Grainger Reports Strong 2nd Quarter

W.W. Grainger, Chicago, IL, reported sales were $1.4 billion, up 9.3% in the second quarter of 2005 ended Jun. 30 over the prior year's second quarter. Net earnings were up 22 percent to $82 million. The company reported a 24 percent increase in earnings per share for the second quarter. Sales for the six months ended June 30, 2005, were $2.7 billion, up 9 percent versus the first six months of 2004. Net earnings increased 20 percent to $154 million versus $129 million in 2004. Earnings per share increased 19 percent to $1.68 from $1.41.

"In the second quarter we continued to see solid sales growth, in spite of disengagements from a number of contracts related to our Integrated Supply and automotive customers," said Richard L. Keyser, Grainger's chairman and CEO. "The improvement in gross profit margins as a result of the replacement of these sales with higher margin business improved overall earnings. We are committed to improving service to our customers as they look for new ways to reduce costs. During the second quarter we continued to invest in our SAP system and our metro market expansion programs to enhance our service offering."

Branch-based Distribution
Sales in the Branch-based Distribution segment were up 9 percent in the 2005 second quarter. In the U.S., sales were up 8 percent with growth in all customer end markets, including the manufacturing, commercial and government sectors. Sales growth was reduced 2 percentage points as a result of the wind-down of Integrated Supply and related automotive contracts.

Phase 1 of the market expansion program - Atlanta, Denver and Seattle - is complete, with sales up 4 percent for the quarter. Sales growth in the Denver market was principally affected by lower sales to one large customer. Excluding the effect of that customer, sales in Phase 1 were up 11 percent. Phase 2, covering four markets in Southern California, is now 80 percent complete; sales in the quarter were up 13 percent. Phase 3 - Houston, St. Louis and Tampa - is 65 percent complete. Sales were up 23 percent for the quarter. During the quarter, Tampa benefited from a state tax holiday designed to encourage residents and businesses to purchase products related to hurricane preparedness. In total, market expansion contributed approximately1 percentage point to the 9 percent segment sales growth.

Sales in Canada were up 19 percent for the quarter - 9 percent in local currency - due primarily to strong sales in the natural resource sector. Sales in Mexico were up 24 percent for the quarter, as an improving economy, expanded telesales and additional branch coverage contributed to the increase.

Operating earnings for the Branch-based Distribution segment were up 16percent as a result of higher sales and a 1.9 percentage point improvement in gross profit margins, partially offset by higher operating expenses primarily related to the market expansion and SAP. Higher gross profit margins were principally the result of programs to control product costs and improve pricing as well as the effect of reduced lower-margin Integrated Supply and automotive business.

Lab Safety Supply (LSS)
Sales for Lab Safety Supply (LSS) increased 14 percent during the quarter, with growth in all product lines and the acquisition of AW Direct in January 2005. Operating earnings increased 12 percent during the quarter due to higher gross profit margins partially offset by higher operating expenses, including one time acquisition-related expenses for the integration of AW Direct.

Cash Flow
Operating cash flow was $102 million for the quarter. The company internally funded its growth initiatives with capital expenditures for the quarter of $42 million. Grainger also repurchased 1.6 million shares of stock during the quarter, which increased second quarter earnings 1 cent per share. The company has an active share repurchase program and approximately 5.2million shares remain under the current authorization.