W.W. Grainger (GWW) 8-K Results of Operations and Financial Condition

W.W. GRAINGER, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
For the Second Quarter Ended June 30, 2005
(Unaudited)

Company Contacts:
W. D. Chapman    847-535-0881
N. A. Hobor          847-535-0065

Issued: July 15, 2005

Second Quarter Highlights
•	Grainger reports record Second Quarter results:
	–   Sales of $1.4 billion were up 9% versus 2004.
	–   Operating earnings for the quarter were $127 million, an increase of 19% versus 2004.
	–   Earnings per share for the quarter were $0.89, up 24% versus $0.72 in 2004.

Contents

I.
II.
III.
IV.



EARNINGS REVIEW
BALANCE SHEET DATA
CASH FLOW DATA
BUSINESS SEGMENT RESULTS

EXHIBITS
A.     Daily Sales Growth by Segment
B.     Sales by Segment
C.     Operating Earnings by Segment 2
4
5
6


9
10
11

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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I.  EARNINGS REVIEW

	Net Sales
	Three Months Ended							Six Months Ended
	($ in millions)
	06/30/05		06/30/04			Inc/(Dec)		06/30/05			06/30/04			Inc/(Dec)
Net Sales	$	1,373		$	1,256		9	%	$	2,708		$	2,484		9	%

Sales Days	2005		2004
Second Quarter		64		64
First Half		128		128
Total Year		255		255

Sales in the second quarter benefited from an improving economy, ongoing strategic initiatives and a favorable Canadian exchange rate. Also contributing to the improved comparison was the positive effect from the timing of the Easter holiday, which fell into the first quarter of 2005 versus the second quarter of 2004.

	Daily Sales Inc/(Dec) 2005 vs. 2004
2005 Month	Total Company			Branch-based Distribution			Lab Safety
April		11.6	%		11.2	%		15.6	%
May		5.6			5.1			13.7
June		10.5			10.5			11.5

Second Quarter	9.3	9.0	13.6
First Half	9.0	8.8	11.3

Sales were up 9% driven by an increase in both segments. The increase in the Branch-based Distribution segment was primarily driven by strong sales to the government, manufacturing and commercial sectors, and a favorable Canadian exchange rate. Lab Safety benefited from the acquisition of AW Direct. April sales were positively affected by the timing of the Easter holiday. Both May and June were affected by summer seasonal sales with May colder and June warmer than the prior year periods.

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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	Operating Earnings
	Three Months Ended							Six Months Ended
	($ in millions)
	06/30/05		06/30/04			Inc/(Dec)		06/30/05			06/30/04			Inc/(Dec)
Operating Earnings	$	127		$	107		19	%	$	236		$	208		13	%
Operating Margin		9.2	%		8.5	%	0.7	pp		8.7	%		8.4	%	0.3	pp
ROIC*										23.7	%		22.5	%	1.2	pp

The Company’s operating earnings were $127 million for the second quarter of 2005 versus $107 million for the second quarter of 2004. The operating earnings improvement was from both the Branch-based Distribution and Lab Safety segments, as well as from lower operating expenses at headquarters. The lower operating expenses at headquarters were primarily due to severance in the 2004 second quarter related to organizational changes.

The increase in ROIC was primarily attributable to higher operating earnings, partially offset by a lower asset turnover.

Other Income and Expense

For the 2005 second quarter, “Other Income and Expense” was $2.0 million of income versus $0.5 million of income for the 2004 quarter. The increase was primarily attributable to the following: higher net interest income and an improvement in the results of unconsolidated entities, partially offset by losses related to fixed assets.

Income Taxes

The Company’s effective income tax rate was 36.7% for the 2005 second quarter and 37.9% for the 2004 second quarter. Excluding the effect of equity in unconsolidated entities, which is recorded net of tax, the effective income tax rate for the quarter was 37.0% for 2005 and 38.0% for 2004. The change in effective tax rate was the result of a lower tax rate in Canada and the utilization of tax benefits related to operations in Mexico.

 *See footnote, page 8.

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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   II. BALANCE SHEET DATA

        Selected Balance Sheet data as of June 30, 2005 (preliminary) and 2004 follow:

	2005		2004
ASSETS	($ in thousands)
Cash and Cash Equivalents	$	326,033		$	486,131
Accounts Receivable – net (1)		531,710			484,547
Inventories (2)		728,468			654,696
Other Current Assets		153,107			154,971
Total Current Assets		1,739,318			1,780,345
Property, Buildings and Equipment – net (3)		763,737			717,158
Investments in Unconsolidated Entities		22,686			22,066
All Other Assets (4)		291,334			233,448
Total Assets	$	2,817,075		$	2,753,017

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Maturities of Long-Term Debt	$	9,485	$	140,190
Trade Accounts Payable		304,925		314,783
Other Current Liabilities		318,503		281,915
Total Current Liabilities		632,913		736,888
Long-Term Debt		--		4,895
All Other Liabilities		86,496		74,670
Shareholders' Equity (5)		2,097,666		1,936,564
Total Liabilities and Shareholders’ Equity	$	2,817,075	$	2,753,017

(1) Accounts receivable – net increased by $47 million, or 10%, due primarily to higher sales, partially offset by improved collections.

(2) Inventories increased by $74 million, or 11%, primarily in the Branch-based Distribution segment, due to volume increases, greater availability of products and market expansion.

(3) Property, buildings and equipment – net was up due to market expansion and technology initiatives. Depreciation and amortization of property, buildings, and equipment amounted to $23 million for the 2005 second quarter and $21 million for the 2004 second quarter.

(4) Other assets increased $58 million or 25% due primarily to intangibles from the acquisition of the assets of AW Direct and increased capitalized software.

(5) Common stock outstanding as of June 30, 2005 was 89,105,942 shares as compared with 91,013,839 shares at June 30, 2004. The Company repurchased 1.6 million shares during the 2005 second quarter bringing the total for the year to 1.8 million shares. As of June 30, 2005, approximately 5.2 million shares of common stock remained under the current share repurchase authorization.

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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III.  CASH FLOW DATA

       The following is a summarized cash flow statement for the six months ended June 30, 2005 (preliminary) and 2004:

	Six Months Ended June 30,
	($ in thousands)
	2005		2004
Cash Flows from Operating Activities:
Net Earnings	$	154,381		$	129,178
Depreciation and Amortization		52,796			50,696
(Income) Losses in Unconsolidated Entities		(1,310	)		202
(Increase) Decrease in Accounts Receivable – net		(50,976	)		(54,158	)
(Increase) Decrease in Inventories		(27,484	)		3,443
(Increase) Decrease in Prepaid Expenses		(7,635	)		(14,386	)
Increase (Decrease) in Trade Accounts Payable		13,887			57,891
Increase (Decrease) in Other Current Liabilities		(48,459	)		(10,600	)
Other – net		29,374			(371	)
Net Cash Provided by Operating Activities		114,574			161,895
Cash Flows from Investing Activities:
Additions to Property, Buildings
and Equipment – net		(45,631	)		(29,653	)
Additions for Capitalized Software		(23,515	)		(6,578	)
Net Cash Paid for Business Acquisition		(24,838	)		--
Other – net		4,140			1,304
Net Cash Used in Investing Activities		(89,844	)		(34,927	)
Cash Flows from Financing Activities:
Net Decrease in Long-Term Debt		--			(24	)
Cash Dividends Paid and Purchase of
Treasury Stock – net		(142,479	)		(81,437	)
Other – net		14,627			39,047
Net Cash Used in Financing Activities		(127,852	)		(42,414	)
Exchange Rate Effect on Cash and Cash
Equivalents		(91	)		(1,247	)
Net (Decrease) Increase in Cash and Cash
Equivalents from beginning of year	$	(103,213	)	$	83,307

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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IV.  BUSINESS SEGMENT RESULTS

	BRANCH-BASED DISTRIBUTION
	Three Months Ended							Six Months Ended
	($ in millions)
	06/30/05		06/30/04			Inc/(Dec)		06/30/05			06/30/04			Inc/(Dec)
Sales	$	1,276		$	1,171		9	%	$	2,518		$	2,314		9	%
Operating Earnings	$	131		$	113		16	%	$	240		$	220		9	%
Operating Margin		10.2	%		9.7	%	0.5	pp		9.5	%		9.5	%	--	pp
ROIC*										25.9	%		26.1	%	(0.2	)pp

North American Branch Network
Number of Branches

	2005 Second Quarter
	03/31/05		Opened		Closed		06/30/05
United States
Branch		393		5		(2	)	396
Will Call Express		18		1		--		19
Canada		164		1		--		165
Mexico		6		--		--		6
Total		581		7		(2	)	586

	2005 Year-to-Date
	12/31/04		Opened		Closed		06/30/05
United States
Branch		394		8		(6	)	396
Will Call Express		16		3		--		19
Canada		166		3		(4	)	165
Mexico		6		--		--		6
Total		582		14		(10	)	586

Net Sales – Sales for this segment were up 9% for the quarter, reflecting the stronger North American economy, ongoing strategic initiatives in the United States, and a favorable Canadian exchange rate. Also contributing to the improved comparisons was the positive effect from the timing of the Easter holiday, which fell into the first quarter of 2005 versus the second quarter of 2004.

Sales in the United States were up 8% versus 2004 reflecting growth across all customer segments, led by the government, manufacturing and commercial sectors. National account sales within all customer segments were up 12% for the quarter. The sales growth was reduced 2 percentage points as a result of the wind-down of Integrated Supply and related automotive contracts.

*See footnote, page 8.

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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BRANCH-BASED DISTRIBUTION (continued)

Results for the market expansion program were as follows:

	Second Quarter
	Sales Increase 2005 vs. 2004			Estimate of Completion
Phase 1 (Atlanta, Denver, Seattle)		4	%		100	%
Phase 2 (Four markets in Southern California)		13	%		80	%
Phase 3 (Houston, St. Louis, Tampa)		23	%		65	%

Overall, market expansion contributed approximately 1 percentage point to the 9% sales growth. The sales growth in Phase 1 was negatively affected in the Denver market due to lower sales to one large customer. Excluding the effect of this customer, sales in Phase 1 were up 11%.

Sales in Canada increased 19% for the quarter versus 2004 due to a stronger economy, primarily in the natural resources sector, and the effect of a favorable Canadian exchange rate. In local currency, sales for this business were up 9%.

Sales in Mexico were up 24% for the quarter versus 2004 driven by an improving economy, an expanded telesales operation, and the opening of a new branch in Queretaro in the third quarter of 2004.

Operating Earnings– Operating earnings for the 2005 second quarter were up 16% compared with the 2004 period, the result of higher sales and improved gross profit margins and warehouse productivity, partially offset by operating expenses, which grew faster than sales.

The gross profit margin was up 1.9 percentage points versus the comparable 2004 quarter. Contributing to the improvement in gross profit margin were selling price category mix and the positive effect of product mix. A major driver of the improvement in the selling price category mix was reduced sales to Integrated Supply and automotive customers, which carry lower margins than the overall average.

The operating expense growth was primarily driven by increased costs related to market expansion and the SAP system, as well as higher sales commissions and profit sharing accruals.

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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	LAB SAFETY
	Three Months Ended							Six Months Ended
	($ in millions)
	06/30/05		06/30/04			Inc/(Dec)		06/30/05			06/30/04			Inc/(Dec)
Sales	$	98		$	86		14	%	$	191		$	172		11	%
Operating Earnings	$	14		$	12		12	%	$	27		$	24		13	%
Operating Margin		13.9	%		14.1	%	(0.2	)pp		14.2	%		13.9	%	0.3	pp
ROIC*										38.1	%		39.0	%	(0.9	)pp

Net Sales– Sales increased 14% for the quarter for Lab Safety, the Company’s direct marketing business, primarily due to the acquisition of AW Direct in January 2005 and increased volume in the core product lines.

Operating Earnings – Operating earnings for the 2005 second quarter were up 12%. The improvement in operating earnings was due to higher sales and improved gross profit margins, partially offset by increased operating expenses. Also contributing to the improvement was the benefit from the results of AW Direct, partially offset by one-time acquisition-related costs.

*Footnote:
The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is calculated using annualized operating earnings based on year-to-date operating earnings divided by a seven point average for net working assets. Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (non-operating cash), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve. Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees’ profit sharing plans, and accrued expenses.

Forward-Looking Statements

This document may contain forward-looking statements under the federal securities laws. The forward-looking statements relate to the Company’s expected future financial results and business plans, strategies and objectives and are not historical facts. They are generally identified by qualifiers such as “estimate of completion” or similar expressions. There are risks and uncertainties the outcome of which could cause the Company’s results to differ materially from what is projected. The forward-looking statements should be read in conjunction with the Company’s most recent annual report, as well as the Company’s Form 10-K and other reports filed with the Securities and Exchange Commission, containing a discussion of the Company’s business and of various factors that may affect it.

– End –

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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EXHIBIT A
Daily Sales Growth
by Segment

	2005 vs. 2004						2004 vs. 2003
Month	Company		Branch-based       Distribution		Lab       Safety		Company		Branch-based       Distribution		Lab       Safety
January		10.4	%	10.9	%	3.0	%	4.7	%	3.8	%	19.6	%
February		10.3	%	10.0	%	15.2	%	5.9	%	5.1	%	17.4	%
March		5.9	%	5.6	%	8.7	%	7.4	%	6.8	%	16.6	%
First Quarter		8.7	%	8.7	%	9.0	%	6.1	%	5.3	%	18.1	%
April		11.6	%	11.2	%	15.6	%	6.1	%	5.6	%	12.0	%
May		5.6	%	5.1	%	13.7	%	8.6	%	8.7	%	5.9	%
June		10.5	%	10.5	%	11.5	%	6.6	%	6.5	%	7.2	%
Second Quarter		9.3	%	9.0	%	13.6	%	7.1	%	7.0	%	8.3	%
July								7.4	%	7.0	%	13.9	%
August								8.9	%	8.9	%	8.7	%
September								8.7	%	8.9	%	5.5	%
Third Quarter								8.4	%	8.3	%	9.3	%
October								9.7	%	9.9	%	6.3	%
November								8.3	%	8.7	%	2.4	%
December								16.2	%	16.7	%	8.4	%
Fourth Quarter								11.3	%	11.7	%	5.7	%
Full Year								8.2	%	8.0	%	10.2	%

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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EXHIBIT B
Sales by Segment
($000’s)

Second Quarter
	Three Months ended June 30, 2005
	Branch-based Distribution		Lab        Safety		Totals
Total net sales		1,276,084		97,668		1,373,752
Intersegment net sales		(441	)	(503	)	(944	)
Net sales to external customers		1,275,643		97,165		1,372,808

	Three Months ended June 30, 2004
	Branch-based Distribution		Lab        Safety		Totals
Total net sales		1,170,563		85,987		1,256,550
Intersegment net sales		(56	)	(520	)	(576	)
Net sales to external customers		1,170,507		85,467		1,255,974

2005 vs. 2004
Total net sales	9.0	%	13.6	%	9.3	%
Intersegment net sales	687.5	%	-3.3	%	63.9	%
Net sales to external customers	9.0	%	13.7	%	9.3	%

Year
	Six Months ended June 30, 2005
	Branch-based Distribution		Lab        Safety		Totals
Total net sales		2,518,339		191,151		2,709,490
Intersegment net sales		(655	)	(1,147	)	(1,802	)
Net sales to external customers		2,517,684		190,004		2,707,688

	Six Months ended June 30, 2004
	Branch-based Distribution		Lab        Safety		Totals
Total net sales		2,313,619		171,766		2,485,385
Intersegment net sales		(666	)	(946	)	(1,612	)
Net sales to external customers		2,312,953		170,820		2,483,773

2005 vs. 2004
Total net sales	8.8	%	11.3	%	9.0	%
Intersegment net sales	-1.7	%	21.2	%	11.8	%
Net sales to external customers	8.9	%	11.2	%	9.0	%

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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EXHIBIT C
Operating Earnings by Segment
($000’s)

Second Quarter
	Three Months ended June 30, 2005
	Branch-based Distribution		Lab        Safety		Totals
Total operating earnings		130,773		13,547		144,320
Unallocated expenses		--		--		(17,361	)
Elimination of intersegment losses		--		--		7
Total consolidated operating earnings		130,773		13,547		126,966

	Three Months ended June 30, 2004
	Branch-based Distribution		Lab        Safety		Totals
Total operating earnings		113,092		12,130		125,222
Unallocated expenses		--		--		(18,332	)
Elimination of intersegment losses		--		--		1
Total consolidated operating earnings		113,092		12,130		106,891

2005 vs. 2004 15.6 % 11.7 % 18.8 %

Year
	Six Months ended June 30, 2005
	Branch-based Distribution		Lab        Safety		Totals
Total operating earnings		239,638		27,175		266,813
Unallocated expenses		--		--		(31,183	)
Elimination of intersegment losses		--		--		12
Total consolidated operating earnings		239,638		27,175		235,642

	Six Months ended June 30, 2004
	Branch-based Distribution		Lab        Safety		Totals
Total operating earnings		220,238		23,944		244,182
Unallocated expenses		--		--		(36,543	)
Elimination of intersegment losses		--		--		--
Total consolidated operating earnings		220,238		23,944		207,639

2005 vs. 2004 8.8 % 13.5 % 13.5 %

W.W. Grainger, Inc. Supplemental Financial Information for the Second Quarter Ended June 30, 2005

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