UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-K

 (Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended December 31, 2021

OR

 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from ______ to _______

 Commission file number 1-5684

W.W. Grainger, Inc.

(Exact name of registrant as specified in its charter)

Illinois			36-1150280
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
100 Grainger Parkway
	Lake Forest,	Illinois	60045-5201
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (847) 535-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	GWW	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒  No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒  Accelerated Filer ☐   Non-accelerated Filer ☐   Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

The aggregate market value of the voting common equity held by non-affiliates of the registrant was $20,483,168,550 as of the close of trading as reported on the New York Stock Exchange on June 30, 2021. The Company does not have nonvoting common equity.

The registrant had 51,107,898 shares of the Company’s Common Stock outstanding as of February 11, 2022.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be filed in connection with the annual meeting of shareholders to be held on April 27, 2022, are incorporated by reference into Part III of this Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (Form 10-K) where indicated. The registrant's definitive 2021 proxy statement will be filed on or about March 17, 2022.

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	TABLE OF CONTENTS		Page
	PART I
Item 1:	BUSINESS		3
Item 1A:	RISK FACTORS		10
Item 1B:	UNRESOLVED STAFF COMMENTS		19
Item 2:	PROPERTIES		20
Item 3:	LEGAL PROCEEDINGS		20
Item 4:	MINE SAFETY DISCLOSURES		20
	PART II
Item 5:	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER		21
		MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6:	RESERVED		22
Item 7:	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL		23
		CONDITION AND RESULTS OF OPERATIONS
Item 7A:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		36
Item 8:	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		37
Item 9:	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS		67
		ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A:	CONTROLS AND PROCEDURES		67
Item 9B:	OTHER INFORMATION		69
Item 9C:	DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS		69
	PART III
Item 10:	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		70
Item 11:	EXECUTIVE COMPENSATION		70
Item 12:	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND		70
		RELATED STOCKHOLDER MATTERS
Item 13:	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR		70
		INDEPENDENCE
Item 14:	PRINCIPAL ACCOUNTANT FEES AND SERVICES		70
	PART IV
Item 15:	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		71
Item 16:	FORM 10-K SUMMARY		74
Signatures			75

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PART I

Item 1: Business

W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.

For financial information regarding the Company, see the Consolidated Financial Statements and Notes included in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

The Grainger Edge

Grainger's framework, “The Grainger Edge,” uniquely defines the Company by asserting why it exists, how it serves customers and how team members work together to achieve its objectives. Grainger’s purpose is to keep the world working, which in turn allows customers to focus on the core of their businesses and do what they do best.

This framework also outlines a set of principles that define the behaviors expected from Grainger’s team members in working with each other and the Company's customers, suppliers and communities as Grainger executes its strategy and creates value for shareholders. For further information on the Company's principles, see below "Workplace Practices and Policies."

General

Effective January 1, 2021, Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. These reportable segments align with Grainger's go-to-market strategies and bifurcated business models of high-touch solutions and endless assortment. For further segment information, see Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

Below is a description of Grainger’s reportable segments and other businesses.

High-Touch Solutions N.A.

The Company's High-Touch Solutions N.A. segment provides value-added MRO solutions that are rooted in deep product knowledge and customer expertise. The high-touch solutions model serves customers with complex buying needs. This segment includes the Grainger-branded businesses in the United States (U.S.), Canada, Mexico and Puerto Rico.

Endless Assortment

The Company’s Endless Assortment segment provides a streamlined and transparent online platform with one-stop shopping for millions of products. The Endless Assortment segment includes the Company’s Zoro Tools, Inc. (Zoro) and MonotaRO Co., Ltd. (MonotaRO) online channels which operate predominately in the U.S., U.K. and Japan.

Other

Other businesses is comprised of smaller international high-touch solutions businesses primarily in the U.K., as well as the Fabory and China businesses in the periods prior to their divestitures in the second and third quarter of 2020, respectively. These businesses individually and in the aggregate do not meet the criteria of a reportable segment. For further business divestitures and liquidation information, see Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

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Business Models

Competing with both high-touch solutions and endless assortment business models allows Grainger to leverage its scale and advantaged supply chain to meet the changing needs of its customers. The following provides a high-level view of the Company's business models:

Customers

The Company uses a combination of its two business models to serve its more than 4.5 million customers worldwide which rely on Grainger for products and services that enable them to run safe, sustainable and productive operations. Grainger’s customers range from smaller businesses to large corporations, government entities and other institutions, representing a broad collection of industries, including, but not limited to commercial, healthcare, and manufacturing. No single end customer accounted for more than 3% of total sales for the year ended December 31, 2021.

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In the High-Touch Solutions N.A. segment, customers are typically large enterprises with multi-faceted purchasing and processing complexities. Customers served in this segment expect product and service depth and are focused on total cost of procurement. For customers with sophisticated electronic purchasing platforms, the segment utilizes eProcurement technology that allows these systems to communicate directly with Grainger.com. Sales and service representatives drive relationships with customers by helping select the right products and reducing costs by utilizing Grainger as a consistent source of supply. KeepStock®, Grainger's inventory management solution, serves customers on site, offering valuable insights to drive efficiencies and cost savings. The North American Customer Service Centers handle customer interactions for the region via phone, email, eCommerce portals and online chat.

In the Endless Assortment segment, customers are typically smaller businesses with straight-forward product and service needs. Additionally, MonotaRO continues to attract and retain large enterprise customers. Customers purchasing through the endless assortment platforms are focused on transparent pricing and an easy-to-navigate procurement process. MonotaRO and Zoro offer an innovative customer experience by allowing customers to quickly find competitively priced products through intuitive business-focused eCommerce platforms with intelligent analytic capabilities.

Products

Grainger’s product offering is grouped under several broad categories, including safety and security, material handling and storage, pumps and plumbing equipment, cleaning and maintenance, metalworking and hand tools. Products are regularly added and removed from Grainger's product lines based on customer demand, market research, suppliers' recommendations and other factors. No single product category comprised more than 18% of the Company's sales for the year ended December 31, 2021.

In the High-Touch Solutions N.A. segment, Grainger.com provides real-time price and product availability, detailed product information and features, such as product search and compare capabilities. Collectively, this segment offers more than 2 million products.

In the Endless Assortment segment, Grainger offers an expansive product assortment and a broad, extensive product range that contains millions of products including those outside of traditional industrial MRO categories. Collectively in the U.S. and U.K., Zoro offers approximately 10 million products and MonotaRO provides access to more than 20 million products, primarily through its websites and catalogs. The endless assortment businesses continue to enhance assortment by strategically adding products and expanding the offer of third party held products.

Distribution and Sources of Supply

In the large and fragmented MRO industry, Grainger holds an advantaged position with its supply chain infrastructure and broad in-stock product offering. Approximately 5,000 suppliers worldwide provide Grainger businesses with more than 1.5 million products stocked in Distribution Centers (DCs) and branches globally. No single supplier comprised more than 5% of Grainger's total purchases for the year ended December 31, 2021.

In the High-Touch Solutions N.A. segment, DCs are the primary order fulfillment channel, mainly through direct shipments to customers. Automation in the DCs allows most orders to ship complete with next-day delivery and replenish branches that provide same-day availability to customers. Grainger’s North American distribution network supplies inventory planning and management, transportation and distribution services to all Grainger businesses in the North American region. Branches serve the immediate needs of customers by allowing them to directly pick up items and leverage branch staff for their technical product expertise and search-and-select support. Additionally, Grainger offers comprehensive inventory management through its KeepStock® program that includes vendor-managed inventory, customer-managed inventory and onsite vending machines.

In the Endless Assortment segment, orders are placed primarily through online channels. Zoro leverages the High-Touch Solution N.A.'s DCs and third-party drop shipments to deliver products to customers. MonotaRO fulfills customer orders through local DCs and third-party drop shipments.

For further information on the Company’s properties, see Part I, Item 2: Properties of this Form 10-K.

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Trademarks and Service Marks

Grainger conducts business under various trademarks and service marks. Approximately 19% of 2021 sales were private label MRO items bearing Grainger’s registered trademarks, including DAYTON®, SPEEDAIRE®, AIR HANDLER®, TOUGH GUY®, WESTWARD®, CONDOR® and LUMAPRO®. Grainger also provides a suite of inventory services to its customers under the KEEPSTOCK® brand, which is a registered service mark. Grainger has taken steps to protect these service marks and trademarks against infringement and believes they will remain available for future use in its business.

Seasonality

Grainger sells products that may have seasonal demand fluctuations during the winter or summer seasons or during periods of natural disasters. However, historical seasonality impacts have not been material to Grainger’s operating results.

Competition

Grainger faces competition from a variety of competitors, including manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, retailers and internet-based businesses. Also, competitors vary by size, from large broad line distributors and eCommerce retailers to small local and regional competitors. Grainger differentiates itself by providing local product availability, a broad product line, sales and service representatives and advanced electronic and eCommerce technology. Grainger also offers other services, such as inventory management and technical support.

Government Regulations

Grainger’s business is subject to a wide array of laws, regulations and standards in each domestic and foreign jurisdiction where Grainger operates. In addition to Grainger’s U.S.-based operations, which in 2021 generated approximately 79% of its consolidated net sales, Grainger operates its business principally through wholly owned subsidiaries in Canada, Mexico and the U.K., and through its majority-owned subsidiary in Japan. Compliance with these laws, regulations and standards requires the dedication of time and effort of team members as well as financial resources. In 2021, compliance with the applicable laws, regulations and standards did not have a material effect on capital expenditures, earnings or competitive position. See Part I, Item 1A: Risk Factors of this Form 10-K for a discussion of the risks associated with government regulations that may materially impact Grainger.

Human Capital

The Company strongly believes that its corporate culture must be aligned with its business strategy and aspiration to create value. To that end, Grainger's Board of Directors and senior management are actively involved in cultivating Grainger’s culture. The Compensation Committee of the Board, which is comprised of independent directors, oversees the Company's human capital management programs and policies and routinely provides updates to the Board.

Grainger believes that a purpose-driven culture is an asset that creates a sustainable, competitive advantage for the Company. Building on its strong foundation while evolving a framework to address future challenges is critical to Grainger’s continued success. Grainger has been consistently recognized for its commitment to its culture, diversity, equity and inclusion efforts and employee engagement.

Team Member Profile

As of December 31, 2021, Grainger had approximately 24,200 team members worldwide, of whom approximately 22,700 were full-time and 1,500 were part-time or temporary. Approximately 86% of these team members resided in North America, 8% in Asia and 6% in Europe. Grainger has not experienced any major work stoppages and considers team member relations to be good.

Workplace Practices and Policies

The Company has in place a strategic framework, The Grainger Edge, which outlines a set of principles that define the behaviors expected from Grainger’s team members in working with each other and the Company's customers, suppliers and communities. This framework helps the Company execute its strategy and create value for shareholders.

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The Grainger Edge principles also guide the Company’s actions supporting health and safety, diversity, equity and inclusion, and team member experience, including talent acquisition and team member retention, development and compensation and benefits. The Grainger Edge principles are:

•Start with the Customer	•Win as One Team
•Embrace Curiosity	•Invest in our Success
•Act with Intent	•Do the Right Thing
•Compete with Urgency

Grainger’s culture and principles help the Company attract, retain, motivate and develop its workforce and help drive team member engagement. The Company believes an engaged workforce leads to a more innovative, productive and profitable company and measures team member engagement on an ongoing basis. The results from engagement surveys are used to identify and then implement programs and processes designed to enhance the inclusive culture Grainger aspires to achieve.

Health and Safety

Grainger strives to provide a safe work environment and ensuring team members are properly prepared to perform the many tasks required to support customers. The Company’s Environmental, Health and Safety (EHS) program is designed to integrate EHS into Grainger’s business operations and comply with applicable regulations. To that end, the Company requires each of its locations to perform regular safety audits to confirm proper safety policies, programs, procedures and training are in place.

The Company is focused on promoting a culture of safety and education. Operational team members must complete routine training to fully understand the expectation of behaviors defined by the Company’s global EHS policy. Managing and reducing risks at DCs and other facilities remain a core objective and injury rates continue to be low. In 2021, the Company’s Occupational Safety and Health Administration (OSHA) Total Recordable Incident Rate in the U.S. was 1.2 and the Company’s Lost Time Incident Rate in the U.S. was 0.3 based upon the number of incidents per 100 team members (or per 200,000 work hours).

The Company has a proactive response to the coronavirus (COVID-19) pandemic via a task force that helps to ensure the Company’s actions around team members and facilities meet the rigorous guidelines from the Center for Disease Control and World Health Organization, as well as maintaining compliance with state and local health guidelines.

To further support team members' well-being, the Company enhanced its benefit offerings to provide greater access to mental, financial and physical health resources.

Diversity, Equity and Inclusion

Grainger believes a diverse talent pipeline is essential to live its principles, foster innovation, build high-performing teams and drive business results. The Company understands that future business success requires a mix of current and new skill sets, multiple experiences, and a diversity of backgrounds and perspectives, and strives to reflect this priority in its hiring, retention and promotion practices. The Company aspires to increasingly promote a welcoming, inclusive culture that values all people – regardless of sex, gender, race, color, religion, national origin, age, disability, veteran status, sexual orientation, gender expression or experiences – through recruiting outreach, internal networking, business resource groups and mentoring programs.

Grainger's commitment to diversity, equity and inclusion starts at the top. The Company’s Board of Directors is comprised of approximately 31% female and 31% racially and ethnically diverse directors. Grainger also maintains this strong commitment with the CEO's leadership team and throughout the organization. The CEO's leadership team is comprised of approximately 43% women and approximately 29% racially and ethnically diverse leaders. As of December 31, 2021, within Grainger’s U.S. workforce, approximately 39% of team members were women and approximately 37% of team members were racially and ethnically diverse.

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Talent Acquisition, Retention and Development

Grainger believes that a great customer experience starts with a great team member experience. The Company is committed to providing team members with resources designed to help them succeed. Grainger focuses on creating opportunities for team member growth, development and training, including offering a comprehensive talent program that continues throughout a team member’s career. This talent program is comprised of performance management, career management, professional development learning opportunities and milestone leadership development programs.

Compensation and Benefits

Grainger believes that its future success is highly dependent upon the Company’s continued ability to attract, retain and motivate team members. As part of its efforts in these areas, the Company offers competitive compensation and benefits to meet the diverse needs of team members and support their health and well-being, financial future and work-life balance. Team members are given access to health plan resources which include 24-hour virtual health services, disease management, tobacco cessation, parental support, stress management and weight loss programs with access to online support communities. In addition, Grainger provides retirement savings, paid holidays and time off, educational assistance and income protection benefits as well as a variety of other programs.

Available Information

Grainger makes available free of charge, through its website, http://www.invest.grainger.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). The content of Grainger’s website is not incorporated by reference into this Form 10-K or in any other report or document filed with the SEC, and any references to Grainger’s website are intended to be inactive textual references only. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

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Information about Executive Officers

Following is information about the Executive Officers of Grainger, including age, as of January 31, 2022. Executive officers of Grainger generally serve until the next annual appointment of officers, or until earlier resignation or removal.

Name and Age	Positions and Offices Held and Principal Occupation and Employment
Kathleen S. Carroll (53)	Senior Vice President and Chief Human Resources Officer, a position assumed in December 2018. Previously, Ms. Carroll served as Executive Vice President, Chief Human Resources Officer of First Midwest Bancorp, Inc., a diversified financial services company, from 2017 to 2018. Prior to that role, Ms. Carroll was employed at Aon Corporation, a global insurance brokerage and consulting company, between 2006 and 2017 in various human resources roles, culminating in her position as Vice President, Global Head of Talent Acquisition.
John L. Howard (64)	Senior Vice President and General Counsel, a position assumed in January 2000. Previously, Mr. Howard served in several roles of increasing responsibility at Tenneco, Inc., a global conglomerate. Prior to those roles, Mr. Howard held a variety of legal positions in the federal government, including Associate Deputy Attorney General in the U.S. Department of Justice and in The White House as Counsel to the Vice President.
D.G. Macpherson (54)	Chairman of the Board, a position assumed in October 2017, and Chief Executive Officer, a position assumed in October 2016 at which time he was also appointed to the Board of Directors. Previously, Mr. Macpherson served as Chief Operating Officer, a position assumed in 2015, Senior Vice President and Group President, Global Supply Chain and International, a position assumed in 2013, Senior Vice President and President, Global Supply Chain and Corporate Strategy, a position assumed in 2012, and Senior Vice President, Global Supply Chain, a position assumed in 2008. Prior to Grainger, Mr. Macpherson served as Partner and Managing Director at Boston Consulting Group, a global management consulting firm.
Deidra C. Merriwether (53)	Senior Vice President and Chief Financial Officer, a position assumed in January 2021. Previously, Ms. Merriwether served as Senior Vice President, and President, North American Sales & Services, a position assumed in November 2019, Senior Vice President, U.S. Direct Sales and Strategic Initiatives, a position assumed in September 2017, Vice President, Pricing and Indirect Procurement, a position assumed in 2016 and as a Vice President in Finance from 2013 to 2016. Prior to Grainger, Ms. Merriwether held various positions as a Vice President, including positions of increasing responsibility at Sears Holdings Corporation, a broadline retailer, PriceWaterhouseCoopers, a global professional services firm, and Eli Lilly & Company, a global pharmaceutical company.
Paige K. Robbins (53)	Senior Vice President and President, Grainger Business Unit, a position assumed in January 2021. Previously, Ms. Robbins served as Senior Vice President and Chief Technology, Merchandising, Marketing, and Strategy Officer, a position assumed in November 2019, as Senior Vice President and Chief Merchandising, Marketing, Digital, Strategy Officer, a position assumed in May 2019, as Senior Vice President and Chief Digital Officer, a position assumed in September 2017, and as Senior Vice President, Global Supply Chain, Branch Network, Contact Centers and Corporate Strategy, a position assumed in 2016. Since joining Grainger in September 2010, Ms. Robbins has held various positions as a Vice President, including in the areas of Global Supply Chain and Logistics. Prior to Grainger, Ms. Robbins served as Partner and Managing Director at Boston Consulting Group, a global management consulting firm.
Laurie R. Thomson (48)	Vice President, Controller and principal accounting officer, a position assumed in May 2021. Previously, Ms. Thomson served as Vice President, Internal Audit and Finance Continuous Improvement of the Company, a position assumed in November 2019, Vice President, Internal Audit from October 2016 to November 2019, Senior Director, Finance from June 2011 to September 2016, and Director, Internal Audit from February 2008 to June 2011. Ms. Thomson is a certified public accountant and prior to Grainger served as Director, Internal Audit at CVS Health Corporation, a pharmacy healthcare provider, and Audit Manager at Arthur Andersen LLP, a professional services firm.

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Item 1A: Risk Factors

The following is a discussion of significant risk factors relevant to Grainger’s business that could adversely affect its financial condition, results of operations and cash flows. The risk factors discussed in this section should be considered together with information included elsewhere in this Annual Report on Form 10-K and should not be considered the only risks to which the Company is exposed.

Industry and Market Risks

Grainger’s business and operations have been and may continue to be adversely affected by the global outbreak of the Coronavirus and its variants, including the Delta variant, the Omicron variant and any other variants that may emerge (COVID-19 pandemic) and may be adversely affected by other global outbreaks of pandemic disease.

Any global outbreaks of pandemic disease, such as the COVID-19 pandemic, could have a material adverse effect on Grainger’s business, results of operations and financial condition, including liquidity, capital and financing resources.

The COVID-19 pandemic has disrupted and adversely affected Grainger’s business, including its business with customers and suppliers. Among other things, Grainger experienced customer disruptions, including their ability or willingness to purchase products, delays in making purchasing decisions, and shifts in the types and quantities of products purchased. These may recur during and beyond the COVID-19 pandemic. Grainger has also experienced and may continue to experience supply chain disruptions, supplier inability to manufacture or deliver products to Grainger or meet the unprecedented demand for pandemic-related products, rapid shifts in the type, quantity or quality of products sold, and higher product costs as a result of inflation.

Additional effects from the COVID-19 pandemic on Grainger's business include adverse impacts on transportation, including shipping delays and port disruptions, increased shipping costs, constraints on the availability of products, and labor shortages, which have impacted Grainger’s ability to hire employees to fill all open positions. The potential for further disruptions from the COVID-19 pandemic, including closures of customer and supplier facilities remains. Furthermore, Grainger's ability to collect its accounts receivable or receive product ordered from suppliers, as customers and suppliers face higher liquidity and solvency risks and seek terms that are less favorable to Grainger, may adversely affect the Company’s business. These developments, alone or in combination, could materially adversely affect Grainger’s future sales and results of operations.

The effects of the COVID-19 pandemic on Grainger also include restrictions on Grainger’s employees’ ability to visit customers and many of Grainger’s employees’ ability to work in offices or at facilities, as well as disruptions or temporary closures of the Company’s facilities, including distribution centers, branches, and support buildings. Some actions that Grainger has taken in response to the COVID-19 pandemic, including enabling remote working arrangements, may increase Grainger’s vulnerability to cybersecurity incidents including breaches of information systems security, which could damage Grainger’s reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card association, employees and others. In addition, Grainger’s remote working arrangements have required the Company to make adaptions to its controls and procedures that could impact their design or operating effectiveness. The COVID-19 pandemic has also resulted in increased variable compensation, wage rates and employee healthcare costs, which adversely affect net earnings, and Grainger expects these trends to continue.

Furthermore, as a result of surges in demand and disruptions in supply chains, including in Asia and other locations, from time to time, the COVID-19 pandemic has resulted in shortages of certain PPE, cleaning supplies and other products. These shortages have impacted and in the future may continue to impact Grainger's ability to obtain or deliver inventory to customers on a timely basis or at all. While Grainger attempts to maintain sufficient inventory levels to meet quickly shifting customer demand patterns and supplier lead time requirements, which may become extended due to the pandemic demand increase, the Company cannot be certain it will be able to accurately predict demand or lead times, which might cause it to be unable to service customer demand or expose it to risks of product shortages. This uncertainty caused Grainger to acquire excess inventory, which led to additional inventory carrying costs and inventory obsolescence, and similar results may occur in the future. For example, in each of its first two fiscal quarters of 2021 as discussed in its corresponding Quarterly Reports on Form 10-Q, the Company had pandemic-related inventory adjustments in the U.S. business (part of High-Touch Solutions N.A.) on certain non-core SKUs, which were selling below cost based on then current market-relevant pricing.

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From time to time, product shortages have also required the Company to procure products from new suppliers or through brokers with whom it has a limited or no prior relationship. Despite due diligence and product compliance protocols, the products from these sources may not be delivered on a timely basis or at all, or their quality may not be as represented, all of which could cause Grainger to incur costs, including the expense of procuring alternate products or recalling or replacing products in addition to reputational and other adverse impacts to Grainger’s business.

Moreover, global outbreaks such as the COVID-19 pandemic have resulted in a widespread health crisis that has adversely affected and could continue to adversely affect the economies of many countries, resulting in a global or regional economic downturn or recession and supply chain challenges. Any such recession could result in a significant decline in access to products, demand for the Company’s products or limit Grainger’s ability to access capital markets, any of which could materially adversely affect the Company’s business, results of operations and financial condition.

The duration and ultimate impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be predicted at this time. Such factors and developments may include the geographic spread, severity and duration of the COVID-19 pandemic, including whether there are periods of increased COVID-19 cases, the further spread of the Delta variant, Omicron variant or the emergence of other new or more contagious variants that may render vaccines ineffective or less effective, disruption to Grainger’s operations resulting from employee illnesses or any inability to attract, retain or motivate employees, the development, availability and administration of effective treatment or vaccines and the willingness of individuals to receive a vaccine or otherwise comply with various mandates, the extent and duration of the impact on the U.S. or global economy, including the pace and extent of recovery when the pandemic subsides, and the actions that have been or may be taken by various governmental authorities in response to the outbreak.

The Company is a federal contractor and part of its workforce is covered by vaccine mandates imposed under President Biden's September 9, 2021 executive order. Complying with these requirements or other potential government mandates could disrupt the workforce and operations and impose additional compliance and other costs. Other requirements, including health and safety measures such as social distancing and mask mandates and/or travel bans, import and export restrictions, pricing mandates, including disaster or emergency declaration pricing statutes, and mandatory directives that certain products be allocated or provided to certain customers, could also disrupt the Company’s business and impose costs. If the Company is unable to respond to and manage the impact of these mandates, requirement or events, the Company’s business and results of operations may continue to be adversely affected.

Inflation could cause Grainger's operating and administrative expenses to grow more rapidly than net sales, which could result in lower gross margins and lower net earnings.

Market variables, such as inflation of product costs, labor rates and fuel, freight and energy costs, could increase potentially causing the Company to be unable to manage its operating and administrative expenses in a way that would enable it to leverage its revenue growth into higher net earnings. In addition, Grainger's inability to pass on such increases in costs to customers in a timely manner, or at all, could cause Grainger's operating and administrative expenses to grow, which could result in lower gross profit margins and lower net earnings.

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Disruptions in Grainger’s supply chain could result in an adverse impact on results of operations.

The occurrence of one or more natural or human induced disasters, including earthquakes, storms, hurricanes, floods, fires, droughts, tornados and other extreme weather; pandemic diseases or viral contagions such as the COVID-19 pandemic; geopolitical events, such as war, civil unrest or terrorist attacks in a country in which Grainger operates or in which its suppliers are located; and the imposition of measures that create barriers to or increase the costs associated with international trade could result in disruption of Grainger’s logistics or supply chain network. For example, the outbreak of the COVID-19 pandemic has disrupted and may continue to disrupt the operations of the Company and its suppliers and customers. Customer demand for certain products has also fluctuated as the pandemic has progressed, which has challenged Grainger's ability to anticipate and/or procure product to maintain inventory levels to meet that demand. These factors have resulted in higher out-of-stock inventory positions in certain products as well as delays in delivering those products to the Company's distribution centers, branches or customers, and similar results may occur in the future. Even when Grainger is able to find alternate sources for certain products, they may cost more or require the Company to incur higher transportation costs, which could adversely impact the Company's profitability and financial condition. Any of these circumstances could impair Grainger's ability to meet customer demand for products and result in lost sales, increased supply chain costs, penalties or damage to Grainger's reputation. Grainger’s ability to provide same-day shipping and next-day delivery is an integral component of Grainger’s business strategy and any such disruption could adversely impact results of operations and financial performance.

Weakness in the economy, market trends and other conditions affecting the profitability and financial stability of Grainger’s customers could negatively impact Grainger’s sales growth and results of operations.

Economic, political and industry trends affect Grainger’s business environments. Grainger serves several industries and markets in which the demand for its products and services is sensitive to the production activity, capital spending and demand for products and services of Grainger’s customers. Many of these customers operate in markets that are subject to cyclical fluctuations resulting from market uncertainty, trade and tariff policies, costs of goods sold, currency exchange rates, central bank interest rate fluctuations, economic downturns, recessions, foreign competition, offshoring of production, oil and natural gas prices, geopolitical developments, labor shortages, inflation, natural or human induced disasters, extreme weather, outbreaks of pandemic disease such as the COVID-19 pandemic, inflation, deflation, and a variety of other factors beyond Grainger’s control. Any of these factors could cause customers to idle or close facilities, delay purchases, reduce production levels, or experience reductions in the demand for their own products or services.

Any of these events could also reduce the volume of products and services these customers purchase from Grainger or impair the ability of Grainger’s customers to make full and timely payments and could cause increased pressure on Grainger’s selling prices and terms of sale. Accordingly, a significant or prolonged slowdown in economic activity in Canada, China, Japan, Mexico, the U.K., the U.S. or any other major world economy, or a segment of any such economy, could negatively impact Grainger’s sales growth and results of operations.

Unexpected product shortages, tariffs, product cost increases and risks associated with Grainger’s suppliers could negatively impact customer relationships or result in an adverse impact on results of operations.

Grainger’s competitive strengths include product selection and availability. Products are purchased from more than 4,900 suppliers located in various countries around the world, not one of which accounted for more than 5% of total purchases.

Disruptions in procuring sources of supply could occur due to factors beyond Grainger’s control. These factors could include economic downturns, recessions, outbreaks of pandemic disease such as the COVID-19 pandemic (which from time to time has resulted in some shortages of PPE, cleaning supplies and other products), natural or human induced disasters, extreme weather, geopolitical unrest, tariffs, new tariffs or tariff increases, trade issues and policies, detention orders or withhold release orders on imported products, labor problems or shortages experienced by Grainger’s suppliers or others in the supply chain, transportation availability, staffing and cost, shortage of raw materials, unilateral product cost increases by suppliers of products in short supply, inflation and other factors, any of which could adversely affect a supplier’s ability to manufacture or deliver products or could result in an increase in Grainger’s product costs.

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Further, Grainger sources products from Asia and other areas of the world. This increases the risk of supply disruption due to the additional lead time required and distances involved.

If Grainger was unable to promptly replace sources of supply that become disrupted, there could be adverse effects on inventory levels, results of operations, customer relationships and Grainger’s reputation. In addition, Grainger has strategic relationships with a number of vendors. In the event Grainger was unable to maintain those relations, there might be a loss of competitive pricing advantages which could, in turn, adversely affect results of operations.

Volatility in commodity prices may adversely affect gross margins.

Some of Grainger’s products contain significant amounts of commodity-priced materials, such as steel, copper, petroleum derivatives, rare earth minerals, or other materials or inputs required to manufacture PPE and other pandemic-related products and are subject to price changes based on fluctuations in the commodities market. The recent global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies. Further changes in U.S. trade policy (including new or additional increases in duties or tariffs) and retaliatory actions by U.S. trade partners could result in a worsening of economic conditions. The level of demand for Grainger's products and services is influenced in multiple ways by the price and availability of raw materials and commodities, including fuel. Fluctuations in the price of fuel or increased demand for freight services, including as a result of outbreaks of pandemic disease such as the COVID-19 pandemic, could affect transportation costs. Grainger’s ability to pass on such increases in costs in a timely manner depends on market conditions. The inability to pass along cost increases could result in lower gross margins. In addition, higher prices could reduce demand for these products, resulting in lower sales volumes.

Fluctuations in foreign currency could have an effect on reported results of operations.

Grainger’s exposure to fluctuations in foreign currency rates results primarily from the translation exposure associated with the preparation of the Consolidated Financial Statements (Financial Statements), as well as from transaction exposure associated with transactions in currencies other than an entity’s functional currency. While the Financial Statements are reported in U.S. dollars, the Financial Statements of Grainger’s subsidiaries outside the U.S. are prepared using the local currency as the functional currency and translated into U.S. dollars. In addition, Grainger is exposed to foreign currency exchange rate risk with respect to the U.S. dollar relative to the local currencies of Grainger’s international subsidiaries, primarily the Canadian dollar, euro, pound sterling, Mexican peso, renminbi and yen, arising from transactions in the normal course of business, such as sales and loans to wholly owned subsidiaries, sales to customers, purchases from suppliers, and bank loans and lines of credit denominated in foreign currencies. Grainger also has foreign currency exposure to the extent receipts and expenditures are not denominated in a subsidiary’s functional currency and that could have an impact on sales, costs and cash flows. These fluctuations in foreign currency exchange rates could affect Grainger’s results of operations and impact reported net sales and net earnings.

The facilities maintenance industry is highly competitive, and changes in competition could result in decreased demand for Grainger’s products and services.

Grainger competes in a variety of ways, including product assortment and availability, services offered to customers, pricing, purchasing convenience, and the overall experience Grainger offers. This includes the ease of use of Grainger’s high-touch operations and delivery of products.

There are several large competitors in the industry, although most of the market is served by small local and regional competitors. Grainger faces competition in all markets it serves from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and online businesses that compete with price transparency.

To remain competitive, the Company must be willing and able to respond to market pressures. Downward pressure on sales prices, changes in the volume of orders, and an inability to pass higher product costs on to customers could cause Grainger’s gross profit percentage to fluctuate or decline. Grainger may not be able to pass rising product costs to customers if those customers have ready product or supplier alternatives in the marketplace. These pressures could have a material effect on Grainger’s sales and profitability. If the Company is unable to grow sales or reduce costs, among other actions, the Company’s results of operations and financial condition may be adversely affected.

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Moreover, Grainger expects technological advancements and the increased use of eCommerce solutions within the industry to continue to evolve at a rapid pace. As a result, Grainger’s ability to effectively compete requires Grainger to respond and adapt to new industry trends and developments. Grainger has increased, and expects to continue to increase, its investments in developing, managing and implementing technology information systems, software development and other capabilities to provide high-quality service to its customers and simplify customer interactions. Developing, managing or implementing new technology and innovations may result in unexpected costs and disruptions to operations, may take longer than expected, may increase the Company’s vulnerability to cyber breaches, attacks or intrusions, and may not provide all anticipated benefits.

Changes in customer base or product mix could cause changes in Grainger’s revenue or gross margin, or affect Grainger’s competitive position.

From time to time, Grainger experiences changes in customer base and product mix that affect gross margin. Changes in customer base and product mix result primarily from business acquisitions, changes in customer demand, customer acquisitions, selling and marketing activities, competition and the increased use of eCommerce by Grainger and its competitors. For example, as a result of the COVID-19 pandemic, the Company has sold higher volumes of lower-margin pandemic-related products to larger, lower-margin customers, while non-pandemic sales have decreased.

In addition, Grainger has entered, and may in the future continue to enter, into contracts with group purchasing organizations (GPOs) that aggregate the buying power of their member customers in negotiating selling prices. If the Company is unable to enter into, or sustain, contractual arrangements on a satisfactory commercial basis with GPOs, Grainger's results of operations could be adversely affected.

As customer base and product mix change over time, Grainger must identify new products, product lines and services that respond to industry trends and customer needs. The inability to introduce new products and services and effectively integrate them into Grainger’s existing mix could have a negative impact on future sales growth and Grainger’s competitive position.

Grainger’s common stock may be subject to volatility or price declines.

The trading prices and volumes of Grainger’s common stock may be subject to broad and unpredictable fluctuations due to changes in economic, political and market conditions, the financial results and business strategies of Grainger and its competitors, changes in expectations as to Grainger’s future financial or operating performance, including estimates by securities analysts and investors, the Company’s failure to meet the financial performance guidance or other forward-looking statements provided to the public, speculation, coverage or sentiment in the media or investment community or by groups of individual investors, changes in capital structure, share repurchase programs or dividend policies, outbreak of pandemic disease such as the COVID-19 pandemic, and a number of other factors, including those discussed in this Item 1A. These factors, many of which are outside of Grainger’s control, could cause stock price and trading volume volatility or Grainger’s stock price to decline. Volatility in the price of Grainger's securities could result in the filing of securities class action litigation, which could result in substantial costs and the diversion of management time and resources.

Operational Risks

Interruptions in the proper functioning of information systems could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues.

The proper functioning of Grainger’s information systems is critical to the successful operation of its business. Grainger continues to invest in software, hardware and network infrastructures in order to effectively manage its information systems. Although Grainger’s information systems are protected with robust backup and security systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to damage or interruption from natural or human induced disasters, extreme weather, power losses, telecommunication failures, user error, third party actions such as malicious computer programs, denial-of-service attacks and cybersecurity breaches, and other problems. In addition, from time to time Grainger relies on the information technology (IT) systems of third parties to assist in conducting its business.

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If Grainger’s systems or those of third parties on which Grainger depends are damaged, breached, cease to function properly or are otherwise disrupted, Grainger may have to make a significant investment to repair or replace them and may suffer interruptions in its business operations in the interim. If critical information systems fail or otherwise become unavailable, Grainger’s ability to operate its eCommerce platforms, process orders, maintain proper levels of inventories, collect accounts receivable, disburse funds, manage its supply chain, monitor results of operations, and process and store employee or customer data, among other functions, could be adversely affected. Any such interruption of Grainger’s information systems could have a material adverse effect on its business or results of operations. Grainger has experienced these incidents in the past, which it deemed immaterial to its business and operations individually and in the aggregate and may be subject to other incidents in the future. There can be no assurance that any future incidents will not be material to Grainger’s business, operations or financial condition.

Cybersecurity incidents, including breaches of information systems security, could damage Grainger’s reputation, disrupt operations, increase costs and/or decrease revenues.

Through Grainger’s sales and eCommerce channels, the Company collects and stores personally identifiable, confidential, proprietary and other information from customers so that they may, among other things, purchase products or services, enroll in promotional programs, register on Grainger’s websites or otherwise communicate or interact with the Company. Moreover, Grainger’s operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to its business, customers, suppliers and employees, and other sensitive matters.

Cyber threats are rapidly evolving and those threats and the means for obtaining access to information in digital and other storage media are becoming increasingly sophisticated. Each year, cyber-attackers make numerous attempts to access the information stored in the Company’s information systems. If successful, these attacks may expose Grainger to risk of loss or misuse of proprietary or confidential information or disruptions of business operations. Some actions that Grainger has taken in response to the COVID-19 pandemic, including enabling remote working arrangements, may increase Grainger’s vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage Grainger’s reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card association, employees and others.

Grainger's IT infrastructure also includes products and services provided by suppliers, vendors and other third parties, and these providers can experience breaches of their systems and products that impact the security of systems and proprietary or confidential information. Moreover, from time to time, Grainger may share information with these third parties in connection with the products and services they provide to the business. While Grainger requires assurances that these third parties will protect confidential information, there is a risk that the confidentiality of data held or accessed by them may be compromised. If successful, those attempting to penetrate Grainger’s or its vendors’ information systems may misappropriate intellectual property or personally identifiable, credit card, confidential, proprietary or other sensitive customer, supplier, employee or business information, or cause systems disruption. While many of Grainger's agreements with these third parties include indemnification provisions, the Company may not be able to recover sufficiently, or at all, under such provisions to adequately offset any losses it may incur.

Moreover, the Company may face the threat to its computer systems of unauthorized access, computer hackers, computer viruses, malicious code, ransomware, phishing, organized cyber-attacks and other security problems and system disruptions. Such tactics may also seek to cause payments due to or from the Company to be misdirected to fraudulent accounts, which may not be recoverable by the Company.

In addition, a Grainger employee, contractor or other third party with whom Grainger does business may attempt to circumvent security measures or otherwise access Grainger’s information systems in order to obtain such information or inadvertently cause a breach involving such information. Further, Grainger’s systems are integrated with customer systems in certain cases, and a breach of the Company’s information systems could be used to gain illicit access to a customer’s systems and information.

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Grainger has been subject to unauthorized accesses of certain supplier and customer information in the past, which it deemed immaterial to its business and operations individually and in the aggregate, and may be subject to other unauthorized accesses of its systems in the future. There can be no assurance that any future unauthorized access to or breach of Grainger’s information systems will not be material to Grainger’s business, operations or financial condition.

Grainger maintains information security staff, policies and procedures for managing risk to its information security systems, conducts annual employee awareness training of cybersecurity threats and routinely utilizes consultants to assist in evaluating the effectiveness of the security of its IT systems. While Grainger has instituted these and other safeguards for the protection of information, because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, Grainger may be unable to anticipate these techniques or implement adequate preventative measures. Any breach of Grainger’s security measures or any breach, error or malfeasance of those of its third-party service providers could cause Grainger to incur significant costs to protect any customers, suppliers, employees, and other parties whose personal data is compromised and to make changes to its information systems and administrative processes to address security issues. In addition, although Grainger maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber and information security risks, such insurance coverage may be insufficient to cover all losses.

Grainger continuously evaluates the need to upgrade and/or replace its systems and network infrastructure to protect its computing environment, to stay current on vendor supported products and to improve the efficiency of its systems and for other business reasons. The implementation of new systems and IT could adversely impact its operations by imposing substantial capital expenditures, demands on management time and risks of delays or difficulties in transitioning to new systems. In addition, the Company's systems implementations may not result in productivity improvements at the levels anticipated. Systems implementation disruption and any other IT disruption, if not anticipated and appropriately mitigated, could have an adverse effect on its business.

Loss of customer, supplier, employee or intellectual property or other business information or failure to comply with data privacy and security laws could disrupt operations, damage Grainger’s reputation and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and others, any of which could have a material adverse effect on Grainger, its financial condition and results of operations. In the past, Grainger has experienced certain cybersecurity incidents. In each instance, Grainger provided notifications and adopted remedial measures. While these incidents have not been deemed to be material to Grainger, there can be no assurance that a future breach or incident would not be material to Grainger’s operations and financial condition.

Grainger’s ability to adequately protect its intellectual property or successfully defend against infringement claims by others may have an adverse impact on operations.

Grainger’s business relies on the use, validity and continued protection of certain proprietary information and intellectual property, which includes current and future patents, trade secrets, trademarks, service marks, copyrights and confidentiality agreements as well as license and sublicense agreements to use intellectual property owned by affiliated entities or third parties. Unauthorized use of Grainger’s intellectual property by others could result in harm to various aspects of the business and may result in costly and protracted litigation in order to protect Grainger’s rights. In addition, Grainger may be subject to claims that it has infringed on the intellectual property rights of others, which could subject Grainger to liability, require Grainger to obtain licenses to use those rights at significant cost or otherwise cause Grainger to modify its operations.

In order to compete, Grainger must attract, retain, train, motivate and develop key employees, and the failure to do so could have an adverse effect on results of operations.

In order to compete and have continued growth, Grainger must attract, retain, train, motivate and develop executives and other key employees, including those in managerial, technical, sales, marketing and IT support positions. Grainger competes to hire employees at increasingly competitive wage rates and then must train them and develop their skills and competencies. Qualified individuals needed to fill open positions may be in short supply in some areas. Further, changes in market compensation rates may adversely affect the Company's labor costs. Competition for qualified employees could require the Company to pay higher wages to attract a sufficient number of employees. The Company's employee hiring and retention also depends on the Company's ability to build and maintain a diverse and inclusive workplace culture that enables its employees to thrive.

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Grainger’s results of operations could be adversely affected by increased costs due to increased competition for diverse talent, higher employee turnover, increased employee benefit costs, failure to successfully hire executives and key employees or the loss of executives and key employees. Further, changes in the Company's management team may be disruptive to its business, and any failure to successfully transition and assimilate key new hires or promoted employees could adversely affect its business and results of operations.

Grainger’s continued success is substantially dependent on positive perceptions of Grainger’s reputation.

One of the reasons customers choose to do business with Grainger and employees choose Grainger as a place of employment is the reputation that Grainger has built over many years. Grainger devotes time and resources to environmental, social and governance (ESG) efforts that are consistent with its corporate values and are designed to strengthen its business and protect and preserve its reputation, including programs driving ethics and corporate responsibility, strong communities, diversity, equity and inclusion, gender equality and environmental sustainability. Grainger’s failure to execute its ESG programs as planned could adversely affect the Company’s reputation, business and financial performance. To be successful in the future, Grainger must continue to preserve, grow and leverage the value of Grainger’s brand. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish Grainger’s brand and lead to adverse effects on Grainger’s business.

Regulatory, Legal and Tax Risks

Grainger is subject to various domestic and foreign laws, regulations and standards. Failure to comply or unforeseen developments in related contingencies such as litigation could adversely affect Grainger’s financial condition, profitability and cash flows.

Grainger’s business is subject to legislative, legal, and regulatory risks and conditions specific to the countries in which it operates. In addition to Grainger’s U.S. operations, which in 2021 generated approximately 79% of its consolidated net sales, Grainger operates its business principally through wholly owned subsidiaries in Canada, China, Mexico, and the U.K., and its majority-owned subsidiary in Japan.

The wide array of laws, regulations and standards in each domestic and foreign jurisdiction where Grainger operates, include, but are not limited to: advertising and marketing regulations, anti-bribery and corruption laws, anti-competition regulations, data protection (including, because Grainger accepts credit cards, the Payment Card Industry Data Security Standard), data privacy (including in the U.S., the California Consumer Privacy Act, and in the European Union, the General Data Protection Regulation 2016) and cybersecurity requirements (including protection of information and incident responses), environmental protection laws, foreign exchange controls and cash repatriation restrictions, health and safety laws, import and export requirements, intellectual property laws, labor laws (including federal and state wage and hour laws), product compliance or safety laws, supplier regulations regarding the sources of supplies or products, tax laws (including as to U.S. taxes on foreign subsidiaries), unclaimed property laws and laws, regulations and standards applicable to other commercial matters. Moreover, Grainger is also subject to audits and inquiries in the normal course of business.

Failure to comply with any of these laws, regulations and standards could result in civil, criminal, monetary and non-monetary fines, penalties and/or, remediation costs as well as potential damage to the Company’s reputation. Changes in these laws, regulations and standards, or in their interpretation, could increase the cost of doing business, including, among other factors, as a result of increased investments in technology and the development of new operational processes. Furthermore, while Grainger has implemented policies and procedures designed to facilitate compliance with these laws, regulations and standards, there can be no assurance that employees, contractors, suppliers, vendors, or other third parties will not violate such laws, regulations and standards or Grainger’s policies. Any such failure to comply or violation could individually or in the aggregate materially adversely affect Grainger’s financial condition, results of operations and cash flows.

In addition, Grainger’s business and results of operations in the U.K. may be negatively affected by changes in trade policies, or changes in labor, immigration, tax or other laws, resulting from the U.K.’s exit from the European Union.

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Grainger is subject to a number of rules and regulations related to its government contracts, which may result in increased compliance costs and potential liabilities.

Grainger’s contracts with U.S. federal, state and local government entities are subject to various and changing regulations related to procurement, formation and performance. In addition, the Company’s government contracts may provide for termination, reduction or modification by the government at any time, with or without cause. From time to time, Grainger is subject to governmental or regulatory investigations or audits related to its compliance with these rules and regulations. Violations of these regulations could result in fines, criminal sanctions, the inability to participate in existing or future government contracting and other administrative sanctions. Any such penalties could result in damage to the Company’s reputation, increased costs of compliance and/or remediation and could adversely affect the Company’s financial condition and results of operations.

In conducting its business, Grainger may become subject to legal proceedings or governmental investigations, including in connection with product liability or product compliance claims if people, property or the environment are harmed by Grainger’s products or services.

Grainger is, and from time to time may become, party to a number of legal proceedings or governmental investigations for alleged violations of laws, rules or regulations. Grainger also may be subject to disputes and proceedings incidental to its business, including product-related claims for personal injury or illness, death, environmental or property damage or other commercial disputes, including the proceedings discussed in Part I, Item 3: Legal Proceedings. The defense of these proceedings may require significant expenses and divert management’s time and attention, and Grainger may be required to pay damages that could individually or in the aggregate materially adversely affect its financial condition, results of operations and cash flows. In addition, any insurance or indemnification rights that Grainger may have with respect to such matters may be insufficient or unavailable to protect the Company against potential loss exposures. Grainger also may be requested or required to recall products or take other actions. The Company’s reputation could also be adversely affected by any resulting negative publicity.

Tax changes could affect Grainger’s effective tax rate and future profitability.

Grainger’s future results could be adversely affected by changes in the effective tax rate as a result of Grainger’s relative overall profitability and the mix of earnings in countries with differing statutory tax rates, changes in tax legislation, the results of the examination of previously filed tax returns, and continuing assessment of the Company’s tax exposures.

Grainger may be adversely impacted by the effects of climate change and may incur increased costs and experience other impacts due to new or more stringent environmental laws and regulations designed to address climate change.

The potential impacts of climate change on the Company’s suppliers, product offerings, operations, facilities and customers are accelerating and uncertain. Increased public awareness and concern regarding global climate change may result in more international, federal, and/or state or other stakeholder requirements or expectations that could result in more restrictive or expansive standards, such as stricter limits on greenhouse gas emissions or more prescriptive reporting of environmental, social, and governance metrics. There continues to be a lack of consistent climate change legislation and standards, which creates economic and regulatory uncertainty. New laws, regulations and enforcement could strain the Company’s suppliers and result in increased compliance-related costs, which could result in higher product costs that are passed to the Company. New or changing environmental laws and regulations could also increase the Company’s operating costs, including through higher utility and transportation costs, and Grainger is unable to predict the potential impact such laws and regulations could have on its financial condition and results of operations. In addition, the potential physical risks of climate change may impact the availability and cost of materials and natural resources, sources and supply of energy and product demand, and could increase the Company’s operating costs. Natural disasters as a result of climate change at locations where the Company, its suppliers or customers operate could cause disruptions to the Company’s operations, which could adversely affect sales and could negatively impact Grainger’s business, financial condition, results of operations and cash flows. If environmental laws and regulations are either changed or adopted that impose significant operational restrictions or compliance requirements upon the Company or its suppliers, products, or customers, or the Company's operations are disrupted due to physical impacts of climate change, the Company's business, capital expenditures, financial condition, results of operations and competitive position could be negatively impacted.

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Credit and Liquidity Risks

Changes in Grainger’s credit ratings and outlook may reduce access to capital and increase borrowing costs.

Grainger’s credit ratings are based on a number of factors, including the Company’s financial strength and factors outside of Grainger’s control, such as conditions affecting Grainger’s industry generally or the introduction of new rating practices and methodologies. Grainger cannot provide assurances that its current credit ratings will remain in effect or that the ratings will not be lowered, suspended or withdrawn entirely by the rating agencies. If rating agencies lower, suspend or withdraw the ratings, the market price or marketability of Grainger’s securities may be adversely affected. In addition, any change in ratings could make it more difficult for the Company to raise capital on favorable terms, impact the Company’s ability to obtain adequate financing, and result in higher interest costs for the Company’s existing credit facilities or on future financings.

Grainger has incurred substantial indebtedness and may incur substantial additional indebtedness, which could adversely affect cash flow, decrease business flexibility, or prevent Grainger from fulfilling its obligations.

As of December 31, 2021, Grainger’s consolidated indebtedness was approximately $2.4 billion. The Company’s indebtedness could, among other things, limit Grainger’s ability to respond to rapidly changing business and economic conditions, require the Company to dedicate a substantial portion of its cash flows to the payment of principal and interest on its indebtedness, reducing the funds available for other business purposes, and make it more difficult to satisfy the Company’s financial obligations as they come due during periods of adverse economic and industry conditions.

The agreements governing Grainger’s debt agreements and instruments contain representations, warranties, affirmative, negative and financial covenants, and default provisions. Grainger’s failure to comply with these restrictions and obligations could result in a default under such agreements, which may allow Grainger’s creditors to accelerate the related indebtedness. Any such acceleration could have a material adverse effect on Grainger’s business, financial condition, results of operations, cash flows, and its ability to obtain financing on favorable terms in the future.

In addition, Grainger may in the future seek to raise additional financing for working capital, capital expenditures, refinancing of indebtedness, share repurchases or other general corporate purposes. Grainger’s ability to obtain additional financing will be dependent on, among other things, the Company’s financial condition, prevailing market conditions and numerous other factors beyond the Company’s control. Such additional financing may not be available on commercially reasonable terms or at all. Any inability to obtain financing when needed could materially adversely affect the Company’s business, financial condition or results of operations.

Item 1B: Unresolved Staff Comments

None.

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Item 2: Properties

As of December 31, 2021, Grainger’s owned and leased facilities totaled approximately 29.2 million square feet. Grainger owns and leases facilities primarily in the U.S., Japan, Canada (5), Mexico (6), Puerto Rico (7) and the U.K. (8) The Company's corporate headquarters is located in Lake Forest, Illinois and other general offices are located in the Chicago Metropolitan area. Grainger believes that its properties are generally in excellent condition, well maintained and suitable for the conduct of business.

The following table includes Grainger's material facilities:

Location	Facility and Use (9)	Size in Square Feet (in thousands)	Segment
U.S. (1)	DCs	9,132	High-Touch Solutions N.A.
U.S. (2)	Branch Locations	6,407	High-Touch Solutions N.A.
U.S. (3)	Other Facilities	4,805	High-Touch Solutions N.A.
Japan (4)	DCs	3,718	Endless Assortment

(1) Consists of 16 DCs that range in size from approximately 55,000 to 1.5 million square feet. These facilities are primarily owned.

(2) Consists of 246 branches, 45 onsite and three will-call express locations. These branches range in size from approximately 500 to 109,000 square feet. These facilities are primarily owned.

(3) Primarily consists of storage facilities, office space and customer service centers. These facilities are both owned and leased. These facilities range in size from approximately 200 to 633,000 square feet.

(4) Consists of eight DCs that range in size from approximately 11,000 to 1.8 million square feet. These facilities are primarily leased. Other facilities include office space that range in size from approximately 1,000 to 49,000 square feet. These facilities are also primarily leased.

(5) In Canada, Grainger has 35 branch locations, five DCs and other facilities which total two million square feet.

(6) In Mexico, Grainger has 16 branch locations and two DCs which total 712,000 square feet.

(7) In Puerto Rico, Grainger has three branch locations and one DC which total 95,000 square feet.

(8) In the U.K., Grainger has 43 branch locations, one DC and other facilities which total 806,000 square feet.

(9) Owned facilities are not subject to any mortgages.

Item 3: Legal Proceedings

For a description of legal proceedings, see the disclosure contained in Note 15 to the Consolidated Financial Statements included in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K, which is incorporated herein by reference.

Item 4: Mine Safety Disclosures

Not applicable.

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PART II

Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information and Dividends

Grainger's common stock is listed and traded on the New York Stock Exchange, under the symbol GWW.

Holders

The approximate number of shareholders of record of Grainger’s common stock as of February 11, 2022, was 553 with approximately 285,524 additional shareholders holding stock through nominees.

Dividends

Grainger expects that its practice of paying quarterly dividends on its common stock will continue, although the payment of future dividends is at the discretion of Grainger’s Board of Directors and will depend upon Grainger’s earnings, capital requirements, financial condition and other factors.

Issuer Purchases of Equity Securities - Fourth Quarter

Period	Total Number of Shares Purchased (A) (D)	Average Price Paid Per Share (B)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C)	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
Oct. 1 – Oct. 31	138,985	$423.80	138,890	4,121,591	shares
Nov. 1 – Nov. 30	101,244	$484.93	101,043	4,020,548	shares
Dec. 1 – Dec. 31	134,893	$502.16	134,359	3,886,189	shares
Total	375,122		374,292

(A)There were no shares withheld to satisfy tax withholding obligations.

(B)Average price paid per share excludes commissions of $0.01 per share paid.

(C)Purchases were made pursuant to a share repurchase program approved by Grainger's Board of Directors and announced April 28, 2021 (2021 Program). The 2021 Program authorized the repurchase of up to five million shares with no expiration date.

(D)The difference of 830 shares between the Total Number of Shares Purchased and the Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs represents shares purchased by the administrator and record keeper of the W.W. Grainger, Inc. Retirement Savings Plan for the benefit of the team members who participate in the plan.

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Company Performance

The following stock price performance graph compares the cumulative total return on an investment in Grainger common stock with the cumulative total return of an investment in each of the Dow Jones US Industrial Suppliers Total Stock Market Index and the S&P 500 Stock Index. It covers the period commencing December 31, 2016 and ending December 31, 2021. The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31, 2016, and that all dividends were reinvested.

	December 31,
	2016		2017		2018		2019		2020		2021
W.W. Grainger, Inc.	$	100	$	104	$	127	$	155	$	191	$	246
Dow Jones US Industrial Suppliers Total Stock Market Index	100		112		103		137		171		233
S&P 500 Stock Index	100		122		116		153		181		233

Item 6: [Reserved]

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Objective

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 the Company. The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

Percentage figures included in this section have not in all cases 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 Consolidated Financial Statements or in the associated text.

Overview

W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (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.

The Company’s continued strategic priority for 2022 is to relentlessly expand Grainger’s leadership position in the MRO space by being the go-to partner for people who build and run safe and productive operations. To achieve this, each Grainger business has a set of strategic objectives. The high-touch solutions businesses are focused on key initiatives that drive top-line revenue and MRO market outgrowth. Additionally, the high-touch solutions businesses are focused on growing through differentiated sales and services (e.g., direct customer relationships and onsite services), advantaged MRO solutions (e.g., get customers the exact products and services they need to solve a problem quickly) and unparalleled customer service (e.g., deliver flawlessly on every customer transaction). The endless assortment businesses are focused on product assortment expansion and innovative customer acquisition and retention. Additionally, all Grainger businesses are focused on continuously improving customer experience, optimizing and scaling cost structures and investing in digital marketing, technology and supply chain infrastructure to ultimately deliver long-term returns for shareholders.

Strategic Priorities and Impact of the COVID-19 Pandemic

The Company continues to adhere to its purpose to keep the world working while using its core principles as the framework for expanding Grainger’s leadership position and ensuring Grainger is the go-to-partner for building and running safe, sustainable and productive operations. However, the Company’s business plans to achieve these strategic priorities continue to be affected by the impact of the COVID-19 pandemic.

The COVID-19 pandemic caused significant disruptions in the U.S. and global markets, and the full extent of the impacts will depend on several uncertain and unpredictable developments including any continued spread of the virus and its variants, the availability and effectiveness of treatments and vaccines, imposition of protective public safety measures and the overall impact of government measures to combat the spread of the virus.

While the ongoing recovery from the COVID-19 pandemic has fluctuated throughout the year, it has been accompanied by a resurgence in demand as industries return to regular operations, which continues to disrupt supply chains, transportation efficiency, raw materials and labor availability. Grainger’s businesses and its major facilities have remained operational as customers rely on Grainger’s products and services to keep their businesses up and running. The Company continues to monitor and refine its product assortment and inventory availability and remains committed to serving customers and supporting team members.

As the pandemic continues to impact global markets and the needs of customers, team members, suppliers and communities continue to change, the Company’s efforts and business plan will evolve accordingly. The Company continues to leverage a dedicated cross-functional task force to understand and implement guidance from government agencies and health officials to meet requirements from federal, state and local authorities and may take further actions in the best interests of its team members, customers, suppliers and shareholders.

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The Company qualified for certain government assistance programs that partially offset related expenses in Canada and the U.K. The amounts received were not material to the Consolidated Financial Statements for the year ended December 31, 2021.

The Company cannot reasonably estimate the full extent to which the COVID-19 pandemic will continue to impact its business and financial results. Grainger is focused on servicing customers and communities in addressing the pandemic and providing products to assist in the ongoing recovery, supporting the needs and safety of team members and ensuring the Company continues to operate with a strong financial position.

Further discussion of the risks and uncertainties posed by the COVID-19 pandemic, see Part I, Item 1A: Risk Factors of this Form 10-K.

Matters Affecting Comparability

There were 254 sales days in the full year 2021 versus 256 and 255 sales days in the full year of 2020 and 2019, respectively.

Effective January 1, 2021, Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. On March 8, 2021, Grainger provided investors with segment summary historical financial information and segment historical data that is consistent with its new reportable segment structure and reflective of its updated intersegment accounting policies. For further segment information, see Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

In November 2020, consistent with the Company's strategic focus on broad line MRO distribution in key markets, Grainger commenced the liquidation of Zoro Tools Europe (ZTE) in Germany. In August 2020, Grainger divested the China high-touch solutions business (China) and in June 2020, divested the Fabory high-touch solutions business. Accordingly, the Company’s operating results include Fabory, China and ZTE through the respective dates of divestiture or liquidation. For further business divestitures and liquidation information, see Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Data and Supplementary Data of this Form 10-K.

In mid-February 2020, the Company began experiencing elevated levels of COVID-19 pandemic-related product sales (e.g., PPE and safety products) due to higher customer demand in response to the COVID-19 pandemic, while non-pandemic sales decreased. Conversely, as the COVID-19 pandemic progressed throughout 2020 and through 2021, the Company has seen pandemic-related sales soften and non-pandemic sales grow, as mix returns to more normalized levels. This shift between pandemic and core, non-pandemic product mix impacted gross margin as pandemic-related product sales are generally lower-margin.

24

Results of Operations

The following table is included as an aid to understanding changes in Grainger's Consolidated Statements of Earnings (in millions of dollars).

	For the Years Ended December 31,
							Percent Increase/(Decrease) from Prior Year		As a Percent of Net Sales
	2021		2020		2019		2021		2021		2020		2019
Net sales (1)	$	13,022	$	11,797	$	11,486	10.4	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	8,302		7,559		7,089		9.8		63.8		64.1		61.7
Gross profit	4,720		4,238		4,397		11.4		36.2		35.9		38.3
SG&A	3,173		3,219		3,135		(1.4)		24.4		27.3		27.3
Operating earnings	1,547		1,019		1,262		51.8		11.9		8.6		11.0
Other expense - net	62		72		53		(12.8)		0.5		0.6		0.5
Income tax provision	371		192		314		92.7		2.8		1.6		2.7
Net earnings	1,114		755		895		47.5		8.6		6.4		7.8
Noncontrolling interest	71		60		46		19.0		0.5		0.5		0.4
Net earnings attributable to W.W. Grainger, Inc.	$	1,043	$	695	$	849	50.0		8.0		5.9		7.4
Diluted earnings per share:	$	19.84	$	12.82	$	15.32	54.8	%
(1) For further information regarding the Company's disaggregated revenue, see Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

2021 Compared to 2020

Net sales of $13,022 million for the year ended December 31, 2021 increased $1,225 million, or 10.4%, compared to the same period in 2020. On a daily basis, net sales increased 11.3%, primarily driven by improved core, non-pandemic related product sales volume as product mix continued to revert to more normalized levels in the year ended December 31, 2021. This consisted of increased volume, which includes product mix, of 10.1%, price, which includes customer mix, of 2.3% and foreign exchange of 0.3%, partially offset by the impact of the business divestitures in the prior year of 1.4%.

Gross profit of $4,720 million for the year ended December 31, 2021 increased $482 million, or 11%, compared to the same period in 2020. Gross profit margin of 36.2% increased 0.3 percentage point compared to the same period in 2020. The increase was primarily driven by price realization and favorable product mix, partially offset by unfavorable pandemic-related inventory adjustments and product cost inflation in the year ended December 31, 2021.

SG&A of $3,173 million for the year ended December 31, 2021 decreased $46 million, or 1%, compared to the same period in 2020. The decrease was the result of impairment charges and losses related to the divested Fabory business in the first half of 2020, partially offset by increased SG&A due to higher wages, variable compensation and marketing expenses in 2021.

Operating earnings of $1,547 million for the year ended December 31, 2021 increased $528 million, or 52%, compared to the same period in 2020. The increase was driven by higher gross profit dollars and lower SG&A.

Other expense, net of $62 million for the year ended December 31, 2021 decreased $10 million, or 13%, compared to the same period in 2020. The decrease was primarily driven by lower interest expense in 2021 due to the increase in indebtedness as a proactive measure to preserve financial flexibility during pandemic uncertainty in the first half of 2020.

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Income taxes of $371 million for the year ended December 31, 2021 increased $179 million, or 93%, compared to the same period in 2020. The increase was primarily driven by higher taxable operating earnings in 2021 and the absence of the tax impacts from the Company's investment in Fabory. In the first quarter of 2020, the Company impaired and reorganized its holdings in Fabory. In the second quarter of 2020, the Company divested its interest in Fabory. Grainger's effective tax rates were 25.0% and 20.3% for the twelve months ended December 31, 2021 and 2020, respectively.

Net earnings of $1,043 million attributable to W.W. Grainger, Inc. for the year ended December 31, 2021 increased $348 million, or 50%, compared to the same period in 2020.

Diluted earnings per share was $19.84 for the year ended December 31, 2021, an increase of 55% compared to $12.82 for the same period in 2020. The increase was primarily due to higher net earnings in 2021.

2020 Compared to 2019

Net sales of $11,797 million for the year ended December 31, 2020 increased $311 million, or 2.7%, compared to the same period in 2019. On a daily basis, net sales increased 2.3%, primarily due to strong pandemic-related sales volume mainly to large government and healthcare customers, partially offset by volume declines of non-pandemic related products across most industries. This consisted of increased volume, which includes product mix, of 3.7% and foreign exchange of 0.1%, partially offset by the impact of the business divestitures and price, including customer mix, of 1.3% and 0.2%, respectively.

Gross profit of $4,238 million for the year ended December 31, 2020 decreased $159 million, or 4%, compared to the same period in 2019. Gross profit margin of 35.9% decreased 2.4 percentage points compared to the same period in 2019. The decrease was primarily driven by lower margins from COVID-19 pandemic-related product sales in the high-touch solutions businesses and business unit mix due to growth in the lower margin endless assortment businesses.

SG&A of $3,219 million for the year ended December 31, 2020 increased $84 million, or 3%, compared to the same period in 2019. The increase was primarily due to a $177 million write-down of goodwill, intangibles and long-lived assets for the Fabory business and a $109 million pretax loss from the sale of the Fabory business in the first and second quarters of 2020, respectively. These charges were partially offset by reduced travel and entertainment expenses in 2020 and an aggregate intangible asset impairment charge of $120 million for the Cromwell business in the fourth quarter of 2019.

Operating earnings of $1,019 million for the year ended December 31, 2020 decreased $243 million, or 19%, compared to $1,262 million for the same period in 2019. The decrease was primarily a result of impairment charges and losses for the divested Fabory business in the first half of 2020.

Other expense, net of $72 million for the year ended December 31, 2020 increased $19 million, or 35%, compared to the same period in 2019. The increase was primarily from costs related to an increase in indebtedness as a proactive measure to preserve financial flexibility during pandemic uncertainty during 2020.

Income taxes of $192 million for the year ended December 31, 2020 decreased $122 million, or 39%, compared to the same period in 2019. The decrease was driven by lower taxable operating earnings for the year, tax losses from the Company's investment in Fabory due to the impairment and internal reorganization of the Company's holdings in Fabory in the first quarter of 2020 and tax impacts of the Fabory divestiture.

Net earnings of $695 million attributable to W.W. Grainger, Inc. for the year ended December 31, 2020 decreased $154 million, or 18%, compared to the same period in 2019.

Diluted earnings per share of $12.82 for the year ended December 31, 2020, decreased 16% compared to $15.32 for the same period in 2019. The decrease was due to lower net earnings.

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Non-GAAP Measures

The following tables reconcile reported SG&A expenses, operating earnings, net earnings attributable to W.W. Grainger, Inc. and diluted earnings per share determined in accordance with U.S. generally accepted accounting principles (GAAP) to non-GAAP measures including adjusted SG&A, adjusted operating earnings, adjusted net earnings attributable to W.W. Grainger, Inc. and adjusted diluted earnings per share. The Company believes that these 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. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies' non-GAAP measures having the same or similar names.

The following tables provide a reconciliation of GAAP to non-GAAP measures (dollars in millions):

	For the Years Ended December 31,
	2021		2020		2019		%
SG&A reported	$	3,173	$	3,219	$	3,135	(1)	%
Restructuring – net (High-Touch Solutions N.A.)	—		18		4
Restructuring – net (Endless Assortment)	—		9		—
Restructuring – net (Other)	—		—		2
Fabory impairment charges (Other)	—		177		—
Cromwell impairment charges (Other)	—		—		120
Fabory divestiture (Other)	—		109		—
Grainger China divestiture (Other)	—		(5)		—
SG&A adjusted	$	3,173	$	2,911	$	3,009	9	%
Operating earnings reported	$	1,547	$	1,019	$	1,262	52	%
Total restructuring – net, impairment charges and business divestiture	—		308		126
Operating earnings adjusted	$	1,547	$	1,327	$	1,388	17	%
Net earnings attributable to W.W. Grainger, Inc. reported	$	1,043	$	695	$	849	50	%
Total restructuring – net, impairment charges and business divestiture	—		308		126
Tax effect (1)	—		(126)		(17)
Total restructuring – net, impairment charges and business divestiture, net of tax	—		182		109
Net earnings attributable to W.W. Grainger, Inc. adjusted	$	1,043	$	877	$	958	19	%
Diluted earnings per share reported	$	19.84	$	12.82	$	15.32	55	%
Restructuring – net (High-Touch Solutions N.A.)	—		0.33		0.08
Restructuring – net (Endless Assortment)	—		0.16		—
Restructuring – net (Other)	—		—		0.03
Fabory impairment charges (Other)	—		3.26		—
Cromwell impairment charges (Other)	—		—		2.15
Fabory divestiture (Other)	—		2.02		—
Grainger China divestiture (Other)	—		(0.09)		—
Total pretax adjustments	—		5.68		2.26
Tax effect (1)	—		(2.32)		(0.29)
Total – net of tax	—		3.36		1.97
Diluted earnings per share adjusted	$	19.84	$	16.18	$	17.29	23	%
(1) The tax impact of adjustments and non-cash impairments are calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility and the Company's ability to realize the associated tax benefits.

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2021 Compared to 2020

Noted in the table above for the twelve months ended December 31, 2020, the Company recorded a $177 million Fabory impairment charge and $109 million loss on the divestiture of the Fabory business in SG&A in the first and second quarters, respectively.

Excluding restructuring, net, impairment charges and business divestitures for the twelve months ended December 31, 2020, adjusted SG&A and operating earnings for the full year 2021 were $3,173 and $1,547, an increase of $262 million and $220 million, or 9% and 17%, respectively, compared to the same period in 2020.

Excluding the tax benefit related to Fabory, as well as the restructuring, net, impairment charges and business divestitures for the twelve months ended December 31, 2020, Grainger's adjusted effective tax rates were 25.0% and 25.3% for the twelve months ended December 31, 2021 and 2020, respectively. The Company's adjusted net earnings attributable to W.W. Grainger Inc. for the full year 2021 was $1,043 million, an increase of $166 million, or 19%, compared to the same period in 2020. Adjusted diluted earnings per share of $19.84 increased 23% compared to $16.18 for the twelve months ended December 31, 2020.

2020 Compared to 2019

Noted in the table above for the twelve months ended December 31, 2019, the Company recorded an aggregate intangible asset impairment charge in SG&A of $120 million for the Cromwell business in the fourth quarter of 2019.

Excluding restructuring, net, impairment charges and business divestitures for the twelve months ended December 31, 2020 and December 31, 2019, adjusted SG&A and operating earnings for the full year 2020 were $2,911 and $1,327, a decrease of $98 million and $61 million, or 3% and 4%, respectively, compared to the same period in 2019.

Excluding restructuring, net, impairment charges, business divestitures and income taxes for the twelve months ended December 31, 2020, and December 31, 2019, Grainger's adjusted effective tax rates were 25.3% and 24.8% for the twelve months ended December 31, 2020 and 2019, respectively. The Company's adjusted net earnings attributable to W.W. Grainger, Inc. for the full year 2020 was $877 million, a decrease of $81 million, or 8%, compared to the same period in 2019. Adjusted diluted earnings per share of $16.18 decreased 6% compared to $17.29 for the twelve months ended December 31, 2019.

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Segment Analysis

The following comments at the reportable segment and other business unit levels include external net sales and operating earnings. For further segment information, see Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

High-Touch Solutions N.A.

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

For the Years Ended December 31,

	2021		Percent Increase from Prior Year		2020 (1)		Percent Increase/ (Decrease) from Prior Year		2019 (1)
Net sales	$	10,186	10.5	%	$	9,221	2.0	%	$	9,036
Gross profit	$	3,906	10.9	%	$	3,524	(4.4)	%	$	3,684
SG&A	$	2,572	9.8	%	$	2,342	(2.7)	%	$	2,406
Operating earnings	$	1,334	12.9	%	$	1,182	(7.6)	%	$	1,278
(1) Effective January 1, 2021, segment results for the years ended December 31, 2020 and 2019 were recast to reflect the Company's re-segmentation.

2021 Compared to 2020

Net sales of $10,186 million for the year ended December 31, 2021 increased $965 million, or 10.5%, compared to the same period in 2020. On a daily basis, net sales increased 11.3%, primarily driven by improved core, non-pandemic related product sales volume as product mix continued to revert to more normalized levels in the year ended December 31, 2021. This consisted of increased volume, price and foreign exchange of 7.8%, 3.0% and 0.5%, respectively.

Gross profit of $3,906 million for the year ended December 31, 2021 increased $382 million, or 11%, compared to the same period in 2020. Gross profit margin of 38.3% increased 0.1 percentage point compared to the same period in 2020. The increase was primarily the result of price realization and product mix in the second half of 2021, partially offset by unfavorable pandemic-related inventory adjustments and product cost inflation in the year ended December 31, 2021.

SG&A of $2,572 million for the year ended December 31, 2021 increased $230 million, or 10%, compared to the same period in 2020. The increase was primarily driven by higher wages, variable compensation and marketing expenses.

Operating earnings of $1,334 million for the year ended December 31, 2021 increased $152 million, or 13%, compared to the same period in 2020. The increase was driven by higher gross profit dollars, partially offset by higher SG&A.

2020 Compared to 2019

Net sales of $9,221 million for the year ended December 31, 2020 increased $185 million, or 2.0%, compared to the same period in 2019. On a daily basis, net sales increased 1.7%, primarily driven by COVID-19 pandemic-related sales, partially offset by volume declines of non-pandemic related products. This consisted of increased volume of 2.2%, partially offset by price and foreign exchange of 0.3% and 0.2%, respectively.

Gross profit of $3,524 million for the year ended December 31, 2020 decreased $160 million, or 4%, compared to the same period in 2019. Gross profit margin of 38.2% decreased 2.6 percentage points compared to the same period in 2019. The decrease was primarily the result of COVID-19 pandemic-related headwinds, including product, customer mix and inventory write-downs in 2020.

SG&A of $2,342 million for the year ended December 31, 2020 decreased $64 million, or 3%, compared to the same period in 2019. The decrease was primarily driven by reduced travel and depreciation expense, partially offset by incremental operating costs to support the response to the COVID-19 pandemic and related activities.

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Operating earnings of $1,182 million for the year ended December 31, 2020 decreased $96 million, or 8%, compared to the same period of 2019. The decrease was primarily driven by lower gross profit dollars.

Endless Assortment

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

For the Years Ended December 31,

	2021		Percent Increase from Prior Year		2020 (1)		Percent Increase from Prior Year		2019 (1)
Net sales	$	2,576	18.3	%	$	2,178	18.7	%	$	1,836
Gross profit	$	729	21.3	%	$	601	18.2	%	$	509
SG&A	$	497	14.4	%	$	435	12.2	%	$	387
Operating earnings	$	232	39.3	%	$	166	37.2	%	$	122
(1) Effective January 1, 2021, segment results for the years ended December 31, 2020 and 2019 were recast to reflect the Company's re-segmentation.

2021 Compared to 2020

Net sales of $2,576 million for the year ended December 31, 2021 increased $398 million, or 18.3%, compared to the same period in 2020. On a daily basis, net sales increased 19.2%, primarily driven by strong customer acquisition and continued growth with enterprise customers at MonotaRO. This consisted of increased volume of 20.5%, partially offset by decreased foreign exchange of 1.3%.

Gross profit of $729 million for the year ended December 31, 2021 increased $128 million, or 21%, compared to the same period in 2020. Gross profit margin of 28.3% increased 0.7 percentage point compared to the same period in 2020. The increase in gross profit margin was primarily driven by pricing actions at Zoro and freight efficiencies at Zoro and MonotaRO, partially offset by unfavorable product mix at MonotaRO.

SG&A of $497 million for the year ended December 31, 2021 increased $62 million, or 14%, compared to the same period in 2020. The increase was primarily driven by higher marketing and payroll expenses due to an increase in team members to support the continued growth of the segment. SG&A leverage improved 0.7 percentage point compared to the same period in 2020 due to sales revenue outpacing SG&A.

Operating earnings of $232 million for the year ended December 31, 2021 increased $66 million, or 39%, compared to the same period in 2020. The increase was primarily driven by higher sales volume, partially offset by higher SG&A.

2020 Compared to 2019

Net sales of $2,178 million for the year ended December 31, 2020 increased $342 million, or 18.7%, compared to the same period in 2019. On a daily basis, net sales increased 18.2%, primarily driven by higher sales volume due to COVID-19 pandemic-related sales and strong customer acquisitions during the year ended December 31, 2020. This consisted of increased volume of 16.6% and foreign exchange of 1.6%.

Gross profit of $601 million for the year ended December 31, 2020 increased $92 million, or 18%, compared to the same period in 2019. Gross profit margin of 27.6% decreased 0.1 percentage point compared to the same period in 2019. The decrease was primarily driven by unfavorable supply chain costs.

SG&A of $435 million for the year ended December 31, 2020 increased $48 million, or 12%, compared to the same period in 2019. The increase was primarily driven by higher payroll and benefits expenses and the liquidation of the ZTE business in the fourth quarter of 2020. SG&A leverage improved 1.1 percentage points compared to the same period in 2019 due to sales revenue outpacing SG&A.

Operating earnings of $166 million for the year ended December 31, 2020, increased $44 million, or 37%, compared to the same period in 2019. The increase was primarily driven by higher sales volume, partially offset by higher SG&A.

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Other

2021 Compared to 2020

Net sales of $260 million for the year ended December 31, 2021 decreased $138 million, or 34.7%, compared to the same period in 2020. On a daily basis, net sales decreased 34.2%, primarily driven by the net impact of the Fabory and China business divestitures, partially offset by volume increases and favorable changes in the exchange rate between the U.S. dollar and the British pound sterling for the Cromwell business. This consisted of a decrease in business divestitures of 39.9%, partially offset by favorable foreign exchange and volume of 4.4% and 1.3%, respectively.

Gross profit of $85 million for the year ended December 31, 2021 decreased $28 million, or 25%, compared to the same period in 2020. Gross profit margin of 32.7% increased 4.2 percentage points compared to the same period in 2020. The increase in gross profit margin was primarily due to the impact of the business divestitures in the prior year and improved customer mix for the Cromwell business.

SG&A of $104 million for the year ended December 31, 2021 decreased $338 million, or 77%, compared to the same period in 2020. The decrease was primarily due to impairment charges and losses related to the divested Fabory business in the first half of 2020.

Operating losses of $19 million for the year ended December 31, 2021 decreased $310 million, or 94%, compared to the same period in 2020. The decrease was primarily driven by the divested Fabory business in the first half of 2020, partially offset by lower gross profit dollars.

2020 Compared to 2019

Net sales of $398 million for the year ended December 31, 2020 decreased $216 million, or 35.3%, compared to the same period in 2019. On a daily basis, net sales decreased 35.5%, primarily driven by the net impact of the Fabory and China business divestitures and lower volume due to COVID-19 pandemic-related slowdown. This consisted of a decrease in business divestitures of 18.3%, volume of 16.7% and foreign exchange of 0.5%.

Gross profit of $113 million for the year ended December 30, 2020 decreased $91 million, or 45%, compared to the same period in 2019. Gross profit margin of 28.4% decreased 4.8 percentage points compared to the same period in 2019. The decrease was primarily driven by the Fabory divestiture and lower margins for the Cromwell business.

SG&A of $442 million for the year ended December 30, 2020 increased $101 million, or 29%, compared to the same period in 2019 to support the continued growth of the segment. The increase was primarily driven by impairment charges and losses related to the divested Fabory business in 2020, partially offset by an intangible asset impairment charge for the Cromwell business in the year ended December 31, 2019.

Operating losses of $329 million for the year ended December 31, 2020 increased $191 million, or 140%, compared to the same period in 2019. The increase was primarily due to the Fabory business divestiture.

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Financial Condition

Grainger believes its current balances of cash and cash equivalents, marketable securities and availability under its revolving credit facilities 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.

For a full discussion related to the financial condition for the fiscal year ended December 31, 2019, including a year-to-year comparison between 2020 and 2019, see Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in Grainger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Cash, Cash Equivalents and Liquidity

At December 31, 2021 and 2020, Grainger had cash and cash equivalents of $241 million and $585 million, respectively. The decrease in cash was primarily due to increased investment in capital expenditures and higher inventory purchases to meet customer demand. As of December 31, 2021, the Company had approximately $1.5 billion in available liquidity.

Cash Flows

Net cash provided by operating activities was $937 million and $1,123 million for the years ended December 31, 2021 and 2020, respectively. The decrease in cash provided by operating activities was driven by working capital, primarily related to an increase in accounts receivable due to strong sales growth and inventory purchases to meet customer demand.

Net cash used in investing activities was $226 million and $179 million for the years ended December 31, 2021 and 2020, respectively. This increase in net cash used in investing activities was primarily driven by investments in the Company's supply chain infrastructure.

Net cash used in financing activities was $1,039 million and $726 million for the years ended December 31, 2021 and 2020, respectively. The increase in net cash used in financing activities was primarily driven by higher stock repurchases in the current year and prior year borrowings of long-term debt.

Working Capital

Internally generated funds are the primary source of working capital and growth initiatives including capital expenditures. Working capital was $2,455 million at December 31, 2021, compared to $2,220 million at December 31, 2020. The increase was primarily driven by an increase in accounts receivable due to strong sales growth, partially offset by an increase in accounts payable due to higher inventory purchases to meet customer demand. At these dates, the ratio of current assets to current liabilities was 2.7 and 2.6, respectively.

Capital Expenditures

For the year ending December 31, 2021 and 2020, capital expenditures were $255 million and $197 million, respectively. The increase was due to the Company's investment in the North American and Japanese distribution networks. In addition, the Company invested in the development of inventory management and technology enhancements.

Project spending for 2022 is expected to be in the range of $275 million and $325 million, which includes DC investments in the U.S. and Japan and IT enhancements. Grainger expects to fund 2022 capital spending primarily from operating cash flows.

Debt

Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit.

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Total debt, which is defined as total interest-bearing debt and lease liabilities as a percent of total capitalization, was 55.4% and 55.6%, as of December 31, 2021 and 2020, respectively.

Grainger receives ratings from two independent credit ratings 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. The following table summarizes the Company's credit ratings at December 31, 2021:

	Corporate	Senior Unsecured	Short-term
Moody's	A3	A3	P2
S&P	A+	A+	A1

Commitments and Other Contractual Obligations

At December 31, 2021, the Company's material cash requirements for commitments and other contractual obligations, included outstanding debt obligations (Senior Notes) with varying maturities for an aggregate principal amount of $2,384 million, with no amount payable within 12 months. Future interest payments associated with the Senior Notes total $1,921 million, with $87 million payable within 12 months.

Additionally, as of December 31, 2021, the Company had purchase obligations of $1,505 million, which includes $1,361 million payable within 12 months. Grainger's purchase obligations primarily include commitments to purchase inventory and other goods and services and uncompleted additions to property, buildings and equipment. Purchase obligations are made in the normal course of business to meet operating needs. While purchase orders for both inventory purchases and non-inventory purchases are generally cancellable without penalty, certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.

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Critical Accounting Estimates

The preparation of Grainger’s 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 and Supplementary Data of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s Consolidated Financial Statements.

Inventories

Company inventories primarily consist of merchandise purchased for resale and are valued at the lower of cost or net realizable value. The majority of the Company’s inventory is accounted for using the last-in, first-out (LIFO) method. Net realizable value is based on an analysis of inventory trends including, but not limited to, reviews of inventory levels, sales and cost information and on-hand quantities relative to the sales history for the product and shelf-life. The Company's methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, liquidation or disposition history values and market conditions such as inflation and other acquisition costs, including freight and duties. If business or economic conditions change, estimates and assumptions may be adjusted as deemed appropriate.

Goodwill and Other Intangible Assets

The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter and more frequently if impairment indicators exist. 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. The Company’s indefinite-lived intangible assets 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 estimates used to calculate the fair values of reporting units and indefinite-lived intangible assets involve the use of significant assumptions, estimates and judgments and changes from year to year based on operating results, market conditions, macroeconomic developments and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and impairment for each reporting unit and indefinite-lived intangible asset. For further information on the Company's goodwill and other intangible assets, see Note 5 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

Contingencies and Legal Matters

The Company is subject to various claims and legal proceedings that arise in the ordinary course of business, the outcomes of which are inherently uncertain. The Company accrues for costs relating to litigation claims and other contingent matters when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. A detailed summary of the Company’s contingencies and legal matters is included in Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

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Forward-Looking Statements

From time to time in this Annual Report on Form 10-K 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 “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project,” “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 the Company’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: the unknown duration and health, economic, operational and financial impacts of the global outbreak of the coronavirus disease 2019 and its variants (COVID-19), as well as the impact of actions taken or contemplated by government authorities to mitigate the spread of COVID-19 (such as vaccine mandates for certain federal contractors, mask mandates, social distancing or other requirements) and to promote economic stability and recovery, on the Company’s businesses, its employees, customers and suppliers, including disruption to Grainger’s operations resulting from employee illnesses, the development, availability and usage of effective treatment or vaccines, changes in customers’ product needs, the acquisition of excess inventory leading to additional inventory carrying costs and inventory obsolescence, raw material, inventory and labor shortages, continued strain on global supply chains, and diminished transportation availability and efficiency, disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company’s controls and procedures required by working remote arrangements, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the Company’s products; inflation, higher product costs or other expenses, including operational expenses; a major loss of customers; loss or disruption of sources of supply; changes in customer or product mix; increased competitive pricing pressures; 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; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the Company’s gross profit margin; the Company’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, advertising and marketing, 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; disruption of information technology or data security systems involving the Company or third parties on which the Company 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 the Company’s common stock; commodity price volatility; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; other pandemic diseases or viral contagions; natural or human induced disasters, extreme weather and other catastrophes or conditions; effects of climate change; competition for, or failure to attract, retain, train, motivate and develop key employees; loss of key members of management or key employees; changes in effective tax rates; changes in credit ratings or outlook; the Company’s incurrence of indebtedness and other factors identified under Part I, Item 1A: Risk Factors and elsewhere in this Form 10-K.

Caution should be taken 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.

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Item 7A: Quantitative and Qualitative Disclosures About Market Risk

Grainger's primary market risk exposures is as follows:

Foreign Currency Exchange Rates

Grainger’s financial results, including the value of assets and liabilities, are exposed to foreign currency exchange rate risk when the financial statements of the business units outside the U.S., as stated in their local currencies, are translated into U.S. dollars. For the fiscal year ended December 31, 2021, approximately 21% of the Company's net sales were denominated in a currency other than the Company's functional U.S. dollar currency. Consequently, the Company is exposed to the impact of exchange rate volatility primarily between the U.S. dollar and the Japanese yen, Canadian dollar and the British pound sterling. In February 2020, Grainger entered into certain derivative instrument agreements to manage this risk. A hypothetical 10% change in the relative value of the U.S. dollar would not materially impact the Company's net earnings for 2021.

For derivative instrument information, see Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

Interest Rate Risks

Grainger is exposed to interest rate risk on its long-term debt. In February 2020, Grainger entered into certain derivative instrument agreements to hedge a portion of its fixed-rate long-term debt to manage this risk. The annualized effect of a 0.1 percentage point increase in interest rates on Grainger’s variable-rate debt obligations did not have a material impact on the Company's net earnings for 2021.

For long-term debt and derivative instrument information, see Note 6 and Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10-K.

Commodity Price Risk

Grainger’s transportation costs are exposed to fluctuations in the price of fuel and some sourced products contain commodity-priced materials. The Company regularly monitors commodity trends and, as a broad line supplier, mitigates any material exposure to commodity price risk by having alternative sourcing plans in place that mitigate the risk of supplier concentration, passing commodity-related inflation to customers or suppliers and continuing to scale its distribution networks, including its transportation infrastructure.

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Item 8: Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

W.W. Grainger, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 23, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matter

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

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	Valuation of Goodwill for the Canadian Reporting Unit
Description of the Matter	At December 31, 2021, the goodwill balance of the Canada business reporting unit was $129 million. As discussed in Notes 1 and 5 of the financial statements, goodwill is tested at the reporting unit level annually during the fourth quarter and more frequently if impairment indicators exist. Auditing management’s annual goodwill impairment analysis is complex and highly judgmental due to certain assumptions that are significant to the analysis. Management performed an annual impairment analysis in the fourth quarter to evaluate changes in key assumptions and results since the last impairment test. The more subjective assumptions used in the analysis were projections of future revenue growth and operating expenditures as well as the discount rate used, which are all affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit	Our audit procedures included, among others obtaining an understanding, evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment analysis, including controls over management’s review of the significant assumptions described above.
	To test management’s annual goodwill impairment analysis of the Canada business reporting unit, we performed audit procedures that included, among others, evaluating the key assumptions and results considering the relevant events and circumstances identified since the date the last fair value calculation. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, customer product mix, and other relevant factors. We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in fair value that would result from changes in the assumptions utilized in the last quantitative assessment. In addition, we reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and tested the completeness and accuracy of the underlying data used by management in its analysis.

/s/ Ernst & Young LLP

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

Chicago, Illinois

February 23, 2022

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W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except for per share amounts)

	For the Years Ended December 31,
	2021		2020		2019
Net sales	$	13,022	$	11,797	$	11,486
Cost of goods sold	8,302		7,559		7,089
Gross profit	4,720		4,238		4,397
Selling, general and administrative expenses	3,173		3,219		3,135
Operating earnings	1,547		1,019		1,262
Other (income) expense:
Interest expense – net	87		93		79
Other – net	(25)		(21)		(26)
Total other expense – net	62		72		53
Earnings before income taxes	1,485		947		1,209
Income tax provision	371		192		314
Net earnings	1,114		755		895
Less: Net earnings attributable to noncontrolling interest	71		60		46
Net earnings attributable to W.W. Grainger, Inc.	$	1,043	$	695	$	849
Earnings per share:
Basic	$	19.94	$	12.88	$	15.39
Diluted	$	19.84	$	12.82	$	15.32
Weighted average number of shares outstanding:
Basic	51.9		53.5		54.7
Diluted	52.2		53.7		54.9

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

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W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In millions of dollars)

	For the Years Ended December 31,
	2021		2020		2019
Net earnings	$	1,114	$	755	$	895
Other comprehensive earnings (losses):
Foreign currency translation adjustments – net of reclassification to earnings (see Note 2 and Note 11)	(64)		83		26
Postretirement benefit plan gains (losses) – net of tax benefit (expense) of $—, $(7), and $2, respectively (see Note 7 and Note 11)	—		22		(6)
Total other comprehensive earnings (losses)	(64)		105		20
Comprehensive earnings – net of tax	1,050		860		915
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings	71		60		46
Foreign currency translation adjustments	(29)		12		3
Total comprehensive earnings (losses) attributable to noncontrolling interest	42		72		49
Comprehensive earnings attributable to W.W. Grainger, Inc.	$	1,008	$	788	$	866

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

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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	2021		2020
Current assets
Cash and cash equivalents	$	241	$	585
Accounts receivable (less allowance for credit losses of $30 and $27, respectively)	1,754		1,474
Inventories – net	1,870		1,733
Prepaid expenses and other current assets	146		127
Total current assets	4,011		3,919
Property, buildings and equipment – net	1,424		1,395
Goodwill	384		391
Intangibles – net	238		228
Operating lease right-of-use	393		210
Other assets	142		152
Total assets	$	6,592	$	6,295
Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt	—		8
Trade accounts payable	816		779
Accrued compensation and benefits	319		307
Operating lease liability	66		57
Accrued expenses	290		248
Income taxes payable	37		42
Total current liabilities	1,528		1,441
Long-term debt (less current maturities)	2,362		2,389
Long-term operating lease liability	334		162
Deferred income taxes and tax uncertainties	121		110
Other non-current liabilities	87		100
Shareholders' equity
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding	—		—
Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares	55		55
Additional contributed capital	1,270		1,239
Retained earnings	9,500		8,779
Accumulated other comprehensive losses	(96)		(61)
Treasury stock, at cost – 58,439,014 and 57,134,828 shares, respectively	(8,855)		(8,184)
Total W.W. Grainger, Inc. shareholders’ equity	1,874		1,828
Noncontrolling interest	286		265
Total shareholders' equity	2,160		2,093
Total liabilities and shareholders' equity	$	6,592	$	6,295

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

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W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of dollars)

	For the Years Ended December 31,
	2021		2020		2019
Cash flows from operating activities:
Net earnings	$	1,114	$	755	$	895
Provision for credit losses	18		22		12
Deferred income taxes and tax uncertainties	27		(5)		4
Depreciation and amortization	185		182		229
Impairment of goodwill, intangible and long-lived assets	—		187		123
Net (gains) losses from sales of assets and business divestitures	(6)		106		(6)
Stock-based compensation	42		46		40
Subtotal	266		538		402
Change in operating assets and liabilities
Accounts receivable	(324)		(121)		(42)
Inventories	(152)		(158)		(106)
Prepaid expenses and other assets	(15)		(23)		(33)
Trade accounts payable	54		80		32
Accrued liabilities	43		15		(84)
Income taxes – net	(26)		24		(3)
Other non-current liabilities	(23)		13		(19)
Subtotal	(443)		(170)		(255)
Net cash provided by operating activities	937		1,123		1,042
Cash flows from investing activities:
Additions to property, buildings, equipment and intangibles	(255)		(197)		(221)
Proceeds from sale or redemption of assets and business divestitures	29		20		17
Other – net	—		(2)		2
Net cash used in investing activities	(226)		(179)		(202)
Cash flows from financing activities:
Borrowings under lines of credit	—		12		20
Payments against lines of credit	—		(65)		(15)
Proceeds from long-term debt	—		1,584		—
Payments of long-term debt	(8)		(1,370)		(42)
Proceeds from stock options exercised	48		70		49
Payments for employee taxes withheld from stock awards	(30)		(18)		(11)
Purchases of treasury stock	(695)		(601)		(700)
Cash dividends paid	(357)		(338)		(328)
Other – net	3		—		4
Net cash used in financing activities	(1,039)		(726)		(1,023)
Exchange rate effect on cash and cash equivalents	(16)		7		5
Net change in cash and cash equivalents:	(344)		225		(178)
Cash and cash equivalents at beginning of year	585		360		538
Cash and cash equivalents at end of year	$	241	$	585	$	360
Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)	$	87	$	94	$	84
Cash payments for income taxes	$	377	$	180	$	322

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

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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, 2019	$	55	$	1,134	$	7,869	$	(171)	$	(6,966)	$	172	$	2,093
Stock-based compensation	—		45		—		—		33		—		78
Purchases of treasury stock	—		—		—		—		(700)		—		(700)
Net earnings	—		—		849		—		—		46		895
Other comprehensive earnings (losses)	—		—		—		17		—		3		20
Capital contribution	—		2		—		—		—		—		2
Cash dividends paid ($5.68 per share)	—		1		(313)		—		—		(16)		(328)
Balance at December 31, 2019	$	55	$	1,182	$	8,405	$	(154)	$	(7,633)	$	205	$	2,060
Stock-based compensation	—		49		—		—		49		—		98
Purchases of treasury stock	—		—		—		—		(600)		(1)		(601)
Net earnings	—		—		695		—		—		60		755
Other comprehensive earnings (losses)	—		—		—		93		—		12		105
Capital contribution	—		7		—		—		—		7		14
Cash dividends paid ($5.94 per share)	—