UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 20202021
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
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,Illinois60045-5201
(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☒  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes☒  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☒  Accelerated Filer ☐   Non-accelerated Filer ☐   Smaller Reporting Company ☐
Emerging Growth Company ☐



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 ☒ 
☒
There were 53,467,93652,110,145 shares of the Company’s Common Stock, par value $0.50, outstanding as of March 31, 2020.
2021.

1



TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1:Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings 
for the Three Months Ended March 31, 20202021 and 20192020
43
Condensed Consolidated Statements of Comprehensive
 Earnings 
for the Three Months Ended March 31, 20202021 and 20192020
54
Condensed Consolidated Balance Sheets
as of March 31, 20202021 and December 31, 20192020
65
Condensed Consolidated Statements of Cash Flows
or the Three Months Ended March 31, 2021 and 2020
6
Condensed Consolidated Statements of Shareholders' Equity
for the Three Months Ended March 31, 20202021 and 20192020
7
Condensed Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2020 and 2019
8
Notes to Condensed Consolidated Financial Statements
98
Item 2:Management's Discussion and Analysis of Financial
 Condition and Results of Operations
2016
Item 3:Quantitative and Qualitative Disclosures About Market Risk
2824
Item 4:Controls and Procedures
2824
PART II - OTHER INFORMATION
28
Item 1:Legal Proceedings
2825
Item 1A:Risk Factors
28
Item 2:Unregistered Sales of Equity Securities and Use of Proceeds
2925
Item 6:Exhibits
3025
Signatures
Signatures
3126
EXHIBITS


2

PART I – FINANCIAL INFORMATION

Item 1:  Financial Statements

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In millions of dollars and shares, except for share and per share amounts)
(Unaudited)
Three Months EndedThree Months Ended
March 31, March 31,
2020 2019 20212020
Net sales$3,001
 $2,799
Net sales$3,084 $3,001 
Cost of goods sold1,880
 1,704
Cost of goods sold1,991 1,880 
Gross profit1,121
 1,095
Gross profit1,093 1,121 
Selling, general and administrative expenses962
 732
Selling, general and administrative expenses735 962 
Operating earnings159
 363
Operating earnings358 159 
Other (income) expense: 
  
Other (income) expense:  
Interest expense, net21
 19
Interest expense, net21 21 
Other, net(4) (7)Other, net(6)(4)
Total other expense, net17
 12
Total other expense, net15 17 
Earnings before income taxes142
 351
Earnings before income taxes343 142 
Income tax (benefit) provision(43) 89
Income tax provision (benefit)Income tax provision (benefit)88 (43)
Net earnings185
 262
Net earnings255 185 
Less: Net earnings attributable to noncontrolling interest12
 9
Less: Net earnings attributable to noncontrolling interest17 12 
Net earnings attributable to W.W. Grainger, Inc.$173
 $253
Net earnings attributable to W.W. Grainger, Inc.$238 $173 
Earnings per share: 
  
Earnings per share:  
Basic$3.20
 $4.50
Basic$4.51 $3.20 
Diluted$3.19
 $4.48
Diluted$4.48 $3.19 
Weighted average number of shares outstanding: 
  
Weighted average number of shares outstanding:  
Basic53.6
 55.6
Basic52.3 53.6 
Diluted53.8
 55.9
Diluted52.6 53.8 
Cash dividends paid per share$1.44
 $1.36
Cash dividends paid per share$1.53 $1.44 
 
The accompanying notes are an integral part of these financial statements.

3

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
(Unaudited)
 Three Months Ended
March 31,
 20212020
Net earnings$255 $185 
Other comprehensive earnings (losses):  
Foreign currency translation adjustments, net of reclassification(35)(58)
Postretirement benefit plan gains (losses), net of tax benefit of $1 in both periods(4)(3)
Other1 1 
Total other comprehensive earnings (losses)(38)(60)
Comprehensive earnings, net of tax217 125 
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings17 12 
Foreign currency translation adjustments(18)3 
Total comprehensive earnings (losses) attributable to noncontrolling interest(1)15 
Comprehensive earnings attributable to W.W. Grainger, Inc.$218 $110 
 Three Months Ended
 March 31,
 2020 2019
Net earnings$185
 $262
Other comprehensive earnings (losses): 
  
Foreign currency translation adjustments, net of reclassification(58) 4
Postretirement benefit plan reclassification, net of tax benefit of $1 million and $1 million, respectively(3) (3)
Other1
 —
Total other comprehensive earnings (losses)(60) 1
Comprehensive earnings, net of tax125
 263
Less: Comprehensive earnings (losses) attributable to noncontrolling interest   
Net earnings12
 9
Foreign currency translation adjustments3
 (2)
Total comprehensive earnings (losses) attributable to noncontrolling interest15
 7
Comprehensive earnings attributable to W.W. Grainger, Inc.$110
 $256


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

4

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share and per share amounts)
 As of
ASSETS(Unaudited) March 31, 2020 December 31, 2019
CURRENT ASSETS   
Cash and cash equivalents$1,492
 $360
Accounts receivable (less allowances for credit losses of $24 million and $21 million, respectively)1,613
 1,425
Inventories - net1,615
 1,655
Prepaid expenses and other current assets129
 104
Prepaid income taxes65
 11
Total current assets4,914
 3,555
PROPERTY, BUILDINGS AND EQUIPMENT - NET1,357
 1,400
DEFERRED INCOME TAXES10
 11
GOODWILL361
 429
INTANGIBLES - NET226
 304
OTHER ASSETS309
 306
TOTAL ASSETS$7,177
 $6,005
    
LIABILITIES AND SHAREHOLDERS' EQUITY   
CURRENT LIABILITIES   
Short-term debt$17
 $55
Current maturities of long-term debt21
 246
Trade accounts payable863
 719
Accrued compensation and benefits177
 228
Accrued contributions to employees' profit sharing plans19
 85
Accrued expenses384
 318
Income taxes payable19
 27
Total current liabilities1,500
 1,678
LONG-TERM DEBT (less current maturities)3,303
 1,914
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES99
 106
OTHER NON-CURRENT LIABILITIES245
 247
SHAREHOLDERS' EQUITY 
  
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding—
 —
Common stock – $0.50 par value – 300,000,000 shares authorized;
109,659,219 shares issued		55
 55
Additional contributed capital1,192
 1,182
Retained earnings8,500
 8,405
Accumulated other comprehensive losses(217) (154)
Treasury stock, at cost – 56,191,283 and 55,971,691 shares, respectively(7,720) (7,633)
Total W.W. Grainger, Inc. shareholders’ equity1,810
 1,855
Noncontrolling interest220
 205
Total shareholders' equity2,030
 2,060
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$7,177
 $6,005
As of
Assets      (Unaudited) March 31, 2021December 31, 2020
Current assets  
Cash and cash equivalents$562 $585 
Accounts receivable (less allowances for credit losses of $28 and $27, respectively)1,576 1,474 
Inventories - net1,675 1,733 
Prepaid expenses and other current assets121 127 
Total current assets3,934 3,919 
Property, buildings and equipment - net1,441 1,395 
Goodwill388 391 
Intangibles - net224 228 
Other assets346 362 
Total assets$6,333 $6,295 
Liabilities and shareholders' equity
Current liabilities  
Current maturities of long-term debt$7 $8 
Trade accounts payable887 779 
Accrued compensation and benefits219 307 
Accrued expenses330 305 
Income taxes payable88 42 
Total current liabilities1,531 1,441 
Long-term debt (less current maturities)2,373 2,389 
Deferred income taxes and tax uncertainties87 110 
Other non-current liabilities262 262 
Shareholders' equity  
Cumulative 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 shares55 55 
Additional contributed capital1,248 1,239 
Retained earnings8,948 8,779 
Accumulated other comprehensive losses(81)(61)
Treasury stock, at cost - 57,549,074 and 57,134,828 shares, respectively(8,354)(8,184)
Total W.W. Grainger, Inc. shareholders’ equity1,816 1,828 
Noncontrolling interest264 265 
Total shareholders' equity2,080 2,093 
Total liabilities and shareholders' equity$6,333 $6,295 
  
The accompanying notes are an integral part of these financial statements.

5

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Three Months Ended
Three Months Ended March 31,
March 31, 20212020
2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:   
Cash flows from operating activities:Cash flows from operating activities:  
Net earnings$185
 $262
Net earnings$255 $185 
   
Provision for credit losses6
 4
Provision for credit losses4 6 
Deferred income taxes and tax uncertainties(7) (4)Deferred income taxes and tax uncertainties(11)(7)
Depreciation and amortization45
 57
Depreciation and amortization43 45 
Net losses (gains) from sales of assets and business divestitures3
 (2)
Impairment of goodwill, intangibles and long-lived assets177
 —
Impairment of goodwill, intangible and long-lived assetsImpairment of goodwill, intangible and long-lived assets0 177 
Net (gains) losses from sale or redemption of assetsNet (gains) losses from sale or redemption of assets(5)3 
Stock-based compensation9
 5
Stock-based compensation8 9 
Subtotal233
 60
Subtotal39 233 
Change in operating assets and liabilities: 
  
Change in operating assets and liabilities:  
Accounts receivable(217) (102)Accounts receivable(121)(217)
Inventories19
 20
Inventories52 19 
Prepaid expenses and other assets(26) (30)Prepaid expenses and other assets(5)(26)
Trade accounts payable155
 64
Trade accounts payable85 155 
Accrued liabilities(36) (207)Accrued liabilities(61)(36)
Income taxes - net(62) 64
Income taxes, netIncome taxes, net55 (62)
Other non-current liabilities(7) (4)Other non-current liabilities(5)(7)
Subtotal(174) (195)Subtotal0 (174)
Net cash provided by operating activities244
 127
Net cash provided by operating activities294 244 
CASH FLOWS FROM INVESTING ACTIVITIES: 
  
Cash flows from investing activities:Cash flows from investing activities:  
Additions to property, buildings, equipment and intangibles(50) (60)Additions to property, buildings, equipment and intangibles(73)(50)
Proceeds from sales of assets—
 6
Other(2) 2
Proceeds from sale or redemption of assetsProceeds from sale or redemption of assets15 0 
Other - netOther - net0 (2)
Net cash used in investing activities(52) (52)Net cash used in investing activities(58)(52)
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
Cash flows from financing activities:Cash flows from financing activities:  
Borrowings under lines of credit9
 10
Borrowings under lines of credit0 9 
Payments against lines of credit(45) (7)Payments against lines of credit0 (45)
Proceeds from long-term debt1,500
 —
Proceeds from long-term debt0 1,500 
Payments of long-term debt(345) (14)Payments of long-term debt0 (345)
Proceeds from stock options exercised19
 3
Proceeds from stock options exercised8 19 
Payments for employee taxes withheld from stock awards(5) (3)Payments for employee taxes withheld from stock awards(2)(5)
Purchases of treasury stock(100) (135)Purchases of treasury stock(175)(100)
Cash dividends paid(78) (76)Cash dividends paid(81)(78)
Other - net—
 1
Net cash provided by (used in) financing activities955
 (221)
Net cash (used in) provided by financing activitiesNet cash (used in) provided by financing activities(250)955 
Exchange rate effect on cash and cash equivalents(15) —
Exchange rate effect on cash and cash equivalents(9)(15)
NET CHANGE IN CASH AND CASH EQUIVALENTS1,132
 (146)
Net change in cash and cash equivalentsNet change in cash and cash equivalents(23)1,132 
Cash and cash equivalents at beginning of year360
 538
Cash and cash equivalents at beginning of year585 360 
Cash and cash equivalents at end of period$1,492
 $392
Cash and cash equivalents at end of period$562 $1,492 
 
The accompanying notes are an integral part of these financial statements.

6

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 Stock
Noncontrolling
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
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 

Common StockAdditional Contributed CapitalRetained EarningsAccumulated Other Comprehensive Earnings (Losses)Treasury StockNoncontrolling
Interest		Total
Balance at January 1, 2021$55 $1,239 $8,779 $(61)$(8,184)$265 $2,093 
Stock-based compensation— 9 — — 5 — 14 
Purchases of treasury stock— — — — (175)— (175)
Net earnings— — 238 — — 17 255 
Other comprehensive earnings (losses)— — — (20)— (18)(38)
Reclassification due to the adoption of ASU 2019-12— — 12 — — — 12 
Cash dividends paid ($1.53 per share)— — (81)— — — (81)
Balance at March 31, 2021$55 $1,248 $8,948 $(81)$(8,354)$264 $2,080 
 Common StockAdditional Contributed CapitalRetained EarningsAccumulated Other Comprehensive Earnings (Losses)Treasury Stock
Noncontrolling
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












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

7


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


1.
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and Europe.the United Kingdom (U.K.). 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.

The Company's Condensed Consolidated Financial Statements (Financial Statements) of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and associated notes for the year ended December 31, 20192020 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 20, 2020 (the 201924, 2021 (2020 Form 10-K). The Condensed Consolidated Balance Sheet as of December 31, 20192020 has been derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by accounting principles generally accepted in the United States of America (U.S.) 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 in this report.

Changes to Reportable Segments
2.    UPDATE TO SIGNIFICANT ACCOUNTING POLICIES

Other thanEffective January 1, 2021, Grainger's 2 reportable segments are High-Touch Solutions (N.A.) and Endless Assortment. On March 8, 2021, the recently implementedCompany provided investors with segment summary historical financial information and segment historical data that is consistent with its new reportable segment structure and reflective of the intersegment accounting policies relateddescribed in Note 10 - Segment Information.

The Company's High-Touch Solutions (N.A.) segment provides value-added MRO solutions that are rooted in deep product knowledge and customer expertise. This segment includes the Grainger-branded businesses in the U.S., Canada, Mexico and Puerto Rico. The Company’s Endless Assortment segment provides a simple, transparent and streamlined experience for customers to shop millions of products online. This segment includes the allowances for credit losses perCompany’s Zoro Tools, Inc. (Zoro) businesses in the U.S. and U.K. and MonotaRO Co., Ltd. (MonotaRO), which operates predominately in Japan. The remaining international high-touch solutions businesses, operating primarily in the U.K., are classified as “Other” to reconcile to consolidated results. These businesses individually do not meet the criteria of a reportable segment.

NOTE 2 - NEW ACCOUNTING STANDARDS
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13 (see Notes 3 and 5 to the Financial Statements), change in depreciation estimates (see Note 6 to the Financial Statements) and accounting for derivative instruments (see Note 10 to the Financial Statements), there have been no material changes to the Company’s significant accounting policies disclosed in the 2019 Form 10-K, Part II, Item 8.

3.    NEW ACCOUNTING STANDARDS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments 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. Per the permitted effective dates, 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 Statements, it required changes to the Company’s process of estimating expected credit losses on trade receivables. See Note 5 for further information on the Company’s allowances 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 income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. The effective date of this ASU iswas for fiscal years and interim periods beginning after December 15, 2020. The Company is currently evaluating the potential impact ofadopted this ASU effective January 1, 2021 and it did not have a material impact on the Financial Statements.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU simplifies the understanding and application of the codification topics by eliminating inconsistencies and providing clarifications. The effective date of this ASU iswas for fiscal years and interim periods beginning after December 15, 2020. The Company is currently evaluating the potential impact ofadopted this ASU on the Financial Statements.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. The amendments in this update represent changes to clarify or improve the codificationeffective January 1, 2021 and correct unintended application. This ASU
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

was effective immediately upon issuance and its adoptionit did not have a material impact on the Company's Financial Statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.as modified by subsequently issued ASU 2021-01. This update provides optional expedients and exceptions 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 potential impact of this standard.
8
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. These amendments improve consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions in the codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The effective date of this ASU was for fiscal years and interim periods beginning after December 15, 2020. The Company adopted this ASU effective January 1, 2021 and it did not have a material impact on the Financial Statements.

4.NOTE 3 - REVENUE

Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services. Total service revenue is not material and accounted for approximately 1% of the Company's revenue for the three months ended March 31, 20202021 and 2019,2020, respectively.

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 segment and industry most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and market specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors. In the High-Touch Solutions (N.A.) segment, more than two-thirds of revenue is derived from customer contracts whereas in the Endless Assortment segment, a majority of revenue is derived from spot buys. The following table presents the Company's percentage of revenue by reportable segment and by major customer industry:
 Three Months Ended March 31,
 2020 2019
 U.S. Canada Total Company (2) U.S. Canada Total Company (2)
Government18% 9% 14% 17% 6% 13%
Heavy Manufacturing18% 19% 17% 19% 21% 18%
Light Manufacturing13% 6% 11% 13% 6% 11%
Transportation5% 9% 5% 6% 8% 5%
Healthcare9% —% 6% 7% —% 6%
Commercial9% 9% 8% 10% 9% 8%
Retail/Wholesale9% 4% 7% 8% 4% 7%
Contractors10% 10% 8% 10% 10% 8%
Natural Resources3% 29% 3% 3% 32% 4%
Other (1)6% 5% 21% 7% 4% 20%
Total100% 100% 100% 100% 100% 100%
Percent of Total Company Revenue73% 4% 100% 72% 5% 100%

Three Months Ended March 31,
20212020
High-Touch Solutions (N.A.)Endless Assortment
Total Company(2)
High-Touch Solutions (N.A.)Endless Assortment
Total Company(2)
Contractors9 %15 %10 %10 %15 %10 %
Commercial9 %15 %10 %9 %15 %10 %
Government19 %3 %16 %17 %3 %14 %
Healthcare7 %2 %6 %8 %1 %7 %
Manufacturing30 %29 %30 %31 %31 %31 %
Retail/Wholesale9 %10 %9 %8 %11 %8 %
Transportation5 %3 %5 %5 %3 %5 %
Others(1)
12 %23 %14 %12 %21 %15 %
Total100 %100 %100 %100 %100 %100 %
Percent of Total Company Revenue78 %20 %100 %78 %17 %100 %
(1) Other categoryOthers primarily includes revenue from individualindustries and customers that are not material individually including agriculture, mining, natural resources and resellers not aligned to a major industry segment, including small businesses and consumers, and intersegment net sales.segment.
(2) Total Company includes other businesses, which includeincludes the Company's endless assortmentCromwell business in the U.K., as well as the Fabory and China businesses in the period prior to their divestitures in the second and operations in Europe and Mexico and accountsthird quarter of 2020, respectively. Other businesses account for approximately 23%2% of revenue for the three months ended March 31, 20202021 and 5% of revenue for the three months ended March 31, 20202019, .respectively.

Total accrued sales returns were approximately $26$37 million and $25$31 million as of March 31, 20202021 and December 31, 2019,2020, respectively and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $57$48 million and $58 million as of March 31, 20202021 and December 31, 2019,2020 and are reported as part of Accrued expenses. The Company did not have anyhad no material unsatisfied performance obligations, contract assets or liabilities as of March 31, 20202021 and December 31, 2019.2020.



9
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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 net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivables. 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 individual customers.

6.NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT

Property, buildings and equipment consisted of the following (in millions of dollars):
As of
March 31, 2021December 31, 2020
Land$328 $329 
Building, structures and improvements1,329 1,330 
Furniture, fixtures, machinery and equipment1,946 1,878 
Property, buildings and equipment$3,603 $3,537 
Less: Accumulated depreciation and amortization2,162 2,142 
Property, buildings and equipment, net$1,441 $1,395 
 As of
 March 31, 2020 December 31, 2019
Land$329
 $332
Building, structures and improvements1,316
 1,329
Furniture, fixtures, machinery and equipment1,833
 1,832
Property, buildings and equipment$3,478
 $3,493
Less: Accumulated depreciation and amortization and impairment2,121
 2,093
Property, buildings and equipment, net$1,357
 $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 January 1, 2020, the method of estimating depreciation for these assets was changed to the straight-line method and useful lives to forty and fifty years. The Company determined 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 the 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 changes resulted in a decrease of $8 million to depreciation expense for the three months ended March 31, 2020.

During the three months ended March 31, 2020, the Company recorded approximately $44 million of impairment charges in Selling, General and Administrative Expenses (SG&A) in connection with the 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. There were 0 impairments of property, buildings and equipment during the three months ended March 31, 2019.

7.NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS

Grainger tests reporting units' goodwill and intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. Accordingly, Grainger performs quarterly 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, including the current global outbreak of the Coronavirus (COVID-19 pandemic) and macro-economic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of reporting unitsunits' goodwill or intangible assets is less than their carrying value. If indicators of impairment are identified, a quantitative impairment test is performed.

Qualitative tests for the quarter The Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators during the three months ended March 31, 2021. As such, quantitative assessments were not required.

The balances and changes in the carrying amount of Goodwill (net of cumulative goodwill impairments) by segment are as follows (in millions of dollars):
High-Touch Solutions (N.A)Endless AssortmentOtherTotal
Balance at January 1, 2020$318 $52 $59 $429 
Acquisition0 15 0 15 
Impairment0 0 (58)(58)
Translation3 3 (1)5 
Balance at December 31, 2020321 70 0 391 
Impairment0 0 0 0 
Translation1 (4)0 (3)
Balance at March 31, 2021$322 $66 $0 $388 
The cumulative goodwill impairments as of March 31, 2021, were $137 million and consisted of $32 million within High-Touch Solutions (N.A.) and $105 million in Other. During the first quarter of 2020, the Company recorded $58 million of impairment charges in Selling, general and administrative expenses (SG&A) in connection with the impairment of Fabory's goodwill. The impairment is presented in Other businesses in the table above. The Company divested Fabory during the second quarter of 2020. Grainger's current business portfolio had 0 impairments to goodwill for Fabory (included in other businesses). Some of these indicators for Fabory included revenue slowdown in key markets, gross profit pressuresthe three months ended March 31, 2021 and a flat-to-declining operating margin against a backdrop of industrial sector declines across Europe, which was further amplified by the long-term implications of the COVID-19 pandemic, among other factors. As a result, the2020.




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

Company concluded that Fabory’s goodwill and tradenames were fully impaired. Concurrently, consistent with the circumstances leading to the goodwill impairment, the Company performed a recoverability and fair value test of Fabory’s long-lived assets, including customer lists and relationships and concluded to impair those assets. The aggregate impairment charge for Fabory’s goodwill and intangible assets in the three months ended March 31, 2020 amounted to approximately $132 million and was recorded in SG&A. See Note 6 for further discussion of the impairment of Fabory's long-lived assets.

The balances and changes in the carrying amount of Goodwill by segment, including the Fabory impairment, are as follows (in millions of dollars):
  United States Canada Other businesses Total
Balance at January 1, 2019 $192
 $120
 $112
 $424
Translation —
 6
 (1) 5
Balance at December 31, 2019 192
 126
 111
 429
Impairment —
 —
 (58) (58)
Translation —
 (10) —
 (10)
Balance at March 31, 2020 $192
 $116
 $53
 $361
  United States Canada Other businesses Total
Cumulative goodwill impairment charges, December 31, 2019 $—
 $32
 $152
 $184
Impairment —
 —
 58
 58
Cumulative goodwill impairment charges, March 31, 2020 $—
 $32
 $210
 $242

During the three months ended March 31, 2020, the Company recorded a $58 million goodwill impairment charge in SG&A in connection with an impairment of the Fabory business. There were no goodwill impairments during the three months ended March 31, 2019.
The balances in Intangible assets, net are as follows (in millions of dollars):
March 31, 2021December 31, 2020
Weighted average lifeGross carrying amountAccumulated amortization/ impairmentNet carrying amountGross carrying amountAccumulated amortization/ impairmentNet carrying amount
Customer lists and relationships11.8 years$221 $171 $50 $223 $171 $52 
Trademarks, trade names and other14.1 years36 23 13 36 22 14 
Non-amortized trade names and otherIndefinite26 0 26 28 0 28 
Capitalized software4.2 years472 337 135 461 327 134 
Total intangible assets7.0 years$755 $531 $224 $748 $520 $228 
   March 31, 2020 December 31, 2019
 Weighted average life Gross carrying amount Accumulated amortization/impairment Net carrying amount Gross carrying amount Accumulated amortization/impairment Net carrying amount
Customer lists and relationships14.1 years $287
 $229
 $58
 $401
 $301
 $100
Trademarks, trade names and other14.2 years 34
 20
 14
 36
 20
 16
Non-amortized trade names and otherIndefinite 61
 34
 27
 100
 38
 62
Capitalized software4.2 years 637
 510
 127
 626
 500
 126
Total intangible assets7.8 years $1,019
 $793
 $226
 $1,163
 $859
 $304


With the exceptionNOTE 6 - DEBT
There was 0 short-term debt as of Fabory, based on the operating results for the three months ended March 31, 20202021 and other considerations,December 31, 2020.

Long-term debt, including current maturities and debt issuance costs and discounts, net, consisted of the following (in millions of dollars):
As of March 31, 2021As of December 31, 2020
Carrying Value
Fair Value(4)
Carrying Value
Fair Value(4)
4.60% senior notes due 2045(1)
$1,000 $1,201 $1,000 $1,343 
3.75% senior notes due 2046(1)
400 422 400 479 
4.20% senior notes due 2047(1)
400 452 400 514 
1.85% senior notes due 2025(2)
500 515 500 526 
Japanese Yen term loan(3)
81 81 87 87 
Other23 23 34 34 
Subtotal2,404 2,694 2,421 2,983 
Less: Current maturities(7)(7)(8)(8)
Debt issuance costs and discounts, net of amortization(24)(24)(24)(24)
Long-term debt (less current maturities)$2,373 $2,663 $2,389 $2,951 

(1) In the years 2015-2017, Grainger issued $1.8 billion in long-term debt (Senior Notes) to partially fund the repurchase of $2.8 billion in shares of the total $3 billion announced in April 2015. The remaining share repurchases were funded from internally generated cash. Debt was issued as follows:
•In May 2017, $400 million payable in 30 years and carries a 4.20% interest rate, payable semiannually.
•In May 2016, $400 million payable in 30 years and carries a 3.75% interest rate, payable semiannually.
•In June 2015, $1 billion payable in 30 years and carries a 4.60% interest rate, payable semiannually.

The Company may redeem the Senior Notes in whole at any time or in part from time to time at a “make-whole” redemption price prior to their respective maturity dates. The 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 Senior Notes plus 20-25 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company believes thatexperiences specific kinds of changes in control, it is more likely than not thatwill be required to make an offer to purchase the enterprise value for eachSenior Notes at 101% of its reporting unitstheir principal amount plus accrued and the fair value of intangibles is still greater than their carrying values. Accordingly, no goodwill impairment indicators were presentunpaid interest, if any, at March 31, 2020 that would necessitate an interim impairment assessment. The Companythe
11
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

will continue to monitor business plans throughout 2020 to determine if an interim goodwill evaluation should be conducted. Changes in assumptions regarding future business performance and macroeconomic conditions, particularlydate of purchase. Within one year of the COVID-19 pandemic and oil and gas prices in Canada, may have a significant impact on future cash flows and reporting unit or intangible valuations. A significant downturn in global economic growth, or recessionary conditions in the U.S., Canada and Japan for prolonged periods, may lead to reduced customer demand in Grainger’s major reporting units or material supply chain interruptions or product shortages. To the extent that such developing economic conditions negatively impact customer demand for the Company's products or product availability over a long period, the Company's businesses, results of operations and financial condition could be significantly and adversely affected, which could result in future impairments of goodwill and intangible assets.

8.     RESTRUCTURING

The Company continues to evaluate performance and take restructuring actions across all businesses to reduce operating costs and streamline operations.In the three months ended March 31, 2020 and 2019,maturity date, the Company recorded restructuring chargesmay redeem the Senior Notes in whole at any time or in part at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs and discounts of approximately $7$24 million associated with the issuance of the Senior Notes, representing underwriting fees and $2 million, respectively. These charges primarily consistedother expenses, have been recorded as a contra-liability within Long-term debt and are being amortized to interest expense over the term of involuntary employee termination costs in the U.S. and Canada, which are all included in SG&A. The reserve balance as of March 31, 2020 and December 31, 2019 was approximately $13 million and $10 million, respectively, and is primarily included in Accrued compensation and benefits. The remaining reserves are expected to be paid through 2020.Senior Notes.

9.    SHORT-TERM AND LONG-TERM DEBT

During the three months ended March 31, 2020, the Company entered into several financing transactions:

(2)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 Canadian dollar revolving credit facility, and to fund general working capital needs.

In connection with the 1.85% Notes, in February 2020, the Company entered into derivative instrument agreements to manage its risks associated with interest rates of the 1.85% Notes and foreign currency fluctuations related to the financing of international operations. See Note 10 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 obtaining additional commitments 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 a proactive measure to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic.

Short-term debt consisted of outstanding lines of credit of $17 million and $55 million as of March 31, 2020 and December 31, 2019, respectively.

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

Long-term debt, including current maturities and debt issuance costs and discounts, net, consisted of the following (in millions of dollars):
 As of March 31, 2020 As of December 31, 2019
 Carrying Value Fair Value (3) Carrying Value Fair Value (3)
4.60% senior notes due 2045$1,000
 $1,167
 $1,000
 $1,194
3.75% senior notes due 2046400
 381
 400
 416
4.20% senior notes due 2047400
 433
 400
 449
1.85% senior notes due 2025 (1)500
 500
 —
 —
$1.25 billion credit facility (2)1,000
 1,000
 —
 —
British pound term loan—
 —
 170
 170
Euro term loan—
 —
 123
 123
Canadian dollar revolving credit facility—
 —
 46
 46
Other51
 51
 42
 42
Subtotal (4)3,351
 3,532
 2,181
 2,440
Less current maturities(21) (21) (246) (246)
Debt issuance costs and discounts, net of amortization(27) (27) (21) (21)
Long-term debt (less current maturities)$3,303
 $3,484
 $1,914
 $2,173


(1) The 1.85% Notes mature in February 2025 and they require no principal payments until the maturity date and interest is payable semi-annually on February 15 and August 15, beginning in August 2020. Prior to January 2025, the Company may redeem the 1.85% Notes in whole at any time or in 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 1.85% Notes plus 10 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 1.85% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. On or after January 15, 2025, the Company may redeem the 1.85% Notes in whole at any time or in part from time to 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 isare being amortized to interest expense, net over the term of the 1.85% Notes.

 In connection with the 1.85% 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 7 to the Financial Statements for further discussion of these derivative instruments and the Company's hedge accounting policies.
(2)
(3) 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. The $1.25 billion credit facilityJapanese Yen term loan matures in February 2025. Borrowings under the credit facility bear2024, payable over 4 equal semi-annual principal installments in 2023 and 2024, and bears average interest at the Company’s option, either at (a) the Eurocurrency rate for specified interest periods plus a margin determined with reference to the rating on the Company’s non-credit-enhanced, senior unsecured long-term debt or (b) the base rate, which is the highest of (i) 1%, (ii) the Wall Street Journal prime rate, (iii) the higher of (A) the federal funds rate and (B) the Federal Reserve Bank of New York overnight rate, in each case plus 0.50% per annum or (iv) the Eurocurrency rate for a one month interest period plus 1.00% per annum, plus, in each case, a margin determined with reference to the rating on the Company’s non-credit-enhanced, senior unsecured long-term debt.0.05%.

(4) No principal payments are required on the credit facility until the maturity date.

(3)The estimated fair value of the Company’s senior notesSenior 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 carrying value of other long-term debt approximates fair value due to their variable interest rates.

(4) The Company's long-term debt instruments include affirmative and negative covenants that are usual and customary for companies with similar credit ratings and do not contain any financial performance covenants. The Company was in compliance with all debt covenants as of March 31, 2020.

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


10.NOTE 7 - DERIVATIVE INSTRUMENTS

The Company maintains various agreements with bank counterparties that permit 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 ofon 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 trading or speculative purposes.

Accounting for derivative instruments
The Company recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of 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 extent 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 March 31, 2021 and December 31, 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 component of accumulatedAccumulated other comprehensive earnings (losses) (AOCE) and reclassified into earnings in the same period during which the hedged transaction affects earnings. The notional amount of the Company’s outstanding cash flow hedges as of March 31, 2021 and December 31, 2020 was approximately $34 million.

12
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 three months ended March 31, 2021 and 2020 is as follows (in millions of dollars):
Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Interest expense, netOther, netInterest expense, netOther, Net
Gain or (loss) recognized in earnings
Fair value hedge:
Hedged item$10 $0 $(18)$0 
Interest rate swap designated as hedging instrument$(10)$0 $18 $0 
Cash flow hedge:
Hedged item$0 $0 $0 $(2)
Cross-currency swap designated as hedging instrument$0 $0 $0 $2 
 Interest expense, net Other, net
Gain or (loss) recognized in earnings

 

Fair value hedge:   
Hedged item$(18) $—
Interest rate swap designated as hedging instrument$18
 $—
    
Cash flow hedge:   
Hedged item$—
 $(2)
Cross-currency swap designated as hedging instrument$—
 $2


The effect of the Company’s fair value and cash flow hedges on AOCE for the three months ended March 31, 2021 and 2020was not material.


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


The fair value and carrying amounts of outstanding derivative instruments in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 waswere as follows (in millions of dollars):
As of March 31, 2021As of December 31, 2020
Balance Sheet ClassificationFair Value and Carrying AmountsFair Value and Carrying Amounts
Cross-currency swapOther non-current liabilities$2 $2 
Interest rate swapOther assets$10 $21 
 Balance Sheet Classification Fair Value and Carrying Amounts
Cross-currency swapPrepaid expenses and other current assets $2
Interest rate swapOther assets $18


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 March 31, 2021 and December 31, 2020 amounted to $518 million.$510 million and $521 million, respectively.

The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 (Level 2 inputs within the fair value hierarchy),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.


11.NOTE 8 - 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 March 31,
 20212020
Federal income tax$72 $35 
States income taxes, net of federal income tax benefit9 4 
Foreign rate difference7 3 
Net tax benefit related to foreign subsidiaries0 (85)
Income tax expense (benefit)$88 $(43)
Effective tax rate25.8 %(30.4)%
 Three Months Ended March 31,
 2020 2019
Federal income tax$30
 $74
States income taxes, net of federal benefit(2) 10
Foreign rate difference2
 5
Goodwill impairment2
 —
Tax benefit related to the Fabory business(82) —
Change in tax contingencies3
 —
Change in valuation allowance3
 1
Investment in foreign subsidiary3
 —
Other, net(2) (1)
Income tax (benefit) expense$(43) $89
Effective tax rate(30.4)% 25.4%


13
The Company's effective tax rate for the three months ended March 31, 2020 was negative 30.4% compared to 25.4% in the three months ended March 31, 2019. The negative tax rate this quarter was primarily driven by a tax benefit from losses in the Company’s investment in the Fabory business.

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 three months ended March 31, 2020. The Company plans to defer the timing of federal tax estimates and payroll taxes as permitted by the CARES Act.


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

12.    SEGMENT INFORMATION

Grainger's 2 reportable segments areThe changes to the U.S.Company's effective tax rate for the three months ended March 31, 2021 was primarily driven by the absence of tax losses in the Company's investment in Fabory due to the impairment and Canada. These reportable segments reflect the resultsinternal reorganization of the Company's high-touch solutions businessesholdings of Fabory in those geographies. Other businesses include the endless assortment businesses, Zoro Tools, Inc. (Zoro) and MonotaRO Co. (MonotaRO), and smaller high-touch solutions businesses in Europe and Mexico. These businesses individually do not meetfirst quarter of 2020. The Company divested Fabory during the criteriasecond quarter of 2020.

NOTE 9 - DIVIDEND
On April 28, 2021, the Company’s Board of Directors declared a reportable segment. Operating segments generate revenue almost exclusively through the distributionquarterly dividend of MRO supplies, as service revenues account for approximately 1%$1.62 per share, payable June 1, 2021, to shareholders of total revenues for each operating segment.record on May 10, 2021.

NOTE 10 - SEGMENT INFORMATION
Following is a summary of segment results (in millions of dollars):
Three Months Ended March 31, 2020 Three Months Ended March 31, 2021
U.S. Canada Total Reportable Segments Other businesses Total High-Touch Solutions (N.A.)Endless AssortmentTotal Reportable SegmentsOtherTotal
Total net sales$2,307
 $129
 $2,436
 $698
 $3,134
Total net sales$2,397 $622 $3,019 $65 $3,084 
Intersegment net sales(133) —
 (133) —
 (133)
Net sales to external customers$2,174
 $129
 $2,303
 $698
 $3,001
Segment operating earnings$340
 $(3) $337
 $(138) $199
Segment operating earnings$306 $55 $361 $(3)$358 
 Three Months Ended March 31, 2019
 U.S. Canada Total Reportable Segments Other businesses Total
Total net sales$2,149
 $136
 $2,285
 $633
 $2,918
Intersegment net sales(118) —
 (118) (1) (119)
Net sales to external customers$2,031
 $136
 $2,167
 $632
 $2,799
Segment operating earnings$364
 $(5) $359
 $30
 $389


 Three Months Ended March 31, 2020
 High-Touch Solutions (N.A.)Endless AssortmentTotal Reportable SegmentsOtherTotal
Total net sales$2,355 $496 $2,851 $150 $3,001 
Segment operating earnings$314 $35 $349 $(190)$159 
Following are reconciliations of segment information with the consolidated totals per the Financial Statements (in millions of dollars):
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 Three Months Ended March 31,
 2020 2019
Operating earnings: 
Total operating earnings for reportable segments$337
 $359
Other businesses(138) 30
Unallocated expenses(40) (26)
Total consolidated operating earnings$159
 $363
    
 As of
 March 31, 2020 December 31, 2019
Assets:   
United States$2,845
 $2,668
Canada167
 173
Assets for reportable segments3,012
 2,841
Other current and noncurrent assets2,767
 3,003
Unallocated assets1,398
 161
Total consolidated assets$7,177
 $6,005
    

The Company is a broad-linebroad line distributor of MRO products and services. Products are regularly added and deletedremoved 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 primarilyIntersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of cash, property, buildings and equipment,third-party sales. Service fees for intersegment eliminations and other adjustments. Unallocated expenses and assetssales from the High-Touch Solutions (N.A.) segment to the Endless Assortment segment are not included in anySG&A.

Corporate costs are substantially allocated to each reportable segment.

segment based on benefits received. Assets for reportable segments include net accounts receivable and first-in, first-out inventory, which are reported tonot disclosed as such information is not regularly reviewed by the Company's Chief Operating Decision Maker.


13.NOTE 11 - 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), employment practices, regulatory compliance, anti-bribery and corruption or other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties. For example,

As previously disclosed, beginning in the fourth quarter of 2019, Grainger, hasKMCO, 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 LLC chemical refinery located in Crosby, Harris County.County, Texas on April 2, 2019. The complaints, which to date encompass 15 lawsuits and approximately 145 plaintiffs, seek recovery of compensatory and other damages and relief. relief in relation to one death and various alleged injuries. 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
14
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7 proceedings, the claims against KMCO in the Harris County lawsuits were stayed. Effective January 1, 2021, the Bankruptcy Court lifted the stay with respect to KMCO.

On December 16, 2020, KMCO, the trustee of its estate and ORG Chemical Holdings, LLC, KMCO’s parent company (“ORG”), filed a product liability-related lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, which seeks unspecified damages (the “KMCO Case”). On April 1, 2021, twenty-four individual plaintiffs filed a petition in intervention seeking to be added as plaintiffs in the KMCO Case and seeking unspecified damages. On March 24, 2021, Indian Harbor Insurance Company together with other insurance companies and underwriters, as subrogees of KMCO and ORG, filed a lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, seeking reimbursement of insurance payments made by the plaintiffs on behalf of the insured parties and other damages.

Grainger is investigating each of the various claims relating to the KMCO chemical refinery incident, 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 may be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration or to pricing compliance.

While 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 condition or results of operations.

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


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, and 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.

15
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

General

W.W. Grainger, Inc. (Grainger or the Company) is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and Europe. Morethe United Kingdom (U.K.). Grainger uses a combination of its high-touch solutions and endless assortment businesses to serve its more than 3.55 million customers worldwide, which rely on Grainger for MRO products such as safety, gloves, ladders, motors and janitorial supplies, along with services like inventory managementthat enable them to run safe, sustainable and technical support. These customers represent a broad collection of industries (see Note 4 in the Condensed Consolidated Financial Statements (Financial Statements)). They place orders through digital channels, over the phone and at local branches. Approximately 5,000 suppliers provide Grainger with approximately 1.6 million products stocked in Grainger's distribution centers (DCs) and branches worldwide.productive operations.

Effective January 1, 2021, Grainger's two reportable segments are the U.S.High-Touch Solutions (N.A.) and Canada (Grainger Canada and its subsidiaries).Endless Assortment. These reportable segments reflectalign with Grainger's go-to-market strategies and bifurcated business models (high-touch solutions and endless assortment). The High-Touch Solutions (N.A.) segment includes the results of the Company's high-touch solutionsGrainger-branded businesses in those geographies. Other businesses include the endless assortment businesses, (ZoroUnited States of America (U.S.), Canada, Mexico and Puerto Rico. The Endless Assortment segment includes the Company’s Zoro Tools, Inc. (Zoro) and MonotaRO Co., Ltd. (MonotaRO) online channels which operate predominately in the U.S., U.K. and MonotaRO in Japan), and smaller high-touch solutions businesses in Europe and Mexico.Japan.

Strategic Priorities Amidst the COVID-19 Pandemic Response

The Company’s strategic priorities for 20202021 have not changed from those stated in Part II, Item 7, “Management’s7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations included in the Company’s Annual Report for the year ended December 31, 20192020 on Form 10-K (the 2019(2020 Form 10-K), which are to "Keep the World Working" and relentlessly expand Grainger’s leadership position in the MRO space by being the go-to-partner for people who build and run safe, sustainable and productive operations. However, the respective business plans to achieve these strategic priorities have and are expectedcontinue to be affected by the global outbreak of Coronavirus in 2019 (COVID-19 pandemic).

The Company has been and intends to continue supporting its employees, customers, suppliers and communities as they keep the world working while navigating these unprecedented events. The Company has a dedicated task force focused on the COVID-19 pandemic responsehas caused significant disruptions in the U.S. and global markets, and economists expect the economic impact will continue to understandbe significant. Grainger is an essential business and implement guidance from government agenciesits major facilities have been allowed to remain operational during the pandemic as customers have depended on Grainger's products and health officialsservices to keep their businesses up and will adapt its efforts and plans as needed.running. As the COVID-19 pandemic continues to spread and significantly impact variousglobal markets and industries around the world, including North America, Japanneeds of customers, employees, suppliers and Europe,communities continue to change, the Company’s efforts and business plans have evolved accordingly. Grainger is currently focused on:

Serving as an essential business under virtually every state order, to continue supporting hospitals, governments, first responders, critical manufacturers, and the many other customers that are assisting in the pandemic response;
Supporting Company employees by providing a safe environment and jobs;
Servingon serving customers and communities by providing safe, high-quality services;
Closely partneringwell in addressing the pandemic and preparing for an ongoing recovery, supporting the needs and safety of employees and ensuring the Company continues to operate with supplier and logistics partners to locate the products needed to replenish inventories, provide much needed products to customers and meet changing customer, community and supplier needs;
Continuing to be a trusted partner to customers and suppliers now and after the expected economic slowdown; and
Preserving a strong financial and liquidity position to execute business plans and remain positioned to succeed beyond this pandemic.position.

Impact of the COVID-19 Pandemic to Grainger Businesses

The COVID-19 pandemic has resulted,impacted and is likely to continue to result, in disruption toimpacting Grainger’s businesses and operations as well as the operations of its customers and suppliers. As

From a customer perspective, business re-openings, production and related activity throughout the quarter varied based on geography, industry and COVID-19 pandemic conditions. For example, the U.S. geography began to see signs of economic recovery while other international geographies faced slower reopenings. In the date of this filing,high-touch solutions and endless assortment businesses, sales to essential businesses remained strong while sales to non-essential and disrupted industries are beginning to return to pre-COVID-19 pandemic levels. From an inventory and supply chain perspective, demand for pandemic-related inventory has started to decrease with excess supply in the marketplace, resulting in inventory adjustments during the quarter.

The Company's major operational facilities and infrastructure (i.e., DCs,Distribution Centers, branches, e-commerce sites, and logistic partners) continuedare remaining operational with limited disruptions, while adhering to operatestrict safety and have managed the incremental demand of pandemic-related product sales and related activities. However,social-distancing protocols. In addition, the Company has experienced some disruption, including supply shortages of personal protective equipment (PPE), temporary facility shutdownsprioritized maintaining all facilities safe for cleaning and restrictions on the Company’s employees' ability to travel to visit customers and many employees' abilityemployees to work and interact. 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 post-pandemic.
Matters Affecting Comparability
There were 63 sales days in offices or at facilities. Nonetheless, these disruptions did not have a material financial impact on the Company’s consolidated financial condition or results of operations forthree months ended March 31, 2021 and 64 sales days in the first quarter ofthree months ended March 31, 2020. Additionally, the COVID-19 pandemic shifted demand towards lower-margin products and increased volume-related

16
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

operating costs in response to the pandemic, particularly during the second half of the first quarter of 2020, which negatively impacted Company quarter-to-date operating margins.
With respect to liquidity for the quarter, the Company took several actions to bolster its financial condition and has in place contingency plans to reduce costs while supporting business operations though the COVID-19 pandemic. Some of these actions included:

Drew down $1.0 billion fromConsistent with the Company's $1.25 billion unsecured revolving credit facility.
Pausedstrategic focus on broad line MRO distribution in key markets, in June 2020 Grainger divested the Fabory high-touch solutions business, in August 2020 divested the China high-touch solutions business (China) and in November 2020 commenced the liquidation of Zoro Tools Europe (ZTE) in Germany. Accordingly, the Company’s share repurchase program.operating results include Fabory, China and ZTE results through the respective dates of divestiture or liquidation.
Implemented several initiatives to conserve cash and optimize profitability, including limiting discretionary spending, temporarily furloughing employees or reducing work hours, reducing short term executive pay, delaying salary increases, scaling back advertising spend, eliminating non-essential travel, delaying or reducing hiring activities and deferring certain discretionary capital expenditures.

The Company completed the quarter ended March 31, 2020 with over $1.7 billion in available liquidity, including $1.5 billion in cash.
2020 Outlook in Consideration of the COVID-19 Pandemic

Due to the speed with which the COVID-19 pandemic is developing and the uncertainties created, including the depth and duration of any disruptions to customers and suppliers, its future effect to the Company’s business, results of operations, and financial condition cannot be predicted. 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 reduce costs are sufficient to manage the impact currently anticipated from the COVID-19 pandemic, which may include reduced sales, earnings and operating cash flows.
Because the COVID-19 pandemic is a rapidly evolving situation, the Company will continue to monitor the business impact and may take further actions that it deems appropriate in light of the circumstances.

Matters Affecting Comparability

There were 64 sales days in the three months ended March 31, 2020 and 63 sales days in the three months ended March 31, 2019. In addition, during the second half of the first quarter ofbeginning in mid-February 2020, the Company experienced a surgeelevated levels of COVID-19 pandemic relatedpandemic-related product sales (e.g., PPEpersonal protective equipment (PPE) and safety products) due to higher customer demand in response to the global outbreak. The incremental demand came primarily from customers inCOVID-19 pandemic, while non-pandemic sales decreased. Conversely, as the front-lines of theCOVID-19 pandemic including hospitals, healthcare providers, governments, first respondersprogressed throughout 2020 and critical manufactures. Conversely,into 2021, the Company experienced adversehas seen levels of pandemic-related sales soften toward pre-pandemic levels and non-pandemic sales turning positive. This will have an impact on gross margin impacts from COVID-19as pandemic-related product sales as well as incremental Selling, general and administrative (SG&A) expense in response to the COVID-19 pandemic and related activities.are generally lower-margin.

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

Results of Operations – Three Months Ended March 31, 2020

2021
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 March 31,
Percent Increase/(Decrease)As a Percent of Net Sales
2021202020212020
Net sales$3,084 $3,001 2.8 %100.0 %100.0 %
Cost of goods sold1,991 1,880 5.9 %64.5 %62.6 %
Gross profit1,093 1,121 (2.5)%35.5 %37.4 %
Selling, general and administrative expenses (SG&A)735 962 (23.6)%23.9 %32.1 %
Operating earnings358 159 125.5 %11.6 %5.3 %
Other expense, net15 17 (10.8)%0.5 %0.6 %
Income tax provision (benefit)88 (43)(304.6)%2.9 %(1.4)%
Net earnings255 185 37.5 %8.3 %6.2 %
Noncontrolling interest17 12 36.6 %0.6 %0.4 %
Net earnings attributable to W.W. Grainger, Inc.$238 $173 37.5 %7.7 %5.8 %
 Three Months Ended March 31,
    Percent Increase/(Decrease) As a Percent of Net Sales
 2020 2019 2020 2019
Net sales$3,001
 $2,799
7.2 % 100.0 % 100.0%
Cost of goods sold1,880
 1,704
10.3 % 62.6 % 60.9%
Gross profit1,121
 1,095
2.4 % 37.4 % 39.1%
Selling, general and administrative expenses962
 732
31.4 % 32.1 % 26.2%
Operating earnings159
 363
(56.3)% 5.3 % 13.0%
Other expense, net17
 12
35.6 % 0.6 % 0.4%
Income taxes(43) 89
(148.4)% (1.4)% 3.2%
Net earnings185
 262
  6.2 % 9.4%
Noncontrolling interest12
 9
34.7 % 0.4 % 0.3%
Net earnings attributable to W.W. Grainger, Inc.$173
 $253
(31.5)% 5.8 % 9.0%

Grainger’s net sales of $3,001$3,084 million for the first quarter of 20202021 increased $202$83 million, or 7.2%2.8%, compared to the same periodquarter in 2019.2020. On a daily basis net sales increased 5.5%4.4%. The increase in net sales was primarily driven by approximately 7% from volume partially offset by priceincreases in the high-touch solutions and mix of approximately 2%. The Company estimates that COVID-19endless assortment businesses. Also, non-pandemic related product sales continue to improve while demand for pandemic-related product sales represented approximately half ofremain higher than their pre-pandemic level. See Note 3 to the sales growth.Financial Statements for information related to disaggregated revenue. See the Segment Analysis below for further details related to segment revenue.

Gross profit of $1,121$1,093 million for the first quarter of 2020 increased $262021 decreased $28 million, or 2%, compared to the same quarter in 2019.2020. The gross profit margin of 37.4%35.5% during the first quarter of 20202021 decreased 1.81.9 percentage points when compared to the same quarter in 2019.2020. This decrease was primarily driven by lower margins from COVID-19non-core pandemic-related products sales and business unit mix impact from higher growthinventory adjustments in the lower margin endless assortment businesses.U.S. business (part of High-Touch Solutions (N.A.)). See the Segment Analysis below for further details related to segment gross profit.

SG&A of $962$735 million for the first quarter of 2020 increased $2302021 decreased $227 million, or 31%24%, compared to the first quarter of 2019. Part2020. This decrease is primarily a result of this increase is due to higher net restructuring charges in the U.S. and Canada businesses (part of High-Touch Solutions (N.A.)) and impairment charges for the divested Fabory business (part of Other businesses)Other) in the first quarter of 2020.

The table below reconcilesfollowing tables (in millions of dollars, except percentages) reconcile reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc. and effective tax rate determined in accordance with U.S. generally accepted accounting principles (GAAP) to adjustednon-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings
17
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
attributable to W.W. Grainger, Inc. and effective tax rate, which are all considered non-GAAP measures.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
Three Months Ended
March 31, 2021
20212020%
SG&A reported$735 $962 (24)%
Restructuring, net (High-Touch Solutions (N.A.))— 7 
Fabory impairment charges (Other)— 177 
          Total restructuring, net and impairment charges— 184 
SG&A adjusted$735 $778 (6)%
20212020%
Operating earnings reported$358 $159 126 %
Total restructuring, net, and impairment charges— 184 
Operating earnings adjusted$358 $343 4 %
20212020%
Net earnings attributable to W.W. Grainger, Inc. reported$238 $173 38 %
     Total restructuring, net, impairment charges and tax¹— 57 
Net earnings attributable to W.W. Grainger, Inc. adjusted$238 $230 3 %
¹ The tax impact of adjustments and non-cash impairments are calculated based on the income tax rate in millions of dollars:each applicable jurisdiction, subject to deductibility and the Company's ability to realize the associated tax benefits.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 Three Months Ended  
 March 31, 2020  
 2020 2019 %
SG&A reported$962
 $732
 (31)%
Restructuring, net of branch gains (U.S.)6
 —
  
Restructuring (Canada)1
 1
  
Fabory impairment charges (Other businesses)177
 —
  
          Total restructuring, net and impairment charges184
 1
  
SG&A adjusted$778
 $731
 (7)%
 2020 2019 %
Operating earnings reported$159
 $363
 (56)%
Total restructuring, net, and impairment charges184
 2
  
Operating earnings adjusted$343
 $365
 (6)%
 2020 2019 %
Net earnings attributable to W.W. Grainger, Inc. reported$173
 $253
 (32)%
Total restructuring, net, and impairment charges, net of tax57
 2
  
Net earnings attributable to W.W. Grainger, Inc. adjusted$230
 $255
 (9)%

Excluding restructuring, net and impairment charges in both periods as noted in the table above, SG&A increased $47decreased $43 million, or 7%6%. The increase in SG&A wasThis decrease is primarily due to higher compensation costs from incremental headcount added incost control actions across the second half of 2019, higher marketing costs and incremental operating costs to support the Company's responsehigh-touch solutions businesses. SG&A leverage improved 2.1 percentage points when compared to the COVID-19 pandemic and related activities, including higher variable costs in connection with the increase in sales volume.first quarter of 2020.

Operating earnings of $159$358 million for the first quarter of 2020 decreased $2042021 increased $199 million, or 56%126%, compared to the first quarter of 2019.2020. Excluding restructuring, net and impairment charges in both periods as noted in the table above, operating earnings decreased $22increased $15 million, or 6%4%, driven primarily by higherlower SG&A expenses partially offset by higherlower gross profit dollars.

Other expense, net was $17$15 million for the first quarter of 2020, an increase2021, a decrease of $5$2 million, or 36%11%, compared to the first quarter of 2019. The increase was primarily related to interest expense on the $500 million in senior notes issued in February 2020.

The Company recorded an income tax benefit, netexpense of $43$88 million for the first quarter of 20202021, which increased $131 million, or 305%, compared to an income tax expense, netbenefit of $89$43 million in the first quarter of 2019. Grainger's effective tax rates were negative 30.4% and positive 25.4% for the three months ended March 31, 2020 and 2019, respectively.2020. This change is primarily related to a tax benefit related to the Fabory business recorded in the first quarter of 2020. Grainger's effective tax rates were 25.8% and negative 30.4% for the three months ended March 31, 2021 and 2020, respectively. Excluding this tax benefit, as well as the restructuring, net and impairment charges in both periods as noted in the table above, the effective tax rates were 25.6%25.8% and 25.4%25.6% for the three months ended March 31, 20202021 and 2019,2020, respectively. The reconciliation of the effective tax rate is as follows:
 Three Months Ended March 31,
 20212020
Effective tax rate reported25.8 %(30.4)%
Tax benefit related to the Fabory business— 61.2 
Tax impact of restructuring, net and impairment charges— (5.2)
Effective tax rate adjusted25.8 %25.6 %
18
 Three Months Ended March 31,
 2020 2019
Effective tax rate reported(30.4)% 25.4%
Tax benefit related to the Fabory business61.2
 —
Tax impact of restructuring, net and impairment charges(5.2) —
Effective tax rate adjusted25.6 % 25.4%

Net earnings attributable to W.W. Grainger, Inc. of $173 million for the first quarter of 2020 decreased $80 million or 32% compared to the first quarter of 2019. Excluding restructuring, net and impairment charges from both periods in the table above, net earnings decreased $25 million or 9%.
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Segment Analysis

The following results at the U.S. and Canada reportable segments and other businesses include external and intersegment net sales and operating earnings. See Note 12Net earnings attributable to the Financial Statements.

United States
Net sales were $2,307W.W. Grainger, Inc. of $238 million for the first quarter of 2020,2021 increased $65 million, or 38%, compared to the first quarter of 2020. Excluding restructuring, net, impairment charges and tax from both periods per the table above, net earnings increased $8 million or 3%.

Segment Analysis
See Note 10 to the Financial Statements for further detail on segment information.

High-Touch Solutions (N.A.)
Net sales were $2,397 million for the first quarter of 2021, an increase of $158$42 million, or 7.4%1.8% compared to the same period in 2019.2020. On a daily basis, net sales increased 5.7%3.4% and consisted of the following:
Percent Increase
Price and customer mix2.0%
Volume (including product mix)1.1
Foreign exchange0.3
TotalPercent Increase/(Decrease)
Volume7.8%
Intersegment sales0.3
Price and mix(2.4)
Total5.7%3.4%
Overall, revenue increases for the high-touch solutions businesses were primarily driven by COVID-19price and customer mix. During the first quarter of 2021, the U.S. business experienced some continuation of elevated sales volume of pandemic-related products from the government and other essential businesses with sales which accounted for approximately half of the sales growth.to non-essential and disrupted industries beginning to return to their pre-pandemic levels. See Note 43 to the Financial Statements for information related to disaggregated revenue.

 From a product perspective, the high-touch solutions business experienced continued demand for COVID-19 pandemic-related products, as well as increasing demand for non-pandemic products as the economy improves.

Gross profit margin for the first quarter of 20202021 decreased 2.3 percentage points compared to the same period in 2019.2020. The decrease was primarily the result of pricing mix, customer mix and tariff cost-related increases that took effect laterU.S. business inventory adjustments on non-core pandemic-related products in 2019. The business also experienced margin declines from higher salesthe first quarter 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 safety and cleaning product sales to large healthcare, government and critical manufacturing customers.2021.

SG&A of $541$589 million for the first quarter of 2020 increased $362021 decreased $31 million, or 7%5%, when compared to the first quarter of 2019. The increase in SG&A was2020, which is primarily related to higher compensation costs from incremental headcount in the second half of 2019, higher marketing costsdriven by reduced travel and incrementalgeneral operating costs to support the U.S. business response to the COVID-19 pandemic and related activities, including higher variable costs in connection with the increase in sales volume.efficiencies.

Operating earnings of $340$306 million for the first quarter of 20202021 decreased $24$8 million, or 7%3%, from $364$314 million for the first quarter of 2019.2020. This decrease was driven by higher SG&Alower gross profit dollars partially offset by higher gross profit dollars.

Canadalower SG&A expenses.

Endless Assortment
Net sales were $129$622 million for the first quarter of 2020, a decrease2021, an increase of $7$126 million, or 4.6%25.4%, compared to the same period in 2019.2020. On a daily basis, net sales decreased 6.1%increased 27.4% and consisted of the following:
Percent Increase
Volume/price/mix23.3%
Foreign exchangePercent Decrease4.1
VolumeTotal(4.4)%
Foreign exchange(1.1)
Price(0.6)
Total(6.1)%27.4%

For the first quarter of 2020, overall sales volume was down 4.4 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 month of March 2020, global oil and gas 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 pressure demand for the business, which is already under pressure from the COVID-19 pandemic.

The grossincrease in net sales was driven by continued strong customer acquisition in the endless assortment businesses.

Gross profit margin increased 0.60.3 percentage points in the first quarter of 2020 versus the first quarter of 2019.

SG&A decreased 7% in the first quarter of 20202021 compared to the first quarter of 2019, primarily2020. The increase was driven by Zoro's improved discounting strategies.

SG&A leverage decreased 1.5 percentage points compared with the same period in 2020 due to lower variable costs from lower sales and cost management actions to improverevenue outpacing SG&A leverage.expenses related to increased sales volume.

19
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating earnings of $55 million for the first quarter of 2021 increased $20 million, or 58% from $35 million for the first quarter of 2020. The increase was driven primarily by higher sales primarily due to continued customer acquisitions.

Other
Net sales were $65 million for the first quarter of 2021, an decrease of $85 million, or 56.5%, when compared to the same quarter in 2020. On a daily basis, net sales decreased 55.8% and consisted of the following:

Percent (Decrease)/ Increase
Business divestitures(43.3)%
Volume/price/mix(15.8)
Foreign exchange3.3
Total(55.8)%

The decrease in net sales was driven by revenue declines in the Cromwell business as a result of pandemic-related slowdowns and the net impact of the Fabory and China business divestitures.

Gross profit margin increased 2.8 percentage points in the first quarter of 2021 compared to the first quarter of 2020 primarily due to business unit mix.

SG&A decreased 89% in the first quarter of 2021 compared to the first quarter of 2020 primarily due to the impairment charges for the divested Fabory business in the first quarter of 2020.

Operating losses wereof $3 million for the first quarter of 20202021 decreased $187 million compared to operating losses of $5 million in the first quarter of 2019.

Other businesses
Net sales were $698$190 million for the first quarter of 2020, an increase of $65 million, or 10.2% when compared2020. This improvement is primarily due to the same period in 2019. On a daily basis, net sales increased 8.5%. The increase in net sales was driven by continued expansion inimpairment charges for the endless assortment businesses, partially offset by lower performance in other international high-touch businesses. The endless assortments businesses benefited from COVID-19 pandemic-related sales and otherwise continued to see strong new customer acquisition during the quarter.

Gross profit margin decreased 0.6 percentage pointsdivested Fabory business in the first quarter of 2020 versus the first quarter of 2019, driven by business unit mix from the faster growing endless assortment businesses as well as deeper discounting2020.


20
W.W. Grainger, Inc. and higher drop-ship activity at Zoro.Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
Operating losses of $138 million for the first quarter of 2020 were down $168 million compared to operating earnings $30 million for the first quarter of 2019. Excluding Fabory impairment charges as noted in the table above, operating earnings would have increased $9 million or 30%. This increase is primarily due to increased SG&A leverage in the endless assortment businesses.CONDITION AND RESULTS OF OPERATIONS

Financial Condition

Cash, Cash Equivalents and Liquidity
As of March 31, 2020 and December 31, 2019, Grainger had cash and cash equivalents of $1,492 million and $360 million, respectively. This increase in cash is due primarily to the proceeds received on March 31, 2020 when the Company drew down $1 billion from its $1.25 billion credit facility. This action was a proactive measure to increase the Company’s cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic (See part II, Item A: “Risk Factors” 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 COVID-19 pandemic for a prolonged period, its current level of cash and cash equivalents, marketable securities and availability under its revolving credit facilities will be sufficient to meet its liquidity needs. Whileneeds for the Company remains committednext twelve months. Grainger expects to returningcontinue to invest in its business and return excess capitalcash to shareholders overthrough cash dividends and share repurchases, which it plans to fund through total available liquidity and cash flows generated from operations. Grainger also maintains access to capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity.

Cash, Cash Equivalents and Liquidity
As of March 31, 2021 and December 31, 2020, Grainger had cash and cash equivalents of $562 million and $585 million, respectively. This decrease in cash is primarily due to resuming capital investments and the Company has temporarily paused its share repurchase program, as it shiftswhich were paused in 2020 due to conserve capital.the COVID-19 pandemic. As of March 31, 2021, the Company had approximately $1.8 billion in available liquidity.

Cash Flows
Net cash provided by operating activities was $244$294 million and $127$244 million for the three months ended March 31, 20202021 and 2019,2020, respectively. The increase in cash provided by operating activities is primarily the result of lowerhigher net payments related to employee variable compensationearnings and benefits paid under annual incentive plans and changes infavorable working capital, drivenincluding strong accounts receivable collections, partially offset by increased growth in March 2020.the net impacts from the now divested Fabory business.


Net cash used in investing activities was $58 million and $52 million for the three months ended March 31, 2021 and 2020, respectively. This increase in net cash used in investing activities was primarily driven by higher additions to the Company's supply chain infrastructure slightly offset by sales and 2019, respectively.redemption of assets.

Net cash provided byused in financing activities was $250 million in the three months ended March 31, 2021 compared to net cash provided by $955 million in the three months ended March 31, 2020 compared to2020. The change in net cash used in financing activities of $221 million in the three months ended March 31, 2019. The increase in net cash(used in) provided by financing activities was primarily driven by higher proceeds from the issuanceprior year borrowings of long-term debt which included $1 billion from the Company's $1.25 billion credit facility and $500 million in unsecured senior notes, and lowerpartially offset by higher treasury stock repurchases partially offset by debt redemption.in the current year.

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, current maturities of long-term debt and lease liabilities). Working capital as of March 31, 2020,2021, was $2,239$2,080 million, an increasea decrease of $147$140 million when compared to $2,092$2,220 million as of December 31, 2019.2020. The increasedecrease was primarily driven by a decrease in inventory and an increase in trade accounts receivable and a decrease in accrued contributions to employees profit-sharing plans due to the
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

annual cash contribution.payable. At these dates, the ratio of current assets to current liabilities was 2.4 and 2.6 for both March 31, 20202021 and December 31, 2019.2020, respectively.

Capital Expenditures
During the first quarter of 2020, the Company continued to invest in essential capital projects, namely the supply chain network, technology and inventory management solutions. Total capital spending for 2020 is expected to range from $150 million to $175 million.

Debt
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including 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 63.8%55.5% at March 31, 2020,2021, and 54.3%55.6% at December 31, 2019.2020.

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 March 31, 2020:

2021:
CorporateSenior UnsecuredShort-term
Moody'sA3A3P2
S&PA+A+A1


21
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Commitments and Other Contractual Obligations
There were no material changes to the Company’s commitments and other contractual obligations from those disclosed in Part II, Item 7, “Management’s7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations in the Company’s 20192020 Form 10K.10-K.


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 position 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 the Company’s critical accounting estimates is described in Part II, Item 7, “Management’s7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations in the Company’s 20192020 Form 10K. The following critical accounting policy is being added to the policies set forth in the 2019 Form 10K.

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

to be “forward-looking statements” under the federal securities laws. Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project,” “will” or “would” and similar terms and phrases, including references to assumptions.

Grainger cannot guarantee that any forward-looking statement will be realized and 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 the forward-looking statements include, without limitation: the unknown duration and health, economic, operational and financial impacts of the global outbreak of the Coronavirus (COVID-19 pandemic)coronavirus disease 2019 (COVID-19) as well as the duration, extent and 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 uncertain durationdevelopment and availability of effective treatment or vaccines, any mandated shut-downsfacility 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, inventory shortages, the potential for government action to allocate or direct products to certain customers which may cause disruption in relationships with other customers, and 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;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 sources of supply; changes in customer or product mix; increased competitive pricing pressures; failure to develop or implement new technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company's gross 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, general commercial disputes, 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 involving the Company or third parties on which the Company
22
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
depends; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including price and trading volume 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 or human induced disasters, extreme weather and other catastrophes; unanticipated and/catastrophes or extreme weather conditions; failure to attract, retain, train, motivate, develop and transition key employees; loss of key members of management; the Company's ability to operate, integrate and leverage acquired businesses;management or key employees; changes in effective tax rates; changes in credit ratings or outlook; the Company's incurrence of indebtedness and other factors identified under Part II, Item 1A: “Risk Factors” in the Company’s 20192020 Form 10-K, as updated from time to time in the Company’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 update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


23

W.W. Grainger, Inc. and Subsidiaries


Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 3.Quantitative and Qualitative Disclosures About Market Risk
As disclosed in Part II, Item 7A,7A: Quantitative and Qualitative Disclosures About Market Risk”Risk in the Company's 20192020 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 10 contained within Part I, Item 1, "Notes to Condensed Consolidated Financial Statements”.

For a discussion of current market conditions resulting from the COVID-19 pandemic, refer to Part I, Item 2, "Management's2: Management's Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, "Risk Factors”.Operations.

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 have been no changes in Grainger's internal control over financial reporting for the quarter ended March 31, 2020,2021, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.

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PART II – OTHER INFORMATION
 
Item 1.
Item 1: Legal Proceedings

For a description of the Company’s legal proceedings, see Note 1311 - 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 Company’s 2019 Annual Report on Form 10-K filed with the Securities 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.  1: Financial Statements.
Grainger’s business and operations may continue to be adversely affected by the global outbreak of the Coronavirus (COVID-19) or other global outbreaks of pandemic disease.
Any global outbreaks of pandemic disease, such as the COVID-19 pandemic, could have a material adverse effect on the Company’s business, results of operations, and financial condition, including liquidity, capital and financing resources. 

The COVID-19 pandemic has disrupted and adversely affected the Company’s business to date. 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 at 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 to 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 currently unknown.
Moreover, the COVID-19 pandemic may materially adversely affect many of the Company's customers' and suppliers' ability to continue to operate as a going concern in the 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 shift 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 events in the future all of which could materially adversely affect Company's future sales and results of operations.
Disruption caused by business responded to the COVID-19 pandemic, including 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, any of which could have a material adverse effect on Grainger its financial condition and results of operations.

In addition, these global outbreaks may result in a widespread health crisis that could 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 Company's products, which could materially adversely affect the Company's business, results of operations and financial condition.
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 future developments, which are highly uncertain and cannot be predicted at this time. Such developments may include the geographic spread, severity and duration of the COVID-19 pandemic, the extent and duration of the impact on the U.S. or global economy, and the actions that have been and may be taken by various governmental authorities in response to the outbreak, including mandatory facility closures of non-essential businesses, stay in shelter or social distancing mandates, 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. Furthermore, the extent any disruptions the COVID-19 pandemic has caused or may cause to the Company's customers or suppliers are not known and cannot be predicted. 

If the Company is not able to respond to and manage the impact of these events, the Company's business and results of operations may continue to be adversely affected.

Item 2.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities – First Quarter
Period
Total Number of Shares Purchased (A) (D)
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
January 1 - January 31155,980$388.26154,9801,338,763
February 1 - February 28146,924$374.55146,9241,191,839
March 1 - March 31150,566$394.53150,0161,041,823
Total453,470451,920 
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
January 1 - January 31110,294$331.91110,2942,968,299
February 1 - February 2977,022$282.9277,0222,891,277
March 1 - March 31150,522$279.10148,7222,742,555
Total337,838 (D)
336,038 
(A)There were no shares withheld to satisfy tax withholding obligations.
(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 1,800 shares between the Total Number of Shares Purchased and the Total Number of
(B)Average price paid per share excludes commissions of $0.01 per share 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. On April 28, 2021, Grainger's Board of Directors authorized and the Company announced a new program authorizing the repurchase of up to 5 million shares with no expiration date, replacing the 2019 Program.
(D)The difference of 1,550 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 SharingRetirement Savings Plan for the benefit
of the employees who participate in the plan.


W.W. Grainger, Inc. and Subsidiaries


Item 6.6: Exhibits

A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 3227 of this report.


25


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.
Date:April 23, 202030, 2021
 
 
 
By:
 
 
 
/s/ Thomas B. OkrayDeidra C. Merriwether
Thomas B. Okray, Deidra C. Merriwether
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date:April 23, 202030, 2021
 
 
 
By:
 
 
 
/s/ Eric R. Tapia
Eric R. Tapia Vice President
and Controller
(Principal Accounting Officer)





EXHIBIT INDEX

Vice President and Controller
(Principal Accounting Officer)


26


EXHIBIT INDEX
EXHIBIT NO.DESCRIPTION
4.131.1
Fourth Supplemental Indenture, dated as of February 26, 2020, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 21, 2020.
4.2
Form of 1.85% Senior Notes due 2025 (included in Exhibit 4.1), incorporated by reference to Exhibit 4.2 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 21, 2020.
10.1
Form of 2020 W.W. Grainger, Inc. 2015 Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers.*
10.2
Form of 2020 W.W. Grainger, Inc. 2015 Incentive Plan Performance Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers.*
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.
32
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 - 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),.

(*) Management contract or compensatory plan or arrangement.


32
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