2018 Annual Report
For more information:
The Grainger Fact Book contains information about the company’s strategy, operations and business units.
The Fact Book can be found on the Grainger Investor Relations website at grainger.com/investor.
Grainger’s Corporate Social Responsibility commitments include operating responsibly, valuing its people,
sustaining the environment and serving its communities. To learn more about Grainger’s CSR efforts,
please visit graingerCSR.com
Grainger Shareholders:
Our customers have some of the toughest jobs imaginable. They are the people
and businesses who keep schools, hospitals, manufacturing facilities and military
bases up and running and people safe. They are first responders, maintenance
managers and contractors who get the call and get the job done. Serving
these customers is an honor and it’s what fuels Grainger’s nearly 25,000 team
members every day to work hard, be better and deliver results.
D.G. Macpherson
Chairman of the Board and
Chief Executive Officer
Understanding our customers’ unique needs and developing solutions that work
is how we’ve earned their trust since 1927. No matter the size of the customer
and across every industry, professionals come to us to solve problems quickly
and with confidence. These customers value Grainger’s quality products,
digital solutions, personal relationships and onsite services. Our team members
operate with an unwavering commitment to deliver a flawless experience for our
customers. More than three and a half million customers throughout the world experienced this commitment in
2018 through Grainger’s two different business models that serve them as they wish to be served.
The first is the high-touch, high-service model designed for customers with complex needs. This model provides
an integrated offer of high-quality, industrial products backed by sellers, branch associates and customer service
agents all possessing strong technical knowledge. Grainger businesses in the United States, Canada and
Mexico as well as Cromwell in the United Kingdom and Fabory in Europe all compete with this model.
The second is the endless assortment model, which serves customers with less complex needs. This business
model appeals to customers who want a simple transaction and competitive pricing on all the products that
serve their business needs. We compete with this model through our MonotaRO business in Japan and our
Zoro businesses in the United States and Europe.
Grainger’s execution of the strategic imperatives supporting these models made 2018 a strong year. The
Grainger business in the United States drove significant share gains across large and midsize customers
as our value proposition continued to resonate. We structurally reset the business in Canada and exited the
year with a profitable fourth quarter, on an adjusted basis. The endless assortment business continued to
drive double-digit growth. Across the company, we drove strong operating expense leverage and achieved
$130 million in cost savings and productivity, which was above our target. We also achieved a 10.3 percent
reported operating margin and a 12 percent adjusted operating margin—meeting our adjusted operating
margin target one year earlier than anticipated.1 Other full-year 2018 highlights include:
• Company sales of $11.2 billion, up 8 percent from 2017.
• Volume growth of 8 percent versus 2017.
• Reported earnings per share were $13.73, up 37 percent versus 2017. Adjusted earnings per share were
$16.70, up 46 percent versus 2017.1
• Cash generated from operations of $1.1 billion.
• Cash returned to shareholders of $741 million in the form of approximately 1.4 million shares repurchased
for $425 million and $316 million in dividends paid.
1 See page 84 for a reconciliation of adjusted operating margin and adjusted earnings per share to the most
directly comparable GAAP financial measures.
i
We know that when we combine the best product assortment, customer relationships, digital solutions and
services with a great experience every time, our value is unbeatable. In 2019, we will continue to strengthen
that value by:
• Powering our digital capabilities with robust product and customer information to build the best solutions
in our industry;
• Executing our sales and services plan to create unique value for our customers;
• Enhancing our industry-leading order transaction process to ensure seamless customer and team
member processes;
• Improving the customer experience in our Canadian business and across our international portfolio to
drive profitable growth;
• Adding new products in our endless assortment model to grow our customer base while leveraging
improved analytics to enhance the customer experience;
• Achieving our cost reduction targets and
• Continuing to enhance our team member experience and invest in leader development.
By accomplishing these priorities, we expect to generate long-term returns for our shareholders, deliver
a great experience for our customers and team members and serve as a good citizen to our neighbors.
Our commitment to serving our customers and communities with integrity and helping them succeed
is core to what we do. Over the last year, we were recognized for how we operate, including a top-10
placement in Barron’s list of the 100 Most Sustainable U.S. Companies and the top category ranking in
Fortune’s World’s Most Admired Companies for the sixth consecutive year. Our team members around
the world are proud to support our customers who keep communities working safely, reliably and
responsibly today and for years to come.
D.G. Macpherson
Chairman of the Board and Chief Executive Officer
February 28, 2019
ii
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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
(State or other jurisdiction of incorporation or
organization)
100 Grainger Parkway, Lake Forest, Illinois
(Address of principal executive offices)
36-1150280
(I.R.S. Employer Identification No.)
60045-5201
(Zip Code)
(847) 535-1000
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock $0.50 par value
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [X] 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 [X]
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 [X]
No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted and posted 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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 [X]
Accelerated filer
[ ]
Non-accelerated
filer [ ]
Smaller reporting
company [ ]
Emerging growth
company [ ]
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]
No [X]
The aggregate market value of the voting common equity held by nonaffiliates of the registrant was $16,101,319,439
as of the close of trading as reported on the New York Stock Exchange on June 30, 2018. The Company does not
have nonvoting common equity.
The registrant had 55,679,223 shares of the Company’s Common Stock outstanding as of January 31, 2019.
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 24, 2019, are incorporated by reference into Part III hereof of this Form 10-K where indicated the
definitive 2018 proxy statement will be filed on or about March 15, 2019.
2
TABLE OF CONTENTS
Page
PART I
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
Item 4A:
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
Item 5:
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6:
Item 7:
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 7A:
Item 8:
Item 9:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A:
Item 9B:
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
PART IV
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
Item 15:
Item 16:
Signatures
4
9
13
14
14
14
15
16
18
19
33
33
33
34
34
35
35
35
35
35
36
36
76
3
Item 1: Business
The Company
PART I
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. W.W. Grainger, Inc.'s operations are primarily in
North America, Europe and Japan. 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.
Strategy
In the large and fragmented MRO industry, Grainger holds an advantaged position with its supply chain infrastructure,
broad in-stock product offering and deep customer relationships. Grainger's purpose is to help businesses keep their
operations running and their people safe.
The Company competes with two models: the high-touch, high-service model and the endless assortment (single-
channel) model. Competing with these two models allows Grainger to leverage its scale and advantaged supply chain
to meet the changing needs of its customers. Grainger’s high-touch, high-service model serves customers with complex
needs in North America and Europe. The endless assortment model is focused on customers with less-complex needs
and includes the Zoro Tools, Inc. (Zoro) brand in the U.S. and MonotaRO Co., Ltd. (MonotaRO) in Japan.
4
MRO Industry
The global MRO market is approximately $608 billion, and the estimated market size where Grainger has operations
is $284 billion. The most attractive geographies for Grainger are those with high GDP per capita and a developed
infrastructure. Grainger’s strategy is concentrated in North America, Europe and Japan. Each of these core markets
is large and the competition is highly fragmented. In total, Grainger has about 4 percent share within its addressable
market with ample opportunity for growth.
Grainger’s two reportable segments are the U.S. and Canada, and they are described further below. Other businesses
include the endless assortment businesses, Zoro in the U.S. and MonotaRO in Japan, and smaller businesses in
Europe, Asia and Mexico. For further segment and financial information, see “Item 7: Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Note 17 to the Consolidated Financial Statements
(Financial Statements).
5
The table below shows Grainger's estimated share of the MRO market and the summary of its operations by reporting
segments and other businesses as of December 31, 2018:
Approximate
MRO Market
Size
(billions)1
Approximate
Market Share
Branches2
Distribution
Centers
(DCs)2
United States
Canada
Other businesses
Endless assortment businesses
High-touch, high-service
businesses3
TOTAL
$93
12
82
97
$284
7%
5%
2%
1%
4%
283
54
—
120
457
16
5
4
6
31
Approximate
Number of
Customers
Served
(thousands)4
1,100
50
2,200
320
3,700
1 Estimated MRO market size where Grainger has operations.
2 See Item 2, "Properties" for more information.
3 Includes businesses in Europe, Asia and Mexico.
4 Customers served in the United States may include overlap with Zoro in Endless assortment business.
Customers and Products
Grainger serves more than 3.5 million customers worldwide through its DCs, eCommerce platform, contact centers,
branches and sales and service representatives. These customers represent a broad collection of industries including
government, manufacturing, transportation, commercial and contractors (see Note 2 to the Financial Statements).
Grainger offers a broad selection of products to its customers including material-handling equipment, safety and security
supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and
maintenance supplies and metalworking tools. Products are regularly added and deleted from Grainger's product lines
on the basis of customer demand, market research, suppliers' recommendations, sales volumes and other factors.
No one product category comprises more than 18% of global sales.
United States
The U.S. business offers a broad selection of MRO products and services through its eCommerce platform, catalogs,
branches and sales and service representatives. A combination of product breadth, local availability, speed of delivery,
detailed product information and competitively priced products and services is provided by this business.
The U.S. business purchases products for sale from approximately 3,000 suppliers, most of which are manufacturers.
No single supplier comprised more than 5% of total purchases and no significant barriers thus far exist with respect
to sources of supply. The majority of products sold by the U.S. business are nationally branded products. In addition,
approximately 21% of 2018 sales were private label MRO items bearing Grainger’s registered trademarks, including
DAYTON®, SPEEDAIRE®, AIR HANDLER®, TOUGH GUY®, WESTWARD®, CONDOR® and LUMAPRO®. Grainger
has taken steps to protect these trademarks against infringement and believes that they will remain available for future
use in its business.
The U.S. business operates and fulfills orders nationally through a network of DCs, branches and contact centers.
Customers range from small and mid-sized businesses to large corporations, government entities and other institutions
within many industries (see Note 2 to the Financial Statements). Sales in 2018 were made to more than 1 million
customers and no single end customer accounted for more than 1% of total sales. The U.S. business also exports to
various countries.
6
Macro trends and technology drive the way Grainger's U.S. customers behave. Customers want highly tailored solutions
with real-time access to information and just-in-time delivery of products and services. Demands for transparency are
also increasing as access to information expands. These changes are reflected in how customers do business in the
U.S. as demonstrated in the following tables for the 2018 line mix:
Order Origination
Order Fulfillment
Website
EDI/ePro
KeepStock®
Counter
Phone
Ship to Customer
Pick up at Branch
KeepStock®
31%
23%
17%
9%
20%
100%
70%
13%
17%
100%
U.S. customers continue to migrate to web and electronic platforms such as EDI, eProcurement and KeepStock®.
Through Grainger.com and other branded websites, customers have access to more than 2.9 million products.
Grainger.com provides real-time price and product availability, detailed product information and features such as
product search and compare capabilities. For customers with sophisticated electronic purchasing platforms, the U.S.
business utilizes technology that allows these systems to communicate directly with Grainger.com.
The U.S. business has an outside and inside sales force to help customers select the right products for their needs
and reduce costs by utilizing Grainger as a consistent source of supply.
Inventory management is another area where the U.S. business helps customers be more productive. KeepStock®
is a comprehensive program that includes vendor-managed inventory, customer-managed inventory and onsite vending
machines.
DCs in the U.S. business range in size from approximately 45,000 square feet to 1.3 million square feet, the largest
of which can accommodate more than 500,000 in-stock products. Automation in the DCs allows Grainger to ship most
orders complete with next-day delivery and replenish branches that provide same-day availability.
Branches in the U.S. business serve the immediate needs of customers in their local markets by allowing them to
directly pick up items. Branches also support local KeepStock® operations and allow customers to leverage branch
staff for their technical product expertise and search-and-select support.
Grainger's contact center network in the U.S. business on average handles about 73,000 customer interactions per
day including approximately 20,000 orders via phone, e-mail and chat.
Canada
Acklands – Grainger Inc. and its subsidiaries (the Canada business) provide a combination of product breadth, local
availability, speed of delivery, detailed product information and competitively priced products and services. The Canada
business serves customers through branches, DCs and sales and service representatives. Customers have access
to more than 194,000 stocked products through a comprehensive catalog and website.
Other businesses
Other businesses is comprised of the endless assortment businesses, Zoro in the U.S. and MonotaRO in Japan, and
smaller high-touch, high-service businesses in Europe, Asia and Mexico.
Zoro
Zoro is an online MRO distributor, primarily serving U.S. customers through its website, Zoro.com. Zoro, with sales of
more than $500 million in 2018, offers a broad selection of more than 2 million products to its customers. Zoro has no
branches or sales force, and customer orders are fulfilled through the U.S. business supply chain and third parties.
MonotaRO
Grainger operates in Japan and other Asian countries primarily through its majority interest in MonotaRO. MonotaRO
had nearly $1 billion in revenue in 2018 and provides customers with access to approximately 20 million MRO products
primarily through its websites and catalogs. A majority of orders are conducted through MonotaRO.com and fulfilled
from its DCs and third parties.
7
Seasonality
Grainger’s business in general is not seasonal, however, there are some products that typically sell more often during
the winter or summer seasons. In any given month, unusual weather patterns, that is, unusually hot or cold weather,
could positively or negatively impact the sales volumes of these products.
Competition
Grainger faces competition in each market from manufacturers (including some of its own suppliers) that sell directly
to certain segments of the market, to wholesale distributors, catalog houses, retail enterprises and internet-based
businesses. Grainger differentiates itself by providing local product availability, a broad product line, sales and service
representatives, competitive pricing, catalogs (which include product descriptions and, in certain cases, extensive
technical and application data) and electronic and eCommerce technology. Grainger also offers other services, such
as inventory management. Grainger has several large competitors and continues to be highly competitive against the
predominant number of small local and regional competitors.
Employees
As of December 31, 2018, Grainger had approximately 24,600 employees, of whom approximately 23,100 were full-
time and 1,500 were part-time or temporary. Grainger has never had a major work stoppage and considers employee
relations to be good.
Website Access to Company Reports
Grainger makes available free of charge, through its website, www.grainger.com/investor, its Annual Report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports
if any, as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the U.S.
Securities and Exchange Commission (SEC).
The SEC maintains a website that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC and the address of that site is http://www.sec.gov.
8
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.
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 changes, foreign competition, offshoring of production, oil and natural gas
prices, geopolitical developments, labor shortages, 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 activity in the U.S.,
Canada or any other major world economy, or a segment of any such economy, could negatively impact Grainger’s
sales growth and results of operations.
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 high-service operations (branches and digital platforms) 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. These pressures, and
the implementation, timing and results of Grainger’s strategic pricing and other responses, 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, to
wholly or partially offset the effect on profitability of its pricing actions, the Company’s results of operations and financial
condition may be adversely affected.
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, and implement new technology and innovations that
may result in unexpected costs or may take longer than expected.
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, or rare earth minerals, and are subject to price changes based upon fluctuations in the
commodities market. Fluctuations in the price of fuel 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 impact demand for these products, resulting in
lower sales volumes.
9
Unexpected product shortages, tariffs, 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 approximately
5,000 suppliers located in various countries around the world, not one of which accounted for more than 5% of total
purchases.
Historically, no significant difficulty has been encountered with respect to sources of supply; however, disruptions could
occur due to factors beyond Grainger’s control, including economic downturns, geopolitical unrest, new tariffs or tariff
increases, trade issues and policies, labor problems experienced by Grainger’s suppliers, transportation availability
and cost, 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.
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 to experience difficulty in obtaining products, there could be a short-term adverse effect on results of
operations and a longer-term adverse effect on 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.
Changes in customer base or product mix could cause changes in Grainger’s 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 and competition. There can be no assurance that Grainger will be able
to maintain historical gross margins in the future.
Additionally, 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 effectively
integrate them into Grainger’s existing product mix could have a negative impact on future sales growth and Grainger’s
competitive position.
Disruptions in Grainger’s supply chain could result in an adverse impact on results of operations.
The occurrence of one or more natural disasters such as earthquakes, storms, hurricanes, floods, fires, droughts,
tornados and other extreme weather; 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. Any such disruption could cause one or more of Grainger’s distribution centers or branches to become non-
operational, adversely affect Grainger’s ability to obtain or deliver inventory in a timely manner, impair Grainger’s ability
to meet customer demand for products, result in lost sales, additional costs, or penalties, or damage 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.
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 disasters, power losses, telecommunication failures, user error, third party actions
such as malicious computer programs, denial-of-service attacks and cybersecurity breaches, and other problems.
If Grainger’s systems are damaged, breached or cease to function properly 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, among other things, Grainger’s ability to process orders,
10
maintain proper levels of inventories, collect accounts receivable, and disburse funds 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.
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, Grainger 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 our information systems.
Moreover, from time to time, Grainger may share information with vendors and other third parties that assist with certain
aspects of the business. While Grainger requires assurances that these vendors and other 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
personally identifiable, credit card, confidential, proprietary or other sensitive customer, supplier, employee or business
information, or cause systems disruption.
In addition, a Grainger employee, contractor or other third party with whom Grainger does business may attempt to
circumvent security measures 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 customer systems and information.
While Grainger has instituted safeguards for the protection of such 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. Loss of customer, supplier, employee or other business information 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 its 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.
11
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, as well as from transaction exposure associated with
transactions in currencies other than an entity’s functional currency. While the Consolidated 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 the 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.
Acquisitions, partnerships, joint ventures and other business combination transactions involve a number of
inherent risks, any of which could result in the benefits anticipated not being realized and could have an
adverse effect on results of operations.
Acquisitions, partnerships, joint ventures and other business combination transactions, both foreign and domestic,
involve various inherent risks, such as uncertainties in assessing value, strengths, weaknesses, liabilities and potential
profitability. There is also risk relating to Grainger’s ability to achieve identified operating and financial synergies
anticipated to result from the transactions. Additionally, problems could arise from the integration of acquired
businesses, including unanticipated changes in the business or industry or general economic or political conditions
that affect the assumptions underlying the acquisition. Any one or more of these factors could cause Grainger to not
realize the benefits anticipated or have a negative impact on the fair value of the reporting units. Accordingly, goodwill
and intangible assets recorded as a result of acquisitions could, and have in the past, become impaired.
In order to compete, Grainger must attract, retain and motivate 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 and motivate executives and other key
employees, including those in managerial, technical, sales, marketing and support positions. Grainger competes to
hire employees and then must train them and develop their skills and competencies. Grainger’s results of operations
could be adversely affected by increased costs due to increased competition for employees, higher employee turnover
or increased employee benefit costs.
Grainger’s continued success is substantially dependent on positive perceptions of Grainger’s reputation.
One of the reasons why customers choose to do business with Grainger and why employees choose Grainger as a
place of employment is the reputation that Grainger has built over many years. 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.
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, results of operations 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 2018 generated approximately 72% of its consolidated
net sales, Grainger operates its business principally through wholly-owned subsidiaries in Canada, China, Germany,
Mexico, the Netherlands, and the United Kingdom, 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. and the European Union, which has traditionally imposed strict obligations
12
under data privacy laws and regulations that vary from country to country) and cybersecurity requirements (including
protection of information and incident responses), environmental protection laws, foreign exchange controls and cash
repatriation restrictions, government business regulations applicable to Grainger as a government contractor selling
to federal, state and local government entities, health and safety laws, import and export requirements, intellectual
property laws, labor laws (including federal and state wage and hour laws), product compliance 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 penalties and/or loss of authorization to participate in, or exclusion from, government contracting, 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 UK may be negatively affected by changes in trade
policies, or changes in labor, immigration, tax or other laws, resulting from the UK’s anticipated exit from the European
Union.
Grainger also is, and from time to time may become, party to a number of legal proceedings incidental to Grainger’s
business involving alleged damages or injuries arising out of the use of Grainger’s products and services or violations
of these laws, regulations or standards. 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.
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 changes in
Grainger’s overall profitability and changes in 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’s common stock may be subject to volatility or price declines.
The trading price of Grainger’s common stock is subject to broad and unpredictable fluctuation due to changes in
economic, political and market conditions, the operating results of Grainger and its competitors, changes in expectations
as to Grainger’s future financial or operating performance, including estimates by securities analysts and investors,
changes in capital structure, stock repurchase programs or dividend policies, and a number of other factors, including
those discussed in this Item 1A. These factors, many which are outside of Grainger’s control, could cause stock price
volatility or Grainger’s stock price to decline.
Item 1B: Unresolved Staff Comments
None.
13
Item 2: Properties
As of December 31, 2018, Grainger’s owned and leased facilities totaled approximately 27 million square feet. The
U.S. and Canada businesses accounted for the majority of the total square footage. Grainger believes that its properties
are generally in excellent condition, well maintained and suitable for the conduct of business.
A brief description of significant facilities follows:
Location
U.S. (1)
U.S. (2)
U.S. (3)
Canada (4)
Canada (5)
Canada
Other businesses (6)
Chicago area (2)
Facility and Use (7)
283 branch locations
16 DCs
Other facilities
92 branch locations
5 DCs
Other facilities
Other facilities
Headquarters and general offices
Total Square Feet
Size in Square Feet
(in thousands)
6,349
8,148
3,674
1,125
968
541
5,118
1,103
27,026
(1) Consists of 249 stand-alone, 32 onsite and 2 will-call express locations, of which 202 are owned and 81 are
(2)
(3)
leased. These branches range in size from approximately 500 to 109,000 square feet.
These facilities are primarily owned and range in size from approximately 45,000 to 1.3 million square feet.
These facilities include both owned and leased locations and primarily consist of storage facilities, office space
and call centers.
(4) Consists of 72 stand-alone and 20 onsite locations, of which 33 are owned and 59 are leased. These branches
range in size from approximately 500 to 110,000 square feet. Of these 92 branch locations, 54 are operational.
(5)
(6)
These facilities are primarily owned and range in size from approximately 40,000 to 540,000 square feet.
These facilities include owned and leased locations in Europe, Asia and Mexico and other U.S. operations.
(7) Owned facilities are not subject to any mortgages.
Item 3: Legal Proceedings
For a description of legal proceedings, see the disclosure contained in Note 18 to the Financial Statements included
in "Part II, Item 8: Financial Statements and Supplementary Data" of this report, which is incorporated herein by
reference.
Item 4: Mine Safety Disclosures
Not applicable.
14
Item 4A: Executive Officers of the Registrant
Following is information about the Executive Officers of Grainger including age as of January 31, 2019. Executive
Officers of Grainger generally serve until the next annual election of officers, or until earlier resignation or removal.
Name and Age
Kathleen S. Carroll (50)
John L. Howard (61)
D.G. Macpherson (51)
Deidra C. Merriwether (50)
Thomas B. Okray (56)
Paige K. Robbins (50)
Eric R. Tapia (42)
Positions and Offices Held and Principal Occupation and Employment
During the Past Five Years
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.
Senior Vice President and General Counsel, a position assumed in 2000.
Previously, Mr. Howard served in several roles of increasing responsibility at
Tenneco, Inc., a global conglomerate. Prior to that role, 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.
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.
From 2002 to 2008, Mr. Macpherson was a partner and managing director
at The Boston Consulting Group, a global management consulting firm.
Senior Vice President, U.S. Direct Sales and Strategic Initiatives, a position
assumed in September 2017. Previously, Ms. Merriwether served as Vice
President, Pricing and Indirect Procurement, a position assumed in 2016,
and as a Vice President in Finance from 2013 to 2016. Prior to joining
Grainger in September 2013, Ms. Merriwether has 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, across Finance, Procurement and Operations,
lastly serving as Chief Operating Officer, Retail Formats, at Sears Holdings
Corporation.
Senior Vice President and Chief Financial Officer, a position assumed in
May 2018. Prior to joining Grainger, Mr. Okray served as Executive Vice
President, Chief Financial Officer of Advance Auto Parts, Inc., a leading
automotive aftermarket parts provider in North America, a position assumed
in 2016. Previously, Mr. Okray served as Vice President, Finance, Global
Customer Fulfillment, of Amazon.com, Inc., an online retailer, from January
2016 to October 2016; as Vice President, Finance, North American
Operations of Amazon, from June 2015 to January 2016; and was
employed by General Motors Company, a global automotive company, from
July 1989 to June 2015, in a variety of finance and supply chain related
roles, culminating in his position as CFO, Global Product Development,
Purchasing & Supply Chain, from January 2010 to June 2015.
Senior Vice President and Chief Digital Officer, a position assumed in
September 2017. Previously, Ms. Robbins served 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.
Vice President and Controller, a position assumed in 2016. Mr. Tapia served
as Vice President, Internal Audit, from 2010 to 2016. Mr. Tapia is a Certified
Public Accountant (CPA) and before joining Grainger in 2010 was an audit
partner with KPMG, a global professional services firm.
15
Item 5: Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
PART II
Market Information and Dividends
Grainger's common stock is listed and traded on the New York Stock Exchange, under the symbol GWW.
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.
Holders
The approximate number of shareholders of record of Grainger’s common stock as of January 31, 2019, was 650 with
approximately 191,921 additional shareholders holding stock through nominees.
Issuer Purchases of Equity Securities - Fourth Quarter
Total Number of
Shares
Purchased (A)
230,018
122,422
118,627
471,067
Average Price
Paid Per Share
(B)
$295.99
$295.33
$289.72
$294.24
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (C)
230,018
122,422
118,627
471,067
Maximum Number of
Shares That May Yet be
Purchased Under the
Plans or Programs
1,619,794 shares
1,497,372 shares
1,378,745 shares
Period
Oct. 1 – Oct. 31
Nov. 1 – Nov. 30
Dec. 1 – Dec. 31
Total
(A) No shares were withheld to satisfy tax withholding obligations in connection with the vesting of employee
restricted stock awards.
(B) Average price paid per share includes any commissions paid and includes only those amounts related to
purchases as part of publicly announced plans or programs.
(C) Purchases were made pursuant to a share repurchase program approved by Grainger's Board of Directors.
This plan was announced on April 16, 2015, for 15 million shares with no expiration date. Activity is reported
on a trade date basis.
16
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, 2013, and ending
December 31, 2018. The graph assumes that the value for the investment in Grainger common stock and in each
index was $100 on December 31, 2013, and that all dividends were reinvested.
W.W. Grainger, Inc.
Dow Jones US Industrial Suppliers Total Stock Market Index
S&P 500 Stock Index
December 31,
2013
2014
2015
2016
2017
2018
$ 100 $ 102 $
82 $
96 $ 101 $ 122
100
100
98
114
79
115
100
129
111
157
103
150
17
Item 6: Selected Financial Data
Net sales
$
Net earnings attributable to W.W.
Grainger, Inc. (herein referred to as
Net earnings)
Net earnings per basic share
Net earnings per diluted share
Total assets
Long-term debt (less current maturities)
and other long-term liabilities
Total shareholders' equity
2018
2017
2016
2015
2014
(In millions of dollars, except for per share amounts)
9,973 $
10,425 $
10,137 $
$
11,221
782
13.82
13.73
5,873
2,279
2,093
586
10.07
10.02
5,804
2,469
1,828
606
9.94
9.87
5,694
2,160
1,906
769
11.69
11.58
5,858
1,717
2,353
9,965
802
11.59
11.45
5,283
737
3,284
4.17
Cash dividends paid per share
$
5.36
$
5.06 $
4.83 $
4.59 $
The items discussed below are considered to materially affect the comparability of the information reflected in the
selected financial data. For further information see “Part II, Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations” of this report, which is incorporated herein by reference.
Net earnings for 2018 included a net expense of $170 million primarily consisting of a $133 million net non-cash charge
related to the Cromwell goodwill and trade name impairment in other businesses and a net charge of $37 million related
to restructuring primarily consisting of asset impairment charges in Canada and other related charges, net of gains
from the sales of branches in the U.S., Canada and corporate offices.
Net earnings for 2017 included a net expense of $84 million primarily consisting of a net charge of $102 million related
to restructuring and other charges primarily consisting of branch closures in the U.S. and Canada businesses, net of
gains on sale of branch real estate in the U.S., the consolidation of the contact center network in the U.S. and the
wind-down of operations in Colombia, which is part of other businesses. This was partially offset by the net benefit of
$15 million related to U.S. tax legislation and other discrete tax items.
Net earnings for 2016 included a net expense of $105 million primarily related to restructuring actions in the U.S. and
Canada, goodwill and intangible impairments, contingencies and a net tax benefit.
Net earnings for 2015 included a net charge of $30 million primarily composed of a $25 million net charge related to
the reorganization in the U.S. and Canada businesses and a $5 million charge for restructuring in other businesses.
Net earnings for 2014 included a net charge of $56 million primarily composed of a $28 million charge related to closing
of the business in Brazil, a $10 million charge due to a retirement plan transition in Europe, a $10 million charge related
to restructuring of the business in Europe and an $8 million charge related to a goodwill impairment charge in other
businesses.
Grainger completed several acquisitions in the years 2014 and 2015, all of which were immaterial individually and in
the aggregate. Operating results have included the results of each business acquired since the respective acquisition
dates.
18
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
W.W. Grainger, Inc. (Grainger) is a broad line, business-to-business distributor of maintenance, repair and operating
(MRO) products and services with operations primarily in North America, Europe and Japan. More than 3.5 million
customers worldwide rely on Grainger for products such as safety, gloves, ladders, motors and janitorial supplies,
along with services like inventory management and technical support. These customers represent a broad collection
of industries (see Note 2 to the Consolidated Financial Statements (Financial Statements)). They place orders online,
on mobile devices, through sales representatives, over the phone and at local branches. Approximately 5,000 suppliers
provide Grainger with about 1.7 million products stocked in Grainger's distribution centers (DCs) and branches
worldwide.
Grainger’s two reportable segments are the U.S. and Canada (Acklands - Grainger, Inc. and its subsidiaries). These
reportable segments reflect the results of the Company's high-touch, high-service businesses in those geographies.
Other businesses include the endless assortment businesses, (Zoro in the U.S. and MonotaRO in Japan), and smaller
high-touch, high-service businesses in Europe, Asia and Mexico.
Business Environment
Given Grainger's large number of customers and the diverse industries it serves, several economic factors and industry
trends tend to shape Grainger’s business environment and provide general insight into projecting Grainger's growth.
Grainger’s sales in the U.S. and Canada tend to positively correlate with Business Investment, Business Inventory,
Exports, Industrial Production and Gross Domestic Product (GDP). Sales in Canada also tend to positively correlate
with oil prices. The table below provides these estimated indicators for 2018 and 2019:
Business Investment
Business Inventory
Exports
Industrial Production
GDP
Oil Prices
U.S.
Canada
Estimated
2018
Forecasted
2019
Estimated
2018
Forecasted
2019
7.3%
1.6%
4.0%
3.9%
2.9%
—
3.4%
2.7%
4.1%
2.4%
2.5%
—
2.8%
—
3.2%
2.6%
2.1%
$65/barrel
1.2%
—
2.2%
1.0%
2.0%
$55/barrel
Source: Global Insight U.S. (January 2019), Global Insight Canada (January 2019)
In the U.S., Business Investment and Exports are two major indicators of MRO spending. Per the Global Insight January
2019 forecast, Business Inventory and Exports are forecast to improve while Business Investment, Industrial Production
and GDP are forecast to slow, yet still remain stable during 2019 despite slowing global growth, financial market
volatility and fading fiscal stimulus.
Per the Global Insight January 2019 forecast, Canada's Business Investment, Exports and Industrial Production are
expected to slow due to a reduction in spending and oil production quotas and increasing interest rates.
Outlook
Each business in Grainger’s portfolio has a specific set of strategic imperatives focused on creating unique value for
customers.
In the U.S. business, Grainger is focused on growing market share through the three pillars of its strategy: (i) building
advantaged MRO solutions, which means being able to get customers the exact product they need to solve a problem
quickly; (ii) offering differentiated sales and services; Grainger has an advantage in serving complex businesses at
their place of business through its direct customer relationships and onsite services and (iii) enabling flawless order
to cash; Grainger is committed to providing the absolute best customer experience in the industry through its effort to
deliver flawlessly on every customer transaction.
19
The Canada business is focused on stabilizing volume performance in 2019 after completing the majority of its cost
structure reset.
In other businesses, the Company is focused on growing the endless assortment businesses profitably, investing in
product assortment and innovating around customer acquisition by building marketing and analytics capabilities. The
high-touch, high-service international businesses are focused on the same initiatives as the U.S. business, as
mentioned above.
Matters Affecting Comparability
There were 255 sales days in the full years 2018 and 2016 versus 254 sales days in the full year 2017. Grainger
completed one divestiture in 2017, which was immaterial.
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):
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating earnings
Other expense, net
Income taxes
Net earnings
Noncontrolling interest
For the Years Ended December 31,
Percent
Increase/
(Decrease)
from Prior
Year
As a Percent of
Net Sales
2018
2017
2018
2018
2017
$
11,221
$
10,425
8 % 100.0% 100.0%
6,873
4,348
3,190
1,158
77
258
823
41
6,327
4,098
3,063
1,035
99
313
623
37
586
9 %
6 %
4 %
12 %
(22)%
(18)%
32 %
11 %
33 %
61.3
38.7
28.4
10.3
0.7
2.3
7.3
0.4
60.7
39.3
29.4
9.9
0.9
3.0
6.0
0.4
7.0%
5.6%
Net earnings attributable to W.W. Grainger, Inc.
$
782
$
2018 Compared to 2017
Grainger's net sales of $11,221 million for 2018 increased $796 million, or 8%, compared to the same period in 2017.
On a daily basis, net sales increased 7%. The increase in net sales was primarily driven by volume increases in the
U.S. business due to market share gain and an improved demand environment and continued double digit growth in
the endless assortment businesses, offset by lower sales in the Canada business. See Note 17 to the Financial
Statements and refer to the Segment Analysis below for further details.
Gross profit of $4,348 million for 2018 increased $250 million, or 6% compared with the same period in 2017. The
gross profit margin of 38.7% decreased 0.6 percentage points when compared to the same period in 2017. The lower
gross profit margin reflects a 0.5 percentage point decline from the implementation of the Financial Accounting
Standards Board (FASB) new revenue recognition standard that primarily reclassified certain costs related to
KeepStock® services from Selling, general and administrative expenses (SG&A) to Cost of goods sold (COGS).
Excluding this impact, gross profit margin would have decreased 0.1 percentage point compared to the prior year.
The tables below reconcile reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc.,
determined in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America to
adjusted SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc., which are all considered non-
GAAP measures. The Company believes that these non-GAAP measures provide meaningful information to assist
shareholders 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
20
compare these measures with other companies' non-GAAP measures having the same or similar names. All tables
below are in millions of dollars:
SG&A reported
Restructuring (U.S.)
Branch gains (U.S.)
Other (gains) charges (U.S.)
Restructuring (Canada)
Branch gains (Canada)
Restructuring (Other businesses)
Impairment charges (Other businesses)
Restructuring (Unallocated expense)
Subtotal
SG&A adjusted
Operating Earnings reported
Total restructuring and impairment charges, net of branch gains
and other charges
Operating earnings adjusted
Net earnings attributable to W.W. Grainger, Inc. reported
Total restructuring and impairment charges, net of branch gains
and other charges
Tax effect (1)
U.S. tax legislation (2)
Discrete tax items
Total restructuring and impairment charges, net of branch
gains and other charges and tax
Twelve Months Ended
December 31,
2018
2017
%
$
3,190 $
3,063
4%
19
(10)
—
36
(1)
5
139
(2)
186
43
(33)
(4)
31
—
51
—
11
99
$
3,004 $
2,964
1%
2018
2017
1,158 $
1,035
%
12%
186
112
1,344 $
1,147
17%
2018
2017
782 $
586
%
33%
$
$
$
186
(16)
—
—
170
112
(13)
(3)
(12)
84
670
42%
Net earnings attributable to W.W. Grainger, Inc. adjusted
$
952 $
(1) The tax impact of adjustments is 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.
(2) U.S. tax legislation reflects the 2017 impact of the benefit of remeasurement of deferred taxes,
partially offset by one-time deemed repatriation tax.
21
SG&A of $3,190 million for 2018 increased $127 million, or 4% from $3,063 million compared with the same period in
2017. In the third quarter of 2018 Grainger recorded $139 million of impairment charges related to goodwill and
tradename intangible asset at the Cromwell business. Excluding restructuring and impairment charges net of branch
gains and other charges in both periods as noted in the table above, SG&A increased $40 million or 1%, driven primarily
by higher variable costs in connection with higher sales.
Operating earnings of $1,158 million for 2018 increased $123 million, or 12% from $1,035 million for 2017. Excluding
restructuring and impairment charges net of branch gains and other charges in both periods as noted in the table
above, operating earnings increased $197 million, or 17%, driven primarily by higher sales and improved SG&A
leverage.
Other expense, net was $77 million in 2018, a decrease of $22 million, or 22% compared to the same period in 2017.
The decrease in expense was primarily due to lower losses from the conclusion of the Company's clean energy
investments during the second half of 2018.
Income taxes of $258 million in 2018 decreased $55 million, or 18% compared with $313 million for the same period
in 2017. Grainger's effective tax rates were 23.9% and 33.5% in 2018 and 2017, respectively. The lower effective tax
rate in 2018 was primarily due to the impact of the Tax Cuts and Jobs Act (the Tax Act) and excess tax benefits from
stock-based awards, partially offset by the impact of nondeductible goodwill impairment. The 2017 effective tax rate
was impacted by the wind-down of the Colombia business and the inability to realize the associated tax benefit. In
addition, Grainger recognized a net tax benefit of $3.2 million for the year ended December 31, 2017, related to the
impact of the Tax Act.
Net earnings attributable to W.W. Grainger, Inc. for 2018 increased $196 million, or 33% to $782 million from $586
million in the same period in 2017. The increase in net earnings primarily resulted from higher operating earnings and
lower income taxes. Excluding restructuring and impairment charges net of branch gains and other charges and income
taxes net from both periods as noted in the table above, net earnings increased $282 million, or 42%.
Diluted earnings per share of $13.73 in 2018 increased 37% compared to $10.02 for the same period in 2017, due to
higher net earnings and lower average shares outstanding. Excluding restructuring and impairment charges net of
branch gains and other charges net of income taxes from both periods in the table above, diluted earnings per share
would have been $16.70 compared to $11.46 in 2017, an increase of 46%.
2017 Compared to 2016
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
2016
2017
2017
2016
$ 10,137
3 %
5 %
— %
2 %
(7)%
5 %
(19)%
(2)%
37 %
(3)%
100.0%
100.0%
60.7
39.3
29.4
9.9
0.9
3.0
6.0
0.4
59.4
40.6
29.6
11.0
0.9
3.8
6.2
0.3
5.6%
6.0%
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating earnings
Other expense, net
Income taxes
Net earnings
Noncontrolling interest
2017
$ 10,425
6,327
4,098
3,063
1,035
99
313
623
37
Net earnings attributable to W.W. Grainger, Inc.
$
586
$
22
6,022
4,115
3,002
1,113
94
386
633
27
606
Grainger's net sales were $10,425 million for 2017, an increase of 3% when compared with net sales of $10,137 million
for the comparable 2016 period. On a daily basis, the 3% increase for the year consisted of the following:
Volume
Divestiture
Price
Total
Percent Increase/
(Decrease)
8
(1)
(4)
3%
The increase in net sales was primarily driven by the endless assortment businesses in the U.S. and Japan, as well
as volume increases in the U.S. business as a result of the pricing actions. The U.S. business pricing actions were
primarily implemented in the first and third quarters of 2017 and included adjusting list price and introducing new lower
web prices on the entire business assortment, which drove faster growth in 2017 through share gains with existing
customers and acquisition of new customers. Refer to the Segment Analysis below for further details
Gross profit of $4,098 million for 2017 decreased by $17 million compared with $4,115 million for 2016. The gross
profit margin for 2017 was 39.3%, a decrease of 1.3 percentage points compared with 2016, driven primarily by the
pricing actions in the U.S. business.
23
The tables below reconcile reported SG&A, operating earnings and net earnings attributable to W.W. Grainger, Inc.,
determined in accordance with U.S. GAAP to adjusted SG&A, operating earnings and net earnings attributable to
W.W. Grainger, Inc., which are all considered non-GAAP measures. The Company believes that these non-GAAP
measures provide meaningful information to assist shareholders 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. All tables below are in millions of dollars:
SG&A reported
Restructuring (U.S.)
Branch gains (U.S.)
Other (gains) charges (U.S.)
Restructuring (Canada)
Restructuring (Other businesses)
Impairment charges (Other businesses)
Restructuring (Unallocated expense)
Subtotal
SG&A adjusted
Operating earnings reported
Total restructuring and impairment charges, net of branch gains
and other charges
Operating earnings adjusted
Net earnings attributable to W.W. Grainger, Inc. reported
Total restructuring and impairment charges, net of branch gains
and other charges
Tax effect (1)
U.S. tax legislation (2)
Discrete tax items
Total restructuring and impairment charges, net of branch
gains and other charges and tax
Twelve Months Ended
December 31,
2017
2016
%
$
3,063 $
3,002
2 %
43
(33)
(4)
31
51
—
11
99
31
(18)
45
13
—
52
9
132
$
2,964 $
2,870
3 %
2017
2016
1,035 $
1,113
%
(7)%
112
147
1,147 $
1,260
(9)%
2017
2016
586 $
606
%
(3)%
$
$
$
112
(13)
(3)
(12)
84
147
(33)
—
(9)
105
711
(6)%
Net earnings attributable to W.W. Grainger, Inc. adjusted
$
670 $
(1) The tax impact of adjustments is 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.
(2) U.S. tax legislation reflects the 2017 impact of the benefit of remeasurement of deferred taxes,
partially offset by one-time deemed repatriation tax.
SG&A of $3,063 million for 2017 increased 2% from $3,002 million for 2016. Excluding restructuring and impairment
charges net of branch gains and other charges in both periods as noted in the table above, operating expenses
increased 3%, driven primarily by higher employee-related costs.
Operating earnings of $1,035 million for 2017 decreased 7% from $1,113 million for 2016. Excluding restructuring and
impairment charges net of branch gains and other charges in both periods as noted in the table above, operating
earnings decreased 9% or $113 million, driven primarily by lower gross profit and higher operating expenses.
24
Other expense, net was $99 million in 2017 compared to $94 million of expense in 2016. The increase in expense
was primarily due to incremental interest expense on $400 million in long-term debt issued in May 2016 and $400
million in long-term debt issued in May 2017, as well as higher operating losses from the Company's clean energy
investments partially offset by higher benefits related to the Company's postretirement plan. See Note 10 to the Financial
Statements for additional information.
Income taxes of $313 million in 2017 decreased 19% compared with $386 million in 2016. Grainger's effective tax
rates were 33.5% and 37.9% in 2017 and 2016, respectively. The lower rate versus the prior year is primarily due to
discrete tax items and U.S. tax legislation.
On December 22, 2017, the Tax Act was signed into law, which significantly revised the U.S. corporate income tax
system by lowering corporate income tax rates from 35% to 21% effective January 1, 2018, allowing accelerated
expensing of qualified capital investments for a specific period, limiting net interest expense deductions and transitioning
U.S. international taxation from a worldwide to a territorial tax system, among other changes. Grainger recognized a
net provisional tax benefit of $3.2 million for the year ended December 31, 2017, related to the estimated impact of
the Tax Act. See Note 15 to the Financial Statements for additional information.
Net earnings attributable to W.W. Grainger, Inc. for 2017 decreased by 3% to $586 million from $606 million in 2016.
The decrease in net earnings primarily resulted from lower operating earnings, partially offset by lower income taxes.
Excluding restructuring and impairment charges net of branch gains and other charges net of income tax and discrete
tax items from both years mentioned in the table above, net earnings decreased 6%.
Diluted earnings per share of $10.02 in 2017 were 2% higher than $9.87 for 2016, due to lower average shares
outstanding partially offset by lower earnings. Excluding restructuring and impairment charges net of branch gains and
other charges net of income taxes in the table above, diluted earnings per share would have been $11.46 compared
to $11.58 in 2016, a decrease of 1%.
Segment Analysis - 2018 Compared to 2017
The following comments at the reportable segment and other business unit level include external and intersegment
net sales and operating earnings. See Note 17 to the Financial Statements.
United States
Net sales were $8,588 million for 2018, an increase of $628 million, or 8% when compared with net sales of $7,960
million for 2017. On a daily basis, the 7% increase consisted of the following:
Volume
Divestiture
Total
Percent Increase
(Decrease)
8%
(1)%
7%
Sales to customers in the government end market increased in the low teens and natural resources increased in the
high single digits. Retail/wholesale, commercial and heavy manufacturing end markets increased in the mid-single
digits. Contractors increased in the low single digits while the light manufacturing end segment was flat year over year.
Overall, revenue increases were primarily driven by market share gains and improved demand in all industries, partially
offset by the Company's pricing actions and the July 2017 divestiture of a specialty business. See Note 2 to the Financial
Statements.
Gross profit margin decreased 0.7 percentage point compared to the same period in 2017. The decline was primarily
driven by 0.5 percentage point due to the implementation of the FASB's new revenue recognition standard. Excluding
the impact of the implementation of the new revenue recognition standard, gross profit margin would have been
unfavorable by 0.2 percentage points.
SG&A for 2018 increased 3% compared to the same period in 2017. This increase was primarily driven by variable
compensation to reflect stronger performance, partially offset by the implementation of the FASB's new revenue
recognition standard.
25
Operating earnings of $1,338 million increased $138 million, or 12% from $1,200 million in the same period of 2017.
This increase was driven primarily by higher sales, higher gross profit dollars and improved SG&A leverage.
Canada
Net sales were $653 million for 2018, a decrease of $100 million, or 13% when compared with $753 million for 2017.
On a daily basis, the 14% decrease consisted of the following:
Volume
Price
Total
Percent
(Decrease)/
Increase
(23)
9
(14)%
During 2018, volume decreased by 23 percentage points compared to the same period in 2017 due to branch closures
and sales coverage optimization activities, partially offset by price increases and continued contract negotiations of 9
percentage points for 2018.
Gross profit margin increased 2.9 percentage points in 2018 compared to the same period in 2017, primarily due to
3.9 percentage points from price increases that began in late 2017 and improved customer mix, net of 1.0 percentage
point from the implementation of the new revenue recognition standard.
SG&A decreased $40 million, or 13% in 2018 compared to the same period in 2017. The decrease was primarily due
to cost reduction actions and lower variable expense on lower sales volume.
Operating losses were $49 million for 2018 compared to losses of $77 million in the same period in 2017. Excluding
restructuring and impairment charges net of branch gains and other charges in both periods (as noted in the table
above and Note 7 to the Financial Statements), operating losses would have been $14 million compared to $37 million
in the prior period primarily due to lower SG&A and lower sales volume.
Other businesses
Net sales for other businesses were $2,441 million for 2018, an increase of $321 million, or 15%, when compared to
the same period in 2017. The net sales increase was primarily due to incremental sales at Zoro and MonotaRO. On
a daily basis, the 15% increase consisted of the following:
Volume
Foreign exchange
Total
Percent Increase
13
2
15%
The net sales increase was primarily due to growth in the endless assortment businesses as a result of increased
customer acquisition and incremental sales in other international businesses. Foreign currencies strengthened in the
countries where the Company operates. These currencies primarily include the euro, pound sterling and yen.
Operating earnings for other businesses were $8 million for 2018, a decrease of $48 million, or 86% compared to $56
million for 2017. Other businesses included impairment charges in 2018 relating to the Cromwell business in the U.K.
See Note 4 and Note 7 to the Financial Statements. Excluding restructuring and impairment charges net of branch
gains and other charges in both periods, operating earnings increased $42 million or 38%, primarily due to strong
performance from the endless assortment businesses.
26
Segment Analysis - 2017 Compared to 2016
United States
Net sales were $7,960 million for 2017, an increase of $90 million, or 1% when compared with net sales of $7,870
million for 2016. On a daily basis, the 2% increase consisted of the following:
Volume
Intercompany sales to Zoro
Divestiture
Price
Total
Percent Increase/
(Decrease)
7
1
(1)
(5)
2%
Sales to customers in natural resources, resellers and retail end markets increased mid-single digits, while heavy
manufacturing and government increased low single digits. The sales growth was partially offset by declines in
contractors and commercial services. Volume increased year over year, primarily driven by the pricing actions.
Gross profit margin decreased 1.7 percentage points in 2017 compared to 2016, driven by price deflation exceeding
higher volume in response to pricing actions.
SG&A of $2,007 decreased by 1% for 2017 compared to 2016. Excluding restructuring and impairment charges net
of branch gains and other charges in both periods, operating expenses increased 1% or $26 million, driven by higher
employee related costs. See Note 7 to the Financial Statements.
Operating earnings of $1,200 million for 2017 decreased 5% compared to $1,269 million in 2016. Excluding restructuring
and impairment charges net of branch gains and other charges in both periods, operating earnings decreased 9% or
$123 million, driven primarily by price deflation. See Note 7 to the Financial Statements.
Canada
Net sales were $753 million for 2017, an increase of $19 million, or 3%, when compared with $734 million for 2016.
On a daily basis, the 3% increase consisted of volume across all end segments.
Gross profit margin increased 1.0 percentage point in 2017 versus 2016, primarily due to a favorable comparison to
an inventory adjustment in the second quarter of 2016 that did not repeat in 2017, partially offset by price deflation,
cost inflation and higher freight costs from an increase in shipping directly to customers in 2017.
SG&A decreased 9% in 2017 versus 2016. Excluding restructuring and impairment charges net of branch gains and
other charges in both periods as noted in the table above, operating expenses would have increased 3%, primarily
related to higher professional service fees related to the business transformation.
Operating losses of $77 million for 2017 increased versus operating losses of $65 million in 2016. Excluding the
restructuring and impairment charges net of branch gains and other charges and the inventory adjustment mentioned
in the table above, operating losses would have been $37 million compared to $41 million in the prior year.
Other businesses
Net sales for other businesses were $2,120 million for 2017, an increase of $235 million, or 12%, when compared to
$1,885 million for 2016. The net sales increase was primarily due to incremental sales at Zoro and MonotaRO. On a
daily basis, the 13% increase consisted of the following:
Volume
Foreign exchange
Total
Percent Increase/
(Decrease)
15
(2)
13%
27
Operating earnings for other businesses were $56 million for 2017 compared to $40 million for 2016. Excluding
restructuring charges in 2017 and the goodwill and intangible impairment charges of $52 million in the Fabory and
Colombia businesses in the prior year, operating earnings increased $18 million or 19%, due to strong performance
from the endless assortment businesses.
Financial Condition
Grainger expects its strong working capital position, cash flows from operations and borrowing capacity to continue,
allowing it to fund its operations, growth initiatives and capital expenditures as well as pay cash dividends, repurchase
shares and repay its long-term debt obligations while maintaining an adequate credit rating.
Cash and Cash Equivalents
At December 31, 2018, 2017 and 2016, Grainger had cash and cash equivalents of $538 million, $327 million and
$274 million, respectively. Approximately 49%, 66% and 71% were outside the U.S. business as of December 31,
2018, 2017 and 2016, respectively. Grainger has no material limits or restrictions on its ability to use these foreign
liquid assets.
Cash Flow
2018 Compared to 2017
Net cash provided by operating activities was $1,057 million for the twelve months ended December 31, 2018 and
2017, as increased net earnings were offset by investment in inventory and timing of payables.
Net cash used in investing activities was $166 million and $146 million for the twelve months ended December 31,
2018 and 2017, respectively. The increase in net cash used in investing activities was driven by lower proceeds primarily
from the sales of branch real estate assets in the U.S. and a U.S. business divestiture when compared to the prior
year.
Net cash used in financing activities was $670 million and $867 million in the twelve months ended December 31,
2018 and 2017, respectively. The decrease in net cash used in financing activities was primarily driven by lower stock
repurchases in 2018 compared to 2017 and higher proceeds from the exercise of stock options.
2017 Compared to 2016
Net cash provided by operating activities was $1,057 million and $1,024 million for the twelve months ended December
31, 2017 and 2016, respectively. The increase in cash provided by operating activities is primarily the result of higher
accruals related to employee benefits, partially offset by lower earnings and higher working capital.
Net cash used in investing activities was $146 million and $262 million for the twelve months ended December 31,
2017 and 2016, respectively. The decrease in net cash used in investing activities was driven by lower additions to
property, buildings and equipment compared to the prior year and higher proceeds primarily from the sales of branch
real estate assets in the U.S. and a U.S. business divestiture when compared to the prior year.
Net cash used in financing activities was $867 million and $776 million in the twelve months ended December 31,
2017 and 2016, respectively. The increase in net cash used in financing activities was primarily driven by higher net
payments of commercial paper, offset by lower stock repurchases in 2017 compared to 2016 and lower payments of
long-term debt.
Working Capital
Internally generated funds are the primary source of working capital and funds used for growth initiatives and capital
expenditures. Grainger's working capital is not impacted by significant seasonality trends throughout the year.
Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt and
current maturities of long-term debt). Working capital was $1,898 million at December 31, 2018, compared with $1,669
million at December 31, 2017, primarily due to an increase in accounts receivable and inventory and decreases in
accounts payable. At these dates, the ratio of current assets to current liabilities was 2.4 and 2.2, respectively.
28
Capital Expenditures
In each of the past three years, a portion of the Company's net cash flows has been used for additions to property,
buildings, equipment and capitalized software (presented in Intangibles - net on the Consolidated Balance Sheet) as
summarized in the following table (in millions of dollars):
Land, buildings, structures and improvements
Furniture, fixtures, machinery and equipment
Subtotal
Capitalized software
Total
For the Years Ended December 31,
2018
2017
2016
69
$
109 $
137
206
33
66
175
62
239
$
237 $
71
139
210
74
284
$
$
In 2018, the Company continued to invest in its North American distribution network (e.g. new or expanding existing
facilities and technology). Other investments include the consolidation of facility and office locations and development
of software solutions.
In 2017, the Company continued to invest in its worldwide distribution network (e.g. new or expanding existing facilities
and technology), digital platforms (e.g. eCommerce websites and inventory management solutions), capital
maintenance of its existing branch networks across the enterprise and other supporting information technology assets.
In 2016, the Company continued to invest in the North America distribution network, as well as the distribution network
in other businesses and sales productivity initiatives. Other significant investments in 2016 included the eCommerce
platform, sustaining capital investments in branches and distribution centers and other technology infrastructure.
In 2019, capital expenditures are expected to range from $300 million to $350 million. Projected spending includes
continued investments in the supply chain, investment in a DC in Japan, software development and inventory
management solutions. Grainger expects to fund 2019 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. Total debt, which is defined as total interest-bearing debt (short-term
current and long-term) as a percent of total capitalization was 51.5% and 56.2%, as of December 31, 2018 and 2017,
respectively.
In the years 2015-2017, Grainger issued $1.8 billion in long-term debt to partially fund the repurchase of $2.8 billion
in shares of the total $3 billion previously announced. The remaining share repurchases were funded from internally
generated cash. Debt was issued as follows:
•
•
•
In June 2015, $1.0 billion payable in 30 years and carries a 4.60% interest rate, payable semiannually.
In May 2016, $400 million payable in 30 years and carries a 3.75% interest rate, payable semiannually.
In May 2017, $400 million payable in 30 years and carries a 4.20% interest rate, payable semiannually.
Refer to Note 9 to the Financial Statements included in Item 8.
29
Commitments and Other Contractual Obligations
At December 31, 2018 Grainger's contractual obligations, including estimated payments due by period, are as follows
(in millions of dollars):
Payments Due by Period
Total
Amounts
Committed
Less than 1
Year
1 - 3 Years
4 - 5 Years
More than 5
Years
Debt obligations
Interest on debt
Operating lease obligations
Purchase obligations:
Uncompleted additions to
property, buildings and
equipment
Commitments to purchase
inventory
Other goods and services
Other liabilities
Total
$
$
$
2,193
2,115
233
$
81
82
65
67
574
366
159
5,707
$
67
574
248
130
1,247
308
158
85
—
—
92
8
$
4
$
156
45
—
—
26
5
1,800
1,719
38
—
—
—
16
$
651
$
236
$
3,573
See Notes 8, 9 and 11 to the Financial Statements for further detail related to debt, interest on debt and operating
lease obligations.
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 cancelable without penalty, certain vendor
agreements provide for cancellation fees or penalties depending on the terms of the contract.
Other liabilities represent future payments for profit sharing and other employee benefit plans.
The Company’s obligation for the postretirement healthcare benefits plan, as determined by actuarial projections, is
$190 million at December 31, 2018. The Company has established a Group Benefit Trust (Trust) to fund the plan
obligations. The Trust assets available for benefits payments are $176 million at December 31, 2018. The Company
has no minimum funding requirements and the timing and amounts of the Company’s additional contributions into the
Trust have not been determined. Other employment-related benefits obligations of $53 million have also not been
included in this table as the timing of benefit payments is not predictable. See Note 10 to the Financial Statements for
further detail.
Grainger has recorded a noncurrent liability of approximately $41 million for tax uncertainties and interest at
December 31, 2018. This amount is excluded from the table above, as Grainger cannot predict the timing of these
cash payments by period. See Note 15 to the Financial Statements.
Off-Balance Sheet Arrangements
Grainger does not have any material exposures to off-balance sheet arrangements. All significant contractual
obligations are recorded on the Company's Consolidated Balance Sheet or disclosed in the notes to Grainger's
Consolidated Financial Statements.
Critical Accounting Estimates
Note 1 to the Financial Statements describes the significant accounting policies used in the preparation of the
Consolidated Financial Statements. As discussed in Note 1, the preparation of financial statements, in conformity with
U.S. GAAP, requires management to make judgments, estimates and assumptions about future events that affect the
amounts reported in the financial statements and accompanying notes.
Accounting policies and estimates are considered critical when they require management to make subjective and
complex judgments, estimates and assumptions about matters that have a material impact on Grainger's financial
statements and accompanying notes.
30
The Company believes that the following discussion addresses Grainger’s most critical accounting policies and
estimates.
Inventory Reserves
Grainger establishes inventory reserves for excess and obsolete inventory. Grainger regularly reviews inventory to
evaluate continued demand and identify any obsolete or excess quantities. Grainger records provisions for the
difference between excess and obsolete inventory cost and its estimated realizable value. Estimated realizable value
is based on anticipated future product demand, market conditions and liquidation values. As Grainger's inventory
consists of approximately 1.7 million stocked products, it is not practical to quantify the actual disposition of excess
and obsolete inventory against estimated amounts at a stock keeping unit (SKU) level and no individual SKU is
material. There were no material differences noted between reserve levels compared to the level of write-offs historically.
Grainger's methodology for estimating reserves is continually evaluated based on current experience and provides
for a materially accurate level of reserves at any reporting date. Actual results could differ materially from projections
and require changes to reserves that could have a material effect on Grainger's results of operations, based on
significant changes in product demand, market conditions or liquidation value. If business or economic conditions
change, Grainger's estimates and assumptions may be revised as appropriate. For fiscal years 2018, 2017 and 2016,
actual results did not vary materially from estimated amounts.
Goodwill and Indefinite-Lived Intangible Assets
Grainger’s goodwill and indefinite-lived intangible assets are evaluated for impairment annually during the fourth
quarter, or more frequently if an event occurs or circumstances change. The Company tests for impairment by first
assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or
indefinite-lived intangible asset is less than its carrying value. Some of the factors considered in the assessment include
general macroeconomic, industry and market trends and significant events impacting reporting units’ current and future
performance. If the Company concludes that it is more likely than not that goodwill and intangible assets may be
impaired, a quantitative impairment test is performed.
In the quantitative impairment tests, the Company uses the discounted cash flow, market approach and royalty relief
methods, which require significant assumptions and judgments with respect to future volume, revenue and expense
growth rates, capital investments, changes in working capital use, the selection of an appropriate discount rate and
terminal growth rate, among other assumptions and estimates. The use of alternative estimates and assumptions
could impact the Company’s estimated fair values of reporting units and indefinite-lived intangible assets and potentially
result in different impacts on the Company’s results of operations. Actual results could differ from the Company’s
assumptions and estimates. See Note 4 to the Financial Statements for further information.
Income Taxes
The tax balances and income tax expense recognized by Grainger are based on management's interpretations of the
tax laws of multiple jurisdictions. Income tax expense reflects Grainger's best estimates and assumptions regarding,
among other items, the level of future taxable income, interpretation of tax laws and tax planning opportunities, plans
for reinvestment of cash overseas and uncertain tax positions. On December 22, 2017, the Tax Cuts and Jobs Act
was signed into law, which significantly revised the U.S. corporate income tax system including lowering the corporate
income tax rates from 35% to 21% effective January 1, 2018. See Note 15 to the Financial Statements for additional
information.
Future rulings by tax authorities and future changes in tax laws and their interpretation, changes in projected levels of
taxable income, changes in planned need for cash overseas and future tax planning strategies could impact the actual
effective tax rate and tax balances recorded by Grainger.
Contingent Liabilities
At any time, Grainger may be subject to investigations, legal proceedings or claims related to the ongoing operation
of its business, including claims both by and against Grainger. Such proceedings typically involve claims related to
product liability, general negligence, contract disputes, environmental issues, unclaimed property, wage and hour laws,
intellectual property, employment practices, regulatory compliance or other matters and actions brought by employees,
customers, competitors, suppliers or governmental entities. As a government contractor selling to federal, state and
local governmental entities, the Company is also subject to governmental or regulatory inquiries or audits or other
proceedings, including those related to contract administration or to pricing compliance. Grainger retains a significant
portion of the risk of certain losses related to workers' compensation, auto liability, general liability and property losses
31
through the utilization of high deductibles and self-insured retentions. Grainger routinely assesses the likelihood of
any adverse outcomes related to these matters on a case by case basis, as well as the potential ranges of losses and
fees. Grainger establishes accruals for its potential exposures, as appropriate, for claims against Grainger when losses
become probable and the financial impact of an adverse outcome is reasonably estimable. Legal fees are recognized
as incurred and are not included in accruals for contingencies. Where Grainger is able to reasonably estimate a range
of potential losses, Grainger records the amount within that range that constitutes Grainger's best estimate. Grainger
also discloses the nature of and range of loss for claims against Grainger when losses are reasonably possible and
the exposure is considered material to Grainger's Consolidated Financial Statements. These accruals and disclosures
are determined based on the facts and circumstances related to the individual cases and require estimates and
judgments regarding the interpretation of facts and laws, as well as the effectiveness of strategies or other factors
beyond Grainger's control. If the assessment of any of these factors changes, the estimates may change. Predicting
the outcome of claims and litigation and estimating related costs and exposure involves substantial uncertainties that
could cause actual costs to vary materially from estimates and accruals.
Other
Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed
above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition,
depreciation, intangibles, long-lived assets, fair value measurements and valuations and warranties require judgments
on complex matters that are often subject to multiple external sources of authoritative guidance such as the Financial
Accounting Standards Board and the Securities and Exchange Commission. Possible changes in estimates or
assumptions associated with these policies are not expected to have a material effect on the financial condition or
results of operations of Grainger. More information on these additional accounting policies can be found in Note 1 to
the Financial Statements.
Effects of Inflation and Changing Prices
Grainger is affected by inflation through increased product and operating costs, and the ability to pass on cost increases
to customers over time is dependent upon market conditions. The ability to achieve sales growth through increased
prices is also subject to inflation and normal competitive conditions. The predominant use of the last-in, first-out (LIFO)
method of accounting for inventories and accelerated depreciation methods for financial reporting and income tax
purposes result in a substantial recognition of the effects of inflation in the financial statements.
Some of Grainger's products contain significant amounts of commodity-priced materials, such as steel, copper,
petroleum derivatives or rare earth minerals, and are subject to price changes based upon fluctuations in the
commodities market.
Grainger believes the most positive means to combat inflation and advance the interests of investors lie in the continued
application of basic business principles, which include improving productivity, maintaining working capital turnover and
offering products and services that can command appropriate prices in the marketplace.
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: higher product costs or other expenses; a major loss of customers; loss
or disruption of sources of supply; increased competitive pricing pressures; failure to develop or implement new
technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend
against infringement claims; the implementation, timing and results of the Company's strategic pricing initiatives and
other responses to market pressures; the outcome of pending and future litigation or governmental or regulatory
32
proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy
and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of
information technology or data security systems; general industry, economic, market or political conditions; general
global economic conditions; currency exchange rate fluctuations; market volatility, including volatility or price declines
of the Company's common stock; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher
fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated and/or extreme
weather conditions; loss of key members of management; the Company's ability to operate, integrate and leverage
acquired businesses; changes in effective tax rates and other factors identified under 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.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Grainger may use financial instruments to reduce its exposure to adverse fluctuations in foreign currency exchange
rates and interest rates as part of its overall risk management strategy. The derivative positions reduce risk by hedging
certain underlying economic exposures. Because of the high correlation between the hedging instrument and the
underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal changes in the value
of the underlying exposure. Grainger does not enter into derivative financial instruments for trading or speculative
purposes.
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, as stated in their local currencies, are translated into U.S.
dollars. While it is difficult to quantify any particular impact of changes in exchange rates, a uniform 10% strengthening
in the U.S. dollar (whereby all other variables are held constant and unusual expense items described in "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of Operations" are excluded) would have
resulted in a decrease in net earnings of $3 million for the year ended December 31, 2018, and an increase in net
earnings of $1 million for the year ended December 31, 2017. Comparatively, a 10% weakening of the U.S. dollar
would have resulted in an increase in net earnings of $3 million for the year ended December 31, 2018, and a decrease
in net earnings of $2 million for the year ended December 31, 2017. This sensitivity analysis of the effects of changes
in foreign currency exchange rates does not factor in future potential changes in sales levels or local currency prices
or costs.
Commodity Price Risk
Grainger has limited primary exposure to commodity price risk on certain products for resale, but does not purchase
commodities directly.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 38 to 76. See the Index to Financial
Statements and Supplementary Data on page 37.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
33
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
Grainger carried out an evaluation, under the supervision and with the participation of its management, including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that Grainger's disclosure controls and procedures were
effective as of the end of the period covered by this report.
Internal Control Over Financial Reporting
(A) Management's Annual Report on Internal Control Over Financial Reporting
Management's report on Grainger's internal control over financial reporting is included on page 38 of this Report
under the heading Management's Annual Report on Internal Control Over Financial Reporting.
(B)
Attestation Report of the Registered Public Accounting Firm
The report from Ernst & Young LLP on its audit of the effectiveness of Grainger's internal control over financial
reporting as of December 31, 2018, is included on page 39 of this Report under the heading Report of Independent
Registered Public Accounting Firm.
(C) Changes in Internal Control Over Financial Reporting
There have been no changes in Grainger's internal control over financial reporting during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, Grainger's internal control over financial
reporting.
Item 9B: Other Information
None.
34
Item 10: Directors, Executive Officers and Corporate Governance
PART III
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual
meeting of shareholders to be held April 24, 2019, under the captions “Nominees and Director Experience and
Qualifications,” "Annual Election of Directors,” “Candidates for Board Membership,” “Board Affairs and Nominating
Committee,” “Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Information required
by this item regarding executive officers of Grainger is set forth in Part I, Item 4A, under the caption “Executive Officers
of the Registrant.”
Grainger has adopted a code of ethics that applies to its principal executive officer, principal financial officer and
principal accounting officer and controller. This code of ethics is part of Grainger’s Business Conduct Guidelines for
directors, officers and employees, which is available free of charge through Grainger’s website at www.grainger.com/
investor. A copy of the Business Conduct Guidelines is also available in print without charge to any person upon request
to Grainger's Corporate Secretary. Grainger intends to disclose on its website any amendment to any provision of the
Business Conduct Guidelines that relates to any element of the definition of “code of ethics” enumerated in Item 406(b)
of Regulation S-K under the Exchange Act and any waiver from any such provision granted to Grainger’s principal
executive officer, principal financial officer, principal accounting officer and controller or persons performing similar
functions. Grainger has also adopted Operating Principles for the Board of Directors, which are available on its website
and are available in print to any person who requests them.
Item 11: Executive Compensation
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual
meeting of shareholders to be held April 24, 2019, under the captions “Director Compensation,” “Compensation
Discussion and Analysis,” “Compensation Committee,” “Report of the Compensation Committee of the Board” and
"Fees for Independent Compensation Consultant."
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual
meeting of shareholders to be held April 24, 2019, under the captions “Ownership of Grainger Stock” and “Equity
Compensation Plans.”
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual
meeting of shareholders to be held April 24, 2019, under the captions “Director Independence,” "Annual Election of
Directors" and “Transactions with Related Persons.”
Item 14: Principal Accountant Fees and Services
The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual
meeting of shareholders to be held April 24, 2019, under the caption “Audit Fees and Audit Committee Pre-Approval
Policies and Procedures.”
35
Item 15: Exhibits and Financial Statements Schedules
(a)
Documents filed as part of the Form 10-K
PART IV
(1)
(2)
(3)
Financial Statements: see "Item 8: Financial Statements and Supplementary Data," on page 37 hereof,
for a list of financial statements. Management's Annual Report on Internal Control Over Financial Reporting.
Financial Statement Schedules: the schedules listed in Rule 5-04 of Regulation S-X have been omitted
because they are either not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
Exhibits Required by Item 601 of Regulation S-K: the information required by this Item 15(a)(3) of Form
10-K is set forth on the Exhibit Index that follows the Signatures page 76 of the Form 10-K.
Item 16: Form 10-K Summary
None.
36
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 2018, 2017 and 2016
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
38
39
41
42
43
44
45
46
37
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining adequate internal
control over financial reporting. Grainger's internal control system was designed to provide reasonable assurance to
Grainger's management and Board of Directors regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements
under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable,
and not absolute, assurance with respect to the preparation and presentation of financial statements.
Grainger's management assessed the effectiveness of Grainger's internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its
assessment under that framework and the criteria established therein, Grainger's management concluded that
Grainger's internal control over financial reporting was effective as of December 31, 2018.
Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger's internal control over
financial reporting as of December 31, 2018, as stated in their report, which is included herein.
38
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, 2018 and 2017, 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, 2018, 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, 2018 and
2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, 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, 2018, 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 28, 2019 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.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2005.
Chicago, Illinois
February 28, 2019
39
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
W.W. Grainger, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited W.W. Grainger, Inc. and subsidiaries’ internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework) (the COSO Criteria). In our opinion, W.W. Grainger,
Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the
related consolidated statements of earnings, comprehensive earnings, shareholders’ equity and cash flows for each
of the three years in the period ended December 31, 2018 and the related notes and our report dated February 28,
2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of effectiveness of the internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
February 28, 2019
40
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except for per share amounts)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating earnings
Other income (expense):
Interest income
Interest expense
Loss from equity method investment
Other, net
Total other expense
Earnings before income taxes
Income taxes
Net earnings
Less: Net earnings attributable to noncontrolling
interest
Net earnings attributable to W.W. Grainger, Inc.
Earnings per share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
For the Years Ended December 31,
2018
2017
2016
$
11,221 $
10,425 $
10,137
6,873
4,348
3,190
1,158
6
(88)
(19)
24
(77)
1,081
258
823
41
782 $
13.82 $
13.73 $
56.1
56.5
6,327
4,098
3,063
1,035
3
(89)
(37)
24
(99)
936
313
623
37
586 $
10.07 $
10.02 $
57.7
58.0
6,022
4,115
3,002
1,113
1
(76)
(31)
12
(94)
1,019
386
633
27
606
9.94
9.87
60.4
60.8
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
41
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
Net earnings
$
823
$
623
$
633
For the Years Ended December 31,
2018
2017
2016
Other comprehensive (losses) earnings:
Foreign currency translation adjustments, net of
reclassification (see Note 7 and Note 14)
Postretirement benefit plan re-measurement, net of tax
expense $29 (see Note 10 and Note 14)
Postretirement benefit plan reclassification, net of tax
benefit of $3, $1 and $7
Total other comprehensive (losses) earnings
Comprehensive earnings, net of tax
Less: Comprehensive earnings attributable to
noncontrolling interest
Net earnings
Foreign currency translation adjustments
Comprehensive earnings attributable to noncontrolling
interest
(41)
—
(7)
(48)
775
41
3
44
93
47
2
142
765
37
4
41
(39)
—
(12)
(51)
582
27
1
28
Comprehensive earnings attributable to W.W. Grainger, Inc. $
731
$
724
$
554
The accompanying notes are an integral part of these consolidated financial statements.
42
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share and per share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable – net
Inventories – net
Prepaid expenses and other assets
Prepaid income taxes
Total current assets
PROPERTY, BUILDINGS AND EQUIPMENT – NET
DEFERRED INCOME TAXES
GOODWILL
INTANGIBLES – NET
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt
Current maturities of long-term debt
Trade accounts payable
Accrued compensation and benefits
Accrued contributions to employees’ profit-sharing plans
Accrued expenses
Income taxes payable
Total current liabilities
LONG-TERM DEBT (less current maturities)
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES
EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES
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
Additional contributed capital
Retained earnings
Accumulated other comprehensive losses
Treasury stock, at cost – 53,796,859 and 53,330,356 shares, respectively
Total W.W. Grainger, Inc. shareholders’ equity
Noncontrolling interest
Total shareholders' equity
As of December 31,
2018
2017
$
538 $
1,385
1,541
83
10
3,557
1,352
12
424
460
68
327
1,325
1,429
87
38
3,206
1,392
22
544
569
71
5,873 $
5,804
$
$
49 $
81
678
262
133
269
29
1,501
2,090
103
86
—
55
1,134
7,869
(171)
(6,966)
1,921
172
2,093
56
39
731
254
93
314
20
1,507
2,248
111
110
—
55
1,041
7,405
(135)
(6,676)
1,690
138
1,828
5,804
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
5,873 $
The accompanying notes are an integral part of these consolidated financial statements.
43
W.W. Grainger, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
For the Years Ended December 31,
2016
2017
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Provision for losses on accounts receivable
Deferred income taxes and tax uncertainties
Depreciation and amortization
Impairment of goodwill, intangible and other assets
Net (gains) losses from sales of assets and business divestitures
Stock-based compensation
Losses from equity method investment
Change in assets and liabilities – net of business acquisitions and
divestitures:
Accounts receivable
Inventories
Prepaid expenses and other assets
Trade accounts payable
Accrued liabilities
Income taxes payable
Employment-related and other liabilities
Other – net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings and equipment and intangibles
Proceeds from sales of assets and business divestitures
Equity method investment
Other – net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in commercial paper
Borrowings under lines of credit
Payments against lines of credit
Proceeds from issuance of long-term debt
Payments of long-term debt
Proceeds from stock options exercised
Payments for employee taxes withheld from stock awards
Excess tax benefits from stock-based compensation
Purchase of treasury stock
Cash dividends paid
Other – net
Net cash used in financing activities
Exchange rate effect on cash and cash equivalents
NET CHANGE IN CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)
Cash payments for income taxes
$
$
$
$
$
823
7
7
257
156
(25)
47
19
$
623
16
(5)
264
28
(9)
33
37
(79)
(129)
(2)
(51)
18
36
(35)
8
1,057
(239)
86
(13)
—
(166)
—
26
(31)
—
(96)
181
(12)
—
(425)
(316)
3
(670)
(10)
211
327
538
86
229
$
$
$
(103)
(5)
(5)
72
113
4
(6)
—
1,057
(237)
120
(35)
6
(146)
(370)
74
(43)
401
(39)
47
(28)
—
(605)
(304)
—
(867)
9
53
274
327
78
335
$
$
$
633
16
(6)
249
52
(19)
36
31
(46)
(4)
19
73
(4)
(4)
8
(10)
1,024
(284)
55
(34)
1
(262)
40
36
(37)
516
(263)
34
(21)
12
(790)
(303)
—
(776)
(2)
(16)
290
274
63
360
The accompanying notes are an integral part of these consolidated financial statements.
44
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
Balance at January 1, 2016
$
55 $
1,000 $
6,802 $
(221) $
(5,370) $
Stock based compensation
Purchase of treasury stock
Net earnings
Other comprehensive
(losses) earnings
Capital contribution
Cash dividends paid ($4.83
per share)
Balance at December 31,
2016
Stock based compensation
Purchase of treasury stock
Net earnings
Other comprehensive
earnings
Cash dividends paid ($5.06
per share)
Balance at December 31,
2017
Stock based compensation
Purchase of treasury stock
Net earnings
Other comprehensive
(losses) earnings
Capital contribution
Reclassification due to the
adoption of ASU 2018-02
Cash dividends paid ($5.36
per share)
Balance at December 31,
2018
—
—
—
—
—
—
29
—
—
—
—
1
—
—
606
—
—
(295)
—
—
—
(52)
—
—
42
(800)
—
—
—
—
$
55 $
1,030 $
7,113 $
(273) $
(6,128) $
—
—
—
—
—
10
—
—
—
1
—
—
586
—
(294)
—
—
—
138
—
60
(608)
—
—
—
$
55 $
1,041 $
7,405 $
(135) $
(6,676) $
—
—
—
—
—
—
—
92
—
—
—
—
—
1
—
—
782
—
—
(15)
(303)
—
—
—
(51)
—
15
—
122
(412)
—
—
—
—
—
$
55 $
1,134 $
7,869 $
(171) $
(6,966) $
The accompanying notes are an integral part of these consolidated financial statements.
86
—
—
27
1
3
(9)
108
—
—
37
4
(11)
138
—
—
41
3
4
—
(14)
172
45
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO)
products and services. W.W. Grainger, Inc.'s operations are primarily in the United States (U.S.), Canada, Europe,
Japan and Mexico. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries over which the
Company exercises control. All significant intercompany transactions are eliminated from the consolidated financial
statements. The Company has a controlling ownership interest in MonotaRO Co., Ltd. (MonotaRO), the endless
assortment (single channel) business in Japan, with the residual representing the noncontrolling interest.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and the disclosure of contingent liabilities. Actual results could differ from those
estimates.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the reporting currency for all periods presented. The financial statements of the Company’s foreign
operating subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of the
Company’s foreign operating subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance
sheet date. Revenues and expenses are translated at average rates in effect during the period. Net exchange gains
or losses resulting from the translation of financial statements of foreign operations are recorded as a separate
component of other comprehensive earnings. See Note 14 to the Consolidated Financial Statements (Financial
Statements). Foreign currency transaction gains and losses are included in the Consolidated Statement of Earnings.
RECLASSIFICATIONS
Certain amounts in the 2017 and 2016 financial statements, as previously reported, have been reclassified to conform
to the 2018 presentation. In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard
Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which became effective January 1, 2018.
See Note 10 to the Financial Statements.
REVENUE RECOGNITION
The Company recognizes revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders,
others), transaction price is fixed or determinable and the Company has satisfied its performance obligation per the
sales arrangement. The Company's sales arrangements generally have standard payment terms that do not exceed
a year.
The majority of Company revenue originates from contracts with a single performance obligation to deliver products,
whereby the Company’s performance obligations are satisfied when control of the product is transferred to the customer
per the arranged shipping terms. Some Company contracts contain a combination of product sales and services, which
are distinct and accounted for as separate performance obligations. The Company’s performance obligations for
services are satisfied when the services are rendered within the arranged service period. Total service revenue is not
material and accounted for approximately 1% of total Company revenue for the twelve months ended December 31,
2018.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events
other than the passage of time. The Company also records a contract liability when customers prepay but the Company
has not yet satisfied its performance obligation. The Company did not have any material unsatisfied performance
obligations, contract assets or liabilities as of December 31, 2018 and 2017.
The Company’s revenue is reported as Net sales and is measured at the determinable transaction price, net of any
variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers
and subsequently remitted to governmental authorities. The Company considers shipping and handling as activities
to fulfill its performance obligation. Billings for freight are accounted for as Net sales and shipping and handling costs
are accounted for in Cost of goods sold.
46
The Company offers customers rights to return product and sales incentives, which primarily consist of volume rebates.
The Company’s terms for product returns and sales incentives generally do not exceed a year. The Company estimates
sales returns and volume rebate accruals throughout the year based on various factors, including contract terms,
historical experience and performance levels. Total accrued sales returns were approximately $29 million and $28
million as of December 31, 2018 and 2017, respectively, and are reported as a reduction of Accounts receivable, net.
Total accrued sales incentives were approximately $62 million and $55 million as of December 31, 2018 and 2017,
respectively, and are reported as part of Accrued expenses.
COST OF GOODS SOLD (COGS)
COGS includes products and product-related costs, vendor consideration, shipping and handling costs and service
costs.
The Company receives rebates and allowances from its vendors to promote their products, which are recorded as a
reduction to COGS unless the considerations are directly identifiable to specific costs incurred to promote vendor
products.
Rebates earned from vendors that are based on product purchases are capitalized into inventory as part of product
purchase price. These rebates are credited to COGS based on sales. Vendor rebates that are earned based on products
sold are credited directly to COGS.
ADVERTISING
Advertising costs are generally expensed in the year the related advertisement is first presented. Catalog expense is
amortized equally to expense over the life of the catalog, generally one year, beginning in the month of its distribution.
Advertising expense, which includes digital marketing costs and catalog amortization, was $241 million, $187 million
and $180 million for 2018, 2017 and 2016, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Included in this category are purchasing, supply chain and branch operations, information services and marketing and
selling expenses, as well as other types of general and administrative costs.
STOCK INCENTIVE PLANS
The Company measures all share-based payments using fair-value-based methods and records compensation
expense related to these payments over the vesting period net of estimated forfeitures. See Note 12 to the Financial
Statements.
INCOME TAXES
Income taxes are recognized during the year in which transactions enter into the determination of financial statement
income, with deferred taxes being provided for temporary differences between financial and tax reporting. The Company
recognizes in the financial statements a provision for tax uncertainties, resulting from application of complex tax
regulations in multiple tax jurisdictions. The Company evaluates deferred income taxes to determine if valuation
allowances are required using a “more likely than not” standard. This assessment considers the nature, frequency and
amount of book and taxable income and losses, the duration of statutory carryback and forward periods, future reversals
of existing taxable temporary differences and tax planning strategies, among other matters. See Note 15 to the Financial
Statements.
OTHER COMPREHENSIVE EARNINGS (LOSSES)
The Company's Other comprehensive earnings (losses) include foreign currency translation adjustments and
unrecognized gains (losses) on postretirement and other employment-related benefit plans. Accumulated other
comprehensive earnings (losses) (AOCE) are presented separately as part of shareholders' equity. See Note 14 to
the Financial Statements.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid debt instruments, purchased with an original maturity of 90 days
or less, to be cash equivalents.
47
CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit quality and, by policy, limits the amount
of credit exposure to any one institution.
The Company has a broad customer base representing many diverse industries doing business in North America,
Europe and Asia. Consequently, no significant concentration of credit risk is considered to exist.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are stated at their estimated net realizable value. The Company establishes reserves for customer
accounts that are potentially uncollectible. The method used to estimate the allowances is based on several factors,
including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables. These
analyses also take into consideration economic conditions that may have an impact on a specific industry, group of
customers or a specific customer. When it is determined that customer accounts cannot be collected, the receivable
balances are charged to the allowance for doubtful accounts. See Note 5 to the Financial Statements.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Cost is determined primarily by the last-in, first-out
(LIFO) method, which accounts for approximately 66% of total inventory. Grainger uses LIFO method to better match
inventory cost and revenue. For the remaining inventory, cost is determined by the first-in, first-out (FIFO) method.
Grainger regularly reviews inventory to evaluate continued demand and identify any obsolete or excess
quantities. Grainger records provisions for the difference between excess and obsolete inventory cost and its estimated
realizable value. See Note 6 of the Financial Statements.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are valued at cost. For financial statement purposes, depreciation and amortization
are recorded in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service
lives, principally on the declining-balance and sum-of-the-years-digits depreciation methods. The Company's
international businesses record depreciation expense primarily on a straight-line basis. The principal estimated useful
lives for determining depreciation are as follows:
Buildings, structures and improvements
Furniture, fixtures, machinery and equipment
10 to 30 years
3 to 10 years
Depreciation expense was $162 million, $170 million and $166 million for the years ended December 31, 2018, 2017
and 2016, respectively.
Improvements to leased property are amortized over the initial terms of the respective leases or the estimated service
lives of the improvements, whichever is shorter.
The Company capitalized interest costs of $10 million, $2 million and $2 million for the years ended December 31,
2018, 2017 and 2016, respectively.
LONG-LIVED ASSETS
The carrying value of long-lived assets, primarily property, buildings and equipment and amortizable intangibles, is
evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired.
An impairment loss is recognized when estimated undiscounted future cash flows resulting from use of the asset,
including disposition, are less than the carrying value of the asset. Impairment is measured as the amount by which
the asset's carrying amount exceeds the fair value.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and
liabilities assumed. Goodwill is not amortized, but rather tested for impairment on an annual basis and more often if
circumstances require. Impairment losses are recognized whenever the carrying value of a reporting unit exceeds its
fair value. See Note 4 to the Financial Statements.
The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual
or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed,
48
rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles
are amortized over their estimated useful lives (approximately 7 to 22 years) unless the estimated useful life is
determined to be indefinite. The straight-line method of amortization is used as it has been determined to approximate
the use pattern of the asset. The Company also maintains intangible assets with indefinite lives that are not amortized.
These intangibles are tested for impairment on an annual basis and more often if circumstances require. An impairment
loss is recognized whenever the estimated fair value of the asset is less than its carrying value. See Note 4 to the
Financial Statements.
The Company capitalizes certain costs related to the purchase and development of internal-use software. Amortization
of capitalized software is on a straight-line basis over three or five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to
the short-term nature of these financial instruments. See Note 9 to the Financial Statements for fair value of long-term
debt.
CONTINGENCIES
The Company accrues for costs relating to litigation claims and other contingent matters, when it is probable that a
liability has been incurred and the amount of the assessment can be reasonably estimated.
NEW ACCOUNTING STANDARDS
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income. This ASU allows a reclassification from AOCE to Retained earnings for stranded tax effects
resulting from the 2017 Tax Cuts and Jobs Act. The effective date of this ASU is for fiscal years and interim periods
beginning after December 15, 2018, and early adoption is permitted. The Company has evaluated the provisions of
this standard and elected to early implement and reclassify $15 million of income tax effects related to the change in
the U.S. federal corporate income tax rate from AOCE to Retained earnings. See Note 14 to the Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Retirement Benefits - Defined Benefit Plans - Changes to the Disclosure
Requirements for Defined Benefit Plans. This ASU removes disclosures that are no longer considered cost-beneficial,
clarifies specific requirements of the disclosure and adds disclosure requirements identified as relevant to improve the
effectiveness of the disclosures. The effective date of this ASU is for fiscal years and interim periods beginning after
December 15, 2020, and early adoption is permitted. The Company elected to early adopt this ASU and the related
disclosure changes are reflected in Note 10 to the Financial Statements.
In September 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other Internal Use Software (Subtopic
350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service
Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software. The effective date of this ASU is for fiscal years and interim periods beginning after December
15, 2019, and early adoption is permitted. The Company elected to early adopt during the fourth quarter of 2018
prospectively, with no material impact to the Company's Consolidated Financial Statements.
LEASE ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU 2016-02, Leases as modified subsequently by ASUs 2018-01, 2018-10,
2018-11 and 2018-20 (Topic 842). The core principle of the ASU improves transparency and comparability related to
the accounting and reporting of leasing arrangements, including balance sheet recognition for assets and liabilities
associated with rights and obligations created by leases with terms greater than twelve months, among other changes.
The effective date of these ASUs is for fiscal years and interim periods beginning after December 15, 2018. The
Company adopted the new guidance on January 1, 2019, utilizing the modified retrospective transition method that
allows for a cumulative-effect adjustment in the period of adoption, and does not plan to restate prior periods. Additionally,
the Company elected certain practical expedients permitted under the transition guidance.
Upon adoption, the Company's rights of use assets and corresponding lease liabilities are estimated at approximately
$210 million to $230 million before considering deferred taxes. These amounts represent 4% and 6% of the Company’s
49
Total assets and Total liabilities, respectively. Grainger does not expect a material impact to the Company’s Consolidated
Statements of Earnings, Comprehensive Earnings or Cash Flows.
NOTE 2 - REVENUE
Company revenue is primarily comprised of MRO product sales and related activities, such as freight and services.
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market
specific factors. The Company's presentation of revenue by industry most reasonably depicts how the nature, amount,
timing and uncertainty of Company revenue and cash flows are affected by economic and market specific factors. The
following table presents the Company's percentage of revenue by reportable segment and by major customer industry:
Government
Heavy Manufacturing
Light Manufacturing
Transportation
Commercial
Retail/Wholesale
Contractors
Natural Resources
Other (1)
Total net sales
Percent of Total Company Revenue
Twelve Months Ended December 31, 2018
U.S.
Canada
Total Company (2)
18 %
19 %
13 %
6 %
16 %
8 %
10 %
3 %
7 %
100 %
72 %
6 %
20 %
6 %
7 %
10 %
4 %
11 %
32 %
4 %
100 %
6 %
14 %
18 %
11 %
5 %
13 %
7 %
8 %
4 %
20 %
100 %
100 %
(1) Other category primarily includes revenue from individual customers not aligned to major industry
segment, including small businesses and consumers and intersegment net sales.
(2) Total Company includes other businesses, which include the Company's endless assortment
businesses and operations in Europe, Asia and Mexico and account for approximately 22% of
revenue for the twelve months ended December 31, 2018.
NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the following (in millions of dollars):
Land
Building, structures and improvements
Furniture, fixtures, machinery and equipment
Property, buildings and equipment
Less: Accumulated depreciation and amortization
Property, buildings and equipment, net
$
$
$
December 31, 2018
As of
318 $
1,338
1,785
3,441 $
2,089
1,352 $
December 31, 2017
349
1,343
1,753
3,445
2,053
1,392
50
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The balances and changes in the carrying amount of Goodwill by segment are as follows (in millions of dollars):
Balance at January 1, 2017
Divestiture
Impairment
Translation
Balance at December 31, 2017
Impairment
Translation
Balance at December 31, 2018
Cumulative goodwill impairment
charges, January 1, 2018
Impairment
Cumulative goodwill impairment
charges, December 31, 2018
$
$
$
$
United States
Canada
Other
businesses
Total
202
$
122
$
203
$
(3)
(7)
—
192
—
—
192
24
—
$
$
—
—
8
130
—
(10)
120
32
—
$
$
—
—
19
222
(105)
(5)
112
71
105
$
$
24
$
32
$
176
$
527
(3)
(7)
27
544
(105)
(15)
424
127
105
232
The balances and changes in Intangible assets - net are as follows (in millions of dollars):
As of December 31,
2018
2017
Weighted
average
life
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Customer lists
and
relationships
Trademarks,
trade names
and other
Non-amortized
trade names
and other
Capitalized
software
Total
intangible
assets
14.3 years
$
410
$
204 $
206
$
430
$
196 $
234
14.5 years
24
99
15
—
9
99
4.2 years
657
511
146
26
137
633
16
—
445
10
137
188
8.2 years
$
1,190
$
730 $
460
$
1,226
$
657 $
569
Amortization expense recognized on intangible assets was $92 million, $89 million and $82 million for the years ended
December 31, 2018, 2017 and 2016, respectively, and is included in SG&A on the Consolidated Statement of Earnings.
Estimated amortization expense for future periods is as follows (in millions of dollars):
Year
2019
2020
2021
2022
2023
Thereafter
Expense
84
66
50
26
20
115
$
51
Grainger tests reporting units’ goodwill and intangible assets for impairment annually during the fourth quarter and
more frequently if impairment indicators exist. Grainger periodically performs qualitative assessments of significant
events and circumstances, such as reporting units' historical and current results, assumptions regarding future
performance, strategic initiatives and overall economic factors to determine the existence of impairment indicators and
assess if it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets is less than
its carrying value and if a quantitative impairment test is necessary. In the quantitative test, Grainger compares the
carrying value of the reporting unit or an indefinite-lived intangible asset with its fair value. Any excess of the carrying
value over fair value is recorded as an impairment charge.
The fair value of reporting units is calculated primarily using the discounted cash flow (DCF) method and utilizing value
indicators from a market approach to evaluate the reasonableness of the resulting fair values. Estimates of market-
participant risk-adjusted weighted average cost of capital are used as a basis for determining the discount rates to
apply to the reporting units’ future expected cash flows and terminal value.
Grainger’s indefinite-lived intangibles are primarily trade names. The fair value of trade names is calculated primarily
using the relief from royalty method, which estimates the expected royalty savings attributable to the ownership of the
trade name asset. The key assumptions when valuing a trade name are the revenue base, the royalty rate and the
discount rate.
During the quarter ended September 30, 2018, the Company identified impairment indicators at the Cromwell reporting
unit. In the quantitative goodwill impairment test performed in 2017, the fair value of the Cromwell reporting unit
exceeded its carrying value by 15%. However, its operating performance deteriorated during 2018 and the Company
lowered its short-term forecasts and long-term outlook projections. These factors, combined with sustained economic
uncertainty in the U.K. market and higher interest rates, led the Company to conclude that it was more likely than not
that the carrying value of Cromwell’s goodwill and intangible assets may not be recoverable. Accordingly, a quantitative
test was performed during the quarter ended September 30, 2018.
The Company considered the impact of the prolonged softness and uncertainty in the U.K. market due to Brexit and
other unfavorable structural economic conditions, as well as Cromwell’s underperformance compared to expectations,
prior year quantitative test assumptions and future performance projections. The revised outlook and uncertainty
beyond 2018 were factored into lower revenues, earnings and cash flow projections which, combined with an increase
in the discount rate, resulted in the calculated fair value of the Cromwell reporting unit below its carrying value.
Accordingly, the Company recorded a full goodwill impairment charge of $105 million with no tax benefit due to the
nondeductibility of goodwill for tax purposes. The revised revenue and gross margin projections also resulted in the
reduction of royalty rate and value attributable to the Cromwell trade name for which the Company recorded a $34
million impairment charge during the same period.
The impairment charges related to Cromwell goodwill and trade name were recorded in other businesses in SG&A.
The Company also performed an impairment test on Cromwell’s intangible assets subject to amortization and long-
lived assets using the undiscounted cash flows method and no impairment charge was required.
Grainger performed its annual impairment testing in the fourth quarter. The testing included a qualitative assessment
of all other reporting units' goodwill and intangible assets. The Company concluded that it was not more likely than
not that the fair value of the reporting unit of indefinite-lived intangible assets is less than its carrying value.
The risk of potential failure of future impairment tests is highly dependent upon a number of assumptions. Changes
in assumptions regarding discount rate and future performance, as well as the ability to execute on growth initiatives
and productivity improvements, may have a significant impact on future cash flows. Likewise, unfavorable economic
environment and changes in market conditions or other factors may result in future impairments of the goodwill and
intangible assets.
52
NOTE 5 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table shows the activity in the allowance for doubtful accounts (in millions of dollars):
Balance at beginning of period
Provision for uncollectible accounts
Write-off of uncollectible accounts, net of recoveries
Foreign currency and other
Balance at end of period
NOTE 6 - INVENTORIES
For the Years Ended December 31,
2018
2017
$
$
(29)
(7)
10
1
(25)
$
$
(27)
(16)
17
(3)
(29)
Inventories primarily consist of merchandise purchased for resale. Inventories would have been $394 million and $382
million higher than reported at December 31, 2018 and December 31, 2017, respectively, if the FIFO method of inventory
accounting had been used for all the Company inventories. Net earnings would have increased by $8 million, and
decreased by $1 million and $3 million for the years ended December 31, 2018, 2017 and 2016, respectively, using
the FIFO method of accounting. Inventory values using the FIFO method of accounting approximate replacement cost.
The following table shows the activity in the reserves for excess and obsolete inventory (in millions of dollars):
For the Years Ended December 31,
2018
2017
Balance at beginning of period
Provision for excess and obsolete inventory
Disposal of unsaleable inventory
Other
Balance at end of period
$
$
(193)
(20)
55
4
(154)
$
$
(191)
(25)
29
(6)
(193)
NOTE 7 - RESTRUCTURING RESERVES
During 2018, Grainger substantially completed initiatives to reduce costs in the U.S. business and at the Company
level (unallocated expense) and streamline and focus on profitability in the Canada business and other businesses.
Restructuring costs, net of gains, for the years ended December 31, 2018, 2017 and 2016 are as follows (in millions
of dollars):
For the Year Ended December 31, 2018
SG&A
COGS
Involuntary
employee
termination costs
Other charges
(gains)
Total
United States
Canada
Other businesses
Unallocated expense
Total
$
$
(1) $
—
1
—
— $
15
24
1
—
40
$
$
(6) $
11
4
(2)
7 $
8
35
6
(2)
47
53
For the Year Ended December 31, 2017
SG&A
COGS
Involuntary
employee
termination costs
Other charges
(gains)
Total
1 $
8
4
—
13
$
32
15
12
—
59
$
$
(22) $
16
39
11
44
11
39
55
11
$
116
For the Year Ended December 31, 2016
SG&A
COGS
Involuntary
employee
termination costs
Other charges
(gains)
Total
3 $
2
—
5 $
21
13
—
34
$
$
(9) $
1
9
1 $
15
16
9
40
United States
Canada
Other businesses
Unallocated expense
Total
United States
Canada
Unallocated expense
Total
$
$
$
$
Other charges (gains) for all three years primarily include asset impairments, write-down losses and other exit-related
costs. The charges in the U.S. and Canada businesses are partially offset by gains from the sales of assets in those
segments. Included in other charges (gains) is also approximately $18 million of accumulated foreign currency
translations losses reclassified from Accumulated other comprehensive losses to earnings primarily related to the wind-
down of Colombia during 2017.
54
Restructuring reserves are primarily recorded as part of Accrued compensation and benefits and Accrued expenses.
The following summarizes the restructuring and related reserve activity for the years ended December 31, 2018 and
2017 (in millions of dollars):
Current liabilities
Property,
buildings
and
equipment
write-downs
and
disposals
Current
assets
write-
downs
Involuntary
employee
termination
costs
Lease
termination
costs
Other
costs
Total
Reserves as of January
1, 2017
Restructuring costs, net
of (gains)
Cash (paid) received
Non-cash, translation
and others
Reserves as of
December 31, 2017
Restructuring costs, net
of (gains)
Cash (paid) received
Non-cash, translation
and others
Reserves as of
December 31, 2018
$
$
$
— $
— $
24
$
3 $
1
$
14
(1)
—
24
— $
(23) $
13
$
1
$
4
(1)
(16)
(10)
44
(35)
59
(34)
1
50
40
(57)
(2)
6
(4)
37
(8)
$
$
— $
(17) $
5 $
13
$
12
(4)
(2)
1
(1)
(8)
$
— $
— $
31
$
11 $
5
$
28
116
(23)
(39)
82
47
(19)
(63)
47
The cumulative amounts incurred to date and expected (excluding results of sales of real estate) in connection with
the Company's restructuring actions for active programs are as follows (in millions of dollars):
Cumulative
amount incurred
to date
United States
Canada
Other businesses
Unallocated expense
Total
$
$
70
93
67
18
248
Additional
amount expected
3
$
—
—
—
3
$
55
NOTE 8 - SHORT-TERM DEBT
Short-term debt consisted of the following (in millions of dollars):
Lines of Credit
Outstanding at December 31
Maximum month-end balance during the year
Weighted average interest rate during the year
Weighted average interest rate at December 31
Commercial Paper
Outstanding at December 31
Maximum month-end balance during the year
Weighted average interest rate during the year
As of December 31,
2018
2017
$
$
$
$
49
138
2.29%
2.35%
—
90
1.80%
$
$
$
$
56
56
2.41%
2.01%
—
455
0.83%
Lines of Credit
The Company's U.S. business has a five-year $750 million unsecured revolving line of credit, maturing in 2022. There
were no borrowings outstanding under the line of credit as of December 31, 2018 and 2017. The primary purpose of
this credit facility is to provide support to the Company's commercial paper program and for general corporate purposes.
Foreign subsidiaries utilize lines of credit for working capital purposes and other operating needs. These foreign lines
of credit in aggregate were $49 million and $56 million as of December 31, 2018 and 2017, respectively.
Commercial Paper
The Company issues commercial paper from time to time for general working capital needs. At December 31, 2018,
there was none outstanding.
The Company's short-term debt instruments include affirmative and negative covenants that are usual and customary
for companies with similar credit ratings and do not contain any financial performance covenants. The Company was
in compliance with all debt covenants as of December 31, 2018.
56
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of the following (in millions of dollars):
4.60% senior notes due 2045
3.75% senior notes due 2046
4.20% senior notes due 2047
British pound term loan
Euro term loan
Canadian dollar revolving credit facility
Other
Subtotal
Less current maturities
Debt issuance costs and discounts, net of
amortization
Long-term debt (less current maturities)
$
As of December 31,
2018
2017
Carrying
Value
Fair Value
Carrying
Value
Fair Value
$
1,000
1,026
$
1,000
$
1,089
400
400
174
126
44
49
2,193
(81)
(22)
2,090
357
383
174
126
44
49
400
400
195
132
99
84
384
411
195
132
99
84
2,159
(81)
2,310
(39)
2,394
(39)
(22)
(23)
(23)
$
2,056
$
2,248
$
2,332
Senior Notes
In May 2017, the Company issued $400 million of unsecured 4.20% Senior Notes that mature on May 15, 2047. A
portion of the proceeds from this bond issuance was used to pay outstanding commercial paper during 2017. The
4.20% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15
and November 15.
In May 2016, the Company issued $400 million of unsecured 3.75% Senior Notes that mature on May 15, 2046. The
3.75% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15
and November 15.
In June 2015, the Company issued $1 billion of unsecured 4.60% Senior Notes that mature on June 15, 2045. The
4.60% Notes require no principal payments until the maturity date and interest is payable semi-annually on June 15
and December 15.
The Company may redeem the Senior Notes in whole at any time or in part from time to time at a “make-whole”
redemption price prior to their respective maturity dates. The redemption price is calculated by reference to the then-
current yield on a U.S. treasury security with a maturity comparable to the remaining term of the Senior Notes plus
20-25 basis points, together with accrued and unpaid interest, if any, at the redemption date. Additionally, if the Company
experiences specific kinds of changes in control, it will be required to make an offer to purchase the Senior Notes at
101% of their principal amount plus accrued and unpaid interest, if any, at the date of purchase. Within one year of
the maturity date, the Company may redeem the Senior Notes in whole at any time or in part at 100% of their principal
amount, together with accrued and unpaid interest, if any, to the redemption date.
Costs and discounts of approximately $24 million associated with the issuance of the Senior Notes, representing
underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and are being
amortized to interest expense over the term of the Notes.
British Pound Term Loan
In August 2015, the Company entered into an unsecured credit facilities agreement providing for a five-year term loan
of £160 million and revolving credit facility of up to £20 million (see Note 8 to the Financial Statements). Under the
agreement, the principal amount of the term loan will be repaid semiannually in installments of £4 million beginning
February 2016 through February 2020 with the remaining outstanding amount due August 2020. At the election of the
Company, the term loan bears interest at the LIBOR Rate plus a margin of 75 basis points, as defined within the term
57
loan agreement. At December 31, 2018, the Company had elected a one-month LIBOR interest period. The weighted
average interest rate was 1.34% and 1.04% for the years ended December 31, 2018 and 2017, respectively.
Euro Term Loan
On August 31, 2016, the Company entered into an agreement for a five-year term loan of €1 10 million and a revolving
credit facility of up to €20 million (see Note 8 to the Financial Statements). The proceeds from the term loan were used
to pay in full €102.5 million of a term loan that matured in August 2016. Under the agreement, no principal amount of
the loan will be required to be paid until the loan becomes due on August 31, 2021, at which time the loan will be
required to be paid in full. The Company, at its option, may prepay this term loan in whole or in part at the end of any
interest period without penalty. The loan bears interest at the EURIBOR plus a margin of 45 basis points, as defined
within the term loan agreement. If EURIBOR is less than zero, then EURIBOR will be deemed to be zero. The interest
rate at both December 31, 2018 and 2017 was 0.45%.
Canadian Dollar Revolving Credit Facility
In September 2014, the Company entered into an unsecured revolving credit facility with a maximum availability of
C$175 million. The loan bears interest at the Canadian Dollar Offered Rate (CDOR) plus a margin of 80 basis points,
as defined within the loan agreement. The weighted average interest rate during the year on this outstanding amount
was 2.50%. No principal payments are required on the credit facility until the maturity date. The facility matures in
2019 and accordingly, the amount outstanding is included in Current maturities of long-term debt as of December 31,
2018.
The estimated fair value of the Company’s senior notes was based on available external pricing data and current
market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair
value hierarchy. The carrying value of other long-term debt approximates fair value due to their variable interest rates.
The scheduled aggregate principal payments related to long-term debt, excluding debt issuance costs, are due as
follows (in millions of dollars):
Year
2019
2020
2021
2022
2023
Thereafter
Total
Payment Amount
$
$
81
182
126
4
—
1,800
2,193
The Company's long-term debt instruments include affirmative and negative covenants that are usual and customary
for companies with similar credit ratings and do not contain any financial performance covenant. The Company was
in compliance with all debt covenants as of December 31, 2018.
NOTE 10 - EMPLOYEE BENEFITS
The Company provides various retirement benefits to eligible employees, including contributions to defined contribution
plans, pension benefits associated with defined benefit plans, postretirement medical benefits and other benefits.
Eligibility requirements and benefit levels vary depending on employee location. Various foreign benefit plans cover
employees in accordance with local legal requirements.
Defined Contribution Plans
A majority of the Company's U.S. employees are covered by a noncontributory profit-sharing plan. The plan aligns
Company contributions to Company performance and includes two components, a variable annual contribution based
on a rate of return on invested capital and an automatic contribution equal to 3% of total eligible compensation. In
addition, employees covered by the plan are also able to make personal contributions. The total Company contribution
will be maintained at a minimum of 8% and a maximum of 18% of total eligible compensation paid to eligible employees.
The total profit-sharing plan expense was $164 million, $120 million and $84 million for 2018, 2017 and 2016,
respectively.
58
The Company sponsors additional defined contribution plans available to certain U.S. and foreign employees for which
contributions are made by the Company and participating employees. The expense associated with these defined
contribution plans totaled $13 million, $18 million, and $12 million for 2018, 2017 and 2016, respectively.
Defined Benefit Plans and Other Retirement Plans
The Company sponsors defined benefit plans available to certain foreign employees. The cost of these programs is
not significant to the Company. In certain countries, pension contributions are made to government-sponsored social
security pension plans in accordance with local legal requirements. For these plans, the Company has no continuing
obligations other than the payment of contributions.
Postretirement Healthcare Benefits Plans
The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its U.S. employees
hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement.
Covered employees become eligible for participation when they qualify for retirement while working for the Company.
Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as
determined by the Company.
During the third quarter of 2017, the Company implemented plan design changes effective January 1, 2018, for the
post-65 age group. This plan change moved all post-65 Medicare eligible retirees to healthcare exchanges and provided
them a subsidy to purchase insurance. The amount of the subsidy is based on years of service. As a result of the plan
change, the plan obligation was remeasured as of August 31, 2017. The remeasurement resulted in a decrease in the
postretirement benefit obligation of $76 million and a corresponding unrecognized gain recorded in Other
comprehensive earnings net of tax of $29 million.
The net periodic costs, as previously reported in the 2017 and 2016 Financial Statements, have been reclassified to
conform to the 2018 presentation in accordance with ASU 2017-07. The net periodic benefits costs were valued with
a measurement date of January 1 for each year and August 31, 2017 remeasurement date and consisted of the
following components (in millions of dollars):
For the Years Ended December 31,
2017
2018
2016
SG&A
Service cost
Other income (expense)
Interest cost
Expected return on assets
Amortization of prior service credit
Amortization of unrecognized gains
Net periodic (benefits) costs
6
$
7
$
7
(13)
(10)
(3)
(13)
$
8
(12)
(7)
(2)
(6)
$
8
10
(10)
(7)
—
1
$
$
59
Reconciliations of the beginning and ending balances of the postretirement benefit obligation, which is calculated as
of December 31 measurement date, the fair value of plan assets available for benefits and the funded status of the
benefit obligation follow (in millions of dollars):
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants' contributions
Actuarial (gains)
Plan amendment
Benefits paid
Prescription drug rebates
Benefit obligation at end of year
Plan assets available for benefits at beginning of year
Actual (losses) returns on plan assets
Plan participants' contributions
Benefits paid
Prescription drug rebates
Plan assets available for benefits at end of year
Noncurrent postretirement benefit obligation
2018
2017
$
$
208
6
7
3
(26)
—
(9)
1
190
189
(8)
3
(9)
1
176
14
$
$
The amounts recognized in AOCE consisted of the following (in millions of dollars):
Prior service credit
Unrecognized gains
Deferred tax (liability)
Net accumulated gains
As of December 31,
2018
2017
$
$
71
37
(26)
82
$
$
265
7
8
3
(34)
(34)
(9)
2
208
164
29
3
(8)
1
189
19
80
37
(44)
73
The Company has elected to amortize the amount of net unrecognized gains over a period equal to the average
remaining service period for active plan participants expected to retire and receive benefits of approximately 12.9 years
for 2018.
The postretirement benefit obligation was determined by applying the terms of the plan and actuarial models. These
models include various actuarial assumptions, including discount rates, long-term rates of return on plan assets,
healthcare cost trend rate and cost-sharing between the Company and the retirees. The Company evaluates its actuarial
assumptions on an annual basis and considers changes in these long-term factors based upon market conditions and
historical experience.
60
The following assumptions were used to determine net periodic benefit costs at January 1 of each year (excluding the
August 31, 2017 remeasurement date):
For the Years Ended December 31,
2018
2017
2016
Discount rate
Long-term rate of return on plan assets, net of tax
Initial healthcare cost trend rate
Pre age 65
Post age 65
Catastrophic drug benefit
Ultimate healthcare cost trend rate
Year ultimate healthcare cost trend rate reached
HRA credit inflation index for grandfathered retirees
3.44%
7.13%
6.56%
NA
12.50%
4.50%
2026
2.50%
4.00%
7.13%
6.81%
9.36%
NA
4.50%
2026
NA
4.20%
6.65%
7.00%
7.00%
NA
4.50%
2026
NA
The following assumptions were used to determine benefit obligations at December 31:
Discount rate
Expected long-term rate of return on plan assets, net of tax
Initial healthcare cost trend rate
Pre age 65
Post age 65
Catastrophic drug benefit
Ultimate healthcare cost trend rate
Year ultimate healthcare cost trend rate reached
HRA credit inflation index for grandfathered retirees
2018
2017
2016
4.08%
7.13%
6.31%
N/A
11.50%
4.50%
2026
2.50%
3.44%
7.13%
6.56%
NA
12.50%
4.50%
2026
2.50%
4.00%
7.13%
6.81%
9.36%
N/A
4.50%
2026
N/A
The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments as of December
31, the measurement date of each year. These rates have been selected due to their similarity to the duration of the
projected cash flows of the postretirement healthcare benefit plan. As of December 31, 2018, the Company increased
the discount rate from 3.44% to 4.08% to reflect the increase in the market interest rates at December 31, 2018.
As of December 31, 2018, the Company changed the mortality improvement table used to project mortality rates into
the future from Mortality Table RPH-2014 with Mortality Improvement Scale MP 2016 to Mortality Table RPH-2014 with
Mortality Improvement Scale MP 2018, which was published by the Society of Actuaries and reflects the most recent
updates to life expectancies. RPH-2014 Table is a headcount weighted table, which is also more appropriate for a
postretirement healthcare benefit plan.
The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost
trend rates. As of December 31, 2016, Grainger adopted a new healthcare trend rate to include a pre and post age
65 trend rates. Post age 65, prescription drug costs, primarily specialty drugs, are expected to increase the cost of
healthcare more significantly than medical expenses. The alternative trend rates allow for a better estimate of expected
costs for this plan. As of December 31, 2018, the initial healthcare cost trend rate was 6.31% for pre age 65. The
healthcare costs trend rates decline each year until reaching the ultimate trend rate of 4.50%. The plan amendment
adopted in 2017 moves all post age 65 Medicare eligible retirees to an exchange and provides a subsidy to those
retirees to purchase insurance. The amount of the subsidy is based on years of service and is indexed at 2.50% for
grandfathered employees.
The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments.
All assets of the Trust are invested in equity funds designed to track to either the Standard & Poor's 500 Index (S&P
500) or the Total International Composite Index. The Total International Composite Index tracks non-U.S. stocks within
developed and emerging market economies. This investment strategy reflects the long-term nature of the plan obligation
and seeks to take advantage of the earnings potential of equity securities in the global markets and intends to reach
a balanced allocation between U.S. and non-U.S. equities. The plan's assets are stated at fair value, which represents
61
the net asset value of shares held by the plan in the registered investment companies at the quoted market prices
(level 1 input). The plan assets available for benefits are net of Trust liabilities, primarily related to deferred income
taxes and taxes payable at December 31 (in millions of dollars):
Registered investment companies:
Fidelity Spartan U.S. Equity Index Fund
Vanguard 500 Index Fund
Vanguard Total International Stock
Plan Assets
Trust liabilities
Plan assets available for benefits
2018
2017
$
$
80
93
26
199
(23)
176
$
$
83
104
30
217
(28)
189
The Company uses the long-term historical return on the plan assets and the historical performance of the S&P 500
and the Total International Composite Index to develop its expected return on plan assets. The after-tax expected long-
term rates of return on plan assets of 7.13% at December 31, 2018 is based on the historical average of long-term
rates of return and an estimated tax rate. The required use of an expected long-term rate of return on plan assets may
result in recognition of income that is greater or lower than the actual return on plan assets in any given year. Over
time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore,
result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees.
The Company's investment policies include periodic reviews by management and trustees at least annually concerning:
(1) the allocation of assets among various asset classes (e.g., domestic stocks, international stocks, short-term bonds,
long-term bonds, etc.); (2) the investment performance of the assets, including performance comparisons with
appropriate benchmarks; (3) investment guidelines and other matters of investment policy and (4) the hiring, dismissal
or retention of investment managers.
The funding of the Trust is an estimated amount that is intended to allow the maximum deductible contribution under
the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company
intends to follow its practice of funding the maximum deductible contribution under the IRC.
The Company forecasts the following benefit payments related to postretirement (which include a projection for
expected future employee service) for the next ten years (in millions of dollars):
Year
2019
2020
2021
2022
2023
2024-2028
Estimated Gross
Benefit
Payments
$
8
9
10
11
12
66
NOTE 11 - LEASES
The Company leases certain land, buildings, equipment and vehicles under noncancelable operating leases that expire
at various dates through 2036. Many of the building leases obligate the Company to pay real estate taxes, insurance
and certain maintenance costs and contain multiple renewal provisions, exercisable at the Company's option. Leases
that contain predetermined fixed escalations of the minimum rentals are recognized in rental expense on a straight-
line basis over the lease term. Cash or rent abatements received upon entering into certain operating leases are also
recognized on a straight-line basis over the lease term.
62
At December 31, 2018 the approximate future minimum lease payments for operating leases were as follows (in
millions of dollars):
Year
2019
2020
2021
2022
2023
Thereafter
Total minimum payments required
Less amounts representing sublease income
Future Minimum
Lease Payments
65
$
49
36
27
18
38
233
(11)
222
$
In the fourth quarter of 2018, Grainger consolidated three office locations into one main location in the Chicago area,
which increased the future minimum lease payments by $48 million and sublease income by $6 million. The new lease
has a 10-year term.
Rent expense was $76 million, $76 million and $81 million for 2018, 2017 and 2016, respectively. These amounts are
net of sublease income of $3 million, $2 million and $2 million for 2018, 2017 and 2016.
Capital leases as of December 31, 2018 are not considered material. Capital lease obligations are reported in Long-
term debt.
Effective January 1, 2019, the Company implemented ASU 2016-02, Leases and subsequent modifications ASUs
2018-01, 2018-10, 2018-11 and 2018-20. See Note 1 to the Financial Statements for more information.
NOTE 12 - STOCK INCENTIVE PLANS
The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to
employees and executives, which include restricted stock units (RSUs), non-qualified stock options, performance
shares and deferred stock units. As of December 31, 2018, there were 2.5 million shares available for grant under the
plans. When awards are exercised or settled, shares of the Company’s treasury stock are issued.
Pretax stock-based compensation expense, included in SG&A was $47 million, $33 million and $36 million in 2018,
2017 and 2016, respectively and was primarily comprised of Restricted Stock Units (RSUs) and option grants. Related
income tax benefits recognized in earnings were $26 million, $26 million and $12 million in 2018, 2017 and 2016,
respectively.
63
Restricted Stock Units
The Company awards RSUs to certain employees and executives. RSUs granted vest generally over periods from
three to seven years from issuance, although accelerated vesting is provided in certain instances. Holders of RSUs
are entitled to receive nonforfeitable cash payments equivalent to cash dividends and other distributions paid with
respect to common stock. RSUs are settled by the issuance of the Company's common stock on a one-for-one basis.
Compensation expense related to RSUs is based upon the closing market price on the last trading day preceding the
date of award and is charged to earnings on a straight-line basis over the vesting period. The following table summarizes
RSU activity (in millions, except for share and per share amounts):
2018
2017
2016
Weighted
Average
Price Per
Share
Weighted
Average
Price Per
Share
Shares
Weighted
Average
Price Per
Share
Shares
Shares
352,919 $
141,775 $
(56,393) $
(94,487) $
343,814 $
226.31
284.98
245.08
233.75
245.38
373,403 $ 221.77
432,783 $
213.45
129,378 $ 222.53
113,909 $
230.36
(47,488) $ 229.36
(62,869) $
229.70
(102,374) $ 203.51
(110,420) $
193.51
352,919 $ 226.31
373,403 $
221.77
Beginning nonvested units
Issued
Canceled
Vested
Ending nonvested units
Fair value of shares vested
$22
$21
$21
At December 31, 2018 there was $51 million of total unrecognized compensation expense related to nonvested RSUs
that the Company expects to recognize over a weighted average period of 3.0 years.
Stock Options
The Company issues stock option grants to certain employees and executives. Option awards are granted with an
exercise price equal to the closing market price of the Company's stock on the day of the grant. The options generally
vest over three years, although accelerated vesting is provided in certain circumstances. Awards generally expire 10
years from the grant date. Transactions involving stock options are summarized as follows:
Outstanding at January 1, 2016
Granted
Exercised
Canceled or expired
Outstanding at December 31, 2016
Granted
Exercised
Canceled or expired
Outstanding at December 31, 2017
Granted
Exercised
Canceled or expired
Outstanding at December 31, 2018
Shares Subject
to Option
Weighted
Average
Price Per
Share
2,226,286
294,874
(317,110)
(80,014)
2,124,036
306,206
(409,269)
(87,260)
1,933,713
204,250
(931,929)
(72,931)
1,133,103
$
$
$
$
$
$
$
$
$
$
$
$
$
169.96
234.25
108.28
210.01
186.59
230.97
115.35
222.00
207.10
276.64
193.68
226.48
229.42
Options
Exercisable
1,411,460
1,346,707
1,375,844
581,534
At December 31, 2018 there was $9 million of total unrecognized compensation expense related to nonvested option
awards, which the Company expects to recognize over a weighted average period of 1.9 years.
64
The following table summarizes information about stock options (in millions of dollars):
Fair value of options exercised
$
Total intrinsic value of options exercised
Fair value of options vested
Settlements of options exercised
For the years ended December 31,
2018
2017
2016
$
38
102
8
180
$
11
47
24
47
8
36
15
35
Information about stock options outstanding and exercisable as of December 31, 2018, is as follows:
Range of
Exercise
Prices
$72.14 -
$204.01
$223.68 -
$276.64
Options Outstanding
Weighted Average
Options Exercisable
Weighted Average
Remaining
Contractual
Life
Exercise
Price
Intrinsic
Value
(millions)
Number
Remaining
Contractual
Life
Exercise
Price
Intrinsic
Value
(millions)
Number
184,435
2.23 years
$ 152.28 $
948,668
7.37 years
$ 244.42
1,133,103
6.54 years
$ 229.42 $
24
36
60
183,292
2.19 years
$ 152.17
$
398,242
6.10 years
$ 238.88
581,534
4.87 years
$ 211.55
$
24
17
41
The Company uses a binomial lattice option pricing model for the valuation of stock options. The weighted average
fair value of options granted in 2018, 2017 and 2016 was $67.31, $45.09 and $44.94, respectively. The fair value of
options granted in 2018, 2017 and 2016 used the following assumptions:
Risk-free interest rate
Expected life
Expected volatility
Expected dividend yield
For the years ended December 31,
2018
2.6%
6 years
27.5%
1.9%
2017
2.0%
6 years
23.9%
2.1%
2016
1.4%
6 years
24.5%
2.0%
The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term
approximately equal to the expected term of the options being valued. The expected life selected for options granted
during each year presented represents the period of time that the options are expected to be outstanding based on
historical data of option holder exercise and termination behavior. Expected volatility is based upon implied and historical
volatility of the Company's closing stock price over a period equal to the expected life of each option grant. Historical
Company information is the primary basis for selection of expected dividend yield assumptions.
65
NOTE 13 - CAPITAL STOCK
The Company had no shares of preferred stock outstanding as of December 31, 2018 and 2017. The activity related
to outstanding common stock and common stock held in treasury was as follows:
2018
2017
2016
Outstanding
Common
Stock
Treasury
Stock
Outstanding
Common
Stock
Treasury
Stock
Outstanding
Common
Stock
Treasury
Stock
56,328,863 53,330,356
58,804,314 50,854,905
62,028,708 47,630,511
930,258
(930,258)
407,542
(407,542)
315,171
(315,171)
80,988
(80,988)
103,331
(103,331)
78,310
(78,310)
Balance at beginning of
period
Exercise of stock options
Settlement of restricted stock
units, net of 39,075,
36,585 and 41,128 shares
retained, respectively
Settlement of performance
share units, net of 1,027,
9,334 and 6,765 shares
retained, respectively
Purchase of treasury shares
(1,479,660)
1,911
(1,911)
1,479,660
13,978
(13,978)
11,806
(11,806)
(3,000,302)
3,000,302
(3,629,681)
3,629,681
Balance at end of period
55,862,360 53,796,859
56,328,863 53,330,356
58,804,314 50,854,905
66
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSSES) (AOCE)
The components of AOCE consisted of the following (in millions of dollars):
Foreign
Currency
Translation
and Other
Defined
Postretirement
Benefit Plan
Other
Employment-
related
Benefit Plans
Total
Foreign
Currency
Translation
Attributable to
Noncontrolling
Interests
AOCE
Attributable
to W.W.
Grainger,
Inc.
$
(277) $
35 $
(3) $
(245) $
(24) $
(221)
Balance at January
1, 2016, net of tax
Other comprehensive
earnings (loss)
before
reclassifications,
net of tax
Amounts reclassified
to Net earnings
Net current period
activity
Balance at December
31, 2016, net of tax $
Other comprehensive
earnings (loss)
before
reclassifications,
net of tax
Amounts reclassified
to Net earnings
Net current period
activity
earnings (loss)
before
reclassifications,
net of tax
Amounts reclassified
to Net earnings
Amounts reclassified
to Retained
earnings
Net current period
activity
Balance at December
31, 2018, net of tax $
(39)
—
$
(39) $
(316) $
75
18
(43)
2
—
(41)
$
93 $
Balance at December
31, 2017, net of tax $
Other comprehensive
(223) $
(6)
(4)
(10) $
25 $
86
(38)
48 $
73 $
4
(10)
15
9
(2)
—
(47)
(4)
1
—
(2) $
(51) $
1 $
(48)
(4)
(52)
(5) $
(296) $
(23) $
(273)
1
—
162
(20)
4
—
1 $
142 $
4 $
158
(20)
138
(4) $
(154) $
(19) $
(135)
(1)
—
—
(1)
(40)
(8)
15
(33)
3
—
—
3
(43)
(8)
15
(36)
(264) $
82 $
(5) $
(187) $
(16) $
(171)
67
NOTE 15 - INCOME TAXES
Income tax expense consisted of the following (in millions of dollars):
For the Years Ended December 31,
2017
2016
2018
Current income tax expense:
U.S. Federal
U.S. State
Foreign
Total current
Deferred income tax expense
Total income tax expense
$
$
166
32
47
245
13
258
$
$
248
29
22
299
14
313
$
$
311
38
25
374
12
386
Earnings (losses) before income taxes by geographical area consisted of the following (in millions of dollars):
U.S.
Foreign
For the Years Ended December 31,
2018
2017
2016
$
$
1,163
(82)
1,081
$
$
971
(35)
936
$
$
1,074
(55)
1,019
The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December
31, 2018 and 2017 were as follows (in millions of dollars):
Deferred tax assets:
Inventory
Accrued expenses
Accrued employment-related benefits
Foreign operating loss carryforwards
Tax credit carryforward
Other
Deferred tax assets
Less valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property, buildings and equipment
Intangibles
Software
Prepaids
Other
Deferred tax liabilities
Net deferred tax liability
The net deferred tax asset (liability) is classified as follows:
Noncurrent assets
Noncurrent liabilities (foreign)
Net deferred tax liability
68
As of December 31,
2018
2017
$
$
4
35
49
64
22
7
181
(72)
109
(29)
(105)
(15)
(6)
(8)
(163)
(54)
$
12
(66)
(54)
$
$
14
44
63
72
20
8
221
(84)
137
(33)
(119)
(20)
(6)
(4)
(182)
(45)
22
(67)
(45)
$
$
$
$
$
At December 31, 2018 the Company had $269 million of net operating loss (NOLs) carryforwards related primarily to
foreign operations. Some of the operating loss carryforwards may expire at various dates through 2038. The Company
has recorded a valuation allowance, which represents a provision for uncertainty as to the realization of the tax benefits
of these carryforwards and deferred tax assets that may not be realized. The Company's valuation allowance changed
as follows (in millions of dollars):
For the Years Ended December 31,
2018
2017
Balance at beginning of period
Increases primarily related to foreign NOLs
Releases related to foreign NOLs
Other changes, net
Increase related to U.S. foreign tax credits
Balance at end of period
$
$
(84)
$
(3)
16
—
(1)
(72)
$
(73)
(13)
8
5
(11)
(84)
A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in millions of dollars):
Federal income tax
State income taxes, net of federal income tax benefit
Clean energy credit
Foreign rate difference
Goodwill impairment
U.S. tax legislation impact (see note below)
Excess tax benefits from stock-based compensation
Other - net
Income tax expense
Effective tax rate
Clean Energy Credit
For the Years Ended December 31,
2017
2016
2018
$
$
227
32
(20)
20
20
—
(15)
(6)
258
23.9%
$
$
327
20
(38)
10
—
(3)
(14)
11
313
33.5%
$
$
357
26
(29)
21
—
—
—
11
386
37.9%
In 2015 and 2016, the Company acquired noncontrolling interests in limited liability companies established to produce
refined coal. The production and sale of refined coal that results in required emission reductions is eligible for tax
credits under Section 45 of the Internal Revenue Code. The Company received tax credits in proportion to its equity
interest. During the second half of 2018, the Company concluded its investments and will not have future benefits from
these interests.
U.S. Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law, which significantly revised the
U.S. corporate income tax system by lowering federal corporate income tax rates from 35% to 21% effective January
1, 2018, allowing accelerated expensing of qualified capital investments for a specific period, limiting net interest
expense deductions and transitioning U.S. international taxation from a worldwide to a territorial tax system that required
a one-time transition tax on unremitted earnings of certain foreign subsidiaries that were previously tax deferred, among
other changes.
During 2018, the Company completed the accounting for the impact from the Tax Act. The Company determined that
there was no material change from its estimate recorded on December 31, 2017.
69
Accounting for Income Taxes on Global Intangible Low-Taxed Income (GILTI)
The Company recognizes the tax on GILTI as a period expense in the period the tax is incurred. Under this policy, the
Company has not provided deferred taxes related to temporary differences that upon their reversal will affect the
amount of income subject to GILTI in the period.
Foreign Undistributed Earnings
Estimated gross undistributed earnings of foreign subsidiaries at December 31, 2018, amounted to $545 million. The
Company considers these undistributed earnings permanently reinvested in its foreign operations and is not recording
a deferred tax liability for any foreign withholding taxes on such amounts. The Company's permanent reinvestment
assertion has not changed following the enactment of the Tax Act. If at some future date the Company ceases to be
permanently reinvested in its foreign subsidiaries, the Company may be subject to foreign withholding and other taxes
on these undistributed earnings and may need to record a deferred tax liability for any outside basis difference in its
investments in its foreign subsidiaries.
Tax Uncertainties
The Company recognizes in the financial statements a provision for tax uncertainties, resulting from application of
complex tax regulations in multiple tax jurisdictions. The changes in the liability for tax uncertainties, excluding interest,
are as follows (in millions of dollars):
For the Years Ended December 31,
2018
2017
2016
Balance at beginning of year
Additions for tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions due to statute lapse
Settlements, audit payments, refunds - net
Balance at end of year
$
$
45
4
3
(5)
(9)
(1)
37
$
$
59
4
5
(13)
(5)
(5)
45
$
$
61
14
13
(15)
(1)
(13)
59
The Company classifies the liability for tax uncertainties in deferred income taxes and tax uncertainties. Included in
this amount are $13 million and $21 million at December 31, 2018 and 2017, respectively, of tax positions for which
the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Any
changes in the timing of deductibility of these items would not affect the annual effective tax rate but would accelerate
the payment of cash to the taxing authorities to an earlier period. Excluding the timing items, the remaining amounts
would affect the annual tax rate. In 2018, the changes to tax positions related generally to the impact of expiring
statutes, conclusion of audits and audit settlements.
The Company regularly undergoes examination of its federal income tax returns by the Internal Revenue Service. The
statute of limitations expired for the Company's 2014 federal tax return. The tax years 2015 through 2018 are open.
The Company is also subject to audit by state, local and foreign taxing authorities. Tax years 2009-2018 remain subject
to state and local audits and 2007-2018 remain subject to foreign audits. The amount of liability associated with the
Company's tax uncertainties may change within the next 12 months due to the pending audit activity, expiring statutes
or tax payments. A reasonable estimate of such change cannot be made.
The Company recognizes interest expense and penalties related to its tax uncertainties in the provision for income
taxes. For the years ended December 31, 2018, 2017 and 2016, the Company recognized an expense of approximately
$1 million for each year. Total accrued interest and penalties related to tax uncertainties as of December 31, 2018,
2017 and 2016, were approximately $4 million, $5 million and $4 million, respectively.
70
NOTE 16 - EARNINGS PER SHARE
Certain stock incentive plans grant stock awards that contain nonforfeitable rights to dividends meet the criteria of a
participating security. Under the two-class method, earnings are allocated between common stock and participating
securities. The presentation of basic and diluted earnings per share is required only for each class of common stock
and not for participating securities. As such, the Company presents basic and diluted earnings per share for its one
class of common stock.
The two-class method includes an earnings allocation formula that determines earnings per share for each class of
common stock according to dividends declared and undistributed earnings for the period. The Company’s reported
net earnings are reduced by the amount allocated to participating securities to arrive at the earnings allocated to
common stock shareholders for purposes of calculating earnings per share.
The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class
method. The Company has determined the two-class method to be the more dilutive. As such, the earnings allocated
to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed
earnings to participating securities to arrive at the earnings allocated to common stock shareholders for calculating
the diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in
millions of dollars, except for share and per share amounts):
For the Years Ended December 31,
2018
2017
2016
Net earnings attributable to W.W. Grainger, Inc. as reported
$
782
$
586
$
606
Distributed earnings available to participating securities
Undistributed earnings available to participating securities
Numerator for basic earnings per share - Undistributed and distributed
earnings available to common shareholders
Undistributed earnings allocated to participating securities
Undistributed earnings reallocated to participating securities
Numerator for diluted earnings per share - Undistributed and
distributed earnings available to common shareholders
(2)
(4)
776
4
(4)
(2)
(3)
581
3
(3)
(2)
(3)
601
3
(3)
$
776
$
581
$
601
Denominator for basic earnings per share – weighted average shares
56,142,604
57,674,977
60,430,892
Effect of dilutive securities
391,581
308,190
409,038
Denominator for diluted earnings per share – weighted average shares
adjusted for dilutive securities
Earnings per share two-class method
Basic
Diluted
56,534,185
57,983,167
60,839,930
$
$
13.82
13.73
$
$
10.07
10.02
$
$
9.94
9.87
71
NOTE 17 - SEGMENT INFORMATION
Grainger’s two reportable segments are the U.S. and Canada. The U.S. reportable segment reflects the results of
Grainger's U.S. businesses. The Canada reportable segment reflects the results for Acklands-Grainger, Inc. and its
subsidiaries. Other businesses include the endless assortment (single-channel online businesses), Zoro Tools, Inc.
(Zoro) in the U.S. and MonotaRO Co. (MonotaRO) in Japan, and smaller high-tough, high-service businesses in
Europe, Asia and Mexico. These businesses individually do not meet the criteria of a reportable segment. Operating
segments generate revenue almost exclusively through the distribution of MRO supplies, as service revenues account
for approximately 1% of total revenues for each operating segment.
The accounting policies of the segments are the same as those described in the summary of significant accounting
policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to a related
party sale. The segment results include certain centrally incurred costs for shared services that are charged to the
segments based upon the relative level of service used by each operating segment.
Following is a summary of segment results (in millions of dollars):
United States
Canada
2018
Total
Reportable
Segments
Other
businesses
Total
Total net sales
$
Intersegment net sales
Net sales to external customers
8,588 $
(457)
8,131
Segment operating earnings
1,338
653 $
9,241 $
2,441 $
11,682
—
653
(49)
(457)
8,784
1,289
(4)
2,437
(461)
11,221
8
1,297
United States
Canada
2017
Total
Reportable
Segments
Other
businesses
Total
Total net sales
$
Intersegment net sales
Net sales to external customers
7,960 $
(404)
7,556
Segment operating earnings
1,200
753 $
8,713 $
2,120 $
10,833
—
753
(77)
(404)
8,309
1,123
(4)
2,116
(408)
10,425
56
1,179
United States
Canada
2016
Total
Reportable
Segments
Other
businesses
Total
Total net sales
$
Intersegment net sales
Net sales to external customers
7,870 $
(348)
7,522
Segment operating earnings
1,269
734 $
8,604 $
1,885 $
10,489
—
734
(65)
(348)
8,256
1,204
(4)
1,881
(352)
10,137
40
1,244
72
Following are reconciliations of the segment information with the consolidated totals per the Financial Statements (in
millions of dollars):
2018
2017
2016
Operating earnings:
Total operating earnings for reportable segments
Other businesses
Unallocated expenses
Total consolidated operating earnings
Assets:
United States
Canada
Assets for reportable segments
Other current and noncurrent assets
Unallocated assets
Total consolidated assets
Depreciation and amortization:
United States
Canada
$
$
$
$
$
$
Depreciation and amortization for reportable segments $
Other businesses and unallocated
Total consolidated depreciation and amortization
Additions to long-lived assets
United States
Canada
Additions to long-lived assets for reportable segments
Other businesses and unallocated
Total consolidated additions to long-lived assets
Revenue by geographic location:
United States
Canada
Other foreign countries
Long-lived segment assets by geographic location:
United States
Canada
Other foreign countries
$
$
$
$
$
$
$
$
1,289
8
(139)
1,158
2,496
188
2,684
2,879
310
5,873
166
19
185
49
234
200
7
207
39
246
$
$
$
$
$
$
$
$
$
$
$
1,123
56
(144)
1,035
2,310
279
2,589
3,033
182
5,804
169
19
188
53
241
187
8
195
67
262
$
$
$
$
$
$
$
$
$
$
$
1,204
40
(131)
1,113
2,275
286
2,561
2,959
174
5,694
159
18
177
46
223
154
12
166
106
272
2018
2017
2016
8,613
658
1,950
11,221
1,140
136
202
1,478
$
$
$
$
7,948
761
1,716
10,425
1,098
199
247
1,544
$
$
$
$
7,834
740
1,563
10,137
1,135
211
210
1,556
Revenues are attributed to countries based on the ship-to location of the customer.
Segment and total consolidated operating earnings for the twelve months ended December 31, 2017 were restated
for the implementation of ASU 2017-07. See Note 1 to the Financial Statements.
73
Unallocated expenses and eliminations primarily relate to the Company's headquarters support services and
intercompany eliminations, which are not part of any reportable segment. Unallocated expenses include supply chain,
product management and procurement, finance, communications, human resources, information systems, legal and
compliance, internal audit and real estate. These services are provided in varying degrees to all businesses.
The Company is a broad-line distributor of MRO products and services. Products are regularly added and deleted
from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category
due to the way the business is managed.
Assets for reportable segments include net accounts receivable and first-in, first-out inventory which are reported to
the Company's Chief Operating Decision Maker. Other current and non-current assets include all other assets of the
reportable segments. Unallocated assets are primarily comprised of non-operating cash and cash equivalents, property,
buildings and equipment, net, and certain prepaid expenses related to the Company's headquarters support services.
Depreciation and amortization presented above includes depreciation of long-lived assets and amortization of
capitalized software.
NOTE 18 - CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings that are incidental to its
business, including claims related to product liability, general negligence, contract disputes, environmental issues,
unclaimed property, wage and hour laws, intellectual property, employment practices, regulatory compliance or other
matters and actions brought by employees, consumers, competitors, suppliers or governmental entities. As a
government contractor selling to federal, state and local governmental entities, the Company is also subject to
governmental or regulatory inquiries or audits or other proceedings, including those related to contract administration
or to pricing compliance. It is not expected that the ultimate resolution of any of these matters will have, either individually
or in the aggregate, a material adverse effect on the Company's consolidated financial position or results of operations.
From time to time, the Company has also been named, along with numerous other nonaffiliated companies, as a
defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of
personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products manufactured
by third parties purportedly distributed by the Company. While several lawsuits have been dismissed in the past based
on the lack of product identification, if a specific product distributed by the Company is identified in any pending or
future lawsuits, the Company will seek to exercise indemnification remedies against the product manufacturer to the
extent available. In addition, the Company believes that a substantial number of these claims are covered by insurance.
The Company has entered into agreements with its major insurance carriers relating to the scope and coverage and
the costs of defense, of lawsuits involving claims of exposure to asbestos. The Company believes it has strong legal
and factual defenses and intends to continue defending itself vigorously in these lawsuits. While the Company is unable
to predict the outcome of these proceedings, it believes that the ultimate resolution will not have, either individually or
in the aggregate, a material adverse effect on the Company’s consolidated financial position or results of operations.
74
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 2018 and 2017 is as follows (in millions of dollars, except for per share
amounts):
Net sales
COGS
Gross profit
SG&A
Operating earnings
Net earnings attributable to
W.W. Grainger, Inc.
Earnings per share - basic
Earnings per share - diluted
March 31
June 30
September 30
December 31
Total
2018 Quarter Ended
$
$
2,766
1,674
1,092
757
335
232
4.09
4.07
$
$
2,861
1,750
1,111
767
344
237
4.19
4.16
$
$
2,831
1,752
1,079
890
189
104
1.84
1.82
$
$
2,763
1,697
1,066
776
290
209
3.71
3.68
$
11,221
6,873
4,348
3,190
1,158
782
13.82
13.73
$
Net sales
COGS
Gross profit
SG&A
$
Operating earnings
Net earnings attributable to
W.W. Grainger, Inc.
Earnings per share - basic
Earnings per share - diluted
$
March 31
June 30
September 30
December 31
Total
2017 Quarter Ended
2,541
1,522
1,019
726
293
175
2.95
2.93
$
$
2,615
1,575
1,040
811
229
98
1.68
1.67
$
$
2,636
1,619
1,017
740
277
162
2.80
2.79
$
$
2,633
1,611
1,022
786
236
151
2.64
2.63
$
10,425
6,327
4,098
3,063
1,035
586
10.07
10.02
$
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: February 28, 2019
W.W. GRAINGER, INC.
By:
/s/ D.G. Macpherson
D.G. Macpherson
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of Grainger on February 28, 2019, in the capacities indicated.
/s/ D.G. Macpherson
D.G. Macpherson
Chairman and Chief Executive Officer,
Director
(Principal Executive Officer)
/s/ Thomas B. Okray
Thomas B. Okray
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric R. Tapia
Eric R. Tapia
Vice President and Controller
(Principal Accounting Officer)
/s/ Brian P. Anderson
Brian P. Anderson
Director
/s/ V. Ann Hailey
V. Ann Hailey
Director
/s/ Neil S. Novich
Neil S. Novich
Director
/s/ E. Scott Santi
E. Scott Santi
Director
/s/ Lucas E. Watson
Lucas E. Watson
Director
76
EXHIBIT NO.
1.1
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
EXHIBIT INDEX (1)
DESCRIPTION
Underwriting Agreement, dated as of May 15, 2017, among W.W. Grainger, Inc. and Morgan
Stanley & Co. LLC, J.P. Morgan Securities LLC and U.S. Bancorp Investments, Inc., as
representatives of the underwriters named therein, incorporated by reference to Exhibit 1.1 to
W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017.
Share Purchase Agreement, dated as of July 30, 2015, by and among Grainger, GWW UK
Holdings Limited, Gregory Family Office Limited and Michael Gregory, incorporated by
reference to Exhibit 2.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated July 31,
2015.
Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) to
W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
By-laws, as amended on March 9, 2017, incorporated by reference to Exhibit 3.1.1 to
W.W. Grainger, Inc.’s Current Report on Form 8-K dated March 9, 2017.
No instruments which define the rights of holders of W.W. Grainger, Inc.’s Industrial
Development Revenue Bonds are filed herewith, pursuant to the exemption contained in
Regulation S-K, Item 601(b)(4)(iii). W.W. Grainger, Inc. hereby agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of any such instrument.
Indenture, dated as of June 11, 2015, between W.W. Grainger, Inc. and U.S. Bank National
Association, as trustee, incorporated by reference to Exhibit 4.1 to W.W. Grainger, Inc.’s
Current Report on Form 8-K dated June 11, 2015.
First Supplemental Indenture, dated as of June 11, 2015, between W.W. Grainger, Inc. and U.S.
Bank National Association, as trustee, and Form of 4.60% Senior Notes due 2045, incorporated
by reference to Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated June 11,
2015.
Second Supplemental Indenture, dated as of May 16, 2016, between W.W. Grainger, Inc., and
U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to
W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 16, 2016.
Third Supplemental Indenture, dated as of May 22, 2017, between W.W. Grainger, Inc., and
U.S. Bank National Association, as trustee, incorporated by reference to Exhibit 4.1 to
W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017.
Form of 3.75% Senior Notes due 2046 (included in Exhibit 4.4), incorporated by reference to
Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 16, 2016.
Form of 4.20% Senior Notes due 2047 (included in Exhibit 4.5), incorporated by reference to
Exhibit 4.2 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated May 22, 2017.
1990 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(a)
to W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.*
Form of Indemnification Agreement between W.W. Grainger, Inc. and each of its directors and
certain of its executive officers, incorporated by reference to Exhibit 10(b)(i) to
W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.*
Frozen Executive Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(b)
(v) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2007.*
First amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to
Exhibit 10(b)(v)(1) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2008.*
Second amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to
Exhibit 10(b)(iv)(2) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2009.*
Supplemental Profit Sharing Plan, as amended, incorporated by reference to Exhibit 10(viii) to
W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.*
Supplemental Profit Sharing Plan II, as amended, incorporated by reference to Exhibit 10(b)(ix)
to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.*
Voluntary Salary and Incentive Deferral Plan, as amended, incorporated by reference to Exhibit
10(b)(xi) to W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December
31, 2007.*
Summary Description of the 2018 Directors Compensation Program.*
2005 Incentive Plan, as amended, incorporated by reference to Exhibit 10(d) to
W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.*
77
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
2010 Incentive Plan, incorporated by reference to Exhibit B of W.W. Grainger, Inc.’s Proxy
Statement dated March 12, 2010.*
Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its
executive officers, incorporated by reference to Exhibit 10(b)(xvi) to W.W. Grainger, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2009.*
Form of Stock Option Award and Restricted Stock Unit Agreement between W.W. Grainger, Inc.
and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvii) to
W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.*
Form of Restricted Stock Unit Agreement between W.W. Grainger, Inc. and certain of its
executive officers, incorporated by reference to Exhibit 10(b)(xviii) to W.W. Grainger, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2010.*
Form of 2012 Performance Share Award Agreement between W.W. Grainger, Inc. and certain
of its executive officers, incorporated by reference to Exhibit 10(b)(xix) to W.W. Grainger, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2012.*
Summary Description of the 2019 Management Incentive Program.*
Incentive Program Recoupment Agreement, incorporated by reference to Exhibit 10(b)(xxv) to
W.W. Grainger, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009.*
Form of Change in Control Employment Agreement between W.W. Grainger, Inc. and certain of
its executive officers, incorporated by reference to Exhibit 10(b)(xxvii) to W.W. Grainger, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2010.*
Form of 2013 Performance Share Award Agreement between Grainger and certain of its
executive officers, incorporated by reference to Exhibit 10(b)(xxiii) to Grainger's Annual Report
on Form 10-K for the year ended December 31, 2013.*
Form of 2014 Performance Share Award Agreement between W.W. Grainger, Inc. and certain
of its executive officers, incorporated by reference to Exhibit 10(b)(xxiv) to Grainger's Annual
Report on Form 10-K for the year ended December 31, 2014.*
Form of 2015 Performance Share Award Agreement between W.W. Grainger, Inc. and certain
of its executive officers, incorporated by reference to Exhibit 10.28 to W.W. Grainger, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2015.*
W.W. Grainger, Inc. 2015 Incentive Plan, incorporated by reference to Exhibit B of
W.W. Grainger, Inc.’s Proxy Statement dated March 13, 2015.*
First Amendment to the W.W. Grainger, Inc. 2015 Incentive Plan, incorporated by reference to
10.1 of W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2017.*
W.W. Grainger, Inc. 2015 Incentive Plan as Amended and Restated Effective October 31, 2018,
incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-
Q for the quarter ended September 30, 2018.*
Separation Agreement and General Release by and between W.W. Grainger, Inc. and Court
Carruthers dated July 22, 2015, incorporated by reference to Exhibit 10(b)(i) to
W.W. Grainger, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.*
£180,000,000 Facilities Agreement, dated as of August 26, 2015, by and among GWW UK
Holdings Ltd, W.W. Grainger, Inc., the lender parties thereto, Lloyds Bank PLC and Lloyds
Securities Inc., as Arrangers, and Lloyds Bank PLC, as Agent, incorporated by reference to
W.W. Grainger, Inc.’s Current Report on Form 8-K dated September 1, 2015.
Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its
executive officers, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2016.*
Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its
executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2016.*
Form of 2016 Performance Share Award Agreement between W.W. Grainger, Inc. and certain
of its executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.*
Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its
executive officers, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017.*
Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its
executive officers, incorporated by reference to Exhibit 10.3 to W.W. Grainger, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017.*
Form of 2017 Performance Share Award Agreement between W.W. Grainger, Inc. and certain
of its executive officers, incorporated by reference to Exhibit 10.4 to W.W. Grainger, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.*
78
10.33
10.34
10.35
10.36
10.37
10.38
21
23
31.1
31.2
32
Credit Agreement dated as of October 6, 2017, by and among W.W. Grainger, Inc., the lenders
parties thereto, and U.S. Bank National Association, as Administrative Agent, incorporated by
reference to Exhibit 10.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K dated October 6,
2017.
Separation Agreement and General Release by and between W.W. Grainger, Inc. and Ronald
L. Jadin dated April 2, 2018, incorporated by reference to Exhibit 10.1 to W.W. Grainger, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
Form of Separation Agreement and General Release by and between W.W. Grainger, Inc. and
Joseph C. High, incorporated by reference to Exhibit 10.2 to W.W. Grainger, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2018.*
Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Stock Option Agreement between W.W.
Grainger, Inc. and certain of its executive officers, incorporated by reference to Exhibit 10.3 to
W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.*
Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Restricted Stock Unit Agreement
between W.W. Grainger, Inc. and certain of its executive officers, incorporated by reference to
Exhibit 10.4 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018.*
Form of 2018 W.W. Grainger, Inc. 2015 Incentive Plan Performance Restricted Stock Unit
Agreement between W.W. Grainger, Inc. and certain of its executive officers, incorporated by
reference to Exhibit 10.5 to W.W. Grainger, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2018.*
Subsidiaries of Grainger.
Consent of Independent Registered Public Accounting Firm.
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
(*)
Management contract or compensatory plan or arrangement.
(1) Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the
SEC, upon request, copies of any such instruments.
79
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-203444) of W. W. Grainger, Inc.
(2) Registration Statement (Form S-4 No. 33-32091 and Post-Effective Amendment No.1) of W. W.
Grainger, Inc.
(3) Registration Statement (Form S-8 No. 33-43902) pertaining to the 1990 Long Term Stock Incentive
Plan of W. W. Grainger, Inc.
(4) Registration Statement (Form S-8 No. 333-24215) pertaining to the Director Stock Plan of W. W.
Grainger, Inc.
(5) Registration Statement (Form S-8 No. 333-61980) pertaining to the 2001 Long Term Stock Incentive
Plan of W. W. Grainger, Inc.
(6) Registration Statement (Form S-8 No. 333-105185) pertaining to the 2001 Long Term Stock
Incentive Plan of W. W. Grainger, Inc.
(7) Registration Statement (Form S-8 No. 333-124356) pertaining to the 2005 Incentive Plan of W. W.
Grainger, Inc.
(8) Registration Statement (Form S-8 No. 333-166345) pertaining to the 2010 Incentive Plan of W. W.
Grainger, Inc.
(9) Registration Statement (Form S-8 No. 333-203715) pertaining to the 2015 Incentive Plan of W. W.
Grainger, Inc.
of our reports dated February 28, 2019, with respect to the consolidated financial statements of W. W.
Grainger, Inc. and the effectiveness of internal control over financial reporting of W.W. Grainger, Inc.
included in this Annual Report on Form 10-K of W. W. Grainger, Inc. for the year ended December 31,
2018.
/s/ Ernst & Young LLP
Chicago, Illinois
February 28, 2019
80
I, D.G. Macpherson, certify that:
CERTIFICATION
Exhibit 31.1
I have reviewed this Annual Report on Form 10-K of W.W. Grainger, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 28, 2019
By:
Name:
Title:
/s/ D.G. Macpherson
D.G. Macpherson
Chairman and Chief Executive Officer
81
I, Thomas B. Okray, certify that:
CERTIFICATION
Exhibit 31.2
I have reviewed this Annual Report on Form 10-K of W.W. Grainger, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 28, 2019
By:
Name:
Title:
/s/ Thomas B. Okray
Thomas B. Okray
Senior Vice President and Chief Financial Officer
82
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report on Form 10-K of W.W. Grainger, Inc. (“Grainger”) for the annual period ended
December 31, 2018, (the “Report”), D.G. Macpherson, as Chief Executive Officer of Grainger, and Thomas B. Okray,
as Chief Financial Officer of Grainger, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of Grainger.
/s/ D.G. Macpherson
D.G. Macpherson
Chairman and Chief Executive
Officer
February 28, 2019
/s/ Thomas B. Okray
Thomas B. Okray
Senior Vice President and
Chief Financial Officer
February 28, 2019
83
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)
(in millions of dollars except for per share data)
The tables provided below reconcile the non-GAAP financial measures of adjusted operating margin, adjusted operating
earnings, adjusted net earnings and adjusted diluted earnings per share with the most directly comparable GAAP
financial measures.
In millions
Twelve Months Ended December 31,
2018
Operating Margin %
2017
Operating Margin %
Operating earnings reported
Restructuring, impairment and
other charges, net
Operating earnings adjusted
$1,158
186
$1,344
10.3%
1.7%
12.0%
$1,035
112
$1,147
In millions
Twelve Months Ended December 31,
Net earnings reported
Restructuring, impairment and other charges, net
Net earnings adjusted
2018
$782
170
$952
2017
$586
84
$670
Diluted earnings per share reported
$13.73
$10.02
9.9%
1.1%
11.0%
%
33%
42%
37%
Pretax restructuring, impairment and other charges, net
Tax effect1
Tax effect of impairment
U.S tax legislation2
Discrete tax items
Total, net of tax
Diluted earnings per share adjusted
3.26
(0.19)
(0.10)
—
—
2.97
$16.70
1.91
(0.21)
—
(0.06)
(0.20)
1.44
$11.46
46%
1 The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility
limitations and the company’s ability to realize the associated tax benefits.
2 U.S. tax legislation reflects the 2017 impact of the benefit of re-measurement of deferred taxes, partially offset by one-time deemed
repatriation tax.
84
BOARD OF DIRECTORS
Rodney C. Adkins
Former Senior Vice President of
International Business Machines
Corporation; President of 3RAM Group LLC
D.G. Macpherson
Chairman of the Board and
Chief Executive Officer of
W.W. Grainger, Inc.
E. Scott Santi
Chairman and Chief Executive Officer
of Illinois Tool Works Inc.
(1, 2)
(2, 3)
Brian P. Anderson
Former Chief Financial Officer of
OfficeMax Incorporated and
Baxter International, Inc.
Neil S. Novich
Former Chairman of the Board,
President and Chief Executive Officer
of Ryerson Inc.
James D. Slavik
Chairman of Mark IV Capital, Inc.;
Chief Executive Officer and President
of Emerald Bay Ventures II, LLC
(1, 2)
(1, 2)
(2, 3)
V. Ann Hailey
Former Executive Vice President and
Chief Financial Officer of L Brands, Inc.
(formerly Limited Brands, Inc.)
(1,* 2)
Stuart L. Levenick
Former Group President of
Caterpillar Inc.
(2,* 3, †)
Beatriz R. Perez
Senior Vice President and Chief
Communications, Public Affairs,
Sustainability and Marketing Assets
Officer of The Coca-Cola Company
(2, 3)
Michael J. Roberts
Former Global President and Chief
Operating Officer of McDonald’s
Corporation; Chief Executive Officer and
founder of Westside Holdings LLC
(2, 3*)
Lucas E. Watson
Chief Marketing Officer and Rideshare
General Manager at GM Cruise LLC
(1, 2)
(1) Member of Audit Committee
(2) Member of Board Affairs and
Nominating Committee
(3) Member of Compensation Committee
† Lead Director
* Committee Chair
GRAINGER LEADERSHIP TEAM
D.G. Macpherson
Chairman of the Board and
Chief Executive Officer
Kathleen S. Carroll
Senior Vice President and
Chief Human Resources Officer
Gregory J. Harman
Senior Vice President,
Chief Information Officer
John L. Howard
Senior Vice President and
General Counsel
Debra S. Oler
Senior Vice President and President,
North American Sales and Services
David L. Rawlinson II
Senior Vice President and President,
Online Business
Fred J. Costello
Senior Vice President and President,
Grainger International
Deidra C. Merriwether
Senior Vice President, U.S. Direct
Sales and Strategic Initiatives
Paige K. Robbins
Senior Vice President,
Grainger Chief Digital Officer
Barry I. Greenhouse
Senior Vice President,
Global Supply Chain
Thomas B. Okray
Senior Vice President and
Chief Financial Officer
85
SHAREHOLDER AND MEDIA INFORMATION
Company Headquarters
W.W. Grainger, Inc.
100 Grainger Parkway
Lake Forest, Illinois 60045-5201
847.535.1000
Annual Meeting
The 2019 Annual Meeting of Shareholders will be held
at the company’s headquarters in Lake Forest, Illinois,
at 10:00 a.m. CDT on Wednesday, April 24, 2019.
Auditor
Ernst & Young LLP
155 North Wacker Drive
Chicago, Illinois 60606-1787
Common stock listing
The company’s common stock is listed on the New York
Stock Exchange under the trading symbol GWW.
Investor Relations Contacts
Irene Holman
Vice President, Investor Relations
847.535.0809
Monica Gupta
Director, Investor Relations
847.535.0099
Grainger’s Annual Report, Form 10-K, Forms 10-Q, Forms
8-K, proxy statement and other reports filed with the Securities
and Exchange Commission, as well as its Fact Book and news
releases, including quarterly earnings, may be accessed free
of charge at the Investor Relations section of the company’s
website at grainger.com/investor. For more information,
contact Investor Relations at 847.535.1000.
Requests for other company-related information should be
made to Hugo Dubovoy, Jr., Vice President, Corporate Secretary,
at the company’s headquarters.
Transfer Agent, Registrar and Dividend Disbursing Agent
Instructions and inquiries regarding transfers, certificates,
changes of title or address, lost or missing dividend checks,
consolidation of accounts and elimination of multiple mailings
should be directed to:
Media Relations Contact
Joseph Micucci
Senior Director, External Affairs
847.535.0879
First Class/Registered/Certified Mail:
Computershare Investor Services
PO BOX 505000
Louisville, KY 40233-5000
800.446.2617
Courier Services:
Computershare Investor Services
462 South 4th Street Suite 1600
Louisville, KY 40202
Dividend Direct Deposit
Shareholders of record have the opportunity to have
their quarterly dividends electronically deposited directly
into their checking, money market or savings accounts
at financial institutions that participate in the automated
clearinghouse system.
Shareholders who are interested in taking advantage of
this service or would like more information on the program
should contact Computershare.
86
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: higher product costs or other expenses; a major loss of customers; loss or disruption of sources of supply;
increased competitive pricing pressures; failure to develop or implement new technology initiatives or business strategies; failure to
adequately protect intellectual property or successfully defend against infringement claims; the implementation, timing and results of
the Company’s strategic pricing initiatives and other 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,
privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information
technology or data security systems; general industry, economic, market or political conditions; general global economic conditions;
currency exchange rate fluctuations; market volatility, including volatility or price declines of the Company’s common stock; commodity
price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural
and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; the Company’s ability
to operate, integrate and leverage acquired businesses; changes in effective tax rates and other factors identified under 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.
For a list of factors that could cause Grainger’s results to differ materially from those that are presented, please see Item 7: Management’s
Discussion and Analysis of Financial Condition and Results of Operations, other factors identified under Item 1A: Risk Factors and
elsewhere in Grainger’s Annual Report on Form 10-K.
Recyclable. Please recycle.
© 2019 W.W. Grainger, Inc.