10-Q

39 Pages Complete

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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

FORM 10-Q

[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended March 31, 2001

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

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

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

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

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     

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 94,958,462 shares of the Company's Common Stock were outstanding as of April 30, 2001.

The Exhibit Index appears on page 19 in the sequential numbering system.

1

Part I - FINANCIAL INFORMATION

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

                                                     Three Months Ended March 31,
                                                 ----------------------------------
                                                    2001                  2000
                                                 ------------         ------------

Net sales ...............................        $  1,219,420         $  1,222,449

Cost of merchandise sold ................             824,509              840,001
                                                 ------------         ------------

   Gross profit .........................             394,911              382,448

Warehousing, marketing, and
   administrative expenses ..............             311,222              307,671
                                                 ------------         ------------

   Operating earnings ...................              83,689               74,777

Other income or (deductions)
   Interest income ......................                 545                  497
   Interest expense .....................              (4,001)              (6,102)
   Equity in loss of unconsolidated
    entities ............................              (5,801)                   -
   Unclassified-net .....................                 373                   91
                                                 ------------         ------------
                                                       (8,884)              (5,514)
                                                 ------------         ------------

Earnings before income taxes ............              74,805               69,263

Income taxes ............................              32,630               28,052
                                                 ------------         ------------

   Net earnings .........................        $     42,175         $     41,211
                                                 ============         ============

Earnings per share:

   Basic ................................        $       0.45         $       0.44
                                                 ============         ============

   Diluted ..............................        $       0.45         $       0.44
                                                 ============         ============

Weighted average number of shares
   outstanding:

   Basic ................................          93,026,308           92,917,780
                                                 ============         ============

   Diluted ..............................          94,297,365           94,416,374
                                                 ============         ============

Cash dividends paid per share ...........        $       0.17         $       0.16
                                                 ============         ============

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

2

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

                                                        Three Months Ended March 31,
                                                     ----------------------------------
                                                        2001                  2000
                                                     ------------         ------------

Net Earnings .....................................   $     42,175         $     41,211

Other comprehensive earnings (loss), net of tax:
  Foreign currency translation adjustments .......        (13,876)              (1,090)
  Gain (loss) in investment securities:
   Unrealized holding (loss) .....................         (4,376)             (10,381)
   Reclassification adjustments for realized gains
    included in net earnings .....................              -                    -
                                                     ------------         ------------
Comprehensive earnings ...........................   $     23,923         $     29,740
                                                     ============         ============

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

3

W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)

ASSETS                                                         March 31, 2001      Dec. 31, 2000
- -------------------------------------------------------------  --------------      -------------
CURRENT ASSETS
  Cash and cash equivalents .................................  $     68,974         $     63,384
  Accounts receivable, less allowance for doubtful
    accounts of $24,691 in 2001 and $23,436 in 2000 .........       595,105              608,297
  Inventories ...............................................       685,823              704,071
  Prepaid expenses ..........................................        55,706               25,173
  Deferred income tax benefits ..............................        82,915               82,077
                                                               ------------         ------------
    Total current assets ....................................     1,488,523            1,483,002

PROPERTY, BUILDINGS, AND EQUIPMENT ..........................     1,321,621            1,308,027
  Less accumulated depreciation and amortization ............       648,149              631,630
                                                               ------------         ------------

  Property, buildings, and equipment-net ....................       673,472              676,397

DEFERRED INCOME TAXES .......................................         7,348                8,820

INVESTMENTS IN UNCONSOLIDATED ENTITIES ......................        21,801               23,838

OTHER ASSETS ................................................       261,219              267,544
                                                               ------------         ------------

TOTAL ASSETS ................................................  $  2,452,363         $  2,459,601
                                                               ============         ============

LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------
CURRENT LIABILITIES
  Short-term debt ...........................................  $    115,310         $    173,538
  Current maturities of long-term debt ......................        22,755               22,770
  Trade accounts payable ....................................       255,664              220,924
  Accrued expenses ..........................................       271,656              300,740
  Income taxes ..............................................        46,199               29,352
                                                               ------------         ------------
    Total current liabilities ...............................       711,584              747,324

LONG-TERM DEBT (less current maturities) ....................       119,355              125,258

ACCRUED EMPLOYMENT RELATED BENEFITS COSTS ...................        50,743               49,537

MINORITY INTEREST ...........................................            94                   96

SHAREHOLDERS' EQUITY
  Cumulative Preferred Stock - $5 par value - authorized,
      12,000,000 shares, issued and outstanding, none .......          --                   --
  Common Stock - $0.50 par value - authorized, 300,000,000
      shares; issued 108,258,170 shares, 2001 and
      108,037,082 shares, 2000 ..............................        54,129               54,017
  Additional contributed capital ............................       282,648              276,819
  Retained earnings .........................................     1,855,062            1,837,298
  Unearned restricted stock compensation ....................       (26,749)             (22,720)
  Accumulated other comprehensive (loss) ....................       (37,084)             (18,832)
  Treasury stock, at cost - 13,348,192 shares, 2001
  and 14,104,212 shares, 2000 ...............................      (557,419)            (589,196)
                                                               ------------         ------------

  Total shareholders' equity ................................     1,570,587            1,537,386
                                                               ------------         ------------

  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................  $  2,452,363         $  2,459,601
                                                               ============         ============

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

4

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

                                                                    Three Months Ended March 31,
                                                                    ---------------------------
                                                                        2001           2000
                                                                    ------------   ------------
Cash flows from operating activities:
  Net earnings .............................................        $     42,175   $     41,211
  Provision for losses on accounts receivable ..............               4,590          3,553
  Depreciation and amortization:
    Property, buildings, and equipment .....................              19,577         21,458
    Intangibles and goodwill ...............................               1,361          4,002
    Amortization of capitalized software ...................               4,534          3,492
  Loss on unconsolidated entities ..........................               5,801           --
  Change in operating assets and liabilities -
     net of business acquisition:
    Decrease (increase) in accounts receivable .............               6,910        (42,898)
    Decrease (increase) in inventories .....................              16,297        (11,088)
    (Increase) in prepaid expenses .........................             (30,024)       (18,808)
    Decrease (increase) in deferred income taxes ...........                 444         (1,548)
    Increase in trade accounts payable .....................              34,763         35,150
    (Decrease) in other current liabilities ................             (29,722)       (21,939)
    Increase in current income taxes payable ...............              15,552         32,534
    Increase in accrued employment related
      benefits costs .......................................               1,206            707
  Other - net ..............................................                 349          2,222
                                                                    ------------   ------------

Net cash provided by operating activities ..................              93,813         48,048
                                                                    ------------   ------------

Cash flows from investing activities:
  Additions to property, buildings, and
    equipment - net of dispositions ........................             (15,305)       (12,103)
  Expenditures for capitalized software ....................              (2,364)        (9,635)
  Net cash paid for business acquisition ...................             (13,250)          --
  Investments in unconsolidated entities ...................              (3,764)          --
  Other - net ..............................................              (1,669)          (743)
                                                                    ------------   ------------

Net cash (used in) investing activities ....................             (36,352)       (22,481)
                                                                    ------------   ------------

Cash flows from financing activities:
  Net (decrease) in short-term debt ........................             (58,228)       (13,317)
  Long-term debt payments ..................................                 (15)           (17)
  Stock incentive plan .....................................               1,139          5,155
  Proceeds from sale of treasury stock .....................              24,366           --
  Purchase of treasury stock-net ...........................              (1,072)          (346)
  Cash dividends paid ......................................             (16,000)       (14,955)
                                                                    ------------   ------------

Net cash (used in) financing activities ....................             (49,810)       (23,480)
                                                                    ------------   ------------

Exchange rate effect on cash and cash equivalents ..........              (2,061)           (85)
                                                                    ------------   ------------

Net increase in cash and cash equivalents ..................               5,590          2,002

Cash and cash equivalents at beginning of year .............              63,384         62,683
                                                                    ------------   ------------

Cash and cash equivalents at end of period .................        $     68,974   $     64,685
                                                                    ============   ============

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

5

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

1. BASIS OF STATEMENT PRESENTATION

The financial statements and the related notes are condensed and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2000, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions are eliminated.

Inventories are valued at the lower of cost or market. Cost is determined primarily by the last-in, first-out (LIFO) method.

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

2. DIVIDEND

On April 25, 2001, the Board of Directors declared a quarterly dividend of 17 1/2 cents per share, payable June 1, 2001 to shareholders of record on May 7, 2001.

6

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

3. SEGMENT INFORMATION (In thousands of dollars)

                                                                 Three Months Ended March 31, 2001
                                        ----------------------------------------------------------------------------

                                                                             Lab
                                        Branch-based                       Safety
                                        Distribution   Digital             Supply            Other          Totals
                                        ------------   ----------         ---------         ----------    ----------
                                                                   (In thousands of dollars)

Total net sales ......................  $1,091,693     $   17,303         $   87,625        $   42,156    $1,238,777
Intersegment net sales ...............       3,486         15,548                323              --          19,357
Net sales to external customers ......   1,088,207          1,755             87,302            42,156     1,219,420
Segment operating earnings (loss) ....      90,079        (10,157)            16,134               371        96,427


                                                               Three Months Ended March 31, 2000
                                        ----------------------------------------------------------------------------

                                                                             Lab
                                        Branch-based                       Safety
                                        Distribution   Digital             Supply            Other          Totals
                                        ------------   ----------         ---------         ----------    ----------
                                                                 (In thousands of dollars)

Total net sales ......................  $1,098,623     $    6,416         $   86,865        $   41,003    $1,232,907
Intersegment net sales ...............       2,654          6,209                223             1,372        10,458
Net sales to external customers ......   1,095,969            207             86,642            39,631     1,222,449
Segment operating earnings (loss) ....      84,508        (10,933)            14,608            (3,106)       85,077


                                                                             Lab
                                        Branch-based                       Safety
                                        Distribution     Digital           Supply            Other          Totals
                                        ------------   ----------         ---------        ----------    ----------
                                                                 (In thousands of dollars)
Segment assets
At March 31, 2001 ....................  $1,994,517     $   14,766        $  143,712        $   42,297    $2,195,292
                                        ==========     ==========        ==========        ==========    ==========
At December 31, 2000 .................  $2,016,220     $    9,933        $  111,961        $   54,095    $2,192,209
                                        ==========     ==========        ==========        ==========    ==========

7

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

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

                                                     Three Months Ended March 31,
                                                    -----------------------------
                                                       2001               2000
                                                    ----------         ----------
Total operating earnings for reportable segments    $   96,427         $   85,077
Unallocated expenses ...........................       (12,738)           (10,300)
Elimination of intersegment profits ............          --                 --
                                                    ----------         ----------
  Total consolidated operating earnings ........    $   83,689         $   74,777
                                                    ==========         ==========



                                                    March 31, 2001    December 31, 2000
                                                    --------------    -----------------
Assets:
Total assets for reportable segments ...........    $    2,195,292    $       2,192,209
Unallocated assets .............................           257,071              267,392
                                                    --------------    -----------------
  Total consolidated assets ....................    $    2,452,363    $       2,459,601
                                                    ==============    =================

4. ADOPTION OF ACCOUNTING STANDARDS

The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accounting for Certain Derivative Instruments and Hedging Activities,” effective January 1, 2001. The Company uses non-derivative financial instruments to help hedge its exposure for certain investments in foreign subsidiaries in which the net assets are exposed to currency exchange rate volatility. Adoption of SFAS No. 133 requires the Company to report the net amounts of gains and losses that arise from qualifying non-derivative hedging instruments in the cumulative translation adjustment during the reporting period. The Company’s accounting treatment of SFAS No. 133 is consistent with the method previously used under Statement of Financial Accounting Standards No. 52 (SFAS 52), “Foreign Currency Translation.”

Currency exposure related to the Company’s investment in the net assets of its Canadian subsidiary, Acklands-Grainger Inc. (AGI), is managed primarily by means of a foreign currency denominated debt obligation of the parent. Gains and losses associated with the debt obligation offset gains and losses in the net investment in AGI.

8

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

For the period ended March 31, 2001, $5,903,000 of net gain related to the foreign currency denominated debt obligation and was included in the cumulative translation adjustment. For the same period of 2000, $457,000 of net gain related to the obligation and was included in the cumulative translation adjustment.

5. ACQUISITION

On February 26, 2001, Lab Safety Supply, Inc., the Company’s wholly owned subsidiary, acquired The Ben Meadows Co., Inc. (Ben Meadows), of Canton, Georgia, for approximately $13.3 million. Ben Meadows, a privately held corporation with annual sales of more than $20,000,000, is a business-to-business direct marketer specializing in equipment for the environmental and forestry management markets. The acquisition was accounted for under the purchase method of accounting. Results for Ben Meadows are included in the Company’s results since the date of its acquisition. Given the size of the acquisition, no accretion or dilution of the Company’s earnings per share is projected.

6. EXECUTIVE STOCK PURCHASE PROGRAM

On March 26, 2001, a group of 83 executives bought approximately 787,000 treasury shares from the Company. Cash proceeds from the sale, which amounted to $24,366,000, will be used by the Company to repurchase shares of the Company’s stock on the open market. Executives who met a threshold purchase requirement of one times their annual base salary received a grant of restricted stock that will vest if they remain with the Company and hold their purchased shares for a minimum of two years. The total number of restricted shares granted was approximately 192,000 shares.

9

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

7. SUBSEQUENT EVENTS

On April 23, 2001, the Company announced it will discontinue the operations of Material Logic, the digital unit the Company formed to seek other equity participants. As a result of this action, the Company will shut down all of Material Logic’s branded e-commerce sites except FindMRO.com, which will remain an integrated sourcing service for the Company’s customers.

The Company will provide a comprehensive separation package, including outplacement services, for the 178 Material Logic employees whose jobs will be eliminated.

In connection with the closing of Material Logic, the Company has taken a non-recurring, after-tax charge of $24 million, or $0.25 per share. In addition, the Company wrote down its investments in other digital enterprises and took an after-tax charge of $14 million, or $0.15 per share. This included divestiture of the Company’s 40 percent investment in Works.com, Inc. The Company acquired its 40 percent interest in Works.com, Inc., an unrelated third party, on August 1, 2000, when OrderZone.com was combined with Works.com.

The total effect of both non-recurring charges amounted to an after-tax cost of $38 million, or $0.40 per share, in the 2001 second quarter. The charges will be partially offset by elimination of the on-going losses relating to Material Logic and the Company’s equity investment in Works.com, which losses were projected at $0.29 per share for the remainder of 2001.

10

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2000:

Company Net Sales

The Company’s net sales of $1,219,420,000 in the 2001 first quarter were essentially flat with sales of $1,222,449,000 for the comparable 2000 period. Sales performance in the first quarter of 2001 was affected by relatively flat sales in most of the Company’s businesses combined with the effect of 1 less selling day versus the first quarter of 2000. The sales decline was primarily the result of a progressively slowing economy and a difficult comparison with the 2000 first quarter.

There were 64 sales days in the 2001 first quarter versus 65 sales days in the 2000 quarter. On a daily basis the Company’s net sales increased 1.3%. The full year 2001 will have 255 sales days, the same number of sales days as the year 2000.

Sales processed through the Company’s digital businesses plus the sales that originated through Grainger.com were $100 million, up more than 60% from the $62 million achieved in the first quarter 2000.

Segment Net Sales

The following comments at the segment level include external and intersegment net sales; those comments at the business unit level include external and inter- and intrasegment net sales. For segment information see Note 3 to the Consolidated Financial Statements included in this report.

Branch-based Distribution Businesses

Net sales of $1,091,693,000 for the first quarter of 2001 decreased 0.6% when compared with net sales of $1,098,623,000 in the first quarter of 2000. Average daily net sales increased 0.9% for the 2001 first quarter compared with the 2000 first quarter.

Daily sales in the United States were relatively flat, tempered by a slowdown in the U.S. economy and a difficult comparison with the 2000 first quarter. Sales to national, government and to education accounts increased by the mid-single digits while sales to other customer categories declined. Sales were favorably affected by the Company’s Internet initiative. Sales through Grainger.com were $75 million, a 36% increase over first quarter 2000 sales of $55 million.

11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (Continued)

Daily sales growth in Canada was in the low-single digits during the first quarter of 2001. Growth was driven by continued strength in the oil and gas, forestry, and mining sectors of the Canadian economy. This growth was partially offset by a slowdown in the manufacturing sector in Eastern Canada and an unfavorable change in the Canadian exchange rate.

The Mexican operation experienced a mid-single digit decline in net sales. The decrease in sales was attributable to weakness in the automotive and electronics manufacturing industries.

Digital Businesses

Net sales for the first quarter of 2001 were $17,303,000, an increase of 169.7% compared with $6,416,000 for the same period in 2000. Net sales for this segment primarily represents product sales for FindMRO.com and service fee revenues for the rest of Material Logic. The large increase in sales for this business segment is largely attributable to the intersegment sales from FindMRO.com to the Branch-based Distribution segment.

On January 26, 2001, the Company announced that it had consolidated FindMRO.com, MROverstocks.com, and TotalMRO.com into one organization, Material Logic. Material Logic also includes related consulting, implementation, and content services. See Note 7 to the Consolidated Financial Statements, “Subsequent Events,” for information concerning the Company’s decision to shut down all of Material Logic’s branded e-commerce sites except FindMRO.com, which will remain an integrated sourcing service for the Company’s customers.

12

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (Continued)

Lab Safety Supply

Net sales for Lab Safety Supply were $87,625,000, an increase of 0.9% compared with $86,865,000 for the same period in 2000. Net sales for the first quarter of 2001 includes net sales for Ben Meadows Co., a direct marketer specializing in equipment for the environmental and forestry management markets, since its acquisition on February 26, 2001. Excluding acquired sales, sales performance for Lab Safety Supply was relatively flat on a daily basis. This performance was the result of a small increase in the sales of industrial products offset by a decline in the sales of safety products. Sales were affected by the slowing of the industrial economy of North America.

Other Businesses

Net sales for the first quarter of 2001 were $42,156,000, an increase of 2.8% compared with $41,003,000 for the same period of 2000. Sales growth for this segment is primarily attributable to increased sales at Grainger Integrated Supply. Sales for this business unit include product sales and management fees.

Company Net Earnings

The Company’s net earnings of $42,175,000 in the first quarter of 2001 increased 2% compared with the net earnings of $41,211,000 for the comparable 2000 period. This increase resulted from improved operating earnings at all of the Company’s business segments and from lower interest expense. Partially offsetting these improvements were higher losses from equity interests in unconsolidated entities.

Segment Operating Earnings

The following comments at the segment level include external and intersegment operating earnings; those comments at the business unit level include external and inter- and intrasegment operating earnings. For segment information see Note 3 to the Consolidated Financial Statements included in this report.

13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (Continued)

Branch-based Distribution Businesses

Operating earnings of $90,079,000 for the first quarter of 2001 increased 6.6% compared with operating earnings of $84,508,000 in the first quarter of 2000. This improvement resulted from higher gross profit margins partially offset by slightly higher operating expenses.

Gross profit margins increased 1.09 percentage points from the comparable quarter in 2000. The improvement in gross profit margins was primarily attributable to selected pricing actions intended to recover freight and supplier cost increases. Partially offsetting this improvement were higher sales of sourced products (not inventoried) which, in general, carry lower than average gross profit margins.

Operating expenses increased 2% for the quarter versus a 1% decline in net sales. The increase in operating expenses primarily related to employee benefits costs. Other operating expenses declined proportionately more than sales.

Digital Businesses

The Digital Businesses incurred operating losses of $10,157,000 compared with operating losses of $10,933,000 for the first quarter of 2000. The decrease in the operating losses primarily relates to the elimination of OrderZone.com operating losses that were included in first quarter 2000 results.

On August 1, 2000, OrderZone.com was combined with Works.com, Inc., an unrelated third party. For its contribution, the Company received a 40% interest in Works.com. The Company recognizes its proportionate share of earnings or losses as part of Equity in Loss of Unconsolidated Entities.

Partially offsetting the above improvement were increased losses at Material Logic. On April 23, 2001, the Company announced it will discontinue the operations of Material Logic and took a charge relating to the divestiture of its investment in Works.com. For additional information, see Note 7 to the Consolidated Financial Statements included in this report.

14

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (Continued)

Lab Safety Supply

Lab Safety Supply had operating earnings of $16,134,000 for the first quarter of 2001, an increase of 10% compared with operating earnings of $14,608,000 for the first quarter of 2000. The increase was primarily due to lower amortization of intangibles partially offset by other operating expenses growing at a faster rate than sales.

Other Businesses

Other Businesses had operating earnings of $371,000 in the first quarter of 2001 compared with operating losses of $3,106,000 in the comparable period of 2000. The significant improvement in operating earnings primarily relates to Grainger Integrated Supply, which has improved profitability by eliminating or restructuring unprofitable contracts and reducing its cost structure.

Other Income or (Deductions)

The majority of the increase in other deductions is attributable to losses of unconsolidated entities accounted for on the equity method. These losses primarily related to the Company’s investment in Works.com, which was acquired during the 2000 third quarter. Partially offsetting the increase in other deductions was lower interest expense, which primarily resulted from lower average borrowings.

See Note 7, "Subsequent Events," to the Notes to Consolidated Financial Statements for information about the divestiture of the Company's investment in Works.com.

Income Taxes

The Company’s effective tax rate was 43.6% for the first quarter of 2001 and 40.5% for the first quarter of 2000. The increase in the effective tax rate relates to losses of unconsolidated entities accounted for on the equity method, which losses are net of tax. Excluding the effect of these losses, the effective rate is 40.5% for both periods.

15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 2001, working capital increased by $41,261,000. The ratio of current assets to current liabilities was 2.1 at March 31, 2001 and 2.0 at December 31, 2000. The Consolidated Statements of Cash Flows, included in this report, detail the sources and uses of cash and cash equivalents.

The Company maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, the Company has various sources of financing available, including commercial paper sales and bank borrowings under lines of credit and otherwise. Total debt as a percent of Shareholders’ Equity was 16% at March 31, 2001 and 21% at December 31, 2000. For the first three months of 2001, $21,175,000 was expended for property, buildings, and equipment, and $2,364,000 was expended for capitalized software, for a total of $23,539,000.

On February 26, 2001, Lab Safety Supply, Inc., the Company's wholly owned subsidiary, acquired The Ben Meadows Co., Inc. for approximately $13.3 million. See Note 5, "Acquisition," to the Notes to Consolidated Financial Statements for additional information.

On March 26, 2001, a group of 83 executives bought $24,366,000 in shares of common stock from the Company. The proceeds will be used to repurchase shares on the open market. See Note 6, “Executive Stock Purchase Program,” to the Notes to Consolidated Financial Statements for additional information.

16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND THE RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Throughout this Form 10-Q are forward-looking statements, i.e., not historical facts, about the Company’s expected future financial results and business plans, strategies, and objectives. These forward-looking statements are often identified by qualifiers such as: “will seek to,” “expects,” “plans,” “anticipates,” “intends,” 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.

Factors that may affect forward-looking statements include the following: higher product costs or other expenses; a major loss of customers; increased competitive pricing pressure on the Company’s businesses; failure to develop, implement, or commercialize successfully new Internet technologies or other business strategies; the outcome of pending and future litigation and governmental proceedings; changes in laws and regulations; facilities disruptions or shutdowns due to accidents, natural acts or governmental action; unanticipated weather conditions; and other difficulties in improving margins or financial performance.

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

17

W.W. Grainger, Inc., and Subsidiaries
PART II - OTHER INFORMATION

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

Item 4 Submission of Matters to a Vote of Security Holders.

        An annual meeting of shareholders of the Company was held on April 25, 2001. At that meeting:

a) Management’s nominees listed in the proxy statement pertaining to the meeting were elected directors for the ensuing year. Of the 81,368,811 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:

                                                           Shares as to Which Voting
             Name           Shares Voted for Election          Authority Withheld
 ------------------------   -------------------------      -------------------------
 B. P. Anderson                     81,127,369                      241,442
 W. H. Gantz                        81,125,020                      243,791
 D. W. Grainger                     81,033,863                      334,948
 R. L. Keyser                       81,120,750                      248,061
 J. W. McCarter, Jr.                81,134,053                      234,758
 N. S. Novich                       81,129,667                      239,144
 J. D. Slavik                       81,135,401                      233,410
 H. B. Smith                        81,131,188                      237,623
 F. L. Turner                       81,126,200                      242,611
 J. S. Webb                         81,137,000                      231,811

b)	A proposal to ratify the appointment of Grant Thornton, LLP as independent auditors of the Company for the year ended December 31, 2001 was approved. Of the 81,368,811 shares present or represented by proxy at the meeting, 80,296,476 shares were voted for the proposal, 801,395 shares were voted against the proposal, and 270,940 shares abstained from voting with respect to the proposal.
c)	A proposal to approve the 2001 Long Term Stock Incentive Plan was approved. Of the 81,368,811 shares present in person or represented by proxy at the meeting, 60,584,983 shares were voted for the proposal, 12,988,533 shares were voted against the proposal, and 7,795,295 shares (including 7,431,805 shares represented by broker non-votes) abstained from voting with respect to the proposal.

18

W.W. Grainger, Inc., and Subsidiaries
PART II - OTHER INFORMATION

Item 6	Exhibits (numbered in accordance with Item 601 of regulation S-K).	EXHIBIT INDEX
	a) Exhibits
	(10)(a) Summary Description of 2001 Management Incentive Program	22-24
	(b) 1990 Long Term Stock Incentive Plan, as amended	25-39
	(11) Computation of Earnings per Common and Common Equivalent Share	21
	b) Reports on Form 8-K - None

19

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 11, 2001	By:	/s/ P.O. LouxP.O. Loux, Senior Vice President, Finance and Chief Financial Officer
Date: May 11, 2001	By:	/s/ R.D. PappanoR.D. Pappano, Vice President, Financial Reporting

20

Exhibit 11

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

                                                                     Three Months Ended March 31,
                                                                    --------------------------------
BASIC:                                                                 2001                 2000
                                                                    ------------       -------------
Weighted average number of shares outstanding
   during the year ................................................   93,026,308          92,917,780
                                                                    ============        ============

Net earnings ...................................................... $ 42,175,000        $ 41,211,000
                                                                    ============        ============

Earnings per share ................................................ $       0.45        $       0.44
                                                                    ============        ============

DILUTED:

Weighted average number of shares outstanding
   during the year (basic) ........................................   93,026,308          92,917,780

     Potential Shares:

       Shares issuable under outstanding options ..................    1,615,030           2,541,850

       Shares which could have been purchased based
         on the average market value for the period ...............    1,379,518           1,737,022
                                                                    ------------        ------------

                                                                         235,512             804,828

       Dilutive effect of exercised options prior to being
         exercised ................................................       10,270              77,266
                                                                    ------------        ------------

       Shares for the portion of the period that the options
         were outstanding .........................................      245,782             882,094

       Contingently issuable shares ...............................    1,025,275             616,500
                                                                    ------------        ------------

                                                                       1,271,057           1,498,594
                                                                    ------------        ------------

Adjusted weighted average number of shares outstanding
  during the year .................................................   94,297,365          94,416,374
                                                                    ============        ============

Net earnings ...................................................... $ 42,175,000        $ 41,211,000
                                                                    ============        ============

Earnings per share ................................................ $       0.45        $       0.44
                                                                    ============        ============

21

EX-10

                                           Exhibit 10(a) to the quarterly report
                                           on Form 10-Q of W.W. Grainger, Inc.
                                           for the quarter ended March 31, 2001


                           SUMMARY DESCRIPTION OF THE
                    2001 COMPANY MANAGEMENT INCENTIVE PROGRAM


I.        Introduction
          ------------

          The 2001 Company Management Incentive Program (MIP) is designed to
          focus on the underlying factors that drive improvements in economic
          earnings and stock price: return on invested capital and sales growth.


II.       Objectives
          ----------

          The MIP is designed to:

          o  Encourage decision-making focused on producing a constantly
             improving rate of return on invested capital and on growing the
             business rapidly, thus leading to improvements in Company
             economic earnings and stock price.
          o  Influence participants to make decisions consistent with
             shareholders' interests.
          o  Align management with Company objectives.
          o  Attract and retain the talent required to achieve the Company's
             objectives.


III.      Eligibility
          -----------

          Positions that participate in this program are those that have
          significant impact on the Company. Eligibility for participation in
          this program is based on the determination of management. Criteria for
          inclusion are market practice, impact of the role on overall Company
          results, and internal practice. Participation in this program is
          subject to the Terms and Conditions.


IV.       Performance Measures
          --------------------
          Economic earnings and share price will improve most dramatically if
          the Company can achieve two goals simultaneously:

               1.   produce a constantly improving rate of return on invested
                    capital and

               2.   grow the business rapidly

          The MIP will be based on two measures: return on invested capital
          (ROIC) and sales growth.

22

          ROIC is defined as follows:

                      ROIC =  Operating Earnings
                              -------------------
                              Net Working Assets

          ROIC will account for 60% of a participant's total target incentive.


          Sales growth is defined as follows:

                Sales growth  =       Total Company 2001 Sales
                                     --------------------------     -   1
                                      Total Company 2000 Sales

          Sales growth will account for 40% of a participant's total target
          incentive.


V.        Target Award Opportunity
          ------------------------
          Target awards are established for each position based on the
          competitive market practice and internal considerations and are stated
          as a percentage of the employee's base salary.


VI.       Determination Of Payment Amounts
          --------------------------------
          The following process is used to determine the payment amount for each
          participant.

          Step 1: Determine the performance results for each Company measure and
          the resultant performance to goal.


          Step 2: Compute the appropriate percentage of target award earned for
          each measure. Determine the Total Percentage Payout using the
          following formula:

          Total % Payout = (Return on Invested Capital % of Target Earned X 60%)
                             +  (Sales Growth % of Target Earned X 40%)


          Step 3: Calculate each participant's incentive amount earned as
          follows:

          Incentive Amount Earned  =
                     (Annualized Base Salary (as of 12/31) X Target Award %) X
                     Total % Payout

          Those employees who are eligible to participate for only part of the
          year will have their incentive amount adjusted accordingly, based on
          the eligibility provisions of the Terms and Conditions.

23

          Step 4: The Compensation Committee of Management and the Compensation
          Committee of the Board must approve final incentive amounts.

          Step 5: Once approved, final incentive amounts are forwarded to the
          Employee Systems Manager for payment.

24

EX-10

                                           Exhibit 10(b) to the quarterly report
                                           on Form 10-Q of W.W. Grainger, Inc.
                                           for the quarter ended March 31, 2001




                               W.W. GRAINGER, INC.




                       1990 LONG TERM STOCK INCENTIVE PLAN

                            AS AMENDED APRIL 25, 2001



















                               W.W. Grainger, Inc.
                              100 Grainger Parkway
                        Lake Forest, Illinois 60045-5201
                                 (847) 535-1000

25

                               W.W. GRAINGER, INC.
                       1990 LONG TERM STOCK INCENTIVE PLAN
                            AS AMENDED APRIL 25, 2001


Section 1.  Objective.

The objective of the W.W. Grainger, Inc. 1990 Long Term Stock Incentive Plan
(the "Plan") is to attract and retain the best available executive personnel and
other key employees to be responsible for the management, growth and success of
the business, and to provide an incentive for such employees to exert their best
efforts on behalf of the Company and its shareholders.

Section 2.  Definitions.

     2.1. General Definitions. The following words and phrases, when used
     herein, shall have the following meanings:

          (a) "Act" - The Securities Exchange Act of 1934, as amended.

          (b) "Agreement" - The document which evidences the grant of any Award
          under the Plan and which sets forth the terms, conditions, and
          limitations relating to such Award.

          (c) "Award" - The grant of any stock option, stock appreciation right,
          share of restricted stock, share of phantom stock, other stock-based
          award, or any combination thereof.

          (d) "Board" - The Board of Directors of W.W. Grainger, Inc.

          (e) "Change in Control" means any one or more of the following events:

               (i) approval by the shareholders of the Company of:

                    (A) 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 Act) of 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

26

                    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;

                    (B) 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

                    (C) a liquidation or dissolution of the Company;

               provided, however, that if the consummation of an event described
               in this paragraph (i) (a "Transaction") is subject to an Other
               Party Approval Requirement (as defined below), the approval of
               such Transaction by the shareholders of the Company shall not be
               deemed a Change in Control until the first date on which such
               Other Party Approval Requirement has been satisfied. For this
               purpose, "Other Party Approval Requirement" means a requirement
               expressly set forth in a Transaction Agreement (as defined below)
               between the Company and another Person to the effect that such
               Person shall obtain the approval of one or more elements of the
               Transaction by the stockholders, members, partners, or other
               holders of equity interests of such Person (or of a parent of
               such Person) prior to the consummation of such Transaction in
               order to comply with the mandatory provisions of (x) the law of
               the jurisdiction of the incorporation or organization of such
               Person (or its parent) or (y) the articles of incorporation or
               other charter or organizational documents of such Person (or its
               parent) that are applicable to such Transaction. For this
               purpose, "Transaction Agreement" means a written agreement that
               sets forth the terms and conditions of the Transaction;

               (ii) the following individuals cease for any reason to constitute
               a majority of the directors of the Company then serving:
               individuals who, on the Effective Date, constitute the Board and
               any subsequently appointed or elected director of the Company
               (other than a director whose initial assumption of office is in
               connection with an actual or threatened election contest,
               including a consent solicitation, relating to the election or
               removal of one or more directors of the Company) whose
               appointment or election

27

               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 Effective
               Date; or

               (iii) 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 (as such term is defined below),
               the Company, any Subsidiary, any employee benefit plan of the
               Company or a Subsidiary) of beneficial ownership (within the
               meaning of Rule 13d-3 under the Act) of 20% or more of either the
               Company's then-outstanding Common Stock or Voting Power; provided
               that:

                    (A) 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;

                    (B) no Change in Control shall be deemed to have occurred
                    solely by reason of any such acquisition if both (x) after
                    giving effect to such 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 (and not excluded
                    from) paragraph (ii) 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

                    (C) no Change in Control shall be deemed to have occurred
                    solely by reason of 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)(A) above.

          Notwithstanding the occurrence of any of the events specified in
          paragraphs (i), (ii) or (iii) of this definition, no Change in Control
          shall occur with respect to any Participant if (x) the event which
          otherwise would be a Change in Control (or the transaction which
          resulted in such event) was initiated by such Participant, or was
          discussed by him with any third party, without the approval of the
          Board with respect to such Participant's initiation or discussion, as
          applicable, or (y) such Participant is, by written agreement, a
          participant on his own behalf in a transaction in which the persons
          (or their affiliates) with whom such Participant has the written
          agreement cause the Change in Control to occur and, pursuant to the
          written agreement, such Participant has an equity interest (or a right
          to acquire such equity interest) in the resulting entity.

28

          (f) "Code" - The Internal Revenue Code of 1986, as amended, including
          the regulations promulgated pursuant thereto.

          (g) "Committee" - The Compensation Committee of the Board, which shall
          consist of two or more members. The members of the Committee shall be
          "non-employee directors" within the meaning of Rule 16b-3, as the same
          may be amended or supplemented from time to time, as promulgated under
          the Act.

          (h) "Common Stock" - The present shares of common stock of the
          Company, and any shares into which such shares are converted, changed
          or reclassified.

         (i)  "Company" - W.W. Grainger, Inc., an Illinois corporation.

         (j)  "Effective Date" - December 9, 1998.

         (k)  "Employee" - Any person designated as an employee of the Company
               or a Subsidiary on the payroll records thereof.

         (l)  "Exempt Person" means any one or more of the following:

               (i) any descendant of W.W. Grainger (deceased) or any spouse,
               widow or widower of any such descendant (any such descendants,
               spouses, widows and widowers collectively defined as the
               "Grainger Family Members");

               (ii) any descendant of E.O. Slavik (deceased) or any spouse,
               widow or widower of 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 Effective 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 Effective 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 Effective 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
               Effective Date, Mark IV Capital, Inc., and Mountain Capital
               Corporation (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");

29

               (v) any estate of a Family Member who dies after the Effective
               Date or any trust established after the Effective 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 Code ("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
               (v) 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.

          (m) "Fair Market Value" - The fair market value of Common Stock on a
          particular day shall be the closing price of the Common Stock on the
          New York Stock Exchange, or any other national stock exchange on which
          the Common Stock is traded, on the last preceding trading day on which
          such Common Stock was traded.

          (n) "Option" - The right to purchase Common Stock at a stated price
          for a specified period of time. For purposes of the Plan, the option
          is a non-qualified stock option.

          (o) "Other Stock Based Award" - An award under Section 9 that is
          valued in whole or in part by reference to, or is otherwise based on,
          the Common Stock.

          (p) "Participant" - Any Employee designated by the Committee to
          participate in the Plan.

          (q) "Person" - Any individual, corporation, partnership, limited
          liability company, sole proprietorship, trust or other entity.

          (r) "Period of Restriction" - The period during which Shares of
          Restricted Stock or Phantom Stock rights are subject to forfeiture or
          restrictions on transfer pursuant to Section 8 of the Plan.

30

          (s) "Phantom Stock" - A right to receive payment from the Company in
          cash, stock, or in combination thereof, in an amount determined by the
          Fair Market Value.

          (t) "Restricted Stock" - Shares granted to a Participant which are
          subject to restrictions on transferability pursuant to Section 8 of
          the Plan.

          (u) "Shares" - Shares of Common Stock.

          (v) "Stock Appreciation Right" or "SAR" - The right to receive a
          payment from the Company in cash, Common Stock, or in combination
          thereof, equal to the excess of the Fair Market Value of a share of
          Common Stock on the date of exercise over a specified price fixed by
          the Committee, but subject to such maximum amounts as the Committee
          may impose.

          (w) "Subsidiary" - Any corporation, partnership, joint venture,
          limited liability company, or other entity in which the Company
          directly or indirectly owns securities representing a majority of the
          aggregate voting power.

2.2. Other Definitions. In addition to the above definitions, certain words and
phrases used in the Plan and any Agreement may be defined elsewhere in the Plan
or in such Agreement.

Section 3.  Common Stock.

3.1. Number of Shares. Subject to the provisions of Section 3.3, the number of
Shares which may be issued or sold or for which Options or Stock Appreciation
Rights may be granted under the Plan may not exceed 8,056,828 Shares.*
Notwithstanding the foregoing, the total number of Shares with respect to which
Options or Stock Appreciation Rights may be granted to any Participant shall not
exceed 800,000 Shares **(proportionately adjusted pursuant to Section 3.3)
in any calendar year.

3.2 Re-usage. If an Option or SAR expires or is terminated, surrendered, or
cancelled without having been fully exercised, if Restricted Stock is forfeited,
if Shares otherwise deliverable upon (i) exercise of Options, (ii) exercise of
SARs or (iii) vesting of Restricted Stock, regardless of when the Options, SARs
or Restricted Stock shall have been granted, are not delivered by reason of
payments of the Option exercise price pursuant to Section 6.5(b) hereunder or
withholdings of Shares in satisfaction of tax obligations pursuant Section 13.3
hereunder, or if any other grant results in Shares not being delivered, the
Shares covered by such Option, SAR, grant of Restricted Stock or other

- --------

*As adjusted to reflect (i) the number of shares remaining available for grants
under the Company's Restated 1975 Non-Qualified Stock Option Plan, (ii) the
Company's 1991 two-for-one stock split and (iii) the Company's 1998 two-for-one
stock split.


**As adjusted to reflect the Company's 1998 two-for-one stock split.

31

grants, or not so delivered, as the case may be, shall again be available for
Awards under the Plan.

3.3. Adjustments. In the event of any change in the outstanding Common Stock by
reason of a stock split, stock dividend, combination, reclassification or
exchange of Shares, recapitalization, merger, consolidation or other similar
event, the number of SARs and the number of Shares available for Options, grants
of Restricted Stock, and Other Stock Based Awards and the number of Shares
subject to outstanding Options, SARs, grants of Restricted Stock, and Other
Stock Based Awards, and the price thereof, and the Fair Market Value, as
applicable, shall be appropriately adjusted by the Committee in its sole
discretion and any such adjustment shall be binding and conclusive on all
parties. Any fractional Shares resulting from any such adjustment shall be
disregarded.

Section 4.  Eligibility and Participation.

Participants in the Plan shall be those key employees selected by the Committee
to participate in the Plan who hold positions of responsibility and whose
participation in the Plan the Committee or management of the Company determines
to be in the best interests of the Company.

Section 5.  Administration.

5.1. Committee. The Plan shall be administered by the Committee. The members of
the Committee shall be appointed by and shall serve at the pleasure of the
Board, which may from time to time change the Committee's membership.

5.2.  Authority.  The Committee shall have the sole and complete authority to:

          (a) determine the individuals to whom Awards are granted, the type and
          amounts of awards to be granted and the time of all such grants;

          (b) determine the terms, conditions and provisions of, and
          restrictions relating to, each Award granted;

          (c) interpret and construe the Plan and all Agreements;

          (d) prescribe, amend and rescind rules and regulations relating to the
          Plan;

          (e) determine the content and form of all Agreements;

          (f) determine all questions relating to Awards under the Plan;

          (g) maintain accounts, records and ledgers relating to Awards;

          (h) maintain records concerning its decisions and proceedings;

32

          (i) employ agents, attorneys, accountants or other persons for such
          purposes as the Committee considers necessary or desirable;

          (j) do and perform all acts which it may deem necessary or appropriate
          for the administration of the Plan and to carry out the objectives of
          the Plan.

5.3. Determinations. All determinations, interpretations, or other actions made
or taken by the Committee pursuant to the provisions of the Plan shall be final,
binding, and conclusive for all purposes and upon all persons.

5.4. Delegation. Except as required by Rule 16b-3 promulgated under the Act (and
any successor to such Rule) with respect to the grant of Awards to Participants
who are subject to Section 16 of the Act, the Committee may delegate to
appropriate senior officers of the Company its duties under the Plan pursuant to
such conditions and limitations as the Committee may establish.

Section 6.  Stock Options.

6.1. Type of Option. It is intended that only non-qualified stock options may be
granted by the Committee under this section of the Plan.

6.2. Grant of Option. An Option may be granted to Participants at such time or
times as shall be determined by the Committee. Each Option shall be evidenced by
an Option Agreement that shall specify the exercise price, the duration of the
Option, the number of Shares to which the Option applies, and such other terms
and conditions not inconsistent with the Plan as the Committee shall determine.

6.3. Option Price. The per share option price shall be at least 100% of the Fair
Market Value at the time the Option is granted.

6.4. Exercise of Options. Options awarded under the Plan shall be exercisable at
such times and shall be subject to such restrictions and conditions, including
the performance of a minimum period of service after the grant, as the Committee
may impose, which need not be uniform for all participants; provided, however,
that no Option shall be exercisable for more than 10 years after the date on
which it is granted.

6.5. Payment. Options shall be exercised by the delivery of a written notice to
the Company, setting forth the number of Shares with respect to which the Option
is to be exercised, and accompanied by full payment for the Shares. Upon the
exercise of any Option, the exercise price shall be payable by any one or
combination of the following means:

33

          (a) cash or its equivalent,

          (b) with the prior approval of the Committee, delivery of Shares
          already owned by the participant and valued at the Fair Market Value
          thereof at the time of exercise,

          (c) with the prior approval of the Committee, a cashless exercise
          through a broker-dealer approved for this purpose by the Company.

6.6. Rights as a Shareholder. Until the exercise of an Option and the issuance
of the Shares in respect thereof, a Participant shall have no rights as a
Shareholder with respect to the Shares covered by such Option.

Section 7.  Stock Appreciation Rights.

7.1. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted to Participants at such time or times as shall be determined by the
Committee and shall be subject to such terms and conditions as the Committee may
decide. A grant of an SAR shall be made pursuant to a written Agreement
containing such provisions not inconsistent with the Plan as the Committee shall
approve.

7.2. Exercise of SARs. SARs may be exercised at such times and subject to such
conditions, including the performance of a minimum period of service, as the
Committee shall impose. SARs which are granted in tandem with an Option may only
be exercised upon the surrender of the right to exercise an equivalent number of
Shares under the related Option and may be exercised only with respect to the
Shares for which the related Option is then exercisable. Notwithstanding any
other provision of the Plan, the Committee may impose conditions on the exercise
of an SAR, including, without limitation, the right of the Committee to limit
the time of exercise to specified periods.

7.3. Payment of SAR Amount. Upon exercise of an SAR, the Participant shall be
entitled to receive payment of an amount determined by multiplying:

          (a) any increase in the Fair Market Value of a Share at the date of
          exercise over the Fair Market Value of a Share at the date of grant,
          by

          (b) the number of Shares with respect to which the SAR is exercised;

provided, however, that at the time of grant, the Committee may establish, in
its sole discretion, a maximum amount per Share which will be payable upon
exercise of an SAR.

7.4. Method of Payment. Subject to the discretion of the Committee, which may be
exercised at the time of grant, the time of payment, or any other time, payment
of an SAR may be made in cash, Shares or any combination thereof.

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Section 8.  Restricted Stock or Phantom Stock.

8.1. Grant of Restricted Stock or Phantom Stock. The Committee may grant Shares
of Restricted Stock or Phantom Stock rights to such Participants at such times
and in such amounts, and subject to such other terms and conditions not
inconsistent with the Plan as it shall determine. Each grant of Restricted Stock
or Phantom Stock rights shall be evidenced by a written Agreement setting forth
the terms of such Award.

8.2. Restrictions on Transferability. Restricted Stock or Phantom Stock rights
may not be sold, transferred, pledged, assigned, or otherwise alienated until
such time, or until the satisfaction of such conditions as shall be determined
by the Committee (including without limitation, the satisfaction of performance
goals or the occurrence of such events as shall be determined by the Committee).
At the end of the period of restriction applicable to any Restricted Stock, such
Shares will be transferred to the Participant free of all restrictions.

8.3. Rights as a Shareholder. Unless otherwise determined by the Committee at
the time of grant, Participants holding Restricted Stock granted hereunder may
exercise full voting rights and other rights as a Shareholder with respect to
those Shares during the period of restriction. Holders of Phantom Stock rights
shall not be deemed Shareholders and, except to the extent provided in
accordance with the Plan, shall have no rights related to any Shares.

8.4. Dividends and Other Distributions. Unless otherwise determined by the
Committee at the time of grant, Participants holding Restricted Stock shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares, provided that if any such dividends or distributions are paid in
shares of stock, such shares shall be subject to the same forfeiture
restrictions and restrictions on transferability as apply to the Restricted
Stock with respect to which they were paid. Unless otherwise determined by the
Committee at the time of grant, Participants holding Phantom Stock rights shall
be entitled to receive cash payments equal to any cash dividends and other
distributions paid with respect to a corresponding number of Shares.

8.5. Payment of Phantom Stock Rights. The Committee may, at the time of grant,
provide for other methods of payment in respect of Phantom Stock rights in cash,
Shares, partially in cash and partially in Shares, or in any other manner not
inconsistent with this Plan.

Section 9.  Other Stock Based Awards and Other Benefits.

9.1. Other Stock Based Awards. The Committee shall have the right to grant Other
Stock Based Awards which may include, without limitation, the grant of Shares
based on certain conditions, the payment of cash based on the performance of the
Common Stock, and the payment of Shares in lieu of cash under other Company
incentive bonus

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programs. Payment under or settlement of any such Awards shall be made in such
manner and at such times as the Committee may determine.

9.2. Other Benefits. The Committee shall have the right to provide types of
Awards under the Plan in addition to those specifically listed utilizing shares
of stock or cash, or a combination thereof, if the Committee believes that such
Awards would further the purposes for which the Plan was established. Payment
under or settlement of any such Awards shall be made in such manner and at such
times as the Committee may determine.

Section 10.  Amendment, Modification, and Termination of Plan.

The Board at any time may terminate or suspend the Plan, and from time to time
may amend or modify the Plan. No amendment, modification, or termination of the
Plan shall in any manner adversely affect any Award theretofore granted under
the Plan to a Participant without the consent of such Participant.

Section 11.  Termination of Employment.

11.1. Termination of Employment Due to Retirement. Unless otherwise determined
by the Committee at the time of grant, in the event a Participant's employment
terminates by reason of retirement, any Option or SAR granted to such
Participant which is then outstanding may be exercised at any time prior to the
expiration of the term of the Option or SAR or within six (6) years following
the Participant's termination of employment, whichever period is shorter, and
any Restricted Stock, Phantom Stock rights, or other Award then outstanding for
which any restriction has not lapsed prior to the effective date of retirement
shall be forfeited.

11.2. Termination of Employment Due to Death or Disability. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment is terminated by reason of death or disability, any Option or SAR
granted to such Participant which is then outstanding may be exercised by the
Participant or the Participant's legal representative at any time prior to the
expiration date of the term of the Option or SAR or within six (6) years
following the Participant's termination of employment, whichever period is
shorter, and any Restricted Stock, Phantom Stock rights, or other Award then
outstanding shall become nonforfeitable and shall become transferable or
payable, as the case may be, as though any restriction had expired.

11.3. Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at the time of grant, in the event the employment of
the Participant shall terminate for any reason other than misconduct or one
described in Section 11.1 or 11.2, any Option or SAR granted to such Participant
which is then outstanding may be exercised by the Participant at any time prior
to the expiration date of the term of the Option or SAR or within three (3)
months following the Participant's termination of employment, whichever period
is shorter; any Restricted Stock, Phantom Stock rights, or other Award then
outstanding for which any restriction has not lapsed prior to the

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date of termination of employment shall be forfeited upon termination of
employment. If the employment of a Participant is terminated by the Company or a
Subsidiary by reason of the Participant's misconduct, any outstanding Option or
SAR shall cease to be exercisable on the date of the Participant's termination
of employment; any Restricted Stock, Phantom Stock rights, or other Award then
outstanding for which any restriction has not lapsed prior to the date of
termination of employment shall be forfeited upon termination of employment. As
used herein, "misconduct" means that the Participant has engaged, or intends to
engage, in competition with the Company or a Subsidiary, has induced any
customer of the Company or a Subsidiary to breach any contract with the Company
or a Subsidiary, has made any unauthorized disclosure of any of the secrets or
confidential information of the Company or a Subsidiary, has committed an act of
embezzlement, fraud, or theft with respect to the property of the Company or a
Subsidiary, or has deliberately disregarded the rules of the Company or a
Subsidiary in such a manner as to cause any loss, damage, or injury to, or
otherwise endanger the property, reputation, or employees of the Company or a
Subsidiary. The Committee shall determine whether a Participant's employment is
terminated by reason of misconduct.

11.4. Accrual of Right at Date of Termination. The Participant shall have the
right to exercise an Option or SAR as indicated in Sections 11.1, 11.2, and 11.3
only to the extent the Participant's right to exercise such Option or SAR had
accrued at the date of termination of employment pursuant to the terms of the
Option or SAR Agreement and had not previously been exercised.

Section 12.  Change in Control.

Except as otherwise provided in an Agreement, if a Change in Control occurs,
then:

          (i) the Participant's Restricted Stock that was forfeitable shall
          thereupon become nonforfeitable; and

          (ii) any unexercised Option or SAR, whether or not exercisable on the
          date of such Change in Control, shall thereupon be fully exercisable
          and may be exercised, in whole or in part.

Section 13.  Effect of Disposition of Facility or Operating Unit.

In the event that the Company or any of its Subsidiaries closes or disposes of
the facility at which a Participant is located or the Company or any of its
Subsidiaries diminish or eliminate ownership interests in any operating unit of
the Company or any of its Subsidiaries so that such operating unit ceases to be
majority owned by the Company or any of its Subsidiaries, then, with respect to
Awards held by Participants who subsequent to such event will not be employees
of the Company or any of its Subsidiaries, the Committee may (i) accelerate the
exercisability of Awards to the extent not yet otherwise exercisable or remove
any restrictions applicable to any Awards and (ii) extend the period during
which Awards will be exercisable to a date subsequent to the date

37

when such Awards would otherwise have expired by reason of the termination of
such Participant's employment with the Company or any of its Subsidiaries (but
in no event to a date later than the expiration date of the Awards or the fifth
anniversary of the transaction in which such facility closes or operating unit
ceases). If the Committee takes no special action with respect to any
disposition of a facility or an operating unit, then any cessation of employment
resulting from such disposition will be treated as an ordinary cessation of
employment as described in Section 11.

Section 14.  Miscellaneous Provisions.

14.1. Non-transferability of Awards. Unless otherwise determined by the
Committee at the time of grant, and except as provided in Section 11, no Awards
granted under the Plan shall be assignable, transferable, or payable to or
exercisable by anyone other than the Participant to whom it was granted.

14.2. No Guarantee of Employment or Participation. Nothing in the Plan shall
interfere with or limit in any way the right of the Company or a Subsidiary to
terminate any Participant's employment at any time, nor confer upon any
Participant any right to continue in the employment of the Company or a
Subsidiary. No employee shall have a right to be selected as a Participant, or,
having been so selected, to receive any future awards.

14.3. Tax Withholding. The Company shall have the authority to withhold, or
require a Participant to remit to the Company an amount sufficient to satisfy
federal, state, and local withholding tax requirements on any Award under the
Plan, and the Company may defer payment of cash or issuance of Shares until such
requirements are satisfied. The Committee may, in its discretion, permit a
Participant to elect, subject to such conditions as the Committee shall require,
to have Shares otherwise issuable under the Plan withheld by the Company and
having a Fair Market Value sufficient to satisfy all or part of the
Participant's estimated total federal, state, and local tax obligation
associated with the transaction.

14.4. Governing Law. The Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by the Code or Act, shall
be governed by the law of the State of Illinois and construed in accordance
therewith.

14.5. Effectiveness of Plan. The Plan became effective upon its approval by the
shareholders of the Company on April 25, 1990; provided, however, that no Award
requiring the issuance of Shares shall be exercised or paid out unless at the
time of such exercise or payout (i) such Shares are covered by a currently
effective registration statement filed under the Securities Act of 1933, as
amended, if one is then required, or in the sole opinion of the Company and its
counsel such issuance of Shares is otherwise exempt from the registration
requirements of such act, and (ii) such Shares are listed on any securities
exchange upon which the Common Stock of the Company is listed.

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14.6. Termination of the 1975 Plan. The Company's Restated 1975 Non-Qualified
Stock Option Plan shall be terminated as of the date of Shareholder approval of
this Plan, provided, however, that such termination shall not affect any Options
or Stock Appreciation Rights outstanding thereunder, all of which shall remain
subject to and be governed by such plan.

14.7. Unfunded Plan. Insofar as the Plan provides for Awards of cash, Shares,
rights or a combination thereof, the Plan shall be unfunded. The Company may
maintain bookkeeping accounts with respect to Participants who are entitled to
Awards under the Plan, but such accounts shall be used merely for bookkeeping
convenience. The Company shall not be required to segregate any assets that may
at any time be represented by interests in Awards nor shall the Plan be
construed as providing for any such segregation. None of the Committee, the
Company or Board shall be deemed to be a trustee of any cash, Shares or rights
to Awards granted under the Plan. Any liability of the Company to any
Participant with respect to an Award or any rights thereunder shall be based
solely upon any contractual obligations that may be created by the Plan and any
Agreement, and no obligation of the Company under the Plan shall be deemed to be
secured by any pledge or other encumbrance on any property of the Company.

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