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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

10/22/2020 | 04:36pm 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, Grainger divested the Fabory business in Europe (Fabory) on June
30, 2020 and the China business (China) on August 21, 2020. Accordingly, the
Company's operating results include Fabory and China results through the
respective dates of divestiture. Grainger recognized a net loss of approximately
$109 million and gain of $5 million (presented within Selling, general and
administrative expenses (SG&A)) as a result of the Fabory and China
divestitures, respectively.

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
third quarter of 2020 varied based on geography and industry. For example, in
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 business and other international high-touch
businesses have been severely impacted by pandemic-related slowdowns with each
geography experiencing meaningful year-over-year declines.
                                       21
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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
third 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 has declined. The Company did not experience any material disruptions on its 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 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 third 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 and pausing share repurchases. During the
third quarter of 2020, the Company repaid its revolver drawdown. As of September
30, 2020, the Company had approximately $2.1 billion in available liquidity,
including $859 million 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 September 30, 2020 and
September 30, 2019. There were 192 sales days in the nine months ended September
30, 2020 and 191 sales days in the nine months ended September 30, 2019.
Grainger completed two divestitures in the nine months ended September 30, 2020,
which were immaterial individually and in the aggregate.

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.


                                       22
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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 September 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 September 30,

                                                                                                           As a Percent of Net Sales
                                    2020              2019     Percent Increase/(Decrease)                             2020                    2019
Net sales                        $  3,018$ 2,947                            2.4  %                 100.0  %                100.0  %
Cost of goods sold                  1,944            1,848                            5.2  %                  64.4  %                 62.7  %
Gross profit                        1,074            1,099                           (2.2) %                  35.6  %                 37.3  %
Selling, general and
administrative expenses               694              761                           (8.7) %                  23.0  %                 25.9  %
Operating earnings                    380              338                           12.4  %                  12.6  %                 11.4  %
Other expense, net                     18               16                           15.2  %                   0.6  %                  0.5  %
Income taxes                          106               78                           36.2  %                   3.5  %                  2.6  %
Net earnings                          256              244                            4.6  %                   8.5  %                  8.3  %
Noncontrolling interest                16               11                           37.1  %                   0.5  %                  0.4  %
Net earnings attributable to
W.W. Grainger, Inc.              $    240$   233                            3.0  %                   8.0  %                  7.9  %



Grainger's net sales of $3,018 million for the third quarter of 2020 increased
$71 million, or 2.4%, compared to the same period in 2019. The increase in net
sales was primarily driven by volume increases on pandemic-related product
sales, partially offset by year over year decreases in non-pandemic related
product sales and decreases due to business divestitures. Also, sales in the
Canada business and other international high-touch businesses were down compared
to 2019 due to COVID-19 related business slowdowns. See Note 4 to the Financial
Statements for information related to disaggregated revenue. See the Segment
Analysis below for further details related to segment revenue.

Gross profit of $1,074 million for the third quarter of 2020 decreased $25
million, or 2%, compared to the same quarter in 2019. The gross profit margin of
35.6% during the third quarter of 2020 decreased 1.7 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 $694 million for the third quarter of 2020 decreased $67 million, or 9%,
compared to the third quarter of 2019. To better explain the changes to SG&A for
the quarter, certain non-recurring or non-core items have been 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 non-GAAP measures including
SG&A adjusted, operating earnings adjusted and net earnings attributable to W.W.
Grainger, Inc. adjusted. 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:
                                       23
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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
                                                       September 30, 2020
                                                         2020           2019       Fav/(Unfav)%
SG&A reported                                      $      694$ 761                9  %

Restructuring, net of branch gains (Canada)                (1)             1

Grainger China divestiture (Unallocated expense)           (5)             -
     Total restructuring, net and business
divestiture                                                (6)             1
SG&A adjusted                                      $      700$ 760                8  %


                                                          2020       2019       Fav/(Unfav) %
   Operating earnings reported                           $ 380$ 338                12  %
   Total restructuring, net, and business divestiture       (6)         1
   Operating earnings adjusted                           $ 374$ 339                10  %


                                                              2020      

2019 Fav/(Unfav)% Net earnings attributable to W.W. Grainger, Inc. reported $ 240$ 233

                3  %

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

                                                              6          -

Net earnings attributable to W.W. Grainger, Inc. adjusted $ 246$ 233

                5  %


(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.

Excluding restructuring, net and business divestiture in both periods as noted in the table above, SG&A decreased $60 million, or 8%. This decrease is primarily due to cost control actions across the high-touch businesses and leverage gains in the endless assortment businesses.


Operating earnings of $380 million for the third quarter of 2020 increased $42
million, or 12%, compared to the third quarter of 2019. Excluding restructuring,
net and business divestiture in both periods as noted in the table above,
operating earnings increased $35 million, or 10%, driven primarily by lower SG&A
expenses partially offset by lower gross profit dollars.

Other expense, net was $18 million for the third quarter of 2020, an increase of
$2 million, or 15%, compared to the third 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 $106 million for the third quarter of 2020 increased $28
million, or 36%, compared to $78 million in the third quarter of 2019. The
increase in 2020 was primarily driven by higher taxable operating earnings for
the quarter. Grainger's effective tax rates were 29.3% and 24.2% for the three
months ended September 30, 2020 and 2019, respectively.

Net earnings attributable to W.W. Grainger, Inc. of $240 million for the third
quarter of 2020 increased $7 million, or 3%, compared to the third quarter of
2019. Excluding restructuring, net, business divestiture and tax from both
periods per the table above, net earnings increased $13 million or 5%.


                                       24
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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 11 to the Financial Statements.


United States
Net sales were $2,347 million for the third quarter of 2020, an increase of $70
million, or 3.1% compared to the same period in 2019 and consisted of the
following:
                                                   Percent Increase
                Volume (including product mix)           2.8%
                Price and customer mix                   0.3

                Total                                    3.1%


Overall, revenue increases for the U.S. business were primarily driven by
volume. 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 partially offset by lower demand of non-pandemic products.

Gross profit margin for the third quarter of 2020 decreased 1.6 percentage
points compared to the same period in 2019. The decrease was primarily the
result of product and customer mix. 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.

SG&A of $501 million for the third quarter of 2020 decreased $22 million, or 4%,
when compared to the third quarter of 2019. The decrease in SG&A was primarily
driven by decreases in travel and employee related expenses as well as operating
efficiencies. 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 $354 million for the third quarter of 2020 increased $11
million, or 3%, from $343 million for the third quarter of 2019. This increase
was driven by lower SG&A expenses partially offset by lower gross profit
dollars.

Canada

Net sales were $116 million for the third quarter of 2020, a decrease of $13
million, or 9.9%, compared to the same period in 2019 and consisted of the
following:
                                                   Percent Decrease
                Volume (including product mix)          (8.1)%
                Price and customer mix                  (1.0)
                Foreign exchange                        (0.8)
                Total                                   (9.9)%



For the third quarter of 2020, overall sales volume was down 8.1 percentage
points compared to the same period in 2019 primarily due to market share
declines. During the third quarter of 2020, global oil prices remained flat as a
result of market forces, including the impact of the COVID-19 pandemic. More
than one 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 affected by
the COVID-19 pandemic.

The gross profit margin decreased 0.5 percentage point in the third quarter of 2020 versus the third quarter of 2019. The decrease was driven by COVID-19 pandemic-related mix impacts partially offset by lower freight costs.

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

SG&A decreased 16% in the third quarter of 2020 compared to the third quarter of 2019 primarily due to reduced advertising and employee related expenses.

Operating earnings were $2 million for the third quarter of 2020 compared to break even in the third quarter of 2019.


Other businesses
Net sales were $687 million for the third quarter of 2020, an increase of $14
million, or 1.9%, when compared to the same period in 2019.

                                         Percent Increase/(Decrease)
               Price/volume                         12.3%
               Foreign exchange                      0.2
               Business divestitures               (10.6)
               Total                                1.9%



The increase in net sales was driven by continued strong customer acquisition in
the endless assortment businesses partially offset by revenue declines in the
international high-touch businesses as a result of pandemic-related slowdowns
and the net impact of the Fabory and China business divestitures.

Gross profit margin decreased 1.8 percentage points in the third quarter of 2020
versus the third quarter of 2019, driven partially by higher freight costs and
business unit mix.

Operating earnings of $44 million for the third quarter of 2020 increased $14
million compared to $30 million for the third quarter of 2019. This increase is
primarily due to higher earnings in the endless assortment businesses resulting
from strong revenue growth and SG&A leverage.

                                       26
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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 - Nine Months Ended September 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):

Nine Months Ended September 30,

                                                                                                                As a Percent of Net Sales
                                       2020                2019     Percent Increase/(Decrease)                             2020                    2019
Net sales                        $       8,856$ 8,639                            2.5  %                 100.0  %                100.0  %
Cost of goods sold                       5,645            5,324                            6.0  %                  63.7  %                 61.6  %
Gross profit                             3,211            3,315                           (3.1) %                  36.3  %                 38.4  %
Selling, general and
administrative expenses                  2,467            2,234                           10.4  %                  27.9  %                 25.9  %
Operating earnings                         744            1,081                          (31.2) %                   8.4  %                 12.5  %
Other expense, net                          56               42                           34.7  %                   0.6  %                  0.5  %
Income taxes                               118              261                          (54.5) %                   1.3  %                  3.0  %
Net earnings                               570              778                          (26.9) %                   6.4  %                  9.0  %
Noncontrolling interest                     43               32                           30.8  %                   0.5  %                  0.4  %
Net earnings attributable to
W.W. Grainger, Inc.              $         527          $   746                          (29.4) %                   6.0  %                  8.6  %



Grainger's net sales of $8,856 million for the nine months ended September 30,
2020 increased $217 million, or 2.5% compared to the same period in 2019. On a
daily basis, net sales increased 2%. The increase in net sales was primarily
driven by volume, partially offset by price and mix and the impact of business
divestitures. 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 and third quarters 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 was partially offset by declining demand from non-essential and disrupted
industries along with declining non-pandemic product sales across most
industries. Also, sales in the Canada business 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 $3,211 million for the nine months ended September 30, 2020
decreased $104 million, or 3%, compared to the same period in 2019. The gross
profit margin of 36.3% decreased 2.1 percentage points when compared to the same
period 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 $2,467 million for the nine months ended September 30, 2020 increased
$233 million, or 10.4%, compared to the same period in 2019. To better explain
the changes to SG&A, certain non-recurring or non-core items have been excluded.

                                       27
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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
non-GAAP measures including SG&A adjusted, operating earnings adjusted and net
earnings attributable to W.W. Grainger, Inc. adjusted. 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:

                                         Nine Months Ended September 30,
                                                2020              2019                Fav/(Unfav)%
 SG&A reported                          $       2,467$ 2,234       (10) %

Restructuring, net of branch gains

 (U.S.)                                             6                 -

Restructuring, net of branch gains

 (Canada)                                           1                (1)

 Impairment charges (Other businesses)            177                 -
 Fabory divestiture (Other businesses)             (7)                -

Fabory divestiture (Unallocated

 expense)                                         116                 -

Grainger China divestiture

 (Unallocated expense)                             (5)                -

Total restructuring, net, impairment

 charges and business divestitures                288                (1)
 SG&A adjusted                          $       2,179$ 2,235         3  %


                                                           2020         2019        Fav/(Unfav)%
Operating earnings reported                              $   744$ 1,081              (31) %
Total restructuring, net, impairment charges and
business divestitures                                        288            -
Operating earnings adjusted                              $ 1,032$ 1,081               (5) %


                                                            2020       2019       Fav/(Unfav) %
Net earnings attributable to W.W. Grainger, Inc. reported  $ 527$ 746               (29) %

Total restructuring, net, impairment charges, business divestitures and tax (1)

                                     153          -

Net earnings attributable to W.W. Grainger, Inc. adjusted $ 680$ 746

                (9) %


(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 nine months ended September 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 divestitures in both periods
as noted in the table above, SG&A decreased $56 million primarily due to reduced
travel, depreciation and employee related expenses across all businesses.

Operating earnings for the nine months ended September 30, 2020 were $744
million, a decrease of $337 million, or 31%, compared to the same period in
2019. Excluding restructuring, net, impairment charges and business divestitures
in both periods as noted in the table above, operating earnings decreased $49
million or 5%, driven by lower gross profit dollars partially offset by lower
SG&A.

Other expense, net was $56 million for the nine months ended September 30, 2020,
an increase of $14 million, or 35%, compared to the nine months ended September
30, 2019. The increase was primarily related to interest expense on the $500
million in senior notes issued in February 2020.

Income taxes of $118 million for the nine months ended September 30, 2020
decreased $143 million, or 55%, compared with $261 million for the comparable
2019 period. This decrease was primarily driven by lower taxable operating
earnings for the nine-month period, tax losses in the Company's investment in
Fabory per the impairment
                                       28
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
and internal 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 17.3% and 25.1% for the nine months ended September 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 nine months ended
September 30, 2020 decreased $219 million or 29% to $527 million from $746
million for the nine months ended September 30, 2019. Excluding restructuring,
net, impairment charges, business divestitures and tax from both periods in the
table above, net earnings decreased $66 million, or 9%. The decrease in net
earnings primarily resulted from lower gross profit dollars partially offset by
lower SG&A.

Segment Analysis
The following comments at the segment and other businesses level include
external and intersegment net sales and operating earnings. See Note 11 to the
Financial Statements.

United States
Net sales were $6,823 million for the nine months ended September 30, 2020, an
increase of $175 million, or 2.6%, compared to the same period in 2019. On a
daily basis, net sales increased 2.1% and consisted of the following:
                                             Percent Increase/(Decrease)
           Volume (including product mix)               2.9%
           Price and customer mix                       (0.8)

           Total                                        2.1%



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 sales 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 partially offset by
lower demand of non-pandemic products.

Gross profit margin decreased 2.3 percentage points compared to the same period
in 2019. The decrease was the result of product and customer mix. 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 nine months ended September 30, 2020 decreased $13 million compared
to the same period in 2019, which is primarily driven by reduced travel and
depreciation expenses partially offset by incremental operating costs to support
the U.S. business response to the COVID-19 pandemic and related activities.

Operating earnings of $1,012 million for the nine months ended September 30,
2020 decreased $76 million, or 7%, from $1,088 million for the nine months ended
September 30, 2019. This decrease was driven primarily by lower gross profit
dollars.

                                       29
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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 $352 million for the nine months ended September 30, 2020, a decrease of $48 million, or 12.1%, compared to the same period in 2019. On a daily basis, net sales decreased 12.5% and consisted of the following:

                                                   Percent Decrease
                Volume (including product mix)         (10.0)%
                Foreign exchange                        (1.6)
                Price and customer mix                  (0.9)
                Total                                  (12.5)%



For the nine months ended September 30, 2020, volume was down 10.0 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 point in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019,
primarily due to negative price cost spread and COVID-19 pandemic-related mix
impact.

SG&A decreased $17 million, or 13% in the nine months ended September 30, 2020 compared to the nine months ended September 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 $4 million for both the nine months ended September 30, 2020 and 2019.


Other businesses
Net sales for other businesses were $2,065 million for the nine months ended
September 30, 2020 an increase of $96 million, or 4.8% compared to the same
period in 2019. On a daily basis, net sales increased 4.3% and consisted of the
following:
                                         Percent Increase/(Decrease)
                Price/volume                        7.7%
                Business divestitures               (3.4)
                Total                               4.3%



The increase in net sales was driven by the endless assortment businesses,
partially offset by lower performance in other international high-touch
businesses, which were heavily impacted by pandemic-related slowdowns and the
net impact of Fabory and China business divestitures. The endless assortments
businesses benefited from COVID-19 pandemic-related sales and otherwise
continued to see strong new customer acquisition during the nine months ended
September 20, 2020.

Gross profit margin decreased 1.3 percentage points 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 $56 million for the nine months ended September 30, 2020
decreased $143 million from operating earnings of $87 million in the comparable
period from the prior year. Excluding restructuring, net, impairment charges and
business divestitures in both periods as noted in the table above, operating
earnings would have increased $27 million or 32%. This increase is primarily due
to higher earnings in the endless assortment businesses resulting from strong
revenue growth and SG&A leverage.

                                       30
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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 September 30, 2020 and December 31, 2019, Grainger had cash and cash
equivalents of $859 million and $360 million, respectively. This increase in
cash is primarily due to cash flows from operations, delayed capital investments
and the pause of the share repurchase program. (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.
Cash Flows
Net cash provided by operating activities was $787 million and $770 million for
the nine months ended September 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 and higher trade payables partially offset by investments
in inventory.

Net cash used in investing activities was $132 million and $145 million for the
nine months ended September 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 used in financing activities was $147 million in the nine months ended
September 30, 2020 compared to $875 million in the nine months ended September
30, 2019. The decrease in net cash used in financing activities was primarily
driven by lower treasury stock repurchases.

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 September 30, 2020, was $2,278
million, an increase of $186 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. At these dates, the ratio of current assets to current
liabilities was 2.7 and 2.6 for September 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 52.5% at September 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 September 30, 2020:
                             Corporate       Senior Unsecured        Short-term
                Moody's         A3                  A3                   P2
                S&P             A+                  A+                   A1



Commitments and Other Contractual Obligations
There were no material changes to the Company's commitments and other
contractual obligations from those disclosed in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 2019 Form 10-K.

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

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 disease 2019 ("COVID-19") as
well as the impact of 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, any 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 required by working remote
arrangements, including financial reporting processes, 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
                                       32
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                      W.W. Grainger, Inc. and Subsidiaries
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
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; other 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.

                                       33
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                      W.W. Grainger, Inc. and Subsidiaries

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