W.W. GRAINGER, INC. - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission file number 1-5684

W.W. Grainger, Inc.

(Exact name of registrant as specified in its charter)



Illinois		36-1150280
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Grainger Parkway, Lake Forest, Illinois		60045-5201
(Address of principal executive offices)		(Zip Code)
(847) 535-1000
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class		Name of each exchange on which registered
Common Stock $0.50 par value		New York Stock Exchange

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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



Large accelerated filer [X]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the voting common equity held by nonaffiliates of the registrant was $16,485,186,075 as of the close of trading as reported on the New York Stock Exchange on June 30, 2014. The Company does not have nonvoting common equity.

The registrant had 67,442,179 shares of the Company’s Common Stock outstanding as of January 31, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement relating to the annual meeting of shareholders of the registrant to be held on April 29, 2015, are incorporated by reference into Part III hereof.



	TABLE OF CONTENTS		Page(s)

	PART I
Item 1:	BUSINESS		3
Item 1A:	RISK FACTORS		7
Item 1B:	UNRESOLVED STAFF COMMENTS		9
Item 2:	PROPERTIES		10
Item 3:	LEGAL PROCEEDINGS		10
Item 4:	MINE SAFETY DISCLOSURES		10
	PART II
Item 5:	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER		11
		MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6:	SELECTED FINANCIAL DATA		13
Item 7:	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL		14
		CONDITION AND RESULTS OF OPERATIONS
Item 7A:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		30
Item 8:	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		31
Item 9:	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS		31
		ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A:	CONTROLS AND PROCEDURES		31
Item 9B:	OTHER INFORMATION		31
	PART III
Item 10:	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		32
Item 11:	EXECUTIVE COMPENSATION		33
Item 12:	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND		33
		MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Item 13:	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND		33
		DIRECTOR INDEPENDENCE
Item 14:	PRINCIPAL ACCOUNTING FEES AND SERVICES		33
	PART IV
Item 15:	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		34
Signatures			77

PART I

Item 1: Business

The Company

W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, is a broad-line distributor of maintenance, repair and operating (MRO) supplies and other related products and services used by businesses and institutions primarily in the United States and Canada, with presence also in Europe, Asia and Latin America. In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries.

Grainger uses a combination of multichannel and single channel online business models to provide customers with a range of options for finding and purchasing products, utilizing sales representatives, contact centers, direct marketing materials, catalogs and eCommerce. Grainger serves more than 2 million customers worldwide through a network of highly integrated branches, distribution centers and websites.

Grainger's Canadian subsidiary, Acklands-Grainger, acquired WFS Enterprises, Inc. (WFS) in the third quarter of 2014. WFS is a distributor of tools and supplies to industrial markets in Southern Ontario and select U.S. locations. Results for the business are consolidated with Grainger from the acquisition date. In 2014, Grainger also announced the decision to close the business in Brazil and operations will cease during 2015. During 2014, Grainger continued to invest in the single channel online business model, which has experienced strong growth in recent years.

Grainger's centralized business support functions provide coordination and guidance in the areas of accounting and finance, business development, communications and investor relations, compensation and benefits, information systems, health and safety, global supply chain functions, human resources, risk management, internal audit, legal, real estate, security, tax and treasury. These services are provided in varying degrees to all business units.

Products are regularly added to and deleted from Grainger’s product lines on the basis of customer demand, market research, recommendations of suppliers, sales volumes and other factors.

Grainger’s two reportable segments are the United States and Canada and they are described further below. Other businesses include Zoro, the single channel online business in the United States, and operations in Europe, Asia and Latin America. These businesses generate revenue through the distribution of maintenance, repair and operating supplies and products and provide related services. For segment and geographical information and consolidated net sales and operating earnings, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 16 to the Consolidated Financial Statements.

United States

The United States business offers a broad selection of maintenance, repair and operating supplies and other related products and services through local branches, sales representatives, catalogs and eCommerce. A combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services is provided by this business. Products offered include material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, building and home inspection supplies, vehicle and fleet components and many other items primarily focused on the facilities maintenance market. Services offered primarily relate to inventory management solutions. In 2014, service fee revenue represented less than 1% of sales.

The majority of the products sold by the United States business are well-recognized national branded products. In addition, 22% of 2014 sales were private label items bearing Grainger’s registered trademarks, such as DAYTON® motors, power transmission, HVAC and material handling equipment, SPEEDAIRE® air compressors, AIR HANDLER® air filtration equipment, TOUGH GUY® cleaning products, WESTWARD® tools, CONDOR® safety products and LUMAPRO® lighting products. Grainger has taken steps to protect these trademarks against infringement and believes that they will remain available for future use in its business. The United States business purchases products for sale from more than 2,500 key suppliers, most of which are manufacturers. Through a global sourcing operation, the business procures competitively priced, high-quality products produced outside the United States from approximately 400 suppliers. Grainger sells these items primarily under the private label brands listed above. No single supplier comprised more than 5% of total purchases and no significant difficulty has been encountered with respect to sources of supply.

Customers range from small and medium-sized businesses to large corporations, government entities and other institutions. They are primarily represented by purchasing managers or workers in facilities maintenance departments and service shops across a wide range of industries such as manufacturing, hospitality, transportation, government, retail, healthcare and education. Sales in 2014 were made to approximately 1.2 million customers averaging 106,000 daily transactions. Approximately 75% of sales are concentrated with large customers and no single customer accounted for more than 3% of total sales.

The United States business operates in all 50 states through a network of 19 distribution centers (DCs), 377 branches and 51 contact centers. DCs range in size from 45,000 square feet to 1.3 million square feet, the largest of which can stock up to 500,000 products. Automated equipment and processes in the larger DCs allow them to handle the majority of the customer shipping for next-day product availability and replenish the branches that provide same-day availability. The DC network increasingly fulfills a larger portion of customer orders, especially as customers migrate to online and electronic purchasing. In 2014, Grainger announced a plan to build a new 1.3 million square-foot DC in New Jersey, scheduled to open in 2016.

The branches are located in close proximity to the majority of U.S. businesses and serve the immediate needs of customers in their local markets by allowing them to pick up items directly from the branches. The branch network has approximately 3,800 employees who primarily fulfill counter and will-call product purchases and provide customer service. An average branch is 22,000 square feet in size and has 10 employees. In the normal course of business, Grainger regularly reviews the effectiveness of its branch network and closed 21 branches in 2014, 11 of which were related to the recently acquired businesses.

Grainger's contact center network consists of approximately 1,900 employees who handle about 36,000 orders per day from customer orders via phone, e-mail and fax. In 2014, the contact center network was regionalized to leverage the scale of the organization and deliver exceptional customer service.

The business has a sales force of approximately 3,500 professionals who help businesses and institutions select the right products to find immediate solutions to maintenance problems and reduce operating expenses by utilizing Grainger as a consistent source of supply across multiple locations. In 2014, Grainger continued to expand its sales force to facilitate growth with targeted segments and provide more specialized support.

Another area in which the United States business helps customers be more productive is through inventory management services. KeepStock® inventory solutions is a comprehensive program that includes vendor-managed inventory, customer-managed inventory and on-site vending machines. Grainger's KeepStock program currently provides services to more than 18,000 customers and completed over 13,000 installations in 2014.

Customers can also purchase products through Grainger.com®. Customers continue to migrate to online and electronic purchasing. eCommerce revenues were $2.8 billion in 2014, an increase of 13% versus 2013. Grainger.com provides access to approximately 1.5 million products and serves as a prominent channel for the United States business. Grainger.com provides real-time price and product availability and detailed product information, and offers advanced features such as product search and compare capabilities. For customers with sophisticated electronic purchasing platforms, Grainger utilizes technology that allows these systems to communicate directly with Grainger.com. Customers can also purchase products through other branded websites. In 2014, Grainger completed transitioning to a new web platform and made improvements to search capabilities on the website.

The Grainger catalog, most recently issued in February 2015, offers approximately 590,000 facilities maintenance and other products, and is used by customers to assist in product selection. The 2015 catalog includes over 32,000 new items and approximately 1.5 million copies of the catalog were produced.

Grainger estimates the United States market for facilities maintenance and related products to be approximately $126 billion, of which Grainger’s share is approximately 6%.

Canada

Acklands – Grainger is Canada’s leading broad-line distributor of industrial and safety supplies. A combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services is provided by this business.

Acklands – Grainger distributes tools, fasteners, safety supplies, instruments, welding and shop equipment, and many other items. The Canadian business serves customers through 181 branches, sales and service representatives and 6 DCs across Canada. During 2014, approximately 15,700 sales transactions were completed daily. A comprehensive catalog, printed in both English and French, was most recently issued in February 2015. The catalog has more than 153,000 products and is used by customers to assist in product selection. In addition, customers can purchase products through Acklandsgrainger.com, a fully bilingual website. In early 2015, the Canadian business opened a 535,000 square-foot DC in the Toronto area. Grainger estimates the Canadian market for facilities maintenance and related products to be approximately $13 billion, of which Acklands – Grainger’s share is approximately 8%.

Other Businesses

Included in other businesses is Zoro and operations in Europe, Asia and Latin America. The more significant businesses in this group, those with revenues of more than $100 million in 2014, are described below.

Fabory

Fabory is a European distributor of fasteners, tools and industrial supplies. Fabory is headquartered in Tilburg, the Netherlands, and has more than 100 locations in 13 countries. Customers have access to more than 100,000 products through a catalog and through Fabory.com. Grainger estimates the European market (in which Fabory has its primary operations) for facilities maintenance and related products, including fasteners, to be approximately $40 billion, of which Grainger’s share is approximately 1%.

Japan

Grainger operates in Japan through its 51% interest in MonotaRO Co. MonotaRO provides small and mid-sized Japanese businesses with products that help them operate and maintain their facilities. MonotaRO is a catalog and web-based direct marketer with approximately 86% of orders being conducted through Monotaro.com, through which customers have access to approximately 8 million products. MonotaRO has no branches or sales force and fulfills all orders from two DCs. Grainger estimates the Japanese market for facilities maintenance and related products to be approximately $43 billion, of which Grainger’s share is approximately 1%.

Mexico

Grainger’s operations in Mexico provide local businesses with maintenance, repair and operating supplies and other related products primarily from Mexico and the United States. The business in Mexico distributes products through a network of branches and two DCs where customers have access to approximately 148,000 products through a Spanish-language catalog and through Grainger.com.mx®. Grainger estimates the Mexican market for facilities maintenance and related products to be approximately $11 billion, of which Grainger’s share is approximately 1%.

Zoro

Zoro is an online distributor of MRO products serving U.S. businesses and consumers through its website Zoro.com. Zoro offers a broad selection of approximately 760,000 items at single, competitive prices. Zoro has no branches or sales force, and customer orders are fulfilled through the Grainger U.S. supply chain. In 2014, Zoro began serving customers in Canada through ZoroCanada.com.

Seasonality

Grainger’s business in general is not seasonal, however, there are some products that typically sell more often during the winter or summer season. In any given month, unusual weather patterns, i.e., unusually hot or cold weather, could impact the sales volumes of these products, either positively or negatively.

Competition

Grainger faces competition in all markets it serves, from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-based businesses. Grainger provides local product availability, a broad product line, sales representatives, competitive pricing, catalogs (which include product descriptions and, in certain cases, extensive technical and application data), and electronic and Internet commerce technology. Other services, such as inventory management, are also offered. Grainger believes that it can effectively compete with manufacturers on small orders, but manufacturers may have an advantage in filling large orders. There are several large competitors, although the majority of the market is served by small local and regional competitors.

Employees

As of December 31, 2014, Grainger had approximately 23,600 employees, of whom approximately 22,300 were full-time and 1,300 were part-time or temporary. Grainger has never had a major work stoppage and considers employee relations to be good.

Website Access to Company Reports

Grainger makes available, through its website, free of charge, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports, as soon as reasonably practicable after this material is electronically filed with or furnished to the Securities and Exchange Commission. This material may be accessed by visiting www.grainger.com/investor.

Item 1A: Risk Factors

The following is a discussion of significant risk factors relevant to Grainger's business that could adversely affect its financial position or results of operations.

Weakness in the economy could negatively impact Grainger's sales growth. Economic and industry trends affect Grainger's business environments. Economic downturns can cause customers, both domestic and international, to idle or close facilities, delay purchases and otherwise reduce their purchases of Grainger's products and services as well as their ability to make full and timely payments. Thus, a significant or prolonged slowdown in economic activity in the United States, Canada or any other major world economy could negatively impact Grainger's sales growth and results of operations.

The facilities maintenance industry is highly fragmented, and changes in competition could result in decreased demand for Grainger's products and services. There are several large competitors in the industry, although most of the market is served by small local and regional competitors. Grainger faces competition in all markets it serves, from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-based businesses. The industry is also consolidating as customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. These customer needs could result in fewer suppliers as the remaining suppliers become larger and capable of consistent sources of supply. Competitive pressures could adversely affect Grainger's sales and profitability.

Changes in inflation may adversely affect gross margins. Inflation impacts the costs at which Grainger can procure product and the ability to increase prices to customers over time. Prolonged periods of low inflation could adversely affect the degree to which Grainger is able to recover inflationary costs or increase sales through price escalation.

Volatility in commodity prices may adversely affect gross margins. Some of Grainger's products contain significant amounts of commodity-priced materials, such as steel, copper, petroleum derivatives or rare earth minerals, and are subject to price changes based upon fluctuations in the commodities market. Increases in the price of fuel could also drive up transportation costs. Grainger's ability to pass on such increases in costs in a timely manner depends on market conditions. The inability to pass along cost increases could result in lower gross margins. In addition, higher prices could impact demand for these products, resulting in lower sales volumes.

Unexpected product shortages could negatively impact customer relationships, resulting in an adverse impact on results of operations. Grainger's competitive strengths include product selection and availability. Products are purchased from more than 4,500 key suppliers located in various countries around the world, no one of which accounted for more than 5% of total purchases. Historically, no significant difficulty has been encountered with respect to sources of supply; however, disruptions could occur due to factors beyond Grainger's control, such as economic downturns, political unrest, port slowdowns, trade issues, etc., any of which could adversely affect a supplier's ability to manufacture or deliver products. As Grainger continues to source lower cost products from Asia and other areas of the world, the risk for disruptions has increased due to the additional lead time required and distances involved. If Grainger was to experience difficulty in obtaining products, there could be a short-term adverse effect on results of operations and a longer-term adverse effect on customer relationships and Grainger's reputation. In addition, Grainger has strategic relationships with key vendors. In the event Grainger was unable to maintain those relations, there might be a loss of competitive pricing advantages which could, in turn, adversely affect results of operations.

Changes in customer or product mix could cause the gross margin percentage to decline. From time to time, Grainger experiences changes in customer and product mix that effect gross margin. Changes in customer and product mix result primarily from business acquisitions, changes in customer demand, customer acquisitions, selling and marketing activities and competition. If rapid growth with large customers continues, Grainger will face pressure to maintain current gross margins, as this customer segment receives discounted pricing due to their higher sales volume. There can be no assurance that Grainger will be able to maintain historical gross margins in the future.

Disruptions in Grainger's supply chain could result in an adverse impact on results of operations. A disruption within Grainger's logistics or supply chain network, including damage, destruction, extreme weather and other events which would cause one or more of the distribution centers to become non-operational, could adversely affect Grainger's ability to deliver inventory in a timely manner, impair Grainger's ability to meet customer demand for products and result in lost sales or damage to Grainger's reputation. Grainger's ability to provide same-day shipping and next-day delivery is an integral component of the business strategy and any such disruption could adversely impact the results of operations.

Interruptions in the proper functioning of information systems could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues. The proper functioning of Grainger's information systems, including its websites, is critical to the successful operation of its business. Grainger continues to invest in software, hardware and network infrastructures in order to effectively manage its information systems and websites. Although Grainger's information systems are protected with robust backup and security systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to natural disasters, power losses, computer viruses, telecommunication failures and other problems. If critical information systems fail or otherwise become unavailable, among other things, Grainger's ability to process orders, maintain proper levels of inventories, collect accounts receivable and disburse funds could be adversely affected. Any such interruption of Grainger's information systems could also subject Grainger to additional costs.

Breaches of information systems security could damage Grainger's reputation, disrupt operations, increase costs and/or decrease revenues. Through Grainger's sales and eCommerce channels, Grainger collects and stores confidential information that customers provide to, among other things, purchase products or services, enroll in promotional programs and register on the website. Grainger also acquires and retains information about suppliers and employees in the normal course of business. Despite instituted safeguards for the protection of such information, computer hackers may attempt to penetrate Grainger's or its vendors' information systems and, if successful, misappropriate confidential customer, supplier, employee or other business information. In addition, a Grainger employee, contractor or other third party with whom Grainger does business may attempt to circumvent security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer, supplier, employee or other business information could disrupt operations, damage Grainger's reputation and expose Grainger to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on Grainger, its financial condition and results of operations. In addition, compliance with tougher privacy and information security laws and standards may result in significant additional expense due to increased investment in technology and the development of new operational processes.

Fluctuations in foreign currency have an effect on reported results of operations. Grainger’s exposure to fluctuations in foreign currency rates results primarily from the translation exposure associated with the preparation of the Consolidated Financial Statements, as well as from transaction exposure associated with transactions in currencies other than an entity’s functional currency. While the Consolidated Financial Statements are reported in U.S. dollars, the financial statements of Grainger’s subsidiaries outside the United States are prepared using the local currency as the functional currency and translated into U.S. dollars. As a result, fluctuations in the exchange rate of the U.S. dollar relative to the local currencies of Grainger’s international subsidiaries could cause fluctuations in reported results. Grainger also has foreign currency exposure to the extent receipts and expenditures are not denominated in the subsidiary’s functional currency, and could have an impact on sales, costs and cash flows.

Acquisitions involve a number of inherent risks, any of which could result in the benefits anticipated not being realized and could have an adverse effect on results of operations. Acquisitions, both foreign and domestic, involve various inherent risks, such as uncertainties in assessing the value, strengths, weaknesses, liabilities and potential profitability of acquired companies. There is a risk of potential loss of key employees of an acquired business and of an inability to achieve identified operating and financial synergies anticipated to result from an acquisition. Additionally, problems could arise from the integration of the acquired business including unanticipated changes in the business or industry, or general economic conditions that affect the assumptions underlying the acquisition. Any one or more of these factors could cause Grainger to not realize the benefits anticipated to result from the acquisitions or have a negative impact on the fair value of the reporting units. Accordingly, goodwill and intangible assets recorded as a result of acquisitions could become impaired.

In order to compete, Grainger must attract, retain and motivate key employees, and the failure to do so could have an adverse effect on results of operations. In order to compete and have continued growth, Grainger must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Grainger competes to hire employees and then must train them and develop their skills and competencies. Grainger's operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.

Grainger's continued success is substantially dependent on positive perceptions of Grainger's reputation. One of the reasons why customers choose to do business with Grainger and why employees choose Grainger as a place of employment is the reputation that Grainger has built over many years. To be successful in the future, Grainger must continue to preserve, grow and leverage the value of Grainger's brand. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish Grainger's brand and lead to adverse effects on Grainger's business.

Grainger's business is subject to various government regulations. Grainger's business is subject to a wide array of laws and regulations in every jurisdiction where it operates, and compliance with these laws and regulations increases the cost of doing business. Grainger is subject to a variety of laws and regulations, including without limitation import and export requirements, the Foreign Corrupt Practices Act, tax laws (including U.S. taxes on foreign subsidiaries), foreign exchange controls and cash repatriation restrictions, data privacy requirements, regulations and potential expansion of regulations on suppliers regarding the sources of supplies or products, labor laws and anti-competition regulations, and is also subject to audits and inquiries in the ordinary course of business. As a government contractor selling to federal, state and local government entities, Grainger is also subject to a wide variety of additional laws and regulations. Changes to the legal and regulatory environments could increase the cost of doing business, and such costs may increase in the future as a result of changes in these laws and regulations or in their interpretation. Furthermore, Grainger has implemented policies and procedures designed to facilitate compliance with these laws and regulations, but there can be no assurance that employees, contractors or agents will not violate such laws and regulations or Grainger's policies. Any such violations could individually or in the aggregate materially adversely affect Grainger's financial condition or operating results.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

As of December 31, 2014, Grainger’s owned and leased facilities totaled approximately 27 million square feet. The United States business and Acklands – Grainger accounted for the majority of the total square footage. Grainger believes that its properties are generally in excellent condition, well maintained and suitable for the conduct of business.

A brief description of significant facilities follows:



Location	Facility and Use (6)	Size in Square Feet (in 000's)
United States (1)	377 United States branch locations	8,310
United States (2)	19 Distribution Centers	7,020
United States (3)	Other facilities	3,189
Canada (4)	191 Acklands – Grainger facilities	3,050
Other Businesses (5)	Other facilities	3,800
Chicago Area (2)	Headquarters and General Offices	1,616
	Total Square Feet	26,985



(1)	United States branches consist of 268 owned and 109 leased properties located throughout the U.S. Branches range in size from approximately 1,000 to 109,000 square feet. Most leases expire between 2015 and 2020.
(2)	These facilities are primarily owned. Distribution Centers range in size from approximately 45,000 square feet to 1,300,000 square feet.
(3)	These facilities include both owned and leased locations, consisting of storage facilities, office space and idle properties.
(4)	Acklands – Grainger facilities consist of general offices, distribution centers and branches located throughout Canada, of which 69 are owned and 122 leased.
(5)	These facilities include owned and leased locations in Europe, Asia, Latin America and other U.S. operations.
(6)	Owned facilities are not subject to any mortgages.

Item 3: Legal Proceedings

Information on specific and significant legal proceedings is set forth in Note 18 to the Consolidated Financial Statements included under Item 8.

Item 4: Mine Safety Disclosures

Not applicable.

PART II

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

Market Information and Dividends

Grainger's common stock is listed on the New York Stock Exchange, with the ticker symbol GWW. Effective January 1, 2015, Grainger voluntarily delisted its common stock from the Chicago Stock Exchange to eliminate duplicative administrative requirements. The high and low sales prices for the common stock and the dividends declared and paid for each calendar quarter during 2014 and 2013 are shown below.



		Prices
	Quarters	High		Low		Dividends
2014	First	$	267.49	$	228.19	$	0.93
	Second	269.69		245.23		1.08
	Third	256.42		231.21		1.08
	Fourth	261.57		223.92		1.08
	Year	$	269.69	$	223.92	$	4.17
2013	First	$	233.95	$	201.49	$	0.80
	Second	269.17		216.64		0.93
	Third	276.38		245.01		0.93
	Fourth	274.37		246.86		0.93
	Year	$	276.38	$	201.49	$	3.59

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

Holders

The approximate number of shareholders of record of Grainger’s common stock as of January 31, 2015, was 767 with approximately 208,500 additional shareholders holding stock through nominees.

Issuer Purchases of Equity Securities - Fourth Quarter



Period	Total Number of Shares Purchased (A)	Average Price Paid Per Share (B)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (C)	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
Oct. 1 – Oct. 31	82,500	238.19	82,500	9,305,286	shares
Nov. 1 – Nov. 30	220,030	247.05	220,030	9,085,256	shares
Dec. 1 – Dec. 31	539,375	247.86	539,375	8,545,881	shares
Total	841,905	246.70	841,905


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


(B)	Average price paid per share includes any commissions paid and includes only those amounts related to purchases as part of publicly announced plans or programs.


(C)	Purchases were made pursuant to a share repurchase program approved by Grainger's Board of Directors on April 30, 2014. The program has no specified expiration date. Activity is reported on a trade date basis.

Company Performance

The following stock price performance graph compares the cumulative total return on an investment in Grainger common stock with the cumulative total return of an investment in each of the Dow Jones US Industrial Suppliers Total Stock Market Index and the S&P 500 Stock Index. It covers the period commencing December 31, 2009, and ending December 31, 2014. The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31, 2009, and that all dividends were reinvested.



	December 31,
	2009		2010		2011		2012		2013		2014
W.W. Grainger, Inc.	$	100	$	145	$	200	$	220	$	282	$	286
Dow Jones US Industrial Suppliers Total Stock Market Index	100		140		180		203		242		237
S&P 500 Stock Index	100		115		117		136		180		205

Item 6: Selected Financial Data



	2014		2013		2012		2011		2010
	(In thousands of dollars, except for per share amounts)
Net sales	$	9,964,953	$	9,437,758	$	8,950,045	$	8,078,185	$	7,182,158
Net earnings attributable to W.W. Grainger, Inc.	801,729		797,036		689,881		658,423		510,865
Net earnings per basic share	11.59		11.31		9.71		9.26		7.05
Net earnings per diluted share	11.45		11.13		9.52		9.07		6.93
Total assets	5,284,252		5,266,328		5,014,598		4,716,062		3,904,377
Long-term debt (less current maturities) and other long-term liabilities	738,435		743,702		817,229		603,858		747,404
Cash dividends paid per share	$	4.17	$	3.59	$	3.06	$	2.52	$	2.08

Net earnings for 2014 included a $0.40 per share expense related to closing the business in Brazil, a $0.15 per share non-cash charge due to the retirement plan transition in Europe and a $0.15 per share expense related to restructuring the business in Europe. Results also included a $0.11 per share expense related to a non-cash goodwill impairment charge. When combined, these items had a net expense effect of $0.81 per share.

Net earnings for 2013 included a $0.29 per share expense related to non-cash impairment charges, primarily for goodwill. Results also included a $0.10 per share expense related to restructuring the businesses in Europe and China. When combined, these items had a net expense effect of $0.39 per share.

Net earnings for 2012 included a $0.66 per share expense related to the settlement of disputes involving the General Services Administration (GSA) and United States Postal Service (USPS) contracts. Results also included a $0.18 per share expense related to restructuring the businesses in Europe, India and China, a $0.04 per share expense due to an impairment charge and a $0.03 per share expense related to U.S. branch closures. When combined, these items had a net expense effect of $0.91 per share.

Net earnings for 2011 included a $0.16 per share expense for U.S. branch closures, a $0.12 per share benefit related to the settlement of prior year tax reviews and a $0.07 per share benefit from a gain on the sale of the MRO Korea Co., Ltd. joint venture, which when combined, resulted in a net benefit of $0.03 per share.

There were two non-cash items included in 2010 earnings, a $0.28 per share benefit from a change to the paid time off policy and a $0.15 per share tax expense related to the tax treatment of retiree healthcare benefits following the passage of the Patient Protection and Affordable Care Act, which when combined, resulted in a net benefit of $0.13 per share.

Grainger completed several acquisitions for the years presented above, all of which were immaterial individually and in the aggregate. Operating results have included the results of each business acquired since the respective acquisition dates.

For further information see “Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.”

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

Overview

General. Grainger is a broad-line distributor of maintenance, repair and operating supplies, and other related products and services used by businesses and institutions. Grainger’s operations are primarily in the United States and Canada, with presence also in Europe, Asia and Latin America. Grainger uses a combination of multichannel and single channel online business models to provide customers with a range of options for finding and purchasing products, utilizing sales representatives, catalogs, direct marketing materials and eCommerce. Grainger serves more than 2 million customers worldwide through a network of highly integrated branches, distribution centers and websites.

Grainger’s two reportable segments are the United States and Canada. The United States segment reflects the results of Grainger’s U.S. operating segment. The Canada segment reflects the results for Acklands – Grainger, Grainger’s Canadian operating segment. Other businesses, which include Zoro and operations in Europe, Asia and Latin America, are not material individually.

Business Environment. Given Grainger's large number of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger’s growth. Grainger’s sales in the United States and Canada tend to positively correlate with Gross Domestic Product (GDP), Industrial Production, Exports and Business Investment. In the United States, sales also tend to positively correlate with Business Inventory. In Canada, sales also tend to positively correlate with oil prices. The table below provides these estimated indicators for 2014 and 2015:



	United States				Canada
	Estimated 2014		Forecasted 2015		Estimated 2014		Forecasted 2015
GDP	2.4	%	3.0	%	2.4	%	1.9	%
Industrial Production	4.3	%	3.0	%	3.7	%	(0.2	)%
Exports	3.1	%	3.3	%	5.1	%	3.9	%
Business Investment	6.3	%	8.4	%	0.3	%	(0.8	)%
Business Inventory	3.8	%	3.7	%	—		—
Oil Prices	—		—		$93/barrel		$42/barrel
Source: Global Insight (February 2015)

In the United States, business investment and exports are two major indicators of MRO spend. After growing 11% for two straight quarters, business investment slowed to 1% in the fourth quarter of 2014, according to Global Insight. However, given the economy's momentum at the end of 2014, as demonstrated through the November and December employment reports, business spending is expected to rebound in the first quarter of 2015. However, investment in equipment is expected to face headwinds if weak foreign demand continues. Export growth is expected to remain in the low single-digits due to subpar world growth and a strong U.S. dollar.

The light and heavy manufacturing customer sectors, which comprised approximately 30% of Grainger’s total 2014 sales, have historically correlated with manufacturing employment levels and manufacturing production. The United States Department of Labor reported an increase of 1.5% in manufacturing employment levels from December 2013 to December 2014. According to the Federal Reserve, manufacturing output increased 4.9% from December 2013 to December 2014. These increases contributed to a high single-digit percent sales increase in the heavy manufacturing customer sector and a mid single-digit percent sales increase in the light manufacturing customer sector for Grainger in 2014.

While full year 2014 economic growth for Canada was positive, the Canadian economy experienced pressure throughout the year as the Canadian dollar weakened to new five-year lows versus the U.S. dollar. The weak Canadian dollar, combined with a 1% drop in the commodity price index for metals and minerals from December 2013 to December 2014, have impacted the performance of the Canadian business, which is heavily dependent on the natural resources sector. These market factors led to declines in the agriculture and mining sectors for the Canadian business in 2014. In addition, the recent decline of oil prices has caused investment in Canada's oil and gas industries to slow, according to the Royal Bank of Canada.

Outlook. In 2015, Grainger plans to continue to make investments in its supply chain, information systems, eCommerce, sales force and inventory management services. These investments are expected to accelerate market share growth and increase Grainger's size and scale.

On January 26, 2015, Grainger revised its 2015 earnings per share guidance from a range of $12.90 to $13.80 to a range of $12.60 to $13.60 and also revised its 2015 sales guidance from a range of 5 to 9 percent to a range of 3 to 7 percent. This change is driven by unfavorable foreign exchange and the weak economy in Canada.

Matters Affecting Comparability.

Grainger completed several acquisitions throughout 2014, 2013 and 2012, all of which were immaterial individually and in the aggregate. Grainger’s operating results have included the results of each business acquired since the respective acquisition dates.

Results of Operations

The following table is included as an aid to understanding changes in Grainger's Consolidated Statements of Earnings:



	For the Years Ended December 31,
	As a Percent of Net Sales						Percent Increase/(Decrease) from Prior Year
	2014		2013		2012		2014		2013
Net sales	100.0	%	100.0	%	100.0	%	5.6	%	5.4	%
Cost of merchandise sold	56.7		56.2		56.2		6.6		5.3
Gross profit	43.3		43.8		43.8		4.3		5.6
Operating expenses	29.8		30.1		31.2		4.5		2.0
Operating earnings	13.5		13.7		12.6		3.9		14.7
Other income (expense)	(0.1	)	(0.1	)	(0.1	)	37.6		(30.6	)
Income taxes	5.2		5.1		4.7		8.8		14.5
Noncontrolling interest	0.1		0.1		0.1		(1.4	)	19.5
Net earnings attributable to W.W. Grainger, Inc.	8.1	%	8.4	%	7.7	%	0.6	%	15.5	%

2014 Compared to 2013

Grainger's net sales of $9,965 million for 2014 increased 6% when compared with net sales of $9,438 million for 2013. The 6% increase for the year consisted of the following contributors:



	Percent Increase/ (Decrease)
Volume	5
Business acquisition, net of divestitures	1
Price	1
Foreign exchange	(1)
Total	6%

Net sales to most customer end markets increased for 2014. The increase in net sales was led by growth in sales to heavy and light manufacturing customers, as well as diversified commercial services customers. Refer to the Segment Analysis below for further details.

Gross profit of $4,314 million for 2014 increased 4%. The gross profit margin for 2014 was 43.3%, down 0.5 percentage point versus 2013, primarily driven by lower margins from the newly acquired businesses, faster growth with lower margin customers, charges related to closing the business in Brazil and restructuring the business in Europe, partially offset by price inflation exceeding cost inflation.

Operating expenses of $2,967 million for 2014 increased 4% from $2,840 million for 2013. The increase was primarily driven by an incremental $78 million in growth-related spending on eCommerce, new sales representatives, supply chain and inventory management solutions, as well as charges related to closing the business in Brazil, restructuring costs and the transition of the retirement plan in Europe, and an impairment charge for the business in Colombia.

Operating earnings of $1,347 million for 2014 increased 4% from $1,297 million for 2013. Operating earnings in 2014 included a $29 million charge related to closing the business in Brazil, a $14 million charge related to the transition of the employee retirement plan in Europe, a $12 million impairment charge for the business in Colombia and $10 million in restructuring costs for the business in Europe. Operating earnings in 2013 included a $26 million expense related to impairment charges for the business in Brazil and Grainger Lighting Services, as well as $10 million of restructuring costs for the businesses in Europe and China. Excluding these charges from both years, operating earnings increased 6%, primarily due to higher sales and operating expenses increasing at a slower rate than sales.

Net earnings attributable to Grainger for 2014 increased by 1% to $802 million from $797 million in 2013. The increase in net earnings primarily resulted from an increase in operating earnings. Diluted earnings per share of $11.45 in 2014 were 3% higher than $11.13 for 2013, due to increased net earnings and lower average shares outstanding.

The table below reconciles reported diluted earnings per share determined in accordance with generally accepted accounting principles (GAAP) in the United States to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes 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 this financial measure with other companies' non-GAAP financial measures having the same or similar names.



	Twelve Months Ended December 31,
	2014	2013	%
Diluted earnings per share reported	$11.45	$11.13	3	%
Brazil business shutdown	0.40	—
Pension change	0.15	—
Restructuring	0.15	0.10
Goodwill impairment	0.11	0.29
Subtotal	0.81	0.39
Diluted earnings per share adjusted	$12.26	$11.52	6	%

Segment Analysis

The following comments at the reportable segment and other business unit level include external and intersegment net sales and operating earnings. See Note 16 to the Consolidated Financial Statements.

United States

Net sales were $7,926 million for 2014, an increase of $512 million, or 7%, when compared with net sales of $7,414 million for 2013. The 7% increase for the year consisted of the following contributors:



	Percent Increase
Volume	4
Business acquisition, net of divestitures	2
Price	1
Total	7%

Net sales to most customer end markets increased for 2014. The increase was led by low double-digit growth to the natural resources end market, followed by high single-digit growth to heavy manufacturing customers and mid-single digit growth to light manufacturing, commercial services, retail and government customers. Resellers were up in the low single digits and contractors were down in the low single digits.

The segment gross profit margin decreased 0.4 percentage point in 2014 compared to 2013, primarily driven by lower margins from the acquired businesses and faster growth with lower margin customers, partially offset by price increases exceeding product cost increases.

Operating expenses were up 3% for 2014 versus 2013. Operating expenses in 2013 included a $13 million expense related to goodwill impairment charges for Grainger Lighting Services. Excluding this expense from the prior year, the growth in operating expenses was primarily driven by an incremental $57 million in growth-related spending on new sales representatives, supply chain and inventory management solutions.

For the segment, operating earnings of $1,444 million for 2014 increased 11% over $1,304 million in 2013. Excluding the expense mentioned above in the prior year, operating earnings were up 10%. The improvement in operating earnings for 2014 was due to an increase in net sales and operating expenses increasing at a slower rate than sales.

Canada

Net sales were $1,076 million for 2014, a decrease of $38 million, or 3%, when compared with $1,114 million for 2013. In local currency, sales increased 4% for 2014. The 3% decrease for the year consisted of the following contributors:



	Percent Increase/ (Decrease)
Business acquisition	2
Volume	1
Price	1
Foreign exchange	(7)
Total	(3)%

Sales performance in Canada was driven by double-digit growth in the utilities market, followed by high single-digit growth in the forestry market and mid-single digit growth to commercial services and heavy manufacturing customers. Net sales in the construction, agriculture and mining end markets were down in the high single digits.

The segment gross profit margin decreased 1.7 percentage points in 2014 versus 2013, primarily driven by product cost inflation exceeding price inflation driven by unfavorable foreign exchange, higher freight costs and lower supplier rebates as well as negative mix from the WFS acquisition.

Operating expenses increased 3% in 2014. In local currency, operating expenses increased 10%, primarily due to the WFS acquisition, higher payroll and information technology expenses, as well as costs associated with opening a new DC.

Operating earnings of $88 million for 2014 decreased $41 million, or 32%, versus 2013. In local currency, operating earnings decreased 27%. The decrease in earnings was due to operating expenses increasing at a faster rate than sales and lower gross profit margins.

Other Businesses

Net sales were $1,182 million for 2014, an increase of $142 million, or 14%, when compared with $1,040 million for 2013. The net sales increase was primarily due to incremental sales from Zoro and the businesses in Japan and Mexico. The 14% increase for the year consisted of the following contributors:



	Percent Increase/ (Decrease)
Volume/Price	18
Foreign exchange	(4)
Total	14%

Operating earnings for other businesses were a loss of $38 million for 2014 compared to earnings of $8 million for 2013. The year 2014 included a $29 million charge related to closing the business in Brazil, a $14 million charge related to the transition of the employee retirement plan in Europe, a $12 million impairment charge for the business in Colombia and $10 million in restructuring costs for the business in Europe. The year 2013 included $13 million of expense related to impairment charges for the business in Brazil and $10 million of expense in structural changes to the businesses in Europe and China. Excluding these charges in both years, operating earnings decreased $3 million, or 10%, primarily driven by incremental expenses associated with the start-up of the single channel online business model in Europe.

Other Income and Expense

Other income and expense was $13 million of expense in 2014 compared with $9 million of expense in 2013. The following table summarizes the components of other income and expense (in thousands of dollars):



	For the Years Ended December 31,
	2014			2013
Interest income (expense) - net	$	(8,025	)	$	(9,991	)
Other non-operating income	483			2,732
Other non-operating expense	(5,189		)	(1,996		)
Total	$	(12,731	)	$	(9,255	)

Other non-operating expense increased in 2014 due to higher foreign exchange transaction losses.

Income Taxes

Income taxes of $522 million in 2014 increased 9% as compared with $480 million in 2013. Grainger's reported tax rates were 39.1% and 37.3% in 2014 and 2013, respectively. Excluding the effect of the separately identified charges reported in both 2014 and 2013, Grainger's reported tax rate was 38.2% and 37.3% in 2014 and 2013, respectively. The increase in the reported tax rate in 2014 was primarily due to a higher proportion of earnings in the United States versus geographies with lower tax rates and losses with no tax benefit.

2013 Compared to 2012

Grainger's net sales of $9,438 million for 2013 increased 5% when compared with net sales of $8,950 million for 2012. The 5% increase for the year consisted of the following contributors:



	Percent Increase/ (Decrease)
Volume	3
Business acquisitions	2
Price	1
Foreign exchange	(1)
Total	5%

Net sales to most customer end markets increased for 2013. The increase in net sales was led by growth in sales to heavy and light manufacturing customers, followed by diversified commercial services customers. Refer to the Segment Analysis below for further details.

Gross profit of $4,136 million for 2013 increased 6%. The gross profit margin for 2013 was 43.8%, flat versus 2012, primarily driven by price increases exceeding product cost increases, offset by lower margins from the acquired businesses and faster growth with lower margin customers.

Operating expenses of $2,840 million for 2013 increased 2% from $2,785 million for 2012. Operating expenses in 2013 included a $26 million expense related to the impairment charges for the business in Brazil and Grainger Lighting Services in the United States. Also included was $10 million of expense related to restructuring charges for improving the long-term performance of the businesses in Europe and China. Operating expenses in 2012 included a $76 million expense related to the settlement of disputes involving the GSA and USPS contracts. Also included in 2012 was $24 million of expense related to branch closure costs, restructuring charges related to improving the long-term performance of the businesses in Europe, India and China and an impairment charge for Grainger Lighting Services. Excluding these expenses from both years, operating expenses increased 4%, primarily driven by the acquisitions and an incremental $132 million in growth-related spending on new sales representatives, eCommerce and inventory management solutions, primarily in the United States.

Operating earnings of $1,297 million for 2013 increased 15% from $1,131 million for 2012. Excluding the expenses mentioned above for both years, operating earnings increased 8%, primarily due to higher sales and operating expenses increasing at a slower rate than sales.

Net earnings attributable to Grainger for 2013 increased by 16% to $797 million from $690 million in 2012. The increase in net earnings primarily resulted from an increase in operating earnings. Diluted earnings per share of $11.13 in 2013 were 17% higher than $9.52 for 2012, due to increased net earnings and lower average shares outstanding.

The table below reconciles reported diluted earnings per share determined in accordance with GAAP in the United States to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes 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 this financial measure with other companies' non-GAAP financial measures having the same or similar names.



	Twelve Months Ended December 31,
	2013	2012	%
Diluted earnings per share reported	$11.13	$9.52	17	%
GSA/USPS settlement	—	0.66
Goodwill impairment	0.29	0.04
Restructuring	0.10	0.18
Charge for U.S. branch closures	—	0.03
Subtotal	0.39	0.91
Diluted earnings per share adjusted	$11.52	$10.43	10	%

Segment Analysis

United States

Net sales were $7,414 million for 2013, an increase of $488 million, or 7%, when compared with net sales of $6,926 million for 2012. The 7% increase for the year consisted of the following contributors:



	Percent Increase
Volume	4
Business acquisitions	2
Price	1
Total	7%

Net sales to most customer end markets increased for 2013. The increase was led by high single-digit growth to light manufacturing customers, followed by mid-single digit growth to heavy manufacturing, commercial services, contractors and natural resources customers. Government was up in the low single digits and net sales to resellers were down in the low single digits.

The segment gross profit margin decreased 0.3 percentage point in 2013 compared to 2012, primarily driven by lower margins from the acquired businesses and faster growth with lower margin customers, partially offset by price increases exceeding product cost increases.

Operating expenses were up 1% for 2013 versus 2012. Operating expenses in 2013 included a $13 million expense related to goodwill impairment charges for Grainger Lighting Services. The 2012 year included a $76 million expense related to the settlement of disputes involving the GSA and USPS contracts. Also included in 2012 was $10 million of expense primarily related to branch closure costs and a goodwill impairment charge for Grainger Lighting Services. Excluding these expenses from both years, operating expenses increased 5%, primarily driven by an incremental $118 million in growth-related spending on new sales representatives, eCommerce and inventory management solutions.

For the segment, operating earnings of $1,304 million for 2013 increased 15% over $1,133 million in 2012. Excluding the expenses mentioned above in both years, operating earnings were up 8%. The improvement in operating earnings for 2013 was due to an increase in net sales and operating expenses increasing at a slower rate than sales.

Canada

Net sales were $1,114 million for 2013, an increase of $8 million, or 1%, when compared with $1,106 million for 2012. In local currency, sales increased 4% for 2013. The 1% increase for the year consisted of the following contributors:



	Percent Increase/ (Decrease)
Volume	4
Foreign exchange	(3)
Total	1%

Sales performance in Canada was driven by double-digit growth in the forestry market, followed by high single-digit growth to the light manufacturing, commercial services and oil and gas end markets. Net sales to heavy manufacturing customers were down in the mid-single digits and the government end market was down in the low single digits.

The segment gross profit margin increased 0.4 percentage point in 2013 over 2012, primarily driven by price increases exceeding product cost increases and favorable freight rates, partially offset by the unfavorable effect of foreign exchange on purchases.

Operating expenses increased 2% in 2013. In local currency, operating expenses increased 5%, primarily due to higher volume-related payroll, occupancy and technology investments, partially offset by lower warehouse expenses.

Operating earnings of $129 million for 2013 were up $1 million, or 1%, versus 2012. In local currency, operating earnings increased 4%. The increase in earnings was due to sales growth and improved gross profit margins, partially offset by operating expenses increasing at a faster rate than sales.

Other Businesses

Net sales were $1,040 million for 2013, an increase of $33 million, or 3%, when compared with $1,007 million for 2012. The net sales increase was primarily due to incremental sales from Zoro, Brazil and Mexico, partially offset by lower sales in India due to a change in its business model. Higher sales in Japan were offset by unfavorable foreign exchange. The 3% increase for the year consisted of the following contributors:



	Percent Increase/ (Decrease)
Volume/Price	10
Foreign exchange	(7)
Total	3%

Operating earnings for other businesses were $8 million for 2013 compared to $20 million for 2012. The year 2013 included $13 million of expense related to impairment charges for the business in Brazil and $10 million of expense in structural changes to the businesses in Europe and China. The year 2012 included $14 million of charges related to restructuring the businesses in Europe, India and China. Excluding these charges, operating earnings decreased $4 million, or 11%, primarily driven by lower earnings from the businesses in Latin America, partially offset by higher earnings at Zoro and Japan.

Other Income and Expense

Other income and expense was $9 million of expense in 2013 compared with $13 million of expense in 2012. The following table summarizes the components of other income and expense (in thousands of dollars):



	For the Years Ended December 31,
	2013			2012
Interest income (expense) - net	$	(9,991	)	$	(13,418	)
Other non-operating income	2,732			1,866
Other non-operating expense	(1,996		)	(1,784		)
Total	$	(9,255	)	$	(13,336	)

Net interest expense decreased in 2013 due to lower average interest rates, partially offset by higher average outstanding debt.

Income Taxes

Income taxes of $480 million in 2013 increased 15% as compared with $419 million in 2012. Grainger's reported tax rates were 37.3% and 37.5% in 2013 and 2012, respectively.

Financial Condition

Grainger expects its strong working capital position, cash flows from operations and borrowing capacity to continue, allowing it to fund its operations, including growth initiatives, capital expenditures, acquisitions and repurchase of shares, as well as to pay cash dividends.

Cash Flow

2014 Compared to 2013

Cash from operating activities continues to serve as Grainger's primary source of liquidity. Net cash flows from operations in 2014 were $960 million versus $986 million in 2013. Cash flows from operations were lower in 2014 primarily due to higher inventory purchases in 2014 compared to 2013. In 2013, the inventory position at the start of the year was higher due to lower sales in December 2012 as well as an inventory build to facilitate the move of Grainger's Chicago-area distribution center.

Net cash used in investing activities was $384 million and $399 million in 2014 and 2013, respectively. The lower use of cash was primarily driven by acquisition activity. Less cash was spent on acquisitions in 2014 versus 2013. The lower use of cash from acquisition activity in 2014 was partially offset by more cash expended in 2014 for additions to property, buildings and equipment, primarily related to supply chain investments.

Net cash used in financing activities of $758 million in 2014 increased $167 million from $591 million in 2013. The increase was primarily due to a partial repayment of the term loan in the United States as well as an increase in the purchase of treasury stock and dividends paid. This was partially offset by proceeds from the new revolving credit facility in the Canadian business.

2013 Compared to 2012

Cash from operating activities served as Grainger's primary source of liquidity. Net cash flows from operations in 2013 were $986 million and increased $170 million from $816 million in 2012. The primary driver of the improvement was an increase in net earnings of $109 million. In addition, changes in operating assets and liabilities resulted in a net use of cash of $58 million for 2013 compared to $129 million for 2012. The lower use of cash for operating assets and liabilities was driven primarily by higher trade accounts payable due to higher inventory purchases at year-end in 2013 compared to 2012, partially offset by higher accounts receivable from increased sales.

Net cash used in investing activities was $399 million and $306 million in 2013 and 2012, respectively. The higher use of cash in 2013 compared to 2012 was primarily driven by the increased cash paid for acquisitions and cash expended for property, buildings, equipment and software.

Net cash used in financing activities of $591 million in 2013 increased $197 million from $394 million in 2012. The increase was primarily due to higher treasury share repurchases. Cash paid for treasury share purchases was $438 million in 2013 versus $341 million in 2012, an increase of $97 million. The prior year also included $300 million in proceeds from the issuance of long-term debt.

Working Capital

Internally generated funds are the primary source of working capital and funds used in business expansion, supplemented by debt. In addition, funds are expended to support growth initiatives, as well as for business and systems development and other infrastructure improvements.

Working capital consists of current assets (less non-operating cash) and current liabilities (less short-term debt and current maturities of long-term debt). Working capital was $1,697 million at December 31, 2014, compared with $1,621 million at December 31, 2013. At these dates, the ratio of current assets to current liabilities was 2.4 and 2.5, respectively. The increase in working capital was primarily related to higher receivable balances driven by sales volume and an increase in extended terms given to customers.

Capital Expenditures

In each of the past three years, a portion of operating cash has been used for additions to property, buildings, equipment and capitalized software as summarized in the following table (in thousands of dollars):



	For the Years Ended December 31,
	2014		2013		2012
Land, buildings, structures and improvements	$	159,793	$	60,419	$	57,929
Furniture, fixtures, machinery and equipment	140,358		152,328		145,483
Subtotal	300,151		212,747		203,412
Capitalized software	87,239		59,398		46,448
Total	$	387,390	$	272,145	$	249,860

In 2014, Grainger made significant capital investments to build new distribution centers in the United States and Canada. In the United States, Grainger began construction of a new 1.3 million square-foot distribution center in New Jersey. In Canada, Grainger continued construction of the new distribution center in the Toronto area. Grainger also invested in technology infrastructure, vending machines for the KeepStock program and normal recurring replacement of equipment.

In 2013 and 2012, significant capital expenditures included investments in the distribution center network in the United States and Canada. In the United States, Grainger opened a new 1 million square-foot and highly automated Chicago-area distribution center in 2013. In Canada, Grainger began construction of the 535,000 square-foot distribution center in the Toronto area. Other significant investments in 2013 and 2012 included investing in a new eCommerce platform, sustaining capital investments for Grainger's branches and distribution centers and other technology infrastructure.

In 2015, capital expenditures are expected to range from $375 million to $425 million. Projected spending includes continued investments in the supply chain, technology infrastructure, eCommerce and in support of sales initiatives. Grainger expects to fund 2015 capital spending from operating cash.

Debt

Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available, including bank borrowings under lines of credit. Refer to Note 6 and Note 7 to the Consolidated Financial Statements included in Item 8. Total debt as a percent of total capitalization was 12.9% and 14.0% as of December 31, 2014 and 2013, respectively. The reduction in total debt as a percent of total capitalization was primarily due to the partial repayment of the term loan in the United States in 2014. Grainger believes any circumstances that would trigger early payment or acceleration with respect to any outstanding debt obligations would not have a material impact on its results of operations or financial position.

Commitments and Other Contractual Obligations

At December 31, 2014, Grainger's contractual obligations, including estimated payments due by period, are as follows (in thousands of dollars):



	Payments Due by Period
	Total Amounts Committed		Less than 1 Year		1 - 3 Years		4 - 5 Years		More than 5 Years
Debt obligations	$	484,836	$	80,300	$	250,494	$	149,826	$	4,216
Interest on debt	27,270		9,557		10,869		6,834		10
Operating lease obligations	186,153		65,901		80,702		31,737		7,813
Purchase obligations:
Uncompleted additions to property, buildings and equipment	116,839		116,839		—		—		—
Commitments to purchase inventory	415,582		415,582		—		—		—
Other purchase obligations	307,948		190,559		101,646		15,743		—
Other liabilities	359,039		187,117		25,717		26,397		119,808
Total	$	1,897,667	$	1,065,855	$	469,428	$	230,537	$	131,847

Purchase obligations for inventory are made in the normal course of business to meet operating needs. While purchase orders for both inventory purchases and non-inventory purchases are generally cancelable without penalty, certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.

Other liabilities represent future payments for profit sharing and employee benefits plans as determined by actuarial projections, and other employee benefit plans. Other employment-related benefits costs of $59 million have not been included in this table as the timing of benefit payments is not predictable. See Note 9 to the Consolidated Financial Statements.

See also Note 7 and Note 10 to the Consolidated Financial Statements for further detail related to the interest on long-term debt and operating lease obligations, respectively.

Grainger has recorded a noncurrent liability of approximately $49 million for tax uncertainties and interest at December 31, 2014. This amount is excluded from the table above, as Grainger cannot make reliable estimates of these cash flows by period. See Note 14 to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements

Grainger does not have any material exposures to off-balance sheet arrangements. Grainger does not have any variable interest entities or activities that include non-exchange-traded contracts accounted for at fair value.

Critical Accounting Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in Grainger's results of operations for the period in which the actual amounts become known.

Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of Grainger's financial condition, changes in financial condition or results of operations.

Note 1 to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the Consolidated Financial Statements. The most significant areas involving management judgments and estimates follow. Actual results in these areas could differ materially from management's estimates under different assumptions or conditions.

Allowance for Doubtful Accounts. Grainger considers several factors to estimate the allowance for uncollectible accounts receivable including the age of the receivables, the percent past due and the historical ratio of actual write-offs to the age of the receivables. The analyses performed also take into consideration economic conditions that may have an impact on a specific industry, group of customers or a specific customer. Based on analysis of actual historical write-offs of uncollectible accounts receivable, Grainger's estimates and assumptions have been materially accurate in regards to the valuation of its allowance for doubtful accounts. However, write-offs could be materially different than the reserves established if business or economic conditions change or actual results deviate from historical trends, and Grainger's estimates and assumptions may be revised as appropriate to reflect these changes. For fiscal years 2014, 2013 and 2012, actual results did not vary materially from estimated amounts.

Inventory Reserves. Grainger establishes inventory reserves for obsolete inventory. Grainger regularly reviews inventory to evaluate continued demand and identify any obsolete or excess quantities. Grainger records provisions for the difference between excess and obsolete inventory and its estimated realizable value. Estimated realizable value is based on anticipated future product demand, market conditions and liquidation values. As Grainger's inventory consists of approximately 1.4 million stocked products, it is not practical to quantify the actual disposition of excess and obsolete inventory against estimated amounts at a stock keeping unit (SKU) level and no individual SKU is material. There were no material differences noted between reserve levels compared to the level of write-offs historically. Grainger's methodology for estimating reserves is continually evaluated based on current experience and the methodology provides for a materially accurate level of reserves at any reporting date. Actual results could differ materially from projections and require changes to reserves which could have a material effect on Grainger's results of operations based on significant changes in product demand, market conditions or liquidation value. If business or economic conditions change, Grainger's estimates and assumptions may be revised as appropriate. For fiscal years 2014, 2013 and 2012, actual results did not vary materially from estimated amounts.

Goodwill and Indefinite Lived Intangible Assets. Business acquisitions result in the recording of goodwill and identified intangible assets which affect the amount of amortization expense and possible impairment write-downs that may occur in future periods. Grainger annually reviews goodwill and intangible assets with indefinite lives for impairment in the fourth quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Grainger tests for goodwill impairment at the reporting unit level and performs a qualitative assessment of factors such as a reporting unit's current performance and overall economic factors to determine if it is more likely than not that the goodwill might be impaired and whether it is necessary to perform the two-step quantitative goodwill impairment test. In the two-step test, Grainger compares the carrying value of assets of the reporting unit to its calculated fair value. If the carrying value of assets of the reporting unit exceeds its calculated fair value, the second step is performed, where the implied fair value of goodwill is compared to the carrying value of assets, to determine the amount of impairment.

The fair value of reporting units is calculated primarily using the discounted cash flow (DCF) method and incorporating value indicators from a market approach to evaluate the reasonableness of the resulting fair values. The DCF method incorporates various assumptions including the amount and timing of future expected cash flows, including revenues, gross margins, operating expenses, capital expenditures and working capital based on operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period and reflects management’s best estimates for perpetual growth for the reporting units. Estimates of market-participant risk-adjusted weighted average cost of capital (WACC) are used as a basis for determining the discount rates to apply to the reporting units’ future expected cash flows and terminal value.

Grainger completed the annual impairment testing during the fourth quarter of 2014, and identified two reporting units for which it could not determine whether or not the fair value would be less than the carrying value. For one of these reporting units, Grainger Colombia, the two-step quantitative test indicated that the carrying value of assets exceeded the calculated fair value and step two impairment calculations were required. During the testing in the fourth quarter, Grainger considered management’s revised outlook on the business, which included lower projected sales growth and incremental investment necessary to execute on the strategy. Grainger incorporated this revised outlook into the two-step quantitative test, resulting in lowered projected sales growth, operating earnings and cash flows. Grainger recorded a full goodwill impairment charge of $12 million on the Grainger Colombia reporting unit.

Fabory, with $118 million of goodwill, had a calculated fair value which exceeded the carrying value of assets by 31%, and step two calculations were not required for this reporting unit. The risk of potential failure of step one of the impairment test for Fabory in future reporting periods is highly dependent upon key assumptions including the amount and timing of future expected cash flows, sales growth rates, gross margins, capital expenditures, discount rates and estimates of market-participant risk-adjusted WACC. These assumptions require considerable management judgment and are subject to uncertainty. Grainger performed a sensitivity analysis to determine the reasonableness of the step one results, and evaluated the impact of a 100 basis point increase in the discount rate or a 100 basis point decrease in the terminal growth rate. No indications of impairment resulted from this sensitivity analysis. Changes in assumptions regarding future performance and a continued unfavorable economic environment in Europe may also have a significant impact on cash flows in the future. Given the sensitivity of the calculated fair value to changes in these key assumptions, Grainger may be required to recognize an impairment for Fabory’s goodwill in the future due to changes in market conditions or other factors related to these key assumptions.

For Grainger’s remaining reporting units, the estimated fair values substantially exceeded the carrying values.

Stock Incentive Plans. Grainger maintains stock incentive plans under which a variety of incentive grants may be awarded to employees and directors. Grainger uses a binomial lattice option pricing model to estimate the fair value of stock option grants. The model requires projections of the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate of the stock option grants. The fair value of options granted used the following assumptions:



	For the Years Ended December 31,
	2014	2013	2012
Risk-free interest rate	2.0%	0.9%	1.1%
Expected life	6 years	6 years	6 years
Expected volatility	25.0%	25.5%	25.9%
Expected dividend yield	1.7%	1.5%	1.6%

The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected term of the options being valued. The expected life selected for options granted during each year presented represents the period of time that the options are expected to be outstanding based on historical data of option holders' exercise and termination behavior. Expected volatility is based upon implied and historical volatility of the closing price of Grainger's stock over a period equal to the expected life of each option grant. Historical information is also the primary basis for selection of the expected dividend yield assumptions. Because stock option compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures, using historical forfeiture experience. The amount of stock option compensation expense is significantly affected by the valuation model and these assumptions. If a different valuation model or different assumptions were used, the stock option compensation expense could be significantly different from what is recorded in the current period.

Compensation expense for other stock-based awards is based upon the closing market price on the last trading date preceding the date of the grant. Because the expense for other stock-based awards should reflect the awards ultimately expected to vest, it has been reduced for estimated forfeitures, using historical forfeiture experience.

For additional information concerning stock incentive plans, see Note 11 to the Consolidated Financial Statements.

Postretirement Healthcare Benefits. The postretirement healthcare obligation and net periodic cost are dependent on assumptions and estimates used in calculating such amounts. The assumptions used include, among others, discount rates, assumed rates of return on plan assets and healthcare cost trend rates, and certain employee-related factors, such as turnover, retirement age and mortality rates. Changes in these and other assumptions (caused by conditions in equity markets or plan experience, for example) could have a material effect on Grainger's postretirement benefit obligation and expense, and could affect its results of operations and financial condition. These changes in assumptions may also affect voluntary decisions to make additional contributions to the trust established for funding the postretirement benefit obligation.

The discount rate assumptions used by management reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date, of each year. A higher discount rate reduces the present value of benefit obligations and net periodic benefit costs. As of December 31, 2014, Grainger decreased the discount rate used in the calculation of the postretirement plan obligation from 4.90% to 3.89% to reflect the decrease in market interest rates. Grainger estimates that this decrease could decrease 2015 pretax earnings by approximately $4.4 million. However, other changes in assumptions may increase, decrease or eliminate this effect.

Grainger considers the long-term historical actual return on plan assets and the historical performance of the Standard & Poor's 500 Index and the Total International Composite Index in developing its expected long-term return on plan assets. In 2014, Grainger increased the expected long-term rate of return on plan assets from 5.70% (net of tax) to 6.65% (net of tax) based on the historical average of long-term rates of return net of estimated tax rates. Grainger estimates this change could increase 2015 pretax earnings by approximately $1.5 million.

A 1 percentage point change in assumed healthcare cost trend rates would have had the following effects on December 31, 2014 results (in thousands of dollars):



	1 Percentage Point
	Increase		(Decrease)
Effect on total of service and interest cost	$	1,978	$	(1,613	)
Effect on postretirement benefit obligation	36,470		(29,404		)

Grainger changed the mortality improvement table used to project mortality rates into the future from Mortality Table RP-2000 with Mortality Improvement Scale BB to Mortality Table RP-2014 with Mortality Improvement Scale MP 2014 at December 31, 2014, which was published by the Society of Actuaries in October 2014, and reflects longer life expectancies than under the previous table and scale. Grainger estimates this change could reduce 2015 pretax earnings by approximately $0.9 million.

Grainger may terminate or modify the postretirement plan at any time, subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, as amended. In the event the postretirement plan is terminated, all assets of the Group Benefit Trust inure to the benefit of the participants. The foregoing assumptions are based on the presumption that the postretirement plan will continue. Were the postretirement plan to terminate, different actuarial assumptions and other factors might be applicable.

Grainger has used its best judgment in making assumptions and estimates and believes such assumptions and estimates used are appropriate. Changes to the assumptions may be required in future years as a result of actual experience or new trends or plan changes and, therefore, may affect Grainger's retirement plan obligations and future expense. For additional information concerning postretirement healthcare benefits, see Note 9 to the Consolidated Financial Statements.

Insurance Reserves. Grainger retains a significant portion of the risk of certain losses related to workers' compensation, auto liability, general liability and property losses through the utilization of high deductibles and self-insured retentions. There are also certain other risk areas for which Grainger does not maintain insurance.

Grainger is responsible for establishing accounting policies on insurance reserves. Although it relies on outside parties to project future claims costs, it retains control over actuarial assumptions, including loss development factors and claim payment patterns. Grainger performs ongoing reviews of its insured and uninsured risks, which it uses to establish the appropriate reserve levels. In calculating the liability, historical trends, claims experience and loss development patterns are analyzed and appropriate loss development factors are applied to the incurred costs associated with the claims made.

The use of assumptions in the analysis leads to fluctuations in required reserves over time. Any change in the required reserve balance is reflected in the current period's results of operations. Grainger believes its estimates are reasonable based on the information currently available and the methodology used to estimate these reserves has been consistently applied. There were no material adjustments based on Grainger's historical experience in 2014, 2013 and 2012. If actual trends, including the nature, severity or frequency of claims differ from Grainger's estimates, or if business or economic conditions change, Grainger's estimates and assumptions may be revised as appropriate and the results of operations could be materially impacted.

Income Taxes. Grainger recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by Grainger are based on management's interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects Grainger's best estimates and assumptions regarding, among other items, the level of future taxable income, interpretation of tax laws and tax planning opportunities, plans for reinvestment of cash overseas and uncertain tax positions. Future rulings by tax authorities and future changes in tax laws and their interpretation, changes in projected levels of taxable income, changes in planned need for cash overseas and future tax planning strategies could impact the actual effective tax rate and tax balances recorded by Grainger.

Contingent Liabilities. At any time, Grainger may be subject to investigations, legal proceedings, or claims related to the ongoing operation of its business, including claims both by and against Grainger. Such proceedings typically involve claims related to product liability, general negligence, contract disputes, environmental issues, wage and hour laws, intellectual property, employment practices, regulatory compliance or other matters and actions brought by employees, consumers, competitors, suppliers or governmental entities. Grainger routinely assesses the likelihood of any adverse outcomes related to these matters on a case by case basis, as well as the potential ranges of losses and fees. Grainger establishes accruals for its potential exposure, as appropriate, for claims against Grainger when losses become probable and reasonably estimable. Where Grainger is able to reasonably estimate a range of potential losses, Grainger records the amount within that range that constitutes Grainger's best estimate. Grainger also discloses the nature of and range of loss for claims against Grainger when losses are reasonably possible and material. These accruals and disclosures are determined based on the facts and circumstances related to the individual cases and require estimates and judgments regarding the interpretation of facts and laws, as well as the effectiveness of strategies or other factors beyond Grainger's control.

Other. Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, long-lived assets, fair value measurements and valuations, and warranties require judgments on complex matters that are often subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board and the Securities and Exchange Commission. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of Grainger. More information on these additional accounting policies can be found in Note 1 to the Consolidated Financial Statements.

Effects of Inflation and Changing Prices

Grainger is affected by inflation through increased product and operating costs, and the ability to pass on cost increases to customers over time is dependent upon market conditions. The ability to achieve sales growth through increased prices is also subject to inflation and normal competitive conditions. The predominant use of the last-in, first-out (LIFO) method of accounting for inventories and accelerated depreciation methods for financial reporting and income tax purposes result in a substantial recognition of the effects of inflation in the financial statements.

Some of Grainger's products contain significant amounts of commodity-priced materials, such as steel, copper, petroleum derivatives or rare earth minerals, and are subject to price changes based upon fluctuations in the commodities market. Grainger has been able to successfully pass on cost increases to its customers minimizing the effect of inflation on results of operations.

Grainger believes the most positive means to combat inflation and advance the interests of investors lie in the continued application of basic business principles, which include improving productivity, maintaining working capital turnover and offering products and services that can command appropriate prices in the marketplace.

Forward-Looking Statements

This Form 10-K contains statements that are not historical in nature but concern future results and business plans, strategies and objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Such forward-looking statements are identified by words such as “anticipate, estimate, expect, forecast, intend, plan, predict" and "project” or similar expressions, and include Grainger's expected earnings per share, sales growth and capital expenditures.

Grainger cannot guarantee that any forward-looking statement will be realized, although Grainger does believe that its assumptions underlying its forward-looking statements are reasonable. Achievement of future results is subject to risks and uncertainties that could cause Grainger's results to differ materially from those which are presented.

Factors that could cause actual results to differ materially from those presented or implied in a forward-looking statement include, without limitation: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies or business strategies; the outcome of pending and future litigation or governmental or regulatory proceedings; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; litigation involving appropriate payment for wages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; and the factors identified in Item 1A: Risk Factors.

Caution should be taken not to place undue reliance on Grainger's forward-looking statements and Grainger undertakes no obligation to publicly update the forward-looking statements, whether as a result of new information, future events or otherwise.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

Grainger may use financial instruments to reduce its exposure to adverse fluctuations in foreign currency exchange rates and interest rates as part of its overall risk management strategy. The derivative positions reduce risk by hedging certain underlying economic exposures. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal changes in the value of the underlying exposure. Grainger does not enter into derivative financial instruments for trading or speculative purposes. See Note 8 and Note 13 to the Consolidated Financial Statements for additional information on Grainger's derivative activities.

Foreign Currency Exchange Rates

Grainger’s financial results, including the value of assets and liabilities, are exposed to foreign currency exchange rate risk when the financial statements of the international subsidiaries, as stated in their local currencies, are translated into U.S. dollars. While it is difficult to quantify any particular impact of changes in exchange rates, a uniform 10% strengthening in the U.S. dollar (whereby all other variables are held constant and unusual expense items described in "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations" are excluded) would have resulted in a decrease in net earnings of $4 million and $8 million for the years ended December 31, 2014 and 2013, respectively. Comparatively, a 10% weakening of the U.S. dollar would have resulted in an increase in net earnings of $5 million and $10 million for the years ended December 31, 2014 and 2013, respectively. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in future potential changes in sales levels or local currency prices or costs.

Interest Rates

Grainger is subject to interest rate risk related to its variable rate debt portfolio. Grainger may enter into interest rate swap agreements to manage those risks. Based on Grainger's variable rate debt and derivative instruments outstanding, a 1 percentage point increase in interest rates paid by Grainger would have resulted in a decrease to net earnings of approximately $2 million for 2014 and $3 million for 2013. A 1 percentage point decrease in interest rates would have resulted in an increase to net earnings of approximately $2 million for 2014 and $3 million for 2013. This sensitivity analysis of the effects of changes in interest rates on long-term debt does not factor in future potential changes in long-term debt levels.

Commodity Price Risk

Grainger has limited primary exposure to commodity price risk on certain products for resale, but does not purchase commodities directly.

Item 8: Financial Statements and Supplementary Data

The financial statements and supplementary data are included on pages 37 to 76. See the Index to Financial Statements and Supplementary Data on page 36.

Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A: Controls and Procedures

Disclosure Controls and Procedures

Grainger carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of Grainger's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger's disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting


(A)	Management's Annual Report on Internal Control Over Financial Reporting

Management's report on Grainger's internal control over financial reporting is included on page 37 of this Report under the heading Management's Annual Report on Internal Control Over Financial Reporting.


(B)	Attestation Report of the Registered Public Accounting Firm

The report from Ernst & Young LLP on its audit of the effectiveness of Grainger's internal control over financial reporting as of December 31, 2014, is included on page 38 of this Report under the heading Report of Independent Registered Public Accounting Firm.


(C)	Changes in Internal Control Over Financial Reporting

There have been no changes in Grainger's internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Grainger's internal control over financial reporting.

Item 9B: Other Information

None.

PART III

Item 10: Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2015, under the captions “Directors,” “Board of Directors and Board Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Information required by this item regarding executive officers of Grainger is set forth below under the caption “Executive Officers.”

Grainger has adopted a code of ethics that applies to the principal executive officer, principal financial officer and principal accounting officer. This code of ethics is incorporated into Grainger's business conduct guidelines for directors, officers and employees. Grainger intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to its code of ethics by posting such information on its website at www.grainger.com/investor. A copy of the code of ethics incorporated into Grainger's business conduct guidelines is also available in print without charge to any person upon request to Grainger's Corporate Secretary. Grainger has also adopted Operating Principles for the Board of Directors, which are available on its website and are available in print to any person who requests them.

Executive Officers

Following is information about the Executive Officers of Grainger including age as of March 1, 2015. Executive Officers of Grainger generally serve until the next annual election of officers, or until earlier resignation or removal.



Name and Age	Positions and Offices Held and Principal Occupation and Employment During the Past Five Years
Michael S. Ali (53)	Senior Vice President and Chief Information Officer, a position assumed in July 2013. Prior to joining Grainger, Dr. Ali was Senior Vice-President, Application Services and PMO at U.S. Foods, a position assumed in 2012 after serving as CIO at Harman, a position assumed in 2010. Prior to this position, Dr. Ali held several management roles in Ford Motor Company from 2000 to 2010.
Laura D. Brown (51)	Senior Vice President, Communications and Investor Relations, a position assumed in 2010 after serving as Vice President, Global Business Communications, a position assumed in 2009 and Vice President, Investor Relations, a position assumed in 2008.
Court D. Carruthers (42)	Senior Vice President and Group President, Americas, a position assumed in 2013 after serving as Senior Vice President and President, Grainger U.S., a position assumed in 2012, President, Grainger International, a position assumed in 2009, and Senior Vice President of Grainger, a position assumed in 2007.
Joseph C. High (60)	Senior Vice President and Chief People Officer, a position assumed in June 2011. Prior to joining Grainger, Mr. High was the Senior Vice President of Human Resources at Owens Corning in Toledo, Ohio, a position assumed in 2004.
John L. Howard (57)	Senior Vice President and General Counsel, a position assumed in 2000.
Ronald L. Jadin (54)	Senior Vice President and Chief Financial Officer, a position assumed in 2008. Previously, Mr. Jadin served as Vice President and Controller, a position assumed in 2006 after serving as Vice President, Finance.
William Lomax (51)	Vice President and Controller, a position assumed in 2014. Previously, Mr. Lomax served as Vice President, Global Supply Chain and International, a position assumed in 2013; Vice President, Grainger International and Chief Risk Officer, positions assumed in 2010 and 2013, respectively; and Vice President, Finance and Chief Financial Officer of Acklands – Grainger Inc., a position assumed in 2008.
Donald G. Macpherson (47)	Senior Vice President and Group President, Global Supply Chain and International, a position assumed in 2013 after serving as Senior Vice President and President, Global Supply Chain and Corporate Strategy, a position assumed in 2012, and Senior Vice President, Global Supply Chain, a position assumed in 2008.
James T. Ryan (56)	Chairman of the Board, President and Chief Executive Officer of Grainger, positions assumed in 2009, 2006 and 2008, respectively.

Item 11: Executive Compensation

The information required by this item is incorporated by reference to Grainger's proxy statement relating to the annual meeting of shareholders to be held April 29, 2015, under the captions “Board of Directors and Board Committees,” “Director Compensation,” “Report of the Compensation Committee of the Board” and “Compensation Discussion and Analysis.”

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13: Certain Relationships and Related Transactions, and Director Independence

Item 14: Principal Accounting Fees and Services



PART IV

Item 15: Exhibits and Financial Statement Schedules

(a)	1	Financial Statements. See Index to Financial Statements and Supplementary Data.
	2	Financial Statement Schedules. The schedules listed in Reg. 210.5-04 have been omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.
	3	Exhibits
		(3	)	(a)	Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
				(b)	Bylaws, as amended February 17, 2010, incorporated by reference to Exhibit 3(b) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
		(4	)	Instruments Defining the Rights of Security Holders, Including Indentures
				(a)	No instruments which define the rights of holders of Grainger’s Industrial Development Revenue Bonds are filed herewith, pursuant to the exemption contained in Regulation S-K, Item 601(b)(4)(iii). Grainger hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any such instrument.
		(10	)	Material Contracts
				(a)	(i)	A Credit Agreement with U.S. Bank National Association, as administrative agent, and other lenders, incorporated by reference to Exhibit 10.1 to Grainger's Form 8-K dated May 8, 2012.
				(b)	Compensatory Plans or Arrangements
					(i)	Director Stock Plan, as amended, incorporated by reference to Exhibit 10(c) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
					(ii)	1990 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(a) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
					(iii)	2001 Long-Term Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(b) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
					(iv)	Form of Indemnification Agreement between Grainger and each of its directors and certain of its executive officers, incorporated by reference to Exhibit 10(b)(i) to Grainger’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
					(v)	Frozen Executive Death Benefit Plan, as amended, incorporated by reference to Exhibit 10(b)(v) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
						(1	)	First amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(v)(1) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2008.
						(2	)	Second amendment to the Frozen Executive Death Benefit Plan, incorporated by reference to Exhibit 10(b)(iv)(2) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
					(vi)	Supplemental Profit Sharing Plan, as amended, incorporated by reference to Exhibit 10(viii) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2003.
					(vii)	Supplemental Profit Sharing Plan II, as amended, incorporated by reference to Exhibit 10(b)(ix) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
					(viii)	Voluntary Salary and Incentive Deferral Plan, as amended, incorporated by reference to Exhibit 10(b)(xi) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2007.
					(ix)	Summary Description of the 2014 Directors Compensation Program, incorporated by reference to Exhibit 10(b)(ix) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2013.
					(x)	2005 Incentive Plan, as amended, incorporated by reference to Exhibit 10(d) to Grainger's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.



				(xi)	2010 Incentive Plan, incorporated by reference to Exhibit B of Grainger’s Proxy Statement dated March 12, 2010.
				(xii)	Form of Stock Option Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(xiv) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2005.
				(xiii)	Form of Stock Option Award and Restricted Stock Unit Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(xv) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2005.
				(xiv)	Form of Stock Option Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvi) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2009.
				(xv)	Form of Stock Option and Restricted Stock Unit Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xvii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2009.
				(xvi)	Form of Restricted Stock Unit Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xviii) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2010.
				(xvii)	Form of 2012 Performance Share Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xix) to Grainger’s Annual Report of Form 10-K for the year ended December 31, 2012.
				(xviii)	Letter of Agreement - Long-Term International Assignment to Mr. Court D. Carruthers dated December 22, 2011, incorporated by reference to Exhibit 10(b)(xxi) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2011.
				(xix)	Summary Description of the 2015 Management Incentive Program.
				(xx)	Incentive Program Recoupment Agreement, incorporated by reference to Exhibit 10(b)(xxv) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2009.
				(xxi)	Form of Change in Control Employment Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxvii) to Grainger’s Annual Report on Form 10-K for the year ended December 31, 2010.
				(xxii)	Form of 2013 Performance Share Award Agreement between Grainger and certain of its executive officers, incorporated by reference to Exhibit 10(b)(xxiii) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2013.
				(xxiii)	Separation Agreement and General Release by and between Grainger and Michael A. Pulick dated October 4, 2013, incorporated by reference to Exhibit 10(b)(xxiv) to Grainger's Annual Report on Form 10-K for the year ended December 31, 2013.
				(xxiv)	Form of 2014 Performance Share Award Agreement between Grainger and certain of its executive officers.

	(21	)	Subsidiaries of Grainger.
	(23	)	Consent of Independent Registered Public Accounting Firm.
	(31	)	Rule 13a – 14(a)/15d – 14(a) Certifications
			(a)	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
			(b)	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	(32	)	Section 1350 Certifications
			Chief Executive Officer and Chief Financial Officer certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document.
101.SCH			XBRL Taxonomy Extension Schema Document.
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

December 31, 2014, 2013 and 2012



Page(s)
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	37
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	38
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS	40
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS	41
CONSOLIDATED BALANCE SHEETS	42
CONSOLIDATED STATEMENTS OF CASH FLOWS	44
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY	45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	47

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of W.W. Grainger, Inc. (Grainger) is responsible for establishing and maintaining adequate internal control over financial reporting. Grainger's internal control system was designed to provide reasonable assurance to Grainger's management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance with respect to the preparation and presentation of financial statements.

Grainger's management assessed the effectiveness of Grainger's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its assessment under that framework and the criteria established therein, Grainger's management concluded that Grainger's internal control over financial reporting was effective as of December 31, 2014.

Ernst & Young LLP, an independent registered public accounting firm, has audited Grainger's internal control over financial reporting as of December 31, 2014, as stated in their report, which is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

W.W. Grainger, Inc.

We have audited W.W. Grainger, Inc. and subsidiaries' (the “Company”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). W.W. Grainger, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, W.W. Grainger, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of W.W. Grainger, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014 of W.W. Grainger, Inc. and subsidiaries and our report dated February 27, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

February 27, 2015

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

W.W. Grainger, Inc.

We have audited the accompanying consolidated balance sheets of W.W. Grainger, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of W.W. Grainger, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), W.W. Grainger Inc. and subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

February 27, 2015

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands of dollars, except for share and per share amounts)



	For the Years Ended December 31,
	2014			2013			2012
Net sales	$	9,964,953		$	9,437,758		$	8,950,045
Cost of merchandise sold	5,650,711			5,301,275			5,033,885
Gross profit	4,314,242			4,136,483			3,916,160
Warehousing, marketing and administrative expenses	2,967,125			2,839,629			2,785,035
Operating earnings	1,347,117			1,296,854			1,131,125
Other income and (expense):
Interest income	2,068			3,234			2,660
Interest expense	(10,093		)	(13,225		)	(16,078		)
Other non-operating income	483			2,732			1,866
Other non-operating expense	(5,189		)	(1,996		)	(1,784		)
Total other income and (expense)	(12,731		)	(9,255		)	(13,336		)
Earnings before income taxes	1,334,386			1,287,599			1,117,789
Income taxes	522,090			479,850			418,940
Net earnings	812,296			807,749			698,849
Less: Net earnings attributable to noncontrolling interest	10,567			10,713			8,968
Net earnings attributable to W.W. Grainger, Inc.	$	801,729		$	797,036		$	689,881
Earnings per share:
Basic	$	11.59		$	11.31		$	9.71
Diluted	$	11.45		$	11.13		$	9.52
Weighted average number of shares outstanding:
Basic	68,334,322			69,455,507			69,811,881
Diluted	69,205,744			70,576,432			71,181,733

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands of dollars)



	For the Years Ended December 31,
	2014			2013			2012
Net earnings	$	812,296		$	807,749		$	698,849
Other comprehensive earnings (losses):
Foreign currency translation adjustments:
Foreign currency translation (loss) gain, net of tax benefit (expense) of $2,806, $4,078 and $(1,653), respectively	(127,847		)	(78,253		)	7,344
Net investment hedge, gain (loss) net of tax (expense) benefit of $(2,360), $(3,393) and $1,204, respectively	3,782			5,438			(1,930		)
Reclassification of cumulative currency translation	9,042			—			—
Net foreign currency translation (loss) gain	(115,023		)	(72,815		)	5,414

Defined postretirement benefit plan:
Defined postretirement benefit plan, net of tax benefit (expense) of $14,140, $(21,632) and $(47,948), respectively	(22,667		)	35,045			75,625
Reclassification adjustments related to amortization, net of tax expense of $2,545, $1,444, respectively	(4,072		)	(2,387		)	—
Net defined postretirement benefit plans	(26,739		)	32,658			75,625

Other employment-related benefit plans:
Loss on other employment-related benefit plans, net of tax benefit of $440, $313, and $1,621, respectively	(1,462		)	(1,319		)	(5,044		)
Reclassification adjustment related to plan amendment and settlement, net of tax benefit of $(2,324)	6,971			—			—
Net other employment-related benefit plans	5,509			(1,319		)	(5,044		)

Derivative instrument change in fair value of cash flow hedge	786			1,190			(2,545		)

Total other comprehensive earnings (losses)	(135,467		)	(40,286		)	73,450
Comprehensive earnings, net of tax	676,829			767,463			772,299
Less: Comprehensive earnings attributable to noncontrolling interest:
Net earnings	10,567			10,713			8,968
Foreign currency translation adjustments	(9,880		)	(15,622		)	(8,866		)
Comprehensive earnings attributable to W.W. Grainger, Inc.	$	676,142		$	772,372		$	772,197

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except for share and per share amounts)



	As of December 31,
ASSETS	2014		2013
CURRENT ASSETS
Cash and cash equivalents	$	226,644	$	430,644
Accounts receivable (less allowances for doubtful
accounts of $22,121 and $20,096, respectively)	1,172,924		1,101,656
Inventories – net	1,356,396		1,305,520
Prepaid expenses and other assets	102,669		115,331
Deferred income taxes	61,387		75,819
Prepaid income taxes	47,529		15,315
Total current assets	2,967,549		3,044,285
PROPERTY, BUILDINGS AND EQUIPMENT
Land	337,573		277,256
Buildings, structures and improvements	1,269,491		1,259,237
Furniture, fixtures, machinery and equipment	1,508,066		1,404,597
	3,115,130		2,941,090
Less: Accumulated depreciation and amortization	1,790,784		1,732,528
Property, buildings and equipment – net	1,324,346		1,208,562
DEFERRED INCOME TAXES	16,718		16,209
GOODWILL	506,905		525,467
OTHER ASSETS AND INTANGIBLES – NET	468,734		471,805
TOTAL ASSETS	$	5,284,252	$	5,266,328

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS - CONTINUED

(In thousands of dollars, except for share and per share amounts)




LIABILITIES AND SHAREHOLDERS' EQUITY	As of December 31,
CURRENT LIABILITIES	2014			2013
Short-term debt	$	56,896		$	66,857
Current maturities of long-term debt	23,404			30,429
Trade accounts payable	554,088			510,634
Accrued compensation and benefits	191,696			185,905
Accrued contributions to employees’ profit sharing plans	178,076			176,800
Accrued expenses	245,300			218,835
Income taxes payable	12,256			6,330
Total current liabilities	1,261,716			1,195,790
LONG-TERM DEBT (less current maturities)	404,536			445,513
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES	95,455			113,585
EMPLOYMENT-RELATED AND OTHER NONCURRENT LIABILITIES	238,444			184,604
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued or outstanding	—			—
Common Stock – $0.50 par value – 300,000,000 shares authorized; issued 109,659,219 shares	54,830			54,830
Additional contributed capital	948,340			893,055
Retained earnings	6,335,990			5,822,612
Accumulated other comprehensive (losses) earnings	(96,673		)	28,914
Treasury stock, at cost – 42,227,178 and 40,805,281 shares, respectively	(4,032,615		)	(3,548,973		)
Total W.W. Grainger, Inc. shareholders’ equity	3,209,872			3,250,438
Noncontrolling interest	74,229			76,398
Total shareholders' equity	3,284,101			3,326,836
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	5,284,252		$	5,266,328

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)



	For the Years Ended December 31,
	2014			2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	812,296		$	807,749		$	698,849
Provision for losses on accounts receivable	12,945			8,855			9,504
Deferred income taxes and tax uncertainties	(13,732		)	(9,319		)	12,343
Depreciation and amortization	208,326			180,613			159,049
Impairment of goodwill and other intangible assets	16,652			26,284			4,945
Losses (gains) from non-cash charges and sales of assets	41,037			(22,155		)	2,609
Stock-based compensation	49,032			55,590			55,500
Change in operating assets and liabilities – net of business acquisitions and divestitures:
Accounts receivable	(122,580		)	(126,465		)	(45,953		)
Inventories	(92,443		)	(23,636		)	(14,872		)
Prepaid expenses and other assets	(24,550		)	16,873			8,346
Trade accounts payable	32,019			71,118			(54,314		)
Other current liabilities	8,693			(707		)	(58,673		)
Current income taxes payable	(1,487		)	(4,813		)	(9,349		)
Accrued employment-related benefits cost	35,027			9,872			45,795
Other – net	(1,421		)	(3,361		)	2,416
Net cash provided by operating activities	959,814			986,498			816,195
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings and equipment	(387,390		)	(272,145		)	(249,860		)
Proceeds from sales of assets	26,755			26,701			8,530
Cash paid for business acquisitions	(30,713		)	(153,915		)	(64,808		)
Other – net	7,290			(68		)	482
Net cash used in investing activities	(384,058		)	(399,427		)	(305,656		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit	113,721			144,805			161,160
Payments against lines of credit	(117,277		)	(154,450		)	(205,006		)
Proceeds from issuance of long-term debt	150,504			—			300,000
Payments of long-term debt and commercial paper	(170,907		)	(16,681		)	(219,950		)
Proceeds from stock options exercised	48,579			69,412			72,084
Excess tax benefits from stock-based compensation	33,772			59,984			57,885
Purchase of treasury stock	(525,120		)	(438,473		)	(340,532		)
Cash dividends paid	(291,395		)	(255,466		)	(220,077		)
Net cash used in financing activities	(758,123		)	(590,869		)	(394,436		)
Exchange rate effect on cash and cash equivalents	(21,633		)	(17,621		)	469
NET CHANGE IN CASH AND CASH EQUIVALENTS:	(204,000		)	(21,419		)	116,572
Cash and cash equivalents at beginning of year	430,644			452,063			335,491
Cash and cash equivalents at end of year	$	226,644		$	430,644		$	452,063

Supplemental cash flow information:
Cash payments for interest (net of amounts capitalized)	$	10,172		$	12,954		$	16,028
Cash payments for income taxes	$	509,378		$	414,363		$	383,698

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

W.W. Grainger, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands of dollars, except for per share amounts)



	W.W. Grainger, Inc. Shareholders' Equity
	Common Stock		Additional Contributed Capital			Retained Earnings			Accumulated Other Comprehensive Earnings (Losses)			Treasury Stock			Noncontrolling Interest
Balance at January 1, 2012	$	54,830	$	700,826		$	4,806,110		$	(28,738	)	$	(2,904,243	)	$	95,494
Exercise of stock options	—		(927		)	—			—			72,502			564
Tax benefits on stock-based compensation awards	—		60,122			—			—			—			—
Stock option expense	—		17,898			—			—			—			105
Amortization of other stock-based compensation awards	—		35,125			—			—			—			—
Settlement and vesting of other stock-based compensation awards	—		(31,175		)	—			—			1,452			—
Director's stock compensation	—		30,867			—			—			—			—
Purchase of treasury stock	—		(163		)	—			—			(345,357		)	(148		)
Net earnings	—		—			689,881			—			—			8,968
Other comprehensive earnings	—		—			—			82,316			—			(8,866		)
Cash dividends paid ($3.06 per share)	—		—			(217,414		)	—			—			(2,663		)
Balance at December 31, 2012	$	54,830	$	812,573		$	5,278,577		$	53,578		$	(3,175,646	)	$	93,454
Exercise of stock options	—		4,035			—			—			64,140			583
Tax benefits on stock-based compensation awards	—		62,385			—			—			—			—
Stock option expense	—		17,373			—			—			—			72
Amortization of other stock-based compensation awards	—		34,049			—			—			—			—
Settlement and vesting of other stock-based compensation awards	—		(37,851		)	—			—			(3,709		)	—
Purchase of treasury stock	—		—			—			—			(433,758		)	(183		)
Purchase of noncontrolling interest - Colombia	—		(51		)	—			—			—			(9,612		)
Net earnings	—		—			797,036			—			—			10,713
Other comprehensive earnings	—		—			—			(24,664		)	—			(15,622		)
Cash dividends paid ($3.59 per share)	—		542			(253,001		)	—			—			(3,007		)
Balance at December 31, 2013	$	54,830	$	893,055		$	5,822,612		$	28,914		$	(3,548,973	)	$	76,398
Exercise of stock options	—		4,709			—			—			42,920			872



Tax benefits on stock-based compensation awards	—		36,618			—			—			—			—
Stock option expense	—		14,547			—			—			—			152
Amortization of other stock-based compensation awards	—		31,480			—			—			—			—
Settlement and vesting of other stock-based compensation awards	—		(32,711		)	—			—			(1,636		)	—
Purchase of treasury stock			—			—						(524,926		)	(194		)
Net earnings	—		—			801,729			—			—			10,567
Other comprehensive earnings	—		—			—			(125,587		)	—			(9,880		)
Cash dividends paid ($4.17 per share)	—		642			(288,351		)	—			—			(3,686		)
Balance at December 31, 2014	$	54,830	$	948,340		$	6,335,990		$	(96,673	)	$	(4,032,615	)	$	74,229

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INDUSTRY INFORMATION

W.W. Grainger, Inc. is a broad-line distributor of maintenance, repair and operating supplies, and other related products and services used by businesses and institutions. In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions are eliminated from the consolidated financial statements.

EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS

For investments in which the Company owns or controls from 20% to 50% of the voting shares, the equity method of accounting is used. The Company also accounts for investments below 20% using the equity method when significant influence can be exercised over the operating and financial policies of the investee company. The Company currently does not have any investments accounted for under the equity method of accounting.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from those estimates.

FOREIGN CURRENCY TRANSLATION

The U.S. dollar is the reporting currency for all periods presented. The financial statements of the Company’s foreign operating subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of the Company’s foreign operating subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the period. Net exchange gains or losses resulting from the translation of financial statements of foreign operations and related long-term debt and derivative instruments are recorded as a separate component of other comprehensive earnings. See Note 13 to the Consolidated Financial Statements. Foreign currency transaction gains and losses are shown in the consolidated statement of earnings.

RECLASSIFICATIONS

Certain amounts in the 2013 and 2012 financial statements, as previously reported, have been reclassified to conform to the 2014 presentation. These reclassifications did not have a material impact on the presentation of the consolidated financial statements.

REVENUE RECOGNITION

Revenues recognized include product sales, billings for freight and handling charges and fees earned for services provided. The Company recognizes product sales and billings for freight and handling charges primarily on the date products are shipped to, or picked up by, the customer. In cases where the product is shipped directly to the customer, the Company recognizes revenue at the time of shipment on a gross basis. The Company's standard shipping terms are FOB shipping point. On occasion, the Company will negotiate FOB destination terms. These sales are recognized upon delivery to the customer. eCommerce revenues, which accounted for 36% of total 2014 revenues, are recognized on the same terms as revenues through other channels. Fee revenues, which accounted for less than 1% of total 2014 revenues, are recognized after services are completed. Taxes collected from customers and remitted to governmental authorities are presented on a net basis and are not included in revenue.

COST OF MERCHANDISE SOLD

Cost of merchandise sold includes product and product-related costs, vendor consideration, freight-out and handling costs. The Company defines handling costs as those costs incurred to fulfill a shipped sales order.

VENDOR CONSIDERATION

The Company receives rebates and allowances from its vendors to promote their products. The Company utilizes numerous advertising programs to promote its vendors' products, including catalogs and other printed media, Internet, radio and other marketing programs. Most of these programs relate to multiple vendors, which makes supporting the specific, identifiable and incremental criteria difficult, and would require numerous assumptions and judgments. Based on the inexact nature of trying to track reimbursements to the advertising expenditure for each vendor, the Company treats most vendor advertising allowances as a reduction to Cost of merchandise sold rather than a reduction of operating (advertising) expenses. Rebates earned from vendors that are based on product purchases are capitalized into inventory as part of product purchase price. These rebates are credited to Cost of merchandise sold based on sales. Vendor rebates that are earned based on products sold are credited directly to Cost of merchandise sold.

ADVERTISING

Advertising costs are expensed in the year the related advertisement is first presented. Advertising expense was $169 million, $178 million and $173 million for 2014, 2013 and 2012, respectively. Most vendor-provided allowances are classified as an offset to Cost of merchandise sold. For additional information see VENDOR CONSIDERATION above.

Catalog expense is amortized equally over the life of the catalog, beginning in the month of its distribution. Advertising costs for catalogs that have not been distributed by year-end are capitalized as Prepaid expenses. Amounts included in Prepaid expenses at December 31, 2014 and 2013, were $27 million and $36 million, respectively.

WAREHOUSING, MARKETING AND ADMINISTRATIVE EXPENSES

Included in this category are purchasing, branch operations, information services, and marketing and selling expenses, as well as other types of general and administrative costs.

STOCK INCENTIVE PLANS

The Company measures all share-based payments using fair-value-based methods and records compensation expense related to these payments over the vesting period. See Note 11 to the Consolidated Financial Statements.

INCOME TAXES

Income taxes are recognized during the year in which transactions enter into the determination of financial statement income, with deferred taxes being provided for temporary differences between financial and tax reporting. The Company recognizes in the financial statements a provision for tax uncertainties, resulting from application of complex tax regulations in multiple tax jurisdictions. See Note 14 to the Consolidated Financial Statements.

OTHER COMPREHENSIVE EARNINGS (LOSSES)

The Company's Other comprehensive earnings (losses) include foreign currency translation adjustments, changes in fair value of derivatives designated as hedges and unrecognized gains (losses) on postretirement and other employment-related benefit plans. See Note 13 to the Consolidated Financial Statements.

CASH AND CASH EQUIVALENTS

The Company considers investments in highly liquid debt instruments, purchased with an original maturity of 90 days or less, to be cash equivalents.

CONCENTRATION OF CREDIT RISK

The Company places temporary cash investments with institutions of high credit quality and, by policy, limits the amount of credit exposure to any one institution.

The Company has a broad customer base representing many diverse industries doing business in all regions of the United States, Canada, Europe, Asia and Latin America. Consequently, no significant concentration of credit risk is considered to exist.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company establishes reserves for customer accounts that are potentially uncollectible. The method used to estimate the allowances is based on several factors, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables. These analyses also take into consideration economic conditions that may have an impact on a specific industry, group of customers or a specific customer.

INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined primarily by the last-in, first-out (LIFO) method, which accounts for approximately 62% of total inventory. For the remaining inventory, cost is determined by the first-in, first-out (FIFO) method.

PROPERTY, BUILDINGS AND EQUIPMENT

Property, buildings and equipment are valued at cost. For financial statement purposes, depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on the declining-balance and sum-of-the-years-digits depreciation methods. The Company's international businesses record depreciation expense primarily on a straight-line basis. The principal estimated useful lives for determining depreciation are as follows:



Buildings, structures and improvements	10 to 30 years
Furniture, fixtures, machinery and equipment	3 to 10 years

Depreciation expense was $154 million, $142 million and $130 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Improvements to leased property are amortized over the initial terms of the respective leases or the estimated service lives of the improvements, whichever is shorter.

The Company capitalized interest costs of $2 million in 2014 and $1 million in years 2013 and 2012.

LONG-LIVED ASSETS

The carrying value of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated undiscounted future cash flows resulting from use of the asset, including disposition, are less than the carrying value of the asset. Impairment is measured as the amount by which the carrying amount exceeds the fair value.

The Company recognized impairment charges of $5 million, $0.4 million and $2 million in 2014, 2013 and 2012, respectively, included in Warehousing, marketing and administrative expenses, to reduce the carrying value of certain long-lived assets to their estimated fair value pursuant to impairment indicators for property currently held for sale, lease terminations, idle assets and branch closures.

CAPITALIZED SOFTWARE

The Company capitalizes certain costs related to the purchase and development of internal-use software. Amortization of capitalized software is on a straight-line basis over three or five years. Amortization begins when the software is available for its intended use. Amortization expense was $36 million, $23 million and $16 million for the years ended December 31, 2014, 2013 and 2012, respectively. Capitalized software was $148 million and $107 million at December 31, 2014 and 2013, respectively, and is included in Other assets and intangibles - net on the Consolidated Balance Sheets. During 2014, the Company wrote off $7 million in capitalized software costs due to a change in the implementation plan for an integrated IT system across North America.

GOODWILL AND OTHER INTANGIBLES

Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for impairment on an annual basis and more often if circumstances require. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.

The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their estimated useful lives unless the estimated useful life is determined to be indefinite. Amortizable intangible assets are being amortized primarily over useful lives of three to 22 years. The straight-line method of amortization is used as it has been determined to approximate the use pattern of the assets. Impairment losses are recognized if the carrying amount of an intangible, subject to amortization, is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.

The Company also maintains intangible assets with indefinite lives, which are not amortized. These intangibles are tested for impairment on an annual basis and more often if circumstances require. Impairment losses are recognized whenever the implied fair value of these assets is less than their carrying value. See Note 2 and Note 3 to the Consolidated Financial Statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to the short-term nature of these financial instruments. The carrying value of long-term debt also approximates fair value due to the variable interest rates. The fair value of the Company's qualifying derivative instruments is recorded in the Consolidated Balance Sheets and is discussed in more detail in Note 8 to the Consolidated Financial Statements.

DERIVATIVE INSTRUMENTS AND HEDGING

The Company uses derivative financial instruments to manage exposures to fluctuations in interest rates and foreign currency exchange rates. The Company does not enter into derivative financial instruments for trading or speculative purposes. All derivative instruments are recognized as either assets or liabilities in the balance sheet at their fair value. Changes in the fair value of derivatives are recognized in net earnings or other comprehensive earnings (losses) depending on whether the derivative is designated as part of a qualifying hedging relationship. The ineffective portion of a qualifying hedging derivative and derivatives not designated as a hedge are recognized immediately in earnings. Instruments that do not qualify for hedge accounting are marked to market with the change recognized in current period earnings. See Note 8 and Note 13 to the Consolidated Financial Statements for additional information on the Company's derivative activities.

INSURANCE RESERVES

The Company purchases insurance for catastrophic exposures and those risks required to be insured by law. It also retains a significant portion of the risk of certain losses related to workers' compensation, general liability and property losses through the utilization of high deductibles and self-insured retentions. Reserves for these potential losses are based on an external analysis of the Company's historical claims results and other actuarial assumptions.

WARRANTY RESERVES

The Company generally warrants the products it sells against defects for one year. For a significant portion of warranty claims, the manufacturer of the product is responsible for expenses. For warranty expenses not covered by the manufacturer, the Company provides a reserve for future costs based primarily on historical experience. Warranty reserves were $4 million at December 31, 2014 and 2013.

NEW ACCOUNTING STANDARDS

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in ASU 2014-08 raise the threshold for a disposal to qualify as discontinued operations and require new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. This ASU will be applied prospectively and is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted provided the disposal was not previously disclosed. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

NOTE 2 - BUSINESS ACQUISITIONS AND DIVESTITURES

In November 2014, the Company announced plans to close the business in Brazil. Operations will cease during 2015. In 2014, the Company recorded shutdown costs of $29 million in the Consolidated Statement of Earnings, including $9 million reclassified from Accumulated other comprehensive earnings (losses) related to foreign currency translation losses from the consolidation of the business unit. See Note 13 to the Consolidated Financial Statements.

On September 2, 2014, the Company's Canadian subsidiary acquired WFS Enterprises, Inc. (WFS). With 2013 sales of approximately $87 million, WFS is a distributor of tools and supplies to industrial markets in Southern Ontario and select U.S. locations. The Company paid $33 million for the WFS acquisition, less cash acquired. Goodwill and intangibles recorded totaled approximately $16 million. The purchase price allocation has not been finalized and is subject to change as the Company obtains additional information during the measurement period related to the valuation of the acquired assets and liabilities.

During 2013, the Company acquired Safety Solutions, Inc. for $30 million, less cash acquired. Goodwill recorded totaled $8 million. Purchased identified intangible assets totaled $13 million.

During 2013, the Company acquired E&R Industrial Sales, Inc. for $116 million, less cash acquired. Goodwill recorded totaled $49 million. Purchased identified intangible assets totaled $51 million.

During 2013, the Company acquired the remaining noncontrolling interest in Grainger Colombia for $10 million.

During 2012, the Company acquired Techni-Tool, Inc., for $43 million, less cash acquired. Goodwill recorded totaled $10 million. Purchased identified intangible assets totaled $20 million.

Purchased identified intangible assets for the acquired businesses primarily consist of customer relationships, trademarks and trade names. See Note 3 to the Consolidated Financial Statements for estimated useful lives and amortization periods.

The results of these acquisitions are included in the Company's consolidated results from the respective dates of acquisition. Due to the immaterial nature of these transactions, both individually and in the aggregate, disclosures of amounts assigned to the acquired assets and assumed liabilities and pro forma results of operations were not considered necessary.

NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is recognized as the excess cost of an acquired entity over the amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for impairment on an annual basis and more often if circumstances require. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.

The changes in the carrying amount of goodwill by segment are as follows (in thousands of dollars):



	United States			Canada			Other Businesses			Total
Balance at January 1, 2013	$	170,439		$	154,775		$	218,456		$	543,670
Acquisitions	35,820			—			—			35,820
Purchase price adjustments	(12,900		)	—			2,067			(10,833		)
Impairment	(12,861		)	—			(11,260		)	(24,121		)
Translation	—			(10,187		)	(8,882		)	(19,069		)
Balance at December 31, 2013	180,498			144,588			200,381			525,467
Acquisitions	—			9,620			—			9,620
Purchase price adjustments	21,522			—			—			21,522
Impairment	—			—			(11,795		)	(11,795		)
Translation	—			(13,019		)	(24,890		)	(37,909		)
Balance at December 31, 2014	$	202,020		$	141,189		$	163,696		$	506,905

Business acquisitions result in the recording of goodwill and identified intangible assets which affect the amount of amortization expense and possible impairment write-downs that may occur in future periods. Grainger annually reviews goodwill and intangible assets with indefinite lives for impairment in the fourth quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Grainger tests for goodwill impairment at the reporting unit level and performs a qualitative assessment of factors such as a reporting unit's current performance and overall economic factors to determine if it is more likely than not that the goodwill might be impaired and whether it is necessary to perform the two-step quantitative goodwill impairment test. In the two-step test, Grainger compares the carrying value of assets of the reporting unit to its calculated fair value. If the carrying value of assets of the reporting unit exceeds its calculated fair value, the second step is performed, where the implied fair value of goodwill is compared to the carrying value of assets, to determine the amount of impairment.

For Grainger’s remaining reporting units, the estimated fair values substantially exceeded the carrying values.

Intangible assets included in Other assets and intangibles - net in the Consolidated Balance Sheets were comprised of the following (in thousands of dollars):



	As of December 31,
	2014						2013
	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Amortized customer lists and relationships	$	316,994	$	133,819	$	183,175	$	350,760	$	134,889	$	215,871
Amortized trademarks, trade names and other	27,235		10,820		16,415		38,670		23,919		14,751
Non-amortized trade names	64,340		—		64,340		72,790		—		72,790
Total intangible assets	$	408,569	$	144,639	$	263,930	$	462,220	$	158,808	$	303,412

The decrease of $54 million in the gross carrying amount for total intangible assets was primarily driven by the write-off of fully amortized intangible assets and foreign currency translation.

The estimated useful lives for acquired intangibles are primarily as follows:



Customer lists and relationships	6 to 22 years
Amortized trademarks, trade names and other	3 to 17 years

Amortization expense recognized on intangible assets was $18 million, $15 million and $13 million for the years ended December 31, 2014, 2013 and 2012, respectively, and is included in Warehousing, marketing and administrative expenses on the Consolidated Statement of Earnings.

Estimated amortization expense for future periods is as follows (in thousands of dollars):



Year	Expense
2015	$	17,221
2016	16,268
2017	15,314
2018	14,928
2019	14,126
Thereafter	121,733

NOTE 4 - ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following table shows the activity in the allowance for doubtful accounts (in thousands of dollars):



	For the Years Ended December 31,
	2014			2013
Balance at beginning of period	$	20,096		$	19,449
Provision for uncollectible accounts	12,945			8,855
Write-off of uncollectible accounts, net of recoveries	(9,628		)	(7,942		)
Business acquisitions, foreign currency and other	(1,292		)	(266		)
Balance at end of period	$	22,121		$	20,096

NOTE 5 - INVENTORIES

Inventories primarily consist of merchandise purchased for resale. Inventories would have been $389 million and $388 million higher than reported at December 31, 2014 and 2013, respectively, if the FIFO method of inventory accounting had been used for all Company inventories. Net earnings would have increased by $1 million, $8 million and $13 million for the years ended December 31, 2014, 2013 and 2012, respectively, using the FIFO method of accounting. Inventory values using the FIFO method of accounting approximate replacement cost. The Company provides reserves for excess and obsolete inventory. The reserve balance was $137 million and $134 million as of December 31, 2014 and 2013, respectively.

NOTE 6 - SHORT-TERM DEBT

The following summarizes information concerning short-term debt (in thousands of dollars):



	As of December 31,
	2014			2013
Lines of Credit
Outstanding at December 31	$	51,896		$	66,857
Maximum month-end balance during the year	$	64,384		$	77,401
Weighted average interest rate during the year	4.16		%	4.96		%
Weighted average interest rate at December 31	3.69		%	5.02		%

Commercial Paper
Outstanding at December 31	$	5,000		$	—
Maximum month-end balance during the year	$	54,997		$	—
Weighted average interest rate during the year	0.16		%	—		%
Weighted average interest rate at December 31	0.17		%	—		%

Lines of Credit

Foreign subsidiaries utilize lines of credit to meet business growth and operating needs. The Company had $114 million and $109 million of uncommitted lines of credit denominated in foreign currencies at December 31, 2014 and 2013, respectively.

The Company had a committed line of credit of $600 million in 2014 and 2013 for which the Company paid a commitment fee of 0.06% as of December 31, 2014 and 2013. This line of credit supports the issuance of commercial paper. The current line is due to expire in August 2018. The Company issued commercial paper during 2014 for general working capital needs.

Letters of Credit

The Company had $29 million and $26 million of letters of credit at December 31, 2014 and 2013, respectively, primarily related to the Company's insurance program. Letters of credit were also issued to facilitate the purchase of products. These issued amounts were $3 million at December 31, 2014 and 2013. Letters of credit issued by the Company's international businesses were immaterial.

NOTE 7 - LONG-TERM DEBT

Long-term debt consisted of the following (in thousands of dollars):



	As of December 31,
	2014			2013
Bank term loan	$	126,770		$	292,500
Revolving line of credit	146,325			—
Euro-denominated bank term loan	133,067			158,067
Other	21,778			25,375
Less current maturities	(23,404		)	(30,429		)
	$	404,536		$	445,513

Bank Term Loan

The Company has a $300 million, unsecured bank term loan, which matures in November 2016. Quarterly principal payments began in August 2013. The change in the bank term loan balance between 2014 and 2013 was primarily due to a $150 million partial prepayment on September 30, 2014.

At the election of the Company, the term loan shall bear interest at the Base Rate plus the Applicable Margin or the LIBOR Rate plus the Applicable Margin as defined within the term loan agreement. At December 31, 2013, the Company had elected a one-month LIBOR Interest Period. The weighted average interest rate during the year was 1.16%.

Revolving Line of Credit

In September 2014, the Company's Canadian subsidiary entered into an unsecured revolving credit facility with a maximum availability of C$175 million. Pursuant to the credit agreement, there is a commitment fee of 0.065% and the facility matures on September 24, 2019. As of December 31, 2014, the Canadian subsidiary had drawn C$170 million under the facility for the purpose of repaying an intercompany loan and to fund general working capital needs. The interest rate on this outstanding amount was 1.91%. No principal payments are required on the credit facility until the maturity date.

Euro-Denominated Bank Term Loan

The Company has a €120 million, unsecured bank term loan that matures in August 2016. Semi-annual payments of €2.5 million began in February 2013. The weighted average interest rate paid during the year was 1.75%. The weighted average interest rate includes inputs from variable rates and an interest rate swap. See Note 8 to the Consolidated Financial Statements.

The scheduled aggregate principal payments related to long-term debt are due as follows (in thousands of dollars):



Year	Payment Amount
2015	$	23,404
2016	247,641
2017	2,853
2018	1,771
2019	148,055
Thereafter	4,216

The Company's debt instruments include only standard affirmative and negative covenants for debt instruments of similar amounts and structure. The Company's debt instruments do not contain financial or performance covenants restrictive to the business of the Company, reflecting its strong financial position. The Company is in compliance with all debt covenants for the year ended December 31, 2014.

NOTE 8 - DERIVATIVE INSTRUMENTS

The fair values of the Company's derivative instruments are determined by using quoted market forward rates (Level 2 inputs) and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates.

During the fourth quarter of 2011, the Company entered into a pay-fixed/receive floating interest rate swap with a notional value of €60 million maturing in August 2016 to partially hedge the future interest expense of the euro-denominated term loan entered into to fund a portion of the Fabory acquisition. The swap is accounted for as a cash flow hedge. The effective portion of the changes in fair value of the derivative is reported as a component of other comprehensive earnings (losses) and reclassified to net income when the hedged transaction affects earnings. The value of the interest-rate swap, included on the Company's balance sheet under Employment-related and other noncurrent liabilities, was $2 million and $3 million as of December 31, 2014 and 2013, respectively.

In September 2014, the Company settled all of the outstanding foreign currency forward contracts, which had a total notional value of C$160 million, and were designated as a hedge of an intercompany net investment in the Canadian subsidiary. An after-tax gain of $4 million is included in the foreign currency translation adjustment, a component of other comprehensive earnings. The cash flows from the settlement are reported under cash flows from investing activities in the consolidated statement of cash flows. As of December 31, 2013, the fair value of the foreign currency forward contracts were included on the Company's balance sheet under Prepaid expenses and other assets for $1 million.

Other foreign currency forward contracts entered into during the current and prior periods to hedge non-functional currency-denominated intercompany note receivables and forecasted U.S. dollar-denominated obligations by foreign subsidiaries of the Company were not material.

See Note 1 to the Consolidated Financial Statements for a description of the Company's Accounting Policy regarding derivative instruments and Note 13 to the Consolidated Financial Statements for additional information.

NOTE 9 - EMPLOYEE BENEFITS

The Company provides various retirement benefits to eligible employees, including contributions to defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and other benefits. Eligibility requirements and benefit levels vary depending on employee location. Various foreign benefit plans cover employees in accordance with local legal requirements.

Defined Contribution Plans

A majority of the Company's U.S. employees are covered by a noncontributory profit sharing plan. This plan provides for annual employer contributions based upon a formula related primarily to earnings before federal income taxes, limited to a percentage of the total eligible compensation paid to eligible employees. The annual contribution is limited to a minimum of 8% and a maximum of 18% of total eligible compensation paid to eligible employees. The profit sharing plan expense was $175 million, $173 million and $165 million for 2014, 2013 and 2012, respectively.

The Company sponsors additional defined contribution plans available to certain U.S. and foreign employees for which contributions are paid by the Company and participating employees. The expense associated with these defined contribution plans totaled $15 million for 2014, and $12 million for 2013 and 2012.

Defined Benefit Plans and Other Retirement Plans

During the second quarter of 2014, the Company adopted changes to the retirement plan offered to employees in the Netherlands. The plan was transitioned from a defined benefit plan to a defined contribution plan, and all existing and future obligations under the defined benefit plan have been transferred to a third party. As of December 31, 2013, this pension plan was in an overfunded position with a net pension asset of $5 million and $9 million of unrecognized losses included in Accumulated other comprehensive earnings (AOCE). As a result of the plan amendment and settlement, the Company reclassified the unrecognized losses from AOCE to warehousing, marketing and administrative expenses on the Statement of Earnings in an amount of $9 million, with a corresponding tax benefit to income taxes on the Statement of Earnings in an amount of $2 million. In addition, the Company recognized a $3 million write-off related to the plan’s assets and liabilities, net of tax. Effective January 1, 2014, the affected employees have an option to participate in the defined contribution plan sponsored by the Company for which contributions are made by the Company and participating employees.

In certain countries, pension contributions are made to government-sponsored social security pension plans in accordance with local legal requirements. For these plans, the Company has no continuing obligations other than the payment of contributions. The Company also sponsors additional defined benefit plans to certain foreign employees. The cost of these programs is not significant to the Company.

Executive Death Benefit Plan

The Executive Death Benefit Plan provides one of three potential benefits: a supplemental income benefit (SIB), an executive death benefit (EDB) or a postretirement payment. The SIB provides income continuation at 50% of total compensation, payable for ten years to the beneficiary of a participant if that participant dies while employed by the Company. The EDB provides an after-tax lump sum payment of one-time final total compensation to the beneficiary of a participant who dies after retirement. In addition, pre-2008 participants may elect to receive a reduced postretirement payment instead of the EDB. Effective January 1, 2010, the plan is not available to new participants.

The net periodic benefits costs charged to operating expenses were $0.7 million in 2014, $0.8 million in 2013 and $1 million in 2012. The net gain recognized in AOCE was $1 million as of December 31, 2014 and 2013. The plan benefits are paid as they come due from the general assets of the Company. The plan benefit obligation was $16 million as of December 31, 2014, and $15 million as of December 31, 2013.

Postretirement Benefits

The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its United States employees hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company. Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.

During the fourth quarter of 2012, the Company implemented plan design changes effective January 1, 2013. Employees hired after January 1, 2013, are not eligible to receive retiree health benefits. Active participants in the plan as of December 31, 2012, will remain eligible for retiree health benefits with the employee contribution structure modified for certain employees based on retirement eligibility. The Company also implemented an Employer Group Waiver Plan (EGWP) and a secondary supplemental "wrap-around" plan for its Medicare eligible retiree medical plan participants and no longer applied for the Part D Retiree Drug Subsidy (RDS) effective January 1, 2013. The EGWP program does not alter the benefits expected to be provided to the plan participants and is expected to increase the level of Medicare subsidies that will offset plan costs.

The net periodic benefits costs charged to operating expenses, which were valued with a measurement date of January 1 for each year, consisted of the following components (in thousands of dollars):



	For the Years Ended December 31,
	2014			2013			2012
Service cost	$	9,005		$	10,589		$	20,058
Interest cost	10,549			8,938			12,810
Expected return on assets	(8,237		)	(7,076		)	(6,210		)
Amortization of prior service credit	(7,254		)	(7,412		)	(495		)
Amortization of transition asset	(143		)	(143		)	(143		)
Amortization of unrecognized losses	779			3,724			4,827
Net periodic benefits costs	$	4,699		$	8,620		$	30,847

Reconciliations of the beginning and ending balances of the postretirement benefit obligation, which is calculated using a December 31 measurement date, the fair value of plan assets and the funded status of the benefit obligation follow (in thousands of dollars):



	2014			2013
Benefit obligation at beginning of year	$	223,488		$	246,087
Service cost	9,005			10,589
Interest cost	10,549			8,938
Plan participants' contributions	2,487			2,289
Actuarial losses (gains)	42,300			(38,476		)
Benefits paid	(5,609		)	(6,021		)
Prescription Drug Rebates	702			—
Medicare Part D Subsidy received	(5		)	82
Benefit obligation at end of year	282,917			223,488

Plan assets available for benefits at beginning of year	144,514			117,939
Actual returns on plan assets	13,730			25,278
Employer's contributions	191			5,029
Plan participants' contributions	2,487			2,289
Prescription Drug Rebates	702			—
Benefits paid	(5,609		)	(6,021		)
Plan assets available for benefits at end of year	156,015			144,514

Noncurrent postretirement benefit obligation	$	126,902		$	78,974

The amounts recognized in AOCE consisted of the following components (in thousands of dollars):



	As of December 31,
	2014			2013
Prior service credit	$	67,303		$	74,556
Transition asset	—			143
Unrecognized losses	(54,034		)	(18,006		)
Deferred tax (liability)	(5,121		)	(21,806		)
Net gains	$	8,148		$	34,887

The $36 million increase in unrecognized losses was primarily driven by a decrease in the discount rate and a change in the mortality improvement tables used.

The components of AOCE related to the postretirement benefit costs that will be amortized into net periodic postretirement benefit costs in 2015 are estimated as follows (in thousands of dollars):



	2015
Amortization of prior service credit	$	(6,801	)
Amortization of unrecognized losses	3,442
Estimated amount to be amortized from AOCE into net periodic postretirement benefit costs	$	(3,359	)

The Company has elected to amortize the amount of net unrecognized gains (losses) over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits of approximately 15.7 years for 2014.

The benefit obligation was determined by applying the terms of the plan and actuarial models. These models include various actuarial assumptions, including discount rates, assumed rates of return on plan assets, healthcare cost trend rate and cost-sharing between the Company and the retirees. The Company evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions and historical experience.

The following assumptions were used to determine net periodic benefit costs at January 1:



	For the Years Ended December 31,
	2014		2013		2012
Discount rate	4.90	%	4.00	%	4.50	%
Expected long-term rate of return on plan assets, net of tax	5.70	%	6.00	%	6.00	%
Initial healthcare cost trend rate	7.50	%	8.00	%	8.50	%
Ultimate healthcare cost trend rate	4.50	%	5.00	%	5.00	%
Year ultimate healthcare cost trend rate reached	2026		2019		2019

The following assumptions were used to determine benefit obligations at December 31:



	2014		2013		2012
Discount rate	3.89	%	4.90	%	4.00	%
Expected long-term rate of return on plan assets, net of tax	6.65	%	5.70	%	6.00	%
Initial healthcare cost trend rate	7.25	%	7.50	%	8.00	%
Ultimate healthcare cost trend rate	4.50	%	4.50	%	5.00	%
Year ultimate healthcare cost trend rate reached	2026		2026		2019

The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date of each year. These rates have been selected due to their similarity to the duration of the projected cash flows of the postretirement healthcare benefit plan. As of December 31, 2014, the Company decreased the discount rate from 4.90% to 3.89% to reflect the decrease in the market interest rates, which contributed to the increase in the unrealized actuarial loss at December 31, 2014. As of December 31, 2014, the Company changed the mortality improvement table used to project mortality rates into the future from Mortality Table RP-2000 with Mortality Improvement Scale BB to Mortality Table RP-2014 with Mortality Improvement Scale MP 2014, which was published by the Society of Actuaries in October 2014, and reflects longer life expectancies than under the previous table and scale. The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2013, Grainger changed the duration and rate of the healthcare trend decline to 25 basis points a year until reaching the ultimate trend rate of 4.50%. Prior to this change, the healthcare trend assumed a 50 basis points decline. As of December 31, 2014, the healthcare cost trend rate was 7.25%, declining 25 basis points a year until reaching the ultimate trend rate. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A 1 percentage point change in assumed healthcare cost trend rates would have the following effects on 2014 results (in thousands of dollars):



	1 Percentage Point
	Increase		(Decrease)
Effect on total service and interest cost	$	1,978	$	(1,613	)
Effect on postretirement benefit obligation	36,470		(29,404		)

The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments. All assets of the Trust are invested in equity funds designed to track to either the Standard & Poor's 500 Index (S&P 500) or the Total International Composite Index. The Total International Composite Index tracks non-U.S. stocks within developed and emerging market economies. This investment strategy reflects the long-term nature of the plan obligation and seeks to take advantage of the earnings potential of equity securities in the global markets and intends to reach a balanced allocation between U.S. and non-U.S. equities. The plan's assets are stated at fair value which represents the net asset value of shares held by the plan in the registered investment companies at the quoted market prices (Level 1 input) as of December 31 (in thousands of dollars):



	2014		2013
Registered investment companies
Fidelity Spartan U.S. Equity Index Fund	73,071		67,160
Vanguard 500 Index Fund	77,202		67,931
Vanguard Total International Stock	23,994		25,034
Total Assets	$	174,267	$	160,125

The Company uses the long-term historical return on the plan assets and the historical performance of the S&P 500 and the Total International Composite Index to develop its expected return on plan assets. In 2013, the Company decreased the after-tax expected long-term rates of return on plan assets from 6.00% to 5.70% based on the historical average of long-term rates of return. In 2014, a change in the estimated tax rate resulted in an increase in the after-tax expected long-term rate of return on plan assets from 5.70% to 6.65%. This change was due to the nature of the taxable income earned on the investments in the Trust and the applicable tax rates. The required use of an expected long-term rate of return on plan assets may result in recognition of income that is greater or less than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees.

The Company's investment policies include periodic reviews by management and trustees at least annually concerning: (1) the allocation of assets among various asset classes (e.g., domestic stocks, international stocks, short-term bonds, long-term bonds, etc.); (2) the investment performance of the assets, including performance comparisons with appropriate benchmarks; (3) investment guidelines and other matters of investment policy; and (4) the hiring, dismissal or retention of investment managers.

The funding of the Trust is an estimated amount that is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are no minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.

The Company forecasts the following benefit payments (which include a projection for expected future employee service) for the next ten years (in thousands of dollars):



Year	Estimated Gross Benefit Payments
2015	$	5,490
2016	6,393
2017	7,394
2018	8,556
2019	9,791
2020-2024	69,854

NOTE 10 - LEASES

The Company leases certain land, buildings and equipment under noncancellable operating leases that expire at various dates through 2036. Capital leases as of December 31, 2014, are not considered material. Many of the building leases obligate the Company to pay real estate taxes, insurance and certain maintenance costs, and contain multiple renewal provisions, exercisable at the Company's option. Leases that contain predetermined fixed escalations of the minimum rentals are recognized in rental expense on a straight-line basis over the lease term. Cash or rent abatements received upon entering into certain operating leases are also recognized on a straight-line basis over the lease term.

At December 31, 2014, the approximate future minimum lease payments for all operating leases were as follows (in thousands of dollars):



Year	Future Minimum Lease Payments
2015	$	65,901
2016	49,898
2017	30,804
2018	19,500
2019	12,237
Thereafter	7,813
Total minimum payments required	186,153
Less amounts representing sublease income	(4,310		)
	$	181,843

Rent expense, including items under lease and items rented on a month-to-month basis, was $77 million for 2014 and $68 million for 2013 and 2012. These amounts are net of sublease income of $2 million for 2014 and $1 million for 2013 and 2012.

NOTE 11 - STOCK INCENTIVE PLANS

The Company maintains stock incentive plans under which the Company may grant a variety of incentive awards to employees and directors. Non-qualified stock options, performance shares, restricted stock units and deferred stock units have been granted and are outstanding under these plans. As of December 31, 2014, there were 1.5 million shares available for grant under the plans.

Pretax stock-based compensation expense was $45 million, $52 million and $53 million in 2014, 2013 and 2012, respectively. Related income tax benefits recognized in earnings were $15 million in 2014, $17 million in 2013 and $18 million in 2012.

Options

In 2014, 2013 and 2012, the Company issued stock option grants to employees as part of their incentive compensation. Option awards are granted with an exercise price equal to the closing market price of the Company's stock on the last trading day preceding the date of grant. The options generally vest over three years, although accelerated vesting is provided in certain circumstances. Awards generally expire 10 years from the grant date. Transactions involving stock options are summarized as follows:



	Shares Subject to Option		Weighted Average Price Per Share		Options Exercisable
Outstanding at January 1, 2012	3,960,675		$	91.53	1,808,667
Granted	404,111		$	203.96
Exercised	(972,015	)	$	74.14
Canceled or expired	(34,055	)	$	105.36
Outstanding at December 31, 2012	3,358,716		$	109.95	1,629,468
Granted	348,054		$	245.95
Exercised	(805,235	)	$	85.75
Canceled or expired	(51,080	)	$	150.15
Outstanding at December 31, 2013	2,850,455		$	132.67	1,652,417
Granted	257,693		$	248.21
Exercised	(479,452	)	$	100.33
Canceled or expired	(45,892	)	$	199.80
Outstanding at December 31, 2014	2,582,804		$	149.01	1,647,903

At December 31, 2014, there was $11 million of total unrecognized compensation expense related to nonvested option awards, which the Company expects to recognize over a weighted average period of 1.8 years.

The following table summarizes information about stock options exercised (in thousands of dollars):



	For the years ended December 31,
	2014		2013		2012
Fair value of options exercised	$	11,167	$	16,407	$	18,120
Total intrinsic value of options exercised	71,924		124,752		126,138
Fair value of options vested	16,115		20,219		15,551
Settlements of options exercised	47,974		69,049		72,066

Information about stock options outstanding and exercisable as of December 31, 2014, is as follows:



	Options Outstanding						Options Exercisable
		Weighted Average						Weighted Average
Range of Exercise Prices	Number	Remaining Contractual Life	Exercise Price		Intrinsic Value (000's)		Number	Remaining Contractual Life	Exercise Price		Intrinsic Value (000's)
$52.29 - $78.86	308,141	1.55 years	$	70.19	$	56,914	308,141	1.55 years	$	70.19	$	56,914
$81.49 - $85.82	562,045	3.64 years	$	83.27	96,457		562,045	3.64 years	$	83.27	96,457
$102.26 - $124.93	392,796	5.29 years	$	107.31	57,970		392,796	5.29 years	$	107.31	57,970
$149.02 - $204.24	734,000	6.82 years	$	176.61	57,458		377,252	6.36 years	$	150.73	39,295
$235.15 - $262.14	585,822	8.75 years	$	246.93	4,666		7,669	8.49 years	$	246.28	66
	2,582,804	5.71 years	$	149.01	$	273,465	1,647,903	4.29 years	$	102.76	$	250,702

The Company uses a binomial lattice option pricing model for the valuation of stock options. The weighted average fair value of options granted in 2014, 2013 and 2012 was $53.43, $51.30 and $43.98, respectively. The fair value of each option granted in 2014, 2013 and 2012 used the following assumptions:



	For the years ended December 31,
	2014	2013	2012
Risk-free interest rate	2.0%	0.9%	1.1%
Expected life	6 years	6 years	6 years
Expected volatility	25.0%	25.5%	25.9%
Expected dividend yield	1.7%	1.5%	1.6%

Performance Shares

The Company awards performance-based shares to certain executives. Receipt of Company stock is contingent upon the Company meeting sales growth and return on invested capital (ROIC) performance goals. Each participant is granted a base number of shares. At the end of the performance period, the number of shares granted will be increased, decreased or remain the same based upon actual Company-wide sales versus target sales. The shares, as determined at the end of the performance period, are issued at the end of the third year if the Company's average target ROIC is achieved during the vesting period.

Performance share value is based upon closing market prices on the last trading day preceding the date of award and is charged to earnings on a ratable basis over the three-year period based on the number of shares expected to vest. Holders of performance share awards are not entitled to receive cash payments equivalent to cash dividends. If the performance shares vest, they will be settled by the Company's issuance of common stock in exchange for the performance shares on a one-for-one basis. The following table summarizes the transactions involving performance-based share awards:



	2014				2013				2012
	Shares		Weighted Average Price Per Share		Shares		Weighted Average Price Per Share		Shares		Weighted Average Price Per Share
Beginning nonvested shares outstanding	57,533		$	185.02	117,979		$	141.86	192,740		$	109.16
Issued	32,194		$	242.65	31,553		$	191.36	28,639		$	177.75
Canceled	(6,835	)	$	190.90	(7,659	)	$	148.25	(1,666	)	$	114.41
Vested	(25,656	)	$	177.75	(84,340	)	$	130.35	(101,734	)	$	90.47
Ending nonvested shares outstanding	57,236		$	220.00	57,533		$	185.02	117,979		$	141.86

At December 31, 2014, there was $7 million of total unrecognized compensation expense related to performance-based share awards that the Company expects to recognize over a weighted average period of 1.8 years.

Restricted Stock Units (RSUs)

RSUs granted vest over periods from three to seven years from issuance, although accelerated vesting is provided in certain instances. Holders of RSUs are entitled to receive cash payments equivalent to cash dividends and other distributions paid with respect to common stock. RSUs are settled by the issuance of the Company's common stock on a one-for-one basis. Compensation expense related to RSUs is based upon the closing market price on the last trading day preceding the date of award and is charged to earnings on a straight-line basis over the vesting period. The following table summarizes RSU activity:



	2014				2013				2012
	Shares		Weighted Average Price Per Share		Shares		Weighted Average Price Per Share		Shares		Weighted Average Price Per Share
Beginning nonvested units	739,717		$	154.09	978,888		$	118.60	1,119,488		$	100.76
Issued	103,427		$	248.12	139,529		$	248.28	152,995		$	204.26
Canceled	(51,410	)	$	170.98	(54,533	)	$	141.48	(37,972	)	$	123.01
Vested	(231,383	)	$	123.82	(324,167	)	$	89.62	(255,623	)	$	88.36
Ending nonvested units	560,351		$	182.40	739,717		$	154.09	978,888		$	118.60
Fair value of shares vested (in millions)	$29				$29				$23

At December 31, 2014, there was $48 million of total unrecognized compensation expense related to nonvested RSUs that the Company expects to recognize over a weighted average period of 3.0 years.

Director Stock Awards

The Company's Board of Directors receives both cash and deferred stock units (DSUs) for its services. A DSU is the economic equivalent of a share of common stock. The directors were each awarded $125,000 of DSUs in 2014 and 2013 and $115,000 in 2012. The number of units granted was based on the 200-day average stock price as of January 31 of the grant year. Compensation expense related to the DSUs is based upon the closing market price on the last trading day preceding the date of award. DSUs vest immediately at grant and are entitled to receive dividends and other distributions with respect to common stock, which are deferred as stock units, based on the market value of the stock at relevant times. Directors can also elect to defer their cash fees in the form of DSUs. Settlement of DSUs is required to be deferred until after termination of service as a director. The accumulated value of DSUs is recorded in Additional contributed capital as of December 31, 2014, 2013 and 2012. During 2012, the Board approved a change in the settlement procedure to eliminate the cash settlement option. The following table summarizes DSU activity (dollars in thousands):



	2014					2013					2012
	Units		Dollars			Units		Dollars			Units		Dollars
Beginning balance	158,868		$	33,063		151,775		$	30,952		142,797		$	26,730
Dividends	2,602		653			2,259		559			2,273		454
Deferred fees	5,866		1,453			7,337		2,059			9,170		1,871
Retirement distribution	(7,666	)	(1,695		)	(2,503	)	(507		)	(2,465	)	(461		)
Unit appreciation	—		—			—		—			—		2,358
Ending balance	159,670		$	33,474		158,868		$	33,063		151,775		$	30,952

NOTE 12 - CAPITAL STOCK

The Company had no shares of preferred stock outstanding as of December 31, 2014 and 2013. The activity related to outstanding common stock and common stock held in treasury was as follows:



	2014				2013
	Outstanding Common Stock		Treasury Stock		Outstanding Common Stock		Treasury Stock
Balance at beginning of period	68,853,938		40,805,281		69,478,495		40,180,724
Exercise of stock options, net of 1,905, and 5,134 shares swapped in stock-for-stock exchange, respectively	477,547		(477,547	)	800,101		(800,101	)
Settlement of restricted stock units, net of 104,552 and 135,341 shares retained, respectively	175,549		(175,549	)	232,483		(232,483	)
Settlement of performance share units, net of 33,003 and 39,874 shares retained, respectively	51,337		(51,337	)	61,860		(61,860	)
Purchase of treasury shares	(2,126,330	)	2,126,330		(1,719,001	)	1,719,001
Balance at end of period	67,432,041		42,227,178		68,853,938		40,805,281

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE EARNINGS

The following table sets forth the components of Accumulated other comprehensive earnings (in thousands of dollars):



	W.W. Grainger, Inc. Accumulated Other Comprehensive Earnings
	Foreign Currency Translation			Interest Rate Swap			Postretirement Benefit Plan			Other Employment-related Benefit Plans			Total			Foreign Currency Translation Attributable to Noncontrolling Interests			AOCE Attributable to W.W. Grainger, Inc.
Balance at January 1, 2012, net of tax	$	60,104		$	(1,616	)	$	(73,396	)	$	(2,448	)	$	(17,356	)	$	11,382		$	(28,738	)
Other comprehensive earnings (loss), net of tax	5,414			(2,545		)	75,625			(5,044		)	73,450			(8,866		)	82,316
Balance at December 31, 2012, net of tax	$	65,518		$	(4,161	)	$	2,229		$	(7,492	)	$	56,094		$	2,516		$	53,578
Other comprehensive earnings (loss) before reclassifications, net of tax	(72,815		)	1,190			35,045			(1,319		)	(37,899		)	(15,622		)	(22,277		)
Amounts reclassified to Warehousing, marketing and administrative expenses	—			—			(3,831		)	—			(3,831		)	—			(3,831		)
Amounts reclassified to Income Taxes	—			—			1,444			—			1,444			—			1,444
Net current period activity	$	(72,815	)	$	1,190		$	32,658		$	(1,319	)	$	(40,286	)	$	(15,622	)	$	(24,664	)
Balance at December 31, 2013, net of tax	$	(7,297	)	$	(2,971	)	$	34,887		$	(8,811	)	$	15,808		$	(13,106	)	$	28,914
Other comprehensive earnings (loss) before reclassifications, net of tax	(124,065		)	786			(22,667		)	(1,462		)	(147,408		)	(9,880		)	(137,528		)
Amounts reclassified to Warehousing, marketing and administrative expenses	9,042			—			(6,617		)	9,295			11,720			—			11,720
Amounts reclassified to Income Taxes	—			—			2,545			(2,324		)	221			—			221
Net current period activity	$	(115,023	)	$	786		$	(26,739	)	$	5,509		$	(135,467	)	$	(9,880	)	$	(125,587	)
Balance at December 31, 2014, net of tax	$	(122,320	)	$	(2,185	)	$	8,148		$	(3,302	)	$	(119,659	)	$	(22,986	)	$	(96,673	)

NOTE 14 - INCOME TAXES

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

Income tax expense (benefit) consisted of the following (in thousands of dollars):



	For the Years Ended December 31,
	2014			2013			2012
Current provision:
Federal	$	437,648		$	398,593		$	324,848
State	47,199			42,526			40,508
Foreign	43,088			52,277			53,564
Total current	527,935			493,396			418,920
Deferred tax (benefit) provision	(5,845		)	(13,546		)	20
Total provision	$	522,090		$	479,850		$	418,940

Earnings before income taxes by geographical area consisted of the following (in thousands of dollars):



	For the Years Ended December 31,
	2014		2013		2012
United States	$	1,299,523	$	1,167,558	$	982,220
Foreign	34,863		120,041		135,569
	$	1,334,386	$	1,287,599	$	1,117,789

The income tax effects of temporary differences that gave rise to the net deferred tax asset were (in thousands of dollars):



	As of December 31,
	2014			2013
Deferred tax assets:
Inventory	$	30,471		$	35,381
Accrued expenses	44,362			38,368
Accrued employment-related benefits	139,392			123,555
Foreign operating loss carryforwards	61,219			70,204
Other	12,748			30,862
Deferred tax assets	288,192			298,370
Less valuation allowance	(56,876		)	(62,825		)
Deferred tax assets, net of valuation allowance	$	231,316		$	235,545
Deferred tax liabilities:
Property, buildings and equipment	(48,044		)	(38,210		)
Intangibles	(101,958		)	(119,923		)
Software	(21,975		)	(17,492		)
Prepaids	(16,673		)	(18,945		)
Other	(12,196		)	(17,378		)
Deferred tax liabilities	(200,846		)	(211,948		)
Net deferred tax asset	$	30,470		$	23,597
The net deferred tax asset is classified as follows:
Current assets	$	61,387		$	75,819
Noncurrent assets	16,718			16,209
Noncurrent liabilities (foreign)	(47,635		)	(68,431		)
Net deferred tax asset	$	30,470		$	23,597

At December 31, 2014, the Company had $236 million of operating loss carryforwards related primarily to foreign operations. Some of the operating loss carryforwards may expire at various dates through 2024. The Company has recorded a valuation allowance, which represents a provision for uncertainty as to the realization of the tax benefits of these carryforwards. In addition, the Company recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. During 2014, the Company's valuation allowance decreased by $5.9 million primarily due to the write-off of the operating loss carryforwards and corresponding valuation allowance in Brazil and foreign currency translation, offset by an increase in foreign net operating losses.

A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in thousands of dollars):



	For the Years Ended December 31,
	2014			2013			2012
Federal income tax at the 35% statutory rate	$	467,035		$	450,660		$	391,226
State income taxes, net of federal income tax benefit	31,263			27,430			26,099
Other - net	23,792			1,760			1,615
Income tax expense	$	522,090		$	479,850		$	418,940
Effective tax rate	39.1		%	37.3		%	37.5		%

In 2014, Other-net increased primarily due to the impact of closure costs for Brazil, foreign tax rates differential and foreign losses for which valuation allowances were provided.

Undistributed earnings of foreign subsidiaries at December 31, 2014, amounted to $464 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because the Company intends to permanently reinvest such earnings in its foreign operations. If at some future date these earnings cease to be permanently invested, the Company may be subject to U.S. income taxes, foreign withholding, and other taxes on such amounts, which cannot be reasonably estimated at this time.

The changes in the liability for tax uncertainties, excluding interest, are as follows (in thousands of dollars):



	2014			2013			2012
Balance at beginning of year	$	40,317		$	40,937		$	22,760
Additions for tax positions related to the current year	11,545			8,396			11,369
Additions for tax positions of prior years	5,318			2,308			8,977
Reductions for tax positions of prior years	(4,109		)	(7,242		)	(1,447		)
Reductions due to statute lapse	(1,271		)	(18		)	(737		)
Settlements, audit payments, refunds - net	(6,674		)	(4,064		)	15
Balance at end of year	$	45,126		$	40,317		$	40,937

The Company classifies the liability for tax uncertainties in Deferred income taxes and tax uncertainties. Included in this amount are $9 million and $8 million at December 31, 2014 and 2013, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Any changes in the timing of deductibility of these items would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authorities to an earlier period. The reduction for tax positions of prior years in 2014 related primarily to law changes, conclusion of audits and audit settlements.

The Company regularly undergoes examination of its federal income tax returns by the Internal Revenue Service (IRS). The Company's federal tax returns for 2009, 2010, 2011 and 2012 are currently under audit by the IRS, and the tax years 2013 through 2014 are open. The Company is also subject to audit by state, local and foreign taxing authorities. Tax years 2002 - 2013 remain subject to state and local audits and 2007 - 2014 remain subject to foreign audits. The estimated amount of liability associated with the Company's uncertain tax positions may change within the next 12 months due to the pending audit activity, expiring statutes or tax payments. A reasonable estimate of such change cannot be made.

The Company recognizes interest expense in the provision for income taxes. During 2014, 2013 and 2012, the Company recognized an expense of $2 million, $2 million and $1 million, respectively. As of December 31, 2014, 2013 and 2012, the Company accrued approximately $4 million, $4 million and $2 million for interest, respectively.

NOTE 15 - EARNINGS PER SHARE

The Company’s unvested Restricted Stock Units and Directors' Deferred Stock Units that contain nonforfeitable rights to dividends meet the criteria of a participating security. Under the two-class method, earnings are allocated between common stock and participating securities. The presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities. As such, the Company presents basic and diluted earnings per share for its one class of common stock.

The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. The Company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. The Company has determined the two-class method to be the more dilutive. As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed earnings to participating securities to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.

The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands of dollars, except for share and per share amounts):



	For the Years Ended December 31,
	2014			2013			2012

Net earnings attributable to W.W. Grainger, Inc. as reported	$	801,729		$	797,036		$	689,881
Distributed earnings available to participating securities	(3,154		)	(3,304		)	(3,641		)
Undistributed earnings available to participating securities	(6,370		)	(8,348		)	(8,704		)
Numerator for basic earnings per share - Undistributed and distributed earnings available to common shareholders	792,205			785,384			677,536
Undistributed earnings allocated to participating securities	6,370			8,348			8,704
Undistributed earnings reallocated to participating securities	(6,290		)	(8,218		)	(8,540		)
Numerator for diluted earnings per share - Undistributed and distributed earnings available to common shareholders	$	792,285		$	785,514		$	677,700

Denominator for basic earnings per share – weighted average shares	68,334,322			69,455,507			69,811,881
Effect of dilutive securities	871,422			1,120,925			1,369,852
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities	69,205,744			70,576,432			71,181,733
Earnings per share two-class method
Basic	$	11.59		$	11.31		$	9.71
Diluted	$	11.45		$	11.13		$	9.52

NOTE 16 - SEGMENT INFORMATION

The Company has two reportable segments: the United States and Canada. The United States operating segment reflects the results of the Company’s U.S. business. The Canada operating segment reflects the results for Acklands – Grainger, the Company’s Canadian business. Other businesses include Zoro, the single channel online business in the United States, and operations in Europe, Asia and Latin America. These businesses individually do not meet the criteria of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of maintenance, repair and operating supplies, as service revenues account for approximately 1% of total revenues for each operating segment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment transfer prices are established at external selling prices, less costs not incurred due to a related party sale. The segment results include certain centrally incurred costs for shared services that are charged to the segments based upon the relative level of service used by each operating segment.

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



	2014
	United States			Canada			Other Businesses			Total
Total net sales	$	7,926,075		$	1,075,754		$	1,182,186		$	10,184,015
Intersegment net sales	(211,399		)	(304		)	(7,359		)	(219,062		)
Net sales to external customers	7,714,676			1,075,450			1,174,827			9,964,953

Segment operating earnings	1,444,288			87,583			(37,806		)	1,494,065

Segment assets	2,181,521			394,342			345,987			2,921,850
Depreciation and amortization	136,081			15,305			20,444			171,830
Additions to long-lived assets	$	243,251		$	106,918		$	31,137		$	381,306



	2013
	United States			Canada			Other Businesses			Total
Total net sales	$	7,413,712		$	1,114,285		$	1,040,473		$	9,568,470
Intersegment net sales	(128,660		)	(300		)	(1,752		)	(130,712		)
Net sales to external customers	7,285,052			1,113,985			1,038,721			9,437,758

Segment operating earnings	1,304,175			128,768			7,599			1,440,542

Segment assets	2,045,564			392,147			359,007			2,796,718
Depreciation and amortization	116,392			14,309			19,754			150,455
Additions to long-lived assets	$	177,046		$	63,821		$	23,951		$	264,818



	2012
	United States			Canada			Other Businesses			Total
Total net sales	$	6,925,842		$	1,105,782		$	1,006,762		$	9,038,386
Intersegment net sales	(87,249		)	(363		)	(729		)	(88,341		)
Net sales to external customers	6,838,593			1,105,419			1,006,033			8,950,045

Segment operating earnings	1,132,722			127,412			20,289			1,280,423

Segment assets	1,884,102			387,915			347,905			2,619,922
Depreciation and amortization	99,229			14,058			19,202			132,489
Additions to long-lived assets	$	182,985		$	46,330		$	21,611		$	250,926

Following are reconciliations of the segment information with the consolidated totals per the financial statements (in thousands of dollars):



	2014			2013			2012
Operating earnings:
Total operating earnings for reportable segments	$	1,494,065		$	1,440,542		$	1,280,423
Unallocated expenses	(146,948		)	(143,688		)	(149,298		)
Total consolidated operating earnings	$	1,347,117		$	1,296,854		$	1,131,125
Assets:
Assets for reportable segments	$	2,921,850		$	2,796,718		$	2,619,922
Other current and noncurrent assets	2,113,900			2,118,298			1,967,480
Unallocated assets	248,502			351,312			427,196
Total consolidated assets	$	5,284,252		$	5,266,328		$	5,014,598



	2014
	Segment Totals		Unallocated		Consolidated Total
Other significant items:
Depreciation and amortization	$	171,830	$	18,341	$	190,171
Additions to long-lived assets	$	381,306	$	22,498	$	403,804

			Revenues		Long-lived Assets
Geographic information:
United States			$	7,780,382	$	1,109,175
Canada			1,074,660		253,466
Other foreign countries			1,109,911		110,083
			$	9,964,953	$	1,472,724



	2013
	Segment Totals		Unallocated		Consolidated Total
Other significant items:
Depreciation and amortization	$	150,455	$	14,447	$	164,902
Additions to long-lived assets	$	264,818	$	12,782	$	277,600

			Revenues		Long-lived Assets
Geographic information:
United States			$	7,290,746	$	1,004,806
Canada			1,126,559		176,491
Other foreign countries			1,020,453		134,535
			$	9,437,758	$	1,315,832



	2012
	Segment Totals		Unallocated		Consolidated Total
Other significant items:
Depreciation and amortization	$	132,489	$	13,123	$	145,612
Additions to long-lived assets	$	250,926	$	6,998	$	257,924

			Revenues		Long-lived Assets
Geographic information:
United States			$	6,786,361	$	944,400
Canada			1,120,470		136,644
Other foreign countries			1,043,214		135,438
			$	8,950,045	$	1,216,482

Revenues are attributed to countries based on the ship-to location of the customer.

Unallocated expenses and unallocated assets primarily relate to the Company headquarters' support services, which are not part of any business segment, as well as intercompany eliminations. Unallocated expenses include payroll and benefits, depreciation and other costs associated with headquarters-related support services. Unallocated assets include non-operating cash and cash equivalents, certain prepaid expenses and property, buildings and equipment-net.

Assets for reportable segments include net accounts receivable and first-in, first-out inventory which are reported to the Company's Chief Operating Decision Maker. Long-lived assets consist of property, buildings, equipment and capitalized software.

Depreciation and amortization presented above includes depreciation of long-lived assets and amortization of capitalized software.

NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly information for 2014 and 2013 is as follows (in thousands of dollars, except for per share amounts):



	2014 Quarter Ended
	March 31		June 30		September 30		December 31		Total
Net sales	$	2,385,627	$	2,506,104	$	2,562,263	$	2,510,959	$	9,964,953
Cost of merchandise sold	1,309,656		1,425,418		1,459,479		1,456,158		5,650,711
Gross profit	1,075,971		1,080,686		1,102,784		1,054,801		4,314,242
Warehousing, marketing and administrative expenses	721,632		739,935		717,271		788,287		2,967,125
Operating earnings	354,339		340,751		385,513		266,514		1,347,117
Net earnings attributable to W.W. Grainger, Inc.	216,653		205,915		230,322		148,839		801,729
Earnings per share - basic	3.11		2.97		3.33		2.17		11.59
Earnings per share - diluted	$	3.07	$	2.94	$	3.30	$	2.14	$	11.45



	2013 Quarter Ended
	March 31		June 30		September 30		December 31		Total
Net sales	$	2,280,435	$	2,381,561	$	2,398,530	$	2,377,232	$	9,437,758
Cost of merchandise sold	1,248,699		1,334,577		1,347,164		1,370,835		5,301,275
Gross profit	1,031,736		1,046,984		1,051,366		1,006,397		4,136,483
Warehousing, marketing and administrative expenses	688,431		696,912		704,651		749,635		2,839,629
Operating earnings	343,305		350,072		346,715		256,762		1,296,854
Net earnings attributable to W.W. Grainger, Inc.	211,838		217,660		210,789		156,749		797,036
Earnings per share - basic	2.99		3.08		2.99		2.24		11.31
Earnings per share - diluted	$	2.94	$	3.03	$	2.95	$	2.20	$	11.13

NOTE 18 - CONTINGENCIES AND LEGAL MATTERS

The Company has been named, along with numerous other nonaffiliated companies, as a defendant in litigation in various states involving asbestos and/or silica. These lawsuits typically assert claims of personal injury arising from alleged exposure to asbestos and/or silica as a consequence of products purportedly distributed by the Company. In 2014, the Company was named in new lawsuits relating to asbestos involving approximately 68 new plaintiffs, while lawsuits relating to asbestos and/or silica involving approximately 1,293 plaintiffs were dismissed with respect to the Company, typically based on the lack of product identification.

As of January 16, 2015, the Company is named in cases filed on behalf of approximately 1,376 plaintiffs in which there is an allegation of exposure to asbestos and/or silica. The Company has denied, or intends to deny, the allegations in all of the above-described lawsuits. If a specific product distributed by the Company is identified in any of these lawsuits, the Company would attempt to exercise indemnification remedies against the product manufacturer. In addition, the Company believes that a substantial number of these claims are covered by insurance. The Company has entered into agreements with its major insurance carriers relating to the scope, coverage and costs of defense of lawsuits involving claims of exposure to asbestos. While the Company is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position or results of operations.

From time to time the Company is involved in various other legal and administrative proceedings that are incidental to its business, including claims related to product liability, general negligence, contract disputes, environmental issues, wage and hour laws, intellectual property, employment practices, regulatory compliance or other matters and actions brought by employees, consumers, competitors, suppliers or governmental entities. As a government contractor selling to federal, state and local governmental entities, the Company is also subject to governmental or regulatory inquiries or audits or other proceedings, including those related to pricing compliance. It is not expected that the ultimate resolution of any of these matters will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position or results of operations.

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Grainger has duly issued this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATE: February 27, 2015



W.W. GRAINGER, INC.

By:	/s/ James T. Ryan
	James T. Ryan
	Chairman, President and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Grainger on February 27, 2015, in the capacities indicated.




/s/ James T. Ryan		/s/ William K. Hall
James T. Ryan		William K. Hall
Chairman, President and Chief Executive Officer		Director
(Principal Executive Officer and Director)
		/s/ Stuart L. Levenick
/s/ Ronald L. Jadin		Stuart L. Levenick
Ronald L. Jadin		Director
Senior Vice President
and Chief Financial Officer		/s/ Neil S. Novich
(Principal Financial Officer)		Neil S. Novich
		Director
/s/ William Lomax
William Lomax		/s/ Michael J. Roberts
Vice President and Controller		Michael J. Roberts
(Principal Accounting Officer)		Director

/s/ Rodney C. Adkins		/s/ Gary L. Rogers
Rodney C. Adkins		Gary L. Rogers
Director		Director

/s/ Brian P. Anderson		/s/ E. Scott Santi
Brian P. Anderson		E. Scott Santi
Director		Director

/s/ V. Ann Hailey		/s/ James D. Slavik
V. Ann Hailey		James D. Slavik
Director		Director