Item 16. Form 10-K Summary

None.

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

December 31, 2020, 2019 and 2018

Page
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING			39
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			40
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS			43
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS			44
CONSOLIDATED BALANCE SHEETS			45
CONSOLIDATED STATEMENTS OF CASH FLOWS			46
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY			47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			48

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, 2020, 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, 2020.

Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger's internal control over financial reporting as of December 31, 2020, 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 24, 2021 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 consolidated 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 consolidated 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, 2020, the Grainger Canada reporting unit’s goodwill balance was $129 million. As discussed in Notes 1 and 5 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 interim quantitative goodwill impairment test performed during the second quarter 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, operating earnings, and discount rate, which are affected by expectations about future market or economic conditions. Management performed a qualitative analysis in the fourth quarter.
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 24, 2021

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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes and our report dated February 24, 2021 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 24, 2021

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except for per share amounts)

			For the Years Ended December 31,
			2020						2019						2018
Net sales			$	11,797					$	11,486					$	11,221
Cost of goods sold			7,559						7,089						6,873
Gross profit			4,238						4,397						4,348
Selling, general and administrative expenses			3,219						3,135						3,190
Operating earnings			1,019						1,262						1,158
Other (income) expense:
Interest expense, net			93						79						82
Other, net			(21)						(26)						(5)
Total other expense, net			72						53						77
Earnings before income taxes			947						1,209						1,081
Income tax provision			192						314						258
Net earnings			755						895						823
Less: Net earnings attributable to noncontrolling interest			60						46						41
Net earnings attributable to W.W. Grainger, Inc.			$	695					$	849					$	782
Earnings per share:
Basic			$	12.88					$	15.39					$	13.82
Diluted			$	12.82					$	15.32					$	13.73
Weighted average number of shares outstanding:
Basic			53.5						54.7						56.1
Diluted			53.7						54.9						56.5

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,
			2020						2019						2018
Net earnings			$	755					$	895					$	823
Other comprehensive earnings (losses):
Foreign currency translation earnings (losses), net of reclassification (see Note 2 and Note 12)			83						26						(41)
Postretirement benefit plan gains (losses), net of tax (expense) benefit of $(7), $2, and $3, respectively			22						(6)						(7)
Total other comprehensive earnings (losses)			105						20						(48)
Comprehensive earnings, net of tax			860						915						775
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings			60						46						41
Foreign currency translation adjustments			12						3						3
Total comprehensive earnings (losses) attributable to noncontrolling interest			72						49						44
Comprehensive earnings attributable to W.W. Grainger, Inc.			$	788					$	866					$	731

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			2020						2019
Current assets
Cash and cash equivalents			$	585					$	360
Accounts receivable (less allowance for credit losses of $27 and $21, respectively)			1,474						1,425
Inventories – net			1,733						1,655
Prepaid expenses and other current assets			120						104
Prepaid income taxes			7						11
Total current assets			3,919						3,555
Property, buildings and equipment – net			1,395						1,400
Deferred income taxes			14						11
Goodwill			391						429
Intangibles – net			228						304
Other assets			348						306
Total assets			$	6,295					$	6,005
Liabilities and shareholders' equity
Current liabilities
Short-term debt			$	—					$	55
Current maturities of long-term debt			8						246
Trade accounts payable			779						719
Accrued compensation and benefits			240						228
Accrued contributions to employees’ profit-sharing plans			67						85
Accrued expenses			305						318
Income taxes payable			42						27
Total current liabilities			1,441						1,678
Long-term debt (less current maturities)			2,389						1,914
Deferred income taxes and tax uncertainties			110						106
Other non-current liabilities			262						247
Shareholders' equity
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding			—						—
Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares			55						55
Additional contributed capital			1,239						1,182
Retained earnings			8,779						8,405
Accumulated other comprehensive losses			(61)						(154)
Treasury stock, at cost - 57,134,828 and 55,971,691 shares, respectively			(8,184)						(7,633)
Total W.W. Grainger, Inc. shareholders’ equity			1,828						1,855
Noncontrolling interest			265						205
Total shareholders' equity			2,093						2,060
Total liabilities and shareholders' equity			$	6,295					$	6,005

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,
			2020						2019						2018
Cash flows from operating activities:
Net earnings			$	755					$	895					$	823
Provision for credit losses			22						12						7
Deferred income taxes and tax uncertainties			(5)						4						7
Depreciation and amortization			182						229						257
Impairment of goodwill, intangibles and long lived assets			187						123						156
Net losses (gains) from sales of assets and business divestitures			106						(6)						(6)
Stock-based compensation			46						40						47
Subtotal			538						402						468
Change in operating assets and liabilities
Accounts receivable			(121)						(42)						(79)
Inventories			(158)						(106)						(129)
Prepaid expenses and other assets			(23)						(33)						(2)
Trade accounts payable			80						32						(51)
Accrued liabilities			15						(84)						18
Income taxes – net			24						(3)						36
Other non-current liabilities			13						(19)						(27)
Net cash provided by operating activities			1,123						1,042						1,057
Cash flows from investing activities:
Additions to property, buildings, equipment and intangibles			(197)						(221)						(239)
Net proceeds of business acquisitions, divestitures and sales of assets			20						17						86
Other – net			(2)						2						(13)
Net cash used in investing activities			(179)						(202)						(166)
Cash flows from financing activities:
Borrowings under lines of credit			12						20						26
Payments against lines of credit			(65)						(15)						(31)
Proceeds from long-term debt			1,584						—						—
Payments of long-term debt			(1,370)						(42)						(96)
Proceeds from stock options exercised			70						49						181
Payments for employee taxes withheld from stock awards			(18)						(11)						(12)
Purchases of treasury stock			(601)						(700)						(425)
Cash dividends paid			(338)						(328)						(316)
Other – net			—						4						3
Net cash used in financing activities			(726)						(1,023)						(670)
Exchange rate effect on cash and cash equivalents			7						5						(10)
Net change in cash and cash equivalents:			225						(178)						211
Cash and cash equivalents at beginning of year			360						538						327
Cash and cash equivalents at end of year			$	585					$	360					$	538
Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)			$	94					$	84					$	86
Cash payments for income taxes			$	180					$	322					$	229

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, 2018			$	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			—			45			—			—			33			—			78
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)			—			1			(313)			—			—			(16)			(328)
Balance at December 31, 2019			$	55		$	1,182		$	8,405		$	(154)		$	(7,633)		$	205		$	2,060
Stock-based compensation			—			49			—			—			49			—			98
Purchases of treasury stock			—			—			—			—			(600)			(1)			(601)
Net earnings			—			—			695			—			—			60			755
Other comprehensive earnings (losses)			—			—			—			93			—			12			105
Capital contribution			—			7			—			—			—			7			14
Cash dividends paid ($5.94 per share)			—			1			(321)			—			—			(18)			(338)
Balance at December 31, 2020			$	55		$	1,239		$	8,779		$	(61)		$	(8,184)		$	265		$	2,093

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.

The following reportable segments reflect how management reviews and evaluates operating performance through December 31, 2020:

• United States (U.S.) - high-touch business

• Canada - high-touch business

Effective January 1, 2021, the Company operates under the reportable segments listed below to align with its go-to-market strategies and bifurcated business models:

• High Touch - North America - the Company’s high-touch businesses provide value-added MRO solutions that are rooted in deep product knowledge and customer expertise. This includes the Grainger-branded businesses in the U.S., Canada, Mexico and Puerto Rico.

• Endless Assortment - the Company’s endless assortment businesses provide a simple, transparent and streamlined experience for customers to shop millions of products. This includes the Company’s Zoro Tools, Inc. (Zoro) and MonotaRO Co., Ltd. (MonotaRO) online channels which operate predominately in the U.S., United Kingdom (U.K.) and Japan.

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, the endless assortment business in Japan, with the residual representing the noncontrolling interest.

The Company reports MonotaRO on a one-month calendar lag allowing for the timely preparation of Financial Statements. This one-month reporting lag is with the exception of significant transactions or events that occur during the intervening period. There were no significant events during the month of December 2020.

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 accounted for approximately 1% of total Company revenue for the twelve months ended December 31, 2020.

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 $31 million and $25 million as of December 31, 2020 and 2019, respectively, and are reported as a reduction of Accounts receivable, net. Total accrued sales incentives were approximately $58 million and $57 million as of December 31, 2020 and 2019, 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, 2020 and 2019.

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.

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.

Advertising

Advertising costs, which include 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 $319 million, $316 million and $241 million for 2020, 2019 and 2018, respectively.

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 Credit Losses

The Company’s accounts receivable arise primarily from sales on credit to customers and are stated at their estimated net realizable value. The Company establishes allowances for credit losses on customer accounts that are potentially uncollectible. These allowances 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.

The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers.

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 71% 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 $446 million and $426 million higher than reported at December 31, 2020 and December 31, 2019, respectively. Concurrently, net earnings would have increased by $15 million and $24 million and $8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Property, Buildings and Equipment

Company property, buildings and equipment are valued at cost. Depreciation is estimated using the straight-line depreciation method over the assets' useful lives as follows:

Buildings, structures and improvements			10 to 50 years
Furniture, fixtures, machinery and equipment			3 to 15 years

Grainger has historically depreciated certain property, building, and equipment using both the declining balance and sum-of-the-years’ digits methods as well as certain buildings over estimated useful lives of approximately thirty years. In accordance with its policy, the Company periodically reviews information impacting the pattern of consumption for its capital assets and useful lives to ensure that estimates of depreciation expenses are appropriate. The Company’s investment in its supply chain infrastructure and technology triggered the review of these patterns of consumption. Pursuant to the review and effective January 1, 2020, the method of estimating depreciation for these assets was changed to the straight-line method and useful lives to forty and fifty years. The Company determined that these changes in depreciation method and useful lives were considered a change in accounting estimate effected by a change in accounting principle, and as such have been accounted for on a prospective basis. Grainger believes the changes to the straight-line method and useful lives are appropriate estimations of the Company's current patterns of economic consumption of its capital assets and appropriately

match current revenues and costs over updated estimates of the assets' useful lives. The effect of these changes resulted in a decrease of $34 million to depreciation expense for the year ended December 31, 2020.

Depreciation expense was $116 million, $150 million and $162 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company capitalized interest costs of $4 million, $9 million and $10 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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.

Leases

The Company leases certain properties and buildings (including branches, warehouses, distribution centers (DCs) 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.

Accounting for Derivative Instruments

The Company recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.

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

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 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, 2019-11 and 2020-02. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The Company adopted this ASU effective January 1, 2020. While the adoption of this ASU did not have a material impact on the Company's Financial Statements, it required changes to the Company’s process of estimating expected credit losses on trade receivables.

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 does not expect a material impact from this ASU.

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

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The

guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the Financial Statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements. These amendments improve consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions in the codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2020. The Company does not expect a material impact from this ASU.

NOTE 2 - BUSINESS DIVESTITURES AND LIQUIDATIONS

Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested the Fabory business in Europe (Fabory) on June 30, 2020 and the China business (China) on August 21, 2020. Accordingly, the Company's condensed consolidated statements of earnings, comprehensive earnings and cash flows and related notes include Fabory and China results through the respective dates of divestiture. The proceeds from these divestitures will be used to fund general corporate needs.

During the second and third quarters of 2020, Grainger recognized a net loss of approximately $109 million and gain of $5 million in SG&A as a result of the Fabory and China divestitures, respectively, which included net accumulated foreign currency translation losses of $45 million, that were reclassified from Accumulated other comprehensive earnings (losses) (AOCE) to SG&A. During the fourth quarter of 2020, the Company commenced the liquidation of Zoro Tools Europe (ZTE) and recognized $9 million in expense associated with winding down the business.

NOTE 3 - 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, 2020
			United States									Canada									Total Company (2)
Government			21			%						9			%						16			%
Heavy Manufacturing			16			%						18			%						15			%
Light Manufacturing			13			%						7			%						10			%
Transportation			5			%						10			%						5			%
Healthcare			10			%						—			%						7			%
Commercial			8			%						9			%						7			%
Retail/Wholesale			10			%						3			%						8			%
Contractors			9			%						10			%						7			%
Natural Resources			2			%						29			%						3			%
Other (1)			6			%						5			%						22			%
Total net sales			100			%						100			%						100			%
Percent of Total Company Revenue			73			%						4			%						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 smaller international high-touch businesses and account for approximately 23% of revenue for the twelve months ended December 31, 2020.

			Twelve Months Ended December 31, 2019
			United States									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 smaller international high-touch businesses and account for approximately 23% of revenue for the twelve months ended December 31, 2019.

NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT

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

			As of
			December 31, 2020									December 31, 2019
Land			$			329						$			332
Building, structures and improvements			1,330									1,329
Furniture, fixtures, machinery and equipment			1,878									1,832
Property, buildings and equipment			$			3,537						$			3,493
Less: Accumulated depreciation and amortization			2,142									2,093
Property, buildings and equipment, net			$			1,395						$			1,400

During the first quarter of 2020, the Company recorded approximately $44 million of impairment charges in SG&A in connection with the impairment of Fabory’s long-lived assets, including property, buildings and equipment for approximately $24 million and right-to-use (ROU) assets for approximately $20 million (presented in Other assets) due to the factors discussed in Note 5 to the Financial Statements. The Company divested Fabory during the second quarter of 2020 (see Note 2 to the Financial Statements).

NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS

Canada Business

Given the slowdowns in global oil markets and the economic repercussions from the COVID-19 pandemic in Canada, qualitative tests performed in the second quarter of 2020 indicated the existence of impairment indicators for the Canada business. As such, quantitative tests were performed to evaluate whether any impairment of goodwill was necessary. Based on the result of the quantitative tests, the Company concluded that there was no impairment of goodwill. The enterprise value of the Canada business at June 30, 2020 exceeded its carrying value by more than 25%, which is a 10 percentage point decrease since the date of the last quantitative test, December 31, 2019. Per the impairment test and respective sensitivity analysis, it was noted that an increase of approximately 3% in the pre-tax discount rate or approximately 1.5% decrease in revenue long-term growth rate projections would cause the Canada business enterprise value to fall to the level of its carrying value and thus trigger an impairment.

During its annual impairment testing the Company performed qualitative goodwill and intangible asset assessments. The Company did not identify any significant events or changes in circumstances that indicated the existence of

impairment indicators, as such quantitative assessments were not required. Changes in assumptions regarding future business performance and macroeconomic conditions, particularly the COVID-19 pandemic and global oil prices, may negatively impact demand generation over a long period, future cash flows and enterprise valuations, which could result in future impairments of goodwill and intangible assets for the Canada business.

Fabory Business

During the first quarter of 2020, the Company impaired Fabory's goodwill and tradenames. Concurrently, consistent with the circumstances leading to the goodwill and tradenames' impairment, the Company performed a recoverability and fair value test of Fabory’s long-lived assets, including property, buildings and equipment and customer lists and relationships and concluded to impair those assets. As a result, the Company recorded impairment charges totaling $133 million, of which $58 million and $75 million were attributable to the goodwill and intangibles, respectively. The impairments of these assets were driven primarily by revenue slowdown in key Fabory markets, gross profit pressures and a flat-to-declining operating margin against a backdrop of industrial sector declines across Europe, which were further amplified by the long-term implications of the COVID-19 pandemic, among other factors. The Company divested Fabory during the second quarter of 2020 (see Note 2 to the Financial Statements).

Company

Grainger completed its annual impairment testing during the fourth quarter of 2020. Qualitative tests did not indicate existence of impairment indicators, as such quantitative assessments were not required.

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

						United States						Canada						Other businesses						Total
Balance at January 1, 2019						$	192					$	120					$	112					$	424
Translation						—						6						(1)						5
Balance at December 31, 2019						192						126						111						429
Acquisition						—						—						15						15
Impairment						—						—						(58)						(58)
Translation						—						3						2						5
Balance at December 31, 2020						$	192					$	129					$	70					$	391

The cumulative goodwill impairments as of December 31, 2020, were $137 million and consisted of $32 million in the Canada business and $105 million in Other businesses. Grainger's current business portfolio had no impairments to goodwill for the twelve months ended December 31, 2020 and 2019. 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,
									2020																		2019
			Weighted average life						Gross carrying amount						Accumulated amortization/ impairment						Net carrying amount						Gross carrying amount						Accumulated amortization/impairment						Net carrying amount
Customer lists and relationships			11.8 years						$	223					$	171					$	52					$	401					$	301					$	100
Trademarks, trade names and other			14.1 years						36						22						14						36						20						16
Non-amortized trade names and other			—						28						—						28						100						38						62
Capitalized software(1)			4.2 years						461						327						134						626						500						126
Total intangible assets			7.1 years						$	748					$	520					$	228					$	1,163					$	859					$	304

(1) During the fourth quarter of 2020, the Company completed a $223 million non-cash retirement of fully amortized capitalized software as a result of the Company's review of long-lived assets. The retirement includes assets that became inactive in prior years and has no impact on amortization expense.

The 2019 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.

Amortization expense of intangible assets presented within SG&A, excluding impairment charges was $60 million, $78 million, and $92 million for the years ended December 31, 2020, 2019 and 2018, respectively. Estimated amortization expense for future periods is as follows (in millions of dollars):

Year						Expense
2021						$	63
2022						48
2023						36
2024						18
2025						16
Thereafter						19
Total						$	200

NOTE 6 - SHORT-TERM DEBT

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

			As of December 31,
			2020						2019
Lines of Credit
Outstanding at December 31			$	—					$	55
Maximum month-end balance during the year			$	—					$	56
Weighted average interest rate during the year			—		%				2.32		%
Weighted average interest rate at December 31			—		%				2.44		%

Lines of Credit

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

There were no borrowings outstanding under the line of credit as of December 31, 2020 and 2019. The primary purpose of this credit facility is to support the Company's commercial paper program and for general corporate purposes.

Commercial Paper

The Company issues commercial paper from time to time for general working capital needs. At December 31, 2020, 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, 2020.

NOTE 7 - LONG-TERM DEBT

Long-term debt, including current maturities and debt issuance costs and discounts, net, consisted of the following (in millions of dollars):

			As of December 31,
			2020												2019
			Carrying Value						Fair Value(5)						Carrying Value						Fair Value(5)
4.60% senior notes due 2045(1)			$	1,000					$	1,343					$	1,000					$	1,194
3.75% senior notes due 2046(1)			400						479						400						416
4.20% senior notes due 2047(1)			400						514						400						449
1.85% senior notes due 2025(2)			500						526						—						—
British pound term loan(3)			—						—						170						170
Euro term loan(3)			—						—						123						123
Japanese Yen term loan(4)			87						87						—						—
Canadian dollar revolving credit facility(3)			—						—						46						46
Other			34						34						42						42
Subtotal			2,421						2,983						2,181						2,440
Less current maturities			(8)						(8)						(246)						(246)
Debt issuance costs and discounts, net of amortization			(24)						(24)						(21)						(21)
Long-term debt (less current maturities)			$	2,389					$	2,951					$	1,914					$	2,173

(1) In the years 2015-2017, Grainger issued $1.8 billion in long-term debt (Senior Notes) to partially fund the repurchase of $2.8 billion in shares of the total $3 billion 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.

(2) In February 2020, the Company issued $500 million of unsecured 1.85% Senior Notes (1.85% Notes) and used the proceeds to repay the British pound term loan, Euro term loan and the Canadian dollar revolving credit facility, and to fund general working capital needs. The 1.85% Notes mature in February 2025 and they require no principal payments until the maturity date and interest is payable semi-annually on February 15 and August 15, beginning in August 2020. Prior to January 2025, the Company may redeem the 1.85% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 1.85% Notes plus 10 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company experiences specific kinds of changes in control, it will be required to make an offer to purchase the 1.85% Notes at 101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. On or after January 15, 2025, the Company may redeem the 1.85% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if

any, to the redemption date. Costs and discounts of approximately $5 million associated with the issuance of the 1.85% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and are being amortized to interest expense, net over the term of the 1.85% Notes. In connection with the 1.85% Notes, in February 2020, the Company entered into derivative instrument agreements to manage its risks associated with interest rates on the 1.85% Notes and foreign currency fluctuations related to the financing of international operations. See Note 13 to the Financial Statements for further discussion of these derivative instruments and the Company's hedge accounting policies.

(3) In February 2020, the Company repaid the British pound term loan, Euro term loan and the Canadian dollar revolving credit facility with the proceeds of the 1.85% Senior Notes.

(4) In August 2020, MonotaRO Co. LTD., the endless assortment business in Japan, entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center network. The Japanese Yen term loan matures in 2024, payable over four equal semi-annual principal installments in 2023 and 2024, and bears average interest at 0.05%.

(5) 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.

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

Year						Payment Amount
2021						$	8
2022						—
2023						43
2024						44
2025						500
Thereafter						1,805
Total						$	2,400

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, 2020.

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 profit-sharing plan expense was $99 million, $113 million, and $164 million for 2020, 2019 and 2018, 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 $16 million, $19 million, and $13 million for 2020, 2019 and 2018, 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.

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

			For the Years Ended December 31,
			2020						2019						2018
SG&A
Service cost			$	5					$	4					$	6
Other income (expense)
Interest cost			6						7						7
Expected return on assets			(8)						(12)						(13)
Amortization of prior service credit			(10)						(10)						(10)
Amortization of unrecognized gains			(5)						(4)						(3)
Net periodic (benefits) costs			$	(12)					$	(15)					$	(13)

Reconciliations of the beginning and ending balances of the postretirement benefit asset (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 asset (obligation) follow (in millions of dollars):

			2020						2019
Benefit obligation at beginning of year			$	200					$	190
Service cost			5						4
Interest cost			6						7
Plan participants' contributions			3						3
Actuarial (gains)/losses			(38)						5
Benefits paid			(9)						(9)
Benefit obligation at end of year			$	167					$	200
Plan assets available for benefits at beginning of year			$	198					$	176
Actual returns on plan assets			14						28
Plan participants' contributions			3						3
Benefits paid			(9)						(9)
Plan assets available for benefits at end of year			206						198
Noncurrent postretirement benefit asset (obligation)			$	39					$	(2)

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

			As of December 31,
			2020						2019
Prior service credit			$	51					$	61
Unrecognized gains			83						44
Deferred tax (liability)			(33)						(26)
Net accumulated gains			$	101					$	79

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 10.9 years for 2020.

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 actuarial gains recognized during the plan year are primarily related to changes in assumptions related to certain retiree coverage elections and health reimbursement arrangement (HRA) subsidy.

The following assumptions were used to determine net periodic benefit costs at January 1 of each year:

			For the Years Ended December 31,
			2020						2019						2018
Discount rate			3.01		%				4.08		%				3.44		%
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						NA						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 following assumptions were used to determine benefit obligations at December 31:

			2020						2019						2018
Discount rate			2.17		%				3.01		%				4.08		%
Expected long-term rate of return on plan assets, net of tax			4.00		%				4.00		%				7.13		%
Initial healthcare cost trend rate
Pre age 65			5.81		%				6.06		%				6.31		%
Post age 65			NA						NA						NA
Catastrophic drug benefit			NA						NA						11.50		%
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		%

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, 2020, the Company decreased the discount rate from 3.01% to 2.17% to reflect the decrease in the market interest rates at December 31, 2020.

The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2020, the initial healthcare cost trend rate was 5.81% for pre age 65. The healthcare costs trend rates decline each year until reaching the ultimate trend rate of 4.50%. 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 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. In 2020, the Company transitioned the Trust assets from money market funds into a liability driven investment solution which enhances the Trust's after-tax returns and de-risks the Company's exposure by more closely match-funding the underlying liability. This investment strategy reflects the long-term nature of the plan obligation and seeks to reach a balanced allocation between Fixed Income securities and Equities of 65% and 35%, respectively. 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) or at significant other observable inputs (Level 2 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):

			2020						2019
Asset Class:
Level 1 Inputs:
Mutual Funds:
Funds - Municipal/Provincial Bonds			$	13					$	—
Funds - Corporate Bonds Fund			5						—
Federal Money Market Fund			11						204
Level 2 Inputs:
Fixed Income:
Corporate Bonds			102						—
Government/Municipal Bonds			8						—
Equity Funds			66						—
Plan Assets			205						204
Less: trust assets/(liabilities)			1						(6)
Plan assets available for benefits			$	206					$	198

Consistent with the new investment strategy, the after-tax expected long-term rates of return on plan assets of 4.00% at December 31, 2020 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 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
2021						$	9
2022						9
2023						10
2024						10
2025						10
2026-2030						47
Total						$	95

NOTE 9 - LEASES

The Company leases certain properties and buildings (including branches, warehouses, DCs 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, 2020
ROU Assets
Other assets						$	210
Operating lease liabilities
Accrued expenses						57
Other non-current liabilities						162
Total operating lease liabilities						$	219

						Twelve Months Ended December 31, 2020
Weighted average remaining lease term						5 years
Weighted average incremental borrowing rate						1.95		%
Cash paid for operating leases						$	69
ROU assets obtained in exchange for operating lease obligations						$	74

Rent expense was $76 million for 2020, 2019 and 2018. These amounts are net of sublease income of $2 million for 2020 and $3 million for 2019 and 2018.

Maturities of operating lease liabilities as of December 31, 2020 (in millions of dollars) are as follows:

						Maturity of operating lease liabilities
2021						$	59
2022						52
2023						40
2024						24
2025						17
Thereafter						38
Total lease payments						230
Less interest						(11)
Present value of lease liabilities						$	219

Finance leases as of December 31, 2020 and 2019 were not considered material. Finance lease obligations are reported in Long-term debt.

As of December 31, 2020, the Company does not have future lease obligations that have not yet commenced.

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), performance shares and deferred stock units. As of December 31, 2020, there were 2.1 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 $46 million, $40 million, and $47 million in 2020, 2019 and 2018, respectively, and was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $16 million, $12 million, and $29 million in 2020, 2019 and 2018, 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, 2020, 2019 and 2018 was approximately $32 million, $27 million and $23 million, respectively. The following table summarizes RSU activity (in millions, except for share and per share amounts):

			2020									2019									2018
			Shares			Weighted Average Price Per Share						Shares			Weighted Average Price Per Share						Shares			Weighted Average Price Per Share
Beginning nonvested units			326,124			$	259.88					343,814			$	245.38					352,919			$	226.31
Issued			140,815			$	252.11					96,823			$	299.25					141,775			$	284.98
Canceled			(26,254)			$	257.56					(36,224)			$	253.22					(56,393)			$	245.08
Vested			(123,271)			$	252.05					(78,289)			$	247.96					(94,487)			$	233.75
Ending nonvested units			317,414			$	259.67					326,124			$	259.88					343,814			$	245.38
Fair value of shares vested			$	31								$	19								$	22

At December 31, 2020 there was $41 million of total unrecognized compensation expense related to nonvested RSUs that the Company expects to recognize over a weighted average period of 1.9 years.

NOTE 11 - CAPITAL STOCK

The Company had no shares of preferred stock outstanding as of December 31, 2020 and 2019. The activity related to outstanding common stock and common stock held in treasury was as follows:

			2020									2019									2018
			Outstanding Common Stock			Treasury Stock						Outstanding Common Stock			Treasury Stock						Outstanding Common Stock			Treasury Stock
Balance at beginning of period			53,687,528			55,971,691						55,862,360			53,796,859						56,328,863			53,330,356
Exercise of stock options			311,374			(311,374)						232,052			(232,052)						930,258			(930,258)
Settlement of restricted stock units, net of 41,019, 26,107, and 39,075 shares retained, respectively			82,241			(82,241)						52,182			(52,182)						80,988			(80,988)
Settlement of performance share units, net of 16,830, 6,737, and 1,027 shares retained, respectively			28,098			(28,098)						14,027			(14,027)						1,911			(1,911)
Purchase of treasury shares			(1,584,850)			1,584,850						(2,473,093)			2,473,093						(1,479,660)			1,479,660
Balance at end of period			52,524,391			57,134,828						53,687,528			55,971,691						55,862,360			53,796,859

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, 2018, 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)
Other comprehensive earnings (loss) before reclassifications, net of tax			36			33			—						69			12			57
Amounts reclassified to Net earnings			47			(11)			—						36			—			36
Net current period activity			83			22			—						105			12			93
Balance at December 31, 2020, net of tax			$	(155)		$	101		$	(8)					$	(62)		$	(1)		$	(61)

NOTE 13 - DERIVATIVE INSTRUMENTS

The Company maintains various agreements with bank counterparties that permit the Company to enter into "over-the-counter" derivative instrument agreements to manage its risk associated with interest rates and foreign currency fluctuations. In February 2020, the Company entered into certain derivative instrument agreements to manage its risk associated with interest rates of its 1.85% Notes and foreign currency fluctuations in connection with its foreign currency-denominated intercompany borrowings. The Company did not enter into these agreements for trading or speculative purposes.

Fair Value Hedges

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

Cash Flow Hedges

The Company uses cash flow hedges primarily to hedge the exposure to variability in forecasted cash flows from foreign currency-denominated intercompany borrowings via cross-currency swaps. Gains or losses on the cross-

currency swaps are reported as a component of AOCE and reclassified into earnings in the same period during which the hedged transaction affects earnings. The notional amount of the Company’s outstanding cash flow hedges as of December 31, 2020 was approximately $34 million.

The effect of the Company's fair value and cash flow hedges on the Company's Condensed Consolidated Statement of Earnings for the twelve months ended December 31, 2020 is as follows (in millions of dollars):

									Twelve Months Ended December 31, 2020
															Interest expense, net						Other, net
Gain or (loss) recognized in earnings
Fair value hedge:
Hedged item															$	(21)					$	—
Interest rate swap designated as hedging instrument															$	21					$	—
Cash flow hedge:
Hedged item															$	—					$	2
Cross-currency swap designated as hedging instrument															$	—					$	(2)

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

The fair value and carrying amounts of outstanding derivative instruments in the Condensed Consolidated Balance Sheets as of December 31, 2020 was as follows (in millions of dollars):

			Balance Sheet Classification						Fair Value and Carrying Amounts
Cross-currency swap			Other non-current liabilities						$	2
Interest rate swap			Other assets						$	21

The carrying amount of the liability hedged by the interest rate swap (long-term debt), including the cumulative amount of fair value hedging adjustments, as of December 31, 2020 amounted to $521 million.

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

NOTE 14 - INCOME TAXES

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

			For the Years Ended December 31,
			2020						2019						2018
U.S.			$	1,015					$	1,226					$	1,163
Foreign			(68)						(17)						(82)
Total			$	947					$	1,209					$	1,081

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

			For the Years Ended December 31,
			2020						2019						2018
Current income tax expense:
U.S. Federal			$	119					$	199					$	166
U.S. State			28						44						32
Foreign			65						58						47
Total current			212						301						245
Deferred income tax expense			(20)						13						13
Total income tax expense			$	192					$	314					$	258

The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December 31, 2020 and 2019 were as follows (in millions of dollars):

			As of December 31,
			2020						2019
Deferred tax assets:
Inventory			$	14					$	4
Accrued expenses			93						86
Foreign operating loss carryforwards			45						67
Accrued employment-related benefits			37						49
Tax credit carryforward			25						22
Other			8						8
Deferred tax assets			222						236
Less valuation allowance			(53)						(72)
Deferred tax assets, net of valuation allowance			$	169					$	164
Deferred tax liabilities:
Property, buildings, equipment and other capital assets			(145)						(134)
Intangibles			(68)						(83)
Other			(10)						(12)
Deferred tax liabilities			(223)						(229)
Net deferred tax liability			$	(54)					$	(65)
The net deferred tax asset (liability) is classified as follows:
Noncurrent assets			$	14					$	11
Noncurrent liabilities (foreign)			(68)						(76)
Net deferred tax liability			$	(54)					$	(65)

At December 31, 2020 the Company had $207 million of net operating loss (NOLs) carryforwards related primarily to foreign operations. Some of the operating loss carryforwards may expire at various dates through 2040. 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,
			2020						2019
Balance at beginning of period			$	(72)					$	(72)
Increases primarily related to foreign NOLs			(16)						(9)
Releases related to foreign NOLs			—						10
Foreign subsidiaries tax impacts due to divestiture			39						—
Other changes, net			(2)						—
Increase related to U.S. foreign tax credits			(2)						(1)
Balance at end of period			$	(53)					$	(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,
			2020						2019						2018
Federal income tax			$	199					$	254					$	227
State income taxes, net of federal income tax benefit			33						36						32
Clean energy credit			—						—						(20)
Foreign rate difference			23						25						20
Foreign subsidiaries tax impacts due to divestiture			(61)						—						20
Change in valuation allowance			16						11						4
Excess tax benefits from stock-based compensation			(4)						(2)						(15)
Other - net			(14)						(10)						(10)
Income tax expense			$	192					$	314					$	258
Effective tax rate			20.3		%				26.0		%				23.9		%

The changes to the Company's effective tax rate for the year ended December 31, 2020 was primarily driven by tax losses in the Company's investment in Fabory due to the impairment and internal reorganization of the Company's holdings of Fabory in the first quarter of 2020. The Company divested Fabory during the second quarter of 2020 (see Note 2 to the Financial Statements).

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. On December 27, 2020, the Consolidated Appropriations Act (CAA) was enacted and extended several of the CARES Act provisions. Neither the CARES or CAA Act had a material impact on the Company’s consolidated financial condition or results of operations as of and for the year ended December 31, 2020.

Foreign Undistributed Earnings

Estimated gross undistributed earnings of foreign subsidiaries at December 31, 2020, amounted to $429 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. 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,
			2020						2019						2018
Balance at beginning of year			$	28					$	37					$	45
Additions for tax positions related to the current year			23						3						4
Additions for tax positions of prior years			—						1						3
Reductions for tax positions of prior years			(2)						(1)						(5)
Reductions due to statute lapse			(10)						(10)						(9)
Settlements, audit payments, refunds - net			—						(2)						(1)
Balance at end of year			$	39					$	28					$	37

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

this amount are $4 million and $8 million at December 31, 2020 and 2019, 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 2020, the changes to tax positions related generally to the tax losses on the Company’s investment in Fabory along with 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 2016 federal tax return while tax years 2017 through 2020 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 15 - 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 businesses in those geographies. Other businesses include the endless assortment businesses, Zoro and MonotaRO, and smaller high-tough businesses in Europe and the U.K. 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. Effective January 1, 2021, the Company's new reportable segments are High Touch - North America and Endless Assortment. See Note 1 of the Financial Statements for additional information.

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):

			2020
			United States						Canada						Total Reportable Segments						Other businesses						Total
Total net sales			$	9,070					$	476					$	9,546					$	2,762					$	12,308
Intersegment net sales			(509)						—						(509)						(2)						(511)
Net sales to external customers			$	8,561					$	476					$	9,037					$	2,760					11,797
Segment operating earnings			$	1,299					$	(16)					$	1,283					$	(24)					$	1,259

			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

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

			2020						2019						2018
Operating earnings:
Total operating earnings for reportable segments			$	1,283					$	1,394					$	1,289
Other businesses			(24)						(9)						8
Unallocated expenses			(240)						(123)						(139)
Total consolidated operating earnings			$	1,019					$	1,262					$	1,158
Assets:
United States			$	2,931					$	2,668					$	2,496
Canada			178						173						188
Assets for reportable segments			$	3,109					$	2,841					$	2,684
Other current and noncurrent assets			2,781						3,003						2,879
Unallocated assets			405						161						310
Total consolidated assets			$	6,295					$	6,005					$	5,873
Depreciation and amortization:
United States			$	113					$	148					$	166
Canada			13						17						19
Depreciation and amortization for reportable segments			$	126					$	165					$	185
Other businesses and unallocated			43						45						49
Total consolidated depreciation and amortization			$	169					$	210					$	234
Additions to long-lived assets
United States			$	92					$	168					$	200
Canada			3						9						7
Additions to long-lived assets for reportable segments			$	95					$	177					$	207
Other businesses and unallocated			97						72						39
Total consolidated additions to long-lived assets			$	192					$	249					$	246

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

			2020						2019						2018
Revenue by geographic location:
United States			$	9,200					$	8,865					$	8,613
Canada			494						539						658
Other foreign countries			2,103						2,082						1,950
			$	11,797					$	11,486					$	11,221
Long-lived segment assets by geographic location:
United States			$	1,139					$	1,268					$	1,140
Canada			114						152						136
Other foreign countries			287						327						202
			$	1,540					$	1,747					$	1,478

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.

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

NOTE 16 - 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, as previously disclosed, beginning in the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints seek recovery of compensatory and other damages and relief. On May 8, 2020, KMCO filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Texas for relief under Chapter 7 of Title 11 of the United States Bankruptcy Court in the case KMCO, LLC. As a result of the Chapter 7 proceedings, the claims against KMCO in the Harris County lawsuits were stayed. Effective January 1, 2021, the Bankruptcy Court lifted the stay with respect to KMCO. On December 16, 2020, KMCO filed a product liability-related lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, which seeks unspecified damages. Grainger is investigating each of the various 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, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits. While the Company is unable to predict the outcome of these proceedings, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition or results of operations.

NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly information for 2020 and 2019 is as follows (in millions of dollars, except for per share amounts):

						2020 Quarter Ended
						March 31						June 30						September 30						December 31						Total
Net sales						$	3,001					$	2,837					$	3,018					$	2,941					$	11,797
COGS						1,880						1,821						1,944						1,914						7,559
Gross profit						1,121						1,016						1,074						1,027						4,238
SG&A						962						811						694						752						3,219
Operating earnings						159						205						380						275						1,019
Net earnings attributable to W.W. Grainger, Inc.						$	173					$	114					$	240					$	168					$	695
Earnings per share - basic						$	3.20					$	2.11					$	4.43					$	3.14					$	12.88
Earnings per share - diluted						$	3.19					$	2.10					$	4.41					$	3.12					$	12.82

						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

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 24, 2021

W.W. GRAINGER, INC.
By:			/s/ D.G. Macpherson
			D.G. Macpherson
			Chairman of the Board
			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 the registrant on February 24, 2021, in the capacities indicated.

/s/ D.G. Macpherson						/s/ Brian P. Anderson
D.G. Macpherson						Brian P. Anderson
Chairman of the Board						Director
and Chief Executive Officer, Director
(Principal Executive Officer)						/s/ V. Ann Hailey
						V. Ann Hailey
/s/ Deidra C. Merriwether						Director
Deidra C. Merriwether
Senior Vice President						/s/ Stuart L. Levenick
and Chief Financial Officer						Stuart L. Levenick
(Principal Financial Officer)						Director
/s/ Eric R. Tapia						/s/ Neil S. Novich
Eric R. Tapia						Neil S. Novich
Vice President and Controller						Director
(Principal Accounting Officer)
						/s/ E. Scott Santi
						E. Scott Santi
						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.
4.9						Fourth Supplemental Indenture, dated as of February 26, 2020, between W.W. Grainger, Inc., and U.S. Bank National Association, as trustee incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 21, 2020.
4.10						Form of 1.85% Senior Notes due 2025 (included in Exhibit 4.1), incorporated by reference to Exhibit 4.2 to W.W. Grainger, Inc.'s Current Report on Form 8-K dated February 21, 2020
10.1						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						2010 Incentive Plan, incorporated by reference to Exhibit B of W.W. Grainger, Inc.’s Proxy Statement dated March 12, 2010.*
10.11						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.*
10.12						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.*
10.13						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.*
10.14						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.*
10.15						Summary Description of the 2021 Company Management Incentive Program.*
10.16						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.*
10.17						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.*
10.18						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.*
10.19						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.*
10.20						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.*
10.21						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.*
10.22						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.*
10.23						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.*
10.24						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.*
10.25						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.*
10.26						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.*
10.27						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.*
10.28						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.*
10.29						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.*
10.30						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.*

10.31						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.*
10.32						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.*
10.33						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.*
10.34						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.*
10.35						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.*
10.36						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.
10.37						Form of 2020 W.W. Grainger, Inc. 2015 Incentive Plan Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, 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, 2020.*
10.38						Form of 2020 W.W. Grainger, Inc. 2015 Incentive Plan Performance Stock Unit Agreement between W.W. Grainger, Inc. and certain of its executive officers, 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, 2020.*
10.39						W.W. Grainger, Inc. – 2015 Incentive Plan CFO Transition –Restricted Stock Unit Agreement between W.W. Grainger, Inc. and Robert F. O’Keef, Jr. dated January 4, 2021.*
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.