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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
 Commission file number 1-5684

W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
Illinois 36-1150280
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
100 Grainger Parkway
 
Lake Forest,Illinois 60045-5201
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (847) 535-1000             
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common StockGWWNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒  Accelerated Filer ☐   Non-accelerated Filer ☐   Smaller Reporting Company Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐  No ☒ 

There were 49,634,150 shares of the Company’s Common Stock outstanding as of October 19, 2023.
1


TABLE OF CONTENTS
 Page
PART I - FINANCIAL INFORMATION 
   
Item 1:Financial Statements (Unaudited) 
 
Condensed Consolidated Statements of Earnings 
    for the Three and Nine Months Ended September 30, 2023 and 2022
 
Condensed Consolidated Statements of Comprehensive Earnings 
    for the Three and Nine Months Ended September 30, 2023 and 2022
 
Condensed Consolidated Balance Sheets
    as of September 30, 2023 and December 31, 2022
 
Condensed Consolidated Statements of Cash Flows
    for the Nine Months Ended September 30, 2023 and 2022
Condensed Consolidated Statements of Shareholders' Equity
    for the Three and Nine Months Ended September 30, 2023 and 2022
 Notes to Condensed Consolidated Financial Statements
Item 2:Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3:Quantitative and Qualitative Disclosures About Market Risk
Item 4:Controls and Procedures
PART II - OTHER INFORMATION

   
Item 1:Legal Proceedings
Item 1A:Risk Factors
Item 2:Unregistered Sales of Equity Securities and Use of Proceeds
Item 5:Other Information
Item 6:Exhibits
Signatures 
  























2


PART I – FINANCIAL INFORMATION

Item 1: Financial Statements

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In millions of dollars and shares, except for per share amounts)
(Unaudited)
Three Months EndedNine Months Ended
 September 30,September 30,
 2023202220232022
Net sales$4,208 $3,942 $12,481 $11,426 
Cost of goods sold2,553 2,423 7,548 7,083 
Gross profit1,655 1,519 4,933 4,343 
Selling, general and administrative expenses988 916 2,925 2,672 
Operating earnings667 603 2,008 1,671 
Other (income) expense:  
Interest expense – net22 25 70 70 
Other – net(7)(9)(21)(20)
Total other expense – net15 16 49 50 
Earnings before income taxes
652 587 1,959 1,621 
Income tax provision159 145 468 405 
Net earnings493 442 1,491 1,216 
Less net earnings attributable to noncontrolling interest17 16 57 53 
Net earnings attributable to W.W. Grainger, Inc.$476 $426 $1,434 $1,163 
Earnings per share:  
Basic$9.47 $8.31 $28.45 $22.64 
Diluted$9.43 $8.27 $28.32 $22.52 
Weighted average number of shares outstanding:    
Basic49.9 50.8 50.1 51.0 
Diluted50.1 51.1 50.3 51.3 
 
The accompanying notes are an integral part of these financial statements.
3


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions of dollars)
(Unaudited)
 Three Months EndedNine Months Ended
September 30,September 30,
 2023202220232022
Net earnings$493 $442 $1,491 1,216 
Other comprehensive earnings (losses):  
Foreign currency translation adjustments – net of reclassification to earnings(39)(71)(69)(180)
Postretirement benefit plan losses and other – net of tax benefit of $1, $2, $3 and $4, respectively
(3)(3)(9)(10)
Total other comprehensive earnings (losses)(42)(74)(78)(190)
Comprehensive earnings – net of tax451 368 1,413 1,026 
Less comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings
17 16 57 53 
Foreign currency translation adjustments
(7)(14)(39)(61)
Total comprehensive earnings (losses) attributable to noncontrolling interest10 2 18 (8)
Comprehensive earnings attributable to W.W. Grainger, Inc.
$441 $366 $1,395 $1,034 

The accompanying notes are an integral part of these financial statements.
4


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share and per share amounts)
As of
Assets
(Unaudited) September 30, 2023
December 31, 2022
Current assets  
Cash and cash equivalents$601 $325 
Accounts receivable (less allowances for credit losses of $38 and $36, respectively)
2,444 2,133 
 Inventories – net2,196 2,253 
 Prepaid expenses and other current assets171 266 
Total current assets5,412 4,977 
Property, buildings and equipment – net1,543 1,461 
Goodwill364 371 
Intangibles – net238 232 
Operating lease right-of-use413 367 
Other assets170 180 
Total assets$8,140 $7,588 
Liabilities and shareholders' equity
Current liabilities  
Current maturities$34 $35 
Trade accounts payable1,067 1,047 
Accrued compensation and benefits297 334 
Operating lease liability73 68 
Accrued expenses403 474 
Income taxes payable24 52 
Total current liabilities1,898 2,010 
Long-term debt2,260 2,284 
Long-term operating lease liability361 318 
Deferred income taxes and tax uncertainties135 121 
Other non-current liabilities104 120 
Shareholders' equity 
Cumulative preferred stock – $5 par value – 12,000,000 shares authorized; none issued or outstanding
  
Common Stock – $0.50 par value – 300,000,000 shares authorized; 109,659,219 shares issued
55 55 
Additional contributed capital1,343 1,310 
Retained earnings11,859 10,700 
Accumulated other comprehensive losses(219)(180)
Treasury stock, at cost – 59,937,912 and 59,402,896
shares, respectively
(9,948)(9,445)
Total W.W. Grainger, Inc. shareholders’ equity3,090 2,440 
Noncontrolling interest292 295 
Total shareholders' equity3,382 2,735 
Total liabilities and shareholders' equity$8,140 $7,588 
 
 The accompanying notes are an integral part of these financial statements.
5


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
 September 30,
 20232022
Cash flows from operating activities: 
Net earnings$1,491 $1,216 
Adjustments to reconcile net earnings to net cash provided by operating activities:
  Provision for credit losses15 13 
  Deferred income taxes and tax uncertainties 20 20 
  Depreciation and amortization162 159 
  Net (gains) losses from sale of assets(4)1 
  Stock-based compensation49 38 
Change in operating assets and liabilities: 
   Accounts receivable(351)(487)
   Inventories42 (253)
   Prepaid expenses and other assets104 (39)
   Trade accounts payable55 261 
   Accrued liabilities(106)51 
   Income taxes – net(34)8 
   Other non-current liabilities(16)(15)
Net cash provided by operating activities1,427 973 
Cash flows from investing activities: 
Capital expenditures(318)(208)
Proceeds from sale of assets11 7 
Other – net (11)
Net cash used in investing activities(307)(212)
Cash flows from financing activities: 
Proceeds from debt7 1 
Payments of debt(37) 
Proceeds from stock options exercised29 21 
Payments for employee taxes withheld from stock awards(32)(22)
Purchases of treasury stock(506)(383)
Cash dividends paid(300)(285)
Net cash used in financing activities(839)(668)
Exchange rate effect on cash and cash equivalents(5)(19)
Net change in cash and cash equivalents276 74 
Cash and cash equivalents at beginning of year325 241 
Cash and cash equivalents at end of period$601 $315 
The accompanying notes are an integral part of these financial statements.
6


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)

Common StockAdditional Contributed CapitalRetained EarningsAccumulated Other Comprehensive Earnings (Losses)Treasury StockNoncontrolling
Interest
Total
Balance at January 1, 2022$55 $1,270 $9,500 $(96)$(8,855)$286 $2,160 
Stock-based compensation— 10 — — 3 — 13 
Purchases of treasury stock— — — — (75)— (75)
Net earnings— — 366 — — 19 385 
Other comprehensive earnings (losses)— — — (13)— (16)(29)
Cash dividends paid ($1.62 per share)
— — (84)— — — (84)
Balance at March 31, 2022$55 $1,280 $9,782 $(109)$(8,927)$289 $2,370 
Stock-based compensation— 7 — — 2 1 10 
Purchases of treasury stock— — — — (117)(1)(118)
Net earnings— — 371 — — 18 389 
Other comprehensive earnings (losses)— — — (56)— (31)(87)
Cash dividends paid ($1.72 per share)
— — (87)— — (12)(99)
Balance at June 30, 2022$55 $1,287 $10,066 $(165)$(9,042)$264 $2,465 
Stock-based compensation$— $12 $— $— $3 $— $15 
Purchases of treasury stock— — — — (184)— (184)
Net earnings— — 426 — — 16 442 
Other comprehensive earnings (losses)— — — (60)— (14)(74)
Cash dividends paid ($1.72 per share)
— — (90)— — (12)(102)
Balance at September 30, 2022$55 $1,299 $10,402 $(225)$(9,223)$254 $2,562 

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







7


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of dollars, except for per share amounts)
(Unaudited)


Common StockAdditional Contributed CapitalRetained EarningsAccumulated Other Comprehensive Earnings (Losses)Treasury StockNoncontrolling
Interest
Total
Balance at January 1, 2023$55 $1,310 $10,700 $(180)$(9,445)$295 $2,735 
Stock-based compensation— 14 — — 18 — 32 
Purchases of treasury stock— — — — (142)— (142)
Net earnings— — 488 — — 20 508 
Other comprehensive earnings (losses)— — — 4 — (5)(1)
Cash dividends paid ($1.72 per share)
— — (87)— — — (87)
Balance at March 31, 2023$55 $1,324 $11,101 $(176)$(9,569)$310 $3,045 
Stock-based compensation— 7 — — (7)2 2 
Purchases of treasury stock— — — — (168) (168)
Net earnings— — 470 — — 20 490 
Other comprehensive earnings (losses)— — — (8)— (27)(35)
Cash dividends paid ($1.86 per share)
— — (94)— — (13)(107)
Balance at June 30, 2023$55 $1,331 $11,477 $(184)$(9,744)$292 $3,227 
Stock-based compensation— 13 — — (1)— 12 
Purchases of treasury stock— — — — (203)(1)(204)
Net earnings— — 476 — — 17 493 
Other comprehensive earnings (losses)— — — (35)— (7)(42)
Capital contribution— (1)— — — 3 2 
Cash dividends paid ($1.86 per share)
— — (94)— — (12)(106)
Balance at September 30, 2023$55 $1,343 $11,859 $(219)$(9,948)$292 $3,382 

The accompanying notes are an integral part of these financial statements.
8

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
W.W. Grainger, Inc. is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services with operations primarily in North America (N.A.), Japan and the United Kingdom (U.K.). 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.

Basis of Presentation
The Company's Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and therefore do not include all information and disclosures normally included in the annual Consolidated Financial Statements. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from these estimated amounts. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.

The Condensed Consolidated Balance Sheet at December 31, 2022, has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2023 (2022 Form 10-K).

There were no material changes to the Company’s significant accounting policies from those disclosed in Note 1 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K.

NOTE 2 - REVENUE
Grainger serves a large number of customers in diverse industries, which are subject to different economic and market-specific factors. The Company's revenue is primarily comprised of MRO product sales and related activities.

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

The following tables present the Company's percentage of revenue by reportable segment and by major customer industry:
9

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three Months Ended September 30,
2023
2022(1)
High-Touch Solutions N.A.Endless Assortment
Total Company(2)
High-Touch Solutions N.A.Endless Assortment
Total Company(2)
Commercial Services7 %12 %8 %7 %13 %8 %
Contractors5 %12 %6 %5 %12 %6 %
Government19 %3 %16 %18 %3 %15 %
Healthcare7 %2 %6 %7 %2 %6 %
Manufacturing30 %30 %30 %31 %30 %30 %
Retail4 %4 %4 %4 %4 %4 %
Transportation5 %2 %4 %4 %2 %4 %
Utilities3 %2 %2 %3 %2 %3 %
Warehousing4 % %4 %5 % %4 %
Wholesale7 %17 %9 %7 %16 %9 %
Other(3)
9 %16 %11 %9 %16 %11 %
Total net sales100 %100 %100 %100 %100 %100 %
Percent of total company revenue81 %17 %100 %81 %18 %100 %
(1) Customer industry results for the three months ended September 30, 2022 were reclassified to reflect the Company's current year classifications, which primarily uses the North American Industry Classification System (NAICS) beginning January 1, 2023.
(2) Total Company includes other businesses, which includes the Cromwell business. Other businesses account for approximately 2% and 1% of total Company revenue for the three months ended September 30, 2023 and 2022, respectively.
(3) Other primarily includes revenue from industries and customers that are not material individually, including hospitality, restaurants, property management and natural resources.

10

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Nine Months Ended September 30,
2023
2022(1)
High-Touch Solutions N.A.Endless Assortment
Total Company(2)
High-Touch Solutions N.A.Endless Assortment
Total Company(2)
Commercial Services7 %12 %8 %7 %13 %8 %
Contractors5 %12 %6 %5 %12 %6 %
Government20 %3 %16 %18 %3 %15 %
Healthcare7 %2 %6 %7 %2 %6 %
Manufacturing30 %30 %30 %31 %30 %31 %
Retail4 %4 %4 %4 %4 %4 %
Transportation4 %2 %4 %4 %2 %4 %
Utilities3 %2 %3 %3 %2 %3 %
Warehousing4 %1 %3 %5 % %4 %
Wholesale7 %16 %9 %7 %16 %8 %
Other(3)
9 %16 %11 %9 %16 %11 %
Total net sales100 %100 %100 %100 %100 %100 %
Percent of total company revenue81 %18 %100 %80 %18 %100 %
(1) Customer industry results for the nine months ended September 30, 2022 were reclassified to reflect the Company's current year classifications, which primarily uses the North American Industry Classification System (NAICS) beginning January 1, 2023.
(2) Total Company includes other businesses, which includes the Cromwell business. Other businesses account for approximately 1% and 2% of total Company revenue for the nine months ended September 30, 2023 and 2022.
(3) Other primarily includes revenue from industries and customers that are not material individually, including hospitality, restaurants, property management and natural resources.

Total accrued sales incentives are recorded in Accrued expenses and were approximately $116 million and $102 million as of September 30, 2023 and December 31, 2022, respectively.

The Company had no material unsatisfied performance obligations, contract assets or liabilities as of September 30, 2023 and December 31, 2022.


NOTE 3 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consisted of the following (in millions of dollars):
As of
September 30, 2023December 31, 2022
Land and land improvements$362 $318 
Building, structures and improvements1,411 1,463 
Furniture, fixtures, machinery and equipment1,802 1,662 
Property, buildings and equipment$3,575 $3,443 
Less accumulated depreciation2,032 1,982 
Property, buildings and equipment – net$1,543 $1,461 





11

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company did not identify any significant events or changes in circumstances that indicated the existence of impairment indicators during the three and nine months ended September 30, 2023. As such, quantitative assessments were not required.     

The balances and changes in the carrying amount of goodwill by segment are as follows (in millions of dollars):
High-Touch Solutions N.A.Endless AssortmentTotal
Balance at January 1, 2022$321 $63 $384 
Translation(8)(5)(13)
Balance at December 31, 2022313 58 371 
Translation(1)(6)(7)
Balance at September 30, 2023
$312 $52 $364 
The Company's cumulative goodwill impairments as of September 30, 2023 were $137 million. No goodwill impairments were recorded for the nine months ended September 30, 2023 or the twelve months ended December 31, 2022.
The balances and changes in intangible assets net are as follows (in millions of dollars):
As of
September 30, 2023December 31, 2022
Weighted average lifeGross carrying amountAccumulated amortizationNet carrying amountGross carrying amountAccumulated amortizationNet carrying amount
Customer lists and relationships11.7 years$214 $184 $30 $217 $181 $36 
Trademarks, trade names and other14.4 years32 24 8 32 22 10 
Non-amortized trade names and otherIndefinite19  19 22  22 
Capitalized software4.2 years632 451 181 580 416 164 
Total intangible assets6.7 years$897 $659 $238 $851 $619 $232 














12

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 5 - DEBT
Total debt, including long-term, current maturities and debt issuance costs and discounts – net, consisted of the following (in millions of dollars):
As of
September 30, 2023
December 31, 2022
Carrying ValueFair Value Carrying ValueFair Value
4.60% senior notes due 2045
$1,000 $857 $1,000 $916 
1.85% senior notes due 2025
500 475 500 470 
4.20% senior notes due 2047
400 328 400 338 
3.75% senior notes due 2046
400 299 400 317 
MonotaRO term loan 34 34 69 69 
Other(21)(21)(29)(29)
Subtotal2,313 1,972 2,340 2,081 
Less current maturities(34)(34)(35)(35)
Debt issuance costs and discounts – net of amortization
(19)(19)(21)(21)
Long-term debt$2,260 $1,919 $2,284 $2,025 


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

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

The Company uses interest rate swaps to manage the risks associated with its 1.85% Senior Notes. These swaps were designated for hedge accounting treatment as fair value hedges. The resulting carrying value adjustments as of September 30, 2023 and December 31, 2022, are presented within Other in the table above. For further discussion on the Company's hedge accounting policies, see Note 6.

MonotaRO Term Loan
In August 2020, MonotaRO entered into a ¥9 billion term loan agreement to fund technology investments and the expansion of its distribution center (DC) network. As of September 30, 2023 and December 31, 2022, the carrying amount of the term loan, including current maturities due within one year, was $34 million and $69 million, respectively. The term loan matures in August 2024, payable over four equal semi-annual principal installments in 2023 and 2024 and bears an average interest of 0.05%.

Fair Value
The estimated fair value of the Company’s Senior Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy.

For further information on the Company’s debt instruments, see Note 5 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company’s 2022 Form 10-K.



13

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6 - DERIVATIVE INSTRUMENTS
The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Grainger currently enters into certain derivatives or other financial instruments to hedge against these risks, and may continue to do so in the future.

Fair Value Hedges
The Company uses interest rate swaps to hedge a portion of its fixed-rate long-term debt. These swaps are treated as fair value hedges and consequently the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item, are recognized in the Consolidated Statements of Earnings in Interest expense – net. The notional amount of the Company’s outstanding fair value hedges as of September 30, 2023 and December 31, 2022 was $450 million and $500 million, respectively.

The liability hedged by the interest rate swaps is recorded on the Condensed Consolidated Balance Sheets in Long-term debt. As of September 30, 2023 and December 31, 2022, the carrying amount of the hedged item, including the cumulative amount of fair value hedging adjustments was $424 million and $466 million, respectively.

The effect of the Company's fair value hedges on the Condensed Consolidated Statements of Earnings in Interest expense net for the three and nine months ended September 30, 2023 and 2022, are shown in the following table (in millions of dollars):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Gain or (loss):
Interest rate swaps:
      Hedged item$(2)$11 $(8)$36 
      Derivatives designated as hedging instrument$2 $(11)$8 $(36)

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, are shown in the following table (in millions of dollars):
As of
September 30, 2023December 31, 2022
Interest rate swaps reported in Other non-current liabilities$23 $34 

Fair Value
The estimated fair values of the Company's derivative instruments were based on quoted market forward rates, which are classified as Level 2 inputs within the fair value hierarchy and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. No adjustments were required during the current period to reflect the counterparty’s credit risk or the Company’s own nonperformance risk.

NOTE 7 - SEGMENT INFORMATION
Grainger's two reportable segments are High-Touch Solutions N.A. and Endless Assortment. The remaining businesses, which include the Company's Cromwell business, are classified as Other to reconcile to consolidated results. These remaining businesses individually and in the aggregate do not meet the criteria of a reportable segment.

The Company's corporate costs are allocated to each reportable segment based on benefits received. Additionally, intersegment sales transactions, which are sales between Grainger businesses in separate reportable segments, are eliminated within the segment to present only the impact of sales to external customers. Service fees for
14

W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
intersegment sales are included in each segment's selling, general and administrative expenses and are also eliminated in the Company's Consolidated Financial Statements.


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

 Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
 Net salesOperating earnings (losses)Net salesOperating earnings (losses)Net salesOperating earnings (losses)Net salesOperating earnings (losses)
High-Touch Solutions N.A.$3,403 $612 $3,180 $550 $10,052 $1,833 $9,111 $1,506 
Endless Assortment732 55 701 58 2,207 178 2,117 175 
Other73  61 (5)222 (3)198 (10)
Total Company$4,208 $667 $3,942 $603 $12,481 $2,008 $11,426 $1,671 

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

NOTE 8 - CONTINGENCIES AND LEGAL MATTERS
From time to time the Company is involved in various legal and administrative proceedings, including claims related to: product liability, safety or compliance; privacy and cybersecurity matters; negligence; contract disputes; environmental issues; unclaimed property; wage and hour laws; intellectual property; advertising and marketing; consumer protection; pricing (including disaster or emergency declaration pricing statutes); employment practices; regulatory compliance, including trade and export matters; anti-bribery and corruption; and other matters and actions brought by employees, consumers, competitors, suppliers, customers, governmental entities and other third parties.

There have been no material changes to the contingencies and legal matters from those disclosed in Note 15 of the Notes to Consolidated Financial Statements in Part II, Item 8: Financial Statements and Supplementary Data in the Company's 2022 Form 10-K and the Company's Form 10-Q for the quarterly period ended March 31, 2023. Although the Company is unable to determine the probability of the outcome of these matters or the estimate of potential loss or range of loss, the Company anticipates that any potential liability, which may arise of or with respect to these matters, will not have, either individually or in the aggregate, a material adverse effect on the Company's financial position, results of operations or cash flows.

NOTE 9 - SUBSEQUENT EVENTS
Revolving Credit Facility
On October 11, 2023, the Company entered into a five-year syndicated $1.25 billion revolving credit facility (the 2023 Credit Facility). The 2023 Credit Facility is unsecured and subject to two one-year extensions if sufficient lenders agree. The 2023 Credit Facility replaced the Company's previous revolving credit facility entered into in February 2020.

Dividend
On October 25, 2023, the Company’s Board of Directors declared a quarterly dividend of $1.86 per share, payable December 1, 2023, to shareholders of record on November 13, 2023.
15

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of W.W. Grainger, Inc. (Grainger or Company) as it is viewed by management of the Company. The following discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in the Company's 2022 Form 10-K and the Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1: Financial Statements of this Form 10-Q.

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

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

Strategic Priorities
For a discussion of the Company’s strategic priorities for 2023, see Part 1, Item 1: Business and Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2022 Form 10-K.

Recent Events

Inflationary Cost Environment and Macroeconomic Pressures
The global economy continues to experience volatile disruptions including to the commodity, labor and transportation markets, arising from a combination of geopolitical events and various economic and financial factors. These disruptions have contributed to an inflationary environment which has affected, and may continue to affect, the price and availability of certain products and services necessary for the Company's operations. Such disruptions have impacted, and may continue to impact, the Company's business, financial condition and results of operations.

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

For further discussion of the Company's risks and uncertainties, see Part I, Item 1A: Risk Factors in the Company’s 2022 Form 10-K.
16

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations –Three Months Ended September 30, 2023
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars except per share amounts):
Three Months Ended September 30,
Percent Increase/(Decrease) from Prior Year
As a Percent of Net Sales
2023202220232022
Net sales(1)
$4,208 $3,942 6.7 %100.0 %100.0 %
Cost of goods sold2,553 2,423 5.3 60.7 61.5 
Gross profit1,655 1,519 9.1 39.3 38.5 
Selling, general and administrative expenses988 916 7.9 23.4 23.2 
Operating earnings667 603 10.7 15.9 15.3 
Other expense – net15 16 (4.1)0.4 0.4 
Income tax provision159 145 9.6 3.8 3.7 
Net earnings493 442 11.7 11.7 11.2 
Noncontrolling interest17 16 6.4 0.4 0.4 
Net earnings attributable to W.W. Grainger, Inc.$476 $426 11.9 11.3 10.8 
Diluted earnings per share:$9.43 $8.27 14.1 %
(1) For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q.

The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior-year period to the most recent period (in millions of dollars):
Three Months Ended September 30,
20232022
Net sales$4,208 $3,942 
  $ Change from prior-year period266 570 
  % Change from prior-year period6.7 %16.9 %
Daily sales(1)
$66.8 $61.6 
  $ Change from prior-year period5.2 8.9 
  % Change from prior-year period8.4 %16.9 %
Daily sales impact of currency fluctuations(0.3)%(3.4)%
(1) Daily sales are defined as the total net sales for the period divided by the number of U.S. selling days in the period. There were 63 and 64 sales days in the three months ended September 30, 2023 and 2022, respectively.

Net sales of $4,208 million for the three months ended September 30, 2023 increased $266 million, or 7%, and on a daily basis, net sales increased 8% compared to the same period in 2022. For further discussion on the Company's net sales, see the Segment Analysis section below.

Gross profit of $1,655 million for the three months ended September 30, 2023 increased $136 million, or 9%, compared to the same period in 2022. Gross profit margin of 39.3% increased 80 basis points compared to the same period in 2022. For further discussion on the Company's gross profit, see the Segment Analysis section below.
17

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SG&A of $988 million for the three months ended September 30, 2023 increased $72 million, or 8%, compared to the same period in 2022. The increase was primarily due to higher marketing expenses.

Operating earnings of $667 million for the three months ended September 30, 2023 increased $64 million, or 11%, compared to the same period in 2022.

Income taxes of $159 million for the three months ended September 30, 2023 increased $14 million, or 10%, compared to the same period in 2022. The increase in tax expense was driven by higher taxable operating earnings for the third quarter of 2023. Grainger's effective tax rates were 24.4% and 24.7% for the three months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to favorable tax impacts related to mix of foreign earnings.

Net earnings of $476 million attributable to W.W. Grainger, Inc. for the three months ended September 30, 2023 increased $50 million, or 12%, compared to the same period in 2022.

Diluted earnings per share was $9.43 for the three months ended September 30, 2023, an increase of 14% compared to $8.27 for the same period in 2022.

Segment Analysis
For further segment information, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.

High-Touch Solutions N.A.
The following table shows reported segment results (in millions of dollars):
Three Months Ended September 30,
20232022Percent Increase
Net sales$3,403 $3,180 7.0 %
Gross profit$1,418 $1,291 9.8 %
Selling, general and administrative expenses$806 $741 8.6 %
Operating earnings$612 $550 11.4 %

Net sales of $3,403 million for the three months ended September 30, 2023 increased $223 million, or 7%, and on a daily basis, increased 9% compared to the same period in 2022. The increase was due to price, which includes customer mix, of 3% and volume, which includes product mix of 6%.

Gross profit of $1,418 million for the three months ended September 30, 2023 increased $127 million, or 10%, compared to the same period in 2022. Gross profit margin of 41.7% increased 110 basis points compared to the same period in 2022. The increase was driven by freight and supply chain efficiencies as well as improved product mix in the third quarter of 2023.

SG&A of $806 million for the three months ended September 30, 2023 increased $65 million, or 9%, compared to the same period in 2022. The increase was primarily due to higher marketing expenses. SG&A leverage decreased 40 basis points compared to the same period in 2022.

Operating earnings of $612 million for the three months ended September 30, 2023 increased $62 million, or 11%, compared to the same period in 2022.





18

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Endless Assortment
The following table shows reported segment results (in millions of dollars):
Three Months Ended September 30,
20232022Percent Increase/(Decrease)
Net sales$732 $701 4.3 %
Gross profit$216 $209 3.5 %
Selling, general and administrative expenses$161 $152 6.4 %
Operating earnings$55 $58 (4.3)%

Net sales of $732 million for the three months ended September 30, 2023 increased $31 million, or 4%, and on a daily basis, increased 6% compared to the same period in 2022. The increase was due to sales growth of 9% driven by customer acquisition for the segment and enterprise growth at MonotaRO, partially offset by declining sales to non-core, consumer-like customers and slower overall market demand at Zoro. Sales growth was offset by unfavorable foreign exchange of 3% due to changes in the exchange rate between the U.S. dollar and the Japanese yen.

Gross profit of $216 million for the three months ended September 30, 2023 increased $7 million, or 4%, compared to the same period in 2022. Gross profit margin of 29.6% decreased 20 basis points compared to the same period in 2022. The decrease was driven by unfavorable Zoro product mix partially offset by price realization and freight efficiencies at MonotaRO in the third quarter of 2023.

SG&A of $161 million for the three months ended September 30, 2023 increased $9 million, or 6%, compared to the same period in 2022. The increase was primarily driven by higher marketing expenses. SG&A leverage decreased 50 basis points compared to the same period in 2022.

Operating earnings of $55 million for the three months ended September 30, 2023 decreased $3 million, or 4%, compared to the same period in 2022.

19

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Nine Months Ended September 30, 2023
The following table is included as an aid to understanding the changes in Grainger's Condensed Consolidated Statements of Earnings (in millions of dollars except per share amounts):

Nine Months Ended September 30,
Percent Increase/(Decrease) from Prior Year
As a Percent of Net Sales
2023202220232022
Net sales(1)
$12,481 $11,426 9.2 %100.0 %100.0 %
Cost of goods sold7,548 7,083 6.6 60.5 62.0 
Gross profit4,933 4,343 13.6 39.5 38.0 
Selling, general and administrative expenses2,925 2,672 9.5 23.4 23.4 
Operating earnings2,008 1,671 20.2 16.1 14.6 
Other expense – net49 50 (1.6)0.4 0.4 
Income tax provision468 405 15.4 3.7 3.5 
Net earnings1,491 1,216 22.6 11.9 10.7 
Noncontrolling interest57 53 7.5 0.5 0.5 
Net earnings attributable to W.W. Grainger, Inc.$1,434 $1,163 23.3 11.5 10.2 
Diluted earnings per share:$28.32 $22.52 25.7 %
(1) For further information regarding the Company's disaggregated revenue, see Note 2 of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1: Financial Statements of this Form 10-Q.

The following table is included as an aid to understanding the changes in Grainger's total net sales and daily sales from the prior period to the most recent period (in millions of dollars):

Nine Months Ended September 30,
20232022
Net sales$12,481 $11,426 
  $ Change from prior-year period1,055 1,763 
  % Change from prior-year period9.2 %18.2 %
Daily sales(1)
$65.3 $59.5 
  $ Change from prior-year period5.8 8.9 
  % Change from prior-year period9.8 %17.6 %
Daily sales impact of currency fluctuations(1.3)%(2.5)%
(1) Daily sales are defined as the total net sales for the period divided by the number U.S. selling days in the period. There were 191 and 192 sales days in the nine months ended September 30, 2023 and 2022, respectively.

Net sales of $12,481 million for the nine months ended September 30, 2023 increased $1,055 million, or 9%, and on a daily basis, increased 10% compared to the same period in 2022. For further discussion on the Company's net sales, see the Segment Analysis section below.

Gross profit of $4,933 million for the nine months ended September 30, 2023 increased $590 million, or 14%, compared to the same period in 2022. Gross profit margin of 39.5% increased 150 basis points compared to the
20

W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
same period in 2022. For further discussion on the Company's gross profit, see the Segment Analysis section below.

SG&A of $2,925 million for the nine months ended September 30, 2023 increased $253 million, or 9%, compared to the same period in 2022. The increase was primarily due to higher marketing and payroll expenses.

Operating earnings of $2,008 million for the nine months ended September 30, 2023 increased $337 million, or 20%, compared to the same period in 2022.

Income taxes of $468 million for the nine months ended September 30, 2023 increased $63 million or 15%, compared to the same period in 2022. The increase in tax expense was driven by higher taxable operating earnings for the nine months ended September 30, 2023. Grainger's effective tax rates were 23.9% and 25.0% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to increased stock compensation tax benefit compared to the same period in 2022.

Net earnings of $1,434 million attributable to W.W. Grainger, Inc. for the nine months ended September 30, 2023 increased $271 million, or 23%, compared to the same period in 2022.

Diluted earnings per share was $28.32 for the nine months ended September 30, 2023, an increase of 26% compared to $22.52 for the same period in 2022.

Segment Analysis
For further segment information, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1: Financial Statements of this Form 10-Q.

High-Touch Solutions N.A.
The following table shows reported segment results (in millions of dollars):
Nine Months Ended September 30,
20232022Percent Increase
Net sales$10,052 $9,111 10.3 %
Gross profit$4,213 $3,666 14.9 %
Selling, general and administrative expenses$2,380 $2,160 10.2 %
Operating earnings$1,833 $1,506