
Amortization of unrecognized losses
    1,034       328  
Amortization of prior service credits
    (289 )     (304 )
Net periodic benefit costs
  $ 5,618     $ 3,670  

The Company has established a Group Benefit Trust to fund the plan and process benefit payments.  The funding of the trust is an estimated amount, which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended.  There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.  During the three months ended March 31, 2009, the Company contributed $0.8 million to the trust.

 
6.  SEGMENT INFORMATION
 
Effective January 1, 2009 the Company revised its segment disclosure.  The Company has two reportable segments:  the United States and Canada.  In the first quarter of 2009, the Company integrated the Lab Safety Supply 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., the Company’s Canadian branch-based distribution business.  Other Businesses include the following:  Grainger, S.A. de C.V. (Mexico), 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.  Prior year segment amounts have been restated in a consistent manner.  Following is a summary of segment results (in thousands of dollars):
 
   
Three Months Ended March 31, 2009
 
   
United States
   
Canada
   
Other Businesses
   
Total
 
Total net sales
  $ 1,308,737     $ 143,795     $ 22,532     $ 1,475,064  
Intersegment net sales
    (9,693 )     (12 )     (111 )     (9,816 )
Net sales to external customers
  $ 1,299,044     $ 143,783     $ 22,421     $ 1,465,248  
                                 
Segment operating earnings
  $ 173,185     $ 5,954     $ (2,934 )   $ 176,205  
                                 


 
11
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

   
Three Months Ended March 31, 2008
 
   
United States
   
Canada
   
Other Businesses
   
Total
 
Total net sales
  $ 1,469,355     $ 177,303     $ 24,545     $ 1,671,203  
Intersegment net sales
    (10,103 )     –       (54 )     (10,157 )
Net sales to external customers
  $ 1,459,252     $ 177,303     $ 24,491     $ 1,661,046  
                                 
Segment operating earnings
  $ 195,133     $ 11,675     $ (4,224 )   $ 202,584  
                                 


   
United States
   
Canada
   
Other Businesses
   
Total
 
Segment assets :
                       
March 31, 2009
  $ 2,238,883     $ 418,865     $ 129,966     $ 2,787,714  
                                 
December 31, 2008
  $ 2,310,484     $ 448,660     $ 133,111     $ 2,892,255  
                                 

Following are reconciliations of segment information with the consolidated totals per the financial statements (in thousands of dollars):
 
   
Three Months Ended March 31,
 
   
2009
 
2008
 
Operating earnings :
     
Total operating earnings for reportable segments
  $ 176,205     $ 202,584  
Unallocated expenses and eliminations
    (16,991 )     (16,761 )
Total consolidated operating earnings
  $ 159,214     $ 185,823  
 
 
   
March 31, 2009
   
Dec. 31, 2008
 
Assets :
     
Total assets for reportable segments
  $ 2,787,714     $ 2,892,255  
Elimination of intersegment assets
    (2,312 )     (2,095 )
Unallocated assets
    485,103       625,257  
Total consolidated assets
  $ 3,270,505     $ 3,515,417  

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 primarily include non-operating cash and cash equivalents, certain prepaid expenses, deferred income taxes and non-operating property, buildings and equipment – net.

The decrease in unallocated assets as of March 31, 2009 is primarily due to the Company’s lower cash balance.

 
12
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
7.  EARNINGS PER SHARE

In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP 03-6-1).  FSP 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  Upon adoption, a company is required to retrospectively adjust its earnings per share data presentation to conform with the FSP 03-6-1 provisions.  FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008.

On January 1, 2009, the Company adopted FSP 03-6-1.  The Company’s unvested share-based payment awards, such as certain Performance Shares, Restricted Stock and Restricted Stock Units that contain nonforfeitable rights to dividends meet the criteria of a participating security as defined by FSP 03-6-1.  The adoption of FSP 03-6-1 has changed the methodology of computing the Company’s earnings per share to the two-class method from the treasury stock method.  As a result, the Company has restated previously reported earnings per share.  This change has not affected previously reported consolidated net earnings or net cash flows from operations.  Under the two-class method, earnings are allocated between common stock and participating securities.  FSP 03-6-1 provides guidance that the presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities.  As such, the Company will present basic and diluted earnings per share for its one class of common stock.

The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period.  The Company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method.  The Company has determined the two-class method to be the more dilutive.  As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed earnings to participating securities as prescribed by FSP 03-6-1 to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.


 
13
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following table sets forth the computation of basic and diluted earnings per share under the two-class method as prescribed by FSP 03-6-1 (in thousands of dollars, except for per share amounts):

   
Three Months Ended March 31,
 
   
2009
   
2008
 
Net earnings as reported
  $ 96,378     $ 114,238  
                 
Less: Distributed earnings available to participating securities
    (690 )     (517 )
                 
Less: Undistributed earnings available to participating securities
    (1,552 )     (1,791 )
                 
Numerator for basic earnings per share –
Undistributed and distributed earnings available to common shareholders
  $ 94,136     $ 111,930  
                 
Add: Undistributed earnings allocated to participating securities
    1,552       1,791  
                 
Less: Undistributed earnings reallocated to participating securities
    (1,534 )     (1,762 )
                 
Numerator for diluted earnings per share –
Undistributed and distributed earnings available to common shareholders
  $ 94,154     $ 111,959  
                 
                 
Denominator for basic earnings per share – weighted average shares
    74,260,401       77,933,996  
                 
Effect of dilutive securities
    882,059       1,311,395  
                 
Denominator for diluted earnings per share – weighted average shares adjusted for
dilutive securities
    75,142,460       79,245,391  
                 
Earnings per share Two-class method
               
Basic
  $ 1.27     $ 1.44  
Diluted
  $ 1.25     $ 1.41  
                 


 
14
 

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.  LEGAL PROCEEDINGS

As previously reported, 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 Company’s contract with the United States General Services Administration (the “GSA”).  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.
 
 

 
15
 

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
Item 2.

Overview
General
Grainger is the leading broad-line supplier of facilities maintenance and other related products in North America.  Grainger distributes a wide range of products used by businesses and institutions to keep their facilities and equipment up and running.  Grainger uses a multichannel business model to provide customers with a range of options for finding and purchasing products through a network of branches, sales representatives, direct marketing including catalogs, and a variety of electronic and Internet channels.  Grainger serves customers through a network of more than 600 branches, 18 distribution centers and multiple Web sites.

Effective January 1, 2009 Grainger revised its segment disclosure.  Grainger has two reportable segments:  the United States and Canada.  In the first quarter of 2009, Grainger integrated the Lab Safety Supply 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., Grainger’s Canadian branch-based distribution business.  Other Businesses include the following:  Grainger, S.A. de C.V. (Mexico), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama).

Business Environment
Several economic factors and industry trends tend to shape Grainger’s business environment.  The overall economy and leading economic indictors provide insight into anticipated economic factors for the near term and help in forming the development of projections for the remainder of 2009.  In April 2009, Consensus Forecast-USA projected a 2009 Industrial Production and GDP decline for the United States of 9.7% and 2.7%, respectively.  In April 2009, Consensus Forecast-USA projected a GDP decline of 2.3% for Canada.

Historically, Grainger’s sales trends have tended to correlate positively with industrial production growth.  According to the Federal Reserve, overall industrial production decreased 12.8% from March 2008 to March 2009.  The continued declines in economic indicators have affected Grainger’s sales growth for the first quarter of 2009, which declined 12 percent, or 10 percent on a daily basis.

The light and heavy manufacturing customer sectors have historically correlated with manufacturing employment levels and manufacturing output.  Manufacturing output decreased 15.0% from March 2008 to March 2009 while manufacturing employment levels decreased 9.8%.  These declines contributed to a mid-twenty percent decline in the heavy manufacturing customer sector and a low teen percent decline in the light manufacturing customer sector for Grainger in the first quarter of 2009.

Grainger expects some continued decline in sales and increased pricing pressure throughout the remainder of the year.  Grainger plans to use its financial strength in an effort to increase its customer base during the downturn.  Some reductions to margins are expected as a result of expanding the sales force and implementing additional customer incentives.  Grainger expects these actions to cost approximately $25-50 million this year.

Given the continued decline in economic trends, in February 2009 Grainger announced the elimination of 300-400 jobs across the Company’s workforce.  Grainger incurred approximately $5 million in severance expenses for the elimination of about 200 of these positions during the first quarter of 2009.

 
16
 

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Matters Affecting Comparability
There were 63 sales days in the first quarter of 2009 compared to 64 sales days in the first quarter of 2008.

Effective January 1, 2009 Grainger revised its segment disclosure.  Prior year amounts have been restated in a consistent manner.

Results of Operations – Three Months Ended March 31, 2009
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:
 
 
 
 
 
 
 
Three Months Ended March 31,
 
         
 Percent
 
     
  As a Percent of Net Sales
 
 Increase
 
     
2009 
 
 2008
 
 (Decrease)
 
 
Net sales
   
100.0
%     100.0 %     (11.8 )%
 
Cost of merchandise sold
   
  57.0
      59.1       (14.8 ) 
 
Gross profit
    43.0       40.9       (7.4 ) 
 
Operating expenses
    32.1       29.7       (4.8 ) 
 
Operating earnings
    10.9       11.2       (14.3 ) 
 
Other income (expense)
   
   (0.1
)     0.0       (210.2 )
 
Income taxes
    4.2       4.3       (14.1 )
 
Net earnings
    6.6 %     6.9 %     (15.6 )%
 
 
Grainger’s net sales of $1,465.2 million for the first quarter of 2009 decreased 11.8% compared with sales of $1,661.0 million for the comparable 2008 quarter.  Daily sales were down 10.4%.  Sales in all customer sectors declined, except sales to the government, which were essentially flat.  The overall decrease in net sales was led by a mid-twenty percent decline in the heavy manufacturing sector and a low teen percent decline in the light-manufacturing, contractor and reseller sectors.  For the quarter, sales were positively affected by pricing of approximately 6 percentage points which was offset by a decline in volume of 14 percentage points.  Sales were negatively affected by 2 percentage points due to foreign exchange.  Refer to the Segment Analysis below for further details.

Gross profit of $629.4 million for the first quarter of 2009 decreased 7.4%.  The gross profit margin during the first quarter of 2009 increased 2.1 percentage points when compared to the same period in 2008, primarily due to positive inflation recovery and lower freight and handling costs, partially offset by unfavorable selling price category mix.

Operating expenses of $470.2 million for the first quarter of 2009 decreased 4.8%.  Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs.

Operating earnings for the first quarter of 2009 totaled $159.2 million, a decrease of 14.3% over the first quarter of 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.

 
17
 

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Net earnings for the first quarter of 2009 decreased by 15.6% to $96.4 million from $114.2 million in 2008.  The decrease in net earnings for the quarter primarily resulted from the decline in operating earnings.  Lower interest income and higher interest expense also contributed to the decline in net earnings.  Diluted earnings per share of $1.25 in the first quarter of 2009 were 11.3% lower than the $1.41 for the first quarter of 2008 primarily due to the decrease in net earnings, partially offset by lower shares outstanding.  During the quarter Grainger adopted FSP 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” resulting in a two cent reduction to the previously reported 2008 first quarter earnings per share.

Segment Analysis
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.  See Note 6 to the Condensed Consolidated Financial Statements.

United States
Net sales were $1,308.7 million for the first quarter of 2009, a decrease of $160.7 million, or 10.9%, when compared with net sales of $1,469.4 million for the same period in 2008.  Daily sales were down 9.5%.  Sales in all customer segments declined except sales to the government, which were essentially flat.  The decrease in net sales was led by a mid-twenty percent decline in the heavy manufacturing sector and a low teen percent decline in the light-manufacturing, contractor and reseller sectors.

The segment added approximately 50,000 net new products in the recently issued February 2009 catalog.  The 2009 catalog includes a total of 233,000 products.  Grainger expects to add more products throughout the year including the 27,000 Lab Safety products currently available on grainger.com.

The segment gross profit margin increased 2.3 percentage points in the 2009 first quarter over the comparable quarter of 2008.  The improvement in gross profit margin was primarily driven by positive inflation recovery and lower freight and handling costs, partially offset by unfavorable selling price category mix.

Operating expenses in this segment were down 3.4% in the first quarter of 2009 versus the first quarter of 2008.  Operating expenses decreased primarily due to lower commissions, bonuses and profit sharing accruals, partially offset by an increase in severance costs.

For the segment, operating earnings of $173.2 million for the first quarter of 2009 decreased 11.2% over $195.1 million for the first quarter of 2008.  The decrease in operating earnings for the quarter is primarily due to the decline in net sales combined with operating expenses, which declined at a lower rate than sales, partially offset by an increase in gross profit margin.

 
18
 

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Canada
Net sales were $143.8 million for the first quarter of 2009, a decrease of $33.5 million, or 18.9%, when compared with $177.3 million for the same period in 2008.  On a daily basis sales decreased 17.6%, however, in local currency daily sales increased 2.0% for the quarter.  The increase in net sales was led by growth in the oil and gas and government customer sectors, partially offset by continued weakness in the forestry and heavy manufacturing customer sectors.

The gross profit margin decreased 1.4 percentage points in the 2009 first quarter versus the first quarter of 2008, primarily due to higher costs of goods sold due to unfavorable foreign exchange, price competition and an increase in low margin sales to large customer and government accounts.

Operating expenses were down 16.1% in the first quarter of 2009 versus the first quarter of 2008.  In local currency operating expense increased 3.8% primarily due to non-payroll related expenses including a higher provision for bad debts and increased occupancy costs, and a slight increase in payroll and benefits.

Operating earnings of $6.0 million for the first quarter of 2009 were down $5.7 million, or 49.0%.  In local currency operating earnings declined 36.9% in the first quarter of 2009 over the same period in 2008.  The decrease in earnings was primarily due to the decline in gross profit margin and increases in operating expenses.

Other Businesses
Net sales for other businesses, which include Mexico, Puerto Rico, China and Panama, were down 8.2% for the first quarter of 2009 when compared to the same period in 2008.  Daily sales decreased 6.7%.  Daily sales in Mexico decreased 23.0% in the first quarter of 2009 versus the first quarter of 2008, however, in local currency daily sales increased 2.7%.  In China daily sales increased 91.6% in the first quarter of 2009 versus the first quarter of 2008.  Operating losses for other businesses were $2.9 million or a 30.5% improvement over operating losses of $4.2 million in the first quarter of 2008.  The operating losses are primarily due to the operations in China.

Other Income and Expense
Other income and expense was an expense of $0.7 million in the first quarter of 2009 compared with $0.7 million of income in the first quarter of 2008.  This decrease in income was primarily attributable to lower interest income due to lower interest rates and higher interest expense in 2009 due to increased borrowings.

Income Taxes
Grainger’s effective income tax rates were 39.2% and 38.7% for the first quarter of 2009 and 2008, respectively.  The increase in the effective rate is due to lower earnings reported in foreign jurisdictions with lower tax rates, as well as an increase in current estimates of the overall U.S. state income tax rate.

 
19
 

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Financial Condition
For the three months ended March 31, 2009, working capital of $1,333.5 million decreased by $48.9 million when compared to $1,382.4 million at December 31, 2008.  The decrease in working capital primarily relates to decreases in cash and receivables.  The ratio of current assets to current liabilities increased to 3.3 at March 31, 2009, versus 2.8 at December 31, 2008, primarily due to the decline in other current liabilities as a result of annual cash payments for profit sharing and bonuses.

Net cash provided by operating activities was $42.5 million and $13.3 million for the three months ended March 31, 2009 and 2008, respectively.  Net cash flows from operating activities serve as Grainger’s primary source to fund its growth initiatives.  Contributing to cash flows from operations were net earnings in the three months ended March 31, 2009 of $96.4 million and the effect of non-cash expenses such as stock-based compensation, and depreciation and amortization.  Partially offsetting these amounts were changes in operating assets and liabilities, which resulted in a net use of cash of $91.1 million for the first three months of 2009.  Other current liabilities declined primarily due to annual cash payments for profit sharing and bonuses.  The principal operating sources of cash were decreases in accounts receivable and inventory due to lower sales volume.

Net cash used in investing activities was $28.4 million and $13.5 million for the three months ended March 31, 2009 and 2008, respectively.  Cash expended for additions to property, buildings, equipment and capitalized software was $28.5 million in the first three months of 2009 versus $35.9 million in the first three months of 2008.  Capital expenditures in 2009 included funding of infrastructure improvement projects in the distribution centers in the United States and Mexico.  In 2008, cash used was partially offset by proceeds on sales of marketable securities.

Net cash used in financing activities was $151.0 million for the three months ended March 31, 2009, versus net cash provided by financing activities of $7.7 million for the three months ended March 31, 2008.  Amounts used in financing activities included treasury stock purchases of $127.7 million for the first three months of 2009 versus $196.4 million for the first three months of 2008.  Grainger repurchased 1.9 million shares and 2.6 million shares in the first three months of 2009 and 2008, respectively.  As of March 31, 2009, approximately 5.7 million shares of common stock remained available under Grainger’s repurchase authorization.  Grainger also used cash in financing activities to pay dividends to shareholders of $30.6 million and $28.1 million for the first three months of 2009 and 2008, respectively.  Offsetting these financing cash outlays were net proceeds from short-term borrowings of $0.8 million in the first three months of 2009 versus $227.8 million in the first three months of 2008, along with proceeds and excess tax benefits realized from stock options exercised of $6.5 million and $4.5 million in the first three months of 2009 and 2008, respectively.

Grainger 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, Grainger has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit.  A four-year bank term loan was obtained in May 2008.  Total debt as a percent of total capitalization was 21.1% at March 31, 2009, and 20.7% at December 31, 2008.

 
20
 

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Critical Accounting Policies and 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 uncertain at the time the estimate is made and when different estimates than those management reasonably could have made have a material impact on the presentation of Grainger’s financial condition, changes in financial condition or results of operations.  For a description of Grainger’s critical accounting policies see the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.


Forward-Looking Statements
This Form 10-Q 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 "believe, believes, continued, continues, continues to believe it complies, could, expect, expected, expects, intended, intends, may, projections, should, tended, and timing and outcome are uncertain" 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 and unanticipated weather conditions.

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
 

W.W. Grainger, Inc. and Subsidiaries


PART I – FINANCIAL INFORMATION

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Item 4.       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.

Changes in Internal Control Over Financial Reporting

There were no changes in Grainger’s internal control over financial reporting that occurred during the first quarter, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.

PART II – OTHER INFORMATION

Items 1A, 3 and 5 not applicable.
 
Item 1.        Legal Proceedings

As previously reported, 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 Company’s contract with the United States General Services Administration (the “GSA”).  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.


 
22
 

W.W. Grainger, Inc. and Subsidiaries


Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities – First 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
           
Jan. 1 – Jan. 31
–
–
–
7,401,826
shares
           
Feb. 1 – Feb. 28
670,970
$67.37
662,098
6,739,728
shares
           
Mar. 1 – Mar. 31
1,056,148
$62.73
1,056,148
5,683,580
shares
           
Total
1,727,118
$64.52
1,718,246
   

 
(A)  
There were 8,872 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.  In January 2009, 225,100 shares were settled that had initially been traded in late 2008.
 

Item 4.        Submission of Matters to a Vote of Security Holders
 
An annual meeting of shareholders of Grainger was held on April 29, 2009.  At that meeting:

Management’s nominees were elected directors for the ensuing year.  Of the 65,489,216 shares present in person or represented by proxy at the meeting, the number of shares voted for, and the number of shares as to which authority to vote in the election was withheld, were as follows with respect to each of the nominees:
 
 
Name
 
Shares Voted for Election
   
Shares as to Which Voting Authority Withheld
 
B. P. Anderson
    65,109,711       379,505  
W. H. Gantz
    64,674,259       814,957  
V. A. Hailey
    65,142,420       346,796  
W. K. Hall
    64,203,572       1,285,644  
R. L. Keyser
    64,825,670       663,546  
S. L. Levenick
    65,212,857       276,359  
J. W. McCarter, Jr.
    64,007,421       1,481,795  
N. S. Novich
    65,222,980       266,236  
M. J. Roberts
    65,203,323       285,893  
G. L. Rogers
    65,220,546       268,670  
J. T. Ryan
    65,065,802       423,414  
J. D. Slavik
    64,782,411       706,805  
H. B. Smith
    63,993,711       1,495,505  

23
 
A proposal to ratify the appointment of Ernst & Young LLP as independent auditors of Grainger for the year ending December 31, 2009, was approved.  Of the 65,489,216 shares present or represented by proxy at the meeting, 65,016,442 shares were voted for the proposal, 429,738 shares were voted against the proposal and 43,036 shares abstained from voting with respect to the proposal.
 
Item 6.        Exhibits 
 
 
 
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
   
(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.
   
(10)
 Material Contracts
     
 (b)  Compensatory Plans or Agreements
  (i) Form of Indemnification Agreement between Grainger and each of its directors and certain of its officers.
  (ii) Separation Agreement and General Release dated May 1, 2009, by and between Grainger and Larry J. Loizzo (who previously served as Vice President; President, Lab Safety Supply, Inc.).



 
24
 

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: May 1, 2009
By:
/s/ R. L. Jadin
   
R. L. Jadin, Senior Vice President
and Chief Financial Officer
     
     
     
Date: May 1, 2009
By:
/s/ G. S. Irving
   
G. S. Irving, Vice President
and Controller



25
 
CERTIFICATION
Exhibit 31(a)
I, J. T. Ryan, certify that:

 
1.
I have reviewed this Quarterly Report on Form 10-Q of W.W. Grainger, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 
Date: May 1, 2009

By:
/s/ J. T. Ryan
Name:
J. T. Ryan
Title:
Chairman, President and Chief Executive Officer



 
CERTIFICATION
Exhibit 31(b)
I, R. L. Jadin, certify that:
 
 
1.
I have reviewed this Quarterly Report on Form 10-Q of W.W. Grainger, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date: May 1, 2009

By:
/s/ R. L. Jadin
Name:
R. L. Jadin
Title:
Senior Vice President and Chief Financial Officer



Exhibit 32(a)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, J. T. Ryan, President and Chief Executive Officer of W.W. Grainger, Inc. (“Grainger”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  
The Quarterly Report on Form 10-Q of Grainger for the quarter ended March 31, 2009, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger.
 

 

/s/ J. T. Ryan
 
J. T. Ryan
 
Chairman, President and
Chief Executive Officer
 
   
May 1, 2009
 



 

Exhibit 32(b)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, R. L. Jadin, Senior Vice President and Chief Financial Officer of W.W. Grainger, Inc. (“Grainger”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  
The Quarterly Report on Form 10-Q of Grainger for the quarter ended March 31, 2009, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger.
 

 

/s/ R. L. Jadin
 
R. L. Jadin
 
Senior Vice President
and Chief Financial Officer
 
   
May 1, 2009
 


 

 
Exhibit 10b (i)
 
Indemnification Agreement
 
 
Indemnification Agreement (this “ Agreement ”), dated as of __________, 2009 (the “ Agreement Date ”), between W.W. Grainger, Inc., an Illinois corporation (the “ Company ”), and  ____________________ (“ Indemnitee ”).
 
WHEREAS, Indemnitee is a [director and/or officer] of the Company;
 
WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today’s environment;
 
WHEREAS, the Illinois Business Corporation Act of 1983, as amended (the “ Illinois Business Corporation Act ”) and the By-Laws of the Company (the “ By-Laws ”) expressly provide that the indemnification and advancement of expenses provisions set forth therein are not exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under, among other things, any agreement;
 
WHEREAS, the Company, consistent with the practice of many other public companies, is desirous of entering into individual agreements to provide its directors and officers with contractual rights to indemnity and advancement of expenses;
 
WHEREAS, the Board of Directors of the Company has determined that the inability of the Company to retain and attract the most capable persons as directors and officers would be detrimental to the interests of the Company and that the Company therefore should seek to assure such persons that indemnification and insurance coverage will be available in the future; and
 
WHEREAS, in recognition of Indemnitee’s need for substantial protection against personal liability in order to enhance Indemnitee’s continued service to the Company in an effective manner, and to provide Indemnitee with specific contractual assurances that indemnification and advancement of expenses will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of the By-Laws or any change in the composition of the Company’s Board of Directors or acquisition transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.
 
NOW, THEREFORE, in consideration of the premises and of Indemnitee agreeing to or continuing to serve the Company directly or, at its request, another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows:
 
1.   Certain Definitions .  In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement:
 
 
 
 
 
 
(a)   Change in Con trol :  any one or more of the following events: (i) the consummation of: (1) any merger, reorganization or consolidation of the Company or any Subsidiary with or into any corporation or other Person if Persons who were the beneficial owners (as such term is used in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “ Act ”)) of the Company’s Common Stock and securities of the Company entitled to vote generally in the election of directors (“ Voting Securities ”) immediately before such merger, reorganization or consolidation are not, immediately thereafter, the beneficial owners, directly or indirectly, of at least 60% of the then-outstanding common shares and the combined voting power of the then-outstanding Voting Securities (“ Voting Power ”) of the corporation or other Person surviving or resulting from such merger, reorganization or consolidation (or the parent corporation thereof) in substantially the same respective proportions as their beneficial ownership, immediately before the consummation of such merger, reorganization or consolidation, of the then-outstanding Common Stock and Voting Power of the Company; or (2) the sale or other disposition of all or substantially all of the consolidated assets of the Company, other than a sale or other disposition by the Company of all or substantially all of its consolidated assets to an entity of which at least 60% of the common shares and the Voting Power outstanding immediately after such sale or other disposition are then beneficially owned (as such term is used in Rule 13d-3 under the Act) by shareholders of the Company in substantially the same respective proportions as their beneficial ownership of Common Stock and Voting Power of the Company immediately before the consummation of such sale or other disposition; or (ii) approval by the shareholders of the Company of a liquidation or dissolution of the Company; or (iii) the following individuals cease for any reason to constitute a majority of the directors of the Company then serving: individuals who, on the Agreement Date, constitute the Board and any subsequently-appointed or elected director of the Company whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds of the Company’s directors then in office whose appointment, election or nomination for election was previously so approved or recommended or who were directors on the Agreement Date; or (iv) the acquisition or holding by any person, entity or “group” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act), other than by any Exempt Person, the Company, any Subsidiary, any employee benefit plan of the Company or a Subsidiary, of beneficial ownership (as such term is used in Rule 13d-3 under the Act) of 20% or more of either the Company’s then-outstanding Common Stock or Voting Power; provided that: (1) no such person, entity or group shall be deemed to own beneficially any securities held by the Company or a Subsidiary or any employee benefit plan (or any related trust) of the Company or a Subsidiary; (2) no Change in Control shall be deemed to have occurred solely by reason of any such acquisition if both (x) after giving effect to acquisition, such person, entity or group has beneficial ownership of less than 30% of the then-outstanding Common Stock and Voting Power of the Company and (y) prior to such acquisition, at least two-thirds of the directors described in paragraph (iii) of this definition vote to adopt a resolution of the Board to the specific effect that such acquisition shall not be deemed a Change in Control; and (3) no Change in Control shall be deemed to have occurred solely by reason any such acquisition or holding in connection with any merger, reorganization or consolidation of the Company or any Subsidiary which is not a Change in Control within the meaning of paragraph (i)(1) of this definition.
 
(b)   Claim :  any threatened, asserted, pending or completed civil, criminal, administrative, investigative or other action, suit, proceeding or inquiry, including any arbitration or other alternative dispute resolution mechanism, or appeal thereof, whether instituted by the Company, any governmental agency or any other party.
 
 
 
 
 
 
(c)   Exempt Person : any one or more of the following: (i) any descendant of W.W. Grainger, or any spouse, widow or widower of W.W. Grainger or any such descendant (any such descendants, spouses, widows and widowers collectively defined as the “ Grainger Family Members ”); (ii) any descendant of E.O. Slavik, or any spouse, widow or widower of E.O. Slavik or any such descendant (any such descendants, spouses, widows and widowers collectively defined as the “ Slavik Family Members ” and with the Grainger Family Members collectively defined as the “ Family Members ”); (iii) any trust which is in existence on the Agreement Date and which has been established by one or more Grainger Family Members, any estate of a Grainger Family Member who died on or before the Agreement Date, and The Grainger Foundation (such trusts, estates and named entity collectively defined as the “ Grainger Family Entities ”); (iv) any trust which is in existence on the Agreement Date and which has been established by one or more Slavik Family Members, any estate of a Slavik Family Member who died on or before the Agreement Date and Mark IV Capital, Inc. (such trusts, estates and named entities collectively defined as the “ Slavik Family Entities ” and with the Grainger Family Entities collectively defined as the “ Existing Family Entities ”); (v) any estate of a Family Member who dies after the Agreement Date or any trust established after the Agreement Date by one or more Family Members or Existing Family Entities; provided that one or more Family Members, Existing Family Entities or charitable organizations which qualify as exempt organizations under Section 501(c) of the Internal Revenue Code of 1986, as amended (“ Charitable Organizations ”), collectively are the beneficiaries of at least 50% of the actuarially-determined beneficial interests in such estate or trust; (vi) any Charitable Organization which is established by one or more Family Members or Existing Family Entities (a “ Family Charitable Organization ”); (vii) any corporation of which a majority of the voting power and a majority of the equity interest is held, directly or indirectly, by or for the benefit of one or more Family Members, Existing Family Entities, estates or trusts described in clause (e) above, or Family Charitable Organizations; or (viii) any partnership or other entity or arrangement of which a majority of the voting interest and a majority of the economic interest is held, directly or indirectly, by or for the benefit of one or more Family Members, Existing Family Entities, estates or trusts described in clause (v) above, or Family Charitable Organizations.
 
(d)   Expenses :  attorneys’ fees and all other costs, expenses and obligations (including, without limitation, experts’ fees, court costs, retainers, transcript fees, duplicating, printing and binding costs, telecommunications, postage and courier charges and travel expenses) paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in, any Claim relating to any Indemnifiable Event.
 
(e)   Indemnifiable Amounts :  any and all Expenses, damages, judgments, fines, penalties, excise taxes assessed with respect to an employee benefit plan and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties, excise taxes assessed with respect to an employee benefit plan or amounts paid in settlement) arising out of or resulting from any Claim relating to an Indemnifiable Event.
 
(f)   Indemnifiable Event :  any event, occurrence or omission, whether taking place before, on or after the date of this Agreement, related to the fact that Indemnitee is or was a director and/or officer or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, limited liability company, partnership, joint venture, employee benefit plan, trust or other entity or enterprise, or by reason of anything done or not done by Indemnitee in any such capacity.
 
(g)   Independent Legal Counsel :  an attorney or firm of attorneys, selected by Indemnitee and approved by the Company (which approval shall not be unreasonably delayed, conditioned or withheld), who is experienced in matters of corporate law and who shall not have otherwise performed a material amount of services for the Company or Indemnitee within the last five years (other than with respect to (i) matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements or (ii) matters for which counsel may have been retained in the past by the independent directors of the Company’s Board of Directors).
 
 
 
 
 
 
(h)   Person :  any individual, corporation, partnership, limited liability company, sole proprietorship, trust or other entity.
 
(i)   Reviewing Party :  any appropriate person or body consisting of a member or members of the Company’s Board of Directors or any other person or body appointed by the Board who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel.
 
(j)   Subsidiary :  a corporation, limited liability company, partnership or other business entity in which the Company, directly or indirectly, holds a majority of the voting power of the outstanding securities.
 
2.   Basic Indemnification Arrangement; Advancement of Expenses .
 
(a)   In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee, or cause Indemnitee to be indemnified, to the fullest extent permitted by law as soon as practicable but in any event no later than thirty days after written demand is presented to the Company, against any and all Indemnifiable Amounts.
 
(b)   Upon the written request of Indemnitee delivered to the Corporate Secretary of the Company, the Company shall advance (within five business days of such request) any and all reasonable Expenses incurred by Indemnitee (an “ Expense Advance ”).  The Company shall, in accordance with such request (but without duplication), either (i) pay such Expenses on behalf of Indemnitee, or (ii) reimburse Indemnitee for such Expenses.  Indemnitee’s right to an Expense Advance is absolute and shall not be subject to any prior determination by the Reviewing Party that Indemnitee has satisfied any applicable standard of conduct for indemnification.
 
(c)   Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to indemnification or advancement of Expenses pursuant to this Agreement in connection with any Claim initiated by Indemnitee unless (i) the Company has joined in or Company’s Board of Directors has authorized or consented to the initiation of such Claim or (ii) the Claim is one to enforce Indemnitee’s rights under this Agreement (including an action pursued by the Indemnitee to secure a determination that the Indemnitee should be indemnified under applicable law).
 
 
 
 
 
 
(d)   Notwithstanding the foregoing, (i) the indemnification obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 4 hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(b) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid (and the foregoing agreement by Indemnitee shall be deemed to satisfy any requirement that Indemnitee provide the Company with an undertaking to repay any Expense Advance if it is ultimately determined that the Indemnitee is not entitled to indemnification under applicable law); provided , however , that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determina­tion to that effect is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed).  Indemnitee’s undertaking to repay such Expense Advances shall be unsecured and interest-free.  If there has not been a Change in Control, the Reviewing Party shall be selected by the Company’s Board of Directors, and if there has been such a Change in Control, the Reviewing Party shall be the Independent Legal Counsel referred to in Section 4 hereof.  If there has been no determination by the Reviewing Party within thirty days after written demand is presented to the Company or if the Reviewing Party determines that Indemnitee would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the State of Illinois having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding.  Otherwise, any determination by the Reviewing Party shall be conclusive and binding on the Company and Indemnitee.
 
(e)   Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in the defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all reasonable Expenses incurred in connection therewith.
 
3.   Defense of C laims .  The Company shall be entitled to participate in the defense of any Claim relating to an Indemnifiable Event or to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee; provided , however , that if Indemnitee believes, after consultation with counsel selected by Indemnitee and paid for by the Company, that (i) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict of interest, (ii) the named parties in any such Claim (including any impleaded parties) include both the Company and Indemnitee and Indemnitee concludes that there may be one or more legal defenses available to him or her that are different from or in addition to those available to the Company, or (iii) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Claim) at the Company’s expense.  The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any Claim relating to an Indemnifiable Event effected without the Company’s prior written consent.  The Company shall not, without the prior written consent of the Indemnitee, effect any settlement of any Claim relating to an Indemnifiable Event which the Indemnitee is or could have been a party unless such settlement solely involves the payment of money and includes a complete and unconditional release of Indemnitee from all liability on all claims that are the subject matter of such Claim.  Neither the Company nor Indemnitee shall unreasonably withhold or delay its or his or her consent to any proposed settlement; provided , however , that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee.
 
 
 
4.   Change in Control .  The Company agrees that if there is a Change in Control of the Company then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any provision of the Restated Articles of Incorporation of the Company (the “ A rticles of Incorporation ”) or By-Laws now or hereafter in effect, the Company shall seek legal advice only from Independent Legal Counsel.  Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law.  The Company agrees to pay the reasonable fees of the Independent Legal Counsel and to indemnify fully such counsel against any and all expenses (including attorneys’ fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
 
5.   Indemnification for Additional Expenses .  The Company shall indemnify Indemnitee against any and all reasonable Expenses and, if requested by Indemnitee, shall advance such Expenses to Indemnitee subject to and in accordance with Section 2(b), which are incurred by Indemnitee in connection with any action brought by Indemnitee for (i) indemnification or an Expense Advance by the Company under this Agreement or any provision of the Company’s Articles of Incorporation or By-Laws now or hereafter in effect and/or (ii) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advance or insurance recovery, as the case may be; provided , however , that the Indemnitee shall be required to reimburse such Indemnifiable Amounts in the event that a final judicial determination is made (as to which all rights of appeal therefrom have been exhausted or lapsed) that such action brought by the Indemnitee, or the defense by the Indemnitee of an action brought by the Company or any other Person, as applicable, was frivolous or in bad faith.
 
6.   Partial Indemnity, Etc.   If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses or other Indemnifiable Amounts in respect of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
 
7.   Burden of Proof .  In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the Reviewing Party or court shall presume that the Indemnitee has satisfied the applicable standard of conduct and is entitled to indemnification, and the burden of proof shall be on the Company to establish, by clear and convincing evidence, that Indemnitee is not so entitled.  Indemnitee shall be entitled to rely in good faith upon the records of the Company, including its financial statements, or upon information, opinions, reports or statements furnished to Indemnitee by the officers or employees of the Company in the course of their duties, or by committees of the Company’s Board of Directors, or by any other person (including legal counsel, accountants and financial advisors) as to matters Indemnitee reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company.  In addition, the knowledge, actions, or failures to act of any director, officer, agent or employee of the Company shall not be imputed to Indemnitee for purposes of determining the right to indemnity hereunder.
 
8.   No Other Presumptions .  For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.  In any legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, shall be a defense to Indemnitee’s claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief.
 
 
 
 
 
 
9.   Nonexclusivity, Etc.   The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company’s Articles of Incorporation or By-Laws, the Illinois Business Corporation Act or otherwise.  To the extent that a change in applicable law or the interpretation thereof (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company’s Articles of Incorporation or By-Laws or this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change.  To the extent that there is a conflict or inconsistency between the terms of this Agreement and the Company’s Articles of Incorporation or By-Laws, it is the intent of the parties hereto that the Indemnitee shall enjoy the greater benefits regardless of whether contained herein, in the Company’s Articles of Incorporation or By-Laws.  No amendment or alteration of the Company’s Articles of Incorporation or By-Laws or any other agreement shall adversely affect the rights provided to Indemnitee under this Agreement.
 
10.   Liability Insurance .  To the extent the Company maintains an insurance policy or policies providing directors’ and officers’ liability insurance, the Company shall use all commercially reasonable efforts to provide coverage to Indemnitee under such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any similarly situated person at the Company.
 
11.   Period of Limitations .  No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee’s spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided , however , that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern.
 
12.   Amendments, Etc.   No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
 
13.   Subrogation .  In the event of payment by the Company under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee with respect to any insurance policy.  Indemnitee shall execute all papers reasonably required and shall do everything that may be reasonably necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.  The Company shall pay or reimburse all expenses actually and reasonably incurred by Indemnitee in connection with such subrogation.
 
14.   No Duplication of Payments .  The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, any provision of the Company’s Articles of Incorporation or By-Laws or otherwise) of the amounts otherwise indemnifiable hereunder.
 
15.   Binding Effect, Etc.   This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.  The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee and his or her counsel, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place; provided , however , that no such assumption shall relieve the Company from its obligations hereunder and any obligations shall thereafter be joint and several.  This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer and/or director of the Company or of any other entity or enterprise at the Company’s request.  Neither this Agreement nor any duties or responsibilities pursuant hereto may be assigned by the Company to any other person or entity without the prior written consent of Indemnitee.
 
 
 
 
 
 
16.   Severability .  The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable in any respect, and the validity and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired and shall remain enforceable to the fullest extent permitted by law.
 
17.   Specific Performance, Etc.   The parties recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law.  Accordingly, in the event of any such violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue.
 
18. Notices .  All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written document delivered in person or sent by telecopy, nationally recognized overnight courier or personal delivery, addressed to such party at the address set forth below or such other address as may hereafter be designated on the signature pages of this Agreement or in writing by such party to the other parties:
 
(a)   If to the Company, to:
 
W.W. Grainger, Inc.
 
100 Grainger Parkway
 
Lake Forest, Illinois 60045
 
Attn:  General Counsel
 
(b)   If to Indemnitee, to the address set forth on Annex A hereto.
 
All such notices, requests, consents and other communications shall be deemed to have been given or made if and when received (including by overnight courier) by the parties at the above addresses or sent by electronic transmission, with confirmation received, to the telecopy numbers specified above (or at such other address or telecopy number for a party as shall be specified by like notice).  Any notice delivered by any party hereto to any other party hereto shall also be delivered to each other party hereto simultaneously with delivery to the first party receiving such notice.
 
19. C ounterparts .  This Agreement may be executed in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement.  Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
 
20.   Headings .  The headings of the sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction or interpretation thereof.
 
21.   Governing Law .  This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Illinois applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws.
 
 

 
 
 


 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
 
 
W.W. GRAINGER, INC. 
 
 
By:__________________________
Name:
Title:

 
 
_____________________________
                 [Indemnitee]
 

 
 
 
ANNEX A

 
Name and Business Address .
 
   
   
   
   
Attn:
 
Tel:
 
Fax:
 
 
 
 

 
SEPARATION AGREEMENT AND GENERAL RELEASE


This Separation Agreement and General Release (“Agreement”) is made and entered into this 1st day of May 2009, by and between W.W. Grainger, Inc. and all related Subsidiaries (including but not limited to Lab Safety Supply, Inc.,) and Affiliates hereinafter collectively referred to as (“Grainger”) and Larry J. Loizzo (the “Officer”).  The Officer understands and voluntarily enters into this Agreement with Grainger and, in consideration of the Separation Payments and benefit continuation described herein, agrees as follows:
 
1.  
Resignation as Officer; Separation Date.   The Officer hereby acknowledges that he has voluntarily resigned effective June 1, 2009 (the “Resignation Date”) as an Officer of Grainger and of all corporations that are direct or indirect subsidiaries of or otherwise affiliated with Grainger (“Affiliates”), and as trustee, member or fiduciary of all trusts, committees or similar bodies of or otherwise affiliated with Grainger and the Affiliates.  The Officer’s active employment with Grainger shall cease effective as of the Resignation Date.
 
2.  
Separation Payments / Profit Sharing Trust Retirement.   Following the Resignation Date, Grainger shall pay the Officer an amount representing Eighteen (18) months of the Officer’s current base pay.  Such total amount shall be pro-rated and thereafter paid over a Twenty-Four (24) month period (“Separation Payments”), less required deductions consistent with the following schedule: Grainger shall pay each pro-rata payment as part of its normal monthly payroll cycle beginning June 1, 2009 and running through May 31, 2011.  (the “Termination Date / Profit Sharing Trust Retirement Date”).  No Separation Payments shall be made to the Officer until at least the eight (8 th ) day following the day on which this Agreement is fully executed, and provided that the Agreement is not revoked by the Officer pursuant to Section 22 prior to that date.

3.  
Benefits.

a.  
Health, Dental, Life and Vision.   To the extent that the Officer currently participates, Grainger will continue to provide, through deductions from the Officer’s Separation Payments at the same rate paid by employees, group health, dental and vision benefits and life insurance as currently maintained for the Officer, or as subsequently modified by Grainger, through the Termination / Retirement Date.  Dental benefits and group life insurance will terminate earlier, however, on the date that the Officer becomes eligible for benefit coverage through a subsequent employer.  After the Officer’s benefit coverage ceases on May 31, 2011, the Officer may elect to continue group health and dental benefits under COBRA or retain group health coverage under the terms of Grainger’s Retiree Health Program.

b.  
Profit Sharing.   For the 2009, 2010 and 2011 plan years, the Officer will be eligible to share in contributions under the W.W. Grainger, Inc. Employees Profit Sharing Plan (“PST”) and the W.W. Grainger, Inc. Supplemental Profit Sharing Plan (“SPSP”).  The Separation Payments received in such plan years, including in the case of the 2009 plan year the MIP payment described in Section 3(e) below, will be included for purposes of determining the amount of the Officer’s contributions under the PST (to the extent permitted by applicable law) and SPSP.  To the extent that the Officer is not permitted to share in PST contributions under the terms of the PST, such amounts shall be contributed to the SPSP in addition to funds otherwise allocated to the Officer under the SPSP.  After the Termination / Retirement Date, the Officer will be eligible for distribution of his vested funds in accordance with the terms of PST and SPSP applicable to Plan participants.

c.  
Unemployment Benefits.    The Officer agrees that he will not apply for unemployment benefits while he continues to receive Separation Payments through the Officer’s Termination / Retirement Date or at any time in the future that would otherwise be chargeable to Grainger’s unemployment insurance account.  Any amounts of unemployment insurance benefits received by the Officer shall offset the Officer’s Separation Payments.

d.  
Vacation.   The Officer understands that he will not be eligible for or accrue any additional vacation eligibility after the Resignation Date.  Payment for any 2009 vacation earned but unused as of the Resignation Date as well as vacation that would otherwise have been taken in 2009 will be made in the form of a lump sum, less required deductions.

 
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e.  
Management Incentive Program (MIP).   As an additional Separation Payment to those provided for in Section 2 hereof, the Officer will participate in the 2009 MIP pursuant to the provisions of the Plan then in effect, and on a 5/12ths pro-rata basis.  For such period, the Officer’s payment shall be based upon the Officer’s Individual Target, current salary and Company performance.  To the extent provided, this payment will be made to Officer on or before March 15, 2010, when executive MIP bonuses are paid and shall be paid in an amount that reflects the lesser of actual or target.  The Officer will not be eligible for any MIP or other cash incentive award other than the above referenced amount or for any period following the Resignation Date.

f.  
Executive Death Benefit Plan.   The Officer will continue as a participant under the W.W. Grainger, Inc. Executive Death Benefit Plan (the “Death Benefit Plan”) through May 31, 2011, and will thereafter be considered a general retiree of Grainger for purposes of post employment benefits under the Death Benefit Plan.  The benefit payment by Grainger to the Officer’s designated beneficiary in the event of the Officer’s death prior to the Termination Date shall be determined and paid in accordance with the provisions of the Death Benefit Plan as in effect on the date of his death, except that the Officer’s monthly salary and target MIP percentage as of the Resignation Date shall be used in any necessary calculations.  Officer has elected accelerated payment at a discounted rate at time of retirement subject to 6 month time delay based upon Section 409-A requirements.

g.  
Tax Preparation.   The Officer will be reimbursed up to a maximum of $10,000.00 for professional tax preparation assistance and related services associated with the preparation of his 2009 and 2010 tax filings.  Reimbursement will be made to Officer no later than 60 days after the receipt of appropriate invoices and paid receipts.  The Officer shall not receive any tax preparation allowance beyond those referenced above.
 
h.  
Career Continuation – Outplacement Assistance.   Officer shall be eligible to receive professional Career Continuation – Outplacement services.  Officer may interview and then select a service provider from those designated firms made available to him for this purpose by Grainger.    

i.  
Cessation of Benefits.   All other benefits and the Officer’s eligibility to participate in any other Grainger employee programs will cease as of the Resignation Date, except as provided or referenced in this Agreement.  The amounts and benefits payable to the Officer under this Agreement shall be in lieu of any amounts or benefits otherwise provided under any severance plan or policy of Grainger.  Notwithstanding, effective May 31, 2011, Officer shall be considered a Profit Sharing Trust Retiree of the Company and entitled to all Company benefits associated with that status.

4.  
Stock Options, Restricted Stock Units and Performance Shares.   The Officer will be eligible to exercise all vested stock options pursuant to the terms of the W.W. Grainger, Inc. 1990, 2001 and 2005 Stock Incentive Plans, and accompanying Agreements.  Options will continue to vest through the Termination Date, with any remaining unvested options forfeiting as of the same Termination Date.  Thereafter, all options must be exercised on or before the expiration date of each option or within six (6) years of the Officer’s Termination / PST Retirement Date, whichever should occur first.  The Officer further understands and agrees that the non-competition provisions of restricted stock unit and/or stock option agreements to which the Officer is a party, which provisions are incorporated herein by reference, including without limitation the Unfair Competition Agreements dated April 30, 2008, and the W.W. Grainger, Inc. Restricted Stock Unit Agreement dated April 30, 2008 (collectively, the “non-competition provisions”), will remain in full force and effect, and are in addition to and not superseded by any other obligation set forth in this Agreement.  The Officer acknowledges and agrees that, for purposes of such agreements, the Officer’s employment with Grainger shall be considered terminated on the Termination Date hereunder, and the term “Date of Termination” as used in the Unfair Competition Agreement dated April 30, 2008, shall mean the Termination Date hereunder.  The Officer understands that he will not be eligible for any further grants of stock options after the Resignation Date.

 
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Grainger management shall recommend to the Compensation Committee of the Board (CCOB) at a CCOB meeting that it approves amendment of the Officer’s Restricted Stock Unit Agreement dated April 26, 2006.  Such amendment shall provide that, subject to the Officer’s compliance with all terms and conditions of the non-competition provisions and this Agreement, as of the Officer’s Termination Date, 5,000 existing shares of Restricted Stock Units of the Company granted to the Officer under such agreements, which stock is currently in the possession of Grainger, shall not be forfeited but shall be delivered to the Officer free of all restrictions, less any shares retained for the purpose of the payment of withholding or other taxes to the extent permitted by law.  The above referenced Restricted Stock Units will vest on Officer’s Termination Date, and shall thereafter be settled as soon as administratively possible after that date.

Officer shall be eligible to receive a Performance Share Award in accordance with the terms of Officer’s Performance Share Agreement dated January 1, 2007, January 1, 2008 and January 1, 2009.

5.  
General Release and Waiver of Claims.   In exchange and in consideration for the promises, obligations, and agreements undertaken by Grainger herein, which the Officer agrees and acknowledges are adequate and sufficient consideration, the Officer, on behalf of himself, his spouse, agents, representatives, attorneys, assigns, heirs, executors, administrators, and other personal representatives, releases and forever discharges Grainger, the Affiliates, and all of their officers, employees, directors, agents, attorneys, personal representatives, predecessors, successors, and assigns (hereinafter collectively referred to as the “Releasees”) from any and all claims of any kind which he has, or might have, as of the date of this Agreement; or which are based on any facts which exist or existed on or before the date of this Agreement.  The claims the Officer is releasing include, but are not limited to, all claims relating in any way to his employment at Grainger or his separation from that employment; and all claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, 42 U.S.C. § 1981, the Equal Pay Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act, the Federal Rehabilitation Act, the Age Discrimination in Employment Act (“ADEA”), the Older Worker Benefit Protection Act, the Illinois Human Rights Act, the Wisconsin Fair Employment Law, the Illinois Wage Payment and Collection Act, the Wisconsin Wage Payment and Collection Act, or any other federal, state or local law relating to employment, discrimination, retaliation, or wages, or under the common law of any state (including, without limitation, claims relating to contracts, wrongful discharge, retaliatory discharge, defamation, intentional or negligent infliction of emotional distress, and wrongful termination of benefits).  The Officer also releases and forever discharges Grainger and all other Releasees from any and all other demands, claims, causes of action, obligations, agreements, promises, representations, damages, suits, and liabilities whatsoever, both known and unknown, in law or in equity, which he has or might have as of the date of this Agreement.  The Officer understands that this Section 5 of this Agreement contains a complete and general release of any claim that he now has against Grainger and all other Releasees, or could ever have against Grainger and all other Releasees, based on any fact, event, or omission that has occurred up to the time at which he signs the Agreement.

The Officer does not intend to nor is he waiving any rights or claims that may arise after the date that he signs this Agreement, or any right on the Officer’s part to challenge the knowing and voluntary nature of this release with respect to claims under ADEA.  Notwithstanding the foregoing, the Officer does not waive any rights he may have to benefits available after termination under any company-sponsored employee benefit plan, or any rights he may have to insurance protection and/or indemnification for actions taken by the Officer while an employee and Officer of Grainger.  The Officer acknowledges that this is an individually negotiated agreement and he agrees that his termination of employment with Grainger is not pursuant to an employment termination program as that term is used in the ADEA.

Excluded from this General Release and Waiver are any claims or rights which Employee cannot waive by law, including workers’ compensation claims, as well as any claims for breach of this Agreement.  Also excluded from this Agreement are Employee’s rights to file a charge with the Equal Employment Opportunity Commission or any other federal, state or local agency, and to participate in an agency investigation.  Employee, however, waives all rights to recover money or other individual relief if any administrative agency or another person or entity pursues any claim on Employee’s behalf arising out of or related to Employee’s employment with Grainger.  Employee represents that there is no lawsuit or other claim against Grainger pending in any federal, state, or municipal court or other tribunal which has not been addressed herein.

The Officer understands and agrees that this waiver and release is an essential and material term of this Agreement and that, without such provision, no agreement would have been reached by the parties.

 
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6.  
Covenant Not to Sue.   The Officer agrees not to pursue or permit to be filed or pursued against Grainger or any Releasee, any claim or action before any federal, state, or local, administrative, legislative or judicial body based on any claim or liability described in the foregoing section, or otherwise related in any way to the Officer’s employment with Grainger, and understands that the purpose of this waiver and release is to dispose of, with finality, any claims that the Officer may have against Grainger and all other Releasees so that there will be no disputes or controversies concerning any matters following the Resignation Date.  The Officer has no such claim or lawsuit outstanding at this time, and the Officer does not know of any such potential claim or lawsuit that may be asserted by the Officer or any other person in connection with the Officer’s employment with Grainger.  The Officer understands that the terms of this section do not apply to a challenge to the knowing and voluntary nature of this release with respect to claims under ADEA.

7.  
Unfair Competition.

a.  
The Officer acknowledges that in connection with the performance of his duties for Grainger, he has either created, used or accessed confidential and trade secret information of Grainger and the Affiliates (as further described in Section 11 below).  The Officer further acknowledges that his employment with or other work on behalf of a Competitor (defined in Section 7(b) below) would necessarily and inevitably lead to his unauthorized use or disclosure of such confidential and trade secret information.  Accordingly, the Officer agrees that for a period beginning on the date hereof and continuing until the second anniversary of the Termination Date, and within one hundred (100) miles of any branch, office or distribution center of Grainger or an Affiliate to which he was assigned within two years prior to ceasing active employment with the Company, as well as on behalf of any Competitor specifically identified on Exhibit A, anywhere in the nation (the “Restricted Area”), he will not directly or indirectly, whether as executive, officer, director, owner, shareholder, partner, associate, consultant, advisor, contractor, joint venturer, manager, agent, representative or otherwise, work for a Competitor in any capacity that would involve:

i.  
the same or substantially similar functions or responsibilities to those the Officer performed for Grainger within two years of the Resignation Date; or

ii.  
supervision over the same or substantially similar responsibilities to those the Officer performed for Grainger within two years of the Resignation Date; or

iii.  
assisting a Competitor in decisions that involve or affect the same or a substantially similar area of operations to those the Officer was involved in with Grainger within two years of the Resignation date.

The Officer may not circumvent the purpose of this restriction by engaging in business within the Restricted Area through remote means such as telephone, correspondence, or computerized communication.

b.  
A “Competitor” is any person or legal entity or branch, office or operation thereof (a “Firm”) that engages in business that is competitive with the business activities of Grainger through, but not limited to: (i) selling maintenance, repair, operating and safety (MRO and Safety) supplies to North American businesses; (ii) providing indirect materials management services to North American businesses; (iii) aggregating information regarding indirect materials for the purpose of conducting business-to-business Internet commerce with North American businesses; or (iv) indirect materials procurement services to North American businesses.  Without limiting the generality of the foregoing, each of the Firms identified on Exhibit A hereto constitutes a Competitor.

c.  
A Firm shall not be deemed a Competitor unless the aggregate revenue of such Firm for its most recently completed fiscal year that is attributable to the categories of products and services set forth in clauses (i) through (iv) of Section 7(b) above equals more than 5% of the aggregate amount of consolidated revenue that Grainger derived from such categories of products and services during its most recently completed fiscal year.

 
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d.  
The Officer may at any time, or from time to time, request Grainger to advise the Officer in writing whether or not Grainger considers a specified Firm to be a Competitor.  Any such request shall be made by written notice to Grainger that includes: (i) the name of the specific business unit for which the Officer proposes to work; (ii) the name or names of any parent companies of such business unit; (iii) a description of the specific services which the Officer proposes to perform for such business unit; (iv) a statement as to why the Officer believes that the performance of such services will not adversely affect Grainger’s legitimate protectible interests; and (v) the requested date of Grainger’s response (which date shall be at least 15 days after the date of Grainger’s receipt of the Officer’s request).

e.  
The Officer specifically recognizes and affirms that Section 7(a) is a material and important term of this Agreement.  If any court of competent jurisdiction determines that the covenant set forth in Section 7(a), or any part thereof, would be unenforceable due to the stated duration or geographical scope of such covenant, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, as so reduced, such provision shall then be enforceable.  If the court does not modify such provision as aforeseaid, or if the provision is otherwise held or found invalid or unenforceable for any reason whatsoever, then (without limiting any other remedies which may be available to Grainger under this Agreement or otherwise, including, without limitation, Section 13 hereof), Grainger shall be entitled to cease making payments and furnishing benefits to the Officer pursuant to this Agreement and shall be further entitled to receive from the Officer reimbursement of all Separation Payments and other payments and benefits theretofore furnished to the Employee pursuant to this Agreement.

Pending such reimbursement, and without limiting Grainger’s rights under Section 13 hereof or any other rights and remedies of Grainger, Grainger shall have the right to offset the amount of such reimbursement against any amount or benefit otherwise payable to the Officer.

8.  
Non-Disparagement.   The Officer agrees to take no action in derogation or disparagement of Grainger or the Affiliates, or their respective businesses or strategic interests, or the Releasees.  The Officer further agrees not to discuss or otherwise comment on Grainger or any Affiliate, or their respective businesses or strategic interests, or the Releasees, in public, for publication on electronic media (including but not limited to chat rooms, message boards, or the like), in similar public forums, or otherwise, other than communication of publicly available information.  Grainger agrees to notify Officer, prior to initiating any action and in an effort to cure, should it believe Officer is in violation of any provision contained within this paragraph.  Should it believe that Officer has violated Grainger agrees that it will make no public statements nor sanction any action in derogation or disparagement of the Officer.  In turn, no member of Grainger’s Senior Management Team shall make any statement in derogation or disparagement of the Officer.

9.  
Non-Interference with Business Relationships.   The Officer agrees not to interfere with the employment of any Grainger employee or otherwise with the business relationships of Grainger, and to the extent required to enforce this promise, agrees not to induce, directly or indirectly, any Grainger customer or supplier to breach any contract with Grainger, and further agrees not to solicit, attempt to hire, or hire, directly or indirectly, any Grainger employee, or request, induce or advise any such employee to leave the employment of Grainger at any time before the Termination Date and for one year thereafter.  Should the Officer wish to hire a Grainger employee in contravention of this Section 9, or to perform work which is precluded by the Officer’s non-competition obligations set forth in Section 7 hereof, the Officer understands that he may request that Grainger agree that the Officer may perform such work or offer employment to such employee, and that with Grainger’s prior written agreement, which it may withhold at its sole discretion, the Officer may do so.

 
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10.  
Return of Property: Business Expenses .  The Officer shall promptly account for and return to Grainger all Grainger property, including but not limited to proprietary information, which is in the Officer’s possession or control.  This property includes (but is not limited to) correspondence, files, reports, minutes, plans, records, surveys, diagrams, computer print-outs, floppy disks, manuals, client/customer information and documentation, and any company research, goals, objectives, recommendations, proposals or other information of any type, including information and materials relating to actual or potential business acquisition candidates, relating to Grainger, its business, or its clients or customers, which is not generally known to the public, and which the Officer acquired in the course of his employment with Grainger.  Notwithstanding the above, Officer shall be eligible to retain two (2) paintings currently hanging in Officer’s Lab Safety Supply Janesville office that were previously given to him by the Company’s prior ownership.  The Officer further agrees that all business expenses incurred prior to the Resignation Date that are reimbursable in accordance with Grainger’s normal policies and procedures have been reimbursed to the Officer or submitted for reimbursement, and that other than as specifically provided in this Agreement, the Officer will not incur any additional business expenses after the Resignation Date.

11.  
Confidential Information.   The Officer agrees to refrain from ever disclosing to anyone outside the employment of Grainger any confidential or trade secret information, whether in oral, written and/or electronic form, including but not limited to information that (a) relates to Grainger’s or the Affiliates’ past, present and future research, development, technical and non-technical data and designs, finances, marketing, products, services, customers, suppliers, and other business activities of any kind or (b) has been identified, either orally or in writing, as confidential by Grainger or any Affiliate; provided that this limitation shall not apply to information that is part of the public domain through no breach of this Agreement or is acquired from a third party not under similar nondisclosure obligations to Grainger or such Affiliate.  The Officer acknowledges that his obligations under any confidentiality or nondisclosure or similar agreements or provisions that the Officer previously executed will remain in full force and effect.  Further, through the Termination Date, the Officer agrees to fully comply with all policies of Grainger regarding confidential or trade secret information.

12.  
Cooperation with Company.   The Officer agrees, during the term of this Agreement as well as during the 12 month period immediately thereafter, to both make himself available and to provide reasonable cooperation to Grainger or its attorneys to assist Grainger or serve as a witness in connection with any matter, litigation or potential litigation in which the Officer may have knowledge, information, or expertise.  The Officer also agrees to provide Grainger or its designated representatives, upon request, with information and assistance about programs, processes, and projects related to the Officer’s job responsibilities while employed by Grainger; to answer any questions relating to the work to which the Officer was assigned; and to otherwise provide reasonable cooperation to Grainger regarding matters relating to this Agreement and the Officer’s employment with Grainger.  Grainger will reimburse the Officer for any reasonable expenses or unpaid compensation he incurs in activities which he undertakes at Grainger’s request pursuant to this Section 12.

13.  
Breach of Agreement; Misconduct.   The Officer understands and agrees that if, after receiving all or any part of the payments and benefits described herein, the Officer breaches this Agreement, or commits or is discovered to have committed any act of embezzlement, fraud or theft with respect to the property of Grainger, or deliberately causes or is discovered to have deliberately caused, any loss, damage, injury or other endangerment to Grainger’s property, reputation or past, present, or future directors, officers or employees, Grainger reserves the right to demand repayment of all such payments and benefits.  Grainger shall further be released from any future payment then or thereafter otherwise due and shall discontinue any and all benefit coverage (other than retiree health coverage, vested benefits under the PST and SPSP, and COBRA coverage if otherwise available).  To the extent permitted by law, the Officer further understands and agrees that Grainger reserves the right to pursue all other available remedies in an effort to preserve its legitimate business interests.  The Officer also agrees to indemnify and hold harmless Grainger from any loss, cost, damage, or expense, including attorneys’ fees, which Grainger may incur because of the Officer’s violation of this Agreement.  The Officer understands that this Section 13 does not apply to a challenge to the knowing and voluntary nature of this release with respect to claims under ADEA.

 
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14.  
Supersedes Other Agreements.   Other than any vested rights that the Officer may have under employee benefit plans subject to ERISA, the Officer understands that this Agreement supersedes any and all obligations (written or oral) which Grainger otherwise might have to the Officer for compensation or other expectations of remuneration or benefit on the Officer’s part.  The Officer specifically acknowledges that all of Grainger’s obligations under the Change in Control Employment Agreement entered into between Grainger and the Officer (the “Change in Control Agreement”) shall become null and void as of the Resignation Date.  Notwithstanding the above, all provisions contained within any Grainger Non-Competition Agreement, Stock Option or Special RSU or Option / Grant Agreement entered into between the Officer and Grainger, or other Grainger Governance shall remain in full force and effect as originally executed.

15.  
References.   At the Officer’s request, Grainger will provide appropriate neutral references to prospective future employers of the Officer.  Those references will be provided by Larry Pilon, Senior Vice President – Human Resources or his designee and / or successor on behalf of Grainger, with the specific content of such references to be mutually agreed between Grainger and the Officer in the future.

16.  
Continuation After Death.   The Officer understands that in the event of the Officer’s death, Grainger’s obligations under this Agreement will extend to the Officer’s beneficiaries, heirs, executors, administrators, personal representatives and assigns.

17.  
Agreement Not Assignable.   The Officer may not assign, and the Officer represents that he has not assigned, this Agreement or any rights or Grainger’s obligations under this Agreement to any other person.

18.  
Entire Understanding.   In conjunction with Officers ceasing active employment, Officer shall be entitled to remove, and thereafter retain ownership of certain pieces of art belonging to Officer that are currently on display in Officer’s office.
The Officer understands and agrees that this Agreement, including Exhibit A hereto, contains the entire understanding between the parties and may not be amended except by mutual agreement in an amendment executed by both parties.

19.  
Severability.   The provisions of this Agreement are declared to be severable, which means that if any provision of this Agreement or the application thereof is found to be invalid, the invalidity shall not affect other provisions or applications of this Agreement, which will be given effect without the invalid provisions or applications. In the event that a court of competent jurisdiction concludes that any term, provision or section of this Agreement is invalid or unenforceable (and, in the case of Section 7(a) of this Agreement, such provision is not modified by the court to be enforceable as described in Section 7(e) hereof), then said term, provision, or section shall be deemed eliminated from this Agreement to the extent necessary and in order to permit the remaining portions of the Agreement to be enforced.  Any such eliminations shall not affect Grainger’s entitlement, if any, to receive, pursuant to Sections 7(e) and 13 hereof, amounts paid and benefits provided to the Officer under this Agreement.

20.  
Confidentiality of Agreement.   The Officer represents and agrees to keep the terms, amount and fact of this Agreement completely confidential, and that the Officer will not disclose any information concerning this Agreement to anyone; provided, however, that this section will not prevent the Officer from disclosing information concerning this Agreement to the Officer’s spouse, attorneys, accountants, financial or tax advisors, a designated Grainger official, or as required by law.  Notwithstanding, in accordance with U.S. Treasury Regulation 1.6011-4(b)(3)(iii), each party (and each employee, representative, or other agent of each party) to this Agreement may disclose to any and all persons, without limitation of any kind, the tax treatment, tax structure, and all materials of any kind provided to the other party relating to such tax treatment and tax structure.

21.  
Jurisdiction and Governing Law.   The Officer acknowledges that for the purpose of this Agreement as well as his employment with Grainger, he is a Wisconsin based Grainger employee.  This Agreement shall in all respects be interpreted, enforced and governed by and under the laws of the State of Wisconsin, without regard to its conflicts of law principles.

 
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22.  
Voluntary Agreement.   The Officer acknowledges that the payments and benefits that Grainger is providing hereunder exceed the compensation and benefits otherwise payable to the Officer or on the Officer’s behalf and that such Separation Payments and benefits are provided by Grainger in exchange for execution of this Agreement.  The Officer acknowledges that he was given twenty-one (21) days to consider the terms of this Agreement, that the Officer may revoke this Agreement at any time within seven (7) days after the date that the Officer signs it, and that he has been advised to and has had the opportunity to seek out counsel of his own choice.  Any revocation must be communicated in writing, via personal delivery or overnight mail, to Henry F. Galatz, Labor Counsel, W.W. Grainger, Inc., 100 Grainger Parkway, Lake Forest, Illinois 60045.  The Officer further understands that this Agreement does not take effect until after the expiration of the seven (7) day period for revocation.  All referenced Separation Payments and applicable benefits identified in this Agreement will automatically cease on the 21 st day should the Officer not return a fully executed copy of this Agreement to Grainger within the specified 21-day consideration period.  The Officer has read this Agreement and understands all of its terms.

I have read this Separation Agreement and General Release and I understand all of its terms.  I voluntarily execute this Separation Agreement and General Release with full knowledge of its meaning, on this 1st day of May, 2009.

 

        W.W. GRAINGER, INC.
       
/s/ Larry J. Loizzo   
By:
/s/ Kim Cysewski 
Larry J. Loizzo
     

 

 
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Exhibit A


 
Airgas Companies
 
Applied Industrial Technologies
 
Barnes Distribution
 
Consolidated Electric
 
Fastenal Company
 
Genuine Parts Co.
 
Graybar Electric Company, Inc.
 
HD Supply, Inc.
 
Industrial Distribution Group, Inc.
 
Interline Brands, Inc.
 
Johnstone Supply Company
 
Kaiser & Kraft Companies (subsidiary of TAKKT AG)
 
Kaman Corporation
 
Lawson Products
 
McJunkin Red Man Corporation (subsidiary of McJunkin Corporation)
 
McMaster-Carr Supply Company
 
MSC Industrial Direct Company
 
Northern Tool + Equipment Catalog Co.
 
Rexel
 
Sonepar Group (Incl. Sonepar USA, Cambar, Texas Mill Supply, Tri-State Electric, Vallen, CenturyVallen)
 
WESCO International, Inc. (Incl. Bruckner Supply Inc.)
 
Wilson Supply (subsidiary of Smith International, Inc.)
  Wurth Group (Incl. Wurth USA Inc.)
 
 
Any affiliates, subsidiaries or joint ventures of the above-referenced Persons shall also constitute Competitors

 
 
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