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.

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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 22, 2024 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matter

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

			Valuation of Goodwill for the Canadian Reporting Unit
Description of the Matter			At December 31, 2023, the goodwill balance of the Canada business reporting unit was $124 million. As discussed in Notes 1 and 4 of the financial statements, goodwill is tested at the reporting unit level annually during the fourth quarter and more frequently if impairment indicators exist. Auditing management’s annual goodwill impairment analysis is complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions such as projections of future operating expenditures, which are affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit			Our audit procedures included, among others obtaining an understanding, evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment analysis, including controls over management’s review of the significant assumption described above.
			To test the estimated fair value of the Canada business 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.

/s/ Ernst & Young LLP

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

Chicago, Illinois

February 22, 2024

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except for per share amounts)

			For the Years Ended December 31,
			2023						2022						2021
Net sales			$	16,478					$	15,228					$	13,022
Cost of goods sold			9,982						9,379						8,302
Gross profit			6,496						5,849						4,720
Selling, general and administrative expenses			3,931						3,634						3,173
Operating earnings			2,565						2,215						1,547
Other (income) expense:
Interest expense – net			93						93						87
Other – net			(28)						(24)						(25)
Total other expense – net			65						69						62
Earnings before income taxes			2,500						2,146						1,485
Income tax provision			597						533						371
Net earnings			1,903						1,613						1,114
Less net earnings attributable to noncontrolling interest			74						66						71
Net earnings attributable to W.W. Grainger, Inc.			$	1,829					$	1,547					$	1,043
Earnings per share:
Basic			$	36.39					$	30.22					$	19.94
Diluted			$	36.23					$	30.06					$	19.84
Weighted average number of shares outstanding:
Basic			49.9						50.9						51.9
Diluted			50.1						51.1						52.2

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,
			2023						2022						2021
Net earnings			$	1,903					$	1,613					$	1,114
Other comprehensive earnings (losses):
Foreign currency translation adjustments – net of reclassification to earnings			(11)						(101)						(64)
Postretirement benefit plan losses – net of tax expense of $2, $6, and $0, respectively			(2)						(17)						—
Total other comprehensive earnings (losses)			(13)						(118)						(64)
Comprehensive earnings – net of tax			1,890						1,495						1,050
Less comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings			74						66						71
Foreign currency translation adjustments			(21)						(34)						(29)
Total comprehensive earnings (losses) attributable to noncontrolling interest			53						32						42
Comprehensive earnings attributable to W.W. Grainger, Inc.			$	1,837					$	1,463					$	1,008

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			2023						2022
Current assets
Cash and cash equivalents			$	660					$	325
Accounts receivable (less allowance for credit losses of $35 and $36, respectively)			2,192						2,133
Inventories – net			2,266						2,253
Prepaid expenses and other current assets			156						266
Total current assets			5,274						4,977
Property, buildings and equipment – net			1,658						1,461
Goodwill			370						371
Intangibles – net			234						232
Operating lease right-of-use			429						367
Other assets			182						180
Total assets			$	8,147					$	7,588
Liabilities and shareholders' equity
Current liabilities
Current maturities			34						35
Trade accounts payable			954						1,047
Accrued compensation and benefits			327						334
Operating lease liability			71						68
Accrued expenses			397						474
Income taxes payable			48						52
Total current liabilities			1,831						2,010
Long-term debt			2,266						2,284
Long-term operating lease liability			381						318
Deferred income taxes and tax uncertainties			104						121
Other non-current liabilities			124						120
Shareholders' equity
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued or outstanding			—						—
Common Stock – $0.50 par value – 300,000,000 shares authorized; 109,659,219 shares issued			55						55
Additional contributed capital			1,355						1,310
Retained earnings			12,162						10,700
Accumulated other comprehensive losses			(172)						(180)
Treasury stock, at cost – 60,341,817 and 59,402,896 shares, respectively			(10,285)						(9,445)
Total W.W. Grainger, Inc. shareholders’ equity			3,115						2,440
Noncontrolling interest			326						295
Total shareholders' equity			3,441						2,735
Total liabilities and shareholders' equity			$	8,147					$	7,588

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,
			2023						2022						2021
Cash flows from operating activities:
Net earnings			$	1,903					$	1,613					$	1,114
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for credit losses			23						19						18
Deferred income taxes and tax uncertainties			(9)						8						27
Depreciation and amortization			214						205						187
Non-cash lease expense			76						70						50
Net losses (gains) from sales of assets and business divestitures			17						(14)						(6)
Stock-based compensation			62						48						42
Change in operating assets and liabilities:
Accounts receivable			(98)						(436)						(324)
Inventories			(16)						(412)						(152)
Prepaid expenses and other assets			101						(158)						(15)
Trade accounts payable			(65)						225						54
Operating lease liabilities			(88)						(76)						(68)
Accrued liabilities			(91)						218						59
Income taxes – net			(4)						42						(26)
Other non-current liabilities			6						(19)						(23)
Net cash provided by operating activities			2,031						1,333						937
Cash flows from investing activities:
Capital expenditures			(445)						(256)						(255)
Proceeds from sales of assets and business divestitures			21						28						29
Other – net			2						(35)						—
Net cash used in investing activities			(422)						(263)						(226)
Cash flows from financing activities:
Proceeds from debt			7						16						—
Payments of debt			(37)						(15)						(8)
Proceeds from stock options exercised			34						26						48
Payments for employee taxes withheld from stock awards			(37)						(23)						(30)
Purchases of treasury stock			(850)						(603)						(695)
Cash dividends paid			(392)						(370)						(357)
Other – net			(3)						(3)						3
Net cash used in financing activities			(1,278)						(972)						(1,039)
Exchange rate effect on cash and cash equivalents			4						(14)						(16)
Net change in cash and cash equivalents			335						84						(344)
Cash and cash equivalents at beginning of year			325						241						585
Cash and cash equivalents at end of period			$	660					$	325					$	241
Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)			$	109					$	91					$	87
Cash payments for income taxes			$	615					$	479					$	377

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, 2021			$	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)
Capital contribution			—			—			—			—			—			2			2
Reclassification due to the adoption of ASU 2019-12			—			—			12			—			—			—			12
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
Stock-based compensation			—			46			—			—			12			2			60
Purchases of treasury stock			—			—			—			—			(852)			(1)			(853)
Net earnings			—			—			1,829			—			—			74			1,903
Other comprehensive earnings (losses)			—			—			—			8			—			(21)			(13)
Capital contribution			—			(1)			—			—			—			3			2
Cash dividends paid ($7.30 per share)			—			—			(367)			—			—			(26)			(393)
Balance at December 31, 2023			$	55		$	1,355		$	12,162		$	(172)		$	(10,285)		$	326		$	3,441

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, 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.

Reclassifications

Certain reclassifications have been made to prior year amounts in Grainger's Consolidated Statements of Cash Flows to conform with the current year presentation. The Company reclassified amounts to separately disclose Non-cash lease expense as an adjustment to reconcile net earnings to net cash provided by operating activities and Operating lease liabilities as a change in operating assets and liabilities. Previously, the net activity for these amounts were included in Depreciation and amortization. The change had no effect on previously reported results including net cash provided by (used in) operating, investing and financing activities or net earnings for the twelve months ended December 31, 2023, 2022 and 2021.

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, 2023, 2022 and 2021.

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 $52 million and $38 million as of December 31, 2023 and 2022, respectively, and are reported as a reduction of Accounts receivable – net. Total accrued sales incentives were approximately $114 million and $102

million as of December 31, 2023 and 2022, 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, 2023 and 2022.

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. Total accrued vendor rebates were $155 million and $136 million as of December 31, 2023 and 2022, respectively, and are reported in Trade accounts payable.

Selling, General and Administrative Expenses (SG&A)

Company SG&A is primarily comprised of payroll and benefits, advertising, depreciation and amortization, lease, indirect purchasing, supply chain and branch operations, technology, 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 $638 million, $519 million and $402 million for 2023, 2022 and 2021, 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 all highly liquid investments with original maturities of three months or less at time of purchase 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. The Company uses the last-in, first-out (LIFO) method, valued at the lower of cost or market, to account for approximately 77% of total inventory and the first-in, first-out (FIFO) method, valued at the lower of cost or net realizable value, 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 market value. Estimated market 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 $770 million and $693 million higher than reported as of December 31, 2023 and December 31, 2022, respectively. Concurrently, net earnings would have increased by $58 million, $139 million and $49 million for the years ended December 31, 2023, 2022 and 2021, 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.

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 effect.

For further discussion on the Company's contingencies, see Note 14.

New Accounting Standards

Accounting Pronouncements Recently Issued

In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This update requires public entities to disclose significant segment expenses and other segment items on an annual and interim basis. The effective date is for fiscal years beginning after December 15, 2023, with the option to early adopt prior to the effective date and requires application on a retrospective basis. The Company is evaluating the impact of the requirements on the related segment reporting disclosures.

In December 2023, the FASB issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update requires public entities to disclose consistent categories and greater disaggregation of information in the rate reconciliation, and income taxes paid disaggregated by jurisdiction. The effective date is for fiscal years beginning after December 15, 2024, with the option to early adopt prior to the effective date and should be applied on prospective basis, but retrospective application is permitted. The Company is evaluating the impact of the requirements on the related income tax disclosures.

NOTE 2 - 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,
			2023																		2022(1)																		2021(1)
			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)
Manufacturing			30		%				30		%				30		%				31		%				30		%				30		%				29		%				30		%				30		%
Government			19		%				3		%				16		%				18		%				3		%				15		%				19		%				3		%				15		%
Wholesale			7		%				16		%				9		%				7		%				16		%				9		%				7		%				14		%				8		%
Commercial Services			7		%				12		%				8		%				7		%				13		%				8		%				7		%				13		%				8		%
Contractors			5		%				12		%				6		%				5		%				12		%				6		%				5		%				13		%				6		%
Healthcare			7		%				2		%				6		%				7		%				2		%				6		%				8		%				2		%				7		%
Retail			4		%				4		%				4		%				4		%				4		%				4		%				4		%				5		%				4		%
Transportation			4		%				2		%				4		%				4		%				2		%				4		%				4		%				2		%				4		%
Utilities			3		%				2		%				3		%				3		%				2		%				3		%				3		%				2		%				3		%
Warehousing			4		%				—		%				3		%				5		%				—		%				4		%				5		%				—		%				4		%
Other(3)			10		%				17		%				11		%				9		%				16		%				11		%				9		%				16		%				11		%
Total net sales			100		%				100		%				100		%				100		%				100		%				100		%				100		%				100		%				100		%
Percent of total company revenue			81		%				18		%				100		%				80		%				18		%				100		%				78		%				20		%				100		%
(1) Customer industry results for the twelve months ended December 31, 2022, and 2021 were reclassified to reflect the Company's current year classifications, which primarily uses the North American Industry Classification System (NAICS) beginning January 1, 2023.
(2) Total Company includes Other, which includes the Cromwell business. Other accounts for approximately 1%, 2% and 2% of revenue for the twelve months ended December 31, 2023, 2022 and 2021, respectively.
(3) Other primarily includes revenue from industries and customers that are not material individually, including hospitality, restaurants, property management and natural resources.

NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT

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

			As of
			December 31, 2023									December 31, 2022
Land and land improvements			$			397						$			318
Building, structures and improvements			1,469									1,463
Furniture, fixtures, machinery and equipment			1,852									1,662
Property, buildings and equipment			$			3,718						$			3,443
Less accumulated depreciation and amortization			2,060									1,982
Property, buildings and equipment – net			$			1,658						$			1,461

Depreciation expense on property, buildings and equipment was $146 million, $139 million and $123 million for the years ended December 31, 2023, 2022 and 2021, respectively.

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

Grainger completed its annual impairment testing of goodwill and intangible assets during the fourth quarter of 2023 and 2022. 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, 2023 and 2022, the Canada business reporting unit had goodwill of $124 million and $121 million, respectively. As part of our annual impairment testing, the Company 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 also performed various sensitivities over key assumptions, including projections of future operating expenditures used in the analysis. 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 it was more likely than not its fair value exceeded its carrying value.

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												Total
Balance at January 1, 2022						$	321					$	63											$	384
Translation						(8)						(5)												(13)
Balance at December 31, 2022						313						58												371
Translation						2						(3)												(1)
Balance at December 31, 2023						$	315					$	55											$	370

Grainger's cumulative goodwill impairment as of December 31, 2023, was $137 million. No goodwill impairment was recorded for the twelve months ended December 31, 2023, 2022 and 2021.

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

									As of December 31,
									2023																		2022
			Weighted average life						Gross carrying amount						Accumulated amortization						Net carrying amount						Gross carrying amount						Accumulated amortization						Net carrying amount
Customer lists and relationships			10.7 years						$	166					$	153					$	13					$	217					$	181					$	36
Trademarks, trade names and other			14.9 years						31						23						8						32						22						10
Non-amortized trade names and other			Indefinite						20						—						20						22						—						22
Capitalized software			4.2 years						659						466						193						580						416						164
Total intangible assets			6.1 years						$	876					$	642					$	234					$	851					$	619					$	232

Amortization expense of intangible assets recorded in SG&A was $64 million, $61 million and $63 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

Year						Expense
2024						$	66
2025						58
2026						46
2027						28
2028						13
Thereafter						3
Total						$	214

NOTE 5 - 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,
			2023												2022
			Carrying Value						Fair Value						Carrying Value						Fair Value
4.60% senior notes due 2045			$	1,000					$	967					$	1,000					$	916
1.85% senior notes due 2025			500						483						500						470
4.20% senior notes due 2047			400						361						400						338
3.75% senior notes due 2046			400						336						400						317
Japanese yen term loan			32						32						69						69
Other			(13)						(13)						(29)						(29)
Subtotal			2,319						2,166						2,340						2,081
Less current maturities			(34)						(34)						(35)						(35)
Debt issuance costs – net of amortization			(19)						(19)						(21)						(21)
Long-term debt			$	2,266					$	2,113					$	2,284					$	2,025

Revolving Credit Facility

In October 2023, the Company entered into a five-year unsecured revolving credit facility agreement (2023 Credit Facility). Grainger may obtain loans in various currencies on a revolving basis in an aggregate amount not exceeding $1.25 billion, which may be increased up to $1.875 billion at the request of the Company, subject to obtaining additional commitments and other customary conditions. The primary purpose of the 2023 Credit Facility is to support the Company's commercial paper program and for general corporate purposes. The 2023 Credit Facility replaced the Company's former $1.25 billion unsecured revolving credit facility, dated as of February 2020 (2020 Credit Facility), which was scheduled to mature in February 2025. The 2020 Credit Facility was terminated in October 2023.

There were no borrowings outstanding under the Company's 2023 Credit Facility and terminated 2020 Credit Facility as of December 31, 2023 and 2022.

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 incurred debt issuance costs related to the senior notes 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. As of December 31, 2023 and 2022, the unamortized costs were $19 million and $21 million, respectively.

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, 2023 and 2022, are presented in Other in the table above. For further discussion on the Company's hedge accounting policies and derivative instruments, see Note 11.

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, 2023 and 2022, the carrying amount of the term loan, including current maturities due within one year, was $32 million and $69 million, respectively. The term loan matures in 2024, payable over two equal remaining semi-annual principal installments in 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, 2023 and 2022.

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, 2023 and 2022.

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
2024						$	34
2025						503
2026						—
2027						—
2028						—
Thereafter						1,800
Total						$	2,337

NOTE 6 - 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, which provides for an automatic contribution equal to 6% of the eligible team member's total eligible compensation. The total retirement savings plan expense was $85 million, $87 million, and $78 million for 2023, 2022 and 2021, 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 $21 million, $11 million and $16 million for 2023, 2022 and 2021, respectively.

Postretirement Healthcare Benefits Plans

The Company has a postretirement healthcare benefit plan that provides coverage for certain U.S. team members. 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,
			2023						2022						2021
SG&A
Service cost			$	2					$	4					$	5
Other (income) expense
Interest cost			5						4						3
Expected return on assets			(6)						(8)						(8)
Amortization of prior service credit			(10)						(10)						(9)
Amortization of unrecognized gains			(7)						(9)						(8)
Net periodic benefits			$	(16)					$	(19)					$	(17)

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

			2023						2022
Benefit obligation at beginning of year			$	112					$	153
Service cost			2						4
Interest cost			5						4
Plan participants' contributions			3						3
Actuarial loss (gains)			2						(40)
Benefits paid			(10)						(12)
Benefit obligation at end of year			$	114					$	112
Plan assets available for benefits at beginning of year			$	162					$	207
Actual returns on plan assets			18						(36)
Plan participants' contributions			3						3
Benefits paid			(10)						(12)
Plan assets available for benefits at end of year			173						162
Noncurrent postretirement benefit asset			$	59					$	50

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

			As of December 31,
			2023						2022
Prior service credit			$	23					$	33
Unrecognized gains			79						77
Deferred tax liability			(25)						(28)
Net accumulated gains			$	77					$	82

The Company has elected to amortize the amount of net unrecognized gains over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits of approximately 10 years for 2023.

The postretirement benefit obligation is 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, mortality and cost-sharing between the Company and the retirees. The actuarial loss recognized during the plan year is primarily related to the change in discount rate assumption.

The following assumptions were used to determine net periodic benefit costs as of January 1:

			2023						2022						2021
Discount rate			4.92		%				2.57		%				2.17		%
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		%
Ultimate healthcare cost trend rate			4.50		%				4.50		%				4.50		%
Year ultimate healthcare cost trend rate reached			2033						2030						2026

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

			2023						2022						2021
Discount rate			4.73		%				4.92		%				2.57		%
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			7.20		%				7.50		%				6.50		%
Ultimate healthcare cost trend rate			4.50		%				4.50		%				4.50		%
Year ultimate healthcare cost trend rate reached			2033						2033						2030

The Company's investment strategy reflects the long-term nature of the plan obligation and seeks to reach a balance allocation between Fixed Income securities and Equities of approximately 65% and 35%, respectively. Current allocations may differ from targeted allocations based on investment results and other timing factors. 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 consisted of the following as of December 31 (in millions of dollars):

			2023						2022
Asset class:
Level 1 inputs:
Mutual funds:
Funds – municipal/provincial bonds			$	—					$	8
Funds – corporate bonds fund			10						3
Level 2 inputs:
Fixed income:
Corporate bonds			56						57
Government/municipal bonds			9						12
Equity funds			88						73
Plan assets			163						153
Trust assets			10						9
Plan assets available for benefits			$	173					$	162

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
2024						$	9
2025						10
2026						10
2027						9
2028						8
2029-2033						41
Total						$	87

NOTE 7 - 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,
						2023						2022
Right-of-use assets
Operating lease right-of-use						$	429					$	367
Operating lease liabilities
Operating lease liability						71						68
Long-term operating lease liability						381						318
Total operating lease liabilities						$	452					$	386

						As of December 31,
						2023						2022
Weighted average remaining lease term						7 years						7 years
Weighted average incremental borrowing rate						2.19		%				1.46		%
Cash paid for operating leases						$	88					$	76
Right-of-use assets obtained in exchange for operating lease obligations						$	161					$	96

Rent expense was $102 million, $93 million and $74 million for 2023, 2022 and 2021, respectively. These amounts are net of sublease income of $2 million for 2023, 2022 and 2021.

The remaining maturity of existing lease liabilities as of December 31, 2023 are as follows (in millions of dollars):

Year						Operating Leases
2024						$	87
2025						87
2026						76
2027						66
2028						57
Thereafter						119
Total lease payments						492
Less interest						(40)
Present value of lease liabilities						$	452

As of December 31, 2023 and 2022, 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.

NOTE 8 - 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, 2023, there were 1.4 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 $62 million, $48 million, and $42 million in 2023, 2022 and 2021, respectively, and was primarily comprised of RSUs. Related income tax benefits recognized in earnings were $34 million, $19 million, and $21 million in 2023, 2022 and 2021, 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, 2023, 2022 and 2021 was approximately $43 million, $34 million and $30 million, respectively.

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

			2023									2022									2021
			Shares			Weighted Average Price Per Share						Shares			Weighted Average Price Per Share						Shares			Weighted Average Price Per Share
Beginning nonvested units			191,032			$	409.77					202,321			$	318.40					317,414			$	259.67
Issued			81,174			$	692.02					96,940			$	520.67					105,866			$	406.17
Canceled			(7,943)			$	512.31					(17,038)			$	345.30					(36,134)			$	274.74
Vested			(91,279)			$	384.92					(91,191)			$	336.99					(184,825)			$	276.34
Ending nonvested units			172,984			$	550.62					191,032			$	409.77					202,321			$	318.40
Fair value of shares vested			$	35								$	31								$	51

As of December 31, 2023, there was $64 million of total unrecognized compensation expense related to nonvested RSUs the Company expects to recognize over a weighted average period of 2 years.

NOTE 9 - CAPITAL STOCK

The Company had no shares of preferred stock outstanding as of December 31, 2023 and 2022. The activity related to outstanding common stock and common stock held in treasury was as follows:

			2023									2022									2021
			Outstanding Common Stock			Treasury Stock						Outstanding Common Stock			Treasury Stock						Outstanding Common Stock			Treasury Stock
Balance at beginning of period			50,256,323			59,402,896						51,220,205			58,439,014						52,524,391			57,134,828
Exercise of stock options			139,189			(139,189)						101,802			(101,802)						188,444			(188,444)
Settlement of restricted stock units – net of 32,800, 31,132 and 61,377 shares retained, respectively			83,795			(83,795)						64,649			(64,649)						127,969			(127,969)
Settlement of performance share units – net of 18,521, 10,359 and 9,746 shares retained, respectively			28,135			(28,135)						13,890			(13,890)						12,507			(12,507)
Purchase of treasury shares			(1,190,040)			1,190,040						(1,144,223)			1,144,223						(1,633,106)			1,633,106
Balance at end of period			49,317,402			60,341,817						50,256,323			59,402,896						51,220,205			58,439,014

NOTE 10 - 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 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)
Other comprehensive earnings (loss) before reclassifications – net of tax			$	(11)		$	8		$	3					$	—		$	(21)		$	21
Amounts reclassified to net earnings			$	—		$	(13)		$	—					$	(13)		$	—		$	(13)
Net current period activity			$	(11)		$	(5)		$	3					$	(13)		$	(21)		$	8
Balance at December 31, 2023 – net of tax			$	(331)		$	77		$	(3)					$	(257)		$	(85)		$	(172)

NOTE 11 - DERIVATIVE INSTRUMENTS

The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Grainger currently enters into certain derivatives or other financial instruments to hedge against these risks, and may continue to do so in the future.

Fair Value Hedges

The Company uses interest rate swaps to hedge a portion of its fixed-rate long-term debt. These swaps are treated as fair value hedges and consequently the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item, are recognized in the Consolidated Statements of Earnings in Interest expense – net. The notional amount of the Company’s outstanding fair value hedges as of December 31, 2023 and 2022 were $450 million and $500 million, respectively.

The liability hedged by the interest rate swaps is recorded on the Consolidated Balance Sheets in Long-term debt. As of December 31, 2023 and 2022, the carrying amount of the hedged item, including the cumulative amount of fair value hedging adjustments totaled $432 million and $466 million, respectively.

The Company's interest rate swaps are reported on the Consolidated Balance Sheets in Other non-current liabilities. As of December 31, 2023 and 2022, the fair values of the Company's interest rate swaps were $16 million and $34 million, respectively.

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, 2023 and 2022, are shown in the following table (in millions of dollars):

									For the Years Ended December 31,
															2023						2022
Gain or (loss):
Interest rate swaps:
Hedged item															$	(15)					$	35
Derivatives designated as hedging instrument															$	15					$	(35)

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.

NOTE 12 - INCOME TAXES

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

			For the Years Ended December 31,
			2023						2022						2021
U.S.			$	2,211					$	1,903					$	1,267
Foreign			289						243						218
Total			$	2,500					$	2,146					$	1,485

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

			For the Years Ended December 31,
			2023						2022						2021
Current income tax expense:
U.S. Federal			$	431					$	374					$	221
U.S. State			100						77						46
Foreign			81						78						81
Total current			612						529						348
Deferred income tax (benefit) expense			(15)						4						23
Total income tax expense			$	597					$	533					$	371

The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December 31, 2023 and 2022 were as follows (in millions of dollars):

			As of December 31,
			2023						2022
Deferred tax assets:
Accrued expenses			177						150
U.S. and foreign loss carryforwards			84						62
Accrued employment-related benefits			51						51
Tax credit carryforward			22						26
Other			30						23
Deferred tax assets			364						312
Less valuation allowance			(93)						(71)
Deferred tax assets – net of valuation allowance			$	271					$	241
Deferred tax liabilities:
Property, buildings, equipment and other capital assets			(238)						(212)
Intangibles			(58)						(64)
Inventory			(11)						(18)
Other			(11)						(11)
Deferred tax liabilities			(318)						(305)
Net deferred tax liability			$	(47)					$	(64)
The net deferred tax asset (liability) is classified as follows:
Noncurrent assets			$	10					$	12
Noncurrent liabilities (foreign)			(57)						(76)
Net deferred tax liability			$	(47)					$	(64)

As of December 31, 2023 and 2022, the Company had $335 million and $248 million, respectively, of gross loss carryforwards related to foreign operations and U.S. transactions. Some of the loss carryforwards may expire at various dates through 2043. 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,
			2023						2022
Balance at beginning of period			$	(71)					$	(70)
Increases primarily related to foreign NOLs			(5)						(10)
Releases primarily related to foreign NOLs			1						1
Foreign exchange rate changes			(2)						4
Increase related to U.S. foreign tax credits			3						1
Increase related to capital loss carryforwards			(19)						—
Other changes – net			—						3
Balance at end of period			$	(93)					$	(71)

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,
			2023						2022						2021
Federal income tax			$	525					$	451					$	312
State income taxes – net of federal income tax benefit			74						64						41
Stock compensation			(16)						(5)						(8)
Foreign rate difference			31						26						26
Change in valuation allowance(1)			6						7						7
Other – net			(23)						(10)						(7)
Income tax expense			$	597					$	533					$	371
Effective tax rate			23.9		%				24.8		%				25.0		%
(1) Net of changes in related tax attributes.

The decrease to the Company's effective tax rate for the year ended December 31, 2023 was primarily driven by increased tax benefits related to stock compensation.

Foreign Undistributed Earnings

Estimated gross undistributed earnings of foreign subsidiaries as of December 31, 2023 and 2022, totaled $544 million and $530 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,
			2023						2022						2021
Balance at beginning of year			$	41					$	38					$	39
Additions for tax positions related to the current year			6						4						3
Additions for tax positions of prior years			1						2						—
Reductions for tax positions of prior years			(1)						—						(1)
Reductions due to statute lapse			(3)						(2)						(3)
Settlements, audit payments, refunds – net			(2)						(1)						—
Balance at end of year			$	42					$	41					$	38

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

this amount is $5 million as of December 31, 2023 and 2022, 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. In 2023, 2022 and 2021, the changes to tax positions were primarily related to the impact of expiring statutes and current year state and local reserves.

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 2019 federal tax return while tax years 2020 through 2022 remain open. The Company is also subject to audit by state, local and foreign taxing authorities. Tax years 2012 through 2022 remain subject to state and local audits and 2012 through 2022 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 13 - 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):

			2023												2022												2021
			Net sales						Operating earnings (losses)						Net sales						Operating earnings (losses)						Net sales						Operating earnings (losses)
High-Touch Solutions N.A.			$	13,267					$	2,334					$	12,182					$	1,983					$	10,186					$	1,334
Endless Assortment			2,916						233						2,787						223						2,576						232
Other			295						(2)						259						9						260						(19)
Total Company			$	16,478					$	2,565					$	15,228					$	2,215					$	13,022					$	1,547

			2023						2022						2021
Depreciation, amortization and non-cash lease expense:
High-Touch Solutions N.A.			$	206					$	168					$	148
Endless Assortment			63						35						22
Other			8						3						3
Total			$	277					$	206					$	173

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

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

			2023						2022						2021
Revenue by geographic location:
United States			$	13,389					$	12,325					$	10,236
Japan			$	1,797					1,719						1,705
Canada			$	646					621						560
Other foreign countries			$	646					563						521
			$	16,478					$	15,228					$	13,022

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 14 - 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 team members, consumers, competitors, suppliers, customers, governmental entities and other third parties.

As previously disclosed, between 2019 and 2021, Grainger, KMCO, LLC (KMCO) and other entities were named as defendants in various personal injury and property damage lawsuits in Harris County, Texas relating to an explosion at a KMCO chemical refinery in Crosby, Texas on April 2, 2019. The Company has since settled several of the personal injury lawsuits, including those alleging the most serious injuries. As previously disclosed, those settlements had no effect on net earnings or cash flows for prior quarters or years. The Company continues to contest the remaining KMCO-related lawsuits. The Company is currently unable to predict the timing, outcome or any estimate of possible loss or range of loss on the KMCO lawsuits.

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.

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 15 - SUBSEQUENT EVENTS

On January 31, 2024, Grainger's Board of Directors declared a quarterly cash dividend of $1.86 per share of common stock, payable March 1, 2024 to shareholders of record on February 12, 2024.