Item 16. Form 10-K Summary

None.

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

December 31, 2019, 2018 and 2017

Page
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	31
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	32
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS	35
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS	36
CONSOLIDATED BALANCE SHEETS	37
CONSOLIDATED STATEMENTS OF CASH FLOWS	38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY	39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	40

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining adequate internal control over financial reporting. Grainger's internal control system was designed to provide reasonable assurance to Grainger's management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance with respect to the preparation and presentation of financial statements.

Grainger's management assessed the effectiveness of Grainger's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its assessment under that framework and the criteria established therein, Grainger's management concluded that Grainger's internal control over financial reporting was effective as of December 31, 2019.

Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger's internal control over financial reporting as of December 31, 2019, as stated in their report, which is included herein.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

W.W. Grainger, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

	Valuation of Goodwill for the Canadian Reporting Unit
Description of the Matter	At December 31, 2019, the Company’s Canadian reporting unit goodwill balance was $126 million. As discussed in Notes 1 and 4 of the financial statements, goodwill is tested at the reporting unit level annually during the fourth quarter and more frequently if impairment indicators exist. Auditing management’s annual goodwill impairment test was complex and highly judgmental due to the significant estimation required in assessing the fair value of the Canadian reporting unit. The fair value estimate was sensitive to significant assumptions such as the revenue growth expectations, future expected cash flows, and operating earnings, which are affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit	Our audit procedures included, among others obtaining an understanding, evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above.
	To test the estimated fair value of the Company’s Canadian reporting unit, we performed audit procedures that included, among others, assessing methodologies and involving our valuation specialists to assist in testing the significant assumptions and testing the completeness and accuracy of the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix, and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. In addition, we reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2005.

Chicago, Illinois

February 20, 2020

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

W.W. Grainger, Inc. and Subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited W.W. Grainger, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO Criteria). In our opinion, W.W Grainger, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018 and the related notes and our report dated February 20, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of effectiveness of the internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Chicago, Illinois

February 20, 2020

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except for per share amounts)

	For the Years Ended December 31,
	2019				2018				2017
Net sales	$	11,486			$	11,221			$	10,425
Cost of goods sold	7,089				6,873				6,327
Gross profit	4,397				4,348				4,098
Selling, general and administrative expenses	3,135				3,190				3,063
Operating earnings	1,262				1,158				1,035
Other (income) expense:
Interest expense, net	79				82				86
Other, net	(26		)		(5		)		13
Total other expense, net	53				77				99
Earnings before income taxes	1,209				1,081				936
Income taxes	314				258				313
Net earnings	895				823				623
Less: Net earnings attributable to noncontrolling interest	46				41				37
Net earnings attributable to W.W. Grainger, Inc.	$	849			$	782			$	586
Earnings per share:
Basic	$	15.39			$	13.82			$	10.07
Diluted	$	15.32			$	13.73			$	10.02
Weighted average number of shares outstanding:
Basic	54.7				56.1				57.7
Diluted	54.9				56.5				58.0

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In millions of dollars)

	For the Years Ended December 31,
	2019				2018				2017
Net earnings	$	895			$	823			$	623
Other comprehensive earnings (losses):
Foreign currency translation adjustments, net of reclassification (see Note 5 and Note 12)	26				(41		)		93
Postretirement benefit plan re-measurement, net of tax expense $29 million (see Note 8 and Note 12)	—				—				47
Postretirement benefit plan reclassification, net of tax benefit of $2 million, $3 million and $1 million, respectively	(6		)		(7		)		2
Total other comprehensive earnings (losses)	20				(48		)		142
Comprehensive earnings, net of tax	915				775				765
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings	46				41				37
Foreign currency translation adjustments	3				3				4
Total comprehensive earnings (losses) attributable to noncontrolling interest	49				44				41
Comprehensive earnings attributable to W.W. Grainger, Inc.	$	866			$	731			$	724

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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

	As of December 31,
ASSETS	2019				2018
CURRENT ASSETS
Cash and cash equivalents	$	360			$	538
Accounts receivable (less allowance for doubtful accounts of $21 million and $25 million, respectively)	1,425				1,385
Inventories – net	1,655				1,541
Prepaid expenses and other assets	104				83
Prepaid income taxes	11				10
Total current assets	3,555				3,557
PROPERTY, BUILDINGS AND EQUIPMENT – NET	1,400				1,352
DEFERRED INCOME TAXES	11				12
GOODWILL	429				424
INTANGIBLES – NET	304				460
OTHER ASSETS	306				68
TOTAL ASSETS	$	6,005			$	5,873
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt	$	55			$	49
Current maturities of long-term debt	246				81
Trade accounts payable	719				678
Accrued compensation and benefits	228				262
Accrued contributions to employees’ profit-sharing plans	85				133
Accrued expenses	318				269
Income taxes payable	27				29
Total current liabilities	1,678				1,501
LONG-TERM DEBT (less current maturities)	1,914				2,090
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES	106				103
OTHER NON-CURRENT LIABILITIES	247				86
SHAREHOLDERS' EQUITY
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding	—				—
Common Stock – $0.50 par value –300,000,000 shares authorized; issued 109,659,219 shares	55				55
Additional contributed capital	1,182				1,134
Retained earnings	8,405				7,869
Accumulated other comprehensive losses	(154		)		(171		)
Treasury stock, at cost - 55,971,691 and 53,796,859 shares, respectively	(7,633		)		(6,966		)
Total W.W. Grainger, Inc. shareholders’ equity	1,855				1,921
Noncontrolling interest	205				172
Total shareholders' equity	2,060				2,093
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	6,005			$	5,873

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of dollars)

	For the Years Ended December 31,
	2019				2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	895			$	823			$	623
Provision for losses on accounts receivable	12				7				16
Deferred income taxes and tax uncertainties	4				7				(5		)
Depreciation and amortization	229				257				264
Impairment of goodwill, intangible and other assets	123				156				28
Net (gains) losses from sales of assets and business divestitures	(6		)		(6		)		28
Stock-based compensation	40				47				33
Subtotal	402				468				364
Change in operating assets and liabilities
Accounts receivable	(42		)		(79		)		(103		)
Inventories	(106		)		(129		)		(5		)
Prepaid expenses and other assets	(33		)		(2		)		(5		)
Trade accounts payable	32				(51		)		72
Accrued liabilities	(84		)		18				113
Income taxes – net	(3		)		36				4
Other non-current liabilities	(19		)		(27		)		(6		)
Net cash provided by operating activities	1,042				1,057				1,057
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings, equipment and intangibles	(221		)		(239		)		(237		)
Proceeds from sales of assets	17				86				120
Equity method proceeds (investment)	2				(13		)		(35		)
Other – net	—				—				6
Net cash used in investing activities	(202		)		(166		)		(146		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in commercial paper	—				—				(370		)
Borrowings under lines of credit	20				26				74
Payments against lines of credit	(15		)		(31		)		(43		)
Proceeds from issuance of long-term debt	—				—				401
Payments of long-term debt	(42		)		(96		)		(39		)
Proceeds from stock options exercised	49				181				47
Payments for employee taxes withheld from stock awards	(11		)		(12		)		(28		)
Purchases of treasury stock	(700		)		(425		)		(605		)
Cash dividends paid	(328		)		(316		)		(304		)
Other – net	4				3				—
Net cash used in financing activities	(1,023		)		(670		)		(867		)
Exchange rate effect on cash and cash equivalents	5				(10		)		9
NET CHANGE IN CASH AND CASH EQUIVALENTS:	(178		)		211				53
Cash and cash equivalents at beginning of year	538				327				274
Cash and cash equivalents at end of year	$	360			$	538			$	327
Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)	$	84			$	86			$	78
Cash payments for income taxes	$	322			$	229			$	335

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

	Common Stock			Additional Contributed Capital			Retained Earnings			Accumulated Other Comprehensive Earnings (Losses)			Treasury Stock			Noncontrolling Interest			Total
Balance at January 1, 2017	$	55		$	1,030		$	7,113		$	(273	)	$	(6,128	)	$	108		$	1,905
Stock based compensation	—			10			—			—			60			—			70
Purchases of treasury stock	—			—			—			—			(608		)	—			(608		)
Net earnings	—			—			586			—			—			37			623
Other comprehensive earnings (losses)	—			—			—			138			—			4			142
Capital contribution	—			—			—			—			—			—			—
Cash dividends paid ($5.06 per share)	—			1			(294		)	—			—			(11		)	(304		)
Balance at December 31, 2017	$	55		$	1,041		$	7,405		$	(135	)	$	(6,676	)	$	138		$	1,828
Stock based compensation	—			92			—			—			122			—			214
Purchases of treasury stock	—			—			—			—			(412		)	—			(412		)
Net earnings	—			—			782			—			—			41			823
Other comprehensive earnings (losses)	—			—			—			(51		)	—			3			(48		)
Capital contribution	—			—			—			—			—			4			4
Reclassification due to the adoption of ASU 2018-02	—			—			(15		)	15			—			—			—
Cash dividends paid ($5.36 per share)	—			1			(303		)	—			—			(14		)	(316		)
Balance at December 31, 2018	$	55		$	1,134		$	7,869		$	(171	)	$	(6,966	)	$	172		$	2,093
Stock based compensation	—			46			—			—			33			—			79
Purchases of treasury stock	—			—			—			—			(700		)	—			(700		)
Net earnings	—			—			849			—			—			46			895
Other comprehensive earnings (losses)	—			—			—			17			—			3			20
Capital contribution	—			2			—			—			—			—			2
Cash dividends paid ($5.68 per share)	—			—			(313		)	—			—			(16		)	(329		)
Balance at December 31, 2019	$	55		$	1,182		$	8,405		$	(154	)	$	(7,633	)	$	205		$	2,060

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY BACKGROUND

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, Japan and Europe. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements (Financial Statements) include the accounts of the Company and its subsidiaries over which the Company exercises control. All significant intercompany transactions are eliminated from the consolidated financial statements. The Company has a controlling ownership interest in MonotaRO Co., Ltd. (MonotaRO), the endless assortment business in Japan, with the residual representing the noncontrolling interest.

USE OF ESTIMATES

The preparation of the Company's consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

FOREIGN CURRENCY TRANSLATION

The U.S. dollar is the Company's reporting currency for all periods presented. The financial statements of the Company’s foreign operating subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of the Company’s foreign operating subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the period. Translation gains or losses are recorded as a separate component of other comprehensive earnings (losses).

REVENUE RECOGNITION

The Company recognizes revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), the transaction price is fixed or determinable and the Company has satisfied its performance obligation per the sales arrangement.

The majority of Company revenue originates from contracts with a single performance obligation to deliver products, whereby performance obligations are satisfied when control of the product is transferred to the customer per the arranged shipping terms. Some Company contracts contain a combination of product sales and services, which are distinct and accounted for as separate performance obligations, and are satisfied when the services are rendered. Total service revenue is not material and accounted for approximately 1% of total Company revenue for the twelve months ended December 31, 2019.

The Company’s revenue is measured at the determinable transaction price, net of any variable considerations granted to customers and any taxes collected from customers and subsequently remitted to governmental authorities. Variable considerations include rights to return product and sales incentives, which primarily consist of volume rebates. These variable considerations are estimated throughout the year based on various factors, including contract terms, historical experience and performance levels. Total accrued sales returns were approximately $25 million and $29 million as of December 31, 2019 and 2018, respectively, and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $57 million and $62 million as of December 31, 2019 and 2018, respectively, and are reported as part of Accrued expenses.

The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material unsatisfied performance obligations, contract assets or liabilities as of December 31, 2019 and 2018.

COST OF GOODS SOLD (COGS)

COGS includes the purchase cost of goods sold, net of vendor considerations, in-bound shipping and handling costs and service costs. The Company receives vendor considerations, such as rebates to promote their products, which are generally recorded as a reduction to COGS. Rebates earned from vendors that are based on product purchases are capitalized into inventory and rebates earned based on products sold are credited directly to COGS.

ADVERTISING

Advertising costs, which includes online marketing, are generally expensed in the year the related advertisement is first presented or when incurred. Catalog expense is amortized over the life of the catalog, generally one year, beginning in the month of its distribution and is included in advertising expense. Total advertising expense was $316 million, $241 million and $187 million for 2019, 2018 and 2017, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)

Company SG&A is primarily comprised of compensation and benefit costs, indirect purchasing, supply chain and branch operations, technology, leases, restructuring, impairments, advertising and selling expenses, as well as other types of general and administrative costs.

STOCK INCENTIVE PLANS

The Company measures all share-based payments using fair-value-based methods and records compensation expense on a straight line basis over the vesting periods, net of estimated forfeitures.

INCOME TAXES

The Company recognizes the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. Also, the Company evaluates deferred income taxes to determine if valuation allowances are required using a “more likely than not” standard. This assessment considers the nature, frequency and amount of book and taxable income and losses, the duration of statutory carryback and forward periods, future reversals of existing taxable temporary differences and tax planning strategies, among other matters.

The Company recognizes tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. The Company recognizes interest expense and penalties to its tax uncertainties in the provision for income taxes.

OTHER COMPREHENSIVE EARNINGS (LOSSES)

The Company's Other comprehensive earnings (losses) include foreign currency translation adjustments and unrecognized gains (losses) on postretirement and other employment-related benefit plans. Accumulated other comprehensive earnings (losses) (AOCE) are presented separately as part of shareholders' equity.

CASH AND CASH EQUIVALENTS

The Company considers investments in highly liquid debt instruments, purchased with an original maturity of 90 days or less, to be cash equivalents.

CONCENTRATION OF CREDIT RISK

The Company places temporary cash investments with institutions of high credit quality and, by policy, limits the amount of credit exposure to any one institution. Also, the Company has a broad customer base representing many diverse industries across North America, Japan and Europe. Consequently, no significant concentration of credit risk is considered to exist.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are stated at their estimated net realizable value. The Company establishes allowances for customer accounts that are potentially uncollectible and these are determined based on several factors, including the age of the receivables, historical collection trends, and economic conditions that may have an impact on a specific industry, group of customers or a specific customer.

INVENTORIES

Company inventories primarily consist of merchandise purchased for resale, and they are valued at the lower of cost or net realizable value. The Company uses the last-in, first-out (LIFO) method to account for approximately 70% of total inventory and the first-in, first-out (FIFO) method for the remaining inventory. The Company regularly reviews inventory to evaluate continued demand and records provisions for the difference between excess and obsolete inventories and net realizable value. Estimated realizable value consider various variables, including product demand, aging and shelf life, market conditions, and liquidation or disposition history and values.

If FIFO had been used for all of the Company’s inventories, they would have been $426 million and $394 million higher than reported at December 31, 2019 and December 31, 2018, respectively. Concurrently, net earnings would have increased by $24 million and $8 million, and decreased by $1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

PROPERTY, BUILDINGS AND EQUIPMENT

Company property, buildings and equipment are valued at cost. Depreciation is estimated using the declining-balance, sum-of-the-years-digits and straight-line depreciation methods over the assets' useful lives as follows:

Buildings, structures and improvements	10 to 30 years
Furniture, fixtures, machinery and equipment	3 to 10 years

Depreciation expense was $150 million, $162 million and $170 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company capitalized interest costs of $9 million, $10 million and $2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

LEASES

The Company leases certain properties and buildings (including branches, warehouses, distribution centers and office space) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists mainly of operating leases which expire at various dates through 2036.

Many of the property and building lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs (hereinafter referred to as non-lease components). Certain of the Company’s lease arrangements contain renewal provisions from 1 to 30 years, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet with right of use (ROU) assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in SG&A.

GOODWILL AND OTHER INTANGIBLE ASSETS

In a business acquisition, the Company recognizes goodwill as the excess purchase price of an acquired reporting unit over the net amount assigned to assets acquired including intangible assets, and liabilities assumed. Acquired intangibles include both: assets with indefinite lives and assets that are subject to amortization, which are amortized straight line over their estimated useful lives.

The Company tests goodwill and indefinite-lived intangibles for impairment annually during the fourth quarter and more frequently if impairment indicators exist. The Company performs qualitative assessments of significant events and circumstances, such as reporting units' historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors to determine the existence of impairment indicators and assess if it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset is less than its carrying value and if a quantitative impairment test is necessary. In the quantitative test, Grainger compares the carrying value of the reporting unit or an indefinite-lived intangible asset with its fair value. Any excess of the carrying value over fair value is recorded as an impairment charge, presented as part of SG&A.

The fair value of reporting units is calculated primarily using the discounted cash flow method and utilizing value indicators from a market approach to evaluate the reasonableness of the resulting fair values. Estimates of market-

participant risk-adjusted weighted average cost of capital are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.

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

Additionally, the Company capitalizes certain costs related to the purchase and development of internal-use software, which are presented as intangible assets. Amortization of capitalized software is on a straight-line basis over three or five years.

LONG-LIVED ASSETS

The carrying value of long-lived assets, primarily property, buildings and equipment and amortizable intangibles, is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset group may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows resulting from use of the asset group, including disposition, are less than their carrying value. Impairment is measured as the amount by which the asset group's carrying amount exceeds the fair value.

CONTINGENCIES

The Company accrues for costs relating to litigation claims and other contingent matters, when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

NEW ACCOUNTING STANDARDS

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). This ASU clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning with the SEC's regulations, thereby eliminating redundancies and making the codification easier to apply. This ASU was

effective immediately upon issuance and did not have a material impact on the Company's Financial Statements and related disclosures.

On January 1, 2019, the Company adopted ASU 2016-02, Leases as modified subsequently by ASUs 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01(Topic 842). The Company utilized the simplified modified retrospective transition method that allowed for a cumulative-effect adjustment in the period of adoption, and did not restate prior periods. Additionally, the Company elected the practical expedients package permitted under the transition guidance. Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $208 million and $205 million, respectively, as of January 1, 2019 related to operating and finance leases.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as modified by subsequently issued ASUs 2018-19, 2019-04, 2019-05 and 2019-11. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Per the permitted effective dates, the Company will adopt this ASU effective January 1, 2020. The Company does not expect the adoption of this ASU to have a material impact on the Company's Financial Statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles, the methodology for calculating income tax rates in an interim period, and recognition of deferred taxes for outside basis differences in an investment, among other updates. Per the permitted effective dates, the Company will adopt this ASU effective January 1, 2021. The Company is evaluating the impact of this ASU.

NOTE 2 - REVENUE

Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services.

Grainger serves a large number of customers in diverse industries, which are subject to different economic and market specific factors. The Company's presentation of revenue by industry most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and market specific factors. The

following table presents the Company's percentage of revenue by reportable segment and by major customer industry:

	Twelve Months Ended December 31, 2019
	U.S.			Canada			Total Company (2)
Government	18	%		6	%		14	%
Heavy Manufacturing	19	%		20	%		17	%
Light Manufacturing	12	%		6	%		10	%
Transportation	6	%		8	%		5	%
Healthcare	7	%		—	%		6	%
Commercial	10	%		9	%		8	%
Retail/Wholesale	9	%		4	%		7	%
Contractors	10	%		10	%		8	%
Natural Resources	3	%		33	%		4	%
Other (1)	6	%		4	%		21	%
Total net sales	100	%		100	%		100	%
Percent of Total Company Revenue	72	%		5	%		100	%
(1) Other category primarily includes revenue from individual customers not aligned to major industry segment, including small businesses and consumers, and intersegment net sales.
(2) Total Company includes other businesses, which include the Company's endless assortment businesses and operations in Europe and Mexico and account for approximately 23% of revenue for the twelve months ended December 31, 2019.

	Twelve Months Ended December 31, 2018
	U.S.			Canada			Total Company (2)
Government	18	%		6	%		14	%
Heavy Manufacturing	19	%		20	%		18	%
Light Manufacturing	13	%		6	%		11	%
Transportation	6	%		7	%		5	%
Healthcare	7	%		—	%		5	%
Commercial	9	%		10	%		8	%
Retail/Wholesale	8	%		4	%		7	%
Contractors	10	%		11	%		8	%
Natural Resources	3	%		32	%		4	%
Other (1)	7	%		4	%		20	%
Total net sales	100	%		100	%		100	%
Percent of Total Company Revenue	72	%		6	%		100	%
(1) Other category primarily includes revenue from individual customers not aligned to major industry segment, including small businesses and consumers, and intersegment net sales.
(2) Total Company includes other businesses, which include the Company's endless assortment businesses and operations in Europe and Mexico and account for approximately 22% of revenue for the twelve months ended December 31, 2018.

NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT

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

	As of
	December 31, 2019					December 31, 2018
Land	$	332				$	318
Building, structures and improvements	1,329					1,338
Furniture, fixtures, machinery and equipment	1,832					1,785
Property, buildings and equipment	$	3,493				$	3,441
Less: Accumulated depreciation and amortization	2,093					2,089
Property, buildings and equipment, net	$	1,400				$	1,352

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

The balances and changes in the carrying amount of Goodwill by segment are as follows (in millions of dollars):

		United States				Canada				Other businesses				Total
Balance at January 1, 2018		$	192			$	130			$	222			$	544
Impairment		—				—				(105		)		(105		)
Translation		—				(10		)		(5		)		(15		)
Balance at December 31, 2018		192				120				112				424
Translation		—				6				(1		)		5
Balance at December 31, 2019		$	192			$	126			$	111			$	429

		United States				Canada				Other businesses				Total
Cumulative goodwill impairment charges, December 31, 2019 (1)		$	—			$	32			$	152			$	184

(1) Restated to include only impairments related to current businesses in Grainger's portfolio.

There were no impairments to goodwill for the years ended December 31, 2019 and 2017. In 2018, there was a $105 million goodwill impairment recorded in SG&A at the Cromwell business in the U.K.

The balances and changes in Intangible assets - net are as follows (in millions of dollars):

			As of December 31,
			2019												2018
	Weighted average life		Gross carrying amount				Accumulated amortization/ impairment				Net carrying amount				Gross carrying amount				Accumulated amortization/impairment				Net carrying amount
Customer lists and relationships	13.2 years		$	401			$	301			$	100			$	410			$	204			$	206
Trademarks, trade names and other	14.1 years		36				20				16				24				15				9
Non-amortized trade names and other	—		100				38				62				133				34				99
Capitalized software	4.2 years		626				500				126				657				511				146
Total intangible assets	8.2 years		$	1,163			$	859			$	304			$	1,224			$	764			$	460

Amortization expense of intangible assets presented within SG&A, excluding impairment charges was $78 million, $92 million, and $89 million for the years ended December 31, 2019, 2018 and 2017, respectively. Estimated amortization expense for future periods is as follows (in millions of dollars):

Year		Expense
2020		$	72
2021		55
2022		38
2023		13
2024		12
Thereafter		52
Total		$	242

Grainger completed its annual impairment testing during the fourth quarter of 2019. Qualitative tests for the quarter indicated the existence of impairment indicators for the Canada business and Cromwell (included in other businesses). As such, quantitative tests were performed.

Based on the result of the quantitative tests performed for the Canada business, the Company concluded that there was no impairment of goodwill. The risk of impairment for the Canada business is dependent upon key assumptions included in the determination of the reporting unit's fair value, particularly revenue growth expectations, future expected cash flows and operating earnings performance. Changes in assumptions regarding future performance and unfavorable economic environment in Canada may have a significant impact on future cash flows expectations and require the recording of future impairment charges. The carrying value of the Canada businesses goodwill was $126 million as of December 31, 2019.

The quantitative test for Cromwell indicated the existence of impairment of the reporting unit’s intangible assets. Cromwell’s declining operating performance and accelerated customer attrition resulted in lowered outlook projections. As a result, the Company concluded that Cromwell’s trade name was fully impaired. Concurrently, as a result of the circumstances leading to trade name impairment, the Company performed a recoverability and fair value test of Cromwell’s customer relationships intangible asset and concluded to impair the asset. The aggregate impairment charge for Cromwell’s intangibles in 2019 amounted to approximately $120 million.

Previously, during the third quarter of 2018 the Company recorded impairment charges totaling $139 million attributable to all of Cromwell’s goodwill and a portion of its trade name assets. This impairment was driven by the deterioration

of Cromwell’s operating performance at the time combined with prolonged softness and uncertainty in the U.K. market due to Brexit and other unfavorable economic conditions.

NOTE 5 - RESTRUCTURING

Restructuring activity for the twelve months ended December 31, 2019 was not material. In the twelve months ended December 31, 2018 and 2017, the Company recorded restructuring charges of approximately $47 million and $116 million, respectively. These charges primarily consisted of involuntary employee termination costs across the business, asset impairments, write-down losses and other exit-related costs and are included in SG&A. The charges in the U.S. and Canada businesses were partially offset by gains from the sales of real estate. The reserve balance as of December 31, 2019 and December 31, 2018 was approximately $10 million and $47 million, respectively, and is primarily included in Accrued compensation and benefits. The remaining reserves are expected to be paid through 2020.

NOTE 6 - SHORT-TERM DEBT

Short-term debt consisted of the following (in millions of dollars):

	As of December 31,
	2019				2018
Lines of Credit
Outstanding at December 31	$	55			$	49
Maximum month-end balance during the year	$	56			$	138
Weighted average interest rate during the year	2.32		%		2.29		%
Weighted average interest rate at December 31	2.44		%		2.35		%
Commercial Paper
Outstanding at December 31	$	—			$	—
Maximum month-end balance during the year	$	—			$	90
Weighted average interest rate during the year	—		%		1.80		%

Lines of Credit

The Company's U.S. business has a five-year $750 million unsecured revolving line of credit, maturing in 2022. There were no borrowings outstanding under the line of credit as of December 31, 2019 and 2018. The primary purpose of this credit facility is to support the Company's commercial paper program and for general corporate purposes.

Foreign subsidiaries utilize lines of credit for working capital purposes and other operating needs. These foreign lines of credit in aggregate were $55 million and $49 million as of December 31, 2019 and 2018, respectively.

Commercial Paper

The Company issues commercial paper from time to time for general working capital needs. At December 31, 2019, there was none outstanding.

The Company's short-term debt instruments include affirmative and negative covenants that are usual and customary for companies with similar credit ratings and do not contain any financial performance covenants. The Company was in compliance with all debt covenants as of December 31, 2019.

NOTE 7 - LONG-TERM DEBT

Long-term debt consisted of the following (in millions of dollars):

	As of December 31,
	2019								2018
	Carrying Value				Fair Value (1)				Carrying Value				Fair Value (1)
4.60% senior notes due 2045	$	1,000			$	1,194			$	1,000			$	1,026
3.75% senior notes due 2046	400				416				400				357
4.20% senior notes due 2047	400				449				400				383
British pound term loan	170				170				174				174
Euro term loan	123				123				126				126
Canadian dollar revolving credit facility	46				46				44				44
Other	42				42				49				49
Subtotal	2,181				2,440				2,193				2,159
Less current maturities	(246		)		(246		)		(81		)		(81		)
Debt issuance costs and discounts, net of amortization	(21		)		(21		)		(22		)		(22		)
Long-term debt (less current maturities)	$	1,914			$	2,173			$	2,090			$	2,056

(1) The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy. The carrying value of other long-term debt approximates fair value due to their variable interest rates.

Senior Notes

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 previously announced. The remaining share repurchases were funded from internally generated cash. Debt was issued as follows:

•	In May 2017, $400 million payable in 30 years and carries a 4.20% interest rate, payable semiannually.

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

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

The Company may redeem the Senior Notes in whole at any time or in part from time to time at a “make-whole” redemption price prior to their respective maturity dates. The redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the Senior Notes plus 20-25 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company 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 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.

British Pound Term Loan

In August 2015, the Company entered into an unsecured credit facilities agreement providing for a five-year term loan of £160 million and revolving credit facility of up to £20 million (see Note 6 to the Financial Statements). Under the agreement, the principal amount of the term loan will be repaid semiannually in installments of £4 million beginning February 2016 through February 2020 with the remaining outstanding amount due August 2020 and accordingly, the amount outstanding is included in Current maturities of long-term debt as of December 31, 2019. At the election of the Company, the term loan bears interest at the LIBOR Rate plus a margin of 75 basis points, as defined within the term loan agreement. At December 31, 2019 , the Company had elected a one-month LIBOR interest period. The weighted average interest rate was 1.47% and 1.34% for the years ended December 31, 2019 and 2018, respectively.

Euro Term Loan

In August 2016, the Company entered into an agreement for a five-year term loan of €110 million and a revolving credit facility of up to €20 million (see Note 6 to the Financial Statements). Under the agreement, no principal amount of the loan will be required to be paid until the loan becomes due on August 31, 2021, at which time the loan will be required to be paid in full. The Company, at its option, may prepay this term loan in whole or in part at the end of any interest period without penalty. The loan bears interest at the EURIBOR plus a margin of 45 basis points, as defined within the term loan agreement. If EURIBOR is less than zero, then EURIBOR will be deemed to be zero. The interest rate at both December 31, 2019 and 2018 was 0.45%.

Canadian Dollar Revolving Credit Facility

In September 2014, the Company entered into an unsecured revolving credit facility with a maximum availability of C$175 million. The loan bears interest at the Canadian Dollar Offered Rate (CDOR) plus a margin of 80 basis points, as defined within the loan agreement. The weighted average interest rate during the year on this outstanding amount was 2.82%. No principal payments are required on the credit facility until the maturity date. In July 2019, the facility was amended to mature in 2020 and accordingly, the amount outstanding is included in Current maturities of long-term debt as of December 31, 2019.

The scheduled aggregate principal payments related to long-term debt, excluding debt issuance costs, are due as follows (in millions of dollars):

Year		Payment Amount
2020		$	246
2021		129
2022		—
2023		—
2024		6
Thereafter		1,800
Total		$	2,181

The Company's long-term debt instruments include affirmative and negative covenants that are usual and customary for companies with similar credit ratings and do not contain any financial performance covenants. The Company was in compliance with all debt covenants as of December 31, 2019.

NOTE 8 - EMPLOYEE BENEFITS

The Company provides various retirement benefits to eligible employees, including contributions to defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and other benefits. Eligibility requirements and benefit levels vary depending on employee location. Various foreign benefit plans cover employees in accordance with local legal requirements.

Defined Contribution Plans

A majority of the Company's U.S. employees are covered by a noncontributory profit-sharing plan. The plan aligns Company contributions to Company performance and includes two components, a variable annual contribution based on the Company's rate of return on invested capital and an automatic contribution equal to 3% of the eligible employee's total eligible compensation. In addition, employees covered by the plan are also able to make personal contributions. The total Company contribution will be maintained at a minimum of 8% and a maximum of 18% of total eligible compensation paid to eligible employees. The total profit-sharing plan expense was $113 million, $164 million, and $120 million for 2019, 2018 and 2017, respectively.

The Company sponsors additional defined contribution plans available to certain U.S. and foreign employees for which contributions are made by the Company and participating employees. The expense associated with these defined contribution plans totaled $19 million, $13 million, and $18 million for 2019, 2018 and 2017, respectively.

Postretirement Healthcare Benefits Plans

The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its U.S. employees hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company.

Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.

During the third quarter of 2017, the Company implemented plan design changes effective January 1, 2018, for the post-65 age group. This plan change moved all post-65 Medicare eligible retirees to healthcare exchanges and provided them a subsidy to purchase insurance. The amount of the subsidy is based on years of service. As a result of the plan change, the plan obligation was remeasured as of August 31, 2017. The remeasurement resulted in a decrease in the postretirement benefit obligation of $76 million and a corresponding unrecognized gain recorded in Other comprehensive earnings net of tax of $29 million.

Certain amounts in the 2017 financial statements, as previously reported, have been reclassified to conform to the 2018 presentation. In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which became effective January 1, 2018.

The net periodic benefits costs were valued with a measurement date of January 1 for each year and August 31, 2017 remeasurement date and consisted of the following components (in millions of dollars):

	For the Years Ended December 31,
	2019				2018				2017
SG&A
Service cost	$	4			$	6			$	7
Other income (expense)
Interest cost	7				7				8
Expected return on assets	(12)				(13		)		(12		)
Amortization of prior service credit	(10)				(10		)		(7		)
Amortization of unrecognized gains	(4)				(3		)		(2		)
Net periodic (benefits) costs	$	(15	)		$	(13	)		$	(6	)

Reconciliations of the beginning and ending balances of the postretirement benefit obligation, which is calculated as of December 31 measurement date, the fair value of plan assets available for benefits and the funded status of the benefit obligation follow (in millions of dollars):

	2019				2018
Benefit obligation at beginning of year	$	190			$	208
Service cost	4				6
Interest cost	7				7
Plan participants' contributions	3				3
Actuarial (gains)	5				(26		)
Benefits paid	(9		)		(9		)
Prescription drug rebates	—				1
Benefit obligation at end of year	$	200			$	190
Plan assets available for benefits at beginning of year	$	176			$	189
Actual (losses) returns on plan assets	28				(8		)
Plan participants' contributions	3				3
Prescription drug rebates	—				1
Benefits paid	(9		)		(9		)
Plan assets available for benefits at end of year	198				176
Noncurrent postretirement benefit obligation	$	2			$	14

The amounts recognized in AOCE consisted of the following (in millions of dollars):

	As of December 31,
	2019				2018
Prior service credit	$	61			$	71
Unrecognized gains	44				37
Deferred tax (liability)	(26		)		(26		)
Net accumulated gains	$	79			$	82

The Company has elected to amortize the amount of net unrecognized gains over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits of approximately 11.1 years for 2019.

The postretirement benefit obligation was determined by applying the terms of the plan and actuarial models. These models include various actuarial assumptions, including discount rates, long-term rates of return on plan assets, healthcare cost trend rate and cost-sharing between the Company and the retirees. The Company evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions and historical experience.

The following assumptions were used to determine net periodic benefit costs at January 1 of each year (excluding the August 31, 2017 remeasurement date):

	For the Years Ended December 31,
	2019			2018			2017
Discount rate	4.08	%		3.44	%		4.00	%
Long-term rate of return on plan assets, net of tax	7.13	%		7.13	%		7.13	%
Initial healthcare cost trend rate
Pre age 65	6.31	%		6.56	%		6.81	%
Post age 65	NA			NA			9.36	%
Catastrophic drug benefit	NA			12.50	%		NA
Ultimate healthcare cost trend rate	4.50	%		4.50	%		4.50	%
Year ultimate healthcare cost trend rate reached	2026			2026			2026
HRA credit inflation index for grandfathered retirees	2.50	%		2.50	%		NA

The following assumptions were used to determine benefit obligations at December 31:

	2019			2018			2017
Discount rate	3.01	%		4.08	%		3.44	%
Expected long-term rate of return on plan assets, net of tax	4.00	%		7.13	%		7.13	%
Initial healthcare cost trend rate
Pre age 65	6.06	%		6.31	%		6.56	%
Post age 65	NA			NA			NA
Catastrophic drug benefit	NA			11.50	%		12.50	%
Ultimate healthcare cost trend rate	4.50	%		4.50	%		4.50	%
Year ultimate healthcare cost trend rate reached	2026			2026			2026
HRA credit inflation index for grandfathered retirees	2.50	%		2.50	%		2.50	%

The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date of each year. These rates have been selected due to their similarity to the duration of the projected cash flows of the postretirement healthcare benefit plan. As of December 31, 2019, the Company decreased the discount rate from 4.08% to 3.01% to reflect the decrease in the market interest rates at December 31, 2019.

The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2019, the initial healthcare cost trend rate was 6.06% for pre age 65. The

healthcare costs trend rates decline each year until reaching the ultimate trend rate of 2.50%. The plan amendment adopted in 2017 moves all post age 65 Medicare eligible retirees to an exchange and provides a subsidy to those retirees to purchase insurance. The amount of the subsidy is based on years of service and is indexed at 2.50% for grandfathered employees.

The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments. In 2019, the Company liquidated previously held index funds and has temporarily invested all assets of the Trust in money market funds. The Company is in the process of transitioning the Trust assets from money market funds into a liability driven investment solution composed of growth assets and fixed income. The plan's assets are stated at fair value, which represents the net asset value of shares held by the plan in the registered investment companies at the quoted market prices (Level 1 input). The plan assets available for benefits are net of Trust liabilities, primarily related to deferred income taxes and taxes payable at December 31 (in millions of dollars):

	2019				2018
Registered investment companies:
Vanguard Federal Money Market Fund	$	109			$	—
Fidelity Government Money Market Fund	95				—
Fidelity Spartan U.S. Equity Index Fund	—				80
Vanguard 500 Index Fund	—				93
Vanguard Total International Stock	—				26
Plan Assets	204				199
Less: trust liabilities	(6		)		(23		)
Plan assets available for benefits	$	198			$	176

Consistent with the new investment strategy, the after-tax expected long-term rates of return on plan assets of 4.00% at December 31, 2019 is based on the historical average of long-term rates of return and an estimated tax rate. The required use of an expected long-term rate of return on plan assets may result in recognition of income that is greater or lower than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees.

The Company's investment policies include periodic reviews by management and trustees at least annually concerning: (1) the allocation of assets among various asset classes (e.g., domestic stocks, international stocks, short-term bonds, long-term bonds, etc.); (2) the investment performance of the assets, including performance comparisons with appropriate benchmarks; (3) investment guidelines and other matters of investment policy and (4) the hiring, dismissal or retention of investment managers.

The funding of the Trust is an estimated amount that is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.

The Company forecasts the following benefit payments related to postretirement (which include a projection for expected future employee service) for the next ten years (in millions of dollars):

Year		Estimated Gross Benefit Payments
2020		$	9
2021		10
2022		11
2023		12
2024		12
2025-2029		62
Total		$	116

NOTE 9 - LEASES

The Company leases certain properties and buildings (including branches, warehouses, distribution centers and office space) and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists mainly of operating leases which expire at various dates through 2036. Finance leases and service contracts with lease arrangements are not material and the following disclosures pertain to the Company’s operating leases.

Information related to operating leases is as follows (in millions of dollars):

		As of December 31, 2019
ROU Assets
Other assets		$	223
Operating lease liabilities
Accrued expenses		58
Other non-current liabilities		171
Total operating lease liabilities		$	229

		Twelve Months Ended December 31, 2019
Weighted average remaining lease term		5 years
Weighted average incremental borrowing rate		2.3		%
Cash paid for operating leases		$	67
ROU assets obtained in exchange for operating lease obligations		$	88

Rent expense was $76 million for 2019, 2018 and 2017. These amounts are net of sublease income of $3 million, $3 million and $2 million for 2019, 2018 and 2017.

Maturities of operating lease liabilities as of December 31, 2019 (in millions of dollars) are as follows:

		Maturity of operating lease liabilities
2020		$	63
2021		55
2022		45
2023		30
2024		16
Thereafter		30
Total lease payments		239
Less interest		(10		)
Present value of lease liabilities		$	229

Capital leases as of December 31, 2019 and 2018 were not considered material. Capital lease obligations are reported in Long-term debt.

As of December 31, 2019, the Company's future lease obligations that have not yet commenced are immaterial.

NOTE 10 - STOCK INCENTIVE PLANS

The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees and executives, which include restricted stock units (RSUs), non-qualified stock options, performance shares and deferred stock units. As of December 31, 2019, there were 2.3 million shares available for grant under the plans. When awards are exercised or settled, shares of the Company’s treasury stock are issued.

Pretax stock-based compensation expense included in SG&A was $40 million, $47 million, and $33 million in 2019, 2018 and 2017, respectively, and was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $15 million, $26 million, and $26 million in 2019, 2018 and 2017, respectively.

Restricted Stock Units

The Company awards RSUs to certain employees and executives. RSUs vest generally over periods from one to seven years from issuance. RSU expense for the years ended December 31, 2019, 2018 and 2017 was approximately $27 million, $23 million and $17 million, respectively. The following table summarizes RSU activity (in millions, except for share and per share amounts):

	2019							2018							2017
	Shares			Weighted Average Price Per Share				Shares			Weighted Average Price Per Share				Shares			Weighted Average Price Per Share
Beginning nonvested units	343,814			$	245.38			352,919			$	226.31			373,403			$	221.77
Issued	96,823			$	299.25			141,775			$	284.98			129,378			$	222.53
Canceled	(36,224		)	$	253.22			(56,393		)	$	245.08			(47,488		)	$	229.36
Vested	(78,289		)	$	247.96			(94,487		)	$	233.75			(102,374		)	$	203.51
Ending nonvested units	326,124			$	259.88			343,814			$	245.38			352,919			$	226.31
Fair value of shares vested	$	19						$	22						$	21

At December 31, 2019 there was $45 million of total unrecognized compensation expense related to nonvested RSUs that the Company expects to recognize over a weighted average period of 2.1 years.

Stock Options

The Company issues stock options to certain employees and executives. Stock options are granted with an exercise price equal to the closing market price of the Company's stock on the day of the grant. The options generally expire 10 years from the grant date. Stock option expense for the years ended December 31, 2019, 2018 and 2017 was approximately $8 million, $9 million and $13 million, respectively. At December 31, 2019 there was $10.5 million of total unrecognized compensation expense related to nonvested option awards, which the Company expects to recognize over a weighted average period of 1.8 years.

NOTE 11 - CAPITAL STOCK

The Company had no shares of preferred stock outstanding as of December 31, 2019 and 2018. The activity related to outstanding common stock and common stock held in treasury was as follows:

	2019					2018					2017
	Outstanding Common Stock		Treasury Stock			Outstanding Common Stock		Treasury Stock			Outstanding Common Stock		Treasury Stock
Balance at beginning of period	55,862,360		53,796,859			56,328,863		53,330,356			58,804,314		50,854,905
Exercise of stock options	232,052		(232,052	)		930,258		(930,258	)		407,542		(407,542	)
Settlement of restricted stock units, net of 26,107, 39,075 and 36,585 shares retained, respectively	52,182		(52,182	)		80,988		(80,988	)		103,331		(103,331	)
Settlement of performance share units, net of 6,737, 1,027 and 9,334 shares retained, respectively	14,027		(14,027	)		1,911		(1,911	)		13,978		(13,978	)
Purchase of treasury shares	(2,473,093	)	2,473,093			(1,479,660	)	1,479,660			(3,000,302	)	3,000,302
Balance at end of period	53,687,528		55,971,691			55,862,360		53,796,859			56,328,863		53,330,356

NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSSES) (AOCE)

The components of AOCE consisted of the following (in millions of dollars):

	Foreign Currency Translation and Other			Defined Postretirement Benefit Plan			Other Employment-related Benefit Plans			Total			Foreign Currency Translation Attributable to Noncontrolling Interests			AOCE Attributable to W.W. Grainger, Inc.
Balance at January 1, 2017, net of tax	$	(316	)	$	25		$	(5	)	$	(296	)	$	(23	)	$	(273	)
Other comprehensive earnings (loss) before reclassifications, net of tax	75			86			1			162			4			158
Amounts reclassified to Net earnings	18			(38		)	—			(20		)	—			(20		)
Net current period activity	$	93		$	48		$	1		$	142		$	4		$	138
Balance at December 31, 2017, net of tax	$	(223	)	$	73		$	(4	)	$	(154	)	$	(19	)	$	(135	)
Other comprehensive earnings (loss) before reclassifications, net of tax	(43		)	4			(1		)	(40		)	3			(43		)
Amounts reclassified to Net earnings	2			(10		)	—			(8		)	—			(8		)
Amounts reclassified to Retained earnings	—			15			—			15			—			15
Net current period activity	$	(41	)	$	9		$	(1	)	$	(33	)	$	3		$	(36	)
Balance at December 31, 2018, net of tax	$	(264	)	$	82		$	(5	)	$	(187	)	$	(16	)	$	(171	)
Other comprehensive earnings (loss) before reclassifications, net of tax	25			8			(3		)	30			3			27
Amounts reclassified to Net earnings	1			(11		)	—			(10		)	—			(10		)
Net current period activity	26			(3		)	(3		)	20			3			17
Balance at December 31, 2019, net of tax	$	(238	)	$	79		$	(8	)	$	(167	)	$	(13	)	$	(154	)

NOTE 13 - INCOME TAXES

Earnings (losses) before income taxes by geographical area consisted of the following (in millions of dollars):

	For the Years Ended December 31,
	2019				2018				2017
U.S.	$	1,226			$	1,163			$	971
Foreign	(17		)		(82		)		(35		)
Total	$	1,209			$	1,081			$	936

Income tax expense consisted of the following (in millions of dollars):

	For the Years Ended December 31,
	2019				2018				2017
Current income tax expense:
U.S. Federal	$	199			$	166			$	248
U.S. State	44				32				29
Foreign	58				47				22
Total current	301				245				299
Deferred income tax expense	13				13				14
Total income tax expense	$	314			$	258			$	313

The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December 31, 2019 and 2018 were as follows (in millions of dollars):

	As of December 31,
	2019				2018
Deferred tax assets:
Accrued expenses	$	86			$	35
Foreign operating loss carryforwards	67				64
Accrued employment-related benefits	49				49
Tax credit carryforward	22				22
Other	12				11
Deferred tax assets	236				181
Less valuation allowance	(72		)		(72		)
Deferred tax assets, net of valuation allowance	$	164			$	109
Deferred tax liabilities:
Property, buildings and equipment	(134		)		(44		)
Intangibles	(83		)		(105		)
Prepaids	(6		)		(6		)
Other	(6		)		(8		)
Deferred tax liabilities	(229		)		(163		)
Net deferred tax liability	$	(65	)		$	(54	)
The net deferred tax asset (liability) is classified as follows:
Noncurrent assets	$	11			$	12
Noncurrent liabilities	(76		)		(66		)
Net deferred tax liability	$	(65	)		$	(54	)

At December 31, 2019 the Company had $286 million of net operating loss (NOLs) carryforwards related primarily to foreign operations. Some of the operating loss carryforwards may expire at various dates through 2039. The Company

has recorded a valuation allowance, which represents a provision for uncertainty as to the realization of the tax benefits of these carryforwards and deferred tax assets that may not be realized. The Company's valuation allowance changed as follows (in millions of dollars):

	For the Years Ended December 31,
	2019				2018
Balance at beginning of period	$	(72	)		$	(84	)
Increases primarily related to foreign NOLs	(9		)		(3		)
Releases related to foreign NOLs	10				16
Increase related to U.S. foreign tax credits	(1		)		(1		)
Balance at end of period	$	(72	)		$	(72	)

A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in millions of dollars):

	For the Years Ended December 31,
	2019				2018				2017
Federal income tax	$	254			$	227			$	327
State income taxes, net of federal income tax benefit	36				32				20
Clean energy credit	—				(20		)		(38		)
Foreign rate difference	25				20				10
Goodwill impairment	—				20				—
U.S. tax legislation impact	—				—				(3		)
Excess tax benefits from stock-based compensation	(2		)		(15		)		(14		)
Other - net	1				(6		)		11
Income tax expense	$	314			$	258			$	313
Effective tax rate	26.0		%		23.9		%		33.5		%

Foreign Undistributed Earnings

Estimated gross undistributed earnings of foreign subsidiaries at December 31, 2019, amounted to $402 million. The Company considers these undistributed earnings permanently reinvested in its foreign operations and is not recording a deferred tax liability for any foreign withholding taxes on such amounts. The Company's permanent reinvestment assertion has not changed following the enactment of the 2017 Tax Cuts and Jobs Act. If at some future date the Company ceases to be permanently reinvested in its foreign subsidiaries, the Company may be subject to foreign withholding and other taxes on these undistributed earnings and may need to record a deferred tax liability for any outside basis difference in its investments in its foreign subsidiaries.

Tax Uncertainties

The Company recognizes in the financial statements a provision for tax uncertainties, resulting from application of complex tax regulations in multiple tax jurisdictions. The changes in the liability for tax uncertainties, excluding interest, are as follows (in millions of dollars):

	For the Years Ended December 31,
	2019				2018				2017
Balance at beginning of year	$	37			$	45			$	59
Additions for tax positions related to the current year	3				4				4
Additions for tax positions of prior years	1				3				5
Reductions for tax positions of prior years	(1		)		(5		)		(13		)
Reductions due to statute lapse	(10		)		(9		)		(5		)
Settlements, audit payments, refunds - net	(2		)		(1		)		(5		)
Balance at end of year	$	28			$	37			$	45

The Company classifies the liability for tax uncertainties in deferred income taxes and tax uncertainties. Included in

this amount are $8 million and $13 million at December 31, 2019 and 2018, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Any

changes in the timing of deductibility of these items would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authorities to an earlier period. Excluding the timing items, the remaining amounts would affect the annual tax rate. In 2019, the changes to tax positions related generally to the impact of expiring statutes, conclusion of audits and audit settlements. Estimated interest and penalties were not material.

The Company regularly undergoes examination of its federal income tax returns by the Internal Revenue Service. The statute of limitations expired for the Company's 2015 federal tax return while tax years 2016 through 2019 are open. The Company is also subject to audit by state, local and foreign taxing authorities. Tax years 2012-2019 remain subject to state and local audits and 2007-2019 remain subject to foreign audits. The amount of liability associated with the Company's tax uncertainties may change within the next 12 months due to the pending audit activity, expiring statutes or tax payments. A reasonable estimate of such change cannot be made.

NOTE 14 - SEGMENT INFORMATION

Grainger’s two reportable segments are the U.S. and Canada. These reportable segments reflect the results of the Company's high-touch solutions businesses in those geographies. Other businesses include the endless assortment businesses, Zoro Tools, Inc. (Zoro) and MonotaRO Co. (MonotaRO), and smaller high-tough solutions businesses in Europe and Mexico. These businesses individually do not meet the criteria of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of MRO supplies, as service revenues account for approximately 1% of total revenues for each operating segment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to a related party sale. The segment results include certain centrally incurred costs for shared services that are charged to the segments based upon the relative level of service used by each operating segment.

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

	2019
	United States				Canada				Total Reportable Segments				Other businesses				Total
Total net sales	$	8,815			$	529			$	9,344			$	2,651			$	11,995
Intersegment net sales	(505		)		—				(505		)		(4		)		(509		)
Net sales to external customers	$	8,310			$	529			$	8,839			$	2,647			11,486
Segment operating earnings	$	1,391			$	3			$	1,394			$	(9	)		$	1,385

	2018
	United States				Canada				Total Reportable Segments				Other businesses				Total
Total net sales	$	8,588			$	653			$	9,241			$	2,441			$	11,682
Intersegment net sales	(457		)		—				(457		)		(4		)		(461		)
Net sales to external customers	$	8,131			$	653			$	8,784			$	2,437			$	11,221
Segment operating earnings	$	1,338			$	(49	)		$	1,289			$	8			$	1,297

	2017
	United States				Canada				Total Reportable Segments				Other businesses				Total
Total net sales	$	7,960			$	753			$	8,713			$	2,120			$	10,833
Intersegment net sales	(404		)		—				(404		)		(4		)		(408		)
Net sales to external customers	$	7,556			$	753			$	8,309			$	2,116			$	10,425
Segment operating earnings	$	1,200			$	(77	)		$	1,123			$	56			$	1,179

Following are reconciliations of the segment information with the consolidated totals per the Financial Statements (in millions of dollars):

	2019				2018				2017
Operating earnings:
Total operating earnings for reportable segments	$	1,394			$	1,289			$	1,123
Other businesses	(9		)		8				56
Unallocated expenses	(123		)		(139		)		(144		)
Total consolidated operating earnings	$	1,262			$	1,158			$	1,035
Assets:
United States	$	2,668			$	2,496			$	2,310
Canada	173				188				279
Assets for reportable segments	$	2,841			$	2,684			$	2,589
Other current and noncurrent assets	3,003				2,879				3,033
Unallocated assets	161				310				182
Total consolidated assets	$	6,005			$	5,873			$	5,804
Depreciation and amortization:
United States	$	148			$	166			$	169
Canada	17				19				19
Depreciation and amortization for reportable segments	$	165			$	185			$	188
Other businesses and unallocated	45				49				53
Total consolidated depreciation and amortization	$	210			$	234			$	241
Additions to long-lived assets
United States	$	168			$	200			$	187
Canada	9				7				8
Additions to long-lived assets for reportable segments	$	177			$	207			$	195
Other businesses and unallocated	72				39				67
Total consolidated additions to long-lived assets	$	249			$	246			$	262

Following are revenue and long-lived assets by geographic location (in millions of dollars):

	2019				2018				2017
Revenue by geographic location:
United States	$	8,865			$	8,613			$	7,948
Canada	539				658				761
Other foreign countries	2,082				1,950				1,716
	$	11,486			$	11,221			$	10,425
Long-lived segment assets by geographic location:
United States	$	1,268			$	1,140			$	1,098
Canada	152				136				199
Other foreign countries	327				202				247
	$	1,747			$	1,478			$	1,544

The Company is a broad-line distributor of MRO products and services. Products are regularly added and deleted 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.

Unallocated amounts include corporate-level support and administrative expenses, corporate-level assets consisting primarily of cash, property, buildings and equipment and intersegment eliminations and other adjustments. Unallocated expenses and assets are not included in any reportable segment.

Assets for reportable segments include net accounts receivable and first-in, first-out inventory, which are reported to the Company's Chief Operating Decision Maker. Long-lived assets consist of property, buildings, equipment, capitalized software and ROU assets of $223 million as of December 31, 2019.

Depreciation and amortization presented above includes depreciation of long-lived assets and amortization of capitalized software.

NOTE 15 - CONTINGENCIES AND LEGAL MATTERS

From time to time the Company is involved in various legal and administrative proceedings that are incidental to its business, including claims related to product liability, general negligence, contract disputes, environmental issues, unclaimed property, wage and hour laws, intellectual property, employment practices, regulatory compliance or other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties. For example, beginning in the fourth quarter of 2019, Grainger has been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO, LLC chemical refinery located in Harris County. The complaints seek recovery of compensatory and other damages and relief. Grainger is investigating the claims, which are at an early stage, and intends to contest these matters vigorously. Also, as a government contractor selling to federal, state and local governmental entities, the Company may be subject to governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration or to pricing compliance. While the Company is unable to predict the outcome of any of these matters, it is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position 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 and coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits. While the Company is unable

to predict the outcome of these proceedings, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position or results of operations.

NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly information for 2019 and 2018 is as follows (in millions of dollars, except for per share amounts):

		2019 Quarter Ended
		March 31				June 30				September 30				December 31				Total
Net sales		$	2,799			$	2,893			$	2,947			$	2,847			$	11,486
COGS		1,704				1,772				1,848				1,765				7,089
Gross profit		1,095				1,121				1,099				1,082				4,397
SG&A		732				741				761				901				3,135
Operating earnings		363				380				338				181				1,262
Net earnings attributable to W.W. Grainger, Inc.		$	253			$	260			$	233			$	103			$	849
Earnings per share - basic		$	4.50			$	4.69			$	4.27			$	1.89			$	15.39
Earnings per share - diluted		$	4.48			$	4.67			$	4.25			$	1.88			$	15.32

		2018 Quarter Ended
		March 31				June 30				September 30				December 31				Total
Net sales		$	2,766			$	2,861			$	2,831			$	2,763			$	11,221
COGS		1,674				1,750				1,752				1,697				6,873
Gross profit		1,092				1,111				1,079				1,066				4,348
SG&A		757				767				890				776				3,190
Operating earnings		335				344				189				290				1,158
Net earnings attributable to W.W. Grainger, Inc.		$	232			$	237			$	104			$	209			$	782
Earnings per share - basic		$	4.09			$	4.19			$	1.84			$	3.71			$	13.82
Earnings per share - diluted		$	4.07			$	4.16			$	1.82			$	3.68			$	13.73

NOTE 17 - SUBSEQUENT EVENT

In February 2020, the Company entered into a five-year syndicated $1.25 billion revolving credit facility (2020 Credit Facility). The 2020 Credit Facility is unsecured and repayable at maturity in February 2025, subject to two one-year extensions if sufficient lenders agree. This revolving credit facility replaced the Company's 2017 Credit Facility.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATE: February 20, 2020

W.W. GRAINGER, INC.
By:	/s/ D.G. Macpherson
	D.G. Macpherson
	Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Grainger on February 20, 2020, in the capacities indicated.

/s/ D.G. Macpherson		/s/ Brian P. Anderson
D.G. Macpherson		Brian P. Anderson
Chairman and Chief Executive Officer, Director		Director
(Principal Executive Officer)
		/s/ V. Ann Hailey
/s/ Thomas B. Okray		V. Ann Hailey
Thomas B. Okray		Director
Senior Vice President
and Chief Financial Officer		/s/ Neil S. Novich
(Principal Financial Officer)		Neil S. Novich
		Director
/s/ Eric R. Tapia
Eric R. Tapia		/s/ E. Scott Santi
Vice President and Controller		E. Scott Santi
(Principal Accounting Officer)		Director
		/s/ Lucas E. Watson
		Lucas E. Watson
		Director

EXHIBIT INDEX (1)
EXHIBIT NO.		DESCRIPTION
2.1		Share Purchase Agreement, dated as of July 30, 2015, by and among Grainger, GWW UK Holdings Limited, Gregory Family Office Limited and Michael Gregory, incorporated by reference to Exhibit 2.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated July 31, 2015.
3.1		Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
3.2		By-laws, as amended on March 9, 2017, incorporated by reference to Exhibit 3.1.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated March 9, 2017.
4.1		No instruments which define the rights of holders of W.W. Grainger, Inc.’s Industrial Development Revenue Bonds are filed herewith, pursuant to the exemption contained in Regulation S-K, Item 601(b)(4)(iii). W.W. Grainger, Inc. hereby agrees to furnish to the SEC, upon request, a copy of any such instrument.
4.2		Indenture, dated as of June 11, 2015, between W.W. Grainger, Inc. and U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated June 11, 2015.
4.3		First Supplemental Indenture, dated as of June 11, 2015, between W.W. Grainger, Inc. and U.S. Bank National Association, as trustee, and Form of 4.60% Senior Notes due 2045, incorporated by reference to Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated June 11, 2015.
4.4		Second Supplemental Indenture, dated as of May 16, 2016, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 16, 2016.
4.5		Third Supplemental Indenture, dated as of May 22, 2017, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017.
4.6		Form of 3.75% Senior Notes due 2046 (included in Exhibit 4.4), incorporated by reference to Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 16, 2016.
4.7		Form of 4.20% Senior Notes due 2047 (included in Exhibit 4.5), incorporated by reference to Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017.
4.8		Description of Registrant's Securities Pursuant to Section 12 of the Securities Exchange Act of 1934.
10.1		1990 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(a) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.*
10.2		Form of Indemnification Agreement between W.W. Grainger, Inc. and each of its directors and certain of its executive officers, incorporated by reference to Exhibit 10(b)(i) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.*
10.3		Frozen Executive Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(b)(v) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.*
10.4		First amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(v)(1) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.5		Second amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(iv)(2) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.6		Supplemental Profit Sharing Plan, as amended, incorporated by reference to Exhibit 10(viii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.*
10.7		Supplemental Profit Sharing Plan II, as amended, incorporated by reference to Exhibit 10(b)(ix) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.*
10.8		Voluntary Salary and Incentive Deferral Plan, as amended, incorporated by reference to Exhibit 10(b)(xi) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.*
10.9		Summary Description of the 2019 Directors Compensation Program.*
10.10		2005 Incentive Plan, as amended, incorporated by reference to Exhibit 10(d) to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.*

10.11		2010 Incentive Plan, incorporated by reference to Exhibit B of W.W. Grainger, Inc.’s Proxy Statement dated March 12, 2010.*
10.12		Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvi) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.13		Form of Stock Option Award and Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.14		Form of Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xviii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010.*
10.15		Form of 2012 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xix) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012.*
10.16		Summary Description of the 2020 Management Incentive Program.*
10.17		Incentive Program Recoupment Agreement, incorporated by reference to Exhibit 10(b)(xxv) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.18		Form of Change in Control Employment Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxvii) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010.*
10.19		Form of 2013 Performance Share Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxiii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2013.*
10.20		Form of 2014 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxiv) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2014.*
10.21		Form of 2015 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.28 to W.W. Grainger, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2015.*
10.22		W.W. Grainger, Inc. 2015 Incentive Plan, incorporated by reference to Exhibit B of W.W. Grainger, Inc.’s Proxy Statement dated March 13, 2015.*
10.23		First Amendment to the W.W. Grainger, Inc. 2015 Incentive Plan, incorporated by reference to 10.1 of W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.*
10.24		W.W. Grainger, Inc. 2015 Incentive Plan as Amended and Restated Effective October 31, 2018, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.*
10.25		£180,000,000 Facilities Agreement, dated as of August 26, 2015, by and among GWW UK Holdings Ltd, W.W. Grainger, Inc., the lender parties thereto, Lloyds Bank PLC and Lloyds Securities Inc., as Arrangers, and Lloyds Bank PLC, as Agent, incorporated by reference to W.W. Grainger, Inc.’s Current Report on Form 8-K dated September 1, 2015.
10.26		Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.*
10.27		Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.*
10.28		Form of 2016 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.*
10.29		Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.*
10.30		Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.*
10.31		Form of 2017 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.4 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.*
10.32		Separation Agreement and General Release by and between W.W. Grainger, Inc. and Ronald L. Jadin dated April 2, 2018, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*

10.33		Form of Separation Agreement and General Release by and between W.W. Grainger, Inc. and Joseph C. High, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
10.34		Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Stock Option Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
10.35		Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.4 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
10.36		Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Performance Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.5 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
10.37		Form of 2019 W.W. Grainger, Inc. 2015 Stock Incentive Plan Stock Option Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.*
10.38		Form of 2019 W.W. Grainger, Inc. 2015 Stock Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.*
10.39		Form of 2019 W.W. Grainger, Inc. 2015 Stock Incentive Plan Performance Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.*
10.40		Credit Agreement dated as of February 14, 2020, by and among W.W. Grainger, Inc., the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 14, 2020.
21		Subsidiaries of Grainger.
23		Consent of Independent Registered Public Accounting Firm.
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).
(*) Management contract or compensatory plan or arrangement.
(1) Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.