The following is a discussion of significant risk factors relevant to Grainger’sGrainger's business that could adversely affect its financial condition, results of operations and cash flows. The risk factors discussed in this section should be considered together with information included elsewhere in this Annual Report on Form 10-K and should not be considered the only risks to which the Company is exposed.

Economic, political, and industry trends affect Grainger’sGrainger's business environments. Grainger serves several industries and markets in which the demand for its products and services is sensitive to the production activity, capital spending and demand for products and services of Grainger’sGrainger's customers. Many of these customers operate in markets that are subject to cyclical fluctuations resulting from market uncertainty, trade and tariff policies, costs of goods sold, currency exchange rates, central bank interest rate changes, foreign competition, offshoring of production, oil and natural gas prices, geopolitical developments, labor shortages, inflation, deflation, and a variety of other factors beyond Grainger’sGrainger's control. Any of these factors could cause customers to idle or close facilities, delay purchases, reduce production levels, or experience reductions in the demand for their own products or services.

Any of these events could impair the ability of Grainger’s customers to make full and timely payments oralso reduce the volume of products and services these customers purchase from Grainger or impair the ability of Grainger's customers to make full and timely payments, and could cause increased pressure on Grainger’sGrainger's selling prices and terms of sale. Accordingly, a significant or prolonged slowdown in economic activity in the United States (U.S.)U.S., Canada or any other major world economy, or a segment of any such economy, could negatively impact Grainger’sGrainger's sales growth and results of operations.

There are several large competitors in the industry, although most of the market is served by small local and regional competitors. Grainger faces competition in all markets it serves from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-basedonline businesses that compete with price transparency. The industry

Moreover, Grainger expects technological advancements and the total costsincreased use of fulfillment and of the need to have consistent sources of supply at multiple locations. This consolidation could causeeCommerce solutions within the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost business models are ablecontinue to operate with lower prices and gross profit on products. These competitive pressures could adversely affect Grainger’s sales and profitability.

Some of Grainger’sGrainger's products contain significant amounts of commodity-priced materials, such as steel, copper, petroleum derivatives, or rare earth minerals, and are subject to price changes based uponon fluctuations in the commodities market. Fluctuations in the price of fuel could affect transportation costs. Grainger’sGrainger's ability to pass on such increases in costs in a timely manner depends on market conditions. The inability to pass along cost increases could result in lower gross margins. In addition, higher prices could impactreduce demand for these products, resulting in lower sales volumes.

Grainger’sGrainger's competitive strengths include product selection and availability. Products are purchased from more than 5,100approximately 5,000 suppliers located in various countries around the world, nonot one of which accounted for more than 5% of total purchases.

Historically, no significant difficulty has been encountered with respect to sources of supply; however, disruptions could occur due to factors beyond Grainger’sGrainger's control, including economic downturns, politicalgeopolitical unrest, port slowdowns,tariffs, new tariffs or tariff increases, trade issues and policies, labor problems experienced by Grainger's suppliers, transportation availability and cost, shortage of raw materials, inflation and other factors, any of which could adversely affect a supplier’ssupplier's ability to manufacture or deliver products or could result in an increase in Grainger's product costs.

If Grainger was to experience difficulty in obtaining products, there could be a short-term adverse effect on results of operations and a longer-term adverse effect on customer relationships and Grainger’sGrainger's reputation. In addition, Grainger has strategic relationships with a number of vendors. In the event Grainger was unable to maintain those relations, there might be a loss of competitive pricing advantages which could, in turn, adversely affect results of operations.

From time to time, Grainger experiences changes in customer base and product mix that affect gross margin. Changes in customer base and product mix result primarily from business acquisitions, changes in customer demand, customer acquisitions, selling and marketing activities, competition and competition. If rapid growth with lower margin customers continues,the increased use of eCommerce by Grainger will face pressure to maintain current gross margins, as these customers receive more discounted pricing due to their higher sales volume.and its competitors. There can be no assurance that Grainger will be able to maintain historical gross margins in the future.

AThe occurrence of one or more natural disasters such as earthquakes, storms, hurricanes, floods, fires, droughts, tornados and other extreme weather; pandemic diseases or viral contagions such as the coronavirus outbreak; geopolitical events, such as war, civil unrest or terrorist attacks in a country in which Grainger operates or in which its suppliers are located; and the imposition of measures that create barriers to or increase the costs associated with international trade could result in disruption within Grainger’sof Grainger's logistics or supply chain network, including damage, destruction, extreme weathernetwork. For example, should the coronavirus outbreak persist or spread, it could disrupt the operations of the Company and its suppliers and customers. Any such disruption or other events, whichcatastrophic event could cause one or more of Grainger’sGrainger's distribution centers or branches to become non-operational, could adversely affect Grainger’sGrainger's ability to obtain or deliver inventory in a timely manner, impair Grainger’sGrainger's ability to meet customer demand for products, and result in lost sales, additional costs, or penalties, or damage to Grainger’sGrainger's reputation. Grainger’sGrainger's ability to provide same-day shipping and next-day delivery is an integral component of Grainger’sGrainger's business strategy and any such disruption could adversely impact results of operations.operations and financial performance.

The proper functioning of Grainger’sGrainger's information systems is critical to the successful operation of its business. Grainger continues to invest in software, hardware and network infrastructures in order to effectively manage its information systems. Although Grainger’sGrainger's information systems are protected with robust backup and security systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to damage or interruption from natural disasters, power losses, computer viruses, telecommunication failures, user error, third party actions

such as malicious computer programs, denial-of-service attacks and cybersecurity breaches, and other problems. In addition, from time to time Grainger relies on the IT systems of third parties to assist in conducting its business.

If Grainger's systems or those of third parties on which Grainger depends are damaged, breached or cease to function properly Grainger may have to make a significant investment to repair or replace them and may suffer interruptions in its business operations in the interim. If critical information systems fail or otherwise become unavailable, among other things, Grainger’sGrainger's ability to operate its eCommerce platforms, process orders, maintain proper levels of inventories, collect accounts receivable, and disburse funds, manage its supply chain, monitor results of operations, and process and store employee or customer data, among other functions, could be adversely affected. Any such interruption of Grainger’sGrainger's information systems could also subject Grainger to additional costs.have a material adverse effect on its business or results of operations.

 

Through Grainger’sGrainger's sales and eCommerce channels, Grainger collects and stores personally identifiable, confidential, proprietary and other information from customers so that they may, among other things, purchase products or services, enroll in promotional programs, register on Grainger’sGrainger's websites or otherwise communicate or interact with the Company. Moreover, Grainger’sGrainger's operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to its business, customers, suppliers and employees, and other sensitive matters.

While Grainger has instituted safeguardsCyber threats are rapidly evolving and those threats and the means for the protection of suchobtaining access to information during the normal course of business, Grainger has experiencedin digital and expects to continue to experienceother storage media are becoming increasingly sophisticated. Each year, cyber-attackers make numerous attempts to breachaccess the Company’s information systems, and Grainger may be unable to protect sensitive data and/orstored in the integrity of the Company’sCompany's information systems. A cybersecurity incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, Grainger may be unable to anticipate these techniques or implement adequate preventative measures.

Moreover, from time to time, Grainger may share information with vendors and other third parties that assist with certain aspects of the business. While Grainger requires assurances that these vendors and other parties will protect confidential information, there is a risk that the confidentiality of data held or accessed by them may be compromised. If successful, those attempting to penetrate Grainger’sGrainger's or its vendors’vendors' information systems may misappropriate

In addition, a Grainger employee, contractor or other third party with whom Grainger does business may attempt to circumvent security measures in order to obtain such information or inadvertently cause a breach involving such information. Further, Grainger’sGrainger's systems are integrated with customer systems in certain cases, and a breach of the Company’sCompany's information systems could be used to gain illicit access to customer systems and information.

Loss of customer, supplier, employee or intellectual property or other business information or failure to comply with data privacy and security laws could disrupt operations, damage Grainger’sGrainger's reputation and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and others, any of which could have a material adverse effect on Grainger, its financial condition and results of operations. In the past, Grainger has experienced certain cybersecurity incidents. In each instance, Grainger provided notifications and adopted remedial measures. While these incidents have not been deemed to be material to Grainger, there can be no assurance that a future breach or incident would not be material to Grainger's operations and financial condition.

Grainger’sGrainger's exposure to fluctuations in foreign currency rates results primarily from the translation exposure associated with the preparation of the Consolidated Financial Statements, as well as from transaction exposure associated with transactions in currencies other than an entity’sentity's functional currency. While the Consolidated Financial Statements are reported in U.S. dollars, the financial statements of Grainger’sGrainger's subsidiaries outside the U.S. are prepared using the local currency as the functional currency and translated into U.S. dollars. In addition, Grainger is exposed to foreign currency exchange rate risk with respect to the U.S. dollar relative to the local currencies of Grainger’sGrainger's international subsidiaries, primarily the Canadian dollar, euro, pound sterling, Mexican peso, renminbi and yen, arising from transactions in the normal course of business, such as sales and loans to wholly owned subsidiaries, sales to third-party customers, purchases from suppliers, and bank loans and lines of credit denominated in foreign currencies. Grainger also has foreign currency exposure to the extent receipts and expenditures are not denominated in the subsidiary’sa subsidiary's functional currency and that could have an impact on sales, costs and cash flows. These fluctuations in foreign currency exchange rates could affect Grainger’sGrainger's results of operations and impact reported net sales and net earnings.

Acquisitions,Grainger has implemented and is implementing several initiatives to increase sales and earnings. If Grainger is unable to successfully implement these initiatives, Grainger’s business, financial condition and results of operations could be materially adversely affected. In addition, acquisitions, partnerships, joint ventures and other business combination transactions, both foreign and domestic, involve various inherent risks, such as uncertainties in assessing value, strengths, weaknesses, liabilities and potential profitability. There is also risk relating to Grainger’sGrainger's ability to achieve identified operating and financial synergies anticipated to result from the transactions. Additionally, problems could arise from the integration of acquired businesses, including unanticipated changes in the business or industry or general economic or political conditions that affect the assumptions underlying the acquisition. Any one or more of these factors could cause Grainger to not realize the benefits anticipated or have a negative impact on the fair value of the reporting units. Accordingly, goodwill and intangible assets recorded as a result of acquisitions could, and have in the past, become impaired.

In order to compete and have continued growth, Grainger must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Grainger competes to hire employees and then must train them and develop their skills and competencies. Grainger’sGrainger's results of operations

One of the reasons why customers choose to do business with Grainger and why employees choose Grainger as a place of employment is the reputation that Grainger has built over many years. To be successful in the future, Grainger must continue to preserve, grow and leverage the value of Grainger’sGrainger's brand. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish Grainger’sGrainger's brand and lead to adverse effects on Grainger’sGrainger's business.

Grainger’sGrainger's business is subject to alegislative, legal, and regulatory risks and conditions specific to the countries in which it operates. In addition to Grainger's U.S. operations, which in 2019 generated approximately 72% of its consolidated net sales, Grainger operates its business principally through wholly-owned subsidiaries in Canada, China, Germany, Mexico, the Netherlands, and the United Kingdom, and its majority-owned subsidiary in Japan.

The wide array of laws, regulations and standards in everyeach domestic and foreign jurisdiction where itGrainger operates, includinginclude, but are not limited to: advertising and marketing regulations, anti-bribery and corruption laws, anti-competition regulations, data protection (including, payment card industry data security standards)because Grainger accepts credit cards, the Payment Card Industry Data Security Standard), data privacy (including in the U.S., the California Consumer Privacy Act, and in the European Union, which has traditionally imposed strict obligations under data privacy lawsthe General Data Protection Regulation 2016, with interpretations varying from state to state and regulations that vary from country to country) and cybersecurity requirements (including as to protection of information and incident responses), environmental protection laws, foreign exchange controls and cash repatriation restrictions, government business regulations applicable to Grainger as a government contractor selling to federal, state and local government entities, health and safety laws, import and export requirements, intellectual property laws, labor laws (including federal and state wage and hour laws), product compliance or safety laws, supplier regulations regarding the sources of supplies or products, tax laws (including as to U.S. taxes on foreign subsidiaries), unclaimed property laws and laws, regulations and standards applicable to other commercial matters. Moreover, Grainger is also subject to audits and inquiries in the normal course of business.

Failure to comply with any of these laws, regulations and standards could result in civil, criminal, monetary and non-monetary fines, penalties and/or, remediation costs as well as potential damage to the Company’sCompany's reputation. Changes in these laws, regulations and standards, or in their interpretation, could increase the cost of doing business, including, among other factors, as a result of increased investments in technology and the development of new operational processes. Furthermore, while Grainger has implemented policies and procedures designed to facilitate compliance with these laws, regulations and standards, there can be no assurance that employees, contractors, suppliers, vendors, or agentsother third parties will not violate such laws, regulations and standards or Grainger’sGrainger's policies. Any such failure to comply or violation could individually or in the aggregate materially adversely affect Grainger’sGrainger's financial condition, results of operations and cash flows.

Grainger is, and from time to time may become, party to a number of legal proceedings or governmental investigations for alleged violations of laws, rules or regulations. Grainger also may be subject to disputes and proceedings incidental to Grainger’sits business, involving alleged damagesincluding product-related claims for personal injury or injuries arising out ofillness, death, or environmental or property damage, including the use of Grainger’sproceedings discussed in Part I, Item 3. Legal Proceedings. Grainger also may be requested or required to recall products and services or violations of these laws, regulations or standards.take other actions. The defense of these proceedings may require significant expenses and divert management’smanagement's time and attention, and Grainger may be required to pay damages that could individually or in the aggregate materially adversely affect its financial condition, results of operations and cash flows. The Company’s

reputation could also be adversely affected by any resulting negative publicity. In addition, any insurance or indemnification rights that Grainger may have with respect to such matters may be insufficient or unavailable to protect the Company against potential loss exposures.

Grainger’sGrainger's future results could be adversely affected by changes in the effective tax rate as a result of changes in Grainger’sGrainger's overall profitability and changes in the mix of earnings in countries with differing statutory tax rates, changes in tax legislation, the results of the examination of previously filed tax returns and continuing assessment of the Company’sCompany's tax exposures.

Item 1B: Unresolved Staff Comments

The tables below reconcile reported Selling, general and Canadian businesses.

For the full year 2017 to 2018 comparative discussion, see Item 7: Management’s Discussion and Latin America.Analysis of Financial Condition and Results of Operations - Results of Operations in Grainger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

The following comments at the reportable segment and other business unit level include external and intersegment net sales and operating earnings. See Note 1614 to the Consolidated Financial Statements.

partially offset by foreign exchange headwinds from the euro and MonotaRO. The 19% increase for the year consisted of the following contributors:pound sterling.

Grainger believes that its current level of cash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to meet its liquidity needs. Grainger expects to continue to invest in its strong working capital position,business and return excess cash to shareholders through cash dividends and share repurchases, which it plans to fund through total available liquidity and cash flows generated from operationsoperations. Grainger also maintains access to capital markets and borrowing capacitymay issue debt or equity securities from time to continue, allowing it to fund its operations, including growth initiatives, capital expenditures, acquisitions and repurchasetime, which may provide an additional source of shares, as well as to pay cash dividends.liquidity.

Internally generated funds are the primary source of working capital and funds used in business expansion, supplemented by debt. In addition, funds are expended to support growth initiatives as well as for business and systems development and other infrastructure improvements.including capital expenditures. Grainger's working capital is not impacted by significant seasonality trends throughout the year.

In each of the past threetwo years, a portion of operatingthe Company's net cash flows has been used for additions to property, buildings, equipment and capitalized software (presented in Intangibles - net on the Consolidated Balance Sheet) as summarized in the following table (in thousandsmillions of dollars):

The financial statements and supplementary data are included on pages 3932 to 80.63. See the Index to Financial Statements and Supplementary Data on page 38.31.

Item 9: Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure

None.

Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act Rule 13a-15.of 1934, as amended (Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger's disclosure controls and procedures were effective as of the end of the period covered by this report.

Management's report on Grainger's internal control over financial reporting is included on page 3932 of this Report under the heading Management's Annual Report on Internal Control Over Financial Reporting.

There have been no changes in Grainger's internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Grainger's internal control over financial reporting.

None.