Item 8. Financial Statements and Supplementary Data

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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 21, 2023 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, 2022, the goodwill balance of the Canada business reporting unit was $121 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 annual goodwill impairment analysis is complex and highly judgmental due to certain assumptions that are significant to the analysis. Management performed an annual impairment analysis in the fourth quarter to evaluate changes in key assumptions and results since the last impairment test. The more subjective assumptions used in the analysis were projections of future revenue growth, operating expenditures, changes in working capital, as well as the discount rate used, which are all affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit			Our audit procedures included, among others obtaining an understanding, evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment analysis, including controls over management’s review of the significant assumptions described above.
			To test management’s annual goodwill impairment analysis of the Canada business reporting unit, we performed audit procedures that included, among others, evaluating the key assumptions and results considering the relevant events and circumstances identified since the date the last fair value calculation. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, customer product mix, and other relevant factors. We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in fair value that would result from changes in the assumptions utilized in the last quantitative assessment. In addition, we reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and tested the completeness and accuracy of the underlying data used by management in its analysis.

/s/ Ernst & Young LLP

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

Chicago, Illinois

February 21, 2023

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except for per share amounts)

			For the Years Ended December 31,
			2022						2021						2020
Net sales			$	15,228					$	13,022					$	11,797
Cost of goods sold			9,379						8,302						7,559
Gross profit			5,849						4,720						4,238
Selling, general and administrative expenses			3,634						3,173						3,219
Operating earnings			2,215						1,547						1,019
Other (income) expense:
Interest expense – net			93						87						93
Other – net			(24)						(25)						(21)
Total other expense – net			69						62						72
Earnings before income taxes			2,146						1,485						947
Income tax provision			533						371						192
Net earnings			1,613						1,114						755
Less net earnings attributable to noncontrolling interest			66						71						60
Net earnings attributable to W.W. Grainger, Inc.			$	1,547					$	1,043					$	695
Earnings per share:
Basic			$	30.22					$	19.94					$	12.88
Diluted			$	30.06					$	19.84					$	12.82
Weighted average number of shares outstanding:
Basic			50.9						51.9						53.5
Diluted			51.1						52.2						53.7

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,
			2022						2021						2020
Net earnings			$	1,613					$	1,114					$	755
Other comprehensive earnings (losses):
Foreign currency translation adjustments – net of reclassification to earnings (see Note 2 and Note 11)			(101)						(64)						83
Postretirement benefit plan (losses) gains – net of tax benefit (expense) of $6, $—, and $(7), respectively (see Note 7 and Note 11)			(17)						—						22
Total other comprehensive earnings (losses)			(118)						(64)						105
Comprehensive earnings – net of tax			1,495						1,050						860
Less comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings			66						71						60
Foreign currency translation adjustments			(34)						(29)						12
Total comprehensive earnings (losses) attributable to noncontrolling interest			32						42						72
Comprehensive earnings attributable to W.W. Grainger, Inc.			$	1,463					$	1,008					$	788

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			2022						2021
Current assets
Cash and cash equivalents			$	325					$	241
Accounts receivable (less allowance for credit losses of $36 and $30, respectively)			2,133						1,754
Inventories – net			2,253						1,870
Prepaid expenses and other current assets			266						146
Total current assets			4,977						4,011
Property, buildings and equipment – net			1,461						1,424
Goodwill			371						384
Intangibles – net			232						238
Operating lease right-of-use			367						393
Other assets			180						142
Total assets			$	7,588					$	6,592
Liabilities and shareholders' equity
Current liabilities
Current maturities			35						—
Trade accounts payable			1,047						816
Accrued compensation and benefits			334						319
Operating lease liability			68						66
Accrued expenses			474						290
Income taxes payable			52						37
Total current liabilities			2,010						1,528
Long-term debt			2,284						2,362
Long-term operating lease liability			318						334
Deferred income taxes and tax uncertainties			121						121
Other non-current liabilities			120						87
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			1,310						1,270
Retained earnings			10,700						9,500
Accumulated other comprehensive losses			(180)						(96)
Treasury stock, at cost – 59,402,896 and 58,439,014 shares, respectively			(9,445)						(8,855)
Total W.W. Grainger, Inc. shareholders’ equity			2,440						1,874
Noncontrolling interest			295						286
Total shareholders' equity			2,735						2,160
Total liabilities and shareholders' equity			$	7,588					$	6,592

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,
			2022						2021						2020
Cash flows from operating activities:
Net earnings			$	1,613					$	1,114					$	755
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for credit losses			19						18						22
Deferred income taxes and tax uncertainties			8						27						(5)
Depreciation and amortization			217						185						182
Impairment of goodwill, intangible and other assets			7						—						187
Net (gains) losses from sales of assets and business divestitures			(14)						(6)						106
Stock-based compensation			48						42						46
Change in operating assets and liabilities:
Accounts receivable			(436)						(324)						(121)
Inventories			(412)						(152)						(158)
Prepaid expenses and other assets			(158)						(15)						(23)
Trade accounts payable			225						54						80
Accrued liabilities			200						43						15
Income taxes – net			42						(26)						24
Other non-current liabilities			(26)						(23)						13
Net cash provided by operating activities			1,333						937						1,123
Cash flows from investing activities:
Additions to property, buildings, equipment and intangibles			(256)						(255)						(197)
Proceeds from sale or redemption of assets			28						29						20
Other – net			(35)						—						(2)
Net cash used in investing activities			(263)						(226)						(179)
Cash flows from financing activities:
Proceeds from short-term debt			16						—						12
Payments of short-term debt			(15)						—						(65)
Proceeds from long-term debt			—						—						1,584
Payments of long-term debt			—						(8)						(1,370)
Proceeds from stock options exercised			26						48						70
Payments for employee taxes withheld from stock awards			(23)						(30)						(18)
Purchases of treasury stock			(603)						(695)						(601)
Cash dividends paid			(370)						(357)						(338)
Other – net			(3)						3						—
Net cash used in financing activities			(972)						(1,039)						(726)
Exchange rate effect on cash and cash equivalents			(14)						(16)						7
Net change in cash and cash equivalents			84						(344)						225
Cash and cash equivalents at beginning of year			241						585						360
Cash and cash equivalents at end of period			$	325					$	241					$	585
Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)			$	91					$	87					$	94
Cash payments for income taxes			$	479					$	377					$	180

The accompanying notes are an integral part of these 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, 2020			$	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
Stock-based compensation			—			31			—			—			28			1			60
Purchases of treasury stock			—			—			—			—			(699)			(1)			(700)
Net earnings			—			—			1,043			—			—			71			1,114
Other comprehensive earnings (losses)			—			—			—			(35)			—			(29)			(64)
Reclassification due to the adoption of ASU 2019-12			—			—			12			—			—			—			12
Capital contribution			—			—			—			—			—			2			2
Cash dividends paid ($6.39 per share)			—			—			(334)			—			—			(23)			(357)
Balance at December 31, 2021			$	55		$	1,270		$	9,500		$	(96)		$	(8,855)		$	286		$	2,160
Stock-based compensation			—			40			—			—			12			1			53
Purchases of treasury stock			—			—			—			—			(602)			(1)			(603)
Net earnings			—			—			1,547			—			—			66			1,613
Other comprehensive earnings (losses)			—			—			—			(84)			—			(34)			(118)
Cash dividends paid ($6.78 per share)			—			—			(347)			—			—			(23)			(370)
Balance at December 31, 2022			$	55		$	1,310		$	10,700		$	(180)		$	(9,445)		$	295		$	2,735

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

W.W. Grainger, Inc. is a broad line distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.

Principles of Consolidation

The Consolidated 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.

Use of Estimates

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

Foreign Currency Translation

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

Revenue Recognition

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

The majority of Company revenue originates from contracts with a single performance obligation to deliver products, whereby performance obligations are satisfied when control of the product is transferred to the customer per the arranged shipping terms. Some Company contracts contain a combination of product sales and services, which are distinct and accounted for as separate performance obligations and are satisfied when the services are rendered. Total service revenue is not material and accounted for approximately 1% of the Company's revenue for the years ended December 31, 2022, 2021 and 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 products 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 $38 million and $34 million as of December 31, 2022 and 2021, respectively, and are reported as a reduction of Accounts receivable – net. Total accrued sales incentives were approximately $102 million and $73 million as of December 31, 2022 and 2021, 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, 2022 and 2021.

Cost of Goods Sold (COGS)

COGS, exclusive of depreciation and amortization, includes the purchase cost of goods sold net of vendor considerations, in-bound shipping costs, outbound 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 depreciation and amortization, 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. Total advertising expense was $519 million, $402 million and $319 million for 2022, 2021 and 2020, 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 U.K. Consequently, no significant concentration of credit risk is considered to exist.

Accounts Receivable and Allowance for Credit Losses

The Company’s accounts receivable arises 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 73% 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 excess and obsolete provisions representing the difference between excess and obsolete inventories and net realizable value. Estimated net realizable value considers 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 $693 million and $510 million higher than reported as of December 31, 2022 and December 31, 2021, respectively. Concurrently, net earnings would have increased by $139 million, $49 million and $15 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Property, Buildings and Equipment

Property, buildings and equipment are stated at cost, less accumulated depreciation. Depreciation is computed over the estimated useful lives of the asset classes using the straight-line method. Useful lives for buildings, structures and improvements range from 10 to 50 years and furniture, fixtures, machinery and equipment from three to 15 years. Amounts expended for maintenance and repairs are charged to expense as incurred.

Historically, Grainger had depreciated certain property, buildings 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 certain assets was changed to the straight-line method and updated 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 2020.

Depreciation expense was $139 million, $123 million and $116 million for the years ended December 31, 2022, 2021 and 2020, 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, including disposition, are less than their carrying value. Impairment is measured as the amount by which the asset's carrying amount exceeds the fair value.

Leases

The Company leases certain properties, buildings and equipment (including branches, warehouses, DCs and office space) under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company determines if an arrangement contains a lease at inception. Leases with an initial term of more than 12 months are recorded on the balance sheet as right-of-use (ROU) assets representing the right to use the underlying asset for the lease term and the corresponding current and long-term lease liabilities representing the obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement or possession 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 using the incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate, the ROU asset and the lease liability are re-evaluated upon a lease modification.

Certain lease agreements include variable lease payments that primarily include payments for non-lease components including pass-through operating expenses such as certain maintenance costs and utilities, and payments for non-components such as real estate taxes and insurance. Lease agreements with fixed lease and non-lease components are generally accounted for as a single lease component for all underlying classes of assets. Certain of the Company’s lease arrangements contain renewal provisions from one 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’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 that would necessitate a quantitative impairment test. 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 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 records a liability when a particular contingency is both probable and estimable. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency and the reasons to the effect that it cannot be reasonably estimated are disclosed. If a loss is reasonably possible, the Company will provide disclosure to that affect.

For further discussion on the Company's contingencies, see Notes 15 and 16.

New Accounting Standards

Accounting Pronouncements Recently Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting as modified by subsequently issued ASU 2021-01. This update provides optional expedients and exceptions for applying GAAP 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 prospectively to contract modifications made and hedging relationships entered or evaluated on or before December 31, 2022. In October 2022, the FASB amended Topic 848, updating the sunset date from December 31, 2022 to December 31, 2024. The Company adopted this ASU on July 1, 2022 on a prospective basis and it did not have a material impact on the Consolidated Financial Statements. For further discussion on the credit agreement modifications made to the revolving credit facility, see Note 6.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update provides increased transparency of government assistance, including the disclosure of the types of assistance an entity receives, an entity's method of accounting for government assistance and the effect of the assistance on an entity's financial statements. The guidance is effective for annual periods beginning after December 15, 2021 and should be applied prospectively or retrospectively. Early adoption is permitted. The Company adopted this ASU on January 1, 2022 on a prospective basis and it did not have a material impact on the Consolidated Financial Statements and related disclosures.

NOTE 2 - BUSINESS DIVESTITURES AND LIQUIDATIONS

Consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger divested Cromwell's wholly owned software business in the U.K. (Cromwell subsidiary) on October 21, 2022, the China business (China) on August 21, 2020, the Fabory business in Europe (Fabory) on June 30, 2020 and commenced the liquidation of Zoro Tools Europe (ZTE) in the fourth quarter of 2020. Accordingly, the Company's Consolidated Statements of Earnings, Comprehensive Earnings and Cash Flows and related notes include these business results in Other businesses through the respective dates of divestiture and liquidation. The proceeds from the divestitures were used to fund general business and corporate needs. The Company does not expect these business exits to have a future material impact on its Consolidated Financial Statements.

In the fourth quarter of 2022, the Company recorded a gain of $21 million in SG&A as a result of the Cromwell subsidiary divestiture. In 2020, Grainger recorded a gain of $5 million and a loss of approximately $109 million in SG&A as a result of the China and Fabory business 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. Additionally in 2020, the Company recorded $9 million in expense in SG&A associated with the wind down of ZTE.

NOTE 3 - REVENUE

The Company's 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 segment and industry most reasonably depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic and market-specific factors. In addition, the segments have unique underlying risks associated with customer purchasing behaviors. In the High-Touch Solutions N.A. segment, more than two-thirds of revenue is derived from customer contracts whereas in the Endless Assortment segment, a majority of revenue is derived from non-contractual purchases.

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

			Twelve Months Ended December 31,
			2022																		2021																		2020
			High-Touch Solutions N.A.						Endless Assortment						Total Company (2)						High-Touch Solutions N.A.						Endless Assortment						Total Company (2)						High-Touch Solutions N.A.						Endless Assortment						Total Company (2)
Contractors			9		%				15		%				10		%				9		%				16		%				10		%				9		%				15		%				10		%
Commercial			9						15						10						9						15						10						8						15						9
Government			17						3						14						18						3						15						20						3						16
Healthcare			7						2						6						7						2						6						9						2						7
Manufacturing			31						30						31						30						29						30						29						29						30
Retail/Wholesale			9						15						10						10						10						10						9						10						9
Transportation			6						3						5						5						3						5						5						3						5
Other(1)			12						17						14						12						22						14						11						23						14
Total net sales			100		%				100		%				100		%				100		%				100		%				100		%				100		%				100		%				100		%
Percent of total company revenue			80		%				18		%				100		%				78		%				20		%				100		%				78		%				18		%				100		%
(1) Other primarily includes revenue from industries and customers that are not material individually, including agriculture, mining, natural resources and resellers not aligned to a major industry segment.
(2) Total Company includes other businesses, which includes the Cromwell business, as well as Grainger's divested businesses in the periods prior to their divestitures. Other businesses account for approximately 2%, 2% and 4% of revenue for the twelve months ended December 31, 2022, 2021 and 2020, respectively.

NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT

Grainger's property, buildings and equipment consisted of the following (in millions of dollars):

			As of
			December 31, 2022									December 31, 2021
Land			$			318						$			329
Building, structures and improvements			1,463									1,431
Furniture, fixtures, machinery and equipment			1,662									1,567
Property, buildings and equipment			$			3,443						$			3,327
Less accumulated depreciation and amortization			1,982									1,903
Property, buildings and equipment – net			$			1,461						$			1,424

NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS

Grainger completed its annual impairment testing of goodwill and intangible assets during the fourth quarter of 2022 and 2021. Based on the results of that testing, the Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators and concluded that it was more likely than not that the fair value of the reporting units exceeded their carrying amounts at each respective period.

High-Touch Solutions N.A. – Canada Business

As of December 31, 2022 and 2021, the Canada business reporting unit had goodwill of $121 million and $129 million, respectively. As part of our annual impairment testing, the Company performed evaluations of changes in key assumptions, notably projections of revenue growth, operating expenditures, changes in working capital, and factors that could impact the discount rate used in the analysis. In doing so, we compared the current results to forecasted expectations of the most recent quantitative analysis, along with analyzing macroeconomic conditions, current industry trends and transactions, and other market data of industry peers. The Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators for its Canada business and concluded that it was more likely than not that the fair value of the Canada business reporting unit exceeded its carrying amount.

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

						High-Touch Solutions N.A.						Endless Assortment						Other						Total
Balance at January 1, 2021						$	321					$	70					$	—					$	391
Translation						—						(7)						—						(7)
Balance at December 31, 2021						321						63						—						384
Translation						(8)						(5)						—						(13)
Balance at December 31, 2022						$	313					$	58					$	—					$	371

The aggregate cumulative goodwill impairments as of December 31, 2022, was $137 million and consisted of $32 million in High-Touch Solutions N.A. and $105 million in Other.

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

									As of December 31,
									2022																		2021
			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			11.7 years						$	217					$	181					$	36					$	221					$	176					$	45
Trademarks, trade names and other			14.4 years						32						22						10						36						24						12
Non-amortized trade names and other			Indefinite						22						—						22						25						—						25
Capitalized software			4.2 years						580						416						164						525						369						156
Total intangible assets			6.9 years						$	851					$	619					$	232					$	807					$	569					$	238

Amortization expense of intangible assets recorded in SG&A was $61 million, $63 million, and $60 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Estimated amortization expense for future periods is as follows (in millions of dollars):

Year						Expense
2023						$	61
2024						53
2025						44
2026						31
2027						16
Thereafter						5
Total						$	210

NOTE 6 - DEBT

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

			As of December 31,
			2022												2021
			Carrying Value						Fair Value						Carrying Value						Fair Value
4.60% senior notes due 2045			$	1,000					$	916					$	1,000					$	1,284
1.85% senior notes due 2025			500						470						500						509
4.20% senior notes due 2047			400						338						400						492
3.75% senior notes due 2046			400						317						400						459
Japanese yen term loan			69						69						78						78
Other			(29)						(29)						7						7
Subtotal			2,340						2,081						2,385						2,829
Less current maturities			(35)						(35)						—						—
Debt issuance costs and discounts – net of amortization			(21)						(21)						(23)						(23)
Long-term debt			$	2,284					$	2,025					$	2,362					$	2,806

Revolving Credit Facility

In February 2020, the Company entered into a five-year unsecured credit agreement. Grainger may obtain loans in various currencies on a revolving basis in an aggregate amount not exceeding $1.25 billion (revolving credit facility), which may be increased up to $1.875 billion at the request of the Company, subject to approval from lenders and other customary conditions. The primary purpose of the revolving credit facility is to support the Company's commercial paper program and for general corporate purposes. The revolving credit facility replaced the Company's former $750 million unsecured revolving credit facility, which originated in October 2017 and was scheduled to mature in October 2022.

In August 2022, the Company entered into a First Amendment (the Amendment) to its revolving credit facility. The Amendment changes the benchmark rate for borrowings denominated in U.S. and foreign currencies from LIBOR to certain alternative benchmark rates. This includes benchmark rates based on the Euro Interbank Offered Rate (EURIBOR) for borrowings denominated in Euros, the Canadian Dollar Offer Rate (CDOR) for borrowings denominated in Canadian dollars, the Sterling Overnight Index Average (SONIA) for borrowings denominated in sterling and Secured Overnight Financing Rate (SOFR) for borrowings denominated in U.S. dollars. The Amendment also updates certain other provisions regarding successor interest rates to LIBOR.

There were no borrowings outstanding under the revolving credit facility as of December 31, 2022 and 2021.

The Company's foreign subsidiaries utilize various financing sources for working capital purposes and other operating needs. These financing sources in aggregate were not material as of December 31, 2022 and 2021.

Commercial Paper

The Company issues commercial paper from time to time for general working capital needs. As of December 31, 2022 and 2021, there was none outstanding.

Senior Notes

In the years 2015-2020, Grainger issued $2.3 billion in unsecured long-term debt (senior notes) primarily to provide flexibility in funding general working capital needs, share repurchases and long-term cash requirements. The senior notes require no principal payments until maturity and interest is paid semi-annually.

The Company may redeem the senior notes in whole at any time or in part from time to time at a make-whole redemption price prior to their respective maturity dates. The redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the senior notes plus 10-25 basis points, together with accrued and unpaid interest, 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, 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, at the redemption date.

The Company incurred debt issuance costs related to the senior notes of approximately $29 million, representing underwriting fees and other expenses. These costs were recorded as a contra-liability in Long-term debt and are being amortized over the term of the senior notes using the straight-line method to Interest expense – net.

Grainger uses interest rate swaps to manage the risks associated with the 1.85% senior notes. These swaps were designated for hedge accounting treatment as fair value hedges. The resulting carrying value adjustments as of December 31, 2022 and 2021, are presented in Other in the table above. For further discussion on the Company's hedge accounting policies and derivative instruments, see Note 12.

Term Loan

In August 2020, MonotaRO entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center (DC) network. As of December 31, 2022 and 2021, the carrying amount of the term loan, including current maturities due within one year, was $69 million and $78 million, respectively. The term loan matures in 2024, payable over four equal semi-annual principal installments in 2023 and 2024 and bears an average interest rate of 0.05%.

Fair Value

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 Company's 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, 2022 and 2021.

The scheduled aggregate principal payments required on the Company's indebtedness, based on the maturity dates defined within the debt arrangements, for the succeeding five years, excluding debt issuance costs and the impact of derivatives, are due as follows (in millions of dollars):

Year						Payment Amount
2023						$	35
2024						34
2025						500
2026						5
2027						—
Thereafter						1,800
Total						$	2,374

NOTE 7 - EMPLOYEE BENEFITS

The Company provides various retirement benefits to eligible team members, 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 team member location. Various foreign benefit plans cover team members in accordance with local legal requirements.

Defined Contribution Plans

A majority of the Company's U.S. team members are covered by a retirement savings plan, adopted as of January 1, 2021. The new plan amended and restated the prior noncontributory profit-sharing plan, which previously aligned Company contributions to Company performance and included 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 team member's total eligible compensation. As part of the amendment, beginning in 2021, the profit-sharing contribution was removed and the Company's automatic contribution increased from 3% to 6% of total eligible participants’ compensation. In addition, team members covered by the plan are also able to make personal contributions.

The total retirement savings plan expense was $87 million, $78 million, and $99 million for 2022, 2021 and 2020, respectively.

The Company sponsors additional defined contribution plans available to certain U.S. and foreign team members for which contributions are made by the Company and participating team members. The expense associated with these defined contribution plans totaled $11 million, $16 million and $16 million for 2022, 2021 and 2020, respectively.

Postretirement Healthcare Benefits Plans

The Company has a postretirement healthcare benefit plan that provides coverage for a majority of its U.S. team members hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered team members 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,
			2022						2021						2020
SG&A
Service cost			$	4					$	5					$	5
Other (income) expense
Interest cost			4						3						6
Expected return on assets			(8)						(8)						(8)
Amortization of prior service credit			(10)						(9)						(10)
Amortization of unrecognized gains			(9)						(8)						(5)
Net periodic benefits			$	(19)					$	(17)					$	(12)

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):

			2022						2021
Benefit obligation at beginning of year			$	153					$	167
Service cost			4						5
Interest cost			4						3
Plan participants' contributions			3						3
Actuarial gains			(40)						(14)
Benefits paid			(12)						(11)
Benefit obligation at end of year			$	112					$	153
Plan assets available for benefits at beginning of year			$	207					$	206
Actual returns on plan assets			(36)						9
Plan participants' contributions			3						3
Benefits paid			(12)						(11)
Plan assets available for benefits at end of year			162						207
Noncurrent postretirement benefit asset			$	50					$	54

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

			As of December 31,
			2022						2021
Prior service credit			$	33					$	42
Unrecognized gains			77						90
Deferred tax liability			(28)						(33)
Net accumulated gains			$	82					$	99

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 years for 2022.

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, health reimbursement arrangement (HRA) subsidy and changes to the discount rate.

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

			For the Years Ended December 31,
			2022						2021						2020
Discount rate			2.57		%				2.17		%				3.01		%
Long-term rate of return on plan assets – net of tax			4.04		%				4.04		%				4.04		%
Initial healthcare cost trend rate
Pre age 65			6.50		%				5.81		%				6.06		%
Post age 65			NA						NA						NA
Catastrophic drug benefit			NA						NA						NA
Ultimate healthcare cost trend rate			4.50		%				4.50		%				4.50		%
Year ultimate healthcare cost trend rate reached			2030						2026						2026
HRA credit inflation index for grandfathered retirees			—		%				—		%				2.50		%

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

			2022						2021						2020
Discount rate			4.92		%				2.57		%				2.17		%
Expected long-term rate of return on plan assets – net of tax			4.04		%				4.04		%				4.04		%
Initial healthcare cost trend rate
Pre age 65			7.50		%				6.50		%				5.81		%
Post age 65			NA						NA						NA
Catastrophic drug benefit			NA						NA						NA
Ultimate healthcare cost trend rate			4.50		%				4.50		%				4.50		%
Year ultimate healthcare cost trend rate reached			2033						2030						2026
HRA credit inflation index for grandfathered retirees			—		%				—		%				—		%

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, 2022, the Company increased the discount rate from 2.57% to 4.92% to reflect the increase in the market interest rates as of December 31, 2022.

The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2022, the initial healthcare cost trend rate was 7.50% 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 team members.

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 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 as of December 31 (in millions of dollars):

			2022						2021
Asset class:
Level 1 inputs:
Mutual funds:
Funds – municipal/provincial bonds			$	8					$	12
Funds – corporate bonds fund			3						5
Federal Money Market Fund			—						4
Level 2 inputs:
Fixed income:
Corporate bonds			57						89
Government/municipal bonds			12						14
Equity funds			73						85
Plan assets			153						209
Less trust assets (liabilities)			9						(2)
Plan assets available for benefits			$	162					$	207

Consistent with the new investment strategy, the after-tax expected long-term rates of return on plan assets of 4.04% as of December 31, 2022 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 team members.

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 team member service) for the next ten years (in millions of dollars):

Year						Estimated Gross Benefit Payments
2023						$	9
2024						9
2025						9
2026						9
2027						9
2028-2032						41
Total						$	86

NOTE 8 - LEASES

The Company leases certain properties, buildings and equipment (including branches, warehouses, DCs and office space) 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 that expire at various dates through 2037.

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

						As of December 31,
						2022						2021
Right-of-use assets
Operating lease right-of-use						$	367					$	393
Operating lease liabilities
Operating lease liability						68						66
Long-term operating lease liability						318						334
Total operating lease liabilities						$	386					$	400

						As of December 31,
						2022						2021
Weighted average remaining lease term						7 years						7 years
Weighted average incremental borrowing rate						1.46		%				0.81		%
Cash paid for operating leases						$	76					$	68
Right-of-use assets obtained in exchange for operating lease obligations						$	96					$	244

Rent expense was $93 million, $74 million and $76 million for 2022, 2021 and 2020, respectively. These amounts are net of sublease income of $2 million for 2022, 2021 and 2020.

Remaining maturity of existing lease liabilities as of December 31, 2022 are as follows (in millions of dollars):

Year						Operating Leases
2023						$	77
2024						68
2025						62
2026						50
2027						40
Thereafter						108
Total lease payments						405
Less interest						(19)
Present value of lease liabilities						$	386

As of December 31, 2022 and 2021, the Company's finance leases and service contracts with lease arrangements were not material. Finance leases are reported in Property, buildings and equipment – net, and as a short and long-term finance lease liability in Accrued Expenses and Other non-current liabilities.

As of December 31, 2022 and 2021, Grainger's future lease obligations that have not yet commenced were $65 million and $18 million, respectively.

NOTE 9 - STOCK INCENTIVE PLANS

The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to team members and executives, which include restricted stock units (RSUs), performance shares and deferred stock units. As of December 31, 2022, there were 1.5 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 $48 million, $42 million, and $46 million in 2022, 2021 and 2020, respectively, and was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $19 million, $21 million, and $16 million in 2022, 2021 and 2020, respectively.

Restricted Stock Units

The Company awards RSUs to certain team members and executives. RSUs vest generally over periods from one to seven years from issuance. The RSU grant date fair value is based on the closing price of the Company's common stock on the last trading day preceding the date of the grant. RSU expense for the years ended December 31, 2022, 2021 and 2020 was approximately $34 million, $30 million and $32 million, respectively.

The following table summarizes RSU activity (in millions of dollars, except for share and per share amounts):

			2022									2021									2020
			Shares			Weighted Average Price Per Share						Shares			Weighted Average Price Per Share						Shares			Weighted Average Price Per Share
Beginning nonvested units			202,321			$	318.40					317,414			$	259.67					326,124			$	259.88
Issued			96,940			$	520.67					105,866			$	406.17					140,815			$	252.11
Canceled			(17,038)			$	345.30					(36,134)			$	274.74					(26,254)			$	257.56
Vested			(91,191)			$	336.99					(184,825)			$	276.34					(123,271)			$	252.05
Ending nonvested units			191,032			$	409.77					202,321			$	318.40					317,414			$	259.67
Fair value of shares vested			$	31								$	51								$	31

As of December 31, 2022, there was $55 million of total unrecognized compensation expense related to nonvested RSUs the Company expects to recognize over a weighted average period of 2.1 years.

NOTE 10 - CAPITAL STOCK

The Company had no shares of preferred stock outstanding as of December 31, 2022 and 2021. The activity related to outstanding common stock and common stock held in treasury was as follows:

			2022									2021									2020
			Outstanding Common Stock			Treasury Stock						Outstanding Common Stock			Treasury Stock						Outstanding Common Stock			Treasury Stock
Balance at beginning of period			51,220,205			58,439,014						52,524,391			57,134,828						53,687,528			55,971,691
Exercise of stock options			101,802			(101,802)						188,444			(188,444)						311,374			(311,374)
Settlement of restricted stock units – net of 31,132, 61,377 and 41,019 shares retained, respectively			64,649			(64,649)						127,969			(127,969)						82,241			(82,241)
Settlement of performance share units – net of 10,359, 9,746 and 16,830 shares retained, respectively			13,890			(13,890)						12,507			(12,507)						28,098			(28,098)
Purchase of treasury shares			(1,144,223)			1,144,223						(1,633,106)			1,633,106						(1,584,850)			1,584,850
Balance at end of period			50,256,323			59,402,896						51,220,205			58,439,014						52,524,391			57,134,828

NOTE 11 - 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, 2020 – 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)
Other comprehensive earnings (loss) before reclassifications – net of tax			(64)			12			2						(50)			(29)			(21)
Amounts reclassified to net earnings			—			(14)			—						(14)			—			(14)
Net current period activity			(64)			(2)			2						(64)			(29)			(35)
Balance at December 31, 2021 – net of tax			$	(219)		$	99		$	(6)					$	(126)		$	(30)		$	(96)
Other comprehensive earnings (loss) before reclassifications – net of tax			$	(101)		$	(4)		$	—					$	(105)		$	(34)		$	(71)
Amounts reclassified to net earnings			$	—		$	(13)		$	—					$	(13)		$	—		$	(13)
Net current period activity			$	(101)		$	(17)		$	—					$	(118)		$	(34)		$	(84)
Balance at December 31, 2022 – net of tax			$	(320)		$	82		$	(6)					$	(244)		$	(64)		$	(180)

NOTE 12 - 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.

Cash Flow Hedges

The Company uses cash flow hedges primarily to hedge the exposure to variability in forecasted cash flows from foreign currency-denominated intercompany borrowings via cross-currency swaps. Gains or losses on the cross-currency swaps are reported as a component of Accumulated other comprehensive earnings (losses) (AOCE) and reclassified into earnings in the same period during which the hedged transaction affects earnings. The notional amount of the Company’s outstanding cash flow hedges as of December 31, 2022 and 2021 was approximately $34 million.

The effect of the Company’s cash flow hedges on AOCE for the twelve months ended December 31, 2022 and 2021 was not material.

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 swaps, 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, 2022 and 2021 was $500 million.

The effect of the Company's fair value hedges on the Consolidated Statement of Earnings in Interest expense – net for the twelve months ended December 31, 2022 and 2021, respectively, were as follows (in millions of dollars):

									For the Years Ended December 31,
															2022						2021
Gain or (loss):
Interest rate swaps:
Hedged item															$	35					$	20
Derivatives designated as hedging instrument															$	(35)					$	(20)

The fair value and carrying amounts of outstanding derivative instruments in the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively, were as follows (in millions of dollars):

									As of December 31,
									2022						2021
			Balance Sheet Classification						Fair Value and Carrying Amounts
Cross-currency swap			Other non-current liabilities						$	—					$	2
Interest rate swaps			Other assets						$	—					$	1
			Other non-current liabilities						$	34					$	—

The carrying amount of the liability hedged by the interest rate swaps recorded in Long-term debt, including the cumulative amount of fair value hedging adjustments, as of December 31, 2022 and 2021 totaled $466 million and $501 million, respectively.

Fair Value

The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 inputs 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 or the Company’s own nonperformance risk.

NOTE 13 - INCOME TAXES

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

			For the Years Ended December 31,
			2022						2021						2020
U.S.			$	1,903					$	1,267					$	1,015
Foreign			243						218						(68)
Total			$	2,146					$	1,485					$	947

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

			For the Years Ended December 31,
			2022						2021						2020
Current income tax expense:
U.S. Federal			$	374					$	221					$	119
U.S. State			77						46						28
Foreign			78						81						65
Total current			529						348						212
Deferred income tax expense (benefit)			4						23						(20)
Total income tax expense			$	533					$	371					$	192

The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December 31, 2022 and 2021 were as follows (in millions of dollars):

			As of December 31,
			2022						2021
Deferred tax assets:
Accrued expenses			150						152
Foreign loss carryforwards			62						59
Accrued employment-related benefits			51						50
Tax credit carryforward			26						27
Other			23						17
Deferred tax assets			312						305
Less valuation allowance			(71)						(70)
Deferred tax assets – net of valuation allowance			$	241					$	235
Deferred tax liabilities:
Property, buildings, equipment and other capital assets			(212)						(217)
Intangibles			(64)						(67)
Inventory			(18)						(9)
Other			(11)						(8)
Deferred tax liabilities			(305)						(301)
Net deferred tax liability			$	(64)					$	(66)
The net deferred tax asset (liability) is classified as follows:
Noncurrent assets			$	12					$	14
Noncurrent liabilities (foreign)			(76)						(80)
Net deferred tax liability			$	(64)					$	(66)

As of December 31, 2022 and 2021, the Company had $248 million and $238 million, respectively, of gross loss carryforwards related to foreign operations. Some of the loss carryforwards may expire at various dates through 2042. 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,
			2022						2021
Balance at beginning of period			$	(70)					$	(53)
Increases primarily related to foreign NOLs			(10)						(8)
Releases primarily related to foreign NOLs			1						2
Foreign subsidiaries tax impacts due to divestiture			—						2
Tax rate changes			—						(7)
Foreign exchange rate changes			4						1
Increase related to U.S. foreign tax credits			1						(3)
Other changes – net			3						(4)
Balance at end of period			$	(71)					$	(70)

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,
			2022						2021						2020
Federal income tax			$	451					$	312					$	199
State income taxes – net of federal income tax benefit			64						41						33
Foreign rate difference			26						26						23
Foreign subsidiaries tax impacts due to divestiture			—						—						(61)
Change in valuation allowance			7						7						16
Other – net			(15)						(15)						(18)
Income tax expense			$	533					$	371					$	192
Effective tax rate			24.8		%				25.0		%				20.3		%

The changes to the Company's effective tax rate for the year ended December 31, 2022 was primarily driven by favorable mix of U.S. earnings versus foreign earnings taxed at a higher rate. The changes to the Company's effective tax rate for the year ending December 31, 2021 was primarily driven by the absence of 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.

Foreign Undistributed Earnings

Estimated gross undistributed earnings of foreign subsidiaries as of December 31, 2022 and 2021, totaled $530 million and $544 million, respectively. 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,
			2022						2021						2020
Balance at beginning of year			$	38					$	39					$	28
Additions for tax positions related to the current year			4						3						23
Additions for tax positions of prior years			2						—						—
Reductions for tax positions of prior years			—						(1)						(2)
Reductions due to statute lapse			(2)						(3)						(10)
Settlements, audit payments, refunds – net			(1)						—						—
Balance at end of year			$	41					$	38					$	39

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

this amount is $5 million and $4 million at December 31, 2022 and 2021, 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 2022 and 2021, the changes to tax positions were primarily related to the impact of expiring statutes and current year state and local reserves. In 2020, the changes to tax positions were related generally to the tax losses on the Company’s investment in Fabory along with the impact of expiring statutes, the conclusion of audits and audit settlements. Estimated interest and penalties were not material.

The Company is regularly subject to examination of its federal income tax returns by the Internal Revenue Service. The statute of limitations expired for the Company's 2018 federal tax return while tax years 2019 through 2021 remain open. The Company is also subject to audit by state, local and foreign taxing authorities. Tax years 2012 through 2021 remain subject to state and local audits and 2017 through 2021 remain subject to foreign audits. The amount of liability associated with the Company's tax uncertainties may change within the next 12 months due to the pending audit activity, expiring statutes or tax payments. A reasonable estimate of such change cannot be made.

NOTE 14 - SEGMENT INFORMATION

Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. The remaining businesses, which includes the Company's Cromwell business, are classified as Other to reconcile to consolidated results. These businesses individually and in the aggregate do not meet the criteria of a reportable segment.

The Company's corporate costs are allocated to each reportable segment based on benefits received. Additionally, intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of sales to external customers. Service fees for intersegment sales are included in each segment's SG&A and are also eliminated in the Company's Consolidated Financial Statements.

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

			2022												2021												2020(1)
			Net sales						Operating earnings (losses)						Net sales						Operating earnings (losses)						Net sales						Operating earnings (losses)
High-Touch Solutions N.A.			$	12,182					$	1,983					$	10,186					$	1,334					$	9,221					$	1,182
Endless Assortment			2,787						223						2,576						232						2,178						166
Other			259						9						260						(19)						398						(329)
Total Company			$	15,228					$	2,215					$	13,022					$	1,547					$	11,797					$	1,019
(1) Segment results for the year ended December 31, 2020 were recast to reflect the Company's 2021 re-segmentation.

			2022						2021						2020(1)
Depreciation and amortization:
High-Touch Solutions N.A.			$	168					$	148					$	143
Endless Assortment			35						22						17
Other			3						3						9
Total consolidated depreciation and amortization			$	206					$	173					$	169
(1) Segment results for the year ended December 31, 2020 were recast to reflect the Company's 2021 re-segmentation.

Depreciation and amortization presented above includes depreciation of long-lived assets and amortization of capitalized software and ROU assets. Long-lived assets consist of property, buildings and equipment.

Following is revenue by geographic location (in millions of dollars):

			2022						2021						2020
Revenue by geographic location:
United States			$	12,325					$	10,236					$	9,200
Japan			1,719						1,705						1,436
Canada			621						560						494
Other foreign countries			563						521						667
			$	15,228					$	13,022					$	11,797

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

NOTE 15 - CONTINGENCIES AND LEGAL MATTERS

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

As previously disclosed, since the fourth quarter of 2019, Grainger, KMCO, LLC (KMCO) and other defendants have been named in several product liability-related lawsuits in the Harris County, Texas District Court relating to an explosion at a KMCO chemical refinery located in Crosby, Harris County, Texas on April 2, 2019. The complaints in which Grainger has been named, which to date encompass approximately 186 plaintiffs, seek recovery of compensatory and other damages and relief in relation to personal injury, including one death and various other alleged injuries. On May 8, 2020, KMCO filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Texas for relief under Chapter 7 of Title 11 of the United States Bankruptcy Court in the case KMCO, LLC, No. 20-60028. As a result of the Chapter 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.

In the product liability cases, the Harris County District Court decided to schedule bellwether trials involving a subset of plaintiffs the Court believes are representative of the parties' claims and defenses, and the first of such trials involving six plaintiffs (the First Scheduled Trial) was scheduled to commence in mid-January 2023. Prior to the start of the First Scheduled Trial, the Company and 27 plaintiffs engaged in mediation and reached settlements in principle with respect to such plaintiffs' claims against the Company. Those 27 plaintiffs include the plaintiffs who alleged the most serious injuries, as well as five of the six plaintiffs from the First Scheduled Trial. The Company has executed final settlement agreements with those 27 plaintiffs. Grainger believes the payment of these settlements is probable through available insurance. The Company recorded a contingent liability related to these settlements in Accrued expenses and a corresponding recoverable asset in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of December 31, 2022, which resulted in no effect to the Company's Consolidated Statement of Earnings for the year ended December 31, 2022.

Whether trials involving any or all of the remaining plaintiffs will proceed is uncertain and the timing or outcome of any such trials cannot currently be predicted, nor is it currently possible to make any additional estimate of potential loss or range of loss.

On December 16, 2020, KMCO, the trustee of its estate and ORG Chemical Holdings, LLC, KMCO’s parent company (ORG), filed a property damage lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, which seeks unspecified damages (the KMCO Case). On April 1, 2021, 24 individual plaintiffs filed a petition in intervention seeking to be added as plaintiffs in the KMCO Case and seeking unspecified damages. On March 24, 2021, Indian Harbor Insurance Company, together with other insurance companies and underwriters, filed a property damage lawsuit relating to the KMCO chemical refinery incident against Grainger and another defendant in the Harris County, Texas District Court, seeking reimbursement of insurance payments made to or on behalf of KMCO and ORG, the insured parties under their respective policies, and other damages. The Company is currently unable to predict the timing, outcome or any estimate of possible loss or range of loss of the ORG and the Indian Harbor Insurance Company lawsuits.

Grainger continues to investigate each of the various remaining claims against the Company relating to the KMCO chemical refinery incident 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, pricing and product compliance.

From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based on the lack of product identification, if a specific product distributed by the Company is identified in any pending or future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the extent available. In addition, the Company believes that a substantial number of these claims

are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal and factual defenses and intends to continue defending itself vigorously in these lawsuits.

While the Company is unable to predict the outcome of any of these proceedings and other matters, it believes that their ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition or results of operations.

NOTE 16 - SUBSEQUENT EVENTS

Subsequent to December 31, 2022, the Company reached a settlement agreement related to the First Scheduled Trial as described in Note 15.

On January 25, 2023, Grainger's Board of Directors declared a quarterly cash dividend of $1.72 per share of common stock, payable March 1, 2023 to shareholders of record on February 13, 2023.

Grainger evaluated all subsequent event activity and concluded that no other subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to Consolidated Financial Statements.