UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 20172020
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


W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)

Illinois36-1150280
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
100 Grainger Parkway,Lake Forest, IllinoisIllinois60045-5201
(Address of principal executive offices)(Zip Code)
(847)847  535-1000
(Registrant’s telephone number including area code)
Not Applicable
(Former name or former address, and former fiscal year; if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common StockGWWNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]☒  No [  ]☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]☒  No [  ]☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]  Accelerated filer [  ]Filer ☒  Accelerated Filer ☐   Non-accelerated filer [  ]Filer ☐   Smaller reporting company [  ]Reporting Company ☐
Emerging growth company [  ]Growth Company ☐


1

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]☐




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]☐  No [X]☒
 
There were 56,983,18853,668,050 shares of the Company’s Common Stock, par value $0.50, outstanding as of September 30, 2017.



2020.
2

TABLE OF CONTENTS
Page No.
PART IFINANCIAL INFORMATION
Item 1.1:Financial Statements (Unaudited).
Condensed Consolidated Statements of Earnings 

    for the Three and Nine Months Ended September 30, 20172020 and 20162019
4
Condensed Consolidated Statements of Comprehensive
Earnings for the Three and Nine Months Ended September 30, 20172020 and 20162019
5
Condensed Consolidated Balance Sheets

    as of September 30, 20172020 and December 31, 20162019
6
Condensed Consolidated Statements of Cash Flows

    for the Nine Months Ended September 30, 20172020 and 20162019
87
Condensed Consolidated Statements of Shareholders' Equity  for the Three and Nine Months Ended September 30, 2020 and 2019
8
Notes to Condensed Consolidated Financial Statements
910
Item 2.2:Management's Discussion and Analysis of Financial

    Condition and Results of Operations.Operations
1921
Item 3.3:Quantitative and Qualitative Disclosures About Market Risk.Risk
2934
Item 4.4:Controls and Procedures.Procedures
2934
PART IIOTHER INFORMATION
29
Item 1.1:Legal Proceedings.Proceedings
2935
Item 2.1A:Risk Factors
35
Item 2:Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
3036
Item 6.6:Exhibits.Exhibits
3036
Signatures
3137
EXHIBITS




3

PART I – FINANCIAL INFORMATION


Item 1.1:  Financial Statements.Statements


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousandsmillions of dollars and shares, except for share and per share amounts)
(Unaudited)
Three Months Ended Nine Months EndedThree Months EndedNine Months Ended
September 30, September 30, September 30,September 30,
2017 2016 2017 2016 2020201920202019
Net sales$2,635,999
 $2,596,288
 $7,792,397
 $7,666,494
Net sales$3,018 $2,947 $8,856 $8,639 
Cost of merchandise sold1,618,819
 1,556,536
 4,716,069
 4,541,629
Cost of goods soldCost of goods sold1,944 1,848 5,645 5,324 
Gross profit1,017,180
 1,039,752
 3,076,328
 3,124,865
Gross profit1,074 1,099 3,211 3,315 
Warehousing, marketing and administrative expenses736,010
 717,165
 2,267,605
 2,179,596
Selling, general and administrative expensesSelling, general and administrative expenses694 761 2,467 2,234 
Operating earnings281,170
 322,587
 808,723
 945,269
Operating earnings380 338 744 1,081 
Other income (expense): 
  
    
Interest income707
 147
 1,365
 474
Interest expense(21,765) (18,024) (58,649) (48,556)
Loss from equity method investment(10,635) (10,333) (25,130) (22,147)
Other non-operating income (expense)521
 (1,192) 1,558
 (1,291)
Total other expense(31,172) (29,402) (80,856) (71,520)
Other (income) expense:Other (income) expense:  
Interest expense, netInterest expense, net23 20 72 60 
Other, netOther, net(5)(4)(16)(18)
Total other expense, netTotal other expense, net18 16 56 42 
Earnings before income taxes249,998
 293,185
 727,867
 873,749
Earnings before income taxes362 322 688 1,039 
Income taxes79,182
 99,776
 267,239
 309,251
Income tax provisionIncome tax provision106 78 118 261 
Net earnings170,816
 193,409
 460,628
 564,498
Net earnings256 244 570 778 
Less: Net earnings attributable to noncontrolling interest8,810
 7,536
 25,957
 19,236
Less: Net earnings attributable to noncontrolling interest16 11 43 32 
Net earnings attributable to W.W. Grainger, Inc.$162,006
 $185,873
 $434,671
 $545,262
Net earnings attributable to W.W. Grainger, Inc.$240 $233 $527 $746 
Earnings per share: 
  
    Earnings per share:  
Basic$2.80
 $3.07
 $7.43
 $8.88
Basic$4.43 $4.27 $9.74 $13.46 
Diluted$2.79
 $3.05
 $7.39
 $8.82
Diluted$4.41 $4.25 $9.70 $13.40 
Weighted average number of shares outstanding: 
  
  
  
Weighted average number of shares outstanding:    
Basic57,316,532
 60,016,550
 58,010,222
 60,854,548
Basic53.6 54.1 53.6 55.0 
Diluted57,521,348
 60,416,151
 58,329,925
 61,268,119
Diluted53.9 54.4 53.8 55.2 
Cash dividends paid per share$1.28
 $1.22
 $3.78
 $3.61
Cash dividends paid per share$1.53 $1.44 $4.41 $4.24 
 
The accompanying notes are an integral part of these financial statements.

4


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousandsmillions of dollars)
(Unaudited)
 Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
Net earnings$256 $244 $570 $778 
Other comprehensive earnings (losses):    
Foreign currency translation adjustments, net of reclassification24 (17)30 6 
Postretirement benefit plan reclassification, net of tax benefit of $1, $1, $3, and $3, respectively(2)(2)(8)(7)
Other0 0 4 0 
Total other comprehensive earnings (losses)22 (19)26 (1)
Comprehensive earnings, net of tax278 225 596 777 
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings16 11 43 32 
Foreign currency translation adjustments5 (1)6 2 
Total comprehensive earnings (losses) attributable to noncontrolling interest21 10 49 34 
Comprehensive earnings attributable to W.W. Grainger, Inc.$257 $215 $547 $743 

 Three Months EndedNine Months Ended
 September 30,September 30,
 2017 20162017 2016
Net earnings$170,816
 $193,409
$460,628
 $564,498
Other comprehensive earnings: 
  
 
  
Foreign currency translation adjustments, net of reclassification (see Note 5)24,563
 (12,866)100,409
 31,709
Postretirement benefit plan re-measurement, net of tax expense $29,172 (see Note 7)46,543
 —
46,543
 —
Postretirement benefit plan reclassification, net of tax benefit of $962, $631, and $2,720, $1,893, respectively(1,540) (1,008)(4,338) (3,026)
  Other1
 188
(11) 844
Comprehensive earnings, net of tax240,383
 179,723
603,231
 594,025
Less: Comprehensive earnings attributable to noncontrolling interest      
Net earnings8,810
 7,536
25,957
 19,236
Foreign currency translation adjustments(8) 2,188
4,338
 16,621
Comprehensive earnings attributable to W.W. Grainger, Inc.$231,581
 $169,999
$572,936
 $558,168


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

5


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousandsmillions of dollars, except for share and per share amounts)
 (Unaudited)  
ASSETSSeptember 30, 2017 December 31, 2016
CURRENT ASSETS   
Cash and cash equivalents$284,575
 $274,146
Accounts receivable (less allowances for doubtful 
  
accounts of $31,583 and $26,690, respectively)1,373,323
 1,223,096
Inventories – net1,391,993
 1,406,470
Prepaid expenses and other assets84,481
 81,766
Prepaid income taxes40,688
 34,751
Total current assets3,175,060
 3,020,229
PROPERTY, BUILDINGS AND EQUIPMENT3,441,802
 3,411,502
Less: Accumulated depreciation and amortization2,045,896
 1,990,611
Property, buildings and equipment – net1,395,906
 1,420,891
DEFERRED INCOME TAXES56,054
 64,775
GOODWILL543,248
 527,150
INTANGIBLES - NET582,274
 586,126
OTHER ASSETS72,518
 75,136
TOTAL ASSETS$5,825,060
 $5,694,307



W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for share and per share amounts)
As of
ASSETSASSETS      (Unaudited) September 30, 2020December 31, 2019
CURRENT ASSETSCURRENT ASSETS  
Cash and cash equivalentsCash and cash equivalents$859 $360 
Accounts receivable (less allowances for credit losses of $26 and $21, respectively)Accounts receivable (less allowances for credit losses of $26 and $21, respectively)1,485 1,425 
Inventories - netInventories - net1,780 1,655 
Prepaid expenses and other current assetsPrepaid expenses and other current assets120 104 
Prepaid income taxesPrepaid income taxes29 11 
Total current assetsTotal current assets4,273 3,555 
PROPERTY, BUILDINGS AND EQUIPMENT - NETPROPERTY, BUILDINGS AND EQUIPMENT - NET1,394 1,400 
DEFERRED INCOME TAXESDEFERRED INCOME TAXES11 11 
GOODWILLGOODWILL369 429 
INTANGIBLES - NETINTANGIBLES - NET224 304 
OTHER ASSETSOTHER ASSETS312 306 
TOTAL ASSETSTOTAL ASSETS$6,583 $6,005 
(Unaudited)  
LIABILITIES AND SHAREHOLDERS' EQUITYSeptember 30, 2017 December 31, 2016LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES   CURRENT LIABILITIES  
Short-term debt$11,348
 $386,140
Short-term debt$0 $55 
Current maturities of long-term debt41,836
 19,966
Current maturities of long-term debt12 246 
Trade accounts payable713,453
 650,092
Trade accounts payable836 719 
Accrued compensation and benefits192,513
 212,525
Accrued compensation and benefits201 228 
Accrued contributions to employees’ profit sharing plans65,988
 54,948
Accrued contributions to employees' profit sharing plansAccrued contributions to employees' profit sharing plans48 85 
Accrued expenses333,311
 290,207
Accrued expenses324 318 
Income taxes payable34,074
 15,059
Income taxes payable20 27 
Total current liabilities1,392,523
 1,628,937
Total current liabilities1,441 1,678 
LONG-TERM DEBT (less current maturities)2,270,001
 1,840,946
LONG-TERM DEBT (less current maturities)2,388 1,914 
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES135,149
 126,101
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES112 106 
EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES126,302
 192,555
OTHER NON-CURRENT LIABILITIESOTHER NON-CURRENT LIABILITIES267 247 
SHAREHOLDERS' EQUITY 
  
SHAREHOLDERS' EQUITY  
Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued or outstanding—
 —
Common Stock – $0.50 par value – 300,000,000 shares authorized; 109,659,219 shares issued54,830
 54,830
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; NaN issued nor outstandingCumulative preferred stock – $5 par value – 12,000,000 shares authorized; NaN issued nor outstanding0 0 
Common Stock – $0.50 par value –300,000,000 shares authorized; issued 109,659,219 sharesCommon Stock – $0.50 par value –300,000,000 shares authorized; issued 109,659,219 shares55 55 
Additional contributed capital1,040,384
 1,030,256
Additional contributed capital1,214 1,182 
Retained earnings7,327,140
 7,113,559
Retained earnings8,694 8,405 
Accumulated other comprehensive losses(134,029) (272,294)
Treasury stock, at cost – 52,676,031 and 50,854,905 shares, respectively(6,520,828) (6,128,416)
Accumulated other comprehensive earnings (losses)Accumulated other comprehensive earnings (losses)(134)(154)
Treasury stock, at cost - 55,991,169 and 55,971,691 shares, respectivelyTreasury stock, at cost - 55,991,169 and 55,971,691 shares, respectively(7,698)(7,633)
Total W.W. Grainger, Inc. shareholders’ equity1,767,497
 1,797,935
Total W.W. Grainger, Inc. shareholders’ equity2,131 1,855 
Noncontrolling interest133,588
 107,833
Noncontrolling interest244 205 
Total shareholders' equity1,901,085
 1,905,768
Total shareholders' equity2,375 2,060 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$5,825,060
 $5,694,307
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$6,583 $6,005 
  
The accompanying notes are an integral part of these financial statements.

6


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousandsmillions of dollars)
(Unaudited)
Nine Months EndedNine Months Ended
September 30, September 30,
2017 2016 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:   CASH FLOWS FROM OPERATING ACTIVITIES:  
Net earnings$460,628
 $564,498
Net earnings$570 $778 
Provision for losses on accounts receivable15,187
 14,753
Provision for credit lossesProvision for credit losses18 7 
Deferred income taxes and tax uncertainties(15,261) 24,259
Deferred income taxes and tax uncertainties9 19 
Depreciation and amortization194,338
 177,395
Depreciation and amortization137 171 
Net losses (gains) from sales of assets and divestitures11,296
 (16,928)
Net losses (gains) from sales of assets and business divestituresNet losses (gains) from sales of assets and business divestitures104 (5)
Impairment of goodwill, intangibles and long-lived assetsImpairment of goodwill, intangibles and long-lived assets177 0 
Stock-based compensation27,152
 27,545
Stock-based compensation36 32 
Losses from equity method investment25,130
 22,147
Change in operating assets and liabilities – net of business
acquisitions and divestitures:
 
  
SubtotalSubtotal481 224 
Change in operating assets and liabilities:Change in operating assets and liabilities:  
Accounts receivable(145,631) (123,922)Accounts receivable(145)(119)
Inventories34,851
 41,938
Inventories(222)18 
Prepaid expenses and other assets(4,206) 3,478
Prepaid expenses and other assets(29)(15)
Trade accounts payable56,717
 36,594
Trade accounts payable145 50 
Other current liabilities29,643
 (68,370)
Current income taxes payable18,015
 (9,714)
Accrued employment-related benefits cost4,306
 5,591
Other – net8,713
 (10,340)
Accrued liabilitiesAccrued liabilities(13)(137)
Income taxes - netIncome taxes - net(19)(16)
Other non-current liabilitiesOther non-current liabilities19 (13)
SubtotalSubtotal(264)(232)
Net cash provided by operating activities720,878
 688,924
Net cash provided by operating activities787 770 
CASH FLOWS FROM INVESTING ACTIVITIES: 
  
CASH FLOWS FROM INVESTING ACTIVITIES:  
Additions to property, buildings and equipment(191,183) (213,622)
Proceeds from sales of assets and divestitures110,421
 48,089
Equity method investment(22,430) (19,299)
Other – net3,554
 (564)
Additions to property, buildings, equipment and intangiblesAdditions to property, buildings, equipment and intangibles(152)(163)
Proceeds from sales of assets and business divestituresProceeds from sales of assets and business divestitures22 16 
OtherOther(2)2 
Net cash used in investing activities(99,638) (185,396)Net cash used in investing activities(132)(145)
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net (decrease) increase in commercial paper(369,748) 39,887
Borrowings under lines of credit33,931
 26,681
Borrowings under lines of credit12 22 
Payments against lines of credit(39,705) (32,515)Payments against lines of credit(65)(18)
Proceeds from issuance of long-term debt424,020
 516,058
Proceeds from long-term debtProceeds from long-term debt1,583 0 
Payments of long-term debt(15,812) (257,109)Payments of long-term debt(1,361)(48)
Proceeds from stock options exercised27,255
 29,553
Proceeds from stock options exercised47 19 
Payments for employee taxes withheld from stock awards(17,546) (18,541)Payments for employee taxes withheld from stock awards(16)(10)
Excess tax benefits from stock-based compensation—
 11,873
Purchase of treasury stock(435,983) (613,198)
Purchases of treasury stockPurchases of treasury stock(101)(600)
Cash dividends paid(225,504) (221,131)Cash dividends paid(246)(242)
Other - netOther - net0 2 
Net cash used in financing activities(619,092) (518,442)Net cash used in financing activities(147)(875)
Exchange rate effect on cash and cash equivalents8,281
 10,759
Exchange rate effect on cash and cash equivalents(9)(2)
NET CHANGE IN CASH AND CASH EQUIVALENTS10,429
 (4,155)NET CHANGE IN CASH AND CASH EQUIVALENTS499 (252)
Cash and cash equivalents at beginning of year274,146
 290,136
Cash and cash equivalents at beginning of year360 538 
Cash and cash equivalents at end of period$284,575
 $285,981
Cash and cash equivalents at end of period$859 $286 
 
The accompanying notes are an integral part of these financial statements.

7


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)
Common StockAdditional Contributed CapitalRetained EarningsAccumulated Other Comprehensive Earnings (Losses)Treasury StockNoncontrolling
Interest		Total
Balance at January 1, 2019$55 $1,134 $7,869 $(171)$(6,966)$172 $2,093 
Stock-based compensation— 3 — — 3 — 6 
Purchases of treasury stock— — — — (135)— (135)
Net earnings— — 253 — — 9 262 
Other comprehensive earnings (losses)— — — 3 — (2)1 
Capital contribution— — — — — 2 2 
Cash dividends paid ($1.36 per share)— — (77)— — — (77)
Balance at March 31, 2019$55 $1,137 $8,045 $(168)$(7,098)$181 $2,152 
Stock-based compensation— 15 — — 9 — 24 
Purchases of treasury stock— — — — (265)— (265)
Net earnings— — 260 — — 12 272 
Other comprehensive earnings (losses)— — — 12 — 5 17 
Cash dividends paid ($1.44 per share)— — (79)— — (7)(86)
Balance at June 30, 2019$55 $1,152 $8,226 $(156)$(7,354)$191 $2,114 
Stock-based compensation— 9 — — 3 — 12 
Purchases of treasury stock— — — — (200)— (200)
Net earnings— — 233 — — 11 244 
Other comprehensive earnings (losses)— — — (18)— (1)(19)
Cash dividends paid ($1.44 per share)— — (79)— — — (79)
Balance at September 30, 2019$55 $1,161 $8,380 $(174)$(7,551)$201 $2,072 


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








8

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)
Common StockAdditional Contributed CapitalRetained EarningsAccumulated Other Comprehensive Earnings (Losses)Treasury StockNoncontrolling
Interest		Total
Balance at January 1, 2020$55 $1,182 $8,405 $(154)$(7,633)$205 $2,060 
Stock-based compensation— 10 — — 13 — 23 
Purchases of treasury stock— — — — (100)— (100)
Net earnings— — 173 — — 12 185 
Other comprehensive earnings (losses)— — — (63)— 3 (60)
Cash dividends paid ($1.44 per share)— — (78)— — — (78)
Balance at March 31, 2020$55 $1,192 $8,500 $(217)$(7,720)$220 $2,030 
Stock-based compensation— 6 — — 11 — 17 
Purchases of treasury stock— — — — — (1)(1)
Net earnings— — 114 — — 15 129 
Other comprehensive earnings (losses)— — — 66 — (2)64 
Cash dividends paid ($1.44 per share)— — (78)— — (9)(87)
Balance at June 30, 2020$55 $1,198 $8,536 $(151)$(7,709)$223 $2,152 
Stock-based compensation— 16 — — 11 — 27 
Net earnings— — 240 — — 16 256 
Other comprehensive earnings (losses)— — — 17 — 5 22 
Cash dividends paid ($1.53 per share)— — (82)— — — (82)
Balance at September 30, 2020$55 $1,214 $8,694 $(134)$(7,698)$244 $2,375 


The accompanying notes are an integral part of these financial statements.
9
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.    BACKGROUND AND BASIS OF PRESENTATION
 
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies, and other related products and services.  W.W. Grainger, Inc.’sservices with operations are primarily in the United States (U.S.)North America, Japan and Canada, with a presence in Europe, Asia and Latin America.Europe. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.
 
Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested the Fabory business in Europe (Fabory) on June 30, 2020 and the China business (China) on August 21, 2020. Accordingly, the Company's condensed consolidated statements of earnings, comprehensive earnings and cash flows and related notes include Fabory and China results through the respective dates of divestiture. The proceeds from these divestitures will be used to fund general corporate needs. During the second and third quarters of 2020, Grainger recognized a net loss of approximately $109 million and gain of $5 million (presented within Selling, general and administrative expenses (SG&A)) as a result of the Fabory and China divestitures, respectively, which included net accumulated foreign currency translation losses of $45 million, that were reclassified from Accumulated other comprehensive earnings (losses) (AOCE) to SG&A.

The Company's Condensed Consolidated Financial Statements of the Company(Financial Statements) and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and relatedassociated notes for the year ended December 31, 20162019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 20, 2020 (the 2019 Form 10-K).
The Condensed Consolidated Balance Sheet as of December 31, 20162019 has been derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by U. S.accounting principles generally accepted accounting principlesin the United States of America (U.S. GAAP)) for complete financial statements.
 
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.in this report.


Certain amounts in
2.    UPDATE TO SIGNIFICANT ACCOUNTING POLICIES

Other than the Condensed Consolidated Statements of Cash Flows, as previously reported, have been reclassified to conformimplemented accounting policies related to the 2017 presentation. In March 2016,allowances for credit losses per the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Stock Based Compensation: Improvements2016-13 (see Notes 3 and 5 to Employee Share-Based Payment Accounting, which became effective January 1, 2017.As a result, the Company reclassified $19 million of employee taxes paid from cash flows from operating activitiesFinancial Statements), change in depreciation estimates (see Note 6 to cash flows from financing activitiesthe Financial Statements) and accounting for derivative instruments (see Note 9 to the Financial Statements), there have been no material changes to the Company’s significant accounting policies disclosed in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016.2019 Form 10-K, Part II, Item 8.


2.3.    NEW ACCOUNTING STANDARDS


In JanuaryJune 2016, the FASB issued ASU 2016-01, 2016-13, Financial Instruments: Recognition andInstruments - Credit Losses: Measurement of Credit Losses on Financial AssetsInstruments as modified by subsequently issued ASUs 2018-19, 2019-04, 2019-05, 2019-11 and 2020-02. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The Company adopted this ASU effective January 1, 2020. While the adoption of this ASU did not have a material impact on the Company's Financial Liabilities. This changeStatements, it required changes to the financial instrument model primarily affectsCompany’s process of estimating expected credit losses on trade receivables. See Note 5 to the Financial Statements for further information on the Company’s allowance for credit losses.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for equity investments, financial liabilities underincome taxes by eliminating certain exceptions for intraperiod tax allocation principles, the fair value optionsmethodology for calculating income tax rates in an interim period, and the presentation and disclosure requirementsrecognition of deferred taxes for financial instruments.outside basis differences in an investment, among other updates. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2017. Certain provisions for the new guidance may be adopted early.2020. The Company is currently evaluating the potential impact of this ASU.ASU on the Financial Statements.

In February 2016,January 2020, the FASB issued ASU 2016-02, Leases. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions
10
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
between Topic 321, Topic 323 and Topic 815. This ASU improves transparencysimplifies the understanding and comparability related toapplication of the accountingcodification topics by eliminating inconsistencies and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months.providing clarifications. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted.2020. The Company is currently evaluating the potential impact of this ASU.ASU on the Financial Statements.


In August 2016,March 2020, the FASB issued ASU 2016-15, Statement2020-04, Reference Rate Reform (Topic 848): Facilitation of Cash Flows - Classificationthe Effects of Certain Cash ReceiptsReference Rate Reform on Financial Reporting. This update provides optional expedients and Cash Payments. This ASU addresses eight specific cash flow issues withexceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the objective of reducing the existing diversity in practice. The effective datepotential impact of this ASU on the Financial Statements.

4.    REVENUE

Company revenue is for fiscal yearsprimarily comprised of MRO product sales and interim periods beginning after December 15, 2017. This ASUrelated activities, such as freight and services. Total service revenue is not expected to have a material impact onand accounted for approximately 1% of the Company's Consolidated Financial Statements.revenue for the three and nine months ended September 30, 2020 and 2019, respectively.


In January 2017,Grainger serves a large number of customers in diverse industries, which are subject to different economic and market specific factors. The Company's presentation of revenue by industry most reasonably depicts how the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definitionnature, amount, timing and uncertainty of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.Company revenue and cash flows are affected by economic and market specific factors. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2017. This ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. This ASU is not expected to have a material impact onfollowing table presents the Company's Consolidated Financial Statements.percentage of revenue by reportable segment and by major customer industry:

Three Months Ended September 30,
20202019
U.S.CanadaTotal Company (2)U.S.CanadaTotal Company (2)
Government23 %8 %17 %20 %5 %15 %
Heavy Manufacturing15 %19 %15 %18 %20 %17 %
Light Manufacturing12 %6 %10 %12 %6 %10 %
Transportation5 %8 %4 %6 %8 %5 %
Healthcare9 %0 %7 %7 %0 %5 %
Commercial8 %11 %6 %10 %9 %8 %
Retail/Wholesale10 %3 %8 %9 %4 %7 %
Contractors9 %11 %7 %9 %11 %8 %
Natural Resources2 %29 %3 %3 %33 %4 %
Other (1)7 %5 %23 %6 %4 %21 %
Total100 %100 %100 %100 %100 %100 %
Percent of Total Company Revenue73 %4 %100 %73 %4 %100 %
9
11
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Nine Months Ended September 30,
20202019
U.S.CanadaTotal Company (2)U.S.CanadaTotal Company (2)
Government22 %9 %16 %19 %6 %14 %
Heavy Manufacturing16 %18 %15 %19 %20 %17 %
Light Manufacturing13 %6 %10 %13 %6 %11 %
Transportation5 %9 %5 %5 %8 %5 %
Healthcare10 %0 %7 %7 %0 %5 %
Commercial8 %10 %7 %10 %9 %8 %
Retail/Wholesale10 %4 %8 %8 %4 %7 %
Contractors9 %10 %7 %10 %11 %8 %
Natural Resources2 %29 %3 %3 %32 %4 %
Other (1)5 %5 %22 %6 %4 %21 %
Total100 %100 %100 %100 %100 %100 %
Percent of Total Company Revenue73 %4 %100 %73 %5 %100 %
In January 2017,
(1) Other category primarily includes revenue from individual customers not aligned to a major industry segment, including small businesses and consumers, and intersegment net sales.
(2) Total Company includes other businesses, which include the FASB issued ASU No. 2017-04, Intangibles-GoodwillCompany's endless assortment businesses and Other (Topic 350) Simplifying the Testsmaller international high-touch businesses and accounts for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurementapproximately 23% of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. Under the updates in ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargerevenue for the amount by whichthree and nine months ended September 30, 2020 and 23% and 22% of revenue for the carrying amount exceedsthree and nine months ended September 30, 2019, respectively.

Total accrued sales returns were approximately $30 million and $25 million as of September 30, 2020 and December 31, 2019, respectively and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $55 million and $57 million as of September 30, 2020 and December 31, 2019 and are reported as part of Accrued expenses. The Company had no material unsatisfied performance obligations, contract assets or liabilities as of September 30, 2020 and December 31, 2019.

5.    ACCOUNTS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

The Company���s accounts receivable arise primarily from sales on credit to customers. The Company establishes an allowance for credit losses to present the reporting unit’s fair value; however, the loss recognized should not exceed the totalnet amount of goodwill allocated to that reporting unit. The amendments of this ASU are effective for annual or any interim goodwill impairment tests beginning after December 15, 2019, and early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company early adopted this ASU during the third quarter of 2017 and there was no impact to the financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this ASU are effective for public entities for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied retrospectively for the presentation of the net periodic postretirement cost components in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company is evaluating the impact of this ASU.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods beginning after December 15, 2017 and early adoption is permitted. The ASU should be applied prospectively on and after the effective date. The Company is evaluating the impact of this ASU.

REVENUE RECOGNITION STANDARDS

In July 2015, the FASB announced a one-year delay in the effective date of ASU 2014-09, Revenue from Contracts with Customers. This ASU will be effective for interim and fiscal years beginning after December 15, 2017. The standard will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expectsaccounts receivable expected to be entitled in exchangecollected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for those goodsfactors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or services. The ASU also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withindividual customers.


In March 2016, the FASB issued ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU reduces the potential for diversity in practice arising from inconsistent application of principal versus agent guidance as well as reduce the cost and complexity during the transition and on an ongoing basis.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. This ASU clarifies the identification of performance obligations and the licensing implementation guidelines, while retaining the related principles of those areas.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This ASU includes technical corrections and improvements to Topic 606 and other topics amended by Update 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gain and Losses from the Derecognition of Nonfinancial Assets. This ASU clarifies the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and adds guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of ASU 2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers.



10
12
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.    PROPERTY, BUILDINGS AND EQUIPMENT

Property, buildings and equipment consisted of the following (in millions of dollars):
As of
September 30, 2020December 31, 2019
Land$331 $332 
Building, structures and improvements1,321 1,329 
Furniture, fixtures, machinery and equipment1,875 1,832 
Property, buildings and equipment$3,527 $3,493 
Less: Accumulated depreciation and amortization and impairment2,133 2,093 
Property, buildings and equipment, net$1,394 $1,400 

Grainger has historically depreciated certain property, building, and equipment using both the declining balance and sum-of-the-years’ digits methods over estimated useful lives of approximately thirty years. In accordance with its policy, the Company periodically reviews information impacting the pattern of consumption for its capital assets and useful lives to ensure that estimates of depreciation expenses are appropriate. The Company’s investment in its supply chain infrastructure and technology triggered the review of these patterns of consumption. Pursuant to the review and effective datesJanuary 1, 2020, the method of ASU 2016-08, ASU 2016-10, ASU 2016-20estimating depreciation for these assets was changed to the straight-line method and ASU 2017-05 are consistent with ASU 2014-09.useful lives to forty and fifty years. The Company has elected notdetermined that these changes in depreciation method and useful lives were considered a change in accounting estimate effected by a change in accounting principle, and as such have been accounted for on a prospective basis. Grainger believes the changes to early adoptthe straight-line method and useful lives are appropriate estimations of the Company's current patterns of economic consumption of its capital assets and appropriately match current revenues and costs over updated estimates of the assets' useful lives. The effect of these ASUs. The standard permitschanges resulted in a decrease of $7 million and $22 million to depreciation expense for the usethree and nine months ended September 30, 2020, respectively.

During the first quarter of either2020, the full retrospective orCompany recorded approximately $44 million of impairment charges in SG&A in connection with the modified retrospective adoption method.impairment of Fabory’s long-lived assets, including property, buildings and equipment for approximately $24 million and right-to-use (ROU) assets for approximately $20 million (presented in Other assets) due to the factors discussed in Note 7 to the Financial Statements. The Company is planning to electdivested Fabory during the modified retrospective method and recognize the cumulative effectsecond quarter of initially applying the new standard as an adjustment2020 (see Note 1 to the opening balance of equity as of January 1, 2018.Financial Statements).

These ASUs require expanded qualitative and quantitative disclosures of revenue and cash flows emerging from contracts with customers. The Company has evaluated the provisions of the new standard and assessed its impact on financial statement disclosures, information systems, business processes and internal controls. The standard is not expected to have a material impact on the Company's Consolidated Financial Statements.

3.    DIVIDEND
On October 25, 2017, the Company’s Board of Directors declared a quarterly dividend of $1.28 per share, payable December 1, 2017, to shareholders of record on November 13, 2017.

4.7.    GOODWILL AND OTHER INTANGIBLE ASSETS


Grainger had approximately $1.1 billionCanada Business
Given the slowdowns in global oil markets and the economic repercussions from the COVID-19 pandemic in Canada, qualitative tests performed in the second quarter of goodwill and intangible assets as of September 30, 2017 and December 31, 2016, or 19% and 20% of total assets, respectively. Grainger tests reporting units’ goodwill and intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. Accordingly, Grainger periodically performs qualitative assessments of significant events and circumstances such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors to determine2020 indicated the existence of impairment indicators and assess if it is more likely than not thatfor the fair value of the reporting unit or indefinite-lived intangible assets is less than its carrying value and if aCanada business. As such, quantitative impairment test is necessary. In the quantitative test, Grainger compares the carrying value of the reporting unit or an indefinite-lived intangible asset with its fair value. Any excess of the carrying value over fair value is recorded as an impairment charge.

The fair value of reporting units is calculated primarily using the discounted cash flow (DCF) method and utilizing value indicators from a market approachtests were performed to evaluate the reasonablenesswhether any impairment of the resulting fair values. The DCF method incorporates various assumptions including the amount and timing of future expected cash flows, including revenues, gross margins, operating expenses, capital expenditures and working capital based on operational budgets, long-range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period and reflects management’s best estimates for perpetual growth for the reporting units. Estimates of market-participant risk-adjusted weighted average cost of capital are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.

Grainger’s indefinite-lived intangibles are primarily trade names. The fair value of trade names is calculated primarily using the relief from royalty method, which estimates the expected royalty savings attributable to the ownership of the trade name asset. The key assumptions when valuing a trade name are the revenue base, the royalty rate and the discount rate.

During the quarter ended September 30, 2017, the Company performed qualitative assessments of its reporting units’ goodwill and intangible assets. The operating performance of two of its reporting units has been below expectations and resulted in lowered short-term forecasts. Accordingly, the Company concluded that further evaluation was required.necessary. Based on the resultsresult of the quantitative tests, the Company concluded that there was no0 impairment of goodwillgoodwill. The enterprise value of the Canada business at June 30, 2020 exceeded its carrying value by more than 25%, which is a 10 percentage point decrease since the date of the last quantitative test, December 31, 2019. Per the impairment test and respective sensitivity analysis, it was noted that an increase of approximately 3% in the pre-tax discount rate or indefinitely-lived intangible assets asapproximately 1.5% decrease in revenue long-term growth rate projections would cause the Canada business enterprise value to fall to the level of its carrying value and thus trigger an impairment.

During the quarter ended September 30, 2017.2020, the Company performed qualitative goodwill and intangible asset assessments. The fair valuesCompany did not identify any significant events or changes in circumstances that indicated the existence of the reporting units exceeded their carrying values by approximately 31 percentimpairment indicators, as such quantitative assessments were not required. The Company will continue to monitor business plans for the Canada reporting unit and 15 percentbusiness throughout 2020 to determine the need for the reporting unit included in Other Businesses.impairment evaluations. Changes in assumptions regarding future business performance as well asand macroeconomic conditions, particularly the ability to execute on growth initiativesCOVID-19 pandemic and productivity improvementsglobal oil prices, may havenegatively impact demand generation over a significant impact onlong period, future cash flows. Likewise, unfavorable economic environmentflows and changes in market conditions or other factors mayenterprise valuations, which could result in future impairments of the goodwill and intangible assets.

Additionally, the Company performed an impairment test on the intangible assets subject to amortization for the two reporting units. The first step of the impairment test is to compare the undiscounted cash flows of the reporting units to their carrying values. If the results of the test determine that the undiscounted cash flows of the reporting units are less than their carrying values, then an impairment risk exists and further testing is required. An impairment chargeCanada business.


11
13
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Fabory Business
During the first quarter of 2020, the Company recorded impairment charges totaling $58 million attributable to all of Fabory's goodwill and tradenames. Concurrently, consistent with the circumstances leading to the goodwill and tradenames' impairment, the Company performed a recoverability and fair value test of Fabory’s long-lived assets, including property, buildings and equipment and customer lists and relationships and concluded to impair those assets. The impairments of these assets were driven primarily by revenue slowdown in key Fabory markets, gross profit pressures and a flat-to-declining operating margin against a backdrop of industrial sector declines across Europe, which was not required asfurther amplified by the long-term implications of September 30, 2017 using this test.the COVID-19 pandemic, among other factors. The Company divested Fabory during the second quarter of 2020 (see Note 1 to the Financial Statements).

Company
The balances and changes in the carrying amount of Goodwill (net of cumulative goodwill impairments) by segment are as follows (in thousandsmillions of dollars):
  United States Canada Other Businesses Total
Balance at December 31, 2016 $202,020
 $122,140
 $202,990
 $527,150
Divestiture (3,316) —
 —
 (3,316)
Impairment (7,169) —
 —
 (7,169)
Translation —
 9,433
 17,150
 26,583
Balance at September 30, 2017 $191,535
 $131,573
 $220,140
 $543,248
Cumulative goodwill impairment charges, December 31, 2016 $17,038
 $32,265
 $70,299
 $119,602
Impairment charges 7,169
 —
 —
 7,169
Cumulative goodwill impairment charges, September 30, 2017 $24,207
 $32,265
 $70,299
 $126,771

United StatesCanadaOther businessesTotal
Balance at January 1, 2019$192 $120 $112 $424 
Translation0 6 (1)5 
Balance at December 31, 2019192 126 111 429 
Impairment0 0 (58)(58)
Translation0 (3)1 (2)
Balance at September 30, 2020$192 $123 $54 $369 
The balancescumulative goodwill impairments as of September 30, 2020, were $137 million and changesconsisted of $32 million in the Canada business and $105 million in Other businesses. There were 0 impairments to goodwill for the three and nine months ended September 30, 2020 related to current businesses in Grainger's portfolio.
The balances in Intangible assets, - net are as follows (in thousandsmillions of dollars)dollars):
September 30, 2020December 31, 2019
Weighted average lifeGross carrying amountAccumulated amortizationNet carrying amountGross carrying amountAccumulated amortizationNet carrying amount
Customer lists and relationships11.8 years$222 $168 $54 $401 $301 $100 
Trademarks, trade names and other14.2 years35 21 14 36 20 16 
Non-amortized trade names and otherIndefinite27 0 27 100 38 62 
Capitalized software4.2 years665 536 129 626 500 126 
Total intangible assets6.7 years$949 $725 $224 $1,163 $859 $304 


8.    SHORT-TERM AND LONG-TERM DEBT
   September 30, 2017 December 31, 2016
 Weighted average life Gross carrying amount Accumulated amortization Net carrying amount Gross carrying amount Accumulated amortization Net carrying amount
Customer relationships13.8 years $428,041
 $190,395
 $237,646
 $424,405
 $175,112
 $249,293
Trade names and other13.5 years 25,960
 15,611
 $10,349
 25,353
 14,262
 11,091
Non-amortized trade names and other—
 136,333
 —
 $136,333
 128,282
 —
 128,282
Capitalized software4.1 years 626,652
 428,706
 $197,946
 571,978
 374,518
 197,460
Total8.2 years $1,216,986
 $634,712
 $582,274
 $1,150,018
 $563,892
 $586,126

ForDuring the nine months ended September 30, 20172020, the Company entered into several financing transactions:

•In February 2020, the Company issued $500 million of unsecured 1.85% Senior Notes (1.85% Notes) and used the proceeds to repay the British pound term loan, Euro term loan and the twelve months ended December 31, 2016, amortization expense recognized on intangible assets was $67 million and $82 million, respectively, and is included in Warehousing, marketing and administrative expenses on the Consolidated statement of earnings.

5.     RESTRUCTURING RESERVES

The Company continues to evaluate performance and take restructuring actions such as the consolidation of the contact center network in the U.S., branch closures in the U.S. and Canada, the disposition of under performing assets in the U.S. and Canada and the wind-down of operations in Colombia which is part of the Other businesses. The purpose of these initiatives is to reduce costs in the U.S.Canadian dollar revolving credit facility, and to streamline and focus on profitability in Canada and Other Businesses.fund general working capital needs.











12
14
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The restructuring costs, net of gains, for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands of dollars):
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
 Cost of merchandise sold Warehousing, marketing and administrative expenses Total Cost of merchandise sold Warehousing, marketing and administrative expenses Total
  Involuntary employee termination costs Other charges (gains)   Involuntary employee termination costs Other charges (gains) 
United States$(100) $10,917
 $(2,873) $7,944
 $—
 $3,511
 $1,926
 $5,437
Canada—
 1,882
 3,055
 4,937
 548
 3,119
 700
 4,367
Other Businesses581
 73
 (864) (210) —
 —
 —
 —
Total$481
 $12,872
 $(682) $12,671
 $548
 $6,630
 $2,626
 $9,804

 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
 Cost of merchandise sold Warehousing, marketing and administrative expenses Total Cost of merchandise sold Warehousing, marketing and administrative expenses Total
  Involuntary employee termination costs Other charges (gains)   Involuntary employee termination costs Other charges (gains) 
United States$(100) $19,459
 $(17,634) $1,725
 $3,100
 $18,342
 $(8,949) $12,493
Canada2,574
 9,842
 14,093
 26,509
 11,452
 13,194
 700
 25,346
Other Businesses581
 3,595
 37,124
 41,300
 —
 —
 —
 —
Unallocated—
 —
   —
 —
 —
 8,947
 8,947
Total$3,055
 $32,896
 $33,583
 $69,534
 $14,552
 $31,536
 $698
 $46,786

Other charges (gains) primarily includes gains from the sales of branches partially offset by asset write-downs in the U. S., assets write-downs in Canada and $16 million of accumulated foreign currency translations losses from the wind-down of Colombia reclassified from Accumulated other comprehensive losses to earnings in Other Businesses.
The following summarizes the restructuring reserve activity (in thousands of dollars):
 Current assets write-downs Fixed assets write - downs and disposals Involuntary employee termination costs Lease termination costs Other costs Total
Reserves as of December 30, 2016$167
 $—
 $24,541
 $3,125
 $511
 $28,344
Restructuring costs, net of (gains)9,775
 (5,987) 32,896
 2,512
 30,338
 69,534
Cash (paid) received(865) 18,793
 (24,370) (2,575) (5,620) (14,637)
Translation(82) 3
 843
 (11) (196) 557
Other—
 (12,809) —
 —
 (17,230) (30,039)
Reserves as of September 30, 2017$8,995
 $—
 $33,910
 $3,051
 $7,803
 $53,759
           



13
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The amounts incurred net of gains in•In connection with the restructuring activities are1.85% Notes, in February 2020, the Company entered into derivative instrument agreements to manage its risks associated with interest rates on the 1.85% Notes and foreign currency fluctuations related to the financing of international operations. See Note 9 to the Financial Statements for further discussion of these derivative instruments and the Company's hedge accounting policies.

•In February 2020, the Company entered into a five-year unsecured credit agreement pursuant to which the Company may obtain loans in various currencies on a revolving basis in an aggregate amount not exceeding the U.S. Dollar equivalent of $1.25 billion ($1.25 billion credit facility), which may be increased from time to time up to $1.875 billion at the request of the Company, subject to approval from lenders and other customary conditions. The $1.25 billion credit facility replaced the Company's former $750 million unsecured revolving credit facility, originated in October 2017, which was scheduled to mature in October 2022.

•In March 2020, the Company received approximately $1 billion after drawing down on its $1.25 billion credit facility as follows (in thousandsa proactive measure to increase its cash position and preserve financial flexibility in light of dollars):uncertainty resulting from the COVID-19 pandemic. During the third quarter of 2020, the Company repaid its $1 billion draw down on its $1.25 billion credit facility.

 Cumulative amount incurred to date Additional amount expected
United States$61,814
 $—
Canada26,509
 11,270
Other Businesses41,300
 —
Total$129,623
 $11,270
•In August 2020, MonotaRO Co. LTD., the endless assortment business in Japan, entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center network.


6.    SHORT-TERM AND LONG-TERM DEBT
The following summarizes information concerningThere was 0 short-term debt (in thousands of dollars):
 September 30, 2017 December 31, 2016
Outstanding lines of credit$11,348
 $16,392
Outstanding commercial paper—
 369,748
 $11,348
 $386,140

Asas of September 30, 2017 and2020. Short-term debt as of December 31, 2016, there was $0 million and $370 million, respectively,2019 consisted of commercial paper outstanding. A portionoutstanding lines of the proceeds from the May 2017 bond issuance (see below) was used to redeem outstanding commercial paper.credit of $55 million.


Long-term debt, including current maturities and debt issuance costs and discounts, net, consisted of the following (in thousandsmillions of dollars):
As of September 30, 2020As of December 31, 2019
Carrying ValueFair Value (3)Carrying ValueFair Value (3)
4.60% senior notes due 2045$1,000 $1,287 $1,000 $1,194 
3.75% senior notes due 2046400 456 400 416 
4.20% senior notes due 2047400 489 400 449 
1.85% senior notes due 2025 (1)500 524 0 0 
British pound term loan0 0 170 170 
Euro term loan0 0 123 123 
Japanese Yen term loan (2)85 85 0 0 
Canadian dollar revolving credit facility0 0 46 46 
Other40 40 42 42 
Subtotal (4)2,425 2,881 2,181 2,440 
Less: Current maturities(12)(12)(246)(246)
Debt issuance costs and discounts, net of amortization(25)(25)(21)(21)
Long-term debt (less current maturities)$2,388 $2,844 $1,914 $2,173 
 September 30, 2017 December 31, 2016
4.60% senior notes due 2045$1,000,000
 $1,000,000
3.75% senior notes due 2046400,000
 400,000
4.20% senior notes due 2047400,000
 —
British pound term loan and revolving credit facility192,903
 187,506
Euro term loan and revolving credit facility141,743
 120,900
Canadian dollar revolving credit facility116,307
 100,521
Other84,860
 71,109
 2,335,813
 1,880,036
Less current maturities(41,836) (19,966)
Debt issuance costs and discounts(23,976) (19,124)
 $2,270,001
 $1,840,946


On May 22, 2017, the Company issued $400 million of unsecured 4.20% Senior(1) The 1.85% Notes (4.20% Notes) that mature on May 15, 2047. The 4.20% Notesin February 2025 and they require no principal payments until the maturity date and interest is payable semi-annually on MayFebruary 15 and NovemberAugust 15, beginning on November 15, 2017.in August 2020. Prior to November 15, 2046,January 2025, the Company may redeem the 4.20%1.85% Notes in whole at any time or graduallyin part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 4.20%1.85% Notes plus 2010 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 4.20%1.85% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. Costs and discounts of approximately $5.8 million associated withOn or after January 15, 2025, the issuance ofCompany may redeem the 4.20%
1.85% Notes representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and will be amortizedin whole at any time or in part from time to interest expense over the term of the 4.20% Notes.

The estimated fair values of the Company’s 4.20% Notes, 3.75% Senior Notes due 2046 (3.75% Notes) and 4.60% Senior Notes due 2045 (4.60% Notes) were based on available external pricing data and current market rates for

14
15
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs and discounts of approximately $5 million associated with the issuance of the 1.85% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and are being amortized to interest expense, net over the term of the 1.85% Notes.


(2) The Japanese Yen term loan matures in 2024, payable over 4 equal semi-annual principal installments in 2023 and 2024, and bears average interest at 0.05%.

(3) The estimated fair value of the Company’s senior notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy. The fair value of the 4.20% Notes was approximately $407 million as of September 30, 2017. The fair value of the 3.75% Notes was approximately $380 million and $371 million as of September 30, 2017 and December 31, 2016, respectively. The fair value of the 4.60% Notes was approximately $1.1 billion as of September 30, 2017 and December 31, 2016, respectively. The carrying value of other long-term debt approximates fair value due to their variable interest rates.


On October 6, 2017, the Company replaced its $900 million unsecured revolving line of credit with a new five-year $750 million unsecured revolving line of credit, with the option to extend the line to up to $1.125 billion subject to customary conditions, to be used for general corporate purposes.(4) The terms of the new line of creditCompany's long-term debt instruments include affirmative and negative covenants that are usual and customary for transactions of this type (including the Company's guarantee of subsidiary borrower obligation)companies with similar credit ratings and do not contain any financial performance covenants. The primary purposeCompany was in compliance with all debt covenants as of this credit facility is to provide support to the Company's commercial paper program. There were no borrowings outstanding under the previous line of credit, which was scheduled to mature on August 22, 2018. The preceding summary of the credit facility does not purport to be complete and is qualified in its entirety by the reference to the full text of the credit facility, a copy of which has been filed as Exhibit 10.1 to the Company's Form 8-K, previously filed on October 10, 2017.September 30, 2020.


7.    EMPLOYEE BENEFITS - POSTRETIREMENT9.    DERIVATIVE INSTRUMENTS

The Company has a postretirement healthcare benefits planmaintains various agreements with bank counterparties that provides coveragepermit the Company to enter into "over-the-counter" derivative instrument agreements to manage its risk associated with interest rates and foreign currency fluctuations. In February 2020, the Company entered into certain derivative instrument agreements to manage its risk associated with interest rates on its 1.85% Notes and foreign currency fluctuations in connection with its foreign currency-denominated intercompany borrowings. The Company did not enter into these agreements for a majority of its U.S. employees (and their dependents) hired prior to January 1, 2013, should they elect to maintain such coverage upon retirement. Covered employees become eligibletrading or speculative purposes.

Accounting for participation when they qualify for retirement while working for the Company. Participationderivative instruments
The Company recognizes all derivative instruments as assets or liabilities in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.

During the third quarter of 2017, the Company implemented plan designCondensed Consolidated Balance Sheets at fair value. The accounting for changes effective January 1, 2018 for the post-65 age group. This plan change will move all post-65 Medicare eligible retirees to healthcare exchanges and provide them a subsidy to purchase insurance. The amount of the subsidy will be based on years of service. The plan obligation was re-measured as a result of this plan design change. At re-measurement, the Company decreased the discount rate from 4.00% at December 31, 2016 to 3.55% and updated various actuarial assumptions andin the fair value of plan assets.a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.

To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability or forecasted transaction, type of risk to be hedged, and how the effectiveness of the derivative is assessed prospectively and retrospectively. To assess effectiveness, the Company uses statistical methods and qualitative comparisons of critical terms. The plan re-measurementextent to which a derivative has been and is expected to continue to be, highly effective at offsetting changes in the fair value or cash flows of the hedged item is assessed and documented periodically. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

For those derivative instruments that are designated and qualify as hedging instruments, the Company classifies them as fair value hedges or cash flow hedges.

Fair value hedges
The Company uses fair value hedges primarily to hedge a portion of its fixed-rate long-term debt via interest rate swaps. Changes in the fair value of the interest rate swap, along with the gain or loss on the hedged item, is recorded in earnings under the same line item, interest expense, net. The notional amount of the Company’s outstanding fair value hedges as of August 31, 2017 resultedSeptember 30, 2020 was $500 million.

Cash flow hedges
The Company uses cash flow hedges primarily to hedge the exposure to variability in forecasted cash flows from foreign currency-denominated intercompany borrowings via cross-currency swaps. Gains or losses on the cross-currency swaps are reported as a decreasecomponent of AOCE and reclassified into earnings in the postretirement benefit obligation of $75.7 million and a corresponding unrecognized gain recorded in Other comprehensive earnings net of tax of $29.2 million.same period during which the hedged transaction affects earnings. The Company has elected to amortize thenotional amount of net unrecognized gains over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits.
The postretirement benefit obligation was $29.0 million and $101.5 million atCompany’s outstanding cash flow hedges as of September 30, 2017 and December 31, 2016, respectively. Net accumulated gains recognized in Accumulated other comprehensive losses were $67.5 million and $25.3 million at September 30, 2017 and December 31, 2016, respectively.2020 was approximately $34 million.
The net periodic (benefits) costs recorded in Warehousing, marketing and administrative expenses consisted of the following components (in thousands of dollars):
16
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Service cost$1,856
 $2,059
 $5,649
 $6,178
Interest cost2,026
 2,464
 6,323
 7,391
Expected return on assets(2,957) (2,528) (8,670) (7,584)
Amortization of unrecognized (gains) losses(609) 32
 (1,919) 96
Amortization of prior service credits(1,893) (1,672) (5,139) (5,016)
Net periodic (benefits) costs$(1,577) $355
 $(3,756) $1,065

The Company has established a Group Benefit Trust (Trust) to fund postretirement healthcare benefits plan obligations and process benefit payments. The funding of the Trust is an estimated amount which is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC. The Company did not make a contribution to the Trust during the nine months ended September 30, 2017.


15
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The effect of the Company's fair value and cash flow hedges on the Company's Condensed Consolidated Statement of Earnings for the nine months ended September 30, 2020 is as follows (in millions of dollars):
8.
Nine Months Ended September 30, 2020
Interest expense, netOther, net
Gain or (loss) recognized in earnings
Fair value hedge:
Hedged item$(22)$0 
Interest rate swap designated as hedging instrument$22 $0 
Cash flow hedge:
Hedged item$0 $0 
Cross-currency swap designated as hedging instrument$0 $0 

The effect of the Company’s fair value and cash flow hedges on earnings for the three months ended September 30, 2020 and AOCE for the three and nine months ended September 30, 2020 was not material.

The fair value and carrying amounts of outstanding derivative instruments in the Condensed Consolidated Balance Sheets as of September 30, 2020 was as follows (in millions of dollars):
Balance Sheet ClassificationFair Value and Carrying Amounts
Cross-currency swapOther noncurrent liabilities$0 
Interest rate swapOther assets$22 

The carrying amount of the liability hedged by the interest rate swap (long-term debt), including the cumulative amount of fair value hedging adjustments, as of September 30, 2020 amounted to $522 million.

The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 within the fair value hierarchy, and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. No adjustments were required during the current period to reflect the counterparty’s’ credit risk and/or the Company’s own nonperformance risk.

10.    INCOME TAXES

The reconciliations of income tax expense with federal income taxes at the statutory rate are as follows (in millions of dollars):
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Federal income tax$76 $67 $145 $218 
States income taxes, net of federal benefit12 9 23 28 
Foreign rate difference12 4 18 14 
Foreign subsidiaries tax impacts, non operating5 0 (71)0 
Change in valuation allowance4 2 8 5 
Other, net(3)(4)(5)(4)
Income tax expense$106 $78 $118 $261 
Effective tax rate29.3 %24.2 %17.3 %25.1 %
17
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The changes to the Company's effective tax rate for the nine months ended September 30, 2020 was primarily driven by tax losses in the Company's investment in Fabory per the impairment and internal reorganization of the Company's holdings of Fabory in the first quarter of 2020. The Company divested Fabory during the second quarter of 2020 (see Note 1 to the Financial Statements).

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on the Company's consolidated financial condition or results of operations as of and for the nine months ended September 30, 2020.

11.    SEGMENT INFORMATION

The Company has twoGrainger's 2 reportable segments:segments are the U.S. and Canada. The U.S. operating segment reflectsThese reportable segments reflect the results of the Company's U.S. businesses. The Canada operating segment reflects the results for Acklands – Grainger Inc. and its subsidiaries.high-touch businesses in those geographies. Other businesses include the endless assortment businesses, Zoro in the U.S,Tools, Inc. (Zoro) and MonotaRO in JapanCo., LTD (MonotaRO), and operations in Europe, Asia and Latin America. Othersmaller international high-touch businesses. These businesses individually do not meet the definitioncriteria of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of MRO supplies, as service revenues account for less thanapproximately 1% of total revenues for each operating segment.

Following is a summary of segment results (in thousandsmillions of dollars):

 Three Months Ended September 30, 2020
 U.S.CanadaTotal Reportable SegmentsOther businessesTotal
Total net sales$2,347 $116 $2,463 $687 $3,150 
Intersegment net sales(131)0 (131)(1)(132)
Net sales to external customers$2,216 $116 $2,332 $686 $3,018 
Segment operating earnings$354 $2 $356 $44 $400 
 Three Months Ended September 30, 2019
 U.S.CanadaTotal Reportable SegmentsOther businessesTotal
Total net sales$2,277 $129 $2,406 $673 $3,079 
Intersegment net sales(131)0 (131)(1)(132)
Net sales to external customers$2,146 $129 $2,275 $672 $2,947 
Segment operating earnings$343 $0 $343 $30 $373 

 Nine Months Ended September 30, 2020
 U.S.CanadaTotal Reportable SegmentsOther businessesTotal
Total net sales$6,823 $352 $7,175 $2,065 $9,240 
Intersegment net sales(382)0 (382)(2)(384)
Net sales to external customers$6,441 $352 6,793 $2,063 $8,856 
Segment operating earnings$1,012 $(4)$1,008 $(56)$952 
18
 Three Months Ended September 30, 2017
 United States Canada Other Businesses Total
Total net sales$2,015,968
 $188,216
 $536,927
 $2,741,111
Intersegment net sales(103,667) (13) (1,432) (105,112)
Net sales to external customers$1,912,301
 $188,203
 $535,495
 $2,635,999
Segment operating earnings (losses)$297,855
 $(14,972) $26,892
 $309,775
 Three Months Ended September 30, 2016
 United States Canada Other Businesses Total
Total net sales$2,028,235
 $179,281
 $481,929
 $2,689,445
Intersegment net sales(92,160) (23) (974) (93,157)
Net sales to external customers$1,936,075
 $179,258
 $480,955
 $2,596,288
Segment operating earnings (losses)$342,524
 $(15,118) $24,835
 $352,241

 Nine Months Ended September 30, 2017
 United States Canada Other Businesses Total
Total net sales$5,968,565
 $563,470
 $1,560,894
 $8,092,929
Intersegment net sales(297,247) (15) (3,270) (300,532)
Net sales to external customers$5,671,318
 $563,455
 $1,557,624
 $7,792,397
Segment operating earnings (losses)$922,614
 $(59,428) $44,177
 $907,363
 Nine Months Ended September 30, 2016
 United States Canada Other Businesses Total
Total net sales$5,973,044
 $552,470
 $1,401,429
 $7,926,943
Intersegment net sales(257,101) (109) (3,239) (260,449)
Net sales to external customers$5,715,943
 $552,361
 $1,398,190
 $7,666,494
Segment operating earnings (losses)$1,023,318
 $(55,207) $76,343
 $1,044,454

 United States Canada Other Businesses Total
Segment assets:       
September 30, 2017$2,316,683
 $298,553
 $589,564
 $3,204,800
December 31, 2016$2,275,009
 $286,035
 $494,067
 $3,055,111



16
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 Nine Months Ended September 30, 2019
 U.S.CanadaTotal Reportable SegmentsOther businessesTotal
Total net sales$6,648 $400 $7,048 $1,969 $9,017 
Intersegment net sales(376)0 (376)(2)(378)
Net sales to external customers$6,272 $400 $6,672 $1,967 $8,639 
Segment operating earnings$1,088 $(4)$1,084 $87 $1,171 

Following are reconciliations of segment information with the consolidated totals per the financial statementsFinancial Statements (in thousandsmillions of dollars):
 Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Operating earnings: 
Total operating earnings for reportable segments$356 $343 $1,008 $1,084 
Other businesses44 30 (56)87 
Unallocated expenses(20)(35)(208)(90)
Total consolidated operating earnings$380 $338 $744 $1,081 
As of
September 30, 2020December 31, 2019
Assets:
United States$3,044 $2,668 
Canada166 173 
Assets for reportable segments3,210 2,841 
Other current and noncurrent assets2,676 3,003 
Unallocated assets697 161 
Total consolidated assets$6,583 $6,005 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Operating earnings:   
Total operating earnings for operating segments$309,775
 $352,241
 $907,363
 $1,044,454
Unallocated expenses and eliminations(28,605) (29,654) (98,640) (99,185)
Total consolidated operating earnings$281,170
 $322,587
 $808,723
 $945,269
The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked.

Unallocated amounts include corporate-level support and administrative expenses, corporate-level assets consisting primarily of cash, property, buildings and equipment, intersegment eliminations and other adjustments. Unallocated expenses and assets are not included in any reportable segment.
 September 30, 2017 December 31, 2016
Assets: 
Total assets for operating segments$3,204,800
 $3,055,111
Other current and non-current assets2,455,538
 2,464,656
Unallocated assets164,722
 174,540
Total consolidated assets$5,825,060
 $5,694,307


Assets for reportable segments include net accounts receivable and first-in, first-out inventory, which are reported to the Company's Chief Operating Decision Maker. Other current and non-current assets include all other assets of the reportable segments.

Unallocated expenses and unallocated assets primarily relate to the Company headquarter's support services, which are not part of any business segment, as well as intercompany eliminations. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets include non-operating cash and cash equivalents, certain prepaid expenses and property, buildings and equipment-net.

Intersegment net sales for the U.S. segment increased by $12 million and $40 million for the three and nine months ended September 30, 2017, respectively, compared to the prior year, driven by increased sales from the U.S. business to Zoro. Zoro's primary source of inventory is the U.S. business' supply chain network.


17
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

9.    EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands of dollars, except for share and per share amounts):
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Net earnings attributable to W.W. Grainger, Inc. as reported$162,006
 $185,873
 $434,671
 $545,262
Distributed earnings available to participating securities(603) (547) (1,576) (1,749)
Undistributed earnings available to participating securities(806) (1,085) (1,966) (3,179)
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders160,597
 184,241
 431,129
 540,334
Undistributed earnings allocated to participating securities806
 1,085
 1,966
 3,179
Undistributed earnings reallocated to participating securities(803) (1,078) (1,956) (3,157)
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders$160,600
 $184,248
 $431,139
 $540,356
Denominator for basic earnings per share – weighted average shares57,316,532
 60,016,550
 58,010,222
 60,854,548
Effect of dilutive securities204,816
 399,601
 319,703
 413,571
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities57,521,348
 60,416,151
 58,329,925
 61,268,119
Earnings per share two-class method 
  
    
Basic$2.80
 $3.07
 $7.43
 $8.88
Diluted$2.79
 $3.05
 $7.39
 $8.82


10.12.    CONTINGENCIES AND LEGAL MATTERS


From time to time the Company is involved in various legal and administrative proceedings that are incidental to its
business, including claims related to product liability, safety or compliance, privacy and cybersecurity matters, general negligence, contract disputes, environmental issues, unclaimed property, wage and hour laws, intellectual property, advertising, consumer protection, pricing (including disaster or emergency declaration pricing statutes),
19
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
employment practices, regulatory compliance, anti-bribery and corruption or other matters and actions brought by employees, consumers, competitors, suppliers, orcustomers, governmental entities.entities and other third parties.

For example, as disclosed in the Company's 2019 Form 10-K, beginning in the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints seek recovery of compensatory and other damages and relief. On May 8, 2020, KMCO filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Texas for relief under Chapter 7 of Title 11 of the United States Bankruptcy Court in the case KMCO, LLC, No. 20-60028. As a result of the Chapter 7 proceedings, the claims against KMCO in the Harris County lawsuits are currently stayed. Grainger is investigating the claims, which are at an early stage, and intends to contest these matters vigorously.

Also, as a government contractor selling to federal, state and local governmental entities, the Company is alsomay be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration or to pricing compliance. ItWhile the Company is unable to predict the outcome of any of these matters, it is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial positioncondition or results of operations.



From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits. While the Company is unable to predict the outcome of these proceedings, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition or results of operations.



18
20
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Item 2.2: Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations


General

W.W. Grainger, Inc. (Grainger)(Grainger or the Company) is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) supplies, and other related products and services with operations primarily in the United States (U.S.)North America, Japan and Canada, with a presence in Europe, Asia and Latin America.Europe. More than 3.23.5 million businesses and institutionscustomers worldwide rely on Grainger for products such as safety, gloves, ladders, motors and janitorial supplies, along with services likeincluding inventory management and technical support. These customers represent a broad collection of industries including commercial, government, healthcare and manufacturing. They(see Note 4 in the Condensed Consolidated Financial Statements (Financial Statements)). Customers place orders online, on mobile devices, through sales representatives,digital channels, over the phone and at local branches. Approximately 5,000 suppliers provide Grainger with more thanapproximately 1.6 million products stocked in Grainger's distribution centers (DCs) and branches worldwide.


Business Environment
Given Grainger's large numbertwo reportable segments are the United States (U.S.) and Canada (Grainger Canada and its subsidiaries). These reportable segments reflect the results of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger's growth. Grainger’s salesCompany's high-touch businesses in those geographies. Other businesses include the endless assortment businesses, (Zoro in the U.S. and Canada tendMonotaRO in Japan), and smaller high-touch businesses in the United Kingdom (U.K.) and Mexico.

Business Divestiture

Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested the Fabory business in Europe (Fabory) on June 30, 2020 and the China business (China) on August 21, 2020. Accordingly, the Company’s operating results include Fabory and China results through the respective dates of divestiture. Grainger recognized a net loss of approximately $109 million and gain of $5 million (presented within Selling, general and administrative expenses (SG&A)) as a result of the Fabory and China divestitures, respectively.

Strategic Priorities Amidst the COVID-19 Pandemic

The Company’s strategic priorities for 2020 have not changed from those stated in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report for the year ended December 31, 2019 on Form 10-K (the 2019 Form 10-K), which are to positively correlate with Business Investment, Business Inventory, Exports"Keep the World Working" and Industrial Production. Inrelentlessly expand Grainger’s leadership position in the U.S., sales tendMRO space by being the go-to-partner for people who build and run safe, sustainable and productive operations. However, the respective business plans to positively correlate with Gross Domestic Product (GDP). In Canada, sales tendachieve these strategic priorities continue to positively correlate with oil prices. The table below provides these estimated indicators for 2017:be affected by the global outbreak of Coronavirus in 2019 (COVID-19 pandemic).
 United StatesCanada
 2017 Forecast (October)2017 Forecast (July)2017 Forecast (October)2017 Forecast (July)
Business Investment3.7%4.3%2.3%1.1%
Business Inventory1.0%0.6%—%—%
Exports3.1%2.7%2.2%1.2%
Industrial Production1.8%2.0%6.1%3.9%
GDP2.2%2.3%3.1%2.5%
Oil Prices —$50/barrel$49/barrel
Source: Global Insight (October & July 2017)    

In March 2020, the U.S., Business Investment and Exports are two major indicatorsWorld Health Organization characterized COVID-19 as a pandemic. The rapid spread of MRO spending. Per the Global Insight October 2017 forecast, Business Investment is forecast to continue to improveCOVID-19 pandemic has caused significant disruptions in 2017 compared to 2016 primarily through equipment-related spending. Export growth has improved, as exports have responded to improved economic growth among countries that the U.S. exports to.
Perand global markets, and economists expect the Global Insight October 2017 forecast, Canada economic growth, as measured by GDP, is forecast to grow to 3.1% in 2017. The 2017 forecast assumes that oil pricesimpact will continue to growbe significant. Grainger is an essential business and stabilizeits major facilities have been allowed to remain operational during the pandemic as customers have depended on Grainger's products and services to keep their businesses up and running. As the COVID-19 pandemic continues to impact global markets and the needs of customers, employees, suppliers and communities change, the Company’s efforts and business plans have evolved accordingly. Grainger is currently focused on remaining open and operational in order to serve customers and communities well through the pandemic, support the needs and safety of employees and ensure the Company continues to operate with a strong financial position.

Impact of the COVID-19 Pandemic to Grainger Businesses

The COVID-19 pandemic has impacted and is likely to continue impacting Grainger’s businesses and operations as well as the operations of its customers and suppliers.

On the customer front, business re-openings and related activity during the third quarter of 2020 varied based on geography and industry. For example, in the U.S. and endless assortment businesses, sales to government, healthcare and other essential businesses remained strong through the quarter but sales to non-essential and disrupted industries were depressed compared to 2016pre-COVID-19 pandemic levels. The Canada business and that business nonresidential investment (a component of Business Investment) will begin to increase. The latest forecast is for the Canadian dollar to strengthen against the U.S. dollar over the next two quarters.other international high-touch businesses have been severely impacted by pandemic-related slowdowns with each geography experiencing meaningful year-over-year declines.

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OutlookCONDITION AND RESULTS OF OPERATIONS
On October 17, 2017, Grainger narrowed its sales and earnings per share guidance for 2017. The Company now expects 2017 sales growth of 1.5 to 2.5 percent and earnings per share of $10.40 to $10.90.
The Company's previous 2017 guidance included sales growth of 1 to 4 percentmajor operational facilities and earnings per share of $10.00 to $11.30.

Matters Affecting Comparability
There were 63 sales daysinfrastructure (i.e., DCs, branches, e-commerce sites, and logistic partners) remained operational in the third quarter of 2017 compared2020 with limited disruptions, while adhering to strict safety and social-distancing protocols.

From an inventory management and supply chain perspective, the Company has experienced elevated levels of demand for pandemic-related products, while demand for non-pandemic products has declined. The Company did not experience any material disruptions on its supply.

To date, the Company has been able to absorb the pandemic impact with minimal workforce reductions or furloughs, which positions the Company for accelerated growth once post-pandemic recovery commences. Also, the Company has prioritized maintaining all facilities safe for customers and employees to work and interact.

With respect to the Company’s financial position, during the third quarter of 2020 the Company maintained a tight focus on liquidity and continued to take actions to preserve cash to confront pandemic-related uncertainties, including deferring certain capital projects and pausing share repurchases. During the third quarter of 2020, the Company repaid its revolver drawdown. As of September 30, 2020, the Company had approximately $2.1 billion in available liquidity, including $859 million in cash.

2020 Outlook in Consideration of the COVID-19 Pandemic

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and, due to numerous uncertainties, is currently unable to predict the continued impact that the COVID-19 pandemic will have on its business, financial position and operating results in future periods. While the Company is unable to accurately foresee these future impacts, it believes that its financial resources and liquidity levels, along with various contingency plans to protect employee and customer health, keep its operations running and reduce costs are sufficient to manage the impact anticipated from the COVID-19 pandemic.

Matters Affecting Comparability

There were 64 sales days in 2016.the three months ended September 30, 2020 and September 30, 2019. There were 192 sales days in the nine months ended September 30, 2020 and 191 sales days in the nine months ended September 30, 2019. Grainger completed two divestitures in the nine months ended September 30, 2020, which were immaterial individually and in the aggregate.


In addition, starting in March, the Company has experienced elevated levels of COVID-19 pandemic-related product sales (e.g., personal protective equipment (PPE) and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales have decreased. The incremental demand came primarily from customers in the front-lines of the pandemic, including government, healthcare and other essential businesses, while the demand from non-essential and disrupted industries has decreased over the same period due to business activity slowdown or temporary shutdowns. Conversely, the Company experienced adverse gross margin impacts from lower-margin COVID-19 pandemic-related product sales.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Three Months Ended September 30, 20172020

The following table is included as an aid to understand the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
Three Months Ended September 30,
Percent Increase/(Decrease)As a Percent of Net Sales
2020201920202019
Net sales$3,018 $2,947 2.4 %100.0 %100.0 %
Cost of goods sold1,944 1,848 5.2 %64.4 %62.7 %
Gross profit1,074 1,099 (2.2)%35.6 %37.3 %
Selling, general and administrative expenses694 761 (8.7)%23.0 %25.9 %
Operating earnings380 338 12.4 %12.6 %11.4 %
Other expense, net18 16 15.2 %0.6 %0.5 %
Income taxes106 78 36.2 %3.5 %2.6 %
Net earnings256 244 4.6 %8.5 %8.3 %
Noncontrolling interest16 11 37.1 %0.5 %0.4 %
Net earnings attributable to W.W. Grainger, Inc.$240 $233 3.0 %8.0 %7.9 %

Grainger’s net sales of $3,018 million for the third quarter of 2020 increased $71 million, or 2.4%, compared to the same period in 2019. The increase in net sales was primarily driven by volume increases on pandemic-related product sales, partially offset by year over year decreases in non-pandemic related product sales and decreases due to business divestitures. Also, sales in the Canada business and other international high-touch businesses were down compared to 2019 due to COVID-19 related business slowdowns. See Note 4 to the Financial Statements for information related to disaggregated revenue. See the Segment Analysis below for further details related to segment revenue.

Gross profit of $1,074 million for the third quarter of 2020 decreased $25 million, or 2%, compared to the same quarter in 2019. The gross profit margin of 35.6% during the third quarter of 2020 decreased 1.7 percentage points when compared to the same quarter in 2019. This decrease was primarily driven by lower margins from COVID-19 pandemic-related products sales in the U.S. and business unit mix impact from higher growth in the lower margin endless assortment businesses. See Segment Analysis below for further details related to segment gross profit.

SG&A of $694 million for the third quarter of 2020 decreased $67 million, or 9%, compared to the third quarter of 2019. To better explain the changes to SG&A for the quarter, certain non-recurring or non-core items have been excluded.

The following tables reconcile reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S. generally accepted accounting principles (GAAP) to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist investors in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies' non-GAAP measures having the same or similar names. All tables below are in millions of dollars, except percentages:
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CONDITION AND RESULTS OF OPERATIONS
Three Months Ended
September 30, 2020
20202019Fav/(Unfav)%
SG&A reported$694 $761 9 %
Restructuring, net of branch gains (Canada)(1)1 
Grainger China divestiture (Unallocated expense)(5)— 
          Total restructuring, net and business divestiture(6)1 
SG&A adjusted$700 $760 8 %
20202019Fav/(Unfav) %
Operating earnings reported$380 $338 12 %
Total restructuring, net, and business divestiture(6)1 
Operating earnings adjusted$374 $339 10 %
20202019Fav/(Unfav)%
Net earnings attributable to W.W. Grainger, Inc. reported$240 $233 3 %
     Total restructuring, net, business divestiture and tax (1)6 — 
Net earnings attributable to W.W. Grainger, Inc. adjusted$246 $233 5 %
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.

Excluding restructuring, net and business divestiture in both periods as noted in the table above, SG&A decreased $60 million, or 8%. This decrease is primarily due to cost control actions across the high-touch businesses and leverage gains in the endless assortment businesses.

Operating earnings of $380 million for the third quarter of 2020 increased $42 million, or 12%, compared to the third quarter of 2019. Excluding restructuring, net and business divestiture in both periods as noted in the table above, operating earnings increased $35 million, or 10%, driven primarily by lower SG&A expenses partially offset by lower gross profit dollars.

Other expense, net was $18 million for the third quarter of 2020, an increase of $2 million, or 15%, compared to the third quarter of 2019. The increase was primarily related to interest expense on the $500 million in senior notes issued in February 2020.

Income taxes of $106 million for the third quarter of 2020 increased $28 million, or 36%, compared to $78 million in the third quarter of 2019. The increase in 2020 was primarily driven by higher taxable operating earnings for the quarter. Grainger's effective tax rates were 29.3% and 24.2% for the three months ended September 30, 2020 and 2019, respectively.

Net earnings attributable to W.W. Grainger, Inc. of $240 million for the third quarter of 2020 increased $7 million, or 3%, compared to the third quarter of 2019. Excluding restructuring, net, business divestiture and tax from both periods per the table above, net earnings increased $13 million or 5%.


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Segment Analysis

The following results of the U.S. and Canada reportable segments and other businesses include external and intersegment net sales and operating earnings. See Note 11 to the Financial Statements.

United States
Net sales were $2,347 million for the third quarter of 2020, an increase of $70 million, or 3.1% compared to the same period in 2019 and consisted of the following:
Percent Increase
Volume (including product mix)2.8%
Price and customer mix0.3
Total3.1%
Overall, revenue increases for the U.S. business were primarily driven by volume. During the quarter, the U.S. business experienced strong sales volume of pandemic-related products from government, healthcare and other essential businesses; however, sales to non-essential and disrupted industries were down compared to 2019. See Note 4 to the Financial Statements for information related to disaggregated revenue. From a product perspective, the U.S. business experienced strong demand for COVID-19 pandemic-related products; however, this elevated demand was partially offset by lower demand of non-pandemic products.

Gross profit margin for the third quarter of 2020 decreased 1.6 percentage points compared to the same period in 2019. The decrease was primarily the result of product and customer mix. The U.S. business experienced margin declines from higher sales of lower margin COVID-19 pandemic-related products. The U.S. business expects these mix-related decreases to continue during the COVID-19 pandemic and expects increased levels of PPE, safety and cleaning product sales to large healthcare, government and critical manufacturing customers.

SG&A of $501 million for the third quarter of 2020 decreased $22 million, or 4%, when compared to the third quarter of 2019. The decrease in SG&A was primarily driven by decreases in travel and employee related expenses as well as operating efficiencies. These decreases more than offset temporary pandemic pay increases for hourly branch and DC employees, as well as incremental operating costs to ensure the safety and health of employees and maintain safe facilities for customer and employee interactions.

Operating earnings of $354 million for the third quarter of 2020 increased $11 million, or 3%, from $343 million for the third quarter of 2019. This increase was driven by lower SG&A expenses partially offset by lower gross profit dollars.

Canada
Net sales were $116 million for the third quarter of 2020, a decrease of $13 million, or 9.9%, compared to the same period in 2019 and consisted of the following:
Percent Decrease
Volume (including product mix)(8.1)%
Price and customer mix(1.0)
Foreign exchange(0.8)
Total(9.9)%

For the third quarter of 2020, overall sales volume was down 8.1 percentage points compared to the same period in 2019 primarily due to market share declines. During the third quarter of 2020, global oil prices remained flat as a result of market forces, including the impact of the COVID-19 pandemic. More than one fifth of sales for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively affected by the COVID-19 pandemic.

The gross profit margin decreased 0.5 percentage point in the third quarter of 2020 versus the third quarter of 2019. The decrease was driven by COVID-19 pandemic-related mix impacts partially offset by lower freight costs.

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CONDITION AND RESULTS OF OPERATIONS
SG&A decreased 16% in the third quarter of 2020 compared to the third quarter of 2019 primarily due to reduced advertising and employee related expenses.

Operating earnings were $2 million for the third quarter of 2020 compared to break even in the third quarter of 2019.

Other businesses
Net sales were $687 million for the third quarter of 2020, an increase of $14 million, or 1.9%, when compared to the same period in 2019.

Percent Increase/(Decrease)
Price/volume12.3%
Foreign exchange0.2
Business divestitures(10.6)
Total1.9%

The increase in net sales was driven by continued strong customer acquisition in the endless assortment businesses partially offset by revenue declines in the international high-touch businesses as a result of pandemic-related slowdowns and the net impact of the Fabory and China business divestitures.

Gross profit margin decreased 1.8 percentage points in the third quarter of 2020 versus the third quarter of 2019, driven partially by higher freight costs and business unit mix.

Operating earnings of $44 million for the third quarter of 2020 increased $14 million compared to $30 million for the third quarter of 2019. This increase is primarily due to higher earnings in the endless assortment businesses resulting from strong revenue growth and SG&A leverage.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Nine Months Ended September 30, 2020
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):

Nine Months Ended September 30,
Percent Increase/(Decrease)As a Percent of Net Sales
2020201920202019
Net sales$8,856 $8,639 2.5 %100.0 %100.0 %
Cost of goods sold5,645 5,324 6.0 %63.7 %61.6 %
Gross profit3,211 3,315 (3.1)%36.3 %38.4 %
Selling, general and administrative expenses2,467 2,234 10.4 %27.9 %25.9 %
Operating earnings744 1,081 (31.2)%8.4 %12.5 %
Other expense, net56 42 34.7 %0.6 %0.5 %
Income taxes118 261 (54.5)%1.3 %3.0 %
Net earnings570 778 (26.9)%6.4 %9.0 %
Noncontrolling interest43 32 30.8 %0.5 %0.4 %
Net earnings attributable to W.W. Grainger, Inc.$527 $746 (29.4)%6.0 %8.6 %

Grainger’s net sales of $8,856 million for the nine months ended September 30, 2020 increased $217 million, or 2.5% compared to the same period in 2019. On a daily basis, net sales increased 2%. The increase in net sales was primarily driven by volume, partially offset by price and mix and the impact of business divestitures. The Company estimates that COVID-19 pandemic-related product sales represented approximately half of the sales growth, primarily in the U.S. and endless assortment businesses, which during the second and third quarters of 2020 experienced strong pandemic-related volume from government, healthcare and other essential businesses. See Note 4 to the Financial Statements for information related to disaggregated revenue. This pandemic-related elevated volume was partially offset by declining demand from non-essential and disrupted industries along with declining non-pandemic product sales across most industries. Also, sales in the Canada business and other international high-touch businesses are down compared to 2019 due to COVID-19 business slowdowns. See Segment Analysis below for further details related to segment revenue.

Gross profit of $3,211 million for the nine months ended September 30, 2020 decreased $104 million, or 3%, compared to the same period in 2019. The gross profit margin of 36.3% decreased 2.1 percentage points when compared to the same period in 2019. This decrease was primarily driven by lower margins from COVID-19 pandemic-related products sales in the U.S. and business unit mix impact from higher growth in the lower margin endless assortment businesses. See Segment Analysis below for further details related to segment gross profit.

SG&A of $2,467 million for the nine months ended September 30, 2020 increased $233 million, or 10.4%, compared to the same period in 2019. To better explain the changes to SG&A, certain non-recurring or non-core items have been excluded.

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CONDITION AND RESULTS OF OPERATIONS

 Three Months Ended September 30,
    Percent Increase/(Decrease) As a Percent of Net Sales
 2017 (A) 2016 (A) 2017 2016
Net sales$2,636
 $2,596
2 % 100.0% 100.0%
Cost of merchandise sold1,619
 1,557
4 % 61.4
 60.0
Gross profit1,017
 1,040
(2)% 38.6
 40.0
Operating expenses736
 717
3 % 27.9
 27.6
Operating earnings281
 323
(13)% 10.7
 12.4
Other expense31
 29
6 % 1.2
 1.1
Income taxes79
 100
(21)% 3.0
 3.8
Noncontrolling interest9
 8
17 % 0.3
 0.3
Net earnings attributable to W.W. Grainger, Inc.$162
 $186
(13)% 6.1% 7.2%

(A) May not sum due to rounding

Grainger’s net sales of $2,636 million for the third quarter of 2017 increased 2% compared with sales of $2,596 million for the comparable 2016 quarter. On a daily basis, sales increased 3% and consisted of the following:
Percent Increase/(Decrease)
Volume8
Hurricane impact1
Seasonal sales(1)
Divestiture(1)
Price(4)
Total3%

The increase in net sales was primarily driven by the single channel online businesses in the U.S. and Japan, as well as volume increases in the U.S. business as a result of the pricing actions. Refer to the Segment Analysistable below for further details.

The U.S. business pricing actions were primarily implemented in the first and third quarters of 2017. The actions included adjusting list price and introducing new lower web prices on the entire business assortment. These actions are expected to enable faster growth through share gains with existing customers and acquisition of new customers. Herein referred to as pricing actions.

In the three months ended September 30, 2017, eCommerce sales for Grainger were $1,387 million, an increase of 12% over the prior year. Total eCommerce sales represented 53% and 48% of total sales for the three months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.com and other electronic purchasing platforms in the U.S. business and the single channel online businesses. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 54% of total sales for the three months ended September 30, 2017 and 2016, respectively.

Gross profit of $1,017 million for the third quarter of 2017 decreased $23 million or 2% compared to the same quarter in 2016. The gross profit margin of 38.6% during the third quarter of 2017 decreased 1.4 percentage points when compared to the same period in 2016, driven primarily by the pricing actions in the U.S. business.

Operating expenses of $736 million for the third quarter of 2017 increased 3% from $717 million for the comparable 2016 quarter, driven primarily by increased employee related costs.


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Operating earnings for the third quarter of 2017 were $281 million, a decrease of 13% compared to the third quarter of 2016. The decrease inreconciles reported SG&A, operating earnings was driven primarily by lower gross profit from the pricing actions in the U.S. business and increased employee related costs.

Netnet earnings attributable to W.W. Grainger, Inc. for the third quarter of 2017 decreased 13% to $162 million from $186 million in the third quarter of 2016, primarily related to lower gross profit and higher operating expenses.

Diluted earnings per share of $2.79 in the third quarter of 2017 were down 9% versus the $3.05 for the third quarter of 2016 due to lower earnings, partially offset by lower average shares outstanding.

The table below reconciles reported operating earnings determined in accordance with U.S. generally accepted accounting principles (GAAP)GAAP to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance as they provide a non-GAAP measure. Management believes adjusted operating earnings is an important indicatorbetter baseline for analyzing the ongoing performance of operations because it excludesits businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measurethese measures with other companies' non-GAAP financial measures having the same or similar names. All tables below are in millions of dollars, except percentages:
Nine Months Ended September 30,
Fav/(Unfav)%
20202019
SG&A reported$2,467 $2,234 (10)%
Restructuring, net of branch gains (U.S.)6 — 
Restructuring, net of branch gains (Canada)1 (1)
Impairment charges (Other businesses)177 — 
Fabory divestiture (Other businesses)(7)— 
Fabory divestiture (Unallocated expense)116 — 
Grainger China divestiture (Unallocated expense)(5)— 
Total restructuring, net, impairment charges and business divestitures288 (1)
SG&A adjusted$2,179 $2,235 3 %
 Three Months Ended 
 September 30, 
 2017 2016%
Operating earnings reported$281,170
 $322,587
(13)%
Restructuring (U.S.)13,151
 6,600
 
Branch gains (U.S.)(5,207) (1,163) 
Other charges (U.S.)(3,023) —
 
Restructuring (Canada)4,937
 4,367
 
Restructuring (Other Businesses)(210) —
 
Subtotal9,648
 9,804
 
Operating earnings adjusted$290,818
 $332,391
(13)%
20202019Fav/(Unfav)%
Operating earnings reported$744 $1,081 (31)%
Total restructuring, net, impairment charges and business divestitures288 — 
Operating earnings adjusted$1,032 $1,081 (5)%

20202019Fav/(Unfav) %
Net earnings attributable to W.W. Grainger, Inc. reported$527 $746 (29)%
Total restructuring, net, impairment charges, business divestitures and tax (1)153 — 
Net earnings attributable to W.W. Grainger, Inc. adjusted$680 $746 (9)%
For(1) The tax impact of adjustments is calculated based on the threeincome tax rate in each applicable jurisdiction, subject to deductibility limitations and the Company's ability to realize the associated tax benefits.

As noted in the table above, a large portion of the Company's SG&A increase for the nine months ended September 30, 20172020 is due to the $177 million impairment of Fabory in the first quarter of 2020 and 2016 the non-GAAP measure presentedloss on the divestiture of Fabory of approximately $109 million during the second quarter of 2020. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, did not have a material impact on the financial results.SG&A decreased $56 million primarily due to reduced travel, depreciation and employee related expenses across all businesses.


Segment Analysis
Grainger’s two reportable segments are the U.S. and Canada. The U.S. operating segment reflects the results of Grainger’s U.S. businesses. The Canada operating segment reflects the results for Acklands – Grainger Inc. and its subsidiaries. Other businesses include the single channel online businesses (Zoro in the U.S. and MonotaRO in Japan) and operations in Europe, Asia and Latin America.

The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 8 to the Condensed Consolidated Financial Statements.

United States
Net sales were $2,016 millionOperating earnings for the third quarter of 2017,nine months ended September 30, 2020 were $744 million, a decrease of 1% when$337 million, or 31%, compared with net sales of $2,028 million forto the same period in 2016. On a daily basis, sales increased 1%2019. Excluding restructuring, net, impairment charges and consistedbusiness divestitures in both periods as noted in the table above, operating earnings decreased $49 million or 5%, driven by lower gross profit dollars partially offset by lower SG&A.

Other expense, net was $56 million for the nine months ended September 30, 2020, an increase of $14 million, or 35%, compared to the following:nine months ended September 30, 2019. The increase was primarily related to interest expense on the $500 million in senior notes issued in February 2020.


Income taxes of $118 million for the nine months ended September 30, 2020decreased $143 million, or 55%, compared with $261 million for the comparable 2019 period. This decrease was primarily driven by lower taxable operating earnings for the nine-month period, tax losses in the Company's investment in Fabory per the impairment
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CONDITION AND RESULTS OF OPERATIONS

and internal reorganization of the Company's holdings in Fabory in the first quarter of 2020 and tax impacts of the Fabory divestiture. Grainger's effective tax rates were 17.3% and 25.1% for the nine months ended September 30, 2020 and 2019, respectively, and this decrease is primarily due to the Fabory tax impacts.

Net earnings attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2020decreased $219 million or 29% to $527 million from $746 million for the nine months ended September 30, 2019. Excluding restructuring, net, impairment charges, business divestitures and tax from both periods in the table above, net earnings decreased $66 million, or 9%. The decrease in net earnings primarily resulted from lower gross profit dollars partially offset by lower SG&A.

Segment Analysis
The following comments at the segment and other businesses level include external and intersegment net sales and operating earnings. See Note 11 to the Financial Statements.

United States
Net sales were $6,823 million for the nine months ended September 30, 2020, an increase of $175 million, or 2.6%, compared to the same period in 2019. On a daily basis, net sales increased 2.1% and consisted of the following:
Percent Increase/(Decrease)
Volume (including product mix)2.9%
Price and customer mix(0.8)
TotalPercent Increase/(Decrease)
Volume7
Intercompany sales to Zoro1
Hurricane impact1
Holiday timing(1)
Seasonal sales(1)
Divestiture(1)
Price(5)
Total1%2.1%


Sales to customers in natural resources increased high single digits. Resellers, transportation and retail end markets increased mid-single digits, while heavy manufacturing and government increased low single digits.

In the three months ended September 30, 2017, eCommerce salesOverall, revenue increases for the U.S. business were $1,039 million, an increase of 8% over the prior year. Total eCommerce sales represented 52% and 47% of total sales for the three months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.comCOVID-19 pandemic-related sales, which accounted for the majority of the sales growth beginning in March 2020. As a result of the COVID-19 pandemic, the U.S. business experienced strong sales volume of pandemic-related products from government, healthcare and other electronic purchasing platforms. Ifessential businesses; however, sales to non-essential and disrupted industries are down compared to 2019. See Note 4 to the Company included KeepStock®,Financial Statements for information related to disaggregated revenue. From a product perspective, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 54%U.S. business experienced strong demand for COVID-19 pandemic-related products; however, this elevated demand was partially offset by lower demand of total sales for the three months ended September 30, 2017 and 2016, respectively.non-pandemic products.


The grossGross profit margin for thethird quarter of 2017 decreased 1.92.3 percentage points compared to the same period in 2016 largely due to2019. The decrease was the pricing actions.

Operating expenses of $493 million in the third quarter of 2017 were flat versus the third quarter of 2016 demonstrating leverage on volume growth as a result of pricing actions.product and customer mix. The business also experienced margin declines from higher sales of lower margin COVID-19 pandemic-related products. The Company expects these mix-related decreases to continue during the pandemic and expects increased levels of PPE, safety and cleaning product sales to large healthcare, government and critical manufacturing customers.


Operating earnings of $298 millionSG&A for the third quarter of 2017nine months ended September 30, 2020 decreased 13% from $343$13 million for the third quarter of 2016 , primarily driven by the pricing actions.

Canada
Net sales were $188 million for the third quarter of 2017, an increase of $9 million, or 5%, when compared with $179 million forto the same period in 2016. On a daily basis, sales increased 7%2019, which is primarily driven by reduced travel and consisteddepreciation expenses partially offset by incremental operating costs to support the U.S. business response to the COVID-19 pandemic and related activities.

Operating earnings of $1,012 million for the following:
Percent Increase
Foreign exchange5
Volume2
Total7%

In the threenine months ended September 30, 20172020decreased $76 million, eCommerce sales in the Canadian business were $33or 7%, from $1,088 million an increase of 41% over the prior year. Total eCommerce sales represented 17% and 13% of total sales for the threenine months ended September 30, 2017 and 2016, respectively. If the Canadian business included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 32% and 26% of total sales for the three months ended September 30, 2017 and 2016, respectively.

The2019. This decrease was driven primarily by lower gross profit margin improved 0.8 percentage points in the third quarter of 2017 versus the third quarter of 2016 primarily due to improved management and disposition of obsolete or discontinued inventory and thus lower inventory reserve requirements in 2017 and incremental vendor rebates.dollars.
Operating expenses increased $4 million, or 6% in the third quarter of 2017 versus the third quarter of 2016, primarily related to foreign exchange and higher employee related costs.

Operating losses of $15 million for the third quarter of 2017 were flat versus the third quarter of 2016.


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Other BusinessesCanada
Net sales for other businesses were $537 million for the third quarter of 2017, an increase of $55 million, or 11%, when compared with net sales of $482 million for the same period in 2016. On a daily basis, sales increased 13% and consisted of the following:
Percent Increase/(Decrease)
Price/volume15
Foreign exchange(2)
Total13%

Operating earnings were $27 million for the third quarter of 2017 up $2 million compared to the third quarter of 2016. The operating earnings included strong results from the single channel online businesses.

Other Income and Expense
Other income and expense was $31 million of expense in the third quarter of 2017 compared to $29 million of expense in the third quarter of 2016. The increase in expense was primarily due to interest expense from the additional $400 million in long-term debt issued in May 2017.

Income Taxes
For the quarter, the effective tax rate was 31.7% versus 34.0% in 2016. The decrease is primarily due to higher benefits primarily from the Company's investments in clean energy along with solar energy and higher foreign tax credits.

Matters Affecting Comparability
There were 191 sales days in the nine months ended September 30, 2017 compared to 192 sales days in 2016.

Results of Operations – Nine Months Ended September 30, 2017
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
 Nine Months Ended September 30,
    Percent Increase/(Decrease) As a Percent of Net Sales
 2017 (A) 2016 (A) 2017 2016
Net sales$7,792
 $7,666
2 % 100.0% 100.0%
Cost of merchandise sold4,716
 4,542
4 % 60.5
 59.2
Gross profit3,076
 3,125
(2)% 39.5
 40.8
Operating expenses2,268
 2,180
4 % 29.1
 28.4
Operating earnings809
 945
(14)% 10.4
 12.3
Other expense81
 72
13 % 1.0
 0.9
Income taxes267
 309
(14)% 3.4
 4.0
Noncontrolling interest26
 19
35 % 0.3
 0.3
Net earnings attributable to W.W. Grainger, Inc.$435
 $545
(20)% 5.6% 7.1%
(A) May not sum due to rounding

Grainger’s net sales of $7,792$352 million for the nine months ended September 30, 2017 increased 2%2020, a decrease of $48 million, or 12.1%, compared with sales of $7,666 million forto the comparable 2016 period.same period in 2019. On a daily basis, net sales increased 2%decreased 12.5% and consisted of the following:

Percent Decrease
Volume (including product mix)(10.0)%
Foreign exchange(1.6)
Price and customer mix(0.9)
Total(12.5)%

For the nine months ended September 30, 2020, volume was down 10.0 percentage points compared to the same period in 2019 primarily due to market share declines partially offset by COVID-19 pandemic-related product sales. During the first half of 2020, global oil prices declined sharply as a result of market forces. More than a fifth of sales for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively impacted by the COVID-19 pandemic.

The gross profit margin decreased 0.5 percentage point in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to negative price cost spread and COVID-19 pandemic-related mix impact.

SG&A decreased $17 million, or 13% in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was primarily due to lower variable costs from lower sales and cost management actions to improve SG&A leverage.

Operating losses were $4 million for both the nine months ended September 30, 2020 and 2019.

Other businesses
Net sales for other businesses were $2,065 million for the nine months ended September 30, 2020 an increase of $96 million, or 4.8% compared to the same period in 2019. On a daily basis, net sales increased 4.3% and consisted of the following:
Percent Increase/(Decrease)
Price/volume7.7%
Business divestitures(3.4)
Total4.3%

The increase in net sales was driven by the endless assortment businesses, partially offset by lower performance in other international high-touch businesses, which were heavily impacted by pandemic-related slowdowns and the net impact of Fabory and China business divestitures. The endless assortments businesses benefited from COVID-19 pandemic-related sales and otherwise continued to see strong new customer acquisition during the nine months ended September 20, 2020.

Gross profit margin decreased 1.3 percentage points compared to the same period in 2019, driven by business unit mix from the faster growing endless assortment businesses as well as higher freight costs.

Operating losses of $56 million for the nine months ended September 30, 2020 decreased $143 million from operating earnings of $87 million in the comparable period from the prior year. Excluding restructuring, net, impairment charges and business divestitures in both periods as noted in the table above, operating earnings would have increased $27 million or 32%. This increase is primarily due to higher earnings in the endless assortment businesses resulting from strong revenue growth and SG&A leverage.

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Financial Condition

Percent Increase/(Decrease)
Volume7
Seasonal sales(1)
Price(4)
Total2%
Cash, Cash Equivalents and Liquidity

TheAs of September 30, 2020 and December 31, 2019, Grainger had cash and cash equivalents of $859 million and $360 million, respectively. This increase in net sales wascash is primarily drivendue to cash flows from operations, delayed capital investments and the pause of the share repurchase program. (See part II, Item A: “Risk Factors”, below, for an update to the Company’s risk factors in connection with the COVID-19 pandemic).

Grainger believes that, assuming its operations are not significantly impacted by the single channel online businesses, as well as volume increases in the U.S. business asCOVID-19 pandemic for a resultprolonged period, its current level of the pricing actions. Refercash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to the Segment Analysis below for further details.meet its liquidity needs.

Cash Flows
In the nine months ended September 30, 2017, eCommerce sales for Grainger were $4,029Net cash provided by operating activities was $787 million an increase of 14% over the prior year. Total eCommerce sales represented 52% and 46% of total sales for the nine months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.com and other electronic purchasing platforms in the U.S. and the single channel online businesses. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 58% and 52% of total sales for the nine months ended September 30, 2017 and 2016, respectively.

Gross profit of $3,076$770 million for the nine months ended September 30, 2017 decreased 2% compared with $3,1252020 and 2019, respectively. The increase in cash provided by operating activities is primarily the result of lower net payments related to employee variable compensation and benefits paid under annual incentive plans and higher trade payables partially offset by investments in inventory.

Net cash used in investing activities was $132 million in the same period in 2016. The gross profit margin during the nine months ended September 30, 2017 decreased 1.3 percentage points when compared to the same period in 2016, driven primarily by the pricing actions in the U.S. business.

Operating expenses of $2,268and $145 million for the nine months ended September 30, 2017 increased 4% compared with $2,180 million for the comparable 2016 period. The increase was primarily due to the following:
$2 million,2020 and 2019, respectively. This decrease in net in restructuring in the U.S., primarily related to the costs incurred in the consolidation of the contact center network and asset write-downs, offset by gains on the sales of branches compared to $12 million, net in 2016. These costs primarily related to involuntary employee termination costs offset by gains on the sales of branches.
$27 million in restructuring due to branch closures and asset write-downs in Canada compared to $15 million in 2016.
$41 million in restructuring in other businesses, primarily related to the wind-down of operations in Colombia.
Excluding restructuring costs, gains on the sale of assets and other charges in both periods, operating expenses increased 3%, driven primarily by higher employee related costs.
Operating earnings for the nine months ended September 30, 2017 were $809 million, a decrease of $137 million or 14%, compared to the nine months ended September 30, 2016. Excluding restructuring costs, gains on the sale of assets and other charges in both periods, operating earnings decreased $117 million or 12%, driven primarily by lower gross profit and higher operating expenses.

Net earnings attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2017 decreased 20% to $435 million from $545 million in the nine months ended September 30, 2016.

Diluted earnings per share of $7.39 in the nine months ended September 30, 2017 were 16% lower than the $8.82 for the nine months ended September 30, 2016, due to lower earnings partially offset by lower average shares outstanding.

The table below reconciles reported operating earning determined in accordance with generally accepted accounting principles in the U.S. to adjusted operating earnings, a non-GAAP measure. Management believes adjusted operating earnings is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.

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 Nine Months Ended 
 September 30, 
 2017 2016%
Operating earnings reported$808,723
 $945,269
(14)%
Restructuring (U.S.)29,757
 29,035
 
Branch gains (U.S.)(28,032) (16,543) 
Other charges (U.S.)(3,023) —
 
Restructuring (Canada)26,509
 15,499
 
Inventory reserve adjustment (Canada)—
 9,847
 
Restructuring (Other Businesses)41,300
 —
 
Restructuring (Unallocated expense)—
 8,947
 
Subtotal66,511
 46,785
 
Operating earnings adjusted$875,234
 $992,054
(12)%



Segment Analysis
The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 8 to the Condensed Consolidated Financial Statements.

United States
Net sales were $5,969 million for the nine months ended September 30, 2017 and were relatively flat when compared with net sales of $5,973 million for the same period in 2016. On a daily basis, sales were flat and consisted of the following:
Percent Increase/(Decrease)
Volume5
Intercompany sales to Zoro1
Seasonal sales(1)
Price(5)
Total0%

Sales to customers in natural resources and retail end markets increased mid-single digits, while heavy manufacturing and government increased low single digits. The sales growth was partially offset by declines in contractors and commercial services. Volume increased year over year primarily driven by the pricing actions.

In the nine months ended September 30 2017, eCommerce sales for the U.S. business were $3,024 million, an increase of 10% over the prior year. Total eCommerce sales represented 51% and 46% of total sales for the nine months ended September 30, 2017 and 2016, respectively. The increase was primarily driven by Grainger.com and other electronic purchasing platforms. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 57% and 53% of total sales for the nine months ended September 30, 2017 and 2016, respectively.

The gross profit margin for the nine months ended September 30, 2017 decreased 1.6 percentage points compared to the same period in 2016, primarily driven by the pricing actions.

Operating expenses were flat for the nine months ended September 30, 2017 versus the nine months ended September 30, 2016. Excluding restructuring costs, net gains on the sale of assets and divestiture and other charges in both periods mentioned above, operating expenses increased 1%.


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Operating earnings of $923 million for the nine months ended September 30, 2017 decreased 10% from $1,023 million for the nine months ended September 30, 2016. Excluding restructuring costs, gains on the sale of assets and divestiture and other charges in both periods, operating earnings decreased 11%, driven primarily by the pricing actions.

Canada
Net sales of $563 million for the nine months ended September 30, 2017 an increase of 2% when compared with $552 million for the same period in 2016. On a daily basis, sales increased 3% and consisted of the following:
Percent Increase/(Decrease)
Volume3
Wildfire impact1
Foreign exchange1
Holiday timing(1)
Price(1)
Total3%

In the nine months ended September 30, 2017, eCommerce sales for the Canadian business were $96 million, an increase of 35% over the prior year. Total eCommerce sales represented 17% and 13% of total sales for the nine months ended September 30, 2017 and 2016, respectively. If the Canadian business included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® sales would represent 31% and 25% of total sales for the nine months ended September 30, 2017 and 2016, respectively.

The gross profit margin increased 0.9 percentage points in the nine months ended September 30, 2017 versus the nine months ended September 30, 2016, largely due to a favorable comparison to an inventory adjustment in the second quarter of 2016 that did not repeat in 2017, partially offset by price deflation, cost inflation and higher freight costs from an increase in shipping directly to customers in 2017.

Operating expenses in the nine months ended September 30, 2017 were $229 million compared to $216 million for the nine months ended September 30, 2016. Excluding restructuring costs in both periods, operating expenses would have increased 1%.

Operating losses were $59 million for the nine months ended September 30, 2017 versus $55 million in the nine months ended September 30, 2016. Excluding the restructuring costs and the inventory adjustment, operating losses would have been $33 million compared to $30 million in the prior year. The higher loss was primarily driven by higher operating expenses.

Other Businesses
Net sales for other businesses, were $1,561 million for the nine months ended September 30, 2017, an increase of $160 million or 11% when compared with net sales of $1,401 million for the same period in 2016. On a daily basis, sales increased 12% and consisted of the following:
Percent Increase/(Decrease)
Volume15
Foreign exchange(3)
Total12%

Operating earnings of $44 million in the nine months ended September 30, 2017 decreased by $32 million compared to $76 million in the nine months ended September 30, 2016. Operating earnings in 2017 included a $41 million charge primarily for the wind-down of the business in Colombia partially offset by strong performance from the single channel online businesses.

Other Income and Expense
Other income and expense was $81 million of expense in the nine months ended September 30, 2017 compared to $72 million of expense in the nine months ended September 30, 2016. The increase in expense was primarily due to

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interest expense from the $400 million of additional long-term debt issued in May 2017, as well as increased losses from the Company's investments in clean energy.

Income Taxes
Grainger’s effective tax rates were 36.7% and 35.4% for the nine months ended September 30, 2017 and 2016, respectively. The increase was primarily due to the wind-down of the business in Colombia and the inability to realize the associated tax benefits, partially offset by incremental tax credits from the Company's investment in clean energy and the benefit of stock awards. The 2016 tax rate also included a benefit from the federal income tax audit resolution for the tax years 2009 through 2012 and other discrete items.

Financial Condition

Cash Flow
Net cash provided by operating activities was $721 million and $689 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in cash provided is primarily the result of lower payments related to employee benefits, partially offset by lower earnings and higher working capital. Net cash provided had been reported as $670 million in the prior year. The $689 million is based on the adoption of ASU 2016-09, which required retrospective reclassification of $19 million from operating activities to financing activities. The reclassification relates to employee taxes paid as part of the exercise of stock options.

Net cash used in investing activities was $100 million and $185 million in the nine months ended September 30, 2017 and 2016, respectively. The decrease in net cash used wasprimarily driven by lower additions to property, buildings and equipment compared to the prior year and higher proceeds from the sales of branch real estate assets and the U.S. specialty business divestiture when compared to the prior year.intangibles.


Net cash used in financing activities was $619 million compared to $518$147 million in the nine months ended September 30, 2017 and 2016, respectively.2020 compared to $875 million in the nine months ended September 30, 2019. The increasedecrease in net cash used in financing activities of $101 million was primarily driven by lower proceeds of long-term debt and higher net payments of commercial paper, offset by lowertreasury stock repurchases in 2017 compared to 2016 and lower payments of long-term debt.repurchases.


Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital expenditures.

Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt, and current maturities of long-term debt)debt and lease liabilities).

Working capital at as of September 30, 20172020, was $1,740$2,278 million, an increase of $18$186 million when compared to $1,722$2,092 million atas of December 31, 2016,2019. The increase was primarily due todriven by an increase in accounts receivable partially offset by increases inand inventory. At these dates, the ratio of current liabilities. The working capital assets to working capitalcurrent liabilities ratio decreased to 2.3 at was 2.7 and 2.6 for September 30, 2017, from 2.4 at 2020 and December 31, 2016.2019, respectively.


Debt
Grainger maintains a debt ratio and liquidity position that provideprovides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit.revolving credit facilities. Total debt, which is defined as total interest-bearing debt (short-term, current maturities and long-term) and lease liabilities as a percent of total capitalization was 55.0%52.5% at September 30, 20172020, and 54.1%54.3% at December 31, 2016.2019.


Grainger receives ratings from two independent credit rating agencies: Moody's Investor Service (Moody's) and Standard & Poor's (S&P). Both credit rating agencies currently rate the Company's corporate credit at investment grade. The following table summarizes the Company's credit ratings at September 30, 2020:
Critical Accounting Policies
CorporateSenior UnsecuredShort-term
Moody'sA3A3P2
S&PA+A+A1

Commitments and EstimatesOther Contractual Obligations
The preparationThere were no material changes to the Company’s commitments and other contractual obligations from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of financial statements, in conformity with accounting principles generally acceptedFinancial Condition and Results of Operations” in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in Grainger’s results of operations for the period in which the actual amounts become known.Company’s 2019 Form 10-K.

Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of Grainger’s financial condition,


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Critical Accounting Estimates

The methods, assumptions, and estimates used in applying the Company’s accounting policies may require the application of judgments regarding matters that are inherently uncertain. The Company considers an accounting policy to be a critical estimate if: (1) it involves assumptions that are uncertain when judgment was applied, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on Grainger’s consolidated financial condition or results of operations. For aposition and results. While the Company believes that estimates, assumptions, and judgments used are reasonable, they are based on information available when the estimate was made.

A description of Grainger’sthe Company’s critical accounting estimates is described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Form 10-K. The following critical accounting policy is being added to the policies set forth in the 2019 Form 10-K.

Allowance for Credit Losses
Pursuant to the January 1, 2020 implementation of the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the Company establishes an allowance for credit losses using estimations of loss rates based upon historical loss experience and adjusted for factors that are relevant to determining the expected collectability of accounts receivables. These estimations and factors require assumptions and judgments regarding matters that are inherently uncertain, including the impact that the COVID-19 pandemic may have on the liquidity, credit and solvency status of customers or individual industries. For further discussion on the Company’s allowances for credit losses, see Grainger's Annual Report on Form 10-K for the year ended December 31, 2016.in Note 5 contained within Part I, Item 1, “Notes to Condensed Consolidated Financial Statements”.


Forward-Looking Statements

From time to time, in this Quarterly Report on Form 10-Q, as well as in other written reports, communications and verbal statements, Grainger makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Such forward-lookingForward-looking statements arecan generally be identified by wordstheir use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project”“project,” “will” or “would” and similar terms and expressions.phrases, including references to assumptions.


Grainger cannot guarantee that any forward-looking statement will be realized although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievementand achievement of future results is subject to risks and uncertainties, many of which are beyond the Company's control, which could cause Grainger's results to differ materially from those that are presented.


Important factors that could cause actual results to differ materially from those presented or implied in athe forward-looking statementstatements include, without limitation: the unknown duration and health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 ("COVID-19") as well as the impact of the actions taken or contemplated by governmental authorities or others in connection with the COVID-19 pandemic on the Company’s businesses, its employees, customers and suppliers, including disruption to Grainger's operations resulting from employee illnesses, the development and availability of effective treatment or vaccines, any mandated facility closures of non-essential businesses, stay in shelter health orders or other similar restrictions for customers and suppliers, changes in customers' product needs, suppliers' inability to meet unprecedented demand for COVID-19 related products, the potential for government action to allocate or direct products to certain customers which may cause disruption in relationships with other customers, disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company's controls and procedures required by working remote arrangements, including financial reporting processes, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the Company's products or limit the Company's ability to access capital markets on terms that are attractive or at all; higher product costs or other expenses; a major loss of customers; loss or disruption of sourcesources of supply; increased competitive pricing pressures; failure to develop or implement new technologiestechnology initiatives or business strategies; the implementation, timingfailure to adequately
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company's strategic pricing actions and othergross profit percentage; the Company's responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, safety or compliance, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards; government contract matters; disruption of information technology or data security systems;systems involving the Company or third parties on which the Company depends; general industry, economic, market or marketpolitical conditions; general global economic conditions;conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility;volatility, including volatility or price declines of the Company's common stock; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; other pandemic diseases or viral contagions; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; the Company's ability to operate, integrate and leverage acquired businesses; changes in credit ratings;effective tax rates; changes in effective tax rates;credit ratings or outlook; the Company's incurrence of indebtedness and other factors identified under Part II, Item 1A: Risk Factors“Risk Factors” in the Company's Annual Report onCompany’s 2019 Form 10-K, for the year ended December 31, 2016, as updated in the Company'sCompany’s Quarterly Reports on Form 10-Q.


Caution should be taken not to place undue reliance on Grainger's forward-looking statements and Grainger undertakes no obligation to publicly update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.otherwise, except as required by law.


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W.W. Grainger, Inc. and Subsidiaries



Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
 
For quantitative and qualitative disclosures about market risk, see “Item 7A: QuantitativeAs disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk” in Grainger's Annual Report onthe Company's 2019 Form 10-K, Grainger’s primary market risk exposures include changes in foreign currency exchange and interest rates. In February 2020, the Company entered into certain derivative instruments to manage portions of these risks. A discussion of the Company’s accounting policies for derivative instruments and further disclosures are provided in Note 9 contained within Part I, Item 1, "Notes to Condensed Consolidated Financial Statements”.

For a discussion of current market conditions resulting from the fiscal year ended December 31, 2016.COVID-19 pandemic, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, "Risk Factors”.


Item 4.Controls and Procedures.
Item 4.Controls and Procedures
 
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of Grainger's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. 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 in (i) ensuring that information required to be disclosed by Grainger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
There werehave been no changes in Grainger's internal control over financial reporting that occurred duringfor the third quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, Grainger'sGrainger’s internal control over financial reporting.


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PART II – OTHER INFORMATION
 
Item 1.Legal Proceedings.

Item 1.Legal Proceedings
As previously disclosed, on April 5, 2013, David Davies filed
For a putative class action lawsuitdescription of the Company’s legal proceedings, see Note 12 - Contingencies and Legal Matters - to the Condensed Consolidated Financial Statements included under Part 1, Item 1, "Financial Statements".

Item 1A.    Risk Factors

The Company’s business, results of operations, and financial condition are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in the Circuit Court of Cook County, Illinois underCompany’s 2019 Annual Report on Form 10-K filed with the Telephone Consumer Protection Act of 1991, as amendedSecurities and Exchange Commission on February 20, 2020 (the 2019 Form 10-K). The following risk factor is being provided to supplement and update the risk factors set forth in the 2019 Form 10-K.  
Grainger’s business and operations have been and may continue to be adversely affected by the Junk Fax Prevention Actglobal outbreak of 2005,the Coronavirus (COVID-19) and sought certificationmay be adversely affected by other global outbreaks of pandemic disease.
Any global outbreaks of pandemic disease, such as the COVID-19 pandemic, could have a classmaterial adverse effect on the Company’s business, results of persons who may have received oneoperations, and financial condition, including liquidity, capital and financing resources. 

The COVID-19 pandemic has disrupted and adversely affected the Company’s business to date. The impact of the COVID-19 pandemic on the Company's results of operations and financial condition, including liquidity, capital and financing resources, will depend on numerous evolving factors that Grainger is unable to accurately predict, including the duration of the pandemic. Some of the effects include restrictions on the Company’s employees' ability to travel, including to visit customers, and many employees' ability to work in offices or more faxesat facilities, and supply chain interruptions, as well as disruptions or temporary closures of the Company’s facilities, including distribution centers, branches, and support buildings. The effects of the COVID-19 pandemic also include disruptions or closures of customer and/or suppliers’ facilities and supply chains in China and other locations, which can materially impact the demand for the Company’s products, the ability for the Company sentto obtain or deliver inventory, and the ability for the Company to collect its accounts receivable as customers face higher liquidity and solvency risks. The ultimate adverse impact on the Company and the duration of these disruptions or closures are unknown.
Moreover, the COVID-19 pandemic may continue to materially adversely affect many of the Company's customers' and suppliers' ability to continue to operate as a going concern in connection withthe future or their ability to purchase Company products, may affect suppliers' ability to meet unprecedented demand for COVID-19-related products, may delay customers’ purchasing decisions, result in a 2009 marketing campaign. Theshift to lower-priced products or away from discretionary products, result in longer payment terms or discounting, or affect customer loyalty or retention rates, and may affect customers’ and suppliers’ ability or willingness to attend Company removedevents in the suitfuture, all of which could materially adversely affect the Company's future sales and results of operations.
Some actions that Grainger has taken in response to the Federal District CourtCOVID-19 pandemic, such as enabling working remote arrangements, may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage Grainger's reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card association, employees and others. In addition, the working remote arrangements have required the Company to make adaptions to its controls and procedures, including to its financial reporting processes, that could impact the design or operating effectiveness of such controls or procedures. Grainger may also be required by government authorities to curtail or cease certain operations, or Grainger may determine to take these actions because they are in the best interests of the Company's employees, customers, or suppliers, any of which could have a material adverse effect on the Company's business, results of operations, and financial condition.

In addition, global outbreaks such as the COVID-19 pandemic have resulted in a widespread health crisis that has adversely affected and could continue to adversely affect the economies of many countries, resulting in a global or regional economic downturn or recession. Any such recession could result in a significant decline in demand for the Northern District of Illinois (the “District Court”). On June 27, 2014, the District Court refusedCompany's products or limit Grainger's ability to certify the class. The United States Court of Appeals for the Seventh Circuit denied Davies’ petition for immediate review of that ruling. The Company has now entered into an individual settlement with Davies resolving all of his claimsaccess capital markets on terms not materialthat are attractive or at all, any of which could materially adversely affect the Company's business, results of operations and financial condition.
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The extent to which the COVID-19 pandemic will continue to impact the Company’s business, results of operations, and financial condition will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be predicted at this time. Such factors and developments may include the geographic spread, severity and duration of the COVID-19 pandemic, including whether there are periods of increased COVID-19 cases, disruption to our operations resulting from employee illnesses, the development and availability of effective treatment or vaccines, the extent and duration of the impact on the U.S. or global economy, including the pace and extent of recovery when the pandemic subsides, and the actions that have been and may be taken by various governmental authorities in response to the Company. outbreak, including mandatory facility closures of non-essential businesses, stay in shelter health orders or similar restrictions, social distancing mandates, face mask measures, travel bans, import and export restrictions, pricing mandates, including disaster or emergency declaration pricing statutes, and mandatory directives that certain products be allocated or provided to certain customers which could disrupt the Company's relationship with other customers, among other actions. Certain jurisdictions have begun lifting stay in shelter mandates only to impose further restrictions in the wake of increases in new COVID-19 cases. As such, there is considerable uncertainty regarding how current and future health and safety measures implemented in response to the COVID-19 pandemic will impact Grainger's business.  

The case was dismissed with prejudice on September 28, 2017.extent of any disruptions the COVID-19 pandemic has caused or may cause to the Company's customers or suppliers is unknown and cannot be predicted. If the Company is unable to respond to and manage the impact of these events, the Company's business and results of operations may continue to be adversely affected.








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W.W. Grainger, Inc. and Subsidiaries


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities – third quarterThird Quarter
PeriodTotal Number of Shares Purchased (A)Average Price Paid per Share (B)Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C)Maximum Number of
Shares That May Yet be Purchased Under the
Plans or Programs
July 1 - July 31180$341.05—2,742,555
August 1 - August 31——2,742,555
September 1 - September 30770$361.75—2,742,555
Total950 (D)— 
(A)There were no shares withheld to satisfy tax withholding obligations.
(B)Average price paid per share includes any commissions paid.
(C)Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors and announced April 24, 2019 (2019 Program). The 2019 Program authorizes the repurchase of up to 5 million shares with no expiration date.
(D)The difference of 950 shares between the Total Number of Shares Purchased and the Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs represents shares purchased by the
administrator and record keeper of the W.W. Grainger, Inc. Employees Profit Sharing Plan for the benefit
of the employees who participate in the plan.

PeriodTotal Number of Shares Purchased (A)Average Price Paid per Share (B)Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C)
Maximum Number of
Shares That May Yet be Purchased Under the
Plans or Programs
July 1 – July 31245,081$170.24245,0814,187,194
Aug. 1 – Aug. 31342,665$163.10342,6653,844,529
Sept. 1 – Sept. 30131,462$170.47131,4623,713,067
Total719,208$166.88719,208 
(A)There were no shares withheld to satisfy tax withholding obligations.
(B)Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs.
(C)Purchases were made pursuant to a share repurchase program approved by Grainger’s Board of Directors on April 6, 2015. The program has no specified expiration date. Activity is reported on a trade date basis.


Item 6.        Exhibits.Exhibits


A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 3238 of this report.































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36

W.W. Grainger, Inc. and Subsidiaries





SIGNATURES




 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
W.W. Grainger, Inc.GRAINGER, INC.
Date:(Registrant)
Date:October 26, 201722, 2020
 
 
 
By:
 
 
 
/s/ R. L. JadinThomas B. Okray
R. L. Jadin,Thomas B. Okray, Senior Vice President

and Chief Financial Officer
Date:(Principal Financial Officer)
Date:October 26, 201722, 2020
 
 
 
By:
 
 
 
/s/ E.Eric R. Tapia
E.Eric R. Tapia, Vice President

and Controller





EXHIBIT INDEX

(Principal Accounting Officer)


37


EXHIBIT INDEX
EXHIBIT NO.DESCRIPTION
10.131.1
Credit Agreement, dated as of October 6, 2017 by and among W.W. Grainger, Inc., the lenders party thereto and U.S. Bank National Association, As Administrative Agent. (filed as Exhibit 10.1 to W. W. Grainger, Inc.'s Current Report on Form 8-K on October 6, 2017, and incorporated herein by reference.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).





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