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,~~June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission file number 1-5684

W.W. Grainger, Inc.

(Exact name of registrant as specified in its charter)

Illinois

36-1150280

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

100 Grainger Parkway,

Lake Forest,

Illinois

60045-5201

(Address of principal executive offices)

(Zip Code)

(847)

535-1000

(Registrant’s telephone number including area code)

Not Applicable

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock	GWW	New 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~~"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 ~~52,110,145~~52,074,363 shares of the Company’s Common Stock, par value $0.50, outstanding as of ~~March 31,~~June 30, 2021.


	TABLE OF CONTENTS
		Page
	PART I - FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings for the Three and Six Months Ended ~~March 31,~~June 30, 2021 and 2020	3
	Condensed Consolidated Statements of Comprehensive Earnings for the Three and Six Months Ended ~~March 31,~~June 30, 2021 and 2020	4
	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2021 and December 31, 2020	5
	Condensed Consolidated Statements of Cash Flows or for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2021 and 2020	6
	Condensed Consolidated Statements of Shareholders' Equity for the Three and Six Months Ended ~~March 31,~~June 30, 2021 and 2020	7
	Notes to Condensed Consolidated Financial Statements	89
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	1618
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	2430
Item 4:	Controls and Procedures	2430

	PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	2531
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	2531
Item 6:	Exhibits	2531
Signatures		2632

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 per share amounts)

(Unaudited)


		Three Months Ended				Three Months Ended				Six Months Ended
		March 31,				June 30,				June 30,
		2021		2020				2021		2020		2021		2020
Net sales	Net sales	$	3,084	$	3,001		Net sales	$	3,207	$	2,837	$	6,291	$	5,838
Cost of goods sold	Cost of goods sold	1,991		1,880			Cost of goods sold	2,083		1,821		4,074		3,701
Gross profit	Gross profit	1,093		1,121			Gross profit	1,124		1,016		2,217		2,137
Selling, general and administrative expenses	Selling, general and administrative expenses	735		962			Selling, general and administrative expenses	790		811		1,525		1,773
Operating earnings	Operating earnings	358		159			Operating earnings	334		205		692		364
Other (income) expense:	Other (income) expense:						Other (income) expense:
Interest expense, net	Interest expense, net	21		21			Interest expense, net	22		28		43		49
Other, net	Other, net	(6)		(4)			Other, net	(7)		(7)		(13)		(11)
Total other expense, net	Total other expense, net	15		17			Total other expense, net	15		21		30		38
Earnings before income taxes	Earnings before income taxes	343		142			Earnings before income taxes	319		184		662		326
Income tax provision (benefit)		88		(43)
Income tax provision							Income tax provision	76		55		164		12
Net earnings	Net earnings	255		185			Net earnings	243		129		498		314
Less: Net earnings attributable to noncontrolling interest	Less: Net earnings attributable to noncontrolling interest	17		12			Less: Net earnings attributable to noncontrolling interest	18		15		35		27
Net earnings attributable to W.W. Grainger, Inc.	Net earnings attributable to W.W. Grainger, Inc.	$	238	$	173		Net earnings attributable to W.W. Grainger, Inc.	$	225	$	114	$	463	$	287
Earnings per share:	Earnings per share:						Earnings per share:
Basic	Basic	$	4.51	$	3.20		Basic	$	4.30	$	2.11	$	8.80	$	5.31
Diluted	Diluted	$	4.48	$	3.19		Diluted	$	4.27	$	2.10	$	8.76	$	5.29
Weighted average number of shares outstanding:	Weighted average number of shares outstanding:						Weighted average number of shares outstanding:
Basic	Basic	52.3		53.6			Basic	52.2		53.5		52.2		53.6
Diluted	Diluted	52.6		53.8			Diluted	52.5		53.7		52.5		53.8
Cash dividends paid per share	Cash dividends paid per share	$	1.53	$	1.44		Cash dividends paid per share	$	1.62	$	1.44	$	3.15	$	2.88

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

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In millions of dollars)

(Unaudited)


		Three Months Ended				Three Months Ended				Six Months Ended
		March 31,				June 30,				June 30,
		2021		2020				2021		2020		2021		2020
Net earnings	Net earnings	$	255	$	185		Net earnings	$	243	$	129	$	498	314
Other comprehensive earnings (losses):	Other comprehensive earnings (losses):						Other comprehensive earnings (losses):
Foreign currency translation adjustments, net of reclassification	Foreign currency translation adjustments, net of reclassification	(35)		(58)			Foreign currency translation adjustments, net of reclassification	9		64		(26)		6

Postretirement benefit plan gains (losses), net of tax benefit of $1 in both periods		(4)		(3)
Postretirement benefit plan gains (losses), net of tax benefit of $1, $1, $2, and $2, respectively							Postretirement benefit plan gains (losses), net of tax benefit of $1, $1, $2, and $2, respectively	(2)		(3)		(6)		(6)
Other	Other	1		1			Other	0		3		1		4
Total other comprehensive earnings (losses)	Total other comprehensive earnings (losses)	(38)		(60)			Total other comprehensive earnings (losses)	7		64		(31)		4
Comprehensive earnings, net of tax	Comprehensive earnings, net of tax	217		125			Comprehensive earnings, net of tax	250		193		467		318
Less: Comprehensive earnings (losses) attributable to noncontrolling interest	Less: Comprehensive earnings (losses) attributable to noncontrolling interest						Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings	Net earnings	17		12			Net earnings	18		15		35		27
Foreign currency translation adjustments	Foreign currency translation adjustments	(18)		3			Foreign currency translation adjustments	0		(2)		(18)		1
Total comprehensive earnings (losses) attributable to noncontrolling interest	Total comprehensive earnings (losses) attributable to noncontrolling interest	(1)		15			Total comprehensive earnings (losses) attributable to noncontrolling interest	18		13		17		28
Comprehensive earnings attributable to W.W. Grainger, Inc.	Comprehensive earnings attributable to W.W. Grainger, Inc.	$	218	$	110		Comprehensive earnings attributable to W.W. Grainger, Inc.	$	232	$	180	$	450	$	290

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

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions of dollars, except for share and per share amounts)


		As of					As of
Assets	Assets	(Unaudited) March 31, 2021		December 31, 2020		Assets	(Unaudited) June 30, 2021		December 31, 2020
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	562	$	585	Cash and cash equivalents	$	547	$	585
Accounts receivable (less allowances for credit losses of $28 and $27, respectively)		1,576		1,474
Accounts receivable (less allowances for credit losses of $29 and $27, respectively)						Accounts receivable (less allowances for credit losses of $29 and $27, respectively)	1,634		1,474
Inventories - net	Inventories - net	1,675		1,733		Inventories - net	1,707		1,733
Prepaid expenses and other current assets	Prepaid expenses and other current assets	121		127		Prepaid expenses and other current assets	169		127

Total current assets	Total current assets	3,934		3,919		Total current assets	4,057		3,919
Property, buildings and equipment - net	Property, buildings and equipment - net	1,441		1,395		Property, buildings and equipment - net	1,436		1,395

Goodwill	Goodwill	388		391		Goodwill	390		391
Intangibles - net	Intangibles - net	224		228		Intangibles - net	232		228
Other assets	Other assets	346		362		Other assets	347		362
Total assets	Total assets	$	6,333	$	6,295	Total assets	$	6,462	$	6,295

Liabilities and shareholders' equity	Liabilities and shareholders' equity					Liabilities and shareholders' equity
Current liabilities	Current liabilities					Current liabilities

Current maturities of long-term debt	Current maturities of long-term debt	$	7	$	8	Current maturities of long-term debt	$	0	$	8
Trade accounts payable	Trade accounts payable	887		779		Trade accounts payable	954		779
Accrued compensation and benefits	Accrued compensation and benefits	219		307		Accrued compensation and benefits	285		307

Accrued expenses	Accrued expenses	330		305		Accrued expenses	321		305
Income taxes payable	Income taxes payable	88		42		Income taxes payable	29		42
Total current liabilities	Total current liabilities	1,531		1,441		Total current liabilities	1,589		1,441
Long-term debt (less current maturities)	Long-term debt (less current maturities)	2,373		2,389		Long-term debt (less current maturities)	2,375		2,389
Deferred income taxes and tax uncertainties	Deferred income taxes and tax uncertainties	87		110		Deferred income taxes and tax uncertainties	88		110
Other non-current liabilities	Other non-current liabilities	262		262		Other non-current liabilities	269		262
Shareholders' equity	Shareholders' equity					Shareholders' equity
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; NaN issued nor outstanding	Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; NaN issued nor outstanding	0		0		Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; NaN issued nor outstanding	0		0
Common Stock – $0.50 par value –300,000,000 shares authorized; issued 109,659,219 shares		55		55
Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares						Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares	55		55
Additional contributed capital	Additional contributed capital	1,248		1,239		Additional contributed capital	1,247		1,239
Retained earnings	Retained earnings	8,948		8,779		Retained earnings	9,089		8,779
Accumulated other comprehensive losses	Accumulated other comprehensive losses	(81)		(61)		Accumulated other comprehensive losses	(74)		(61)
Treasury stock, at cost - 57,549,074 and 57,134,828 shares, respectively		(8,354)		(8,184)
Treasury stock, at cost - 57,584,856 and 57,134,828 shares, respectively						Treasury stock, at cost - 57,584,856 and 57,134,828 shares, respectively	(8,449)		(8,184)
Total W.W. Grainger, Inc. shareholders’ equity	Total W.W. Grainger, Inc. shareholders’ equity	1,816		1,828		Total W.W. Grainger, Inc. shareholders’ equity	1,868		1,828
Noncontrolling interest	Noncontrolling interest	264		265		Noncontrolling interest	273		265
Total shareholders' equity	Total shareholders' equity	2,080		2,093		Total shareholders' equity	2,141		2,093
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	6,333	$	6,295	Total liabilities and shareholders' equity	$	6,462	$	6,295

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

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of dollars)

(Unaudited)


		Three Months Ended					Six Months Ended
		March 31,					June 30,
		2021		2020			2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net earnings	Net earnings	$	255	$	185	Net earnings	$	498	$	314

Provision for credit losses	Provision for credit losses	4		6		Provision for credit losses	8		14
Deferred income taxes and tax uncertainties	Deferred income taxes and tax uncertainties	(11)		(7)		Deferred income taxes and tax uncertainties	(8)		0
Depreciation and amortization	Depreciation and amortization	43		45		Depreciation and amortization	92		95
Impairment of goodwill, intangible and long-lived assets	Impairment of goodwill, intangible and long-lived assets	0		177		Impairment of goodwill, intangible and long-lived assets	0		177
Net (gains) losses from sale or redemption of assets		(5)		3
Net (gains) losses from sale or redemption of assets and business divestitures						Net (gains) losses from sale or redemption of assets and business divestitures	(4)		110
Stock-based compensation	Stock-based compensation	8		9		Stock-based compensation	25		26

Subtotal	Subtotal	39		233		Subtotal	113		422
Change in operating assets and liabilities:	Change in operating assets and liabilities:					Change in operating assets and liabilities:
Accounts receivable	Accounts receivable	(121)		(217)		Accounts receivable	(180)		(113)
Inventories	Inventories	52		19		Inventories	22		(144)
Prepaid expenses and other assets	Prepaid expenses and other assets	(5)		(26)		Prepaid expenses and other assets	(8)		(37)
Trade accounts payable	Trade accounts payable	85		155		Trade accounts payable	178		79
Accrued liabilities	Accrued liabilities	(61)		(36)		Accrued liabilities	(7)		(32)
Income taxes, net	Income taxes, net	55		(62)		Income taxes, net	(50)		(18)
Other non-current liabilities	Other non-current liabilities	(5)		(7)		Other non-current liabilities	(3)		5
Subtotal	Subtotal	0		(174)		Subtotal	(48)		(260)
Net cash provided by operating activities	Net cash provided by operating activities	294		244		Net cash provided by operating activities	563		476
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Additions to property, buildings, equipment and intangibles	Additions to property, buildings, equipment and intangibles	(73)		(50)		Additions to property, buildings, equipment and intangibles	(147)		(93)
Proceeds from sale or redemption of assets		15		0
Proceeds from sale or redemption of assets and business divestitures						Proceeds from sale or redemption of assets and business divestitures	17		13
Other - net	Other - net	0		(2)		Other - net	0		(2)

Net cash used in investing activities	Net cash used in investing activities	(58)		(52)		Net cash used in investing activities	(130)		(82)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Borrowings under lines of credit	Borrowings under lines of credit	0		9		Borrowings under lines of credit	0		12
Payments against lines of credit	Payments against lines of credit	0		(45)		Payments against lines of credit	0		(50)
Proceeds from long-term debt	Proceeds from long-term debt	0		1,500		Proceeds from long-term debt	0		1,500
Payments of long-term debt	Payments of long-term debt	0		(345)		Payments of long-term debt	(8)		(347)
Proceeds from stock options exercised	Proceeds from stock options exercised	8		19		Proceeds from stock options exercised	30		28
Payments for employee taxes withheld from stock awards	Payments for employee taxes withheld from stock awards	(2)		(5)		Payments for employee taxes withheld from stock awards	(28)		(14)
Purchases of treasury stock	Purchases of treasury stock	(175)		(100)		Purchases of treasury stock	(283)		(101)
Cash dividends paid	Cash dividends paid	(81)		(78)		Cash dividends paid	(176)		(164)

Other - net						Other - net	2		0
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities	(250)		955		Net cash (used in) provided by financing activities	(463)		864
Exchange rate effect on cash and cash equivalents	Exchange rate effect on cash and cash equivalents	(9)		(15)		Exchange rate effect on cash and cash equivalents	(8)		(15)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	(23)		1,132		Net change in cash and cash equivalents	(38)		1,243
Cash and cash equivalents at beginning of year	Cash and cash equivalents at beginning of year	585		360		Cash and cash equivalents at beginning of year	585		360
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	562	$	1,492	Cash and cash equivalents at end of period	$	547	$	1,603

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

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In millions of dollars, except for per share amounts)

(Unaudited)


		Common Stock		Additional Contributed Capital		Retained Earnings		Accumulated Other Comprehensive Earnings (Losses)		Treasury Stock		Noncontrolling Interest		Total			Common Stock		Additional Contributed Capital		Retained Earnings		Accumulated Other Comprehensive Earnings (Losses)		Treasury Stock		Noncontrolling Interest		Total
Balance at January 1, 2020	Balance at January 1, 2020	$	55	$	1,182	$	8,405	$	(154)	$	(7,633)	$	205	$	2,060	Balance at January 1, 2020	$	55	$	1,182	$	8,405	$	(154)	$	(7,633)	$	205	$	2,060
Stock-based compensation	Stock-based compensation	—		10		—		—		13		—		23		Stock-based compensation	—		10		—		—		13		—		23
Purchases of treasury stock	Purchases of treasury stock	—		—		—		—		(100)		—		(100)		Purchases of treasury stock	—		—		—		—		(100)		—		(100)
Net earnings	Net earnings	—		—		173		—		—		12		185		Net earnings	—		—		173		—		—		12		185
Other comprehensive earnings (losses)	Other comprehensive earnings (losses)	—		—		—		(63)		—		3		(60)		Other comprehensive earnings (losses)	—		—		—		(63)		—		3		(60)

Cash dividends paid ($1.44 per share)	Cash dividends paid ($1.44 per share)	—		—		(78)		—		—		—		(78)		Cash dividends paid ($1.44 per share)	—		—		(78)		—		—		—		(78)
Balance at March 31, 2020	Balance at March 31, 2020	$	55	$	1,192	$	8,500	$	(217)	$	(7,720)	$	220	$	2,030	Balance at March 31, 2020	$	55	$	1,192	$	8,500	$	(217)	$	(7,720)	$	220	$	2,030
Stock-based compensation																Stock-based compensation	—		6		—		—		11		—		17
Purchases of treasury stock																Purchases of treasury stock	—		—		—		—		—		(1)		(1)
Net earnings																Net earnings	—		—		114		—		—		15		129
Other comprehensive earnings (losses)																Other comprehensive earnings (losses)	—		—		—		66		—		(2)		64

Cash dividends paid ($1.44 per share)																Cash dividends paid ($1.44 per share)	—		—		(78)		—		—		(9)		(87)
Balance at June 30, 2020																Balance at June 30, 2020	$	55	$	1,198	$	8,536	$	(151)	$	(7,709)	$	223	$	2,152

Common Stock Additional Contributed Capital Retained Earnings Accumulated Other Comprehensive Earnings (Losses) Treasury Stock Noncontrolling
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
The accompanying notes are an integral part of these financial statements.

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In millions of dollars, except for per share amounts)

(Unaudited)


	Common Stock		Additional Contributed Capital		Retained Earnings		Accumulated Other Comprehensive Earnings (Losses)		Treasury Stock		Noncontrolling 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
Stock-based compensation	—		(1)		—		—		12		1		12
Purchases of treasury stock	—		—		—		—		(107)		(1)		(108)
Net earnings	—		—		225		—		—		18		243
Other comprehensive earnings (losses)	—		—		—		7		—		—		7
Capital contribution	—		—		—		—		—		2		2
Cash dividends paid ($1.62 per share)	—		—		(84)		—		—		(11)		(95)
Balance at June 30, 2021	$	55	$	1,247	$	9,089	$	(74)	$	(8,449)	$	273	$	2,141

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

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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) 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, 2020 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 24, 2021 (2020 Form 10-K). The Condensed Consolidated Balance Sheet as of December 31, 2020 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

Effective January 1, 2021, Grainger's 2 reportable segments are High-Touch Solutions ~~(N.A.)~~N.A. and Endless Assortment. On March 8, 2021, the Company 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 described in Note 10 - Segment Information.

The Company's High-Touch Solutions ~~(N.A.)~~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 Company’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~~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) 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~~intra-period 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 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.

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 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.

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 impact of this standard.~~

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the impact of this standard.

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.

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 and six months ended ~~March 31,~~June 30, 2021 and 2020, respectively.

Grainger serves a large number of customers in diverse industries, which are subject to different economic and ~~market specific~~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~~market-specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors. In the High-Touch Solutions ~~(N.A.)~~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 customer 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,										Three Months Ended June 30,
		2021				2020						2021								2020
		High-Touch Solutions (N.A.)		Endless Assortment		Total Company(2)		High-Touch Solutions (N.A.)		Endless Assortment			Total Company(2)			High-Touch Solutions N.A.		Endless Assortment		Total Company(2)		High-Touch Solutions N.A.		Endless Assortment		Total Company(2)
Contractors	Contractors	9	%	15	%	10	%	10	%	15	%		10	%	Contractors	9	%	15	%	10	%	9	%	16	%	10	%
Commercial	Commercial	9	%	15	%	10	%	9	%	15	%		10	%	Commercial	9	%	14	%	10	%	8	%	15	%	9	%
Government	Government	19	%	3	%	16	%	17	%	3	%		14	%	Government	19	%	3	%	15	%	22	%	2	%	18	%
Healthcare	Healthcare	7	%	2	%	6	%	8	%	1	%		7	%	Healthcare	7	%	2	%	6	%	10	%	2	%	8	%
Manufacturing	Manufacturing	30	%	29	%	30	%	31	%	31	%		31	%	Manufacturing	29	%	30	%	30	%	28	%	28	%	28	%
Retail/Wholesale	Retail/Wholesale	9	%	10	%	9	%	8	%	11	%		8	%	Retail/Wholesale	10	%	10	%	10	%	10	%	10	%	10	%
Transportation	Transportation	5	%	3	%	5	%	5	%	3	%		5	%	Transportation	5	%	3	%	5	%	5	%	3	%	5	%
Others(1)	Others(1)	12	%	23	%	14	%	12	%	21	%		15	%	Others(1)	12	%	23	%	14	%	8	%	24	%	12	%
Total	Total	100	%	100	%	100	%	100	%	100	%		100	%	Total	100	%	100	%	100	%	100	%	100	%	100	%
Percent of Total Company Revenue	Percent of Total Company Revenue	78	%	20	%	100	%	78	%	17	%		100	%	Percent of Total Company Revenue	78	%	20	%	100	%	77	%	19	%	100	%

(1) Others primarily includes revenue from industries and customers that are not material individually, including agriculture, mining, natural resources and resellers not aligned to a major industry segment.

(2) Total Company includes other businesses, which includes the Cromwell business in the U.K., as well as the Fabory and China businesses in the period prior to their divestitures in the second and third quarter of 2020, respectively. Other businesses account for approximately 2% of revenue for the three months ended ~~March 31,~~June 30, 2021 and 4% of revenue for the three months ended June 30, 2020, respectively.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


	Six Months Ended June 30,
	2021						2020
	High-Touch Solutions N.A.		Endless Assortment		Total Company(2)		High-Touch Solutions N.A.		Endless Assortment		Total Company(2)
Contractors	9	%	15	%	10	%	9	%	16	%	10	%
Commercial	9	%	15	%	10	%	8	%	14	%	9	%
Government	19	%	3	%	15	%	20	%	3	%	16	%
Healthcare	7	%	2	%	6	%	9	%	2	%	8	%
Manufacturing	30	%	29	%	30	%	30	%	29	%	30	%
Retail/Wholesale	10	%	10	%	10	%	9	%	10	%	9	%
Transportation	5	%	3	%	5	%	5	%	3	%	5	%
Others(1)	11	%	23	%	14	%	10	%	23	%	13	%
Total	100	%	100	%	100	%	100	%	100	%	100	%
Percent of Total Company Revenue	78	%	20	%	100	%	78	%	17	%	100	%

(2) Total Company includes other businesses, which includes the Cromwell business in the U.K., as well as the Fabory and China businesses in the period prior to their divestitures in the second and third quarter of 2020, respectively. Other businesses account for approximately 2% of revenue for the six months ended June 30, 2021 and 5% of revenue for the ~~three~~six months ended ~~March 31,~~June 30, 2020, respectively.

Total accrued sales returns were approximately ~~$37~~$41 million and $31 million as of ~~March 31,~~June 30, 2021 and December 31, 2020, respectively and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately ~~$48 million and~~ $58 million as of ~~March 31,~~June 30, 2021 and December 31, 2020 and are reported as part of Accrued expenses. The Company had no material unsatisfied performance obligations, contract assets or liabilities as of ~~March 31,~~June 30, 2021 and December 31, 2020.

~~W.W. Grainger, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT

Property, buildings and equipment consisted of the following (in millions of dollars):

As of
March 31, 2021 December 31, 2020
Land $ 328 $ 329
Building, structures and improvements 1,329 1,330
Furniture, fixtures, machinery and equipment 1,946 1,878
Property, buildings and equipment $ 3,603 $ 3,537
Less: Accumulated depreciation and amortization 2,162 2,142
Property, buildings and equipment, net $ 1,441 $ 1,395


	As of
	June 30, 2021		December 31, 2020
Land	$	329	$	329
Building, structures and improvements	1,440		1,330
Furniture, fixtures, machinery and equipment	1,570		1,878
Property, buildings and equipment	$	3,339	$	3,537
Less: Accumulated depreciation and amortization	1,903		2,142
Property, buildings and equipment, net	$	1,436	$	1,395

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 units' goodwill or intangible assets is less than their carrying value. If indicators of impairment are identified, a quantitative impairment test is performed. The Company did not identify any significant events or changes in circumstances that indicated

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

the existence of impairment indicators during the three and six months ended ~~March 31,~~June 30, 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 Assortment		Other		Total			High-Touch Solutions N.A		Endless Assortment		Other		Total
Balance at January 1, 2020	Balance at January 1, 2020	$	318	$	52	$	59	$	429	Balance at January 1, 2020	$	318	$	52	$	59	$	429
Acquisition	Acquisition	0		15		0		15		Acquisition	0		15		0		15
Impairment	Impairment	0		0		(58)		(58)		Impairment	0		0		(58)		(58)
Translation	Translation	3		3		(1)		5		Translation	3		3		(1)		5
Balance at December 31, 2020	Balance at December 31, 2020	321		70		0		391		Balance at December 31, 2020	321		70		0		391

Impairment		0		0		0		0

Translation	Translation	1		(4)		0		(3)		Translation	3		(4)		0		(1)
Balance at March 31, 2021		$	322	$	66	$	0	$	388
Balance at June 30, 2021										Balance at June 30, 2021	$	324	$	66	$	0	$	390

The cumulative goodwill impairments as of ~~March 31,~~June 30, 2021, were $137 million and consisted of $32 million within High-Touch Solutions ~~(N.A.)~~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 the Fabory business during the second quarter of 2020. Grainger's current business portfolio had 0 impairments to goodwill for the three and six months ended ~~March 31,~~June 30, 2021 and 2020.

~~W.W. Grainger, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

The balances in Intangible assets, net are as follows (in millions of dollars):


			March 31, 2021						December 31, 2020								June 30, 2021						December 31, 2020
		Weighted average life	Gross carrying amount		Accumulated amortization/ impairment		Net carrying amount		Gross carrying amount		Accumulated amortization/ impairment		Net carrying amount			Weighted average life	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Customer lists and relationships	Customer lists and relationships	11.8 years	$	221	$	171	$	50	$	223	$	171	$	52	Customer lists and relationships	11.8 years	$	221	$	173	$	48	$	223	$	171	$	52
Trademarks, trade names and other	Trademarks, trade names and other	14.1 years	36		23		13		36		22		14		Trademarks, trade names and other	14.1 years	36		24		12		36		22		14
Non-amortized trade names and other	Non-amortized trade names and other	Indefinite	26		0		26		28		0		28		Non-amortized trade names and other	Indefinite	26		0		26		28		0		28
Capitalized software	Capitalized software	4.2 years	472		337		135		461		327		134		Capitalized software	4.2 years	496		350		146		461		327		134
Total intangible assets	Total intangible assets	7.0 years	$	755	$	531	$	224	$	748	$	520	$	228	Total intangible assets	6.9 years	$	779	$	547	$	232	$	748	$	520	$	228

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 - DEBT

There was 0 short-term debt as of ~~March 31,~~June 30, 2021 and 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, 2021				As of December 31, 2020					As of June 30, 2021				As of December 31, 2020
		Carrying Value		Fair Value(4)		Carrying Value		Fair Value(4)			Carrying Value		Fair Value(4)		Carrying Value		Fair Value(4)
4.60% senior notes due 2045(1)	4.60% senior notes due 2045(1)	$	1,000	$	1,201	$	1,000	$	1,343	4.60% senior notes due 2045(1)	$	1,000	$	1,294	$	1,000	$	1,343
3.75% senior notes due 2046(1)	3.75% senior notes due 2046(1)	400		422		400		479		3.75% senior notes due 2046(1)	400		458		400		479
4.20% senior notes due 2047(1)	4.20% senior notes due 2047(1)	400		452		400		514		4.20% senior notes due 2047(1)	400		490		400		514
1.85% senior notes due 2025(2)	1.85% senior notes due 2025(2)	500		515		500		526		1.85% senior notes due 2025(2)	500		518		500		526

Japanese Yen term loan(3)	Japanese Yen term loan(3)	81		81		87		87		Japanese Yen term loan(3)	81		81		87		87

Other	Other	23		23		34		34		Other	17		17		34		34
Subtotal	Subtotal	2,404		2,694		2,421		2,983		Subtotal	2,398		2,858		2,421		2,983
Less: Current maturities	Less: Current maturities	(7)		(7)		(8)		(8)		Less: Current maturities	0		0		(8)		(8)
Debt issuance costs and discounts, net of amortization	Debt issuance costs and discounts, net of amortization	(24)		(24)		(24)		(24)		Debt issuance costs and discounts, net of amortization	(23)		(23)		(24)		(24)
Long-term debt (less current maturities)	Long-term debt (less current maturities)	$	2,373	$	2,663	$	2,389	$	2,951	Long-term debt (less current maturities)	$	2,375	$	2,835	$	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.~~semi-annually.

•In May 2016, $400 million payable in 30 years and carries a 3.75% interest rate, payable ~~semiannually.~~semi-annually.

•In June 2015, $1 billion payable in 30 years and carries a 4.60% interest rate, payable ~~semiannually.~~semi-annually.

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 experiences specific kinds of changes in control, it will be required to make an offer to purchase the Senior Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the

~~W.W. Grainger, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

date of purchase. Within one year of the maturity date, the Company may 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 $24 million associated with the issuance of the Senior Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and are being amortized to interest expense over the term of the Senior Notes.

(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. 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 are being amortized to interest expense, net over the term of the 1.85% Notes. In

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

(3) In August 2020, MonotaRO Co. ~~LTD.~~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 Japanese Yen term loan matures in 2024, payable over 4 equal semi-annual principal installments in 2023 and 2024, and bears average interest at 0.05%.

(4) The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as ~~level~~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.

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 on its 1.85% Notes and foreign currency fluctuations in connection with its foreign currency-denominated intercompany borrowings. The Company did not enter into these agreements for trading or speculative purposes.

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,~~June 30, 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 Accumulated 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,~~June 30, 2021 and December 31, 2020 was approximately $34 million.

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 and six months ended ~~March 31,~~June 30, 2021 and 2020 is as follows (in millions of dollars):


													Three Months Ended June 30,								Six Months Ended June 30,
		Three Months Ended March 31, 2021			Three Months Ended March 31, 2020						2021				2020				2021				2020
			Interest expense, net		Other, net		Interest expense, net		Other, Net				Interest expense, net		Other, net		Interest expense, net		Other, net		Interest expense, net		Other, Net		Interest expense, net		Other, Net
Gain or (loss) recognized in earnings	Gain or (loss) recognized in earnings											Gain or (loss) recognized in earnings
Fair value hedge:	Fair value hedge:											Fair value hedge:
Hedged item	Hedged item		$	10	$	0	$	(18)	$	0		Hedged item	$	(1)	$	0	$	(4)	$	0	$	9	$	0	$	(22)	$	0
Interest rate swap designated as hedging instrument	Interest rate swap designated as hedging instrument		$	(10)	$	0	$	18	$	0		Interest rate swap designated as hedging instrument	$	1	$	0	$	4	$	0	$	(9)	$	0	$	22	$	0

Cash flow hedge:	Cash flow hedge:											Cash flow hedge:
Hedged item	Hedged item		$	0	$	0	$	0	$	(2)		Hedged item	$	0	$	1	$	0	$	2	$	0	$	1	$	0	$	0
Cross-currency swap designated as hedging instrument	Cross-currency swap designated as hedging instrument		$	0	$	0	$	0	$	2		Cross-currency swap designated as hedging instrument	$	0	$	(1)	$	0	$	(2)	$	0	$	(1)	$	0	$	0

The effect of the Company’s fair value and cash flow hedges on AOCE for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020was not material.

The fair value and carrying amounts of outstanding derivative instruments in the Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2021 and December 31, 2020 were as follows (in millions of dollars):


			As of March 31, 2021		As of December 31, 2020				As of June 30, 2021		As of December 31, 2020
		Balance Sheet Classification	Fair Value and Carrying Amounts		Fair Value and Carrying Amounts			Balance Sheet Classification	Fair Value and Carrying Amounts		Fair Value and Carrying Amounts
Cross-currency swap	Cross-currency swap	Other non-current liabilities	$	2	$	2	Cross-currency swap	Other non-current liabilities	$	3	$	2
Interest rate swap	Interest rate swap	Other assets	$	10	$	21	Interest rate swap	Other assets	$	12	$	21

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,~~June 30, 2021 and December 31, 2020 amounted to ~~$510~~$512 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 within the fair value hierarchy, and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. No adjustments were required during the current period to reflect the ~~counterparty’s’~~counterparty’s credit risk and/or the Company’s own nonperformance risk.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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,						Three Months Ended June 30,					Six Months Ended June 30,
		2021			2020					2021			2020			2021			2020
Federal income tax	Federal income tax	$	72		$	35			Federal income tax	$	67		$	47		$	139		$	82
States income taxes, net of federal income tax benefit	States income taxes, net of federal income tax benefit	9			4				States income taxes, net of federal income tax benefit	8			7			18			11
Stock compensation									Stock compensation	(6)			0			(7)			(2)
Foreign rate difference	Foreign rate difference	7			3				Foreign rate difference	6			4			13			7

Net tax benefit related to foreign subsidiaries	Net tax benefit related to foreign subsidiaries	0			(85)				Net tax benefit related to foreign subsidiaries	0			(3)			0			(88)

Income tax expense (benefit)		$	88		$	(43)
Other, net									Other, net	1			0			1			2
Income tax provision									Income tax provision	$	76		$	55		$	164		$	12
Effective tax rate	Effective tax rate	25.8		%	(30.4)		%		Effective tax rate	23.6		%	30.2		%	24.7		%	3.9		%

~~W.W. Grainger, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(Unaudited)~~

The changes to the Company's effective tax rate for the ~~three~~six months ended ~~March 31,~~June 30, 2021 ~~was~~were primarily driven by the absence of the prior year net tax ~~losses in~~benefit from the Company's investment in ~~Fabory due to the impairment and internal reorganization of the Company's holdings of Fabory in the first quarter of 2020.~~Fabory. The Company divested the Fabory business during the second quarter of 2020.

NOTE 9 - DIVIDEND

On ~~April~~July 28, 2021, the Company’s Board of Directors declared a quarterly dividend of $1.62 per share, payable ~~June~~September 1, 2021, to shareholders of record on ~~May 10,~~August 9, 2021.

NOTE 10 - SEGMENT INFORMATION

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

Three Months Ended March 31, 2021
High-Touch Solutions (N.A.) Endless Assortment Total Reportable Segments Other Total
Total net sales $ 2,397 $ 622 $ 3,019 $ 65 $ 3,084
Segment operating earnings $ 306 $ 55 $ 361 $ (3) $ 358

Three Months Ended March 31, 2020
High-Touch Solutions (N.A.) Endless Assortment Total Reportable Segments Other Total
Total net sales $ 2,355 $ 496 $ 2,851 $ 150 $ 3,001
Segment operating earnings $ 314 $ 35 $ 349 $ (190) $ 159


	Three Months Ended June 30,								Six Months Ended June 30,
	2021				2020				2021				2020
	Net sales		Operating earnings		Net sales		Operating earnings		Net sales		Operating earnings		Net sales		Operating earnings
High-Touch Solutions N.A.	$	2,498	$	282	$	2,197	$	285	$	4,895	$	588	$	4,552	$	599
Endless Assortment	645		58		525		42		1,267		113		1,021		77
Other	64		(6)		115		(122)		129		(9)		265		(312)
Total Company	$	3,207	$	334	$	2,837	$	205	$	6,291	$	692	$	5,838	$	364

The Company is a broad line distributor of MRO products and services. Products are regularly added and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered, including the evolving list of products stocked and additional products available online but not stocked.

Intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of third-party sales. Service fees for intersegment sales from the High-Touch Solutions ~~(N.A.)~~N.A. segment to the Endless Assortment segment are included in SG&A.

Corporate costs are substantially allocated to each reportable segment based on benefits received. Assets for reportable segments are not disclosed as such information is not regularly reviewed by the Company's Chief Operating Decision Maker.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 - CONTINGENCIES AND LEGAL MATTERS

From time to time the Company is involved in various legal and administrative proceedings, including claims related to product liability, safety or ~~compliance,~~compliance; privacy and cybersecurity ~~matters, negligence,~~matters; negligence; contract ~~disputes,~~disputes; environmental ~~issues,~~issues; unclaimed ~~property,~~property; wage and hour ~~laws,~~laws; intellectual ~~property,~~property; advertising and marketing; consumer ~~protection,~~protection; pricing (including disaster or emergency declaration pricing statutes),; employment ~~practices,~~practices; regulatory compliance, including as to trade and export matters; anti-bribery and ~~corruption or~~corruption; and other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties.

As previously disclosed, beginning in the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints in which Grainger has been named, which to date encompass 1516 lawsuits and approximately ~~145~~186 plaintiffs, seek recovery of compensatory and other damages and 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

~~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~~24 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 against the Company 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 and product 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.

From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits.

While the Company is unable to predict the outcome of any of these proceedings and other matters, it believes that ~~the~~their 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.

1517

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 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 the United Kingdom (U.K.). Grainger uses a combination of its high-touch solutions and endless assortment businesses to serve its more than 5 million customers worldwide, which rely on Grainger for MRO products and services that enable them to run safe, sustainable and productive operations.

Effective January 1, 2021, Grainger's two reportable segments are High-Touch Solutions ~~(N.A.)~~N.A. and Endless Assortment. These reportable segments align with Grainger's go-to-market strategies and bifurcated business models (high-touch solutions and endless assortment). The High-Touch Solutions ~~(N.A.)~~N.A. segment includes the Grainger-branded businesses in the United 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 Japan.

Strategic Priorities ~~Amidst~~and Impact of the COVID-19 Pandemic

The Company’s longstanding strategic priorities for 2021 have not changed from those stated in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report for the year ended December 31, 2020 on Form 10-K (2020 Form 10-K), which are to ~~"Keep~~“Keep the World ~~Working"~~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~~Company’s business plans to achieve these strategic priorities continue to be affected by the ~~global~~impact of the Coronavirus outbreak ~~of Coronavirus in 2019~~ (COVID-19 pandemic).

The COVID-19 pandemic ~~has~~ caused significant disruptions in the U.S. and global markets, and ~~economists expect~~ the full extent of the impacts is still unknown and will depend on a number of developments, including any continued spread of the virus and its variants, the availability of and use of vaccines, and the impact of governmental measures to combat the spread of the virus (such as mask mandates or social distancing requirements) and to promote economic ~~impact will continue to be significant. Grainger~~stability and recovery. The initial recovery from the COVID-19 pandemic has been accompanied by a resurgence in demand as industries re-open, which is ~~an essential business~~currently straining global supply chains, raw material and labor availability, and transportation efficiency. Grainger’s businesses and its major facilities have ~~been allowed to remain~~remained operational during the pandemic as customers ~~have depended~~relied on ~~Grainger's~~Grainger’s products and services to keep their businesses up and running. As

While the COVID-19 pandemic continues to impact global markets and the needs of customers, employees, suppliers and communities continue to change, the Company’s efforts and business plans ~~have evolved~~will evolve accordingly. Grainger is ~~currently~~ focused on serving customers and communities ~~well~~ in addressing the pandemic and ~~preparing for an~~providing products to assist in the ongoing recovery, supporting the needs and safety of employees and ensuring the Company continues to operate with a strong financial position. As more vaccine is distributed and mask mandates evolve, the Company continues to monitor and refine its product assortment and actions to support customers’ return to regular operations.

~~Impact~~Further discussion of the ~~COVID-19 Pandemic to Grainger Businesses~~

~~The~~risks and uncertainties posed by the COVID-19 pandemic ~~has impacted and~~ is ~~likely to continue impacting Grainger’s businesses and operations as well as~~disclosed in “Risk Factors” under Part I, Item 1A of the ~~operations of its customers and suppliers.~~

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 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., Distribution Centers, branches, e-commerce sites, and logistic partners) are remaining operational with limited disruptions, while adhering to strict safety and social-distancing protocols. In addition, the Company has prioritized maintaining all facilities safe for customers and employees 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.Company’s 2020 Form 10-K.

Matters Affecting Comparability

There were ~~63 sales days in the three months ended March 31, 2021 and~~ 64 sales days in the three months ended ~~March 31,~~June 30, 2021 and June 30, 2020. There were 127 sales days in the six months ended June 30, 2021 and 128 sales days in the six months ended June 30, 2020.

~~W.W. Grainger, Inc. and Subsidiaries~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Consistent with the Company's strategic 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 operating results include Fabory, China and ZTE results through the respective dates of divestiture or liquidation.

In addition, beginning in mid-February 2020, the Company experienced elevated levels of COVID-19 pandemic-related product sales (e.g., personal protective equipment (PPE) and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales decreased. Conversely, as the COVID-19 pandemic progressed throughout 2020 and into 2021, the Company has seen ~~levels of~~ pandemic-related sales

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

soften ~~toward pre-pandemic levels~~ and non-pandemic sales ~~turning positive.~~grow, as mix returns to more normalized levels. This ~~will have an impact on~~shift in pandemic/non-pandemic product mix impacted gross margin as pandemic-related product sales are generally lower-margin.

Results of Operations – Three Months Ended ~~March 31,~~June 30, 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,											Three Months Ended June 30,
						Percent Increase/(Decrease)		As a Percent of Net Sales									Percent Increase/(Decrease)		As a Percent of Net Sales
		2021		2020				2021		2020			2021		2020				2021		2020
Net sales	Net sales	$	3,084	$	3,001	2.8	%	100.0	%	100.0	%	Net sales	$	3,207	$	2,837	13.1	%	100.0	%	100.0	%
Cost of goods sold	Cost of goods sold	1,991		1,880		5.9	%	64.5	%	62.6	%	Cost of goods sold	2,083		1,821		14.4	%	65.0	%	64.2	%
Gross profit	Gross profit	1,093		1,121		(2.5)	%	35.5	%	37.4	%	Gross profit	1,124		1,016		10.6	%	35.0	%	35.8	%
Selling, general and administrative expenses (SG&A)	Selling, general and administrative expenses (SG&A)	735		962		(23.6)	%	23.9	%	32.1	%	Selling, general and administrative expenses (SG&A)	790		811		(2.5)	%	24.6	%	28.6	%
Operating earnings	Operating earnings	358		159		125.5	%	11.6	%	5.3	%	Operating earnings	334		205		62.3	%	10.4	%	7.2	%
Other expense, net	Other expense, net	15		17		(10.8)	%	0.5	%	0.6	%	Other expense, net	15		21		(29.7)	%	0.5	%	0.7	%
Income tax provision (benefit)		88		(43)		(304.6)	%	2.9	%	(1.4)	%
Income tax provision												Income tax provision	76		55		35.1	%	2.3	%	1.9	%
Net earnings	Net earnings	255		185		37.5	%	8.3	%	6.2	%	Net earnings	243		129		89.4	%	7.6	%	4.5	%
Noncontrolling interest	Noncontrolling interest	17		12		36.6	%	0.6	%	0.4	%	Noncontrolling interest	18		15		23.0	%	0.6	%	0.5	%
Net earnings attributable to W.W. Grainger, Inc.	Net earnings attributable to W.W. Grainger, Inc.	$	238	$	173	37.5	%	7.7	%	5.8	%	Net earnings attributable to W.W. Grainger, Inc.	$	225	$	114	97.9	%	7.0	%	4.0	%

Grainger’s net sales of ~~$3,084~~$3,207 million for the ~~first~~second quarter of 2021 increased ~~$83~~$370 million, or ~~2.8%~~13.1%, compared to the same quarter in 2020. ~~On a daily basis net sales increased 4.4%.~~ The increase in net sales was primarily driven by volume increases in the ~~high-touch solutions~~High-Touch Solutions N.A. and ~~endless assortment businesses.~~Endless Assortment segments. Also, non-pandemic ~~related~~ product sales ~~continue to improve~~grew significantly as the economy improved, while demand for pandemic-related ~~product sales remain higher than their~~products continued to taper off with mix reverting to near pre-pandemic ~~level.~~levels. See Note 3 to the Financial Statements for information related to disaggregated revenue. See the Segment Analysis below for further details related to segment revenue.

Gross profit of ~~$1,093~~$1,124 million for the ~~first~~second quarter of 2021 ~~decreased $28~~increased $108 million, or 2%11%, compared to the same quarter in 2020. The gross profit margin of ~~35.5%~~35.0% during the ~~first~~second quarter of 2021 decreased ~~1.9~~0.8 percentage ~~points~~point when compared to the same quarter in 2020. This decrease was primarily driven by ~~non-core~~certain pandemic-related inventory adjustments in the U.S. business (part of High-Touch Solutions ~~(N.A.)~~N.A.). See Segment Analysis below for further details related to segment gross profit.

SG&A of ~~$735~~$790 million for the ~~first~~second quarter of 2021 decreased ~~$227~~$21 million, or ~~24%~~3%, compared to the ~~first~~second quarter of 2020. This decrease iswas primarily a result of ~~higher net restructuring charges in~~ the ~~U.S. and Canada businesses (part of High-Touch Solutions (N.A.)) and impairment charges for~~losses related to the divested Fabory business (part of Other) in the ~~first~~second quarter of 2020.

The following tables (in millions of dollars, except percentages) reconcile reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S. generally accepted accounting principles (GAAP) to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings

~~W.W. Grainger, Inc. and Subsidiaries~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

attributable to W.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist investors in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its businesses by excluding items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies' non-GAAP measures having the same or similar names.

Three Months Ended
March 31, 2021
2021 2020 %
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) %

W.W. Grainger, Inc. and Subsidiaries

2021 2020 %
Operating earnings reported $ 358 $ 159 126 %
Total restructuring, net, and impairment charges — 184
Operating earnings adjusted $ 358 $ 343 4 %
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

2021 2020 %
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 %
CONDITION AND RESULTS OF OPERATIONS


	Three Months Ended June 30,

	2021		2020		%
SG&A reported	$	790	$	811	(3)	%
Restructuring, net (High-Touch Solutions N.A.)	—		1



Fabory divestiture (Other)	—		109

Total restructuring, net and business divestiture	—		110
SG&A adjusted	$	790	$	701	13	%


	2021		2020		%
Operating earnings reported	$	334	$	205	62	%
Total restructuring, net and business divestiture	—		110
Operating earnings adjusted	$	334	$	315	6	%


	2021		2020		%
Net earnings attributable to W.W. Grainger, Inc. reported	$	225	$	114	98	%



Total restructuring, net, business divestiture and tax¹	—		90
Net earnings attributable to W.W. Grainger, Inc. adjusted	$	225	$	204	11	%

¹ The tax impact of adjustments and non-cash impairments are calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility and the Company's ability to realize the associated tax benefits.

Excluding restructuring, net and ~~impairment charges in both periods as noted~~business divestiture in the ~~table above,~~second quarter of 2020, SG&A ~~decreased $43~~increased $89 million, or 6%13%. This ~~decrease~~increase is primarily due to ~~cost control actions across the high-touch solutions businesses. SG&A leverage improved 2.1 percentage points when compared to the first quarter of 2020.~~higher wages, variable compensation and marketing expenses.

Operating earnings of ~~$358~~$334 million for the ~~first~~second quarter of 2021 increased ~~$199~~$129 million, or ~~126%~~62%, compared to the ~~first~~second quarter of 2020. Excluding restructuring, net and ~~impairment charges~~business divestiture in both periods as noted in the table above, operating earnings increased ~~$15~~$19 million, or 4%6%, driven primarily by ~~lower SG&A expenses~~higher gross profit dollars partially offset by ~~lower gross profit dollars.~~higher SG&A expenses.

Other expense, net was $15 million for the ~~first~~second quarter of 2021, a decrease of $2$6 million, or ~~11%~~30%, compared to the ~~first~~second quarter of 2020. The decrease was primarily related to higher prior year interest expense for the quarter on the draw down on the Company's revolving credit facility of $1 billion in March 2020 as a proactive measure to preserve financial flexibility during pandemic uncertainty.

~~The Company recorded an income tax expense~~Income taxes of ~~$88~~$76 million for the ~~first~~second quarter of 2021 ~~which~~ increased ~~$131~~$21 million, or ~~305%~~35%, compared to ~~an income tax benefit of $43~~$55 million in the ~~first~~second quarter of 2020. This change iswas primarily ~~related to a tax benefit related to~~driven by lower taxable operating earnings for the ~~Fabory business recorded in the first~~second quarter of ~~2020.~~2020, and the prior year tax impact from the Company's divestiture of its investment in Fabory. Grainger's effective tax rates were ~~25.8%~~23.6% and ~~negative 30.4%~~30.2% for the three months ended ~~March 31,~~June 30, 2021 and 2020, respectively. Excluding ~~this~~the tax benefit related to Fabory, as well as the restructuring, net and ~~impairment charges~~business divestiture in both periods as noted in the table above, the effective tax rates were ~~25.8%~~23.6% and ~~25.6%~~25.8% for the three months ended ~~March 31,~~June 30, 2021 and 2020, respectively. ~~The reconciliation~~

Net earnings attributable to W.W. Grainger, Inc. of $225 million for the ~~effective~~second quarter of 2021 increased $111 million, or 98%, compared to the second quarter of 2020. Excluding restructuring, net, business divestiture and tax ~~rate is as follows:~~from both periods per the table above, net earnings increased $21 million or 11%.

Three Months Ended March 31,
2021 2020
Effective tax rate reported 25.8 % (30.4) %
Tax benefit related to the Fabory business — 61.2
Tax impact of restructuring, net and impairment charges — (5.2)
Effective tax rate adjusted 25.8 % 25.6 %

1820

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net earnings attributable to W.W. Grainger, Inc. of $238 million for the first quarter of 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.)~~N.A.

Net sales were ~~$2,397~~$2,498 million for the ~~first~~second quarter of 2021, an increase of ~~$42~~$301 million, or ~~1.8%~~13.7% compared to the same period in ~~2020. On a daily basis, net sales increased 3.4%~~2020 and consisted of the following:


			Percent Increase
Volume (including product mix)			10.6%
Price and customer mix			~~2.0%~~
~~Volume (including product mix)~~			~~1.1~~2.1
Foreign exchange			~~0.3~~1.0

Total			~~3.4%~~13.7%

Overall, revenue increases for the high-touch solutions businesses were primarily driven by ~~price~~volume and ~~customer~~product mix. During the ~~first~~second quarter of 2021, the U.S. business ~~experienced some continuation of~~continued to experience elevated sales volume of ~~pandemic-related~~non-pandemic products from ~~the government~~commercial and ~~other essential~~manufacturing businesses with overall sales up for nearly all customer segments as industries continued to ~~non-essential~~improve and ~~disrupted industries beginning to return to their pre-pandemic levels.~~re-open. See Note 3 to the Financial Statements for information related to disaggregated revenue. From a product perspective, ~~the high-touch solutions business experienced~~mix continued ~~demand for COVID-19 pandemic-related products, as well as increasing~~to revert to more normalized levels with higher demand for non-pandemic products as the economy ~~improves.~~recovered, and declining demand for pandemic-related products as PPE guidelines eased during the quarter.

Gross profit margin for the ~~first~~second quarter of 2021 decreased ~~2.3~~1.2 percentage points compared to the same period in 2020. The decrease was primarily the result of U.S. business inventory adjustments on ~~non-core~~certain pandemic-related products in the ~~first~~second quarter of 2021.

SG&A of ~~$589~~$640 million for the ~~first~~second quarter of 2021 ~~decreased $31~~increased $87 million, or 5%16%, when compared to the ~~first~~second quarter of 2020, which iswas primarily driven by ~~reduced travel~~higher wages, variable compensation and ~~general operating efficiencies.~~marketing expenses.

Operating earnings of ~~$306~~$282 million for the ~~first~~second quarter of 2021 decreased $8$3 million, or 3%1%, from ~~$314~~$285 million for the ~~first~~second quarter of 2020. This decrease was driven by ~~lower gross profit dollars~~higher SG&A expenses, partially offset by ~~lower SG&A expenses.~~higher gross profit dollars.

Endless Assortment

Net sales were ~~$622~~$645 million for the ~~first~~second quarter of 2021, an increase of ~~$126~~$120 million, or ~~25.4%~~23.0%, compared to the same period in ~~2020. On a daily basis, net sales increased 27.4%~~2020 and consisted of the following:


			Percent ~~Increase~~Increase/ (Decrease)
Volume/price/mix			~~23.3%~~23.9%

Foreign exchange			~~4.1~~(0.9)
Total			~~27.4%~~23.0%

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

Gross profit margin increased ~~0.3~~0.7 percentage ~~points~~point in the ~~first~~second quarter of 2021 compared to the ~~first~~second quarter of 2020. ~~The increase was driven by~~ ~~Zoro's improved discounting strategies.~~

SG&A of $124 million for the second quarter of 2021 increased $22 million or 22% when compared to the second quarter of 2020. SG&A leverage ~~decreased 1.5~~improved 0.2 percentage ~~points~~point compared with the same period in 2020 due to sales revenue outpacing SG&A ~~expenses related to increased sales volume.~~expenses.

Operating earnings of $58 million for the second quarter of 2021 increased $16 million, or 37% from $42 million for the second quarter of 2020. The increase was primarily driven by higher sales due to continued customer acquisitions.

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~~$64 million for the ~~first~~second quarter of 2021, ana decrease of ~~$85~~$51 million, or ~~56.5%~~45.1%, when compared to the same quarter in ~~2020. On a daily basis, net sales decreased 55.8%~~2020 and consisted of the following:


			Percent (Decrease)/ Increase
Business ~~divestitures~~divestiture			~~(43.3)~~(80.1)%
Volume/price/mix			~~(15.8)~~28.9
Foreign exchange			~~3.3~~6.1
Total			~~(55.8)~~(45.1)%

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.~~divestitures, partially offset by volume increases at the Cromwell business in the U.K.

Gross profit margin increased ~~2.8~~2.5 percentage points in the ~~first~~second quarter of 2021 compared to the ~~first~~second quarter of 2020 primarily due to business unit mix.

SG&A decreased ~~89%~~$130 million, or 83%, in the ~~first~~second quarter of 2021 ~~compared~~from $156 million for the second quarter of 2020 primarily due to the ~~first quarter of 2020~~ ~~primarily due to the impairment charges for~~losses related to the divested Fabory business in the ~~first~~second quarter of 2020. Excluding restructuring, net, impairment charges and business divestiture in both periods, SG&A would have decreased $21 million, or 43%.

Operating losses of $3$6 million for the ~~first~~second quarter of 2021 ~~decreased $187~~improved $116 million compared to operating losses of ~~$190~~$122 million for the ~~first~~second quarter of 2020. This improvement is primarily due to the losses related to the divested Fabory business in the second quarter of 2020. Excluding restructuring, net, impairment charges and business divestiture in both periods, operating losses would have improved $7 million or 48%.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results of Operations – Six Months Ended June 30, 2021

The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):


	Six Months Ended June 30,
					Percent Increase/(Decrease)		As a Percent of Net Sales
	2021		2020				2021		2020
Net sales	$	6,291	$	5,838	7.8	%	100.0	%	100.0	%
Cost of goods sold	4,074		3,701		10.1	%	64.8	%	63.4	%
Gross profit	2,217		2,137		3.8	%	35.2	%	36.6	%
Selling, general and administrative expenses	1,525		1,773		(13.9)	%	24.2	%	30.4	%
Operating earnings	692		364		89.8	%	11.0	%	6.2	%
Other expense, net	30		38		(21.5)	%	0.5	%	0.7	%
Income tax provision	164		12		1,200.7	%	2.6	%	0.2	%
Net earnings	498		314		58.8	%	7.9	%	5.4	%
Noncontrolling interest	35		27		29.2	%	0.5	%	0.5	%
Net earnings attributable to W.W. Grainger, Inc.	$	463	$	287	61.5	%	7.4	%	4.9	%

Grainger’s net sales of $6,291 million for the six months ended June 30, 2021 increased $453 million, or 7.8% compared to the same period in 2020. On a daily basis, net sales increased 8.6%. The increase in net sales was primarily driven by volume and product mix, partially offset by the impact of the business divestitures. Also, non-pandemic related product sales continued to improve throughout the first half of 2021, while demand for pandemic-related product sales declined. See Note 3 to the Financial Statements for information related to disaggregated revenue. See Segment Analysis below for further details related to segment revenue.

Gross profit of $2,217 million for the six months ended June 30, 2021 increased $80 million, or 4%, compared to the same period in 2020. The gross profit margin of 35.2% decreased 1.4 percentage points when compared to the same period in 2020. This decrease was primarily driven by certain pandemic-related inventory adjustments in the U.S. business (part of High-Touch Solutions N.A.). See Segment Analysis below for further details related to segment gross profit.

SG&A of $1,525 million for the six months ended June 30, 2021 decreased $248 million, or 14%, compared to the same period in 2020. This decrease is primarily a result of the impairment charges and losses for the divested Fabory business (part of Other) in the first and second quarter of 2020, respectively.

The following tables (in millions of dollars, except percentages) reconciles reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S. GAAP to non-GAAP measures including SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W. Grainger, Inc. adjusted. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance as they provide a 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.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS


	Six Months Ended June 30,
					%
	2021		2020
SG&A reported	$	1,525	$	1,773	(14)	%
Restructuring, net (High-Touch Solutions N.A.)	—		8


Fabory impairment charges (Other)	—		177
Fabory divestiture (Other)	—		109

Total restructuring, net, impairment charges and business divestiture	—		294
SG&A adjusted	$	1,525	$	1,479	3	%


	2021		2020		%
Operating earnings reported	$	692	$	364	90	%
Total restructuring, net, impairment charges and business divestiture	—		294
Operating earnings adjusted	$	692	$	658	5	%


	2021		2020		%
Net earnings attributable to W.W. Grainger, Inc. reported	$	463	$	287	62	%



Total restructuring, net, impairment charges, business divestiture and tax 1	—		147
Net earnings attributable to W.W. Grainger, Inc. adjusted	$	463	$	434	7	%

As noted in the table above, a large portion of the Company's SG&A decrease for the six months ended June 30, 2021 is due to the $177 million Fabory impairment and $109 million loss on the divestiture of the Fabory business in the first and second quarter of 2020, respectively. Excluding restructuring, net, impairment charges and business divestiture in both periods as noted in the table above, SG&A increased $46 million, or 3%, primarily due to higher wages, variable compensation and marketing expenses.

Operating earnings for the six months ended June 30, 2021 were $692 million, an increase of $328 million, or 90%, compared to the same period in 2020. Excluding restructuring, net, impairment charges and business divestiture in both periods as noted in the table above, operating earnings increased $34 million or 5%, driven by higher gross profit dollars partially offset by higher SG&A.

Other expense, net was $30 million for the six months ended June 30, 2021, a decrease of $8 million, or 22%, compared to the six months ended June 30, 2020. The decrease was primarily related to higher prior year interest expense on the draw down on the Company's revolving credit facility of $1 billion in March 2020 as a proactive measure to preserve financial flexibility during pandemic uncertainty.

Income taxes of $164 million for the six months ended June 30, 2021 increased $152 million, or 1,201%, compared with $12 million for the comparable 2020 period. This change was primarily driven by lower taxable operating earnings for the first half of 2020, and the absence of the prior year tax impact from the Company's divestiture of its investment in Fabory. Grainger's effective tax rates were 24.7% and 3.9% for the six months ended June 30, 2021 and 2020, respectively. Excluding the tax benefit related to Fabory, as well as the restructuring, net and business divestiture in both periods as noted in the table above, the effective tax rates were 24.7% and 25.7% for the six months ended June 30, 2021 and 2020, respectively.

Net earnings attributable to W.W. Grainger, Inc. for the six months ended June 30, 2021 increased $176 million or 62% to $463 million from $287 million for the six months ended June 30, 2020. Excluding restructuring, net, impairment charges, business divestiture and tax from both periods in the table above, net earnings increased $29 million, or 7%. The increase in net earnings primarily resulted from higher gross profit dollars partially offset by higher SG&A.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Segment Analysis

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

High-Touch Solutions N.A.

Net sales were $4,895 million for the six months ended June 30, 2021, an increase of $343 million, or 7.5%, compared to the same period in 2020. On a daily basis, net sales increased 8.4% and consisted of the following:


			Percent Increase
Volume (including product mix)			5.7%
Price and customer mix			2.0
Foreign exchange			0.7

Total			8.4%

Overall, revenue increases for the high-touch solutions businesses were primarily driven by volume and product mix. See Note 3 to the Financial Statements for information related to disaggregated revenue. From a product perspective, the high-touch solutions businesses experienced higher demand for non-pandemic products, while demand for COVID-19 pandemic-related products continued to taper as guidance and mandates evolved throughout the pandemic.

Gross profit margin decreased 1.8 percentage points compared to the same period in 2020. The decrease was primarily the result of U.S. business inventory adjustments on certain pandemic-related products in the first half of 2021.

SG&A for the six months ended June 30, 2021 increased $56 million compared to the same period in 2020, which is primarily driven by higher wages, variable compensation and marketing expenses.

Operating earnings of $588 million for the six months ended June 30, 2021 decreased $11 million, or 2%, from $599 million for the six months ended June 30, 2020. This decrease was driven by higher SG&A expenses, partially offset by higher gross profit dollars.

Endless Assortment

Net sales were $1,267 million for the six months ended June 30, 2021, an increase of $246 million, or 24.2%, compared to the same period in 2020. On a daily basis, net sales increased 25.2% and consisted of the following:


			Percent Increase
Volume/price/mix			23.7%
Foreign exchange			1.5

Total			25.2%

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

The gross profit margin increased 0.5 percentage point in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

SG&A increased $39 million, or 19% in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. SG&A leverage improved 0.8 percentage point compared to the same period in 2020 due to sales revenue outpacing SG&A expenses.

Operating earnings of $113 million for the six months ended June 30, 2021 increased $36 million, or 47%, from $77 million for the six months ended June 30, 2020. The increase was primarily driven by higher sales due to continued customer acquisitions.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Other

Net sales for other businesses were $129 million for the six months ended June 30, 2021 a decrease of $136 million, or 51.6% compared to the same period in 2020. On a daily basis, net sales decreased 51.2% and consisted of the following:


			Percent (Decrease)/Increase
Business divestiture			(56.7)%
Foreign exchange			4.5
Volume/price/mix			1.0
Total			(51.2)%

The decrease in net sales was driven by the net impact of the Fabory and China business divestitures, partially offset by favorable foreign exchange and volume increases at the Cromwell business in the U.K.

Gross profit margin increased 2.5 percentage points for the six months ended June 30, 2021 compared to the same period in 2020, primarily due to improved margins at the Cromwell business in the U.K.

SG&A decreased $343 million, or 87%, in the six months ended June 30, 2021 from $395 million for the same period in 2020 primarily due to the impairment and losses related to the divested Fabory business in the first ~~quarter~~half of 2020. Excluding restructuring, net, impairment charges and business divestiture in both periods, SG&A would have decreased $57 million, or 51%.

Operating losses of $9 million for the six months ended June 30, 2021 improved $303 million from operating losses of $312 million in the comparable period from the prior year. Excluding restructuring, net, impairment charges and business divestiture in both periods, operating losses would have improved $17 million or 62%.

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W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Financial Condition

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 for the next twelve months. Grainger expects to continue to invest in its business and return excess cash to shareholders through cash dividends and share repurchases, which it plans to fund through total available liquidity and cash flows generated from 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,~~June 30, 2021 and December 31, 2020, Grainger had cash and cash equivalents of ~~$562~~$547 million and $585 million, respectively. This decrease in cash is primarily due to resuming capital investments and the share repurchase program, which were paused in 2020 due to the COVID-19 pandemic. As of ~~March 31,~~June 30, 2021, the Company had approximately $1.8 billion in available liquidity.

Cash Flows

Net cash provided by operating activities was ~~$294~~$563 million and ~~$244~~$476 million for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, respectively. The increase in cash provided by operating activities is primarily the result of higher net earnings and favorable working capital, ~~including strong accounts receivable collections,~~ partially offset by the net impacts from the now divested Fabory business.

Net cash used in investing activities was ~~$58~~$130 million and ~~$52~~$82 million for the ~~three~~six months ended ~~March 31,~~June 30, 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 redemption of assets.

Net cash used in financing activities was ~~$250~~$463 million in the ~~three~~six months ended ~~March 31,~~June 30, 2021 compared to net cash provided by ~~$955~~$864 million in the ~~three~~six months ended ~~March 31,~~June 30, 2020. The change in net cash (used in) provided by financing activities was primarily driven by prior year borrowings of long-term debt partially offset by higher treasury stock repurchases 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,~~June 30, 2021, was ~~$2,080~~$2,150 million, a decrease of ~~$140~~$70 million when compared to $2,220 million as of December 31, 2020. The decrease was primarily driven by a decrease in inventory and an increase in trade accounts payable. At these dates, the ratio of current assets to current liabilities was 2.4 and 2.6 for ~~March 31,~~June 30, 2021 and December 31, 2020, respectively.

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 ~~55.5%~~54.9% at ~~March 31,~~June 30, 2021, and 55.6% at December 31, 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,~~June 30, 2021:

Corporate

Senior Unsecured

Short-term

Moody's

S&P

A+

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’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2020 Form 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’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2020 Form 10-K.

Forward-Looking Statements

From time to time in this Quarterly Report on Form 10-Q as well as in other written reports, communications and verbal statements, Grainger makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. 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~~Company’s control, which could cause ~~Grainger's~~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 disease 2019 and its variants (COVID-19), as well as the ~~duration, extent and~~ impact of ~~the~~ actions taken or contemplated by ~~governmental~~government authorities to mitigate the spread of COVID-19 (such as mask mandates or ~~others in connection with the COVID-19 pandemic~~social distancing requirements) and to promote economic stability and recovery, on the Company’s businesses, its employees, customers and suppliers, including disruption to ~~Grainger's~~Grainger’s operations resulting from employee illnesses, the development, availability and ~~availability~~usage of effective treatment or vaccines, ~~any mandated facility closures of non-essential businesses, stay in shelter health orders or other similar restrictions for customers and suppliers,~~ changes in ~~customers'~~customers’ product needs, ~~suppliers' inability to meet unprecedented demand for COVID-19 related products,~~raw material, inventory and labor shortages, ~~the potential for government action to allocate or direct products to certain customers which may cause disruption in relationships with other customers,~~continued strain on global supply chains and diminished transportation carrier performance, disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the ~~Company's~~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;~~Company’s products; 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 sustain contractual arrangements on a satisfactory basis with group purchasing organizations; 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~~Company’s gross profit percentage; the ~~Company's~~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 and marketing, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, compliance or safety, trade and export compliance, 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

~~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~~Company’s common stock; commodity price

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 or conditions; failure to attract, retain, train, motivate, develop and transition key employees; loss of key members of management or key employees; changes in effective tax rates; changes in credit ratings or outlook; the ~~Company's~~Company’s incurrence of indebtedness and other factors identified under Part ~~II,~~I, Item 1A: “Risk Factors” in the Company’s 2020 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~~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.

2329

W.W. Grainger, Inc. and Subsidiaries

Item 3.Quantitative and Qualitative Disclosures About Market Risk

As disclosed in Part II, Item 7A: Quantitative and Qualitative Disclosures About Market Risk in the Company's 2020 Form 10-K, Grainger’s primary market risk exposures include changes in foreign currency exchange and interest rates.

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

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,~~June 30, 2021, that have materially affected, or are reasonably likely to materially affect, Grainger’s internal control over financial reporting.

2430

PART II – OTHER INFORMATION

Item 1: Legal Proceedings

For a description of the Company’s legal proceedings, see Note 11 - Contingencies and Legal Matters - to the Condensed Consolidated Financial Statements included under Part 1,I, Item 1: Financial Statements.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities – ~~First~~Second 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 31 155,980 $388.26 154,980 1,338,763
February 1 - February 28 146,924 $374.55 146,924 1,191,839
March 1 - March 31 150,566 $394.53 150,016 1,041,823
Total 453,470 451,920


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
April 1 - April 30	89,796	$420.44	89,766	4,976,059
May 1 - May 31	75,485	$458.96	75,485	4,900,574
June 1 - June 30	78,010	$450.68	78,010	4,822,564
Total	243,291		243,261

(A)There were no shares withheld to satisfy tax withholding obligations.

(B)Average price paid per share excludes commissions of $0.01 per share paid.

(C)~~Purchases~~Prior to April 28, 2021, 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~~authorized the repurchase of up to 5 million shares with no expiration date. On April 28, 2021, Grainger's Board of Directors ~~authorized~~approved and the Company announced a new program (2021 Program) authorizing the repurchase of up to 5 million shares with no expiration date, replacing the 2019 ~~Program.~~Program effective immediately.

(D)The difference of ~~1,550~~30 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. Retirement Savings Plan for the benefit

of the employees who participate in the plan.

Item 6: Exhibits

A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 2733 of this report.

2531

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~~July 30, 2021	By:	/s/ Deidra C. Merriwether
			Deidra C. Merriwether
			Senior Vice President
			and Chief Financial Officer
			(Principal Financial Officer)
Date:	~~April~~July 30, 2021	By:	/s/ ~~Eric~~Laurie R. ~~Tapia~~Thomson
			~~Eric~~Laurie R. ~~Tapia~~Thomson
			Vice President and Controller
			(Principal Accounting Officer)

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EXHIBIT INDEX


EXHIBIT NO.						DESCRIPTION
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.INS						XBRL 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.SCH						XBRL Taxonomy Extension Schema Document.
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB						XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document.
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

2733