W.W. Grainger, Inc. (GWW, NYSE)
Industry: Industrial Distribution
Annual report, fiscal year 2015


## GRAINGER \( ^{®} \) 
FOR THE ONES WHO GET IT DONE

2015 Annual Report



## For more information:

The Grainger Fact Book contains information about the company’s strategy, operations and business units. You can find the Fact Book on the Grainger Investor Relations website at grainger.com/investor.

Grainger’s Corporate Social Responsibility platform includes the company’s commitments to operating responsibly, valuing its people, sustaining the environment and serving its communities. To learn more about Grainger’s CSR efforts, please visit graingercsr.com.



# GRAINGER \( ^{®} \) 
FOR THE ONES WHO GET IT DONE

## To Our Shareholders:

In my 35 years in this industry, I've never seen a time like the one we are in right now, but I've also never seen an opportunity like the one in front of us.

The industrial economy has been under pressure from an unprecedented combination of declining oil and commodity prices, low inflation and a strong U.S. dollar. The competitive landscape is becoming more eclectic with new entrants and new technologies. And we are seeing dramatic changes in the way our customers purchase products and services; more and more, customers want to do business online and on-site at their operations.

Successful businesses adjust to the current realities of the market. At Grainger, we are facing into the challenges and creating opportunities to accelerate market share gains now and for the long term by investing in our business, even in this soft economy.

This past year we continued to invest in what makes us strong — our people, our infrastructure and the products and services that we offer. We strengthened our position to grow through new channels and in new markets, and we took action to improve our profitability. At the same time, we had to rebalance our investments toward the channels customers are using more often and improve our cost of doing business.

While 2015 was a tough year in many ways, it was also a year of great progress. Our financial strength and stability served us well, and we chose to continue to build for our future.

## 2015 FINANCIAL HIGHLIGHTS

• Sales for the year were $10 billion, flat versus 2014.

• Reported earnings per share of $11.58 increased 1 percent versus $11.45 in 2014; on an adjusted basis, earnings per share were $11.94, down 3 percent. Restructuring charges in several of our businesses and tax benefits resulted in net charges of $0.36 per share.

• In 2015, cash flow from operations was $1 billion. Gross capital expenditures for the year were $374 million versus $387 million in 2014, including expansion of the distribution center network in North America and investments in SAP.

• We adjusted our capital structure by completing a $1 billion public debt offering while receiving a AA– rating.

• In total, we returned $1.7 billion in cash to shareholders. Through our expanded share buyback program announced in April 2015, we repurchased 6.1 million shares of stock, approximately 9 percent of our outstanding share count, for $1.4 billion. We paid out $306 million in dividends, reflecting an 8 percent increase in the quarterly dividend over the prior year; 2015 was our 44th consecutive year of increased dividends.

## STRENGTHENING HOW WE WILL SERVE

For more than a decade we’ve been investing in the foundation of what makes great service possible — our product offering, supply chain, systems and eCommerce platform. Our foundation in North America is both high capacity and adaptable to changing customer behaviors. It runs the business we’ve got today and will launch the businesses and services we build in the future.

## Connecting our businesses in the Americas

This past year we successfully extended our U.S. SAP system to our business in Mexico and in early 2016 completed the installation in Canada as well. Operating on one North American SAP system is a competitive advantage. Having one common platform allows for better data visibility across our North American businesses and enables direct shipment to customers from distribution centers in Canada and Mexico, which we have been doing in the United States for more than 10 years.



## Improving customer service and efficiency

Serving our customers with the products they need quickly requires high availability and efficient distribution centers. In the United States, we broke ground on a 1.3 million square-foot facility in New Jersey. This facility is modeled after our Minooka, Ill., distribution center — it will be highly automated, highly efficient and set new standards for customer service in the Northeast. In Japan, our MonotaRO business began work on a new distribution center, located near Tokyo, to accommodate future growth. In Canada, our new Toronto distribution center has demonstrated better efficiency and throughput since opening last year, enabling us to dramatically improve service.

As our customers’ preferences shift to purchasing online and to having more of their orders shipped, we must improve our own network efficiency by rebalancing our investments. This past year we closed 49 branches in the United States, 16 branches in Canada and 16 branches at Fabory in Europe to better align with how our customers choose to do business with us.

We are using our foundation to deliver the service our customers expect, even as we redefine what that service will look like in the future. Going forward, we will lean on our foundation to provide the best products, availability and service where and how our customers want to be served.

## REDEFINING HOW WE WILL LEAD

Customer behaviors, their expectations and our industry are all changing and redefining how we lead. We understand how to go after a customer segment, break it down and use our foundation to build new capabilities and tailored offers. We believe there are great opportunities in this changing environment, and in 2015 we made bold moves to exceed our customers' expectations both now and in the future.

## Taking a segmented approach in the U.S.

To continue to adapt to how customers of different sizes buy differently, in 2015 we reorganized our U.S. sales and marketing teams to further accelerate market share gains with both large and medium-sized customers. We know that the middle market has distinct characteristics that require a more tailored approach. This past year we established a team focused solely on building a more compelling offer and go-to-market strategy for those medium-sized customers. In the future, we’ll continue to build our business for how our customers think, buy and act, even down to the individual buyer.

## Growing the online model

We have seen tremendous growth through our single channel online businesses in Japan with MonotaRO and in the United States with Zoro. In 2015, MonotaRO grew 29 percent in local currency while Zoro recorded $296 million in sales, a 62 percent increase over 2014.

We believe there is a compelling opportunity in western Europe to grow the online model, and in September 2015 we established a leading position in the United Kingdom MRO market with the acquisition of Cromwell Group (Holdings) Limited. This acquisition brings together Cromwell's product strength and customer relationships with Grainger's expertise in supply chain and eCommerce to accelerate growth in the core and online Cromwell business.

## ADAPTING FOR THE FUTURE

Grainger’s ability to adapt and stay ahead has set us apart for decades. Focusing our investments and priorities to best serve our customers, create a great environment for our team members and generate profitable returns for our shareholders guides how we run our business. Even during these dynamic and changing times, our path ahead is clear.



Our 2016 priorities are:

• Ensure an industry-leading customer experience across all businesses and geographies.

• Accelerate share gain with large customers in North America where we have the greatest advantage.

• Take advantage of the rapidly changing and profitable medium-sized customer segment and mitigate the rate of decline in the United States.

• Accelerate the rapid growth in revenue and earnings through our single channel online businesses MonotaRO, Zoro and Cromwell.

• Stabilize our Canadian business by keeping service high, adjusting the cost structure and continuing to diversify our customer base.

• Improve our cost structure by reducing management layers, adjusting the business to customer purchasing patterns and eliminating unnecessary costs throughout the business.

• Attract and retain team members who like to win and are driven to serve.

• Generate attractive returns for our shareholders.

## LOOKING FORWARD

I’m confident and excited about our future. Grainger is a financially strong and stable company, and we have the ability to create and deliver what our customers really need. Our strategy is sound and we have a tremendous opportunity to grow this business. We are investing for growth and making the decisions we need to make to be an even tougher competitor.

As CEO, my job is to lead our company today while also preparing it for the future. We must have a process that nurtures and grows the talent we need, now and going forward. In 2015, I named DG Macpherson our Chief Operating Officer. As we become a larger organization with more ways for our customers to do business with us, serving them well requires tighter alignment and stronger execution across all of our operations. I’m confident that with DG’s leadership, he and his team will help us focus to grow faster, more profitably and do what we do even better.

I believe Grainger is well-positioned to fulfill our mission to customers for many years to come. As we evolve, our company will look and feel different, but the core of who we are will remain the same. We’ll continue to be a trusted partner that our customers and communities can rely on, a business that operates with integrity and a workplace where team members can grow and succeed. We have a responsibility to hold true to what’s made this company special for almost 90 years, and you have my commitment that we will.

As we move ahead, I would like to thank Bill Hall, a Grainger director for 11 years. Bill will not stand for re-election in 2016. We appreciate the experience and judgment Bill has brought during his years of service to Grainger.

Grainger is the leader in this industry. It’s a position that we’ve earned over decades with the help of our team members, customers, supplier partners, communities and shareholders and for that I thank you. Together, we will continue to earn that position by listening to our customers and building a business that can serve them better than anyone else.



James T. Ryan

Chairman of the Board, President and Chief Executive Officer

February 29, 2016



## Board of Directors

## Rodney C. Adkins

Former Senior Vice President of International Business Machines Corporation, President of 3RAM Group LLC, Miami Beach, Fla.
(2, 3)

## Brian P. Anderson

Former Executive Vice President and Chief Financial Officer, OfficeMax Incorporated, Itasca, Ill.
(1, 2)

## V. Ann Hailey

Former President, Chief Executive Officer and Chief Financial Officer,
Famous Yard Sale, Inc., New Albany, Ohio
(1, 2)

## William K. Hall

Founding Partner, Procyon Advisors LLP,
Skokie, Ill.
(1, 2)

## Management

## Executive Management

Laura D. Brown
Senior Vice President,
Communications and Investor Relations

Joseph C. High
Senior Vice President
and Chief People Officer

John L. Howard
Senior Vice President
and General Counsel

Ronald L. Jadin
Senior Vice President
and Chief Financial Officer

DG Macpherson
Chief Operating Officer

James T. Ryan
Chairman, President
and Chief Executive Officer

## Stuart L. Levenick

Retired Group President, Caterpillar Inc.,
Peoria, Ill.
(2, 3, 1)

## Neil S. Novich

Former Chairman, President and Chief Executive Officer, Ryerson Inc., Chicago, Ill.
(1, 2)

## Michael J. Roberts

Former Global President and COO of McDonalds Corporation,
Founder of LYFE Kitchen, Chicago, Ill.
(2, 3)

## Gary L. Rogers

Former Vice Chairman,
General Electric Company, Fairfield, Conn.
(2, 3)

## Operating Management

Michael S. Ali
Senior Vice President
and Chief Information Officer

## Fred Costello

Vice President and President, Global Product Management

## John Kaul

Vice President and President,
Acklands–Grainger

## Michael Kerins

Vice President and President,
Cromwell

## Paul C. Miller

Vice President and President, Global eCommerce, Customer Information and Innovation

## James T. Ryan

Chairman, President and
Chief Executive Officer, W.W. Grainger, Inc.

## E. Scott Santi

Chairman and Chief Executive Officer,
Illinois Tool Works Inc., Glenview, Ill.
(1, 2)

## James D. Slavik

Chairman, Mark IV Capital, Inc.,
Newport Beach, Calif.
(2, 3)

(1) Member of Audit Committee
(2) Member of Board Affairs and Nominating Committee
(3) Member of Compensation Committee
+ Lead Director

## Debra S. Oler

Vice President and President, Large Customer, Latin America and Direct Sales

## David Rawlinson II

President, Online Business

## Paige Robbins

Senior Vice President, Global Supply Chain, Branch Network and Corporate Strategy

## Elizabeth Ubell

Vice President and President,
U.S. Medium Customer, Marketing and
Contact Centers



## Shareholder and Media Information

## Company Headquarters

W.W. Grainger, Inc.
100 Grainger Parkway
Lake Forest, Illinois 60045-5201
847.535.1000 Phone

## Annual Meeting

The 2016 Annual Meeting of Shareholders will be held at the company’s headquarters in Lake Forest, Illinois, at 10:00 a.m. CDT on Wednesday, April 27, 2016.

## Auditors

Ernst & Young LLP
155 North Wacker Drive
Chicago, Illinois 60606-1787

## Common Stock Listing

The company’s common stock is listed on the New York Stock Exchange under the trading symbol GWW.

## Transfer Agent, Registrar and Dividend Disbursing Agent

Instructions and inquiries regarding transfers, certificates, changes of title or address, lost or missing dividend checks, consolidation of accounts and elimination of multiple mailings should be directed to:
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
800.446.2617

## Dividend Direct Deposit

Shareholders of record have the opportunity to have their quarterly dividends electronically deposited directly into their checking, money market or savings accounts at financial institutions that participate in the automated clearinghouse system.
Shareholders who are interested in taking advantage of this service or would like more information on the program should contact Computershare.

## Investor Relations Contacts

Laura D. Brown
Senior Vice President, Communications and Investor Relations
847.535.0409

William D. Chapman
Senior Director, Investor Relations
847.535.0881

Michael P. Ferreter
Financial Communications Manager
847.535.1439

Upon written request to Investor Relations, we will provide, free of charge, a copy of our Form 10-K for the fiscal year ended December 31, 2015.

Grainger’s Annual Report, Form 10-K, Form 10-Q, proxy statement and other filings with the Securities and Exchange Commission, as well as the Fact Book and news releases including quarterly earnings and monthly sales, can be accessed free of charge at the Investor Relations section of the company’s website at www.grainger.com/investor. For more information, contact Investor Relations at 847.535.1000.

Requests for other company-related information should be made to Hugo Dubovoy, Jr., Vice President, Corporate Secretary, at the company’s headquarters.

## Media Relations Contact

Joseph Micucci
Director, Media Relations
847.535.0879

## Trademarks

ACKLANDS-GRAINGER, AIR HANDLER, CONDOR, FOR THE ONES WHO GET IT DONE, GRAINGER, GRAINGER and Design, GRAINGER FOR THE ONES WHO GET IT DONE and Design, GRAINGER.COM, GRAINGER.COM.MX, KEEPSTOCK, LUMAPRO, TOUGH GUY and WESTWARD are the trademarks or service marks of W.W. Grainger, Inc., which may be registered in the United States and/or other countries.

CROMWELL is the trademark of Cromwell Group (Holdings) Limited, which may be registered in the United States and/or other countries.

DAYTON and SPEEDAIRE are the trademarks of Dayton Electric Manufacturing Co., which may be registered in the United States and/or other countries.

FABORY is the trademark of Fabory Nederland B.V., which may be registered in the United States and/or other countries.

MONOTARO is the trademark of MonotARO Co., Ltd., which may be registered in the United States and/or other countries.

ZORO and ZORO CANADA are the trademarks of Zoro IP Holdings LLC, which may be registered in the United States and/or other countries.

All other trademarks and service marks are the property of their respective owners.

## Forward-Looking Statements

From time to time, in this Annual Report and Form 10-K, 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 under Item 1A: Risk Factors and elsewhere in the Form 10-K.

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.



Headquarters

W.W. Grainger, Inc.

100 Grainger Parkway

Lake Forest, Illinois 60045-5201

847.535.1000

www.grainger.com