UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to _______
 
Commission file number 1-5684

W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)

Illinois
 
36-1150280
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 Grainger Parkway, Lake Forest, Illinois
 
60045-5201
(Address of principal executive offices)
 
(Zip Code)
(847) 535-1000
(Registrant’s telephone number including area code)
 
Not Applicable
(Former name, former address and former fiscal year; if changed since last report)
 
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 Web site, 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 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 Exchange Act).
Yes [  ]  No [X]
 
There were  60,422,556 shares of the Company’s Common Stock outstanding as of June 30, 2016 .

1



 
TABLE OF CONTENTS
 
 
 
Page No.
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited).
 
 
 
 
 
Condensed Consolidated Statements of Earnings 
    for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive
    Earnings for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Balance Sheets
    as of June 30, 2016 and December 31, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows
    for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial
    Condition and Results of Operations.
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
 
 
Item 4.
Controls and Procedures.
 
 
 
PART II
OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings.
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
 
 
Item 6.
Exhibits.
 
 
 
Signatures
 
 
 
 
EXHIBITS
 
 


2


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
2,563,668

 
$
2,522,565

 
$
5,070,206

 
$
4,962,226

Cost of merchandise sold
1,523,609

 
1,449,133

 
2,985,094

 
2,795,052

Gross profit
1,040,059

 
1,073,432

 
2,085,112

 
2,167,174

Warehousing, marketing and administrative expenses
734,470

 
716,715

 
1,462,431

 
1,459,209

Operating earnings
305,589

 
356,717

 
622,681

 
707,965

Other income and (expense):
 

 
 

 
 
 
 
Interest income
162

 
277

 
327

 
469

Interest expense
(16,806
)
 
(4,184
)
 
(30,531
)
 
(5,819
)
Loss from equity method investment
(5,427
)
 
(4,302
)
 
(11,815
)
 
(4,302
)
Other non-operating income and (expense)
(538
)
 
178

 
(98
)
 
(1,988
)
Total other expense
(22,609
)
 
(8,031
)
 
(42,117
)
 
(11,640
)
Earnings before income taxes
282,980

 
348,686

 
580,564

 
696,325

Income taxes
103,535

 
123,451

 
209,475

 
256,944

Net earnings
179,445

 
225,235

 
371,089

 
439,381

Less: Net earnings attributable to noncontrolling interest
6,769

 
4,687

 
11,700

 
7,818

Net earnings attributable to W.W. Grainger, Inc.
$
172,676

 
$
220,548

 
$
359,389

 
$
431,563

Earnings per share:
 

 
 

 
 
 
 
Basic
$
2.81

 
$
3.28

 
$
5.81

 
$
6.38

Diluted
$
2.79

 
$
3.25

 
$
5.77

 
$
6.32

Weighted average number of shares outstanding:
 

 
 

 
 

 
 

Basic
60,891,298

 
66,652,130

 
61,278,981

 
66,939,110

Diluted
61,301,545

 
67,317,131

 
61,699,603

 
67,647,689

Cash dividends paid per share
$
1.22

 
$
1.17

 
$
2.39

 
$
2.25

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

3


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
 
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2016
 
2015
2016
 
2015
Net earnings
$
179,445

 
$
225,235

$
371,089

 
$
439,381

Other comprehensive earnings (losses):
 

 
 

 

 
 

Foreign currency translation gain (loss)
(6,915
)
 
9,061

44,575

 
(66,954
)
Defined postretirement benefit plan:
 
 
 
 
 
 
Reclassification adjustments related to amortization, net of tax benefit of $631, $512, and $1,262, $1,021, respectively
(1,009
)
 
(810
)
(2,018
)
 
(1,623
)
Derivative instrument change in fair value of cash flow hedge
352

 
245

656

 
727

Comprehensive earnings, net of tax
171,873

 
233,731

414,302

 
371,531

Less: Comprehensive earnings (losses) attributable to noncontrolling interest
 
 
 
 
 
 
Net earnings
6,769

 
4,687

11,700

 
7,818

Foreign currency translation adjustments
8,729

 
(1,509
)
14,433

 
(1,802
)
Comprehensive earnings attributable to W.W. Grainger, Inc.
$
156,375

 
$
230,553

$
388,169

 
$
365,515

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

4


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share amounts)
 
 
(Unaudited)
 
 
ASSETS
June 30, 2016
 
December 31, 2015
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
315,997

 
$
290,136

Accounts receivable (less allowances for doubtful
 

 
 

accounts of $26,403 and $22,288, respectively)
1,310,382

 
1,209,641

Inventories – net
1,418,678

 
1,414,177

Prepaid expenses and other assets
103,885

 
85,670

Prepaid income taxes
41,320

 
49,018

Total current assets
3,190,262

 
3,048,642

PROPERTY, BUILDINGS AND EQUIPMENT
3,385,566

 
3,370,313

Less: Accumulated depreciation and amortization
1,966,861

 
1,939,072

Property, buildings and equipment – net
1,418,705

 
1,431,241

DEFERRED INCOME TAXES
62,007

 
83,996

GOODWILL
590,109

 
582,336

INTANGIBLES - NET
437,521

 
463,294

OTHER ASSETS
266,200

 
248,246

TOTAL ASSETS
$
5,964,804

 
$
5,857,755


5



W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for share and per share amounts)
 
 
(Unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2016
 
December 31, 2015
CURRENT LIABILITIES
 
 
 
Short-term debt
$
372,854

 
$
353,072

Current maturities of long-term debt
132,620

 
247,346

Trade accounts payable
628,659

 
583,474

Accrued compensation and benefits
203,401

 
196,667

Accrued contributions to employees’ profit sharing plans
35,950

 
124,587

Accrued expenses
250,573

 
266,702

Income taxes payable
17,287

 
16,686

Total current liabilities
1,641,344

 
1,788,534

LONG-TERM DEBT (less current maturities)
1,765,809

 
1,388,414

DEFERRED INCOME TAXES AND TAX UNCERTAINTIES
135,950

 
154,352

EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES
179,127

 
173,741

SHAREHOLDERS' EQUITY
 

 
 

Cumulative Preferred Stock – $5 par value – 12,000,000 shares authorized; none issued nor outstanding
—

 
—

Common Stock – $0.50 par value – 300,000,000 shares authorized;
109,659,219 shares issued
54,830

 
54,830

Additional contributed capital
1,016,044

 
1,000,476

Retained earnings
7,013,688

 
6,802,130

Accumulated other comprehensive losses
(192,310
)
 
(221,091
)
Treasury stock, at cost – 49,236,663 and 47,630,511 shares, respectively
(5,758,349
)
 
(5,369,711
)
Total W.W. Grainger, Inc. shareholders’ equity
2,133,903

 
2,266,634

Noncontrolling interest
108,671

 
86,080

Total shareholders' equity
2,242,574

 
2,352,714

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
5,964,804

 
$
5,857,755

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

6


W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
$
371,089

 
$
439,381

Provision for losses on accounts receivable
8,282

 
4,630

Deferred income taxes and tax uncertainties
4,565

 
1,995

Depreciation and amortization
113,496

 
106,937

(Gains) from sales of assets, net of asset impairment
(15,564
)
 
(51
)
Stock-based compensation
21,135

 
27,043

Losses from equity method investment
11,815

 
4,302

Change in operating assets and liabilities – net of business 
  acquisitions:
 

 
 

Accounts receivable
(98,394
)
 
(50,586
)
Inventories
8,733

 
26,075

Prepaid expenses and other assets
(6,143
)
 
6,929

Trade accounts payable
43,338

 
(29,144
)
Other current liabilities
(128,960
)
 
(169,123
)
Current income taxes payable
(1,368
)
 
(847
)
Accrued employment-related benefits cost
3,877

 
4,231

Other – net
(9,512
)
 
(2,267
)
Net cash provided by operating activities
326,389

 
369,505

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Additions to property, buildings and equipment
(105,717
)
 
(170,873
)
Proceeds from sales of assets
43,119

 
10,119

Equity method investment
(10,340
)
 
(10,190
)
Net cash received for business divestiture
—

 
1,114

Other – net
(597
)
 
(567
)
Net cash used in investing activities
(73,535
)
 
(170,397
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net increase in commercial paper
19,888

 
(4,967
)
Borrowings under lines of credit
18,501

 
26,842

Payments against lines of credit
(19,306
)
 
(46,649
)
Proceeds from issuance of long-term debt
393,284

 
995,880

Payments of long-term debt
(129,981
)
 
(25,630
)
Proceeds from stock options exercised
26,191

 
35,549

Excess tax benefits from stock-based compensation
9,770

 
17,106

Purchase of treasury stock
(412,647
)
 
(442,595
)
Cash dividends paid
(147,480
)
 
(153,906
)
Net cash (used in) provided by financing activities
(241,780
)
 
401,630

Exchange rate effect on cash and cash equivalents
14,787

 
(7,596
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
25,861

 
593,142

Cash and cash equivalents at beginning of year
290,136

 
226,644

Cash and cash equivalents at end of period
$
315,997

 
$
819,786

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

7


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


1.    BACKGROUND AND BASIS OF PRESENTATION
 
W.W. Grainger, Inc. is a broad-line distributor of maintenance, repair and operating (MRO) supplies, and other related products and services used by businesses and institutions.  W.W. Grainger, Inc.’s operations are primarily in the United States and Canada, with a presence in Europe, Asia and Latin America.  In this report, the words “Company” or “Grainger” mean W.W. Grainger, Inc. and its subsidiaries.
 
The Condensed Consolidated Financial Statements of the Company and the related notes are unaudited and should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
 
The Condensed Consolidated Balance Sheet as of December 31, 2015 has been derived from the audited consolidated financial statements at that date, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
 
The unaudited financial information reflects all adjustments (primarily consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the statements contained herein.

Certain amounts in the 2016 first quarter Condensed Consolidated Statements of Cash Flows, as previously reported, have been reclassified within the cash flows from financing activities section. These changes did not have a material impact on the statements of cash flows.

2.    NEW ACCOUNTING STANDARDS

In July 2015, the Financial Accounting Standards Board (FASB) announced a one-year delay in the effective date of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard will now be effective for interim and annual periods beginning after December 15, 2017. The standard also permits adoption as early as the original effective date, which was for interim and annual periods beginning after December 15, 2016. The Company is evaluating the impact of this ASU but does not expect it to have a material impact on the Company's consolidated financial statements.

In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (NRV) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. This pronouncement is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2016, and prospective adoption is required. The Company is evaluating the impact of this ASU.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities . This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under the fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions for the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
 
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of the standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The effective date for the standard is for fiscal year and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of this ASU.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures; Simplifying the Transition to the Equity Method of Accounting . This update eliminates the requirement to retroactively adjust the

8
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


investment, results of operations and retained earnings when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The amendment requires that the investor add the cost of acquiring the additional interest to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2016. The amendment should be applied prospectively and early application is permitted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.
    
In March 2016, the FASB issued ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . The amendment is meant to reduce the potential for diversity in practice arising from inconsistent application of the principal versus agent guidance as well as reduce the cost and complexity during the transition and on an ongoing basis. The effective date for the amendment to the standard is consistent with ASU 2014-09, Revenue from Contracts with Customers, which is interim and annual periods beginning after December 15, 2017. The Company is evaluating the impact of this ASU.

In March 2016, the FASB issued ASU 2016-09, Stock Based Compensation: Improvements to Employee Share-Based Payment Accounting . The standard simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholdings requirements, as well as classification in the statement of cash flows. The effective date for the standard is for fiscal years and interim periods with those years beginning after December 15, 2016. Early adoption is permitted. If early adoption is elected, all amendments in the ASU that apply must be adopted in the same period. The Company has elected not to early adopt this ASU. The new guidance is expected to impact tax expense and dilutive shares outstanding calculation, with a potentially dilutive impact on future earnings per share and increased period to period variability of net earnings.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing . The amendment is meant to clarify the identification of performance obligations and the licensing implementation guidelines, while retaining the related principles of those areas. The effective date of the amendment to the standard is consistent with ASU 2014-09, Revenue from Contracts with Customers , which is for interim and annual periods beginning after December 15, 2017. The company is evaluating the impact of this ASU .

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is evaluating the impact of this ASU.

3.    DIVIDEND
 
On July 27, 2016 , the Company’s Board of Directors declared a quarterly dividend of  $1.22 per share, payable September 1, 2016 , to shareholders of record on August 8, 2016 .

4.    ACQUISITION

On September 1, 2015 , the Company acquired all of the issued share capital of Cromwell Group (Holdings) Limited (Cromwell). With sales of approximately £ 285 million ($ 437 million ) for fiscal year ending August 31, 2015, prior to the acquisition, Cromwell was the largest independent MRO distributor in the United Kingdom, serving more than 35,000 industrial and manufacturing customers worldwide. The Company paid £ 310 million ($ 464 million ), subject to customary adjustments, for the Cromwell acquisition. The acquisition was partially funded with newly issued debt in the United Kingdom. Goodwill and intangibles recorded totaled approximately $ 357 million . The goodwill is not deductible for tax purposes. 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. Disclosure of pro forma results was not required.

5.     RESTRUCTURING RESERVES

The Company recorded employee termination benefits with the majority expected to be paid in 2016 related to the reorganization of the business. Severance costs of approximately $9 million and $25 million were recorded in the three and six months ended June 30, 2016 , respectively, and are included in Warehousing, marketing and administrative expenses. The reserve balance as of June 30, 2016 and December 31, 2015 was approximately $35 million and $24 million , respectively, and is included in Accrued compensation and benefits.





9
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


6.    SHORT-TERM AND LONG-TERM DEBT
 
The following summarizes information concerning short-term debt (in thousands of dollars):
 
June 30, 2016
 
December 31, 2015
Outstanding lines of credit
$
22,966

 
$
23,072

Outstanding commercial paper
349,888

 
330,000

 
$
372,854

 
$
353,072


Long-term debt consisted of the following (in thousands of dollars):
 
June 30, 2016
 
December 31, 2015
4.60% senior notes
$
1,000,000

 
$
1,000,000

3.75% senior notes
400,000

 
—

U.S. dollar term loan
—

 
114,614

British pound denominated term loan
207,574

 
235,808

Euro denominated term loan
113,816

 
114,030

Japanese yen denominated term loans
56,907

 
49,875

Canadian dollar revolving credit facility
112,203

 
108,389

Other
27,194

 
25,991

Debt issuance costs and discounts
(19,265
)
 
(12,947
)
Less current maturities
(132,620
)
 
(247,346
)
 
$
1,765,809

 
$
1,388,414


On May 16, 2016 , the Company issued $400 million of unsecured 3.75% Senior Notes ( 3.75% Notes) that mature on May 15, 2046 . The 3.75% Notes require no principal payments until the maturity date and interest is payable semi-annually on May 15 and November 15, beginning on November 15, 2016. Prior to November 15, 2045, the Company may redeem the 3.75% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 3.75% Notes plus 20 basis points, together with accrued and unpaid interest, if any, to the redemption date. On or after November 15, 2045, the Company may redeem the 3.75% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs of approximately  $4 million  associated with the issuance of the 3.75% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and will be amortized to interest expense over the term of the 3.75% Notes. The fair value of the 3.75% Notes was approximately $420 million as of June 30, 2016.

On June 11, 2015 , the Company issued $1 billion of unsecured 4.60% Senior Notes ( 4.60% Notes) that mature on June 15, 2045 . The 4.60% Notes require no principal payments until the maturity date and interest is payable semi-annually on June 15 and December 15, beginning on December 31, 2015. Prior to December 15, 2044, the Company may redeem the 4.60% Notes in whole at any time or in part from time to time at a “make-whole” redemption price. This redemption price is calculated by reference to the then-current yield on a U.S. treasury security with a maturity comparable to the remaining term of the 4.60% Notes plus 25 basis points, together with accrued and unpaid interest, if any, to the redemption date. On or after December 15, 2044, the Company may redeem the 4.60% Notes in whole at any time or in part from time to time at 100% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date. Costs of approximately  $10 million  associated with the issuance of the 4.60% Notes, representing underwriting fees and other expenses, have been recorded as a contra-liability within Long-term debt and will be amortized to interest expense over the term of the 4.60% Notes. The fair value of the 4.60% Notes was approximately $1.2 billion and $1 billion as of June 30, 2016 and December 31, 2015, respectively.

The estimated fair value of the Company’s 3.75% Notes and 4.60% Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs within the fair value hierarchy. The carrying value of other long-term debt approximates fair value due to the variable interest rates.

10
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


7.    DERIVATIVE INSTRUMENTS

The Company uses derivative instruments to manage a portion of 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. The fair values of these 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. These instruments qualify for hedge accounting and the changes in fair value are reported as a component of other comprehensive earnings (losses) net of tax effects.

The fair value of the Company's interest rate swap was approximately $0.3 million and $1 million as of June 30, 2016 and December 31, 2015, respectively, and was included on the balance sheet as a liability under Accrued expenses. The purpose of the interest rate swap is to partially hedge the future interest expense of the euro-denominated term loan entered into to fund a portion of the Fabory acquisition in 2011. The swap matures in August 2016 . All remaining derivative instruments were immaterial individually and in the aggregate as of June 30, 2016 and December 31, 2015 .

8.    EQUITY METHOD INVESTMENT

In addition to the investment made in 2015, in January 2016, the Company invested in a second limited liability company established to produce refined coal, which is then sold to a utility to produce electricity.  The production and sale of refined coal is eligible for renewable energy tax credits under Section 45 of the Internal Revenue Code.  Under the terms of the investment, effective control lies with a co-investor who manages the day-to-day operations of the entity, and as such the investments are accounted for under the equity method of accounting.  

As of June 30, 2016 and December 31, 2015, the balance of the combined refined coal investments was $7 million million and $9 million , respectively, and is included on the balance sheet under Other assets. During the three and six months ended June 30, 2016 , the Company recorded $5 million and $12 million , respectively, in equity losses. The total tax benefit of $14 million including energy tax credits, is reflected in the Company’s effective tax rate for the six months ended June 30, 2016. The investments contributed $1.7 million to net earnings for six months ended June 30, 2016 .

9.    EMPLOYEE BENEFITS - POSTRETIREMENT
 
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.

The net periodic benefit costs charged to operating expenses, which are valued at the measurement date of January 1 and recognized evenly throughout the year, consisted of the following components (in thousands of dollars):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
2,060

 
$
2,532

 
$
4,119

 
$
5,064

Interest cost
2,463

 
2,412

 
4,927

 
4,824

Expected return on assets
(2,528
)
 
(2,594
)
 
(5,056
)
 
(5,188
)
Amortization of unrecognized losses
32

 
378

 
64

 
756

Amortization of prior service credits
(1,672
)
 
(1,700
)
 
(3,344
)
 
(3,400
)
Net periodic benefit costs
$
355

 
$
1,028

 
$
710

 
$
2,056

 
The Company has established a Group Benefit Trust to fund the plan and process benefit payments. The funding of the trust is an estimated amount which 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 did not make a contribution to the trust during the three and six months ended June 30, 2016 .

11
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

10.    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 Inc. (Acklands-Grainger), the Company’s Canadian business. Other businesses include Zoro, the single channel business in the United States, and business units in Europe, Asia and Latin America. Other businesses do not meet the definition of a reportable segment. Operating segments generate revenue almost exclusively through the distribution of maintenance, repair and operating supplies, as service revenues account for less than 1% of total revenues for each operating segment. Following is a summary of segment results (in thousands of dollars):

 
Three Months Ended June 30, 2016
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
1,978,542

 
$
194,418

 
$
474,166

 
$
2,647,126

Intersegment net sales
(82,442
)
 
(50
)
 
(966
)
 
(83,458
)
Net sales to external customers
$
1,896,100

 
$
194,368

 
$
473,200

 
$
2,563,668

Segment operating earnings
$
348,938

 
$
(27,741
)
 
$
29,724

 
$
350,921

  
 
Three Months Ended June 30, 2015
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
2,030,633

 
$
239,466

 
$
318,898

 
$
2,588,997

Intersegment net sales
(65,394
)
 
(17
)
 
(1,021
)
 
(66,432
)
Net sales to external customers
$
1,965,239

 
$
239,449

 
$
317,877

 
$
2,522,565

Segment operating earnings
$
369,533

 
$
9,499

 
$
15,158

 
$
394,190


 
Six Months Ended June 30, 2016
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
3,944,809

 
$
373,189

 
$
919,500

 
$
5,237,498

Intersegment net sales
(164,941
)
 
(86
)
 
(2,265
)
 
(167,292
)
Net sales to external customers
$
3,779,868

 
$
373,103

 
$
917,235

 
$
5,070,206

Segment operating earnings
$
680,795

 
$
(40,088
)
 
$
51,508

 
$
692,215

 
 
Six Months Ended June 30, 2015
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
4,002,088

 
$
473,996

 
$
616,697

 
$
5,092,781

Intersegment net sales
(128,585
)
 
(53
)
 
(1,917
)
 
(130,555
)
Net sales to external customers
$
3,873,503

 
$
473,943

 
$
614,780

 
$
4,962,226

Segment operating earnings
$
735,622

 
$
18,886

 
$
24,684

 
$
779,192



12
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
United States
 
Canada
 
Other Businesses
 
Total
Segment assets:
 
 
 
 
 
 
 
June 30, 2016
$
2,280,207

 
$
315,742

 
$
525,142

 
$
3,121,091

December 31, 2015
$
2,191,045

 
$
317,504

 
$
507,116

 
$
3,015,665


Following are reconciliations of segment information with the consolidated totals per the financial statements (in thousands of dollars):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating earnings:
 
 
 
Total operating earnings for operating segments
$
350,921

 
$
394,190

 
$
692,215

 
$
779,192

Unallocated expenses and eliminations
(45,332
)
 
(37,473
)
 
(69,534
)
 
(71,227
)
Total consolidated operating earnings
$
305,589

 
$
356,717

 
$
622,681

 
$
707,965

 
 
June 30, 2016
 
December 31, 2015
Assets:
 
Total assets for operating segments
$
3,121,091

 
$
3,015,665

Other current and non-current assets
2,690,398

 
2,624,966

Unallocated assets
153,315

 
217,124

Total consolidated assets
$
5,964,804

 
$
5,857,755


Assets for operating segments include net accounts receivable and first-in, first-out inventory which are reported to the Company's Chief Operating Decision Maker. Other current and non-current assets include all other asset balances for the operating segments.

Unallocated expenses and unallocated assets primarily relate to the Company headquarter's 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. Unallocated expenses of $45 million increased 22% in the three months ended June 30, 2016 versus $37 million in the prior year quarter. The increase was driven primarily by a $9 million write-down of a corporate aircraft that the Company plans to sell in connection with the outsourcing of the aviation department.

Intersegment net sales for the U.S. segment increased by $17 million and $36 million for the three and six months ended June 30, 2016, respectively, compared to the prior year, driven by increased sales from the U.S. business to Zoro. The U.S. business' supply chain network is Zoro's primary source of inventory.


13
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

11.    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):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net earnings attributable to W.W. Grainger, Inc. as reported
$
172,676

 
$
220,548

 
$
359,389

 
$
431,563

Distributed earnings available to participating securities
(576
)
 
(742
)
 
(1,202
)
 
(1,510
)
Undistributed earnings available to participating securities
(970
)
 
(1,418
)
 
(2,092
)
 
(2,879
)
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders
171,130

 
218,388

 
356,095

 
427,174

Undistributed earnings allocated to participating securities
970

 
1,418

 
2,092

 
2,879

Undistributed earnings reallocated to participating securities
(964
)
 
(1,404
)
 
(2,078
)
 
(2,850
)
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders
$
171,136

 
$
218,402

 
$
356,109

 
$
427,203

Denominator for basic earnings per share – weighted average shares
60,891,298

 
66,652,130

 
61,278,981

 
66,939,110

Effect of dilutive securities
410,247

 
665,001

 
420,622

 
708,579

Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities
61,301,545

 
67,317,131

 
61,699,603

 
67,647,689

Earnings per share two-class method
 

 
 

 
 
 
 
Basic
$
2.81

 
$
3.28

 
$
5.81

 
$
6.38

Diluted
$
2.79

 
$
3.25

 
$
5.77

 
$
6.32



12.    CONTINGENCIES AND LEGAL MATTERS

From time to time the Company is involved in various legal and administrative proceedings that are incidental to its business, including claims related to product liability, general negligence, contract disputes, environmental issues, 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.

TCPA Matter

On April 5, 2013, David Davies filed a putative class action lawsuit in the Circuit Court of Cook County, Illinois on behalf of all those who received faxes in connection with a 2009 marketing campaign. The complaint alleges, among other things, that the Company violated the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (the “TCPA”), by sending fax advertisements that either were unsolicited and/or did not contain a valid opt-out notice. The TCPA provides for penalties of $500 to $1,500 for each non-compliant individual fax.


14
W.W. Grainger, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


On May 13, 2013, the Company removed the case to the Federal District Court for the Northern District of Illinois (the “District Court”). On June 27, 2014, the District Court granted the Company’s motion for a determination that the court should not certify a class, finding that Davies was not an adequate class representative. On October 2, 2014, the United States Court of Appeals for the Seventh Circuit denied Davies’ petition for immediate review of the June 27, 2014 ruling. Davies may seek to pursue an appeal of the June 27, 2014 ruling at the conclusion of the District Court proceedings.

The Company subsequently moved to dismiss Davies’ individual claims based on the position that he had suffered no injury relating to his notice-related claims on account of the single fax he received, or otherwise. On April 4, 2016, the District Court issued an opinion denying the Company’s motion.

The parties have filed cross-motions for summary judgment and are in the process of completing briefing on their motions.

We believe we have strong legal and factual defenses and intend to continue defending the Company vigorously in the pending lawsuit. While the Company is unable to predict the outcome of this proceeding, the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company’s consolidated financial position or results of operations.


15
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General
Grainger is a broad-line distributor of maintenance, repair and operating (MRO) supplies, and other related products and services used by businesses and institutions. Grainger’s operations are primarily in the United States and Canada, with a presence in Europe, Asia and Latin America. Grainger uses a combination of multichannel and single channel 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 approximately 3 million customers worldwide through a network of highly integrated branches, distribution centers and websites.

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 Business Investment, Business Inventory, Exports and Industrial Production. In the United States, sales tend to positively correlate with Gross Domestic Product (GDP). In Canada, sales tend to positively correlate with oil prices. The table below provides these estimated indicators for 2016:
 
United States
Canada
 
2016 Forecast (April)
2016 Forecast (July)
2016 Forecast (April)
2016 Forecast (July)
Business Investment
1.8%
—%
(3.3)%
(3.9)%
Business Inventory
1.8%
1.3%
—%
—%
Exports
1.4%
0.9%
2.2%
2.4%
Industrial Production
(0.8)%
(1.6)%
(1.1)%
(2.0)%
GDP
2.1%
1.9%
1.3%
1.3%
Oil Prices
—
—
$40/barrel
$44/barrel
Source: Global Insight (April & July 2016)
 
 
 
 

In the United States, Business Investment and Exports are two major indicators of MRO spending. Business Investment is forecast to remain weak into 2017 primarily due to four factors: declines in oil and gas drilling, excess global capacity, a stronger U.S. dollar and slower growth in export markets. Capital spending should begin to have moderate growth in 2017 and 2018 as domestic demand strengthens and oil prices recover. Export growth is expected to to be less than 1% for 2016, which is lower than the performance experienced in 2015. Export growth is expected to grow slightly over the remainder of the year as the global economy stabilizes and the uncertainty of the Brexit vote fades. As a result of the strong U.S. dollar and slower growth abroad, U.S. economic growth , as measured by GDP, is forecast to remain below 2.0% for the year.
For Canada, economic growth in 2016 is forecast to continue to remain low. For the second quarter, GDP is forecast to have contracted, largely due to the negative impact of the Alberta wildfires, which are estimated by the Bank of Canada to have subtracted approximately 1 percentage point from GDP growth in the second quarter. A rebound is forecast by the Bank to occur in the third quarter as oil production has resumed and rebuilding efforts in the affected region get underway, combined with growth driven by improving U.S. domestic demand and federal infrastructure spending announced by the government earlier this year. For the year, the Canadian economy, as measured by GDP, is forecast to grow 1.3% in 2016 compared to 1.1% in the prior year. Over the near term, a key factor contributing to the low level of economic growth will be nonresidential business investment (a component of Business Investment) which is forecast to be negative for the remainder of the year.

Outlook
On July 19, 2016, Grainger revised the 2016 sales growth guidance from a range of 0 to 6 percent to a range of 1 to 4 percent and also revised the 2016 earnings per share guidance from a range of $11.00 to $12.80 to a range of $11.20 to $12.20. The revised guidance reflects lower than expected volume in the U.S. and Canada, partially offset by improved gross profit and operating expense leverage in the second half of the year. In addition, the Company is now expecting a higher effective tax rate for the year due to an increased concentration of earnings in higher tax rate jurisdictions and lower benefit from the clean energy investments.


16
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Matters Affecting Comparability
There were 64 sales days in the second quarter of 2016 and 2015. Grainger completed the Cromwell Group (Holdings) Limited acquisition in the third quarter of 2015 and operating results of Cromwell have been included in the results of the Company since the acquisition date.

Results of Operations – Three Months Ended June 30, 2016
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):
 
Three Months Ended June 30,
 
 
 
 
Percent Increase/(Decrease)
 
As a Percent of Net Sales
 
2016 (A)
 
2015 (A)
 
2016
 
2015
Net sales
$
2,564

 
$
2,523

2
 %
 
100.0
%
 
100.0
%
Cost of merchandise sold
1,524

 
1,449

5
 %
 
59.4

 
57.4

Gross profit
1,040

 
1,073

(3
)%
 
40.6

 
42.6

Operating expenses
734

 
717

2
 %
 
28.7

 
28.5

Operating earnings
306

 
357

(14
)%
 
11.9

 
14.1

Other expense
23

 
8

NM

 
0.9

 
0.3

Income taxes
104

 
123

(16
)%
 
4.0

 
4.9

Noncontrolling interest
7

 
5

44
 %
 
0.3

 
0.2

Net earnings attributable to W.W. Grainger, Inc.
$
173

 
$
221

(22
)%
 
6.7
%
 
8.7
%

(A) May not sum due to rounding

Grainger’s net sales of $ 2,564 million for the second quarter of 2016 increased 2% compared with sales of $ 2,523 million for the comparable 2015 quarter. On a daily basis, sales increased 2%. The 2% daily increase for the quarter consisted of the following:
 
Percent Increase/(Decrease)
Business acquisition
4
Price
(1)
Volume
(1)
Total
2%

The increase in net sales was primarily driven by the acquisition of Cromwell in September 2015 and single channel online businesses in the U.S. and Japan. Refer to the Segment Analysis below for further details.

In the three months ended June 30 2016 , eCommerce sales for Grainger were $1,183 million, an increase of 14% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms in the United States.

Gross profit of $ 1,040 million for the second quarter of 2016 decreased 3% . The gross profit margin of 40.6% during the second quarter of 2016 decreased 2.0 percentage points when compared to the same period in 2015, due primarily to price deflation exceeding cost deflation, negative customer selling mix, as well as an inventory reserves adjustment in Canada.


17
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Operating expenses of $ 734 million for the second quarter of 2016 increased 2% from $717 million for the comparable 2015 quarter primarily due to the acquisition of Cromwell. Restructuring related expenses contributed 0.6 percentage point to the increase.

Operating earnings for the second quarter of 2016 were $ 306 million , a decrease of 14% compared to the second quarter of 2015 . The decline was driven by lower gross profit margins and higher operating expenses.

Net earnings attributable to W.W. Grainger, Inc. for the second quarter of 2016 decreased 22% to $ 173 million from $ 221 million in the second quarter of 2015 .

Diluted earnings per share of $2.79 in the second quarter of 2016 were down 14% versus the $3.25 for the second quarter of 2015 , due to lower earnings, partially offset by lower average shares outstanding. The table below reconciles reported diluted earnings per share determined in accordance with United States generally accepted accounting principles (GAAP) 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.
 
Three Months Ended
 
 
June 30,
 
 
2016
 
2015
%
Diluted earnings per share reported
$2.79
 
$3.25
(14
)%
Restructuring (United States)
(0.09)
 
—
 
Inventory reserve adjustment (Canada)
0.12
 
—
 
Restructuring (Canada)
0.09
 
—
 
Restructuring (Unallocated expense)
0.09
 
—
 
Discrete tax item
(0.11)
 
—
 
Restructuring (Other Businesses)
—
 
0.02
 
   Subtotal
$0.10
 
0.02
 
Diluted earnings per share adjusted
$2.89
 
$3.27
(12
)%

Segment Analysis
Grainger’s two reportable segments are the United States and Canada. The United States operating segment reflects the results of Grainger’s U.S. business. The Canada operating segment reflects the results for Acklands – Grainger Inc., Grainger’s Canadian business. Other businesses include Zoro U.S. and business units in Europe, Asia and Latin America.

The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 10 to the Condensed Consolidated Financial Statements.

United States
Net sales were $ 1,979 million for the second quarter of 2016 , a decrease of 3% when compared with net sales of $ 2,031 million for the same period in 2015. On a daily basis, sales decreased 3%. The 3% daily decrease for the quarter consisted of the following:
 
Percent Increase/(Decrease)
Intercompany sales to Zoro
1
Price
(2)
Volume
(2)
Total
(3)%


18
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Sales to natural resource customers and resellers were down in the mid-teens. Contractor customers were down in the high single digits and heavy manufacturing was down in the mid-single digits. Commercial customers were down in the low single digits and light manufacturing was flat. Low oil prices negatively impacted the performance of the heavy manufacturing and natural resources customers. These decreases were slightly offset by low single digit growth in government and retail. Sales to Zoro continue to contribute to sales growth as the U.S. business' supply chain network is Zoro's primary source of inventory.

In the three months ended June 30, 2016 , eCommerce sales for the United States business were $916 million, an increase of 11% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms.

The gross profit margin for the second quarter of 2016 decreased 0.9 percentage point compared to the same period in 2015, driven by unfavorable customer mix and price deflation outpacing cost deflation. Excluding sales to Zoro, the gross profit margin decreased 0.6 percentage point versus prior year.

Operating expenses of $ 487 million in the second quarter of 2016 were down $21 million, or 4% versus the second quarter of 2015 . Operating expenses in 2016 included $6 million in restructuring costs for the previously announced branch closures and the offshoring of some IT support functions. These charges were more than offset by $15 million in gains on the sale of branch real estate for a net restructuring benefit of $9 million. Excluding the restructuring impact, operating expenses decreased 2%.

Operating earnings of $ 349 million for the second quarter of 2016 decreased 6% from $ 370 million for the second quarter of 2015 driven by lower sales and lower gross profit margins, partially offset by lower operating expenses. Excluding the restructuring gains mentioned above, operating earnings decreased 8%.

Canada
Net sales were $ 194 million for the second quarter of 2016 , a decrease of $45 million, or 19%, when compared with $ 239 million for the same period in 2015. In local currency, sales decreased 16%. On a daily sales basis, sales decreased 19% for the quarter and consisted of the following:
 
Percent Increase/(Decrease)
Wildfire impact
(2)
Foreign exchange
(3)
Volume
(14)
Total
(19)%

Sales performance in Canada continues to be affected by a weak economic environment, resulting in lower sales to most customer end markets. The Alberta region, which represents about one-third of the sales in the Canadian business, decreased 28% versus prior year, on a daily basis, as it was negatively impacted by wildfires and oil prices. Sales growth for the remaining regions in aggregate was down 11% in local currency.

In the three months ended June 30, 2016 , eCommerce sales in Canada were $25 million, a decrease of 7% over the prior year and represented 13% of total sales.

The gross profit margin decreased 11.9 percentage points in the second quarter of 2016 versus the second quarter of 2015 due largely to an inventory adjustment, along with cost of goods inflation exceeding price inflation due to unfavorable foreign exchange.

The Company maintains reserves for obsolete and excess inventory.  The reserve methodology and estimates are regularly reviewed based on experience and continued demand to identify obsolete or excess quantities.  During the quarter ended June 30, 2016, the Canadian business recorded an additional reserve of $10 million , as a result of additional visibility to inventory performance provided by the recent conversion to the U.S. SAP system.
 
Operating expenses decreased 3% in the second quarter of 2016 versus the second quarter of 2015 , benefiting from lower SAP project costs and lower advertising costs, partially offset by restructuring costs of $7 million.

19
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Operating losses were $28 million for the second quarter of 2016 versus operating earnings of $9 million in the second quarter of 2015 . Excluding the restructuring costs and the inventory adjustment mentioned above, the operating losses would have been $10 million driven by the sales decline, lower gross profit margin and expenses declining at a slower rate than sales.

Other Businesses
Net sales for other businesses, which include Zoro U.S., business units in Europe, Asia, Latin America, and the newly acquired Cromwell, were $ 474 million for the second quarter of 2016 , an increase of $155 million when compared with net sales of $ 319 million for the same period in 2015, primarily due to the acquisition of Cromwell. On a daily sales basis, sales were up 49%. The drivers of the increase in daily sales for the quarter consisted of the following:
 
Percent Increase/(Decrease)
Business acquisition
31
Price/volume
17
Foreign exchange
1
Total
49%

Operating earnings of $ 30 million for the second quarter of 2016 were up $15 million compared to the second quarter of 2015 . The earnings performance for the quarter versus prior year was primarily driven by strong results from Zoro U.S. and the business in Japan as well as the acquisition of Cromwell, which reported modest profit as expected.

Other Income and Expense
Other income and expense was $23 million of expense in the second quarter of 2016 compared to $8 million of expense in the second quarter of 2015 . The increase in expense was primarily due to interest expense from the $1 billion of debt the Company issued in June 2015 and $400 million of debt issued in May 2016, as well as expected losses from the Company's investments in clean energy.

Income Taxes
For the quarter, the effective tax rate in 2016 was 36.6% versus 35.4% in 2015. The 2016 second quarter included a $7 million benefit from the effective settlement of certain federal income tax issues under audit for the years 2009 through 2012. Excluding this discrete benefit, the Company’s effective tax rate was 39.1%. The effective tax rate for the 2015 second quarter, excluding a year-to-date adjustment for the benefit from the Company’s first clean energy investment, was 36.9%. The year-over-year increase in the tax rate, excluding the settlement benefit, was primarily due to a larger proportion of earnings from higher tax rate jurisdictions and lower benefit from the clean energy investments in the quarter . Grainger is expecting an effective tax rate, excluding the settlement benefit, of approximately 36.8% to 37.8% for the full year 2016.

Matters Affecting Comparability
There were 128 sales days in the six months ended June 30, 2016 compared to 127 sales days in 2015 .

Results of Operations – Six Months Ended June 30, 2016
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings (in millions of dollars):

20
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 
Six Months Ended June 30,
 
 
 
 
Percent Increase/(Decrease)
 
As a Percent of Net Sales
 
2016 (A)
 
2015 (A)
 
2016
 
2015
Net sales
$
5,070

 
$
4,962

2
 %
 
100.0
%
 
100.0
%
Cost of merchandise sold
2,985

 
2,795

7
 %
 
58.9

 
56.3

Gross profit
2,085

 
2,167

(4
)%
 
41.1

 
43.7

Operating expenses
1,462

 
1,459

—
 %
 
28.8

 
29.4

Operating earnings
623

 
708

(12
)%
 
12.3

 
14.3

Other expense
42

 
12

NM

 
0.8

 
0.2

Income taxes
209

 
257

(18
)%
 
4.1

 
5.2

Noncontrolling interest
12

 
8

50
 %
 
0.2

 
0.2

Net earnings attributable to W.W. Grainger, Inc.
$
359

 
$
432

(17
)%
 
7.1
%
 
8.7
%

(A) May not sum due to rounding

Grainger’s net sales of $5,070 million for the six months ended June 30, 2016 increased 2% compared with sales of $4,962 million for the comparable 2015 period. On a daily sales basis, sales increased 1% for the quarter and consisted of the following:
 
Percent Increase/(Decrease)
Business acquisition
4
Volume
1
Seasonal sales
(1)
Foreign exchange
(1)
Price
(2)
Total
1%

The increase in net sales for the six months ended June 30, 2016 was led by the contribution from Cromwell and growth in sales to retail, government, and light manufacturing. The sales growth was partially offset by declines in the natural resources, reseller and contractors. Refer to the Segment Analysis below for further details.

In the six months ended June 30 2016 , eCommerce sales for Grainger were $2,308 million, as increase of 15% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms in the United States.

Gross profit of $2,085 million for the six months ended June 30, 2016 decreased 4% compared with $2,167 million in the same period in 2015 . The gross profit margin during the six months ended June 30, 2016 decreased 2.6 percentage points when compared to the same period in 2015 , primarily due to price deflation exceeding product cost deflation and increased sales to lower margin customers.

Operating expenses of $1,462 million for the six months ended June 30, 2016 were flat relative to $1,459 million for the comparable 2015 period. Excluding restructuring related expenses, operating expenses decreased 1 percentage point.
 
Operating earnings for the six months ended June 30, 2016 were $623 million , a decrease of $85 million or 12%, compared to the six months ended June 30, 2015 , driven by lower gross profit margins.

Net earnings attributable to W.W. Grainger, Inc. for the six months ended June 30, 2016 decreased 17% to $359 million from $432 million in the six months ended June 30, 2015 .


21
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Diluted earnings per share of $5.77 in the six months ended June 30, 2016 were 9% lower than the $6.32 for the six months ended June 30, 2015 , due to lower earnings, partially offset by 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.

 
Six Months Ended
 
 
June 30,
 
 
2016
 
2015
%
Diluted Earnings Per Share reported
$5.77
 
$6.32
(9
)%
Restructuring (United States)
0.07
 
—
 
Inventory reserve adjustment (Canada)
0.12
 
—
 
Restructuring (Canada)
0.13
 
—
 
Restructuring (Unallocated expense)
0.09
 
—
 
Discrete tax items
(0.11)
 
—
 
Restructuring (Other Businesses)
—
 
0.05
 
   Subtotal
0.30
 
0.05
 
Diluted earnings per share adjusted
$6.07
 
$6.37
(5
)%

Segment Analysis
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 Inc., Grainger’s Canadian operating segment. Other businesses include Zoro U.S. and operations in Europe, Asia and Latin America.

The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 10 to the Condensed Consolidated Financial Statements.

United States
Net sales were $3,945 million for the six months ended June 30, 2016 , a decrease of 1%, when compared with net sales of $4,002 million for the same period in 2015 . On a daily basis, sales decreased 2% for the period and consisted of the following:
 
Percent Increase/(Decrease)
Intercompany sales to Zoro
1
Seasonal sales
(1)
Price
(2)
Total
(2)%

Sales to natural resource customers and resellers were down in the mid-teens. Contractor customers were down in the high single digits and heavy manufacturing and commercial services were down in the mid-single digits. Hospitality, wholesale and healthcare markets were down in the low single digits. Low oil prices negatively impacted the performance of the heavy manufacturing and natural resources customers. These decreases were offset by mid-single digit growth in government and retail and low single digit growth in light manufacturing and transportation. Sales to Zoro continue to contribute to sales growth as the U.S. business' supply chain network is Zoro's primary source of inventory.


22
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

In the six months ended June 30, 2016 , eCommerce sales were $1,800 million, an increase of 12% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms.

The gross profit margin for the six months ended June 30, 2016 decreased 1.8 percentage points compared to the same period in 2015 , driven by unfavorable customer mix and price deflation outpacing cost deflation. Excluding sales to Zoro, gross profit margin decreased 1.5 percentage points versus the prior year.

Operating expenses were down 4% in the six months ended June 30, 2016 versus the six months ended June 30, 2015 . Operating expenses in 2016 included $19 million in restructuring costs for the previously announced branch closures and the offshoring of some IT support functions. These charges were partially offset by $15 million in net gains on the sale of branch real estate for a net restructuring impact of $4 million. Excluding restructuring costs, operating expenses decreased 4%.

Operating earnings of $681 million for the six months ended June 30, 2016 decreased 7% from $736 million for the six months ended June 30, 2015 , driven by lower sales and lower gross profit margins, partially offset by expenses declining faster than sales.

Canada
Net sales were $373 million for the six months ended June 30, 2016 , a decrease of $101 million, or 21%, when compared with $474 million for the same period in 2015 . In local currency, sales decreased 16%. On a daily basis, sales decreased 22% for the period and consisted of the following:
 
Percent Increase/(Decrease)
Volume
(13)
Foreign exchange
(6)
SAP implementation
(3)
Wildfire impact
(1)
Price
1
Total
(22)%

Sales performance in Canada was primarily driven by declines within the oil and gas sector in Alberta, combined with declines in all other end markets across the country.  In addition, the Canadian business implemented the U.S. SAP system in February 2016, which negatively impacted sales as employees transitioned to operating with the new system.

In the six months ended June 30, 2016 , eCommerce sales were $48 million, as decrease of 12% over the prior year and represented 13% of total sales. The decrease was primarily driven by lower sales volume.

The gross profit margin decreased 9.4 percentage points in the six months ended June 30, 2016 versus the six months ended June 30, 2015 , primarily due to an inventory adjustment in the second quarter of 2016, along with cost of goods inflation exceeding price inflation primarily due to unfavorable foreign exchange.

Operating expenses in the six months ended June 30, 2016 were $145 million compared to $159 million for the six months ended June 30, 2015 . The decrease was due to the benefit of a $7 million gain from the sale of property, lower advertising costs and SAP project costs, partially offset by restructuring costs of $10 million.

Operating losses were $40 million for the six months ended June 30, 2016 versus operating earnings of $19 million in the six months ended June 30, 2015 . Excluding the restructuring costs and the inventory adjustment mentioned above, the operating losses would have been $19 million driven by the sales decline, lower gross profit margin and expenses declining at a slower rate than sales.





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

Other Businesses
Net sales for other businesses, which include Zoro U.S. and operations in Europe, Asia and Latin America, were $920 million for the six months ended June 30, 2016 , an increase of $303 million, when compared with net sales of $617 million for the same period in 2015 . The drivers of net sales for the period consisted of the following:
 
Percent Increase/(Decrease)
Business acquisition
32
Volume
17
Foreign exchange
(1)
Total
48%

Operating earnings of $52 million in the six months ended June 30, 2016 increased $27 million compared to the six months ended June 30, 2015 . Operating earnings in 2016 included strong performance from Zoro U.S. and Japan and the earnings contribution of Cromwell.

Other Income and Expense
Other income and expense was $42 million of expense in the six months ended June 30, 2016 compared to $12 million of expense in the six months ended June 30, 2015 . The increase in expense was primarily due to interest expense from the $1 billion of debt the Company issued in June 2015 and $400 million of debt issued in May 2016, as well as expected losses from the Company's investments in clean energy.

Income Taxes
Grainger’s effective tax rates were 36.1% and 36.9% for the six months ended June 30, 2016 and 2015 , respectively. The decrease in the tax rate was due to a discrete benefit arising from the effective settlement of certain federal income tax issues under audit for the years 2009 through 2012, offset by a larger proportion of earnings from higher tax rate jurisdictions. Grainger is expecting an effective tax rate, excluding the settlement benefit, of approximately 36.8% to 37.8% for the full year 2016.

Financial Condition

Cash Flow
Net cash provided by operating activities was $ 326 million and $ 370 million for the six months ended June 30, 2016 and 2015 , respectively.

Net cash used in investing activities was $ 74 million and $ 170 million for the six months ended June 30, 2016 and 2015 , respectively. The lower use of cash was driven by lower additions to property, buildings and equipment compared to the prior year and higher proceeds from the sales of branch real estate assets.

Net cash used in financing activities was $ 242 million compared to net cash provided by financing activities of $ 402 million in the six months ended June 30, 2016 and 2015 , respectively. The change in financing activities was primarily driven by the issuance of $400 million in long-term debt in May 2016 compared to the issuance of $1 billion in long-term debt in June 2015.

Working Capital
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 at June 30, 2016 , was $1,936 million, an increase of $142 million when compared to $1,794 million at December 31, 2015 primarily due to an increase in accounts receivable and lower profit sharing accruals due to the timing of annual payments. The working capital assets to working capital liabilities ratio increased to 2.7 at June 30, 2016 , from 2.5 at December 31, 2015 .

Debt
Grainger maintains a debt ratio and liquidity position that provide flexibility in funding working capital needs and long-term cash requirements. In addition to internally generated funds, Grainger has various sources of financing available,

24
W.W. Grainger, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

including bank borrowings under lines of credit. Total interest-bearing debt as a percent of total capitalization was 50.3% at June 30, 2016 , and 45.8% at December 31, 2015 .

Critical Accounting Policies and 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. For a description of Grainger’s critical accounting policies see Grainger's Annual Report on Form 10-K for the year ended December 31, 2015.

Forward-Looking Statements
From time to time, in this Quarterly Report on Form 10-Q, as well as in other written reports and verbal statements, Grainger makes forward-looking statements that are not historical in nature but concern forecasts of future results, business plans, analyses, prospects, strategies, objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. Such forward-looking statements are identified by words such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project” and similar terms and expressions.

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, many of which are beyond the Company's control, which could cause Grainger's results to differ materially from those which are presented.

Important 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, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; the Company's ability to operate, integrate and leverage acquired businesses and the factors identified in the Company's Annual Report on Form 10-K for the year-ended December 31, 2015 and other filings with the SEC.

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.


25

W.W. Grainger, Inc. and Subsidiaries


Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
For quantitative and qualitative disclosures about market risk, see “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in Grainger's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 .

Item 4.
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 Grainger's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. 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 in (i) ensuring that information required to be disclosed by Grainger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
There were no changes in Grainger's internal control over financial reporting that occurred during the second quarter that have materially affected, or are reasonably likely to materially affect, Grainger's internal control over financial reporting.

PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings.

For a description of certain of the Company's legal proceedings, see Note 12 - Contingencies and Legal Matters to the Condensed Consolidated Financial Statements included under Item 1 - Financial Statements of Part I of this report.




26

W.W. Grainger, Inc. and Subsidiaries


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities – second 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
Apr. 1 – Apr. 30
367,604
$231.54
367,604
8,227,680
May 1 – May 31
337,104
$227.19
337,104
7,890,576
June 1 – June 30
328,898
$221.92
328,898
7,561,678
Total
1,033,606
$227.06
1,033,606
 
 
(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 6, 2015. The program has no specified expiration date. Activity is reported on a trade date basis.


Item 6.        Exhibits.

A list of exhibits filed with this report on Form 10-Q is provided in the Exhibit Index on page 29 of this report.






























27

W.W. Grainger, Inc. and Subsidiaries



SIGNATURES


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
W.W. Grainger, Inc.
 
 
 
(Registrant)
Date:
July 28, 2016
 
 
 
By:
 
 
 
/s/ R. L. Jadin
 
 
 
R. L. Jadin, Senior Vice President
and Chief Financial Officer
Date:
July 28, 2016
 
 
 
By:
 
 
 
/s/ W. Lomax
 
 
 
W. Lomax, Vice President
and Controller



28



EXHIBIT INDEX

EXHIBIT NO.
 
DESCRIPTION
10.1
 
Form of Stock Option Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.*
10.2
 
Form of Restricted Stock Unit Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.*
10.3
 
Form of 2016 Performance Share Award Agreement between W.W. Grainger, Inc. and certain of its executive officers.*
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
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.

(*) Management contract or compensatory plan or arrangement.

29
Exhibit 10.1

W.W. GRAINGER, INC.
2015 Incentive Plan
Stock Option Agreement
This Stock Option Agreement (this “Agreement”), dated as of April 1, 2016 (the “Grant Date”), is entered into between W.W. Grainger, Inc., an Illinois corporation (the “Company”), and you as the executive (the “Executive”), who is employed by the Company or a Subsidiary of the Company (the “Employer”).
In consideration of the Executive’s agreement to enter into an Unfair Competition Agreement with the Company concurrently with this Agreement on the Grant Date (the “Unfair Competition Agreement”), the Company desires to grant the Executive the right and option (“Option”) to purchase shares of the Company’s common stock (“Shares”) pursuant to the W.W. Grainger, Inc. 2015 Incentive Plan (the “Plan”) and the Executive desires to enter into the Unfair Competition Agreement and accept such Option on the terms and conditions set forth in this Agreement, the Plan and the Unfair Competition Agreement.
Capitalized terms used but not defined in this Agreement have the meanings specified in the Plan.
In consideration of the mutual provisions set forth in this Agreement and in the Unfair Competition Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Grants
1.01 Grants . Subject to the terms and conditions of this Agreement, the Plan and the Unfair Competition Agreement (the terms of which are hereby incorporated herein by reference) and effective on the Grant Date, the Company hereby grants to the Executive the Option to purchase all or part of the number of shares of Common Stock specified in the April 1, 2016 Award grant at the price per Share as specified in the grant notice posted to the Executive’s electronic investment account maintained with the broker firm/third party service provider engaged by the Company in connection with the operation of the Plan (the “Administrator”).
1.02 Term of Option . The Option shall expire ten (10) years from the Grant Date (i.e., a grant on April, 1, 2016 would expire on March 31, 2026), subject to the terms and conditions set forth in this Agreement, the Plan and the Unfair Competition Agreement.
ARTICLE II
Provisions Relating to Option
2.01 Vesting of Option . If the Executive remains continuously employed by the Employer (or any other Subsidiary or Affiliate) until the vesting date specified in the grant notice (the “Option Vesting Date”), the Option shall become fully vested and exercisable on such date. The Option shall not vest before the Option Vesting Date unless otherwise provided or permitted by the Plan or this Agreement.
2.02 Effect of Termination of Employment . If the Executive’s employment or service is terminated prior to the Option Vesting Date for any reason whatsoever other than the Executive’s death or Disability (defined below), the Executive shall cease vesting in the Option as of the Executive’s Termination Date (defined below) and the Option shall be forfeited in its entirety. In addition, the Executive shall have three (3) months from the Termination Date to exercise vested Options. If the Executive is a resident of, or employed in, the United States, “Termination Date” shall mean the effective date of termination of the Executive’s employment. If the Executive is a resident of, or employed outside of, the United States, “Termination Date” shall mean the earliest of (i) the date on which notice of termination is provided to the Executive, (ii) the last day of the Executive’s active service with the Employer or (iii) the last day on which the Executive is an employee of the Employer, as determined in each case without including any required advanced notice period and irrespective of the status of the termination under local labor or employment laws.
2.03 Effect of Death or Disability of the Executive . If the Executive’s employment or service is terminated prior to the Option Vesting Date due to the Executive’s death or Disability, the Option immediately shall fully vest, become exercisable and will expire on the earlier of (i) six (6) years from the Termination Date or (ii) the original expiration date of the Option. For purposes of this Agreement, “Disability” shall have the same meaning as defined in the Plan, subject to modification as may be required to conform to the laws of the Executive’s country of residence (and country of employment, if different).
2.04 Exercise of Option . The Executive may exercise the vested portion of the Option in accordance with such policies and procedures as shall be established by the Company and/or the Administrator from time to time.
2.05 Payment of Option Price . The Executive shall at the time of exercise of the Option (except in the case of a cashless exercise) tender to the Company the full Option Price. At the discretion of the Committee, and subject to such policies and procedures as it may adopt from time to time, the Option Price may be paid (i) in cash, (ii) in Shares already owned by the Executive for at least six (6) months and having a Fair Market Value on the date of exercise equal to the Option Price, (iii) through a combination of cash and Shares, or (iv) through a cashless exercise through a broker-dealer approved for this purpose by the Company. Notwithstanding anything to the contrary in this Agreement, if the Executive resides in a country where the local foreign exchange rules and regulations either preclude the remittance of currency out of the country for purposes of paying the Option Price, or require the Company, the Employer and/or the Executive to secure any legal or regulatory approvals, complete any legal or regulatory filings, or undertake any additional steps for remitting currency out of the country, the Company may restrict the method of exercise to a form of cashless exercise or such other form(s) of exercise as it determines in its sole discretion.
ARTICLE III
Recoupment
3.01     Recoupment in Event of Misconduct . If the Board of Directors of the Company (the “Board”) determines that the Executive has committed fraud against the Company or has been engaged in any criminal conduct that involves or is related to the Company and such Executive is entitled to receive performance shares, stock options, restricted stock units or cash incentive compensation (“Incentive Compensation”), then the Company shall recover from the Executive such Incentive Compensation, in whole or in part, for any period of time, as it deems appropriate under the circumstances. The Board shall have sole discretion in determining whether the Executive’s conduct was in compliance with applicable law or Company policy and the extent to which the Company will seek recovery of the Incentive Compensation notwithstanding any other remedies available to the Company. If the Executive engages in misconduct or is believed to have engaged in misconduct, including but not limited to any violation of any of Executive’s obligations under the Unfair Competition Agreement, the Company shall be entitled to recover from the Executive, and the Executive shall re-pay any Awards received pursuant to the Plan and this Agreement, in whole or in part, for any period of time, as the Company deems appropriate under the circumstances.
3.02     Recoupment in Event of Materially Inaccurate Financial Results . If the Company has publicly filed materially inaccurate financial results (the “Subject Financials”), whether or not they result in a restatement, the Board has the discretion to recover any Incentive Compensation that was paid or settled to the Executive during the period covered by the Subject Financials as set forth herein. If the payment or settlement of Incentive Compensation would have been lower had the achievement of applicable financial performance goals been calculated based on restated financial results with respect to the Subject Financials, the Board may, if it determines appropriate in its sole discretion, recover the portion of the paid or settled Incentive Compensation in excess of the payment or settlement that would have been made based on restated financial results. The Company will not seek to recover Incentive Compensation received or settled more than three years after the date of the initial filing that contained the Subject Financials.
3.03     Implementation . For purposes of this Article III , the Executive expressly authorizes the Company to issue instructions, on behalf of the Executive, to the Administrator (and/or any other brokerage firm/third party service provider engaged by the Company to hold Shares and other amounts acquired under the Plan) to reconvey, transfer or otherwise return to the Company any Incentive Compensation subject to recoupment hereunder. Executive acknowledges and agrees that the Company’s rights hereunder shall not be affected in any way by any subsequent change in status, including retirement or termination of employment.
3.04     Forfeiture . To the extent any of the events set forth in Sections 3.01 or 3.02 occur before the Executive receives any Award due hereunder, any such Award shall be forfeited as determined by the Company in its sole discretion.


ARTICLE IV
Tax
4.01 Tax-Related Items . Regardless of any action the Company or the Employer takes with respect to any or all income tax (including U.S. federal, state and local taxes or non-U.S. taxes), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Executive acknowledges and agrees that the ultimate liability for all Tax-Related Items legally due by the Executive is and remains the Executive’s responsibility and that the Company and the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant of the Option, the vesting of the Option, the exercise of the Option, the subsequent sale of any Shares acquired pursuant to the Option and the receipt of any dividends and (ii) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Executive’s liability for Tax-Related Items.
4.02     Tax Withholding Obligations . Prior to the delivery of Shares upon the exercise of the Option, if the Executive’s country of residence (and country of employment, if different) requires withholding of Tax-Related Items, the Company shall withhold a sufficient number of whole Shares otherwise issuable upon exercise of the Option that have an aggregate Fair Market Value sufficient to pay the minimum Tax-Related Items required to be withheld with respect to the Shares. In cases where the Fair Market Value of the number of whole Shares withheld is greater than the minimum Tax-Related Items required to be withheld, the Company shall make a cash payment to the Executive equal to the difference as soon as administratively practicable. The cash equivalent of the Shares withheld will be used to settle the obligation to withhold the Tax-Related Items. Alternatively, the Company and the Employer may withhold the minimum Tax-Related Items required to be withheld with respect to the Shares in cash from the Executive’s regular salary and/or wages or any other amounts payable to the Executive. In the event the withholding requirements are not satisfied through the withholding of Shares by the Company or through the withholding of cash from the Executive’s regular salary and/or wages or other amounts payable to the Executive, no Shares will be issued to the Executive (or the Executive’s estate) upon the exercise of the Option unless and until satisfactory arrangements (as determined by the Committee) have been made by the Executive with respect to the payment of any Tax-Related Items that the Company or the Employer determines, in its sole discretion, must be withheld or collected with respect to such Option. If the obligation for the Executive’s Tax-Related Items is satisfied by withholding a number of Shares as described herein, the Executive shall be deemed to have been issued the full number of Shares issuable upon exercise, notwithstanding that a number of the Shares is held back solely for the purpose of paying the Tax-Related Items due as a result of the exercise or any other aspect of the Award.
    The Executive will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of the Executive’s participation in the Plan or the Executive’s acquisition of Shares that cannot be satisfied by the means described in this Section 4.02 . The Company may refuse to deliver any Shares due upon exercise of the Option if the Executive fails to comply with his or her obligations in connection with the Tax-Related Items as described herein. If the Executive is subject to taxation in more than one jurisdiction, the Executive acknowledges that the Company, the Employer or one or more of their respective Subsidiaries may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Executive hereby consents to any action reasonably taken by the Company and the Employer to meet his or her obligation for Tax-Related Items. By accepting this grant of Option, the Executive expressly consents to the withholding of Shares and/or withholding from the Executive’s regular salary and/or wages or other amounts payable to the Executive as provided for hereunder. All other Tax-Related Items related to the Option and any Shares delivered in payment thereof are the Executive’s sole responsibility.
ARTICLE V
International Arrangements
5.01 Exchange Controls . As a condition to this grant of Options, the Executive agrees to comply with any applicable foreign exchange laws, rules and regulations and hereby consents to any necessary, appropriate or advisable actions taken by the Company, the Employer or any of their respective Subsidiaries as may be required to comply with any applicable laws, rules and regulations of the Executive’s country of residence (and country of employment, if different).
5.02     Foreign Asset and Account Reporting Requirements . The Executive acknowledges that there may be certain foreign asset and/or account reporting requirements which may affect the Executive’s ability to acquire or hold Shares acquired under the Plan or cash received from participating in the Plan (including from any dividends or dividend equivalent payments) in a brokerage or bank account outside the Executive’s country of residence (and country of employment, if different). The Executive may be required to report such accounts, assets or transactions to the tax or other authorities in the Executive’s country of residence (and country of employment, if different). The Executive acknowledges and agrees that it is his or her personal responsibility to be compliant with such regulations.
5.03     Country Specific Addendum . Notwithstanding any provisions of this Agreement to the contrary, the Option shall be subject to any special terms and conditions for the Executive’s country of residence (and country of employment, if different) set forth in the addendum to this Agreement (“Addendum”). If the Executive transfers residence and/or employment to another country reflected in an Addendum at the time of transfer, the special terms and conditions for such country will apply to the Executive to the extent the Company determines, in its sole discretion, that the application of such special terms and conditions is necessary or advisable in order to comply with local law, rules and regulations or to facilitate the operation and administration of the Option and the Plan (or the Company may establish alternative terms and conditions as may be necessary or advisable to accommodate the Executive’s transfer). In all circumstances, any applicable Addendum shall constitute part of this Agreement.
5.04     Controlling Language . The Executive acknowledges and agrees that it is the Executive’s express intent that this Agreement, the Plan, the Unfair Competition Agreement and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the Option be drawn up in English. If the Executive has received this Agreement, the Plan, the Unfair Competition Agreement or any other documents related to the Option translated into a language other than English and the meaning of any translated version is different than the English version, the English version will control.
ARTICLE VI
Miscellaneous
6.01 Restriction on Transferability . Except to the extent expressly provided in the Plan or this Agreement, the Option may not be sold, transferred, pledged, assigned, or otherwise alienated at any time other than by will or by the laws of descent and distribution. Any attempt to do so contrary to the provisions hereof shall be null and void.
6.02 Rights as Shareholder . The Executive shall not have voting or any other rights as a shareholder of the Company with respect to the Shares issuable upon exercise of the Option until the date of issuance of such Shares. Upon exercise of the Option the Executive will obtain, with respect to the Shares received in such exercise, full voting and other rights as a shareholder of the Company.
6.03 Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Executive, the Company, and all other Persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.
6.04 No Employment Rights . This Agreement and the Executive’s participation in the Plan are not and shall not be interpreted to: (i) form an employment contract or relationship with the Company, the Employer or any of their respective Subsidiaries; (ii) confer upon the Executive any right to continue in the employ of the Company, the Employer or any of their respective Subsidiaries; or (iii) interfere with the ability of the Company, the Employer or any of their respective Subsidiaries to terminate the Executive’s employment at any time.
6.05     Nature of Grant . In accepting the grant hereunder, the Executive acknowledges and agrees that: (i) the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time; (ii) the Executive has read the Plan and any Awards granted under it shall be subject to all of the terms and conditions of the Plan, including but not limited to the exclusive right of the Committee to interpret and determine the terms and provisions of the Plan and this Agreement and to make all determinations necessary or advisable for the administration of the Plan, all of which interpretations and determinations shall be final and binding; (iii) the Award does not create any contractual or other right to receive future grants of Awards, benefits in lieu of Awards, or any other Plan benefits in the future; (iv) nothing contained in this Agreement is intended to create or enlarge any other contractual obligations between the Company or the Employer and the Executive; (v) any grant under the Plan, including any grant of Awards, is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long service option, pension, or retirement benefits or similar payments; (vi) the Executive is voluntarily participating in the Plan; (vii) the future value of the Shares underlying the Award granted hereunder is unknown and cannot be predicted with certainty; and (viii) neither the Company, the Employer nor any of their respective Subsidiaries shall be liable for any change in value of the Award, the amount realized upon settlement of the Award or the amount realized upon a subsequent sale of any Shares acquired upon settlement of the Award, resulting from any fluctuation of the United States Dollar/local currency foreign exchange rate. Without limiting the generality of the foregoing, the Committee shall have the discretion to adjust the terms and conditions of any Award to correct for any windfalls or shortfalls in such Award which, in the Committee’s determination, arise from factors beyond the Executive’s control; provided, however, that the Committee’s authority with respect to any Award to a “covered employee,” as defined in Section 162(m)(3) of the Code, shall be limited to decreasing, and not increasing, such Award.
6.06 Compliance with Law . The Company shall not be required to issue or deliver any Shares pursuant to this Agreement pending compliance with all applicable securities and other laws, rules and regulations (including any registration requirements or tax withholding requirements) and compliance with the rules and practices of any stock exchange upon which the Shares are listed.
6.07     Amendment . This Agreement may be amended by a writing which specifically states that it is amending this Agreement executed by (i) the Company and the Executive, (ii) the Committee, so long as a copy of such amendment is delivered to the Executive, and provided that no such amendment adversely affecting the rights of the Executive hereunder may be made without the Executive’s written consent or (iii) the Committee in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision.
6.08 Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary. Any notice to be given to the Executive shall be addressed to the Executive at the address listed in the Employer’s records or to the Executive’s electronic stock plan account held at the Company’s third party provider. By a notice given pursuant to this Section 6.08 , either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.
6.09 Severability . If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any provision of this Agreement (or part of such provision) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such provision (or part of such provision) to the fullest extent possible while remaining lawful and valid.
6.10 Construction . The Option is being issued pursuant to Article 6 (Stock Option) of the Plan. The Option is subject to the terms of the Plan. The Executive acknowledges receipt of the Plan booklet which contains the entire Plan, and the Executive represents and warrants that the Executive has read the Plan. Additional copies of the Plan are available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with an express provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect. The words “including,” “includes,” or “include” are to be read as listing non-exclusive examples of the matters referred to, whether or not words such as “without limitation” or “but not limited to” are used in each instance.
6.11 Waiver of Right to Jury Trial . EACH OF THE PARTIES KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THE OPTION, THE PLAN OR THIS AGREEMENT.
6.12 Waiver; No Third Party Beneficiaries . A waiver by the Company of a breach of any provision of this Agreement by the Executive shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Executive. This Agreement shall not be construed to create any third party beneficiary rights.
6.13 Data Privacy .
(i) Pursuant to applicable personal Data (defined below) protection laws, the collection, processing and transfer of the Executive’s personal Data is necessary for the Company’s administration of the Plan and the Executive’s participation in the Plan. The Executive expressly and voluntarily (a) acknowledges, consents and agrees to the collection, use, processing and/or transfer of personal Data as described herein; and (b) authorizes Data recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for purposes of implementing, administering and managing the Executive’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Executive’s behalf to a broker or other third party with whom the Executive may elect to deposit any Shares acquired pursuant to the Plan. For purposes of this Section 6.13 , “Data” means certain personal information about the Executive including (but not limited to) the Executive’s name, home address and telephone number, date of birth, social security number or other employee identification number, salary, nationality, job title, any Share ownership and details of any Award or any other entitlement to Shares awarded, canceled, purchased, vested, unvested or outstanding in the Executive’s favor for the purpose of managing and administering the Plan.
(ii)    Data may be provided by the Executive or collected, where lawful, from third parties, and the Company, the Employer and any third party service providers will process the Data collected hereunder for the purpose of implementing, administering and managing the Executive’s participation in the Plan. The Company and the Employer will transfer Data as necessary for the purpose of implementation, administration and management of the Executive’s participation in the Plan, and the Company and the Employer may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. These recipients may be located throughout the world. Data processing will take place through electronic and non-electronic means in accordance with applicable law and the Company and the Employer’s policies and procedures as in effect from time to time. The Executive may, at any time, seek to exercise his or her rights provided under applicable personal Data protection laws by contacting his or her local human resources manager.
6.14     Private Placement . The grant of the Option is not intended to be a public offering of securities in the Executive’s country of residence (and country of employment, if different). The Company has not submitted any registration statement, prospectus or other filing with the local securities authorities (unless otherwise required under local law).
6.15     No Advice Regarding Grant . Neither the Company nor the Employer is providing any tax, legal or financial advice, nor is the Company nor the Employer making any recommendations regarding the Option, the Executive’s participation in the Plan or the Executive’s acquisition or sale of the underlying Shares. The Executive is hereby advised to consult with the Executive’s own personal tax, legal and financial advisors regarding participation in the Plan before taking any action related to the Plan.
6.16      Securities Law Restrictions . The Executive acknowledges that, depending on the Executive’s country of residence (and country of employment, if different), the Executive may be subject to insider trading restrictions and/or market abuse laws, which may affect the Executive’s ability to acquire or sell Shares or rights to Shares (e.g., the Option) under the Plan during such times as the Executive is considered to have “inside information” regarding the Company or its business (as defined by the laws in the Executive’s country of residence and/or employment). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading or other policy. The Executive solely is responsible for ensuring compliance with any applicable restrictions and should consult with his or her personal legal advisor on this matter.
6.17     Stock Ownership and Retention Guidelines . The exercise of any Options is subject to the Company’s Stock Ownership and Retention Guidelines, as in effect from time to time, in all respects.
6.18     Electronic Delivery . The Company may, in its sole discretion, deliver any documents related to the Option or other Awards granted to the Executive under the Plan by electronic means. The Executive hereby expressly consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
6.19     Governing Law; Jurisdiction . This Agreement shall be exclusively governed by, and construed in accordance with, the laws of the State of Illinois without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Illinois or of any other jurisdiction) that would cause the application of the laws of a jurisdiction other than the State of Illinois. All disputes and controversies arising between the parties are to be submitted for determination exclusively to the federal or state courts of the State of Illinois and by accepting the grant of the Option, the Executive expressly consents to the jurisdiction of such courts. Notwithstanding the foregoing, the Company may at its option seek interim and permanent injunctive relief before any competent court, tribunal or judicial forum, which in the absence of the foregoing provision, would have jurisdiction to grant the relief sought.
6.20     Entire Agreement . The Plan is incorporated by reference. The Plan, this Agreement (including any applicable addendum) and the Unfair Competition Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede, in their entirety, all prior undertakings and agreements of the Company and the Executive with respect to the subject matter hereof.
[ Signature Page Follows ]


IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer and the Executive acknowledges and agrees that by clicking on the box next to this Agreement in the section “Read and Acknowledge Award Documents” on the screen titled “Award Acceptance,” the Executive expressly agrees to be bound by the terms and conditions of the Award, including Executive’s electronic signature as the sole and exclusive means of executing this Agreement.

W.W. GRAINGER, INC.


By:         
Name:    James T. Ryan
Title:    Chairman, President
and Chief Executive Officer

W.W. GRAINGER, INC.
2015 Incentive Plan
Addendum to Stock Option Agreement

In addition to the terms of the W.W. Grainger, Inc. 2015 Incentive Plan (the “Plan”) and the Stock Option Agreement (the “Agreement”), the Option is subject to the following additional terms and conditions as set forth in this addendum (this “Addendum”) to the extent the Executive resides or is employed in one of the countries addressed herein. All capitalized terms contained in this Addendum shall have the same meaning as set forth in the Plan and the Agreement unless otherwise defined. If the Executive transfers residence or employment to a country identified in this Addendum, the additional terms and conditions for such country as reflected in this Addendum will apply to the Executive to the extent the Company determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and regulations, or to facilitate the operation and administration of the Option and the Plan (or the Company may establish alternative terms and conditions as may be necessary or advisable to accommodate the Executive’s transfer).

Belgium
Name: ________________________ Number of Shares: _____________________


Grant Date: ____________________ Option Price: _______________________
Acceptance of Option
In order for the Option to be subject to taxation at the time of grant, the Executive must affirmatively accept the Option in writing within 60 days of the Grant Date specified above by signing below and returning this original executed Addendum to:
Attn: Treasury Department
100 Grainger Parkway, Lake Forest, IL 60045, USA
mary.geraci@grainger.com
The Executive hereby accepts the Option granted by the Company on the Grant Date. The Executive acknowledges that the Executive has been advised to discuss the acceptance of the Option and the applicable tax treatment with a financial and/or tax advisor, and that the Executive’s decision to accept the Option is made in full knowledge.


Executive Signature:        _______________________________

Executive Printed Name:        _______________________________

Date of Acceptance:        _______________________________


If the Executive fails to affirmatively accept the Option in writing within 60 days of the Grant Date, the Option will not be subject to taxation at the time of grant but instead will be subject to taxation on the date the Executive exercises the Option (or such other treatment as may apply under Belgian tax law at the time of exercise).
Undertaking for Qualifying Option
If the Executive is accepting the Option in writing within 60 days of the Grant Date and wishes to have the Option subject to a lower valuation for Belgium tax purposes pursuant to article 43, §6 of the Belgian law of 26 March 1999, the Executive may agree and undertake to (a) not exercise the Option before December 31 of the third (3 rd ) calendar year following the calendar year in which the Grant Date falls, and (b) not transfer the Option under any circumstances (except upon rights the Executive’s heir might have in the Option upon the Executive’s death). If the Executive wishes to make this undertaking, the Executive must sign below and return this executed Addendum to the address listed above.
Executive Signature:        _______________________________

Executive Printed Name:        _______________________________
Payment of Exercise Price Limited to Cash Payment
Notwithstanding anything to the contrary in the Agreement or the Plan, the Executive shall be permitted to pay the Option Price only by means of a cash payment.
Foreign Asset Reporting Information
The Executive is required to report any security or bank account (including a brokerage account) opened and maintained outside Belgium on the Executive’s annual tax return. In a separate report, the Executive is required to provide the National Bank of Belgium with the account details of any such foreign accounts (including the account number, bank name and country in which any such account was opened). This report, as well as additional information on how to complete it, can be found on the website of the National Bank of Belgium, www.nbb.be, under the Kredietcentrales / Centrales des crédits caption.
Canada
Accelerated Vesting upon Retirement
Notwithstanding anything in the Agreement or the Plan to the contrary, if the Executive’s employment or service is terminated by reason of retirement, the Option immediately shall fully vest, become exercisable and will expire on the earlier of (i) six (6) years from the Termination Date or (ii) the original expiration date of the Option. For purposes of the foregoing, “retirement” shall have the definition prescribed by local law.
No Exercise Using Previously Owned Shares
Notwithstanding any provision in the Agreement or the Plan to the contrary, the Executive may not pay the Option Price by tendering Shares already owned by the Executive.
Use of English Language
If the Executive is a resident of Quebec, by accepting the Option, the Executive acknowledges and agrees that it is the Executive’s wish that the Agreement, this Addendum, the Plan, as well as all other documents, notices and legal proceedings entered into, given or instituted pursuant to the Option, either directly or indirectly, be drawn up in English.
Utilisation de l’anglais . Si l’exécutif est un résident du Québec, en acceptant le Option, l l’exécutif reconnaît et accepte que ce est le souhait du l’exécutif que l’Accord , le présent Addenda, ainsi que tous autres documents, avis et procédures judiciaires, exécutés, donnés ou intentés en vertu de le Option, liés directement ou indirectement, soient rédigés en anglais.

Mexico
Accelerated Vesting upon Retirement
Notwithstanding anything in the Agreement or the Plan to the contrary, if the Executive’s employment or service is terminated by reason of retirement, the Option immediately shall fully vest, become exercisable and will expire on the earlier of (i) six (6) years from the Termination Date or (ii) the original expiration date of the Option. For purposes of the foregoing, “retirement” shall have the definition prescribed by local law.
Commercial Relationship
The Executive expressly recognizes that participation in the Plan and the Company’s grant of the Option does not constitute an employment relationship between the Executive and the Company. The Executive has been granted the Option as a consequence of the commercial relationship between the Company and the Employer, and the Employer is the Executive’s sole employer. Based on the foregoing, (a) the Executive expressly recognizes that the Plan and the benefits derived from participation in the Plan do not establish any rights between the Executive and the Company or the Employer, (b) the Plan and the benefits derived from participation in the Plan are not part of the employment conditions and/or benefits provided by the Company or the Employer, and (c) any modifications or amendments to the Plan by the Company, or a termination of the Plan by the Company, shall not constitute a change or impairment of the terms and conditions of the Executive’s employment with the Employer.
Extraordinary Item of Compensation
The Executive expressly acknowledges and agrees that participation in the Plan is a result of the discretionary and unilateral decision of the Company, as well as the Executive’s free and voluntary decision to participate in the Plan in accord with the terms and conditions of the Plan, the Agreement, the Unfair Competition Agreement and this Addendum. As such, the Executive acknowledges and agrees that the Company may, in its sole discretion, amend and/or discontinue the Executive’s participation in the Plan at any time and without any liability. The value of the Option is an extraordinary item of compensation outside the scope of the employment contract, if any. The Option is not a part of the Executive’s regular or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits, or any similar payments, which are the exclusive obligations of the Employer.

Netherlands
Waiver of Termination Rights
The Executive waives any and all rights to compensation or damages as a result of any termination of employment for any reason whatsoever, insofar as those rights result or may result from (a) the loss or diminution in value of such rights or entitlements under the Plan or (b) the Executive ceasing to have rights under, or ceasing to be entitled to any Awards under the Plan as a result of such termination.

Portugal
Use of English Language
The Executive hereby expressly declares that the Executive has full knowledge of the English language and has read, understood and fully accepted and agreed with the terms and conditions established in the Plan, the Agreement, the Unfair Competition Agreement and this Addendum.
Uso da Língua Inglesa
Por meio do presente, o Executivo declara que Executivo possui pleno conhecimento da língua inglesa e que leu, compreendeu, e livremente aceita e concorda com os termos e condiçoes estabelecidas no Plano, o Acordo, o Acordo de Concorrência Desleal e este Adendo.

United Kingdom
Income Tax and Social Insurance Contribution Withholding
The following provision shall replace Article IV of the Agreement:
Regardless of any action the Company and the Employer take with respect to any or all income tax, primary and secondary Class 1 National Insurance contributions, payroll tax or other tax-related withholding attributable to or payable in connection with or pursuant to the grant, vesting, or exercise of the Option or the release or assignment of the Option for consideration, or the receipt of any other benefit in connection with the Option (“Tax-Related Items”), the Executive acknowledges that the ultimate liability for all Tax-Related Items legally due by the Executive is and remains the Executive’s responsibility and that the Company and the Employer: (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant of the Option, the vesting of the Option, the exercise of the Option and the sale of any Shares acquired pursuant to the Option, and (ii) do not commit to structure the terms of the Option or any aspect of the Option to reduce or eliminate the Executive’s liability for Tax-Related Items.
As a condition to the settlement of the Option following the date of exercise, the Company and/or the Employer shall be entitled to withhold and the Executive agrees to pay, or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy, all obligations of the Company and/or the Employer to account to HM Revenue & Customs (“HMRC”) for any Tax-Related Items. In this regard, the Executive authorizes the Company or the Employer to withhold all applicable Tax-Related Items legally payable by the Executive from any wages/salary or other cash compensation payable to the Executive. Alternatively, or in addition, if permissible under applicable law, the Executive authorizes the Company, at its discretion and pursuant to such procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Executive by one or a combination of the following: (i) withholding otherwise deliverable whole Shares; (ii) arranging for the sale of whole Shares otherwise deliverable to the Executive (on the Executive’s behalf and at the Executive’s direction pursuant to this authorization); or (iii) withholding from the proceeds of the sale of any Shares acquired upon the exercise of the Option. If the obligation for Tax-Related Items is satisfied by withholding a number of whole Shares as described herein, the Executive shall be deemed to have been issued the full number of whole Shares issued upon the exercise of the Option, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Option. If, by the date on which the event giving rise to the Tax-Related Items occurs (the “Chargeable Event”), the Executive has relocated to a country other than the United Kingdom (the “U.K.”), the Executive acknowledges that the Company or the Employer may be required to withhold or account for Tax-Related Items in more than one country, including the U.K. The Executive also agrees that the Company may determine the amount of Tax-Related Items to be withheld and accounted for by reference to the maximum applicable rates, without prejudice to any right which the Executive may have to recover any overpayment from the relevant tax authorities.
The Executive shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to account to HMRC with respect to the Chargeable Event that cannot be satisfied by the means previously described. If payment or withholding is not made within 90 days after the end of the U.K. tax year in which the Chargeable Event occurs or such other period specified in section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003 (the “Due Date”), the Executive agrees that the amount of any uncollected Tax-Related Items shall (assuming the Executive is not a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended), constitute a loan owed by the Executive to the Company or the Employer, as effective on the Due Date. The Executive agrees that the loan will bear interest at the then-current HMRC Official Rate and it will be immediately due and repayable, and the Company may recover it at any time thereafter by any of the means referred to above. If any of the foregoing methods of collection are not allowed under applicable laws or if the Executive fails to comply with the Executive’s obligations in connection with the Tax-Related Items as described in this Article IV , the Company may refuse to deliver any Shares otherwise payable upon the exercise of the Option.
Exclusion of Claim
The Executive acknowledges and agrees that the Executive will have no entitlement to compensation or damages, insofar as such entitlement arises or may arise from the Executive’s ceasing to have rights under or to be entitled to exercise the Option as a result of such termination (whether the termination is in breach of contract or otherwise), or from the loss or diminution in value of the Option. Upon the grant of the Option, the Executive shall be deemed to have irrevocably waived any such entitlement.

United States
Accelerated Vesting upon Retirement Eligibility
Notwithstanding anything in the Agreement or the Plan to the contrary, if the Executive’s employment or service is terminated prior to the Option Vesting Date due to the Executive’s retirement, the Option immediately shall fully vest, become exercisable and will expire on the earlier of (i) six (6) years from the Termination Date or (ii) the original expiration date of the Option. For purposes of the foregoing, “retirement” shall mean the Executive’s termination of service with (i) 25 years of service, (ii) 20 years of service and attainment of age 55, or (iii) attainment of age 60.
* * * * *



Exhibit 10.2


W.W. GRAINGER, INC.
2015 Incentive Plan
Restricted Stock Unit Agreement
This Restricted Stock Unit Agreement (this “Agreement”), dated as of April 1, 2016 (the “Grant Date”), is entered into between W.W. Grainger, Inc., an Illinois corporation (the “Company”), and you as the executive (the “Executive”), who is employed by the Company or a Subsidiary of the Company (the “Employer”).
In consideration of the Executive’s agreement to enter into an Unfair Competition Agreement with the Company concurrently with this Agreement on the Grant Date (the “Unfair Competition Agreement”), the Company desires to grant the Executive restricted stock units (the “RSUs”) providing for the issuance of shares of the Company’s common stock (“Shares”) pursuant to the W.W. Grainger, Inc. 2015 Incentive Plan (the “Plan”) and the Executive desires to enter into the Unfair Competition Agreement and accept such RSUs on the terms and conditions set forth in this Agreement, the Plan and the Unfair Competition Agreement.
Capitalized terms used but not defined in this Agreement have the meanings specified in the Plan.
In consideration of the mutual provisions set forth in this Agreement and in the Unfair Competition Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Grants
1.01 Grants . Subject to the terms and conditions of this Agreement, the Plan and the Unfair Competition Agreement (the terms of which are hereby incorporated herein by reference) and effective on the Grant Date, the Company hereby grants to the Executive the number of RSUs as specified in the April 1, 2016 Award grant in the Executive’s electronic investment account maintained with the brokerage firm/third party service provider engaged by the Company in connection with the operation of the Plan (the “Administrator”). Each RSU represents a contractual right to receive one (1) Share upon the satisfaction of the terms and conditions of this Agreement.
ARTICLE II
Provisions Relating to RSUs
2.01 Vesting of RSUs . If the Executive remains continuously employed by the Employer (or any other Subsidiary or Affiliate) until the vesting date specified in the grant notice (the “RSU Vesting Date”), the RSUs shall become fully vested on such date and the Executive shall be entitled to receive the underlying Shares as provided herein. The RSUs shall not vest before the RSU Vesting Date unless otherwise provided or permitted by the Plan or this Agreement.
2.02     Effect of Termination of Employment . If the Executive’s employment or service is terminated prior to the RSU Vesting Date for any reason whatsoever other than the Executive’s death or Disability (defined below), the Executive shall cease vesting in the RSUs as of the Executive’s Termination Date (defined below) and the RSUs shall be forfeited in their entirety. If the Executive is a resident of, or employed in, the United States, “Termination Date” shall mean the effective date of termination of the Executive’s employment. If the Executive is a resident of, or employed outside of, the United States, “Termination Date” shall mean the earliest of (i) the date on which notice of termination is provided to the Executive, (ii) the last day of the Executive’s active service with the Employer or (iii) the last day on which the Executive is an employee of the Employer, as determined in each case without including any required advanced notice period and irrespective of the status of the termination under local labor or employment laws.
2.03 Effect of Death or Disability of the Executive . If the Executive’s employment or service is terminated prior to the RSU Vesting Date due to the Executive’s death or Disability, the RSUs immediately shall fully vest. For purposes of this Agreement, “Disability” shall have the same meaning as defined in the Plan, subject to modification as may be required to conform to the laws of the Executive’s country of residence (and country of employment, if different).
2.04 Settlement . Upon the RSU Vesting Date, the Company shall, as soon as practicable, settle the RSUs by registering Shares in the Executive’s name and delivering such Shares to the Executive’s electronic stock plan account maintained by the Administrator. At the discretion of the Committee, and subject to such policies and procedures as it may adopt from time to time, the Executive’s RSUs may be settled in the form of: (i) cash, to the extent settlement in Shares (a) is prohibited under applicable law, (b) would require the Executive, the Company or the Employer to obtain the approval of any governmental and/or regulatory body in the Executive’s country of residence (and country of employment, if different), or (c) is administratively burdensome or (ii) Shares, but the Company may require the Executive to immediately sell such Shares if necessary to comply with applicable law (in which case, the Executive hereby expressly authorizes the Company to issue sales instructions in relation to such Shares on the Executive’s behalf).
2.05 Dividend Equivalents . Prior to the RSU Vesting Date, the Executive shall be entitled to receive cash dividend equivalent payments equal to any cash dividends and other distributions paid with respect to a number of Shares underlying the RSUs held by the Executive. If the Company declares any dividends payable in Shares (rather than in cash), the Executive shall be entitled to additional RSUs equal to the Fair Market Value of such Share dividends; provided, such additional RSUs shall be subject to the same vesting, forfeiture and transferability requirements and restrictions that apply to the original RSUs with respect to which they relate.
ARTICLE III
Recoupment
3.01     Recoupment in Event of Misconduct . If the Board of Directors of the Company (the “Board”) determines that the Executive has committed fraud against the Company or has been engaged in any criminal conduct that involves or is related to the Company and such Executive is entitled to receive performance shares, stock options, restricted stock units or cash incentive compensation (“Incentive Compensation”), then the Company shall recover from the Executive such Incentive Compensation, in whole or in part, for any period of time, as it deems appropriate under the circumstances. The Board shall have sole discretion in determining whether the Executive’s conduct was in compliance with applicable law or Company policy and the extent to which the Company will seek recovery of the Incentive Compensation notwithstanding any other remedies available to the Company. If the Executive engages in misconduct or is believed to have engaged in misconduct, including but not limited to any violation of any of Executive’s obligations under the Unfair Competition Agreement, the Company shall be entitled to recover from the Executive, and the Executive shall re-pay any Awards received pursuant to the Plan and this Agreement, in whole or in part, for any period of time, as the Company deems appropriate under the circumstances.
3.02     Recoupment in Event of Materially Inaccurate Financial Results . If the Company has publicly filed materially inaccurate financial results (the “Subject Financials”), whether or not they result in a restatement, the Board has the discretion to recover any Incentive Compensation that was paid or settled to the Executive during the period covered by the Subject Financials as set forth herein. If the payment or settlement of Incentive Compensation would have been lower had the achievement of applicable financial performance goals been calculated based on restated financial results with respect to the Subject Financials, the Board may, if it determines appropriate in its sole discretion, recover the portion of the paid or settled Incentive Compensation in excess of the payment or settlement that would have been made based on restated financial results. The Company will not seek to recover Incentive Compensation received or settled more than three years after the date of the initial filing that contained the Subject Financials.
3.03     Implementation . For purposes of this Article III , the Executive expressly authorizes the Company to issue instructions, on behalf of the Executive, to the Administrator (and/or any other brokerage firm/third party service provider engaged by the Company to hold Shares and other amounts acquired under the Plan) to reconvey, transfer or otherwise return to the Company any Incentive Compensation subject to recoupment hereunder. Executive acknowledges and agrees that the Company’s rights hereunder shall not be affected in any way by any subsequent change in status, including retirement or termination of employment.
3.04     Forfeiture . To the extent any of the events set forth in Sections 3.01 or 3.02 occur before the Executive receives any Award due hereunder, any such Award shall be forfeited as determined by the Company in its sole discretion.
ARTICLE IV
Tax
4.01 Tax-Related Items . Regardless of any action the Company or the Employer takes with respect to any or all income tax (including U.S. federal, state and local taxes or non-U.S. taxes), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Executive acknowledges and agrees that the ultimate liability for all Tax-Related Items legally due by the Executive is and remains the Executive’s responsibility and that the Company an d the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant of the RSUs, the vesting of the RSUs, the subsequent sale of any Shares acquired pursuant to the RSUs and the receipt of any dividends or dividend equivalents and (ii) do not commit to structure the terms of the grant or any aspect of the RSUs to reduce or eliminate the Executive’s liability for Tax-Related Items.
4.02     Tax Withholding Obligations . Prior to the delivery of Shares upon the vesting of the RSUs, if the Executive’s country of residence (and country of employment, if different) requires withholding of Tax-Related Items, the Company shall withhold a sufficient number of whole Shares otherwise issuable upon the vesting of the RSUs that have an aggregate Fair Market Value sufficient to pay the minimum Tax-Related Items required to be withheld with respect to the Shares. In cases where the Fair Market Value of the number of whole Shares withheld is greater than the minimum Tax-Related Items required to be withheld, the Company shall make a cash payment to the Executive equal to the difference as soon as administratively practicable. The cash equivalent of the Shares withheld will be used to settle the obligation to withhold the Tax-Related Items. Alternatively, the Company and the Employer may withhold the minimum Tax-Related Items required to be withheld with respect to the Shares in cash from the Executive’s regular salary and/or wages or any other amounts payable to the Executive. In the event the withholding requirements are not satisfied through the withholding of Shares by the Company or through the withholding of cash from the Executive’s regular salary and/or wages or other amounts payable to the Executive, no Shares will be issued to the Executive (or the Executive’s estate) upon vesting of the RSUs unless and until satisfactory arrangements (as determined by the Committee) have been made by the Executive with respect to the payment of any Tax-Related Items that the Company or the Employer determines, in its sole discretion, must be withheld or collected with respect to such RSUs. If the obligation for the Executive’s Tax-Related Items is satisfied by withholding a number of Shares as described herein, the Executive shall be deemed to have been issued the full number of Shares issuable upon vesting, notwithstanding that a number of the Shares is held back solely for the purpose of paying the Tax-Related Items due as a result of the vesting or any other aspect of the Award.
    The Executive will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of the Executive’s participation in the Plan or the Executive’s acquisition of Shares that cannot be satisfied by the means described in this Section 4.02 . The Company may refuse to deliver any Shares due upon vesting of the RSUs if the Executive fails to comply with his or her obligations in connection with the Tax-Related Items as described herein. If the Executive is subject to taxation in more than one jurisdiction, the Executive acknowledges that the Company, the Employer or one or more of their respective Subsidiaries may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Executive hereby consents to any action reasonably taken by the Company and the Employer to meet his or her obligation for Tax-Related Items. By accepting this grant of RSUs, the Executive expressly consents to the withholding of Shares and/or withholding from the Executive’s regular salary and/or wages or other amounts payable to the Executive as provided for hereunder. All other Tax-Related Items related to the RSUs and any Shares delivered in payment thereof are the Executive’s sole responsibility.
ARTICLE V
International Arrangements
5.01 Exchange Controls . As a condition to this grant of RSUs, the Executive agrees to comply with any applicable foreign exchange laws, rules and regulations and hereby consents to any necessary, appropriate or advisable actions taken by the Company, the Employer or any of their respective Subsidiaries as may be required to comply with any applicable laws, rules and regulations of the Executive’s country of residence (and country of employment, if different).
5.02     Foreign Asset and Account Reporting Requirements . The Executive acknowledges that there may be certain foreign asset and/or account reporting requirements which may affect the Executive’s ability to acquire or hold Shares acquired under the Plan or cash received from participating in the Plan (including from any dividends or dividend equivalent payments) in a brokerage or bank account outside the Executive’s country of residence (and country of employment, if different). The Executive may be required to report such accounts, assets or transactions to the tax or other authorities in the Executive’s country of residence (and country of employment, if different). The Executive acknowledges and agrees that it is his or her personal responsibility to be compliant with such regulations.
5.03     Country Specific Addendum . Notwithstanding any provisions of this Agreement to the contrary, the RSUs shall be subject to any special terms and conditions for the Executive’s country of residence (and country of employment, if different) set forth in the addendum to this Agreement (“Addendum”). If the Executive transfers residence and/or employment to another country reflected in an Addendum at the time of transfer, the special terms and conditions for such country will apply to the Executive to the extent the Company determines, in its sole discretion, that the application of such special terms and conditions is necessary or advisable in order to comply with local law, rules and regulations or to facilitate the operation and administration of the RSUs and the Plan (or the Company may establish alternative terms and conditions as may be necessary or advisable to accommodate the Executive’s transfer). In all circumstances, any applicable Addendum shall constitute part of this Agreement.
5.04     Controlling Language . The Executive acknowledges and agrees that it is the Executive’s express intent that this Agreement, the Plan, the Unfair Competition Agreement and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the RSUs be drawn up in English. If the Executive has received this Agreement, the Plan, the Unfair Competition Agreement or any other documents related to the RSUs translated into a language other than English and the meaning of any translated version is different than the English version, the English version will control.
ARTICLE VI
Miscellaneous
6.01 Restriction on Transferability . Except to the extent expressly provided in the Plan or this Agreement, the RSUs may not be sold, transferred, pledged, assigned, or otherwise alienated at any time other than by will or by the laws of descent and distribution. Any attempt to do so contrary to the provisions hereof shall be null and void.
6.02 Rights as Shareholder . The Executive shall not have voting or any other rights as a shareholder of the Company with respect to the Shares issuable upon the vesting of RSUs until the date of issuance of such Shares. Upon settlement of the RSUs, the Executive will obtain, with respect to the Shares received in such settlement, full voting and other rights as a shareholder of the Company.
6.03 Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Executive, the Company, and all other Persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.
6.04 No Employment Rights . This Agreement and the Executive’s participation in the Plan are not and shall not be interpreted to: (i) form an employment contract or relationship with the Company, the Employer or any of their respective Subsidiaries; (ii) confer upon the Executive any right to continue in the employ of the Company, the Employer or any of their respective Subsidiaries; or (iii) interfere with the ability of the Company, the Employer or any of their respective Subsidiaries to terminate the Executive’s employment at any time.
6.05     Nature of Grant . In accepting the grant hereunder, the Executive acknowledges and agrees that: (i) the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time; (ii) the Executive has read the Plan and any Awards granted under it shall be subject to all of the terms and conditions of the Plan, including but not limited to the exclusive right of the Committee to interpret and determine the terms and provisions of the Plan and this Agreement and to make all determinations necessary or advisable for the administration of the Plan, all of which interpretations and determinations shall be final and binding; (iii) the Award does not create any contractual or other right to receive future grants of Awards, benefits in lieu of Awards, or any other Plan benefits in the future; (iv) nothing contained in this Agreement is intended to create or enlarge any other contractual obligations between the Company or the Employer and the Executive; (v) any grant under the Plan, including any grant of Awards, is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long service option, pension, or retirement benefits or similar payments; (vi) the Executive is voluntarily participating in the Plan; (vii) the future value of the Shares underlying the Award granted hereunder is unknown and cannot be predicted with certainty; and (viii) neither the Company, the Employer nor any of their respective Subsidiaries shall be liable for any change in value of the Award, the amount realized upon settlement of the Award or the amount realized upon a subsequent sale of any Shares acquired upon settlement of the Award, resulting from any fluctuation of the United States Dollar/local currency foreign exchange rate. Without limiting the generality of the foregoing, the Committee shall have the discretion to adjust the terms and conditions of any Award to correct for any windfalls or shortfalls in such Award which, in the Committee’s determination, arise from factors beyond the Executive’s control; provided, however, that the Committee’s authority with respect to any Award to a “covered employee,” as defined in Section 162(m)(3) of the Code, shall be limited to decreasing, and not increasing, such Award.
6.06 Compliance with Law . The Company shall not be required to issue or deliver any Shares pursuant to this Agreement pending compliance with all applicable securities and other laws, rules and regulations (including any registration requirements or tax withholding requirements) and compliance with the rules and practices of any stock exchange upon which the Shares are listed.
6.07 Amendment . This Agreement may be amended by a writing which specifically states that it is amending this Agreement executed by (i) the Company and the Executive, (ii) the Committee, so long as a copy of such amendment is delivered to the Executive, and provided that no such amendment adversely affecting the rights of the Executive hereunder may be made without the Executive’s written consent or (iii) the Committee in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision.
6.08 Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary. Any notice to be given to the Executive shall be addressed to the Executive at the address listed in the Employer’s records or to the Executive’s electronic stock plan account held at the Company’s third party provider. By a notice given pursuant to this Section 6.08 , either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.
6.09 Severability . If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any provision of this Agreement (or part of such provision) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such provision (or part of such provision) to the fullest extent possible while remaining lawful and valid.
6.10 Construction . The RSUs are being issued pursuant to Article 8 (Restricted Stock and Restricted Stock Units) of the Plan. The RSUs are subject to the terms of the Plan. The Executive acknowledges receipt of the Plan booklet which contains the entire Plan, and the Executive represents and warrants that the Executive has read the Plan. Additional copies of the Plan are available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with an express provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect. The words “including,” “includes,” or “include” are to be read as listing non-exclusive examples of the matters referred to, whether or not words such as “without limitation” or “but not limited to” are used in each instance.
6.11 Waiver of Right to Jury Trial . EACH OF THE PARTIES KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THE OPTION, THE PLAN OR THIS AGREEMENT.
6.12 Waiver; No Third Party Beneficiaries . A waiver by the Company of a breach of any provision of this Agreement by the Executive shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Executive. This Agreement shall not be construed to create any third party beneficiary rights.
6.13 Data Privacy .
(i) Pursuant to applicable personal Data (defined below) protection laws, the collection, processing and transfer of the Executive’s personal Data is necessary for the Company’s administration of the Plan and the Executive’s participation in the Plan. The Executive expressly and voluntarily (a) acknowledges, consents and agrees to the collection, use, processing and/or transfer of personal Data as described herein; and (b) authorizes Data recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for purposes of implementing, administering and managing the Executive’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Executive’s behalf to a broker or other third party with whom the Executive may elect to deposit any Shares acquired pursuant to the Plan. For purposes of this Section 6.13 , “Data” means certain personal information about the Executive including (but not limited to) the Executive’s name, home address and telephone number, date of birth, social security number or other employee identification number, salary, nationality, job title, any Share ownership and details of any Award or any other entitlement to Shares awarded, canceled, purchased, vested, unvested or outstanding in the Executive’s favor for the purpose of managing and administering the Plan.
(ii)    Data may be provided by the Executive or collected, where lawful, from third parties, and the Company, the Employer and any third party service providers will process the Data collected hereunder for the purpose of implementing, administering and managing the Executive’s participation in the Plan. The Company and the Employer will transfer Data as necessary for the purpose of implementation, administration and management of the Executive’s participation in the Plan, and the Company and the Employer may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. These recipients may be located throughout the world. Data processing will take place through electronic and non-electronic means in accordance with applicable law and the Company and the Employer’s policies and procedures as in effect from time to time. The Executive may, at any time, seek to exercise his or her rights provided under applicable personal Data protection laws by contacting his or her local human resources manager.
6.14     Private Placement . The grant of the RSUs is not intended to be a public offering of securities in the Executive’s country of residence (and country of employment, if different). The Company has not submitted any registration statement, prospectus or other filing with the local securities authorities (unless otherwise required under local law).
6.15     No Advice Regarding Grant . Neither the Company nor the Employer is providing any tax, legal or financial advice, nor is the Company nor the Employer making any recommendations regarding the RSUs, the Executive’s participation in the Plan or the Executive’s acquisition or sale of the underlying Shares. The Executive is hereby advised to consult with the Executive’s own personal tax, legal and financial advisors regarding participation in the Plan before taking any action related to the Plan.    
6.16      Securities Law Restrictions . The Executive acknowledges that, depending on the Executive’s country of residence (and country of employment, if different), the Executive may be subject to insider trading restrictions and/or market abuse laws, which may affect the Executive’s ability to acquire or sell Shares or rights to Shares (e.g., RSUs) under the Plan during such times as the Executive is considered to have “inside information” regarding the Company or its business (as defined by the laws in the Executive’s country of residence and/or employment). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading or other policy. The Executive solely is responsible for ensuring compliance with any applicable restrictions and should consult with his or her personal legal advisor on this matter.
6.17     Electronic Delivery . The Company may, in its sole discretion, deliver any documents related to the RSUs or other Awards granted to the Executive under the Plan by electronic means. The Executive hereby expressly consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
6.18     Governing Law; Jurisdiction . This Agreement shall be exclusively governed by, and construed in accordance with, the laws of the State of Illinois without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Illinois or of any other jurisdiction) that would cause the application of the laws of a jurisdiction other than the State of Illinois. All disputes and controversies arising between the parties are to be submitted for determination exclusively to the federal or state courts of the State of Illinois and by accepting the grant of RSUs, the Executive expressly consents to the jurisdiction of such courts. Notwithstanding the foregoing, the Company may at its option seek interim and permanent injunctive relief before any competent court, tribunal or judicial forum, which in the absence of the foregoing provision, would have jurisdiction to grant the relief sought.
6.19     Entire Agreement . The Plan is incorporated by reference. The Plan, this Agreement (including any applicable addendum) and the Unfair Competition Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede, in their entirety, all prior undertakings and agreements of the Company and the Executive with respect to the subject matter hereof.
[ Signature Page Follows ]


IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer and the Executive acknowledges and agrees that by clicking on the box next to this Agreement in the section “Read and Acknowledge Award Documents” on the screen titled “Award Acceptance,” the Executive expressly agrees to be bound by the terms and conditions of the Award, including Executive’s electronic signature as the sole and exclusive means of executing this Agreement.

W.W. GRAINGER, INC.


By:         
Name:    James T. Ryan
Title:    Chairman, President
and Chief Executive Officer


W.W. GRAINGER, INC.
2015 Incentive Plan
Addendum to Restricted Stock Unit Agreement
In addition to the terms of the W.W. Grainger, Inc. 2015 Incentive Plan (the “Plan”) and the Restricted Stock Unit Agreement (the “Agreement”), the RSUs are subject to the following additional terms and conditions as set forth in this addendum (this “Addendum”) to the extent the Executive resides or is employed in one of the countries addressed herein. All capitalized terms contained in this Addendum shall have the same meaning as set forth in the Plan and the Agreement unless otherwise defined. If the Executive transfers residence or employment to a country identified in this Addendum, the additional terms and conditions for such country as reflected in this Addendum will apply to the Executive to the extent the Company determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and regulations, or to facilitate the operation and administration of the RSUs and the Plan (or the Company may establish alternative terms and conditions as may be necessary or advisable to accommodate the Executive’s transfer).
Belgium

Foreign Asset Reporting Information

The Executive is required to report any security or bank account (including a brokerage account) opened and maintained outside Belgium on the Executive’s annual tax return. In a separate report, the Executive is required to provide the National Bank of Belgium with the account details of any such foreign accounts (including the account number, bank name and country in which any such account was opened). This report, as well as additional information on how to complete it, can be found on the website of the National Bank of Belgium, www.nbb.be , under the Kredietcentrales / Centrales des crédits caption.

Canada
RSUs Payable in Shares Only
Notwithstanding any provision in the Agreement or the Plan to the contrary, vested RSUs shall be payable in Shares only (and shall not be settled in cash).
Accelerated Vesting upon Retirement
Notwithstanding anything in the Agreement or the Plan to the contrary, if the Executive’s employment or service is terminated by reason of retirement, the RSUs immediately shall fully vest. For purposes of the foregoing, “retirement” shall have the definition prescribed by local law.
Use of English Language
If the Executive is a resident of Quebec, by accepting the RSUs, the Executive acknowledges and agrees that it is the Executive’s wish that the Agreement, this Addendum, the Plan, as well as all other documents, notices and legal proceedings entered into, given or instituted pursuant to the RSUs, either directly or indirectly, be drawn up in English.
Utilisation de l’anglais
Si l’exécutif est un résident du Québec, en acceptant le RSUs, l l’exécutif reconnaît et accepte que ce est le souhait du l’exécutif que l’Accord , le présent Addenda, ainsi que tous autres documents, avis et procédures judiciaires, exécutés, donnés ou intentés en vertu de le RSUs, liés directement ou indirectement, soient rédigés en anglais.
Mexico
Accelerated Vesting upon Retirement
Notwithstanding anything in the Agreement or the Plan to the contrary, if the Executive’s employment or service is terminated by reason of retirement, the RSUs immediately shall fully vest. For purposes of the foregoing, “retirement” shall have the definition prescribed by local law.
Commercial Relationship
The Executive expressly recognizes that participation in the Plan and the Company’s grant of the RSUs does not constitute an employment relationship between the Executive and the Company. The Executive has been granted RSUs as a consequence of the commercial relationship between the Company and the Employer, and the Employer is the Executive’s sole employer. Based on the foregoing, (a) the Executive expressly recognizes that the Plan and the benefits derived from participation in the Plan do not establish any rights between the Executive and the Company or the Employer, (b) the Plan and the benefits derived from participation in the Plan are not part of the employment conditions and/or benefits provided by the Company or the Employer, and (c) any modifications or amendments to the Plan by the Company, or a termination of the Plan by the Company, shall not constitute a change or impairment of the terms and conditions of the Executive’s employment with the Employer.
Extraordinary Item of Compensation
The Executive expressly acknowledges and agrees that participation in the Plan is a result of the discretionary and unilateral decision of the Company, as well as the Executive’s free and voluntary decision to participate in the Plan in accord with the terms and conditions of the Plan, the Agreement, the Unfair Competition Agreement and this Addendum. As such, the Executive acknowledges and agrees that the Company may, in its sole discretion, amend and/or discontinue the Executive’s participation in the Plan at any time and without any liability. The value of the RSUs is an extraordinary item of compensation outside the scope of the employment contract, if any. The RSUs are not a part of the Executive’s regular or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits, or any similar payments, which are the exclusive obligations of the Employer.
Netherlands
Waiver of Termination Rights
The Executive waives any and all rights to compensation or damages as a result of any termination of employment for any reason whatsoever, insofar as those rights result or may result from (a) the loss or diminution in value of such rights or entitlements under the Plan or (b) the Executive ceasing to have rights under, or ceasing to be entitled to any Awards under the Plan as a result of such termination.
Portugal
Use of English Language
The Executive hereby expressly declares that the Executive has full knowledge of the English language and has read, understood and fully accepted and agreed with the terms and conditions established in the Plan, the Agreement, the Unfair Competition Agreement and this Addendum.
Uso da Língua Inglesa
Por meio do presente, o Executivo declara que Executivo possui pleno conhecimento da língua inglesa e que leu, compreendeu, e livremente aceita e concorda com os termos e condiçoes estabelecidas no Plano, o Acordo, o Acordo de Concorrência Desleal e este Adendo.

United Kingdom
Income Tax and Social Insurance Contribution Withholding
The following provision shall replace Article IV of the Agreement:
Regardless of any action the Company and the Employer take with respect to any or all income tax, primary and secondary Class 1 National Insurance contributions, payroll tax or other tax-related withholding attributable to or payable in connection with or pursuant to the grant, vesting, or the release or assignment of the RSUs for consideration, or the receipt of any other benefit in connection with the RSUs (“Tax-Related Items”), the Executive acknowledges that the ultimate liability for all Tax-Related Items legally due by the Executive is and remains the Executive’s responsibility and that the Company and the Employer: (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant of the RSUs, the vesting of the RSUs, and the sale of any Shares acquired pursuant to the RSUs, and (ii) do not commit to structure the terms of the RSUs or any aspect of the RSUs to reduce or eliminate the Executive’s liability for Tax-Related Items.
As a condition to the settlement of the RSUs following the RSU Vesting Date, the Company and/or the Employer shall be entitled to withhold and the Executive agrees to pay, or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy, all obligations of the Company and/or the Employer to account to HM Revenue & Customs (“HMRC”) for any Tax-Related Items. In this regard, the Executive authorizes the Company or the Employer to withhold all applicable Tax-Related Items legally payable by the Executive from any wages/salary or other cash compensation payable to the Executive. Alternatively, or in addition, if permissible under applicable law, the Executive authorizes the Company, at its discretion and pursuant to such procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Executive by one or a combination of the following: (i) withholding otherwise deliverable whole Shares; (ii) arranging for the sale of whole Shares otherwise deliverable to the Executive (on the Executive’s behalf and at the Executive’s direction pursuant to this authorization); or (iii) withholding from the proceeds of the sale of any Shares acquired upon the vesting of the RSUs. If the obligation for Tax-Related Items is satisfied by withholding a number of whole Shares as described herein, the Executive shall be deemed to have been issued the full number of whole Shares issued upon vesting of the RSUs, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the RSUs. If, by the date on which the event giving rise to the Tax-Related Items occurs (the “Chargeable Event”), the Executive has relocated to a country other than the United Kingdom (the “U.K.”), the Executive acknowledges that the Company or the Employer may be required to withhold or account for Tax-Related Items in more than one country, including the U.K. The Executive also agrees that the Company may determine the amount of Tax-Related Items to be withheld and accounted for by reference to the maximum applicable rates, without prejudice to any right which the Executive may have to recover any overpayment from the relevant tax authorities.
The Executive shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to account to HMRC with respect to the Chargeable Event that cannot be satisfied by the means previously described. If payment or withholding is not made within 90 days after the end of the U.K. tax year in which the Chargeable Event occurs or such other period specified in section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003 (the “Due Date”), the Executive agrees that the amount of any uncollected Tax-Related Items shall (assuming the Executive is not a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended), constitute a loan owed by the Executive to the Company or the Employer, as effective on the Due Date. The Executive agrees that the loan will bear interest at the then-current HMRC Official Rate and it will be immediately due and repayable, and the Company may recover it at any time thereafter by any of the means referred to above. If any of the foregoing methods of collection are not allowed under applicable laws or if the Executive fails to comply with the Executive’s obligations in connection with the Tax-Related Items as described in this Article IV , the Company may refuse to deliver any Shares otherwise payable upon the vesting of the RSUs.
Exclusion of Claim
The Executive acknowledges and agrees that the Executive will have no entitlement to compensation or damages, insofar as such entitlement arises or may arise from the Executive’s ceasing to have rights under or to be entitled to vest in the RSUs as a result of such termination (whether the termination is in breach of contract or otherwise), or from the loss or diminution in value of the RSUs. Upon the grant of the RSUs, the Executive shall be deemed to have irrevocably waived any such entitlement.

* * * * *


RSU16
Exhibit 10.3

W.W. GRAINGER, INC.
2015 Incentive Plan
Performance Share Agreement

This Performance Share Agreement (this “Agreement”), dated as of January 1, 2016 (the “Grant Date”), is entered into between W.W. Grainger, Inc., an Illinois corporation (the “Company”), and you as the executive (the “Executive”), who is employed by the Company or a Subsidiary of the Company (the “Employer”).

In consideration of the Executive’s agreement to enter into an Unfair Competition Agreement with the Company concurrently with this Agreement on the Grant Date (the “Unfair Competition Agreement”), the Company desires to grant the Executive an award of performance shares (the “Performance Shares” or “Award”), providing for the issuance of shares of the Company’s common stock (“Shares”) pursuant to the W.W. Grainger, Inc. 2015 Incentive Plan (the “Plan”) based upon the Company’s attainment of certain long-term performance goals and the Executive desires to enter into the Unfair Competition Agreement and accept such Award on the terms and conditions set forth in this Agreement, the Plan and the Unfair Competition Agreement.

Capitalized terms used but not defined in this Agreement have the meanings specified in the Plan.

In consideration of the mutual provisions set forth in this Agreement and in the Unfair Competition Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I
Grants
1.01     Grants . Subject to the terms and conditions of this Agreement, the Plan and the Unfair Competition Agreement (the terms of which are hereby incorporated herein by reference) and effective on the Grant Date, the Company hereby grants to the Executive the number Performance Shares (the “Target Number”) as specified in the January 1, 2016 Award grant in the Executive’s electronic investment account maintained with the brokerage firm/third party service provider engaged by the Company in connection with the operation of the Plan (the “Administrator”). The actual number of Performance Shares subject to this Agreement shall be determined based upon the Company’s achievement of: (a) the net sales target for fiscal year 2018 (the “Net Sales Target”); and (b) the Company’s average return on invested capital for fiscal years 2016, 2017 and 2018 (the “ROIC Target”), in each case, as further defined in Article II below. For purposes hereof, “Measuring Period” means the period encompassing the Company’s fiscal years ended 2016, 2017 and 2018. The Performance Share payout will range from 0% to 200%. Each Performance Share represents a contractual right to receive one (1) Share upon the Company’s achievement of the Net Sales Target and the ROIC Target and the satisfaction of the terms and conditions of this Agreement.

ARTICLE II
Provisions Relating to Performance Shares

2.01      Net Sales Target . A portion of the actual number of Performance Shares subject to this Agreement shall be determined based upon the Company’s achievement of the Net Sales Target as follows:

If the Company’s Net Sales
for fiscal year 2018 are:
Actual Number of
Performance Shares:
< $11.2 Billion
0% of the Target Number
$11.7 Billion
50% of the Target Number
$ > 12.2 Billion
100% of the Target Number

For purposes of the foregoing, the level of achievement of the Net Sales Target shall be determined by the Committee in its sole discretion. Further, the actual number of Performance Shares subject to this Agreement based upon the Company’s achievement of the Net Sales Target shall be determined by applying straight-line interpolation rounded down to the nearest whole number of Performance Shares.

2.02      ROIC Target . A portion of the actual number of Performance Shares subject to this Agreement also shall be determined based upon the Company’s achievement of the ROIC Target as follows:

If the Company’s average ROIC
during the Measuring Period is:
Actual Number of
Performance Shares:
<21.6%
0% of the Target Number
23.8 %
50% of the Target Number
> 26.0%
100% of the Target Number

For purposes of the foregoing, the level of achievement of the ROIC Target shall be determined by the Committee in its sole discretion by calculating the Company’s return on invested capital for each applicable fiscal year by dividing (a) the Company’s operating earnings for the applicable fiscal year, by (b) the Company’s net working assets for the applicable fiscal year. Further, the actual number of Performance Shares subject to this Agreement based upon the Company’s achievement of the ROIC Target shall be determined by applying straight-line interpolation rounded down to the nearest whole number of Performance Shares.

2.03      Vesting of Performance Shares . If the Executive remains continuously employed by the Employer (or any other Subsidiary or Affiliate) through the last day of the Measuring Period (the “Performance Share Vesting Date”), the actual number of Performance Shares as determined pursuant to Sections 2.01 and 2.02 shall become fully vested on such date and the Executive shall be entitled to receive the underlying Shares as provided herein. The Performance Shares shall not vest before the Performance Share Vesting Date unless otherwise provided or permitted by the Plan or this Agreement, and any Performance Shares that do not vest shall be forfeited in full and the Executive shall have no further rights with respect to such Performance Shares. Each Performance Share that becomes vested as provided herein shall be settled in accordance with Section 2.07 .

2.04     Effect of Termination of Employment . If the Executive’s employment or service is terminated prior to the Performance Share Vesting Date for any reason whatsoever other than the Executive’s death, retirement or Disability (defined below), the Performance Shares shall be forfeited in their entirety. If the Executive is a resident of, or employed in, the United States, “Termination Date” shall mean the effective date of termination of the Executive’s employment. If the Executive is a resident of, or employed outside of, the United States, “Termination Date” shall mean the earliest of (i) the date on which notice of termination is provided to the Executive, (ii) the last day of the Executive’s active service with the Employer or (iii) the last day on which the Executive is an employee of the Employer, as determined in each case without including any required advanced notice period and irrespective of the status of the termination under local labor or employment laws.

2.05 Effect of Death or Retirement of the Executive . If the Executive’s employment or service is terminated prior to the Performance Share Vesting Date due to retirement of the Executive in accordance with the provisions of the applicable retirement plan or death, the Executive’s estate or the Executive will become vested in the number of Performance Shares (on the Performance Share Vesting Date) equal to the product of (x) the number of Performance Shares, if any, which subsequently become deliverable under Sections 2.01 and 2.02 above, multiplied by (y) a fraction, the numerator of which is the number of months during the Measuring Period that the Executive was employed by the Employer and the denominator of which is the total number of months in the Measuring Period, i.e., 36 months. For purposes of the foregoing calculation, the Executive will be deemed to have been employed by the Employer during the month that his employment terminates if, and only if, such termination occurs on or after the fifteenth (15 th ) calendar day of that month. Each Performance Share that becomes vested as provided herein shall be settled in accordance with Section 2.07 .

2.06     Effect of Disability of the Executive . If the Executive’s employment or service is terminated prior to the Performance Share Vesting Date due to the Executive’s Disability, the Executive will become vested in the number of Performance Shares (on the Performance Share Vesting Date) calculated in the same manner prescribed by Section 2.05 , provided, however, that if such termination of employment occurs during fiscal year 2016, then for purposes of such calculation the number of Performance Shares referred to in clause (x) of such calculation shall be determined as though the Company had met, but not exceeded, its sales growth target and one hundred percent (100%) of such Performance Shares had vested. Each Performance Share that becomes vested as provided herein shall be settled in accordance with Section 2.07 . For purposes of this Agreement, “Disability” shall have the same meaning as defined in the Plan, subject to modification as may be required to conform to the laws of the Executive’s country of residence (and country of employment, if different).

2.07 Settlement . Upon the Performance Share Vesting Date, the Company shall, as soon as practicable, settle the Performance Shares by registering Shares in the Executive’s name and delivering such Shares to the Executive’s electronic stock plan account maintained by the Administrator. At the discretion of the Committee, and subject to such policies and procedures as it may adopt from time to time, the Executive’s Performance Shares may be settled in the form of: (i) cash, to the extent settlement in Shares (a) is prohibited under applicable law, (b) would require the Executive, the Company or the Employer to obtain the approval of any governmental and/or regulatory body in the Executive’s country of residence (and country of employment, if different), or (c) is administratively burdensome or (ii) Shares, but the Company may require the Executive to immediately sell such Shares if necessary to comply with applicable law (in which case, the Executive hereby expressly authorizes the Company to issue sales instructions in relation to such Shares on the Executive’s behalf).

ARTICLE III
Recoupment
3.01     Recoupment in Event of Misconduct . If the Board of Directors of the Company (the “Board”) determines that the Executive has committed fraud against the Company or has been engaged in any criminal conduct that involves or is related to the Company and such Executive is entitled to receive performance shares, stock options, restricted stock units or cash incentive compensation (“Incentive Compensation”), then the Company shall recover from the Executive such Incentive Compensation, in whole or in part, for any period of time, as it deems appropriate under the circumstances. The Board shall have sole discretion in determining whether the Executive’s conduct was in compliance with applicable law or Company policy and the extent to which the Company will seek recovery of the Incentive Compensation notwithstanding any other remedies available to the Company. If the Executive engages in misconduct or is believed to have engaged in misconduct, including but not limited to any violation of any of Executive’s obligations under the Unfair Competition Agreement, the Company shall be entitled to recover from the Executive, and the Executive shall re-pay any Awards received pursuant to the Plan and this Agreement, in whole or in part, for any period of time, as the Company deems appropriate under the circumstances.
3.02     Recoupment in Event of Materially Inaccurate Financial Results . If the Company has publicly filed materially inaccurate financial results (the “Subject Financials”), whether or not they result in a restatement, the Board has the discretion to recover any Incentive Compensation that was paid or settled to the Executive during the period covered by the Subject Financials as set forth herein. If the payment or settlement of Incentive Compensation would have been lower had the achievement of applicable financial performance goals been calculated based on restated financial results with respect to the Subject Financials, the Board may, if it determines appropriate in its sole discretion, recover the portion of the paid or settled Incentive Compensation in excess of the payment or settlement that would have been made based on restated financial results. The Company will not seek to recover Incentive Compensation received or settled more than three years after the date of the initial filing that contained the Subject Financials.
3.03     Implementation . For purposes of this Article III , the Executive expressly authorizes the Company to issue instructions, on behalf of the Executive, to the Administrator (and/or any other brokerage firm/third party service provider engaged by the Company to hold Shares and other amounts acquired under the Plan) to reconvey, transfer or otherwise return to the Company any Incentive Compensation subject to recoupment hereunder. Executive acknowledges and agrees that the Company’s rights hereunder shall not be affected in any way by any subsequent change in status, including retirement or termination of employment.

3.04     Forfeiture . To the extent any of the events set forth in Sections 3.01 or 3.02 occur before the Executive receives any Award due hereunder, any such Award shall be forfeited as determined by the Company in its sole discretion.

ARTICLE IV
Tax
4.01 Tax-Related Items . Regardless of any action the Company or the Employer takes with respect to any or all income tax (including U.S. federal, state and local taxes or non-U.S. taxes), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Executive acknowledges and agrees that the ultimate liability for all Tax-Related Items legally due by the Executive is and remains the Executive’s responsibility and that the Company and the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the Award, the subsequent sale of any Shares acquired pursuant to the Award and the receipt of any dividends and (ii) do not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Executive’s liability for Tax-Related Items.
4.02     Tax Withholding Obligations . Prior to the delivery of Shares upon the vesting of the Award, if the Executive’s country of residence (and country of employment, if different) requires withholding of Tax-Related Items, the Company shall withhold a sufficient number of whole Shares otherwise issuable upon the vesting of the Award that have an aggregate Fair Market Value sufficient to pay the minimum Tax-Related Items required to be withheld with respect to the Shares. In cases where the Fair Market Value of the number of whole Shares withheld is greater than the minimum Tax-Related Items required to be withheld, the Company shall make a cash payment to the Executive equal to the difference as soon as administratively practicable. The cash equivalent of the Shares withheld will be used to settle the obligation to withhold the Tax-Related Items. Alternatively, the Company and the Employer may withhold the minimum Tax-Related Items required to be withheld with respect to the Shares in cash from the Executive’s regular salary and/or wages or any other amounts payable to the Executive. In the event the withholding requirements are not satisfied through the withholding of Shares by the Company or through the withholding of cash from the Executive’s regular salary and/or wages or other amounts payable to the Executive, no Shares will be issued to the Executive (or the Executive’s estate) upon vesting of the Award unless and until satisfactory arrangements (as determined by the Committee) have been made by the Executive with respect to the payment of any Tax-Related Items that the Company or the Employer determines, in its sole discretion, must be withheld or collected with respect to such Performance Shares. If the obligation for the Executive’s Tax-Related Items is satisfied by withholding a number of Shares as described herein, the Executive shall be deemed to have been issued the full number of Shares issuable upon vesting, notwithstanding that a number of the Shares is held back solely for the purpose of paying the Tax-Related Items due as a result of the vesting or any other aspect of the Award.
The Executive will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of the Executive’s participation in the Plan or the Executive’s acquisition of Shares that cannot be satisfied by the means described in this Article IV . The Company may refuse to deliver any Shares due upon vesting of the Award if the Executive fails to comply with his or her obligations in connection with the Tax-Related Items as described herein. If the Executive is subject to taxation in more than one jurisdiction, the Executive acknowledges that the Company, the Employer or one or more of their respective Subsidiaries may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Executive hereby consents to any action reasonably taken by the Company and the Employer to meet his or her obligation for Tax-Related Items. By accepting this grant of the Award, the Executive expressly consents to the withholding of Shares and/or withholding from the Executive’s regular salary and/or wages or other amounts payable to the Executive as provided for hereunder. All other Tax-Related Items related to the Award and any Shares delivered in payment thereof are the Executive’s sole responsibility.

ARTICLE V
International Arrangements
5.01 Exchange Controls . As a condition to this grant Award, the Executive agrees to comply with any applicable foreign exchange laws, rules and regulations and hereby consents to any necessary, appropriate or advisable actions taken by the Company, the Employer or any of their respective Subsidiaries as may be required to comply with any applicable laws, rules and regulations of the Executive’s country of residence (and country of employment, if different).
5.02     Foreign Asset and Account Reporting Requirements . The Executive acknowledges that there may be certain foreign asset and/or account reporting requirements which may affect the Executive’s ability to acquire or hold Shares acquired under the Plan or cash received from participating in the Plan (including from any dividends or dividend equivalent payments) in a brokerage or bank account outside the Executive’s country of residence (and country of employment, if different). The Executive may be required to report such accounts, assets or transactions to the tax or other authorities in the Executive’s country of residence (and country of employment, if different). The Executive acknowledges and agrees that it is his or her personal responsibility to be compliant with such regulations.
5.03     Country Specific Addendum . Notwithstanding any provisions of this Agreement to the contrary, the Award shall be subject to any special terms and conditions for the Executive’s country of residence (and country of employment, if different) set forth in the addendum to this Agreement (“Addendum”). If the Executive transfers residence and/or employment to another country reflected in an Addendum at the time of transfer, the special terms and conditions for such country will apply to the Executive to the extent the Company determines, in its sole discretion, that the application of such special terms and conditions is necessary or advisable in order to comply with local law, rules and regulations or to facilitate the operation and administration of the Award and the Plan (or the Company may establish alternative terms and conditions as may be necessary or advisable to accommodate the Executive’s transfer). In all circumstances, any applicable Addendum shall constitute part of this Agreement.
5.04     Controlling Language . The Executive acknowledges and agrees that it is the Executive’s express intent that this Agreement, the Plan, the Unfair Competition Agreement and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the Award be drawn up in English. If the Executive has received this Agreement, the Plan, the Unfair Competition Agreement or any other documents related to the Award translated into a language other than English and the meaning of any translated version is different than the English version, the English version will control.
ARTICLE VI
Miscellaneous
6.01 Restriction on Transferability . Except to the extent expressly provided in the Plan or this Agreement, the Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated at any time other than by will or by the laws of descent and distribution. Any attempt to do so contrary to the provisions hereof shall be null and void.
6.02 Rights as Shareholder . The Executive shall not have voting or any other rights as a shareholder of the Company with respect to the Shares issuable upon the vesting of Performance Shares until the date of issuance of such Shares. Upon settlement of the Award, the Executive will obtain, with respect to the Shares received in such settlement, full voting and other rights as a shareholder of the Company.
6.03 Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Executive, the Company, and all other Persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.
6.04 No Employment Rights . This Agreement and the Executive’s participation in the Plan are not and shall not be interpreted to: (i) form an employment contract or relationship with the Company, the Employer or any of their respective Subsidiaries; (ii) confer upon the Executive any right to continue in the employ of the Company, the Employer or any of their respective Subsidiaries; or (iii) interfere with the ability of the Company, the Employer or any of their respective Subsidiaries to terminate the Executive’s employment at any time.
6.05     Nature of Grant . In accepting the grant hereunder, the Executive acknowledges and agrees that: (i) the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time; (ii) the Executive has read the Plan and any Awards granted under it shall be subject to all of the terms and conditions of the Plan, including but not limited to the exclusive right of the Committee to interpret and determine the terms and provisions of the Plan and this Agreement and to make all determinations necessary or advisable for the administration of the Plan, all of which interpretations and determinations shall be final and binding; (iii) the Award does not create any contractual or other right to receive future grants of Awards, benefits in lieu of Awards, or any other Plan benefits in the future; (iv) nothing contained in this Agreement is intended to create or enlarge any other contractual obligations between the Company or the Employer and the Executive; (vi) any grant under the Plan, including any grant of Performance Shares, is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long service option, pension, or retirement benefits or similar payments; (vii) the Executive is voluntarily participating in the Plan; (viii) the future value of the Shares underlying the Award granted hereunder is unknown and cannot be predicted with certainty; and (ix) neither the Company, the Employer nor any of their respective Subsidiaries shall be liable for any change in value of the Award, the amount realized upon settlement of the Award or the amount realized upon a subsequent sale of any Shares acquired upon settlement of the Award, resulting from any fluctuation of the United States Dollar/local currency foreign exchange rate. Without limiting the generality of the foregoing, the Committee shall have the discretion to adjust the terms and conditions of any Award of Performance Shares to correct for any windfalls or shortfalls in such Award which, in the Committee’s determination, arise from factors beyond the Executive’s control; provided, however, that the Committee’s authority with respect to any Award to a “covered employee,” as defined in Section 162(m)(3) of the Code, shall be limited to decreasing, and not increasing, such Award.
6.06 Compliance with Law . The Company shall not be required to issue or deliver any Shares pursuant to this Agreement pending compliance with all applicable securities and other laws, rules and regulations (including any registration requirements or tax withholding requirements) and compliance with the rules and practices of any stock exchange upon which the Shares are listed.
6.07 Amendment . This Agreement may be amended by a writing which specifically states that it is amending this Agreement executed by (i) the Company and the Executive, (ii) the Committee, so long as a copy of such amendment is delivered to the Executive, and provided that no such amendment adversely affecting the rights of the Executive hereunder may be made without the Executive’s written consent or (iii) the Committee in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision.
6.08 Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary. Any notice to be given to the Executive shall be addressed to the Executive at the address listed in the Employer’s records or to the Executive’s electronic stock plan account held at the Company’s third party provider. By a notice given pursuant to this Section 6.08 , either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.
6.09 Severability . If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any provision of this Agreement (or part of such provision) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such provision (or part of such provision) to the fullest extent possible while remaining lawful and valid.
6.10 Construction . The Performance Shares are being issued pursuant to Article 9 of the Plan. Performance Shares are subject to the terms of the Plan. The Executive acknowledges receipt of the Plan booklet which contains the entire Plan, and the Executive represents and warrants that the Executive has read the Plan. Additional copies of the Plan are available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with an express provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect. The words “including,” “includes,” or “include” are to be read as listing non-exclusive examples of the matters referred to, whether or not words such as “without limitation” or “but not limited to” are used in each instance.
6.11 Waiver of Right to Jury Trial . EACH OF THE PARTIES KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THE OPTION, THE PLAN OR THIS AGREEMENT.
6.12 Waiver; No Third Party Beneficiaries . A waiver by the Company of a breach of any provision of this Agreement by the Executive shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Executive. This Agreement shall not be construed to create any third party beneficiary rights.
6.13 Data Privacy .
(i) Pursuant to applicable personal Data (defined below) protection laws, the collection, processing and transfer of the Executive’s personal Data is necessary for the Company’s administration of the Plan and the Executive’s participation in the Plan. The Executive expressly and voluntarily (a) acknowledges, consents and agrees to the collection, use, processing and/or transfer of personal Data as described herein; and (b) authorizes Data recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for purposes of implementing, administering and managing the Executive’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Executive’s behalf to a broker or other third party with whom the Executive may elect to deposit any Shares acquired pursuant to the Plan. For purposes of this Section 6.13 , “Data” means certain personal information about the Executive including (but not limited to) the Executive’s name, home address and telephone number, date of birth, social security number or other employee identification number, salary, nationality, job title, any Share ownership and details of any Award or any other entitlement to Shares awarded, canceled, purchased, vested, unvested or outstanding in the Executive’s favor for the purpose of managing and administering the Plan.
(ii)    Data may be provided by the Executive or collected, where lawful, from third parties, and the Company, the Employer and any third party service providers will process the Data collected hereunder for the purpose of implementing, administering and managing the Executive’s participation in the Plan. The Company and the Employer will transfer Data as necessary for the purpose of implementation, administration and management of the Executive’s participation in the Plan, and the Company and the Employer may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. These recipients may be located throughout the world. Data processing will take place through electronic and non-electronic means in accordance with applicable law and the Company and the Employer’s policies and procedures as in effect from time to time. The Executive may, at any time, seek to exercise his or her rights provided under applicable personal Data protection laws by contacting his or her local human resources manager.
6.14     Private Placement . The grant of the Performance Shares is not intended to be a public offering of securities in the Executive’s country of residence (and country of employment, if different). The Company has not submitted any registration statement, prospectus or other filing with the local securities authorities (unless otherwise required under local law).
6.15     No Advice Regarding Grant . Neither the Company nor the Employer is providing any tax, legal or financial advice, nor is the Company nor the Employer making any recommendations regarding the Award, the Executive’s participation in the Plan or the Executive’s acquisition or sale of the underlying Shares. The Executive is hereby advised to consult with the Executive’s own personal tax, legal and financial advisors regarding participation in the Plan before taking any action related to the Plan.    
6.16      Securities Law Restrictions . The Executive acknowledges that, depending on the Executive’s country of residence (and country of employment, if different), the Executive may be subject to insider trading restrictions and/or market abuse laws, which may affect the Executive’s ability to acquire or sell Shares or rights to Shares (e.g., Performance Shares) under the Plan during such times as the Executive is considered to have “inside information” regarding the Company or its business (as defined by the laws in the Executive’s country of residence and/or employment). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading or other policy. The Executive solely is responsible for ensuring compliance with any applicable restrictions and should consult with his or her personal legal advisor on this matter.
6.17     Electronic Delivery . The Company may, in its sole discretion, deliver any documents related to the Award granted to the Executive under the Plan by electronic means. The Executive hereby expressly consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
6.18     Governing Law; Jurisdiction . This Agreement shall be exclusively governed by, and construed in accordance with, the laws of the State of Illinois without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Illinois or of any other jurisdiction) that would cause the application of the laws of a jurisdiction other than the State of Illinois. All disputes and controversies arising between the parties are to be submitted for determination exclusively to the federal or state courts of the State of Illinois and by accepting the grant of Performance Shares, the Executive expressly consents to the jurisdiction of such courts. Notwithstanding the foregoing, the Company may at its option seek interim and permanent injunctive relief before any competent court, tribunal or judicial forum, which in the absence of the foregoing provision, would have jurisdiction to grant the relief sought.
6.19     Entire Agreement . The Plan is incorporated by reference. The Plan, this Agreement (including any applicable addendum) and the Unfair Competition Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede, in their entirety, all prior undertakings and agreements of the Company and the Executive with respect to the subject matter hereof.
[ Signature Page Follows ]
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer and the Executive acknowledges and agrees that by clicking on the box next to this Agreement in the section “Read and Acknowledge Award Documents” on the screen titled “Award Acceptance,” the Executive expressly agrees to be bound by the terms and conditions of the Award, including Executive’s electronic signature as the sole and exclusive means of executing this Agreement.

W.W. GRAINGER, INC.


By:         
Name:    James T. Ryan
Title:    Chairman, President
and Chief Executive Officer

W.W. GRAINGER, INC.
2015 Incentive Plan
Addendum to Performance Share Agreement
In addition to the terms of the W.W. Grainger, Inc. 2015 Incentive Plan (the “Plan”) and the Restricted Stock Unit Agreement (the “Agreement”), the Performance Shares are subject to the following additional terms and conditions as set forth in this addendum (this “Addendum”) to the extent the Executive resides or is employed in one of the countries addressed herein. All capitalized terms contained in this Addendum shall have the same meaning as set forth in the Plan and the Agreement unless otherwise defined. If the Executive transfers residence or employment to a country identified in this Addendum, the additional terms and conditions for such country as reflected in this Addendum will apply to the Executive to the extent the Company determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and regulations, or to facilitate the operation and administration of the Performance Shares and the Plan (or the Company may establish alternative terms and conditions as may be necessary or advisable to accommodate the Executive’s transfer).
Canada
Performance Shares Payable in Shares Only
Notwithstanding any provision in the Agreement or the Plan to the contrary, vested Performance Shares shall be payable in Shares only (and shall not be settled in cash).
Accelerated Vesting upon Retirement
Notwithstanding anything in the Agreement or the Plan to the contrary, if the Executive’s employment or service is terminated by reason of retirement, the Performance Shares immediately shall fully vest. For purposes of the foregoing, “retirement” shall have the definition prescribed by local law.
Use of English Language
If the Executive is a resident of Quebec, by accepting the Performance Shares, the Executive acknowledges and agrees that it is the Executive’s wish that the Agreement, this Addendum, the Plan, as well as all other documents, notices and legal proceedings entered into, given or instituted pursuant to the Performance Shares, either directly or indirectly, be drawn up in English.
Utilisation de l’anglais
Si l’exécutif est un résident du Québec, en acceptant le Performance Shares, l l’exécutif reconnaît et accepte que ce est le souhait du l’exécutif que l’Accord , le présent Addenda, ainsi que tous autres documents, avis et procédures judiciaires, exécutés, donnés ou intentés en vertu de le Performance Shares, liés directement ou indirectement, soient rédigés en anglais.
United Kingdom
Income Tax and Social Insurance Contribution Withholding
The following provision shall replace Article IV of the Agreement:
Regardless of any action the Company and the Employer take with respect to any or all income tax, primary and secondary Class 1 National Insurance contributions, payroll tax or other tax-related withholding attributable to or payable in connection with or pursuant to the grant, vesting, or the release or assignment of the Performance Shares for consideration, or the receipt of any other benefit in connection with the Performance Shares (“Tax-Related Items”), the Executive acknowledges that the ultimate liability for all Tax-Related Items legally due by the Executive is and remains the Executive’s responsibility and that the Company and the Employer: (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Performance Shares, including the grant of the Performance Shares, the vesting of the Performance Shares, and the sale of any Shares acquired pursuant to the Performance Shares, and (ii) do not commit to structure the terms of the Performance Shares or any aspect of the Performance Shares to reduce or eliminate the Executive’s liability for Tax-Related Items.
As a condition to the settlement of the Performance Shares following the RSU Vesting Date, the Company and/or the Employer shall be entitled to withhold and the Executive agrees to pay, or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy, all obligations of the Company and/or the Employer to account to HM Revenue & Customs (“HMRC”) for any Tax-Related Items. In this regard, the Executive authorizes the Company or the Employer to withhold all applicable Tax-Related Items legally payable by the Executive from any wages/salary or other cash compensation payable to the Executive. Alternatively, or in addition, if permissible under applicable law, the Executive authorizes the Company, at its discretion and pursuant to such procedures as it may specify from time to time, to satisfy the obligations with regard to all Tax-Related Items legally payable by the Executive by one or a combination of the following: (i) withholding otherwise deliverable whole Shares; (ii) arranging for the sale of whole Shares otherwise deliverable to the Executive (on the Executive’s behalf and at the Executive’s direction pursuant to this authorization); or (iii) withholding from the proceeds of the sale of any Shares acquired upon the vesting of the Performance Shares. If the obligation for Tax-Related Items is satisfied by withholding a number of whole Shares as described herein, the Executive shall be deemed to have been issued the full number of whole Shares issued upon vesting of the Performance Shares, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Performance Shares. If, by the date on which the event giving rise to the Tax-Related Items occurs (the “Chargeable Event”), the Executive has relocated to a country other than the United Kingdom (the “U.K.”), the Executive acknowledges that the Company or the Employer may be required to withhold or account for Tax-Related Items in more than one country, including the U.K. The Executive also agrees that the Company may determine the amount of Tax-Related Items to be withheld and accounted for by reference to the maximum applicable rates, without prejudice to any right which the Executive may have to recover any overpayment from the relevant tax authorities.
The Executive shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to account to HMRC with respect to the Chargeable Event that cannot be satisfied by the means previously described. If payment or withholding is not made within 90 days after the end of the U.K. tax year in which the Chargeable Event occurs or such other period specified in section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003 (the “Due Date”), the Executive agrees that the amount of any uncollected Tax-Related Items shall (assuming the Executive is not a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended), constitute a loan owed by the Executive to the Company or the Employer, as effective on the Due Date. The Executive agrees that the loan will bear interest at the then-current HMRC Official Rate and it will be immediately due and repayable, and the Company may recover it at any time thereafter by any of the means referred to above. If any of the foregoing methods of collection are not allowed under applicable laws or if the Executive fails to comply with the Executive’s obligations in connection with the Tax-Related Items as described in this Article IV , the Company may refuse to deliver any Shares otherwise payable upon the vesting of the Performance Shares.
Exclusion of Claim
The Executive acknowledges and agrees that the Executive will have no entitlement to compensation or damages, insofar as such entitlement arises or may arise from the Executive’s ceasing to have rights under or to be entitled to vest in the Performance Shares as a result of such termination (whether the termination is in breach of contract or otherwise), or from the loss or diminution in value of the Performance Shares. Upon the grant of the Performance Shares, the Executive shall be deemed to have irrevocably waived any such entitlement.


* * * * *





CERTIFICATION
Exhibit 31.1
I, J. T. Ryan, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of W.W. Grainger, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 28, 2016
 
By:
/ s/ J. T. Ryan                                                         
Name:
J. T. Ryan
Title:
Chairman, President and Chief Executive Officer





CERTIFICATION
Exhibit 31.2
I, R. L. Jadin, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of W.W. Grainger, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 28, 2016
 
By:
/ s/ R. L. Jadin                                                        
Name:
R. L. Jadin
Title:
Senior Vice President and Chief Financial Officer





Exhibit 32
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
In connection with the Quarterly Report on Form 10-Q of W.W. Grainger, Inc. (“Grainger”) for the quarterly period ended June 30, 2016 , (the “Report”), J. T. Ryan, as Chairman, President and Chief Executive Officer of Grainger, and R. L. Jadin, as Senior Vice President and Chief Financial Officer of Grainger, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Grainger.

/s/ J. T. Ryan
J. T. Ryan
Chairman, President and Chief Executive Officer
July 28, 2016
 
 
 
/s/ R. L. Jadin
R. L. Jadin
Senior Vice President and Chief Financial Officer
July 28, 2016