(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).
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.
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 May11, 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):
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.
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):
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 January1, 2009the 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):
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.
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.
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):
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.
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 January1, 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.
There were 63 sales
days in the first quarter of 2009 compared to 64 sales days in the first quarter
of 2008.
Effective January1, 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.
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.
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.
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 March31, 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.
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.
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.
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.
(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.