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MarketScreener Homepage  >  Equities  >  Nyse  >  W.W. Grainger,Inc.    GWW

W.W. GRAINGER,INC.

(GWW)
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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

07/23/2020 | 04:28pm EST

General


W.W. Grainger, Inc. (Grainger or the Company) 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
Europe. More than 3.5 million customers worldwide rely on Grainger for products
such as safety, gloves, ladders, motors and janitorial supplies, along with
services including inventory management and technical support. These customers
represent a broad collection of industries (see Note 4 in the Condensed
Consolidated Financial Statements (Financial Statements)). Customers place
orders through digital channels, over the phone and at local branches.
Approximately 5,000 suppliers provide Grainger with approximately 1.6 million
products stocked in Grainger's distribution centers (DCs) and branches
worldwide.

Grainger's two reportable segments are the United States (U.S.) and Canada (Grainger Canada and its subsidiaries). These reportable segments reflect the results of the Company's high-touch businesses in those geographies. Other businesses include the endless assortment businesses, (Zoro in the U.S. and MonotaRO in Japan), and smaller high-touch businesses in the United Kingdom (U.K.) and Mexico.

Business Divestiture


Consistent with the Company's strategic focus on broad line MRO distribution in
key markets, on June 30, 2020, Grainger divested the Fabory business in Europe
(Fabory). Accordingly, the Company's operating results include Fabory's results
through the date of divestiture. Grainger recognized a net loss of approximately
$109 million (presented within Selling, general and administrative expenses
(SG&A)) as a result of this divestiture. The impact to the Company's financial
condition as of June 30, 2020 was not material.

Strategic Priorities Amidst the COVID-19 Pandemic


The Company's strategic priorities for 2020 have not changed from those stated
in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in the Company's Annual Report for the year
ended December 31, 2019 on Form 10-K (the 2019 Form 10-K), which are to "Keep
the World Working" and relentlessly expand Grainger's leadership position in the
MRO space by being the go-to-partner for people who build and run safe,
sustainable and productive operations. However, the respective business plans to
achieve these strategic priorities continue to be affected by the global
outbreak of Coronavirus in 2019 (COVID-19 pandemic).

In March 2020, the World Health Organization characterized COVID-19 as a
pandemic. The rapid spread of the COVID-19 pandemic has caused significant
disruptions in the U.S. and global markets, and economists expect the economic
impact will continue to be significant. Grainger is an essential business and
its major facilities have been allowed to remain operational during the pandemic
as customers have depended on Grainger's products and services to keep their
businesses up and running. As the COVID-19 pandemic continues to impact global
markets and the needs of customers, employees, suppliers and communities change,
the Company's efforts and business plans have evolved accordingly. Grainger is
currently focused on remaining open and operational in order to serve customers
and communities well through the pandemic, support the needs and safety of
employees and ensure the Company continues to operate with a strong financial
position.

Impact of the COVID-19 Pandemic to Grainger Businesses

The COVID-19 pandemic has impacted and is likely to continue impacting Grainger's businesses and operations as well as the operations of its customers and suppliers.


On the customer front, business re-openings and related activity during the
second quarter of 2020 varied based on geography and industry. For example, for
the U.S. and endless assortment businesses, sales to government, healthcare and
other essential businesses remained strong through the quarter but sales to
non-essential and disrupted industries were depressed compared to pre-COVID-19
pandemic levels. The Canada and other international high-touch businesses have
been severely impacted by pandemic-related slowdowns with each geography
experiencing meaningful year-over-year declines.
                                       22
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

The Company's major operational facilities and infrastructure (i.e., DCs,
branches, e-commerce sites, and logistic partners) remained operational in the
second quarter of 2020 with limited disruptions, while adhering to strict safety
and social-distancing protocols.

From an inventory management and supply chain perspective, the Company has
experienced elevated levels of demand for pandemic-related products, while
demand for non-pandemic products declined. The Company's businesses also
experienced some shortages of pandemic-related supply during the earlier part of
the second quarter of 2020; however, these shortages subsided over the quarter
with minimal impact to Grainger's results. The Company did not experience any
major disruptions on its non-pandemic supply.

To date, the Company has been able to absorb the pandemic impact with minimal
workforce reductions or furloughs, which positions the Company for accelerated
growth once the post-pandemic recovery commences. Also, the Company has
prioritized maintaining all facilities safe for customers and employees to work
and interact.

With respect to the Company's financial position, during the second quarter of
2020 the Company maintained a tight focus on liquidity and continued to take
actions to preserve cash to confront pandemic-related uncertainties, including
deferring certain capital projects, pausing share repurchases and retaining a
large cash position from its revolver drawdown during the first quarter of 2020.
The Company completed the quarter ended June 30, 2020 with approximately $1.9
billion in available liquidity, including $1.6 billion in cash.

2020 Outlook in Consideration of the COVID-19 Pandemic


The Company is closely monitoring the impact of the COVID-19 pandemic on all
aspects of its business and, due to numerous uncertainties, is currently unable
to predict the continued impact that the COVID-19 pandemic will have on its
business, financial position and operating results in future periods. While the
Company is unable to accurately foresee these future impacts, it believes that
its financial resources and liquidity levels, along with various contingency
plans to protect employee and customer health, keep its operations running and
reduce costs are sufficient to manage the impact anticipated from the COVID-19
pandemic.

Matters Affecting Comparability


There were 64 sales days in the three months ended June 30, 2020 and June 30,
2019. There were 128 sales days in the six months ended June 30, 2020 and 127
sales days in the six months ended June 30, 2019.

In addition, starting in March, the Company has experienced elevated levels of
COVID-19 pandemic-related product sales (e.g., personal protective equipment
(PPE) and safety products) due to higher customer demand in response to the
COVID-19 pandemic, while non-pandemic sales have decreased. The incremental
demand came primarily from customers in the front-lines of the pandemic,
including government, healthcare and other essential businesses, while the
demand from non-essential and disrupted industries has decreased over the same
period due to business activity slowdown or temporary shutdowns. Conversely, the
Company experienced adverse gross margin impacts from lower-margin COVID-19
pandemic-related product sales.


                                       23
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Three Months Ended June 30, 2020


The following table is included as an aid to understand the changes in
Grainger's Condensed Consolidated Statements of Earnings (in millions of
dollars):
                                                                          Three Months Ended June 30,
                                                                                                              As a Percent of Net Sales
                                      2020                2019     Percent Increase/(Decrease)                           2020                    2019
Net sales                        $     2,837$ 2,893                          (1.9) %                100.0  %                100.0  %
Cost of goods sold                     1,821             1,772                           2.8  %                 64.2  %                 61.3  %
Gross profit                           1,016             1,121                          (9.4) %                 35.8  %                 38.7  %
Selling, general and
administrative expenses                  811               741                           9.3  %                 28.6  %                 25.6  %
Operating earnings                       205               380                         (45.9) %                  7.2  %                 13.1  %
Other expense, net                        21                14                          55.6  %                  0.7  %                  0.5  %
Income taxes                              55                94                         (40.5) %                  1.9  %                  3.2  %
Net earnings                             129               272                         (52.8)                    4.5  %                  9.4  %
Noncontrolling interest                   15                12                          21.7  %                  0.5  %                  0.4  %
Net earnings attributable to
W.W. Grainger, Inc.              $       114$   260                         (56.3) %                  4.0  %                  9.0  %



Grainger's net sales of $2,837 million for the second quarter of 2020 decreased
$56 million, or 1.9%, compared to the same period in 2019. The decrease in net
sales was primarily driven by volume. During the second quarter, the Company's
U.S. and endless assortment businesses experienced strong pandemic-related sales
volume from government, healthcare and other essential businesses; however,
sales to non-essential and disrupted industries were down compared to 2019.
Also, sales in the Canada and other international high-touch businesses are down
compared to 2019 due to COVID-19 related business slowdowns with the exception
of essential businesses in those geographies. See Note 4 to the Financial
Statements for information related to disaggregated revenue. From a product
perspective, the net volume decrease was driven by lower sales of non-pandemic
products as well as unfavorable product mix from COVID-19 pandemic-related
sales. See the Segment Analysis below for further details related to segment
revenue.

Gross profit of $1,016 million for the second quarter of 2020 decreased $105
million, or 9%, compared to the same quarter in 2019. The gross profit margin of
35.8% during the second quarter of 2020 decreased 3.0 percentage points when
compared to the same quarter in 2019. This decrease was primarily driven by
lower margins from COVID-19 pandemic-related products sales in the U.S. and
business unit mix impact from higher growth in the lower margin endless
assortment businesses. See Segment Analysis below for further details related to
segment gross profit.

SG&A of $811 million for the second quarter of 2020 increased $70 million, or
9%, compared to the second quarter of 2019. To better explain the changes to
SG&A for the quarter, certain non-recurring or non-core items need to be
excluded.

The following tables reconcile reported SG&A, operating earnings and net
earnings attributable to W.W. Grainger, Inc. determined in accordance with U.S.
generally accepted accounting principles (GAAP) to SG&A adjusted, operating
earnings adjusted and net earnings attributable to W.W. Grainger, Inc. adjusted,
which are all considered non-GAAP measures. The Company believes that these
non-GAAP measures provide meaningful information to assist investors in
understanding financial results and assessing prospects for future performance
as they provide a better baseline for analyzing the ongoing performance of its
businesses by excluding items that may not be indicative of core operating
results. Because non-GAAP financial measures are not standardized, it may not be
possible to compare these measures with other companies' non-GAAP measures
having the same or similar names. All tables below are in millions of dollars,
except percentages:
                                       24
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
                                                       Three Months Ended
                                                          June 30, 2020
                                                       2020             2019       Fav/(Unfav)%
SG&A reported                                      $    811$ 741                (9) %
Restructuring, net of branch gains (U.S.)                 -               2

Restructuring, net branch gains (Canada)                  1              

(4)


Restructuring (Unallocated expense)                       -              

(1)

Fabory Divestiture (Other businesses)                    (7)              -
Fabory Divestiture (Unallocated expense)                116               -
     Total restructuring, net and business
divestiture                                             110              (3)
SG&A adjusted                                      $    701$ 744                 6  %


                                                          2020        2019       Fav/(Unfav) %
  Operating earnings reported                           $ 205$ 380                (46) %
  Total restructuring, net, and business divestiture      110          (3)
  Operating earnings adjusted                           $ 315$ 377                (16) %


                                                            2020        2019       Fav/(Unfav)%
Net earnings attributable to W.W. Grainger, Inc. reported $ 114$ 260               (56) %

Total restructuring, net, business divestiture and tax (1)

                                                          90          

(2)

Net earnings attributable to W.W. Grainger, Inc. adjusted $ 204$ 258

               (21) %


(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.

As noted in the table above, a large portion of the Company's SG&A increase for
the quarter was due to the approximately $109 million loss related to the
divestiture of Fabory during the second quarter of 2020. Excluding
restructuring, net and business divestiture in both periods, SG&A decreased $43
million, or 6%. This decrease is primarily due to reduced travel, marketing and
labor related expenses across all businesses.

Operating earnings of $205 million for the second quarter of 2020 decreased $175
million, or 46%, compared to the second quarter of 2019. Excluding
restructuring, net and business divestiture in both periods as noted in the
table above, operating earnings decreased $62 million, or 16%, driven primarily
by lower sales and gross profit dollars partially offset by lower SG&A.

Other expense, net was $21 million for the second quarter of 2020, an increase
of $7 million, or 56%, compared to the second quarter of 2019. The increase was
primarily related to interest expense on the $500 million in senior notes issued
in February 2020.

Income taxes of $55 million for the second quarter of 2020 decreased $39
million, or 40%, compared to $94 million in the second quarter of 2019. The
decrease in 2020 was primarily driven by lower taxable operating earnings for
the quarter, tax losses in the Company's investment in Fabory per the impairment
and internal reorganizations of the Company's holdings in Fabory in the first
quarter of 2020, and tax impacts from the Fabory divestiture. Grainger's
effective tax rates were 30.2% and 25.6% for the three months ended June 30,
2020 and 2019, respectively, and this rate difference is primarily due to the
Fabory tax impacts in the second quarter of 2020.

Net earnings attributable to W.W. Grainger, Inc. of $114 million for the second
quarter of 2020 decreased $146 million, or 56%, compared to the second quarter
of 2019. Excluding restructuring, net, business divestiture and tax from both
periods per the table above, net earnings decreased $54 million or 21%.


                                       25
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

Segment Analysis

The following results of the U.S. and Canada reportable segments and other businesses include external and intersegment net sales and operating earnings. See Note 12 to the Financial Statements.


United States
Net sales were $2,169 million for the second quarter of 2020, a decrease of $53
million, or 2.4% compared to the same period in 2019 and consisted of the
following:
                                                   Percent Decrease
                Volume (including product mix)          (1.9)%
                Price and customer mix                  (0.3)
                Intersegment sales                      (0.2)

                Total                                   (2.4)%


Overall, revenue decreases for the U.S. business were primarily driven by
unfavorable product mix from COVID-19 pandemic-related sales, as well as
decreased sales volume of non-pandemic products. During the quarter, the U.S.
business experienced strong sales volume of pandemic-related products from
government, healthcare and other essential businesses; however, sales to
non-essential and disrupted industries were down compared to 2019. See Note 4 to
the Financial Statements for information related to disaggregated revenue. From
a product perspective, the U.S. business experienced strong demand for COVID-19
pandemic-related products; however, this elevated demand was outweighed by lower
demand of non-pandemic products.

Gross profit margin for the second quarter of 2020 decreased 3.1 percentage
points compared to the same period in 2019. The decrease was the result of
product mix, customer mix and tariff cost-related increases. The U.S. business
experienced margin declines from higher sales of lower margin COVID-19
pandemic-related products. The U.S. business expects these mix-related decreases
to continue during the COVID-19 pandemic and expects increased levels of PPE,
safety and cleaning product sales to large healthcare, government and critical
manufacturing customers. Additionally, as the Company worked to support
customers during the COVID-19 pandemic, there was increased margin pressure and
related freight costs from sourcing high demand products from non-traditional
and alternate suppliers.

SG&A of $477 million for the second quarter of 2020 decreased $27 million, or
5%, when compared to the second quarter of 2019. The decrease in SG&A was
primarily driven by decreases in travel, marketing and labor related expenses.
These decreases more than offset temporary pandemic pay increases for hourly
branch and DC employees, as well as incremental operating costs to ensure the
safety and health of employees and maintain safe facilities for customer and
employee interactions.

Operating earnings of $318 million for the second quarter of 2020 decreased $63
million, or 17%, from $381 million for the second quarter of 2019. This decrease
was driven by lower sales and gross profit dollars partially offset by lower
SG&A.

Canada

Net sales were $107 million for the second quarter of 2020, a decrease of $28
million, or 21.7%, compared to the same period in 2019 and consisted of the
following:
                                                   Percent Decrease
                Volume (including product mix)         (17.5)%
                Foreign exchange                        (2.7)
                Price and customer mix                  (1.5)
                Total                                  (21.7)%


For the second quarter of 2020, overall sales volume was down 17.5 percentage points compared to the same period in 2019 primarily due to market share declines. During the second quarter of 2020, global oil prices continued to decline as a result of market forces, including the impact of the COVID-19 pandemic. More than one fifth of sales

                                       26
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

for the Canada business are derived from the oil industry or ancillary segments. This current low-oil price environment could further reduce demand for the business, which is already negatively affected by the COVID-19 pandemic.


The gross profit margin decreased 1.6 percentage points in the second quarter of
2020 versus the second quarter of 2019. The decrease was driven by pricing
actions aimed to reinvigorate the customer base, COVID-19 pandemic-related mix
impacts and lower vendor rebates partially offset by lower freight costs.

SG&A decreased 17% in the second quarter of 2020 compared to the second quarter of 2019, primarily due to lower variable costs from lower sales and cost management actions to improve SG&A leverage.

Operating losses were $3 million for the second quarter of 2020 compared to operating earnings of $1 million in the second quarter of 2019.


Other businesses
Net sales were $680 million for the second quarter of 2020, an increase of $17
million, or 2.7%, when compared to the same period in 2019. The increase in net
sales was driven by continued strong customer acquisition in the endless
assortment businesses partially offset by lower performance in the international
high-touch businesses, which were heavily impacted by pandemic-related
slowdowns.

Gross profit margin decreased 1.4 percentage points in the second quarter of
2020 versus the second quarter of 2019, driven partially by higher freight costs
and business unit mix.

Operating earnings of $38 million for the second quarter of 2020 increased $11
million compared to $27 million for the second quarter of 2019. This increase is
primarily due to lower SG&A partially offset by lower gross profit dollars.

                                       27
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Six Months Ended June 30, 2020
The following table is included as an aid to understanding the changes in
Grainger's Condensed Consolidated Statements of Earnings (in millions of
dollars):
                                                                             Six Months Ended June 30,
                                                                                                                  As a Percent of Net Sales
                                      2020                    2019     Percent Increase/(Decrease)                           2020                    2019
Net sales                        $    5,838$ 5,692                           2.6  %                100.0  %                100.0  %
Cost of goods sold                    3,701                  3,476                           6.5                    63.4  %                 61.1  %
Gross profit                          2,137                  2,216                          (3.6)                   36.6  %                 38.9  %
Selling, general and
administrative expenses               1,773                  1,473                          20.3                    30.4  %                 25.9  %
Operating earnings                      364                    743                         (51.0)                    6.2  %                 13.1  %
Other expense, net                       38                     26                          46.1                     0.7  %                  0.5  %
Income taxes                             12                    183                         (93.1)                    0.2  %                  3.2  %
Net earnings                            314                    534                         (41.3)                    5.4  %                  9.4  %
Noncontrolling interest                  27                     21                          27.3                     0.5  %                  0.4  %
Net earnings attributable to
W.W. Grainger, Inc.              $      287$   513                         (44.1) %                  4.9  %                  9.0  %



Grainger's net sales of $5,838 million for the six months ended June 30, 2020
increased $146 million, or 2.6% compared to the same period in 2019. On a daily
basis, net sales increased 1.8%. The increase in net sales was primarily driven
by approximately 3% from volume, partially offset by price and mix of
approximately 1%. The Company estimates that COVID-19 pandemic-related product
sales represented approximately half of the sales growth, primarily in the U.S.
and endless assortment businesses, which during the second quarter of 2020
experienced strong pandemic-related volume from government, healthcare and other
essential businesses. See Note 4 to the Financial Statements for information
related to disaggregated revenue. This pandemic-related elevated volume demand
was partially offset by declining demand from non-essential and disrupted
industries and non-pandemic products during the second quarter of 2020. Also,
sales in the Canada and other international high-touch businesses are down
compared to 2019 due to COVID-19 business slowdowns. See Segment Analysis below
for further details related to segment revenue.

Gross profit of $2,137 million for the six months ended June 30, 2020 decreased
$79 million, or 4%, compared to the same period in 2019. The gross profit margin
of 36.6% decreased 2.3 percentage point when compared to the same period in
2019. This decrease was primarily driven by lower margins from COVID-19
pandemic-related products sales and business unit mix impact from higher growth
in the lower margin endless assortment businesses. See Segment Analysis below
for further details related to segment gross profit.

SG&A of $1,773 million for the six months ended June 30, 2020 increased $300
million, or 20.3%, compared to the same period in 2019. To better explain the
changes to SG&A, certain non-recurring or non-core items need to be excluded.

                                       28
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
The table below reconciles reported SG&A, operating earnings and net earnings
attributable to W.W. Grainger, Inc. determined in accordance with U.S. GAAP to
SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W.
Grainger, Inc. adjusted, 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, except percentages:

                                            Six Months Ended June 30,
                                              2020                2019                Fav/(Unfav)%
 SG&A reported                          $      1,773$ 1,473         20  %

Restructuring, net of branch gains

 (U.S.)                                            6                 2

Restructuring, net branch gains

 (Canada)                                          2                (3)

 Restructuring (Unallocated expense)               -                (1)
 Impairment charges (Other businesses)           177                 -
 Fabory Divestiture (Other businesses)            (7)                -

Fabory Divestiture (Unallocated

 expense)                                        116                 -

Total restructuring, net, impairment

 charges and business divestiture                294                (2)
 SG&A adjusted                          $      1,479$ 1,475          -  %


                                                            2020        2019       Fav/(Unfav)%
 Operating earnings reported                              $ 364$ 743               (51) %

Total restructuring, net, impairment charges and

 business divestiture                                       294          

(1)

 Operating earnings adjusted                              $ 658$ 742               (11) %


                                                           2020        2019       Fav/(Unfav) %

Net earnings attributable to W.W. Grainger, Inc.

 reported                                                $ 287$ 513                (44) %

Total restructuring, net, impairment charges, business

 divestiture and tax (1)                                   147           -

Net earnings attributable to W.W. Grainger, Inc.

 adjusted                                                $ 434$ 513                (15) %


(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.


As noted in the table above, a large portion of the Company's SG&A increase for
the six months ended June 30, 2020 is due to the $177 million impairment of
Fabory in the first quarter of 2020 and the loss on the divestiture of Fabory of
approximately $109 million during the second quarter of 2020. Excluding
restructuring, net, impairment charges and business divestiture in both periods
as noted in the table above, SG&A remained flat.

Operating earnings for the six months ended June 30, 2020 were $364 million, a
decrease of $379 million, or 51%, compared to the same period in 2019. Excluding
restructuring, net, impairment charges and business divestiture in both periods
as noted in the table above, operating earnings decreased $84 million or 11%,
driven by lower gross profit dollars and slightly higher SG&A.

Other expense, net was $38 million for the six months ended June 30, 2020, an
increase of $12 million, or 46%, compared to the six months ended June 30, 2019.
The increase was primarily related to interest expense on the $500 million in
senior notes issued in February 2020.

Income taxes of $12 million for the six months ended June 30, 2020 decreased
$171 million, or 93%, compared with $183 million for the comparable 2019 period.
This decrease was primarily driven by lower taxable operating earnings for the
six-month period, tax losses in the Company's investment in Fabory per the
impairment and internal
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
reorganization of the Company's holdings in Fabory in the first quarter of 2020
and tax impacts of the Fabory divestiture. Grainger's effective tax rates were
3.9% and 25.5% for the six months ended June 30, 2020 and 2019, respectively,
and this decrease is primarily due to the Fabory tax impacts.

Net earnings attributable to W.W. Grainger, Inc. for the six months ended June
30, 2020 decreased $226 million or 44% to $287 million from $513 million for the
six months ended June 30, 2019. Excluding restructuring, net and impairment
charges from both periods in the table above, net earnings decreased $79
million, or 15%. The decrease in net earnings primarily resulted from lower
gross profit dollars.

Segment Analysis
The following comments at the segment and other businesses level include
external and intersegment net sales and operating earnings. See Note 12 to the
Financial Statements.

United States
Net sales were $4,476 million for the six months ended June 30, 2020, an
increase of $105 million, or 2.4%, compared to the same period in 2019. On a
daily basis, net sales increased 1.6% and consisted of the following:
                                             Percent Increase/(Decrease)
           Volume (including product mix)               2.9%
           Price and customer mix                       (1.3)

           Total                                        1.6%



Overall, revenue increases for the U.S. business were primarily driven by
COVID-19 pandemic-related sales, which accounted for the majority of the sales
growth beginning in March 2020. As a result of the COVID-19 pandemic, the U.S.
business experienced strong sale volume of pandemic-related products from
government. healthcare and other essential businesses; however, sales to
non-essential and disrupted industries are down compared to 2019. See Note 4 to
the Financial Statements for information related to disaggregated revenue. From
a product perspective, the U.S. business experienced strong demand for COVID-19
pandemic-related products; however, this elevated demand was outweighed by lower
demand of non-pandemic products.

Gross profit margin decreased 2.7 percentage points compared to the same period
in 2019. The decrease was the result of product mix, customer mix and tariff
cost-related increases. The business also experienced margin declines from
higher sales of lower margin COVID-19 pandemic-related products. The Company
expects these mix-related decreases to continue during the pandemic and expects
increased levels of PPE, safety and cleaning product sales to large healthcare,
government and critical manufacturing customers.

SG&A for the six months ended June 30, 2020 increased $9 million compared to the
same period in 2019, which is primarily driven by incremental operating costs
incurred in the first quarter from incremental headcount in the second half of
2019, higher marketing costs and incremental operating costs to support the U.S.
business response to the COVID-19 pandemic and related activities. These
incremental operating costs were partially offset by reductions in travel,
marketing and labor related expenses during the second quarter of 2020.

Operating earnings of $658 million for the six months ended June 30, 2020
decreased $87 million, or 12%, from $745 million for the six months ended June
30, 2019. This decrease was driven primarily by lower gross profit dollars and
higher SG&A.

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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

Canada

Net sales were $236 million for the six months ended June 30, 2020, a decrease
of $35 million, or 13.1%, compared to the same period in 2019. On a daily basis,
net sales decreased 13.8% and consisted of the following:
                                                   Percent Decrease
                Volume (including product mix)         (10.9)%
                Foreign exchange                        (1.9)
                Price and customer mix                  (1.0)
                Total                                  (13.8)%



For the six months ended June 30, 2020, volume was down 10.9 percentage points
compared to the same period in 2019 primarily due to market share declines
partially offset by COVID-19 pandemic-related product sales. During the first
half of 2020, global oil prices declined sharply as a result of market forces.
More than a fifth of sales for the Canada business are derived from the oil
industry or ancillary segments. This current low-oil price environment could
further reduce demand for the business, which is already negatively impacted by
the COVID-19 pandemic.

The gross profit margin decreased 0.5 percentage points in the six months ended
June 30, 2020 compared to the six months ended June 30, 2019, primarily due to
negative price cost spread.

SG&A decreased $10 million, or 12% in the six months ended June 30, 2020
compared to the six months ended June 30, 2019. This decrease was primarily due
to lower variable costs from lower sales and cost management actions to improve
SG&A leverage.

Operating losses were $6 million for the six months ended June 30, 2020 compared
to losses of $4 million in the six months ended June 30, 2019. This decrease is
primarily due to lower gross profit dollars, partially offset by lower SG&A.

Other businesses
Net sales for other businesses were $1,378 million for the six months ended June
30, 2020 an increase of $82 million, or 6.4% compared to the same period in
2019. On a daily basis, net sales increased 5.5% and consisted of the following:
                                      Percent Increase/(Decrease)
                  Price/volume                   5.6%
                  Foreign exchange               (0.1)
                  Total                          5.5%


The increase in net sales was driven by continued expansion in the endless assortment businesses, partially offset by lower performance in other international high-touch businesses. The endless assortments businesses benefited from COVID-19 pandemic-related sales and otherwise continued to see strong new customer acquisition during the first half of the year.


Gross profit margin decreased 1.0 percentage point compared to the same period
in 2019, driven by business unit mix from the faster growing endless assortment
businesses as well as higher freight costs.

Operating losses of $100 million for the six months ended June 30, 2020
decreased $157 million from operating earnings of $57 million in the comparable
period from the prior year. Excluding restructuring, net, impairment charges and
business divestiture in both periods as noted in the table above, operating
earnings would have increased $13 million or 25%. This increase is primarily due
to higher sales and gross profit dollars and increased SG&A leverage in the
endless assortment businesses.

                                       31
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

Financial Condition


Cash, Cash Equivalents and Liquidity
As of June 30, 2020 and December 31, 2019, Grainger had cash and cash
equivalents of $1,603 million and $360 million, respectively. This increase in
cash is due primarily to the proceeds received in March 2020 when the Company
drew down $1 billion from its $1.25 billion credit facility. This action was a
proactive measure to increase the Company's cash position and preserve financial
flexibility in light of the uncertainty in the global markets resulting from the
COVID-19 pandemic (See part II, Item A: "Risk Factors", below, for an update to
the Company's risk factors in connection with the COVID-19 pandemic).

Grainger believes that, assuming its operations are not significantly impacted
by the COVID-19 pandemic for a prolonged period, its current level of cash and
cash equivalents, marketable securities and availability under its revolving
credit facilities will be sufficient to meet its liquidity needs. While the
Company remains committed to returning excess capital to shareholders over time,
the Company has temporarily paused its share repurchase program as it shifts to
conserve capital.
Cash Flows
Net cash provided by operating activities was $476 million and $450 million for
the six months ended June 30, 2020 and 2019, respectively. The increase in cash
provided by operating activities is primarily the result of lower net payments
related to employee variable compensation and benefits paid under annual
incentive plans partially offset by investments in inventory.

Net cash used in investing activities was $82 million and $91 million for the
six months ended June 30, 2020 and 2019, respectively. This decrease in net cash
used in investing activities was primarily driven by lower additions to
property, buildings and equipment and intangibles.

Net cash provided by financing activities was $864 million in the six months
ended June 30, 2020 compared to net cash used in financing activities of $586
million in the six months ended June 30, 2019. The increase in net cash provided
by financing activities was primarily driven by higher proceeds from the
issuance of long-term debt, which included a $1 billion draw down from the
Company's $1.25 billion credit facility and $500 million in unsecured senior
notes, and lower treasury stock repurchases partially offset by debt redemption.

Working Capital
Internally generated funds are the primary source of working capital and funds
used for growth initiatives and capital expenditures.

Working capital consists of current assets (less non-operating cash) and current
liabilities (less short-term debt, current maturities of long-term debt and
lease liabilities). Working capital as of June 30, 2020, was $2,253 million, an
increase of $161 million when compared to $2,092 million as of December 31,
2019. The increase was primarily driven by an increase in accounts receivable
and inventory and a decrease in accrued contributions to employees
profit-sharing plans due to the annual cash contribution. At these dates, the
ratio of current assets to current liabilities was 2.7 and 2.6 for June 30, 2020
and December 31, 2019, respectively.

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 revolving credit facilities. Total debt, which is defined as total
interest-bearing debt (short-term, current maturities and long-term) and lease
liabilities as a percent of total capitalization was 62.3% at June 30, 2020, and
54.3% at December 31, 2019.

Grainger receives ratings from two independent credit rating agencies: Moody's
Investor Service (Moody's) and Standard & Poor's (S&P). Both credit rating
agencies currently rate the Company's corporate credit at investment grade. The
following table summarizes the Company's credit ratings at June 30, 2020:
                             Corporate       Senior Unsecured        Short-term
                Moody's         A3                  A3                   P2
                S&P             A+                  A+                   A1


                                       32
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
Commitments and Other Contractual Obligations
There were no material changes to the Company's commitments and other
contractual obligations from those disclosed in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 2019 Form 10-K.

Critical Accounting Estimates


The methods, assumptions, and estimates used in applying the Company's
accounting policies may require the application of judgments regarding matters
that are inherently uncertain. The Company considers an accounting policy to be
a critical estimate if: (1) it involves assumptions that are uncertain when
judgment was applied, and (2) changes in the estimate assumptions, or selection
of a different estimate methodology could have a significant impact on
Grainger's consolidated financial position and results. While the Company
believes that estimates, assumptions, and judgments used are reasonable, they
are based on information available when the estimate was made.

A description of the Company's critical accounting estimates is described in
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's 2019 Form 10-K. The following
critical accounting policy is being added to the policies set forth in the 2019
Form 10-K.

Allowance for Credit Losses
Pursuant to the January 1, 2020 implementation of the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments, the Company establishes an allowance for credit losses using
estimations of loss rates based upon historical loss experience and
adjusted for factors that are relevant to determining the
expected collectability of accounts receivables. These estimations and factors
require assumptions and judgments regarding matters that are inherently
uncertain, including the impact that the COVID-19 pandemic may have on the
liquidity, credit and solvency status of customers or individual industries. For
further discussion on the Company's allowances for credit losses, see in Note 5
contained within Part I, Item 1, "Notes to Condensed Consolidated Financial
Statements".

Forward-Looking Statements


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

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

Important factors that could cause actual results to differ materially from
those presented or implied in the forward-looking statements include, without
limitation: the unknown duration and health, economic, operational and financial
impacts of the global outbreak of the Coronavirus in 2019 (COVID-19 pandemic)
and the actions taken or contemplated by governmental authorities or others in
connection with the COVID-19 pandemic on the Company's businesses, its
employees, customers and suppliers, including disruption to Grainger's
operations resulting from employee illnesses, the development and availability
of effective treatment or vaccines, the uncertain duration of mandated facility
closures of non-essential businesses, stay in shelter health orders or other
similar restrictions for customers and suppliers, changes in customers' product
needs, suppliers' inability to meet unprecedented demand for COVID-19 related
products, the potential for government action to allocate or direct products to
certain customers which may cause disruption in relationships with other
customers, disruption caused by business responses to the COVID-19 pandemic,
including working remote arrangements, which may create increased vulnerability
to cybersecurity incidents, including breaches of information systems security,
adaptions to the Company's controls and procedures, including financial
reporting processes, required by working remote
                                       33
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
arrangements, which could impact the design or operating effectiveness of such
controls or procedures, and global or regional economic downturns or recessions,
which could result in a decline in demand for the Company's products or limit
the Company's ability to access capital markets on terms that are attractive or
at all; 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; fluctuations or declines in the Company's
gross profit percentage; the Company's responses to market pressures; the
outcome of pending and future litigation or governmental or regulatory
proceedings, including with respect to wage and hour, anti-bribery and
corruption, environmental, advertising, consumer protection, pricing (including
disaster or emergency declaration pricing statutes), product liability, safety
or compliance, or privacy and cybersecurity matters; investigations, inquiries,
audits and changes in laws and regulations; failure to comply with laws,
regulations and standards; government contract matters; disruption of
information technology or data security systems involving the Company or third
parties on which the Company depends; general industry, economic, market or
political conditions; general global economic conditions including tariffs and
trade issues and policies; currency exchange rate fluctuations; market
volatility, including 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; pandemic
diseases or viral contagions; 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; changes in credit ratings or outlook; the
Company's incurrence of indebtedness and other factors identified under Part II,
Item 1A: "Risk Factors" in the Company's 2019 Form 10-K, as updated in the
Company's Quarterly Reports on Form 10-Q.

Caution should be taken not to place undue reliance on Grainger's forward-looking statements and Grainger undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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                      W.W. Grainger, Inc. and Subsidiaries

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