Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of W.W. Grainger, Inc. (Grainger or Company) as it is viewed by management of the Company. The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2023 included in the Company's 2023 Form 10-K and the Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1: Financial Statements of this Form 10-Q.

Percentage figures included in this section have not been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in the Company's Condensed Consolidated Financial Statements or in the associated text.

Overview

Grainger is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America, Japan and the U.K. Grainger uses a combination of its high-touch solutions and endless assortment businesses to serve its customers worldwide, which rely on Grainger for products and services that enable them to run safe, sustainable and productive operations.

Strategic Priorities

For a discussion of the Company’s strategic priorities for 2024, see Part 1, Item 1: Business and Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2023 Form 10-K.

Recent Events

Macroeconomic Conditions

The global economy continues to experience volatility and uncertainty including to the commodity, labor and transportation markets, arising from a combination of geopolitical conditions and events, and various economic and financial factors. These conditions have affected the Company's operations and may continue to affect the Company's business, financial condition and results of operations.

The Company continues to monitor economic conditions in the U.S. and globally, and the impact of macroeconomic pressures, including repercussions from changes in interest rates, currency exchange fluctuations, changing inflationary environment, and a potential recession on the Company’s business, customers, suppliers and other third parties. The Company has implemented strategies designed to mitigate certain adverse effects from the impact of the changing inflationary environment while remaining market price competitive. Historically, the Company’s broad and diverse customer base and the nondiscretionary nature of the Company’s products to its customers has helped to insulate it from the effects of recessionary periods in the industrial MRO market. The full extent and impact of these conditions are uncertain and cannot be predicted at this time.

For further discussion of the Company's risks and uncertainties, see Part I, Item 1A: Risk Factors in the Company’s 2023 Form 10-K.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results of Operations –Three Months Ended June 30, 2024

In this section, Grainger utilizes non-GAAP measures where it believes it will assist users of its financial statements in understanding its business. For further information regarding the Company's non-GAAP measures including reconciliations to the most directly comparable GAAP measure, see below "Non-GAAP Measures."

The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings for three months ended June 30, 2024 and 2023 (in millions of dollars except per share amounts):

			Three Months Ended June 30,
															% Change						% of Net Sales
			2024						2023									2024						2023
Net sales(1)			$	4,312					$	4,182					3.1		%				100.0		%				100.0		%
Cost of goods sold			2,618						2,538						3.2						60.7						60.7
Gross profit			1,694						1,644						3.0						39.3						39.3
Selling, general and administrative expenses			1,045						983						6.3						24.2						23.5
Operating earnings			649						661						(1.8)						15.1						15.8
Other expense – net			13						16						(18.8)						0.3						0.4
Income tax provision			146						155						(5.8)						3.4						3.7
Net earnings			490						490						—						11.4						11.7
Noncontrolling interest			20						20						—						0.5						0.5
Net earnings attributable to W.W. Grainger, Inc.			$	470					$	470					—						10.9		%				11.2		%
Diluted earnings per share			$	9.51					$	9.28					2.5		%
(1) For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q.

The following table is included as an aid to understanding the changes of Grainger's total net sales, daily net sales and daily, organic constant currency net sales from the prior period for the three months ended June 30, 2024 and 2023 (in millions of dollars):

			Three Months Ended June 30,
			2024						% Change(1)						2023						% Change(1)
Net sales			$	4,312					3.1		%				$	4,182					9.0		%
Daily net sales(2)			$	67.4					3.1		%				$	65.3					9.0		%
Daily, organic constant currency net sales(2)			$	68.7					5.1		%				$	66.0					10.1		%
(1) Calculated on the basis of prior year net sales for the three months ended June 30, 2024 and 2023.
(2) Daily net sales are adjusted for the difference in U.S. selling days relative to the prior year period. Daily, organic constant currency net sales are also adjusted to exclude the impact on net sales due to year-over-year foreign currency exchange rate fluctuations and the prior year period results of E & R Industrial Sales, Inc. (E&R) divested in the fourth quarter of 2023. There were 64 sales days in the three months ended June 30, 2024 and 2023. For further information regarding the Company's non-GAAP measures, including reconciliations to the most directly comparable GAAP measure, see below "Non-GAAP Measures."

Net sales of $4,312 million for the three months ended June 30, 2024 increased $130 million, or 3%, and on a daily, organic constant currency basis net sales increased 5% compared to the same period in 2023. Both High-Touch Solutions N.A. and the Endless Assortment segments contributed to sales growth in the second quarter of 2024. For further discussion on the Company's net sales, see the Segment Analysis section below.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Gross profit of $1,694 million for the three months ended June 30, 2024 increased $50 million, or 3%. Gross profit margin was 39.3% for both the second quarter of 2024 and 2023. For further discussion on the Company's gross profit, see the Segment Analysis section below.

Selling, general and administrative (SG&A) expenses of $1,045 million for the three months ended June 30, 2024 increased $62 million, or 6%, compared to the same period in 2023. Adjusted SG&A of $1,029 million increased $46 million, or 5% driven by higher marketing and payroll and benefit expenses in the second quarter of 2024. Adjusted SG&A leverage decreased 40 basis points compared to the same period in 2023.

Operating earnings of $649 million for the three months ended June 30, 2024 decreased $12 million, or 2%, compared to the same period in 2023. Adjusted operating earnings of $665 million increased $4 million, or 1%, due to higher gross profit dollars, partially offset by increased SG&A expenses in the second quarter of 2024.

Income tax expense of $146 million and $155 million represents effective tax rates of 22.9% and 24.0% for the three months ended June 30, 2024 and 2023, respectively. Adjusted income tax expense of $150 million represents an adjusted effective tax rate of 22.9%. The decrease in the effective tax rate was primarily due to increased benefits from tax credits compared to the same period in 2023.

Diluted earnings per share was $9.51 and adjusted diluted earnings per share was $9.76 for the three months ended June 30, 2024. On an adjusted basis, this was an increase of 5.2% compared to $9.28 for the same period in 2023.

Segment Analysis

In this section, Grainger utilizes non-GAAP measures where it believes it will assist users of its financial statements in understanding its business. For further information regarding the Company's non-GAAP measures including reconciliations to the most directly comparable GAAP measure, see below "Non-GAAP Measures." For further segment information, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.

High-Touch Solutions N.A.

The following table shows reported segment results (in millions of dollars):

			Three Months Ended June 30,
			2024						2023						% Change
Net sales			$	3,458					$	3,355					3.1		%
Gross profit			$	1,443					$	1,398					3.2		%
Selling, general and administrative expenses			$	852					$	798					6.8		%
Operating earnings			$	591					$	600					(1.5)		%

Net sales of $3,458 million for the three months ended June 30, 2024 increased $103 million, or 3%, and on a daily, organic constant currency basis increased 4% compared to the same period in 2023. The increase was primarily due to volume.

Gross profit of $1,443 million for the three months ended June 30, 2024 increased $45 million, or 3%. Gross profit margin was 41.7% for both the second quarter of 2024 and 2023.

SG&A of $852 million for the three months ended June 30, 2024 increased $54 million, or 7%, compared to the same period in 2023. Adjusted SG&A of $837 million increased $39 million, or 5%, primarily due to higher marketing and occupancy expenses in the second quarter of 2024. Adjusted SG&A leverage decreased 40 basis points compared to the same period in 2023.

Operating earnings of $591 million for the three months ended June 30, 2024 decreased $9 million, or 2%, compared to the same period in 2023. Adjusted operating earnings of $606 million increased $6 million, or 1%.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Endless Assortment

The following table shows reported segment results (in millions of dollars):

			Three Months Ended June 30,
			2024						2023						% Change
Net sales			$	776					$	751					3.3		%
Gross profit			$	229					$	224					2.2		%
Selling, general and administrative expenses			$	168					$	159					5.7		%
Operating earnings			$	61					$	65					(6.2)		%

Net sales of $776 million for the three months ended June 30, 2024 increased $25 million, or 3%, and on a daily constant currency basis increased 12% compared to the same period in 2023. The increase was due to sales growth of 12%, driven by customer acquisition for the segment and enterprise growth at MonotaRO, partially offset by declining non-core, consumer-like customers at Zoro. Sales growth was offset by unfavorable currency exchange of 9% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.

Gross profit of $229 million for the three months ended June 30, 2024 increased $5 million, or 2%, and gross profit margin of 29.5% decreased 20 basis points compared to the same period in 2023. The decrease was primarily driven by unfavorable product and customer mix.

SG&A of $168 million for the three months ended June 30, 2024 increased $9 million, or 6%, compared to the same period in 2023. The increase was due to higher marketing expenses in the second quarter of 2024. SG&A leverage decreased 50 basis points compared to the same period in 2023.

Operating earnings of $61 million for the three months ended June 30, 2024 decreased $4 million, or 6%, compared to the same period in 2023.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results of Operations – Six Months Ended June 30, 2024

In this section, Grainger utilizes non-GAAP measures where it believes it will assist users of its financial statements in understanding its business. For further information regarding the Company's non-GAAP measures including reconciliations to the most directly comparable GAAP measure, see below "Non-GAAP Measures."

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

			Six Months Ended June 30,
															Percent Increase/(Decrease) from Prior Year						As a Percent of Net Sales
			2024						2023									2024						2023
Net sales(1)			$	8,547					$	8,273					3.3		%				100.0		%				100.0		%
Cost of goods sold			5,185						4,995						3.8						60.7						60.4
Gross profit			3,362						3,278						2.6						39.3						39.6
Selling, general and administrative expenses			2,044						1,937						5.5						23.9						23.4
Operating earnings			1,318						1,341						(1.7)						15.4						16.2
Other expense – net			27						34						(20.6)						0.2						0.4
Income tax provision			304						309						(1.6)						3.6						3.7
Net earnings			987						998						(1.1)						11.6						12.1
Noncontrolling interest			39						40						(2.5)						0.5						0.5
Net earnings attributable to W.W. Grainger, Inc.			$	948					$	958					(1.0)						11.1		%				11.6		%
Diluted earnings per share			$	19.13					$	18.89					1.3		%
(1) For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q.

The following table is included as an aid to understanding the changes of Grainger's total net sales, daily net sales and daily, organic constant currency net sales compared from the prior period for the six months ended June 30, 2024 and 2023 (in millions of dollars):

			Six Months Ended June 30,
			2024						% Change(1)						2023						% Change(1)
Net sales			$	8,547					3.3		%				$	8,273					10.6		%
Daily net sales(2)			$	66.8					3.3		%				$	64.6					10.6		%
Daily, organic constant currency net sales(2)			$	67.9					5.0		%				$	65.6					12.3		%
(1) Calculated on the basis of prior year net sales for the six months ended June 30, 2024 and 2023.
(2) Daily net sales are adjusted for the difference in U.S. selling days relative to the prior year period. Daily, organic constant currency net sales are also adjusted to exclude the impact on net sales due to year-over-year foreign currency exchange rate fluctuations and the prior year period results of E&R divested in the fourth quarter of 2023. There were 128 sales days in the six months ended June 30, 2024 and 2023. For further information regarding the Company's non-GAAP measures, including reconciliations to the most directly comparable GAAP measure, see below "Non-GAAP Measures."

Net sales of $8,547 million for the six months ended June 30, 2024 increased $274 million, or 3%, and on a daily, organic constant currency basis increased 5% compared to the same period in 2023. Both High-Touch Solutions N.A. and the Endless Assortment segments contributed to sales growth in the first half of 2024. For further discussion on the Company's net sales, see the Segment Analysis section below.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Gross profit of $3,362 million for the six months ended June 30, 2024 increased $84 million, or 3%, and gross profit margin of 39.3% decreased 30 basis points compared to the same period in 2023. For further discussion on the Company's gross profit, see the Segment Analysis section below.

SG&A of $2,044 million for the six months ended June 30, 2024 increased $107 million, or 6%, compared to the same period in 2023. Adjusted SG&A of $2,028 million increased $91 million, or 5%, driven by higher marketing and payroll and benefit expenses in 2024. Adjusted SG&A leverage decreased 30 basis points compared to the same period in 2023.

Operating earnings of $1,318 million for the six months ended June 30, 2024 decreased $23 million, or 2%, compared to the same period in 2023. Adjusted operating earnings of $1,334 million decreased $7 million, or 1%.

Income taxes of $304 million for the six months ended June 30, 2024 decreased $5 million or 2%, compared to the same period in 2023. Adjusted income taxes of $308 million decreased $1 million. Grainger's effective tax rates were 23.5% and 23.6% for the six months ended June 30, 2024 and 2023, respectively. The adjusted effective tax rate for the six months ended June 30, 2024 was 23.5%.

Diluted earnings per share was $19.13 and adjusted diluted earnings per share was $19.37 for the six months ended June 30, 2024. On an adjusted basis, this was an increase of 3% compared to $18.89 for the same period in 2023.

Segment Analysis

In this section, Grainger utilizes non-GAAP measures where it believes it will assist users of its financial statements in understanding its business. For further information regarding the Company's non-GAAP measures including reconciliations to the most directly comparable GAAP measure, see "Non-GAAP Measures." For further segment information, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.

High-Touch Solutions N.A.

The following table shows reported segment results (in millions of dollars):

			Six Months Ended June 30,
			2024						2023						% Change
Net sales			$	6,863					$	6,649					3.2		%
Gross profit			$	2,866					$	2,795					2.5		%
Selling, general and administrative expenses			$	1,665					$	1,574					5.8		%
Operating earnings			$	1,201					$	1,221					(1.6)		%

Net sales of $6,863 million for the six months ended June 30, 2024 increased $214 million, or 3%, and on a daily, organic constant currency basis increased 4% compared to the same period in 2023. The increase was primarily due to volume.

Gross profit of $2,866 million for the six months ended June 30, 2024 increased $71 million, or 3%, and gross profit margin of 41.8% decreased 20 basis points compared to the same period in 2023. The decrease was primarily driven by negative price cost spread due to timing.

SG&A of $1,665 million for the six months ended June 30, 2024 increased $91 million, or 6%, compared to the same period in 2023. Adjusted SG&A of $1,650 million increased $76 million, or 5%. The increase was primarily due to higher marketing expenses in 2024. Adjusted SG&A leverage decreased 50 basis points compared to the same period in 2023.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Operating earnings of $1,201 million for the six months ended June 30, 2024 decreased $20 million, or 2%, compared to the same period in 2023. Adjusted operating earnings of $1,216 million decreased $5 million.

Endless Assortment

The following table shows reported segment results (in millions of dollars):

			Six Months Ended June 30,
			2024						2023						% Change
Net sales			$	1,527					$	1,475					3.5		%
Gross profit			$	449					$	438					2.5		%
Selling, general and administrative expenses			$	329					$	315					4.4		%
Operating earnings			$	120					$	123					(2.4)		%

Net sales of $1,527 million for the six months ended June 30, 2024 increased $52 million, or 4% and on a daily constant currency basis increased 11% compared to the same period in 2023. The increase was due to sales growth of 11% driven by customer acquisition for the segment and enterprise growth at MonotaRO, partially offset by unfavorable foreign exchange of 7% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.

Gross profit of $449 million for the six months ended June 30, 2024 increased $11 million, or 3%, and gross profit margin of 29.4% decreased 30 basis points compared to the same period in 2023. The decrease was driven by unfavorable product mix, partially offset by freight efficiencies.

SG&A of $329 million for the six months ended June 30, 2024 increased $14 million, or 4%, compared to the same period in 2023. The increase was primarily due to higher marketing expenses in 2024. SG&A leverage decreased 20 basis points compared to the same period in 2023.

Operating earnings of $120 million for the six months ended June 30, 2024 decreased $3 million, or 2% compared to the same period in 2023.

Non-GAAP Measures

Grainger utilizes non-GAAP measures where it believes it will assist users of its financial statements in understanding its business. Non-GAAP measures exclude certain items affecting comparability that can affect the year-over-year assessment of operating results and other one-time items that do not directly reflect ongoing operating results. The Company adjusts its reported net sales when there are differences in the number of U.S. selling days relative to the prior year period and also excludes the impact on reported net sales due to changes in foreign currency exchange rate fluctuations and results of certain divested businesses. This includes the net sales results of E&R divested in the fourth quarter of 2023 previously reported in the High-Touch Solutions N.A. segment. Adjusted results including adjusted SG&A, adjusted operating earnings, adjusted net earnings and adjusted diluted EPS exclude certain non-recurring items, including restructuring charges, asset impairments, gains and losses associated with business divestitures and other non-recurring, infrequent or unusual gains and losses from the Company’s most directly comparable reported U.S. generally accepted accounting principles (GAAP) results. The Company believes its non-GAAP measures provide meaningful information to assist investors in understanding financial results and assessing prospects for future performance as they provide a better baseline for analyzing the ongoing performance of its businesses by excluding items that may not be indicative of core operating results. Grainger’s non-GAAP financial measures should be considered in addition to, and not as a replacement for or as a superior measure to its most directly comparable GAAP measures and may not be comparable to similarly titled measures reported by other companies.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Restructuring Actions

In the second quarter of 2024, the Company recorded restructuring charges in SG&A of $15 million in the High-Touch Solutions N.A. segment and $1 million in Grainger's Other businesses. The charges consisted primarily of employee severance and benefit costs. The Company does not expect these actions to have a material effect on its future results of operations.

The following tables provide reconciliations of reported net sales growth from the prior year period in accordance with GAAP to the Company's non-GAAP measures daily net sales and daily, organic constant currency net sales for the three months ended June 30, 2024 and 2023 (in millions of dollars):

						Three Months Ended June 30,
						High-Touch Solutions N.A.												Endless Assortment												Total Company(1)
						2024						% Change(2)						2024						% Change(2)						2024						% Change(2)
Reported net sales						$	3,458					3.1		%				$	776					3.3		%				$	4,312					3.1		%
Daily net sales(3)						54.0						3.1						12.1						3.3						67.4						3.1
Foreign currency exchange(4)						—						—						1.0						8.4						1.0						1.5
Business divestiture(5)						0.3						0.6						—						—						0.3						0.5
Daily, organic constant currency net sales						$	54.3					3.7		%				$	13.1					11.7		%				$	68.7					5.1		%
						2023						% Change(2)						2023						% Change(2)						2023						% Change(2)
Reported net sales						$	3,355					9.9		%				$	751					4.5		%				$	4,182					9.0		%
Daily net sales(3)						52.4						9.9						11.7						4.5						65.3						9.0
Foreign currency exchange(4)						—						0.1						0.6						5.6						0.7						1.1
Daily, organic constant currency net sales						$	52.4					10.0		%				$	12.3					10.1		%				66.0						10.1		%
(1) Total Company includes Other. Grainger's businesses reported in Other do not meet the criteria of a reportable segment.
(2) Compared to net sales in the prior year period.
(3) There were 64 sales days in the three months ended June 30, 2024 and 2023.
(4) Excludes the impact on net sales due to year-over-year foreign currency exchange rate fluctuations on a daily basis.
(5) Excludes the net sales results of the divested E&R business in the prior year period on a daily basis.

The following tables provide reconciliations of reported SG&A expenses, operating earnings, net earnings attributable to W.W. Grainger, Inc. and diluted earnings per share determined in accordance with GAAP to the Company's non-GAAP measures adjusted SG&A, adjusted operating earnings, adjusted net earnings attributable to W.W. Grainger, Inc. and adjusted diluted earnings per share for the three months ended June 30, 2024 and 2023 (in millions of dollars):

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Three Months Ended June 30, 2024			Reported						Adjustment(1)						Adjusted						% Change Reported(2)						% Change Adjusted(2)
Selling, general and administrative expenses
High-Touch Solutions N.A.			$	852					$	(15)					$	837
Endless Assortment			168						—						168
Other(3)			25						(1)						24
Selling, general and administrative expenses			$	1,045					$	(16)					$	1,029					6.3%						4.7%
Earnings
High-Touch Solutions N.A.			$	591					$	15					$	606
Endless Assortment			61						—						61
Other(3)			(3)						1						(2)
Operating earnings			$	649					$	16					$	665					(1.8)%						0.6%
Total other expense – net			(13)						—						(13)
Income tax provision(4)			(146)						(4)						(150)
Net earnings			$	490					$	12					$	502
Noncontrolling interest			(20)						—						(20)
Net earnings attributable to W.W. Grainger, Inc.			$	470					$	12					$	482					—						2.6%
Diluted earnings per share			$	9.51					$	0.25					$	9.76					2.5%						5.2%
Three Months Ended June 30, 2023			Reported						Adjustment(1)						Adjusted						% Change Reported(2)						% Change Adjusted(2)
Selling, general and administrative expenses
High-Touch Solutions N.A.			$	798					$	—					$	798
Endless Assortment			159						—						159
Other(3)			26						—						26
Selling, general and administrative expenses			$	983					$	—					$	983					8.4%						8.4%
Earnings
High-Touch Solutions N.A.			$	600					$	—					$	600
Endless Assortment			65						—						65
Other(3)			(4)						—						(4)
Operating earnings			$	661					$	—					$	661					23.5%						23.5%
Total other expense – net			(16)						—						(16)
Income tax provision			(155)						—						(155)
Net earnings			$	490					$	—					$	490
Noncontrolling interest			(20)						—						(20)
Net earnings attributable to W.W. Grainger, Inc.			$	470					$	—					$	470					26.5%						26.5%
Diluted earnings per share			$	9.28					$	—					$	9.28					29.1%						29.1%
(1) Reflects restructuring costs incurred in the second quarter of 2024. There were no non-GAAP adjustments for the three months ended June 30, 2023.
(2) Compared to the reported and adjusted results of the prior year period.
(3) Grainger's businesses reported in Other do not meet the criteria of a reportable segment.
(4) Reflects a tax benefit related to the restructuring costs incurred in the second quarter of 2024. Grainger's reported and adjusted effective tax rates were 22.9% for the three months ended June 30, 2024.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following tables provide reconciliations of reported net sales growth from the prior year period in accordance with GAAP to the Company's non-GAAP measures daily net sales and daily, organic constant currency net sales for the six months ended June 30, 2024 and 2023 (in millions of dollars):

						Six months ended June 30,
						High-Touch Solutions N.A.												Endless Assortment												Total Company(1)
						2024						% Change(2)						2024						% Change(2)						2024						% Change(2)
Reported net sales						$	6,863					3.2		%				$	1,527					3.5		%				$	8,547					3.3		%
Daily net sales(3)						53.6						3.2						11.9						3.5						66.8						3.3
Foreign currency exchange(4)						—						(0.1)						0.9						7.4						0.8						1.2
Business divestiture(5)						0.3						0.6						—						—						0.3						0.5
Daily, organic constant currency net sales						$	53.9					3.7		%				$	12.8					10.9		%				$	67.9					5.0		%
						2023						% Change(2)						2023						% Change(2)						2023						% Change(2)
Reported net sales						$	6,649					12.1		%				$	1,475					4.2		%				$	8,273					10.6		%
Daily net sales(3)						51.9						12.1						11.5						4.2						64.6						10.6
Foreign currency exchange(4)						0.1						0.1						0.9						7.8						1.0						1.7
Daily, organic constant currency net sales						$	52.0					12.2		%				$	12.4					12.0		%				65.6						12.3		%
(1) Total Company includes Other. Grainger's businesses reported in Other do not meet the criteria of a reportable segment.
(2) Compared to net sales in the prior year period.
(3) There were 128 sales days in the six months ended June 30, 2024 and 2023.
(4) Excludes the impact on net sales due to year-over-year foreign currency exchange rate fluctuations on a daily basis.
(5) Excludes the net sales results of the divested E&R business in the prior year period on a daily basis.

The following tables provide reconciliations of reported SG&A expenses, operating earnings, net earnings attributable to W.W. Grainger, Inc. and diluted earnings per share determined in accordance with GAAP to the Company's non-GAAP measures adjusted SG&A, adjusted operating earnings, adjusted net earnings attributable to W.W. Grainger, Inc. and adjusted diluted earnings per share for the six months ended June 30, 2024 and 2023 (in millions of dollars):

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Six Months Ended June 30, 2024			Reported						Adjustment(1)						Adjusted						% Change Reported(2)						% Change Adjusted(2)
Selling, general and administrative expenses
High-Touch Solutions N.A.			$	1,665					$	(15)					$	1,650
Endless Assortment			329						—						329
Other(3)			50						(1)						49
Selling, general and administrative expenses			$	2,044					$	(16)					$	2,028					5.5%						4.7%
Earnings
High-Touch Solutions N.A.			$	1,201					$	15					$	1,216
Endless Assortment			120						—						120
Other(3)			(3)						1						(2)
Operating earnings			$	1,318					$	16					$	1,334					(1.7)%						(0.5)%
Total other expense – net			(27)						—						(27)
Income tax provision(4)			(304)						(4)						(308)
Net earnings			$	987					$	12					$	999
Noncontrolling interest			(39)						—						(39)
Net earnings attributable to W.W. Grainger, Inc.			$	948					$	12					$	960					(1.0)%						0.2%
Diluted earnings per share			$	19.13					$	0.24					$	19.37					1.3%						2.5%
Six Months Ended June 30, 2023			Reported						Adjustment(1)						Adjusted						% Change Reported(2)						% Change Adjusted(2)
Selling, general and administrative expenses
High-Touch Solutions N.A.			$	1,574					$	—					$	1,574
Endless Assortment			315						—						315
Other(3)			48						—						48
Selling, general and administrative expenses			$	1,937					$	—					$	1,937					10.3%						10.3%
Earnings
High-Touch Solutions N.A.			$	1,221					$	—					$	1,221
Endless Assortment			123						—						123
Other(3)			(3)						—						(3)
Operating earnings			$	1,341					$	—					$	1,341					25.5%						25.5%
Total other expense – net			(34)						—						(34)
Income tax provision			(309)						—						(309)
Net earnings			$	998					$	—					$	998
Noncontrolling interest			(40)						—						(40)
Net earnings attributable to W.W. Grainger, Inc.			$	958					$	—					$	958					30.0%						30.0%
Diluted earnings per share			$	18.89					$	—					$	18.89					32.6%						32.6%
(1) Reflects restructuring costs incurred in the second quarter of 2024. There were no non-GAAP adjustments for the six months ended June 30, 2023.
(2) Compared to the reported and adjusted results of the prior year period.
(3) Grainger's businesses reported in Other do not meet the criteria of a reportable segment.
(4) Reflects a tax benefit related to the restructuring costs incurred in the second quarter of 2024. Grainger's reported and adjusted effective tax rates were 23.5% for the six months ended June 30, 2024.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

Grainger believes its current balances of cash and cash equivalents, marketable securities and availability under its revolving credit facility will be sufficient to meet its liquidity needs for the next twelve months. The Company expects to continue to invest in its business and return excess cash to shareholders through cash dividends and share repurchases, which it plans to fund through cash flows generated from operations. Grainger also maintains access to capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity.

Cash and Cash Equivalents

As of June 30, 2024 and December 31, 2023, Grainger had cash and cash equivalents of $769 million and $660 million, respectively. The Company had approximately $2.0 billion in available liquidity as of June 30, 2024.

Cash Flows

The following table shows the Company's cash flow activity for the periods presented (in millions of dollars):

			Six Months Ended June 30,
			2024						2023
Total cash provided by (used in):
Operating activities			$	1,072					$	904
Investing activities			(177)						(191)
Financing activities			(763)						(521)
Effect of exchange rate changes on cash and cash equivalents			(23)						(2)
Increase in cash and cash equivalents			$	109					$	190

Net cash provided by operating activities was $1,072 million and $904 million for the six months ended June 30, 2024 and 2023, respectively. The increase was driven by favorable changes in working capital and inventory management combined with supply chain efficiencies compared to the prior year period.

Net cash used in investing activities was $177 million and $191 million for the six months ended June 30, 2024 and 2023, respectively.

Net cash used in financing activities was $763 million and $521 million for the six months ended June 30, 2024 and 2023, respectively. The increase was primarily due to higher treasury stock purchases compared to the prior year period.

Working Capital

Working capital as of June 30, 2024 was $3,153 million, an increase of $75 million compared to $3,078 million as of December 31, 2023. The increase was driven by higher operating cash and increased accounts receivable. As of June 30, 2024 and December 31, 2023, the ratio of current assets to current liabilities was 2.7 and 2.8, respectively.

Debt

Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. Grainger has various sources of financing available.

Total debt as a percent of total capitalization was 38.9% and 40.1% as of June 30, 2024 and December 31, 2023, respectively.

Grainger receives ratings from two independent credit rating agencies: Moody's Investor Service (Moody's) and Standard & Poor's (S&P). Both credit rating agencies currently rate the Company's corporate credit at investment grade.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the Company's credit ratings as of June 30, 2024:

			Corporate						Senior Unsecured						Short-term
Moody's			A2						A2						P1
S&P			A+						A+						A1

Commitments and Other Contractual Obligations

There were no material changes to the Company’s commitments and other contractual obligations from those disclosed in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2023 Form 10-K.

Critical Accounting Estimates

The preparation of Grainger’s Condensed Consolidated Financial Statements and accompanying notes are in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make assumptions and estimates that affect the reported amounts. The Company considers an accounting policy to be a critical estimate if: (1) it involves assumptions that are uncertain when judgment was applied, and (2) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on Grainger’s consolidated financial position and results. While the Company believes the assumptions and estimates used are reasonable, the Company’s management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances.

Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements of the Company's 2023 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s Condensed Consolidated Financial Statements.

There were no material changes to the Company's critical accounting estimates from those disclosed in Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2023 Form 10-K.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

From time to time in this Quarterly Report on Form 10-Q as well as in other written reports, communications and verbal statements, Grainger makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Forward-looking statements can generally be identified by their use of terms such as “estimate,” “believe,” “expect,” “could,” “may,” "continue," “plan,” “predict,” “will,” or “would,” and similar terms and phrases, including references to assumptions.

Grainger cannot guarantee that any forward-looking statement will be realized and achievement of future results is subject to risks and uncertainties, many of which are beyond Grainger’s control, which could cause Grainger’s results to differ materially from those that are presented.

Important factors that could cause actual results to differ materially from those presented or implied in the forward-looking statements include, without limitation: inflation, higher product costs or other expenses, including operational and administrative expenses; the impact of macroeconomic pressures and geopolitical trends, changes and events; a major loss of customers; loss or disruption of sources of supply; changes in customer or product mix; increased competitive pricing pressures; changes in third party practices regarding digital advertising; failure to enter into or sustain contractual arrangements on a satisfactory basis with group purchasing organizations; failure to develop, manage or implement new technology initiatives or business strategies, including with respect to Grainger’s eCommerce platforms; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in Grainger's gross profit margin; Grainger’s responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, regulations related to advertising, marketing and the Internet, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, compliance or safety, trade and export compliance, general commercial disputes, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards, including new or stricter environmental laws or regulations; government contract matters; the impact of any government shutdown; disruption or breaches of information technology or data security systems involving Grainger or third parties on which Grainger depends; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including price and trading volume volatility or price declines of Grainger’s common stock; commodity price volatility; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; outbreaks of pandemic disease or viral contagions; natural or human induced disasters, extreme weather and other catastrophes or conditions; effects of climate change; failure to execute on our efforts and programs related to environmental, social and governance matters; competition for, or failure to attract, retain, train, motivate and develop executives and key team members; loss of key members of management or key team members; loss of operational flexibility and potential for work stoppages or slowdowns if team members unionize or join a collective bargaining arrangement; changes in effective tax rates; changes in credit ratings or outlook; Grainger’s incurrence of indebtedness or failure to comply with restrictions and obligations under its debt agreements and instruments; and other factors identified under Part I, Item 1A: Risk Factors and elsewhere in Grainger's latest Form 10-K, as updated from time to time in Grainger's Quarterly Form 10-Q.

The preceding list is not intended to be an exhaustive list of all of the factors that could impact Grainger's forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on Grainger’s forward-looking statements and Grainger undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

W.W. Grainger, Inc. and Subsidiaries