Form 10-Q GRAINGER W W INC For: Jun 30

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July 30, 2015 1:46 PM EDT

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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, 2015

[ ] 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 65,975,137 shares of the Company’s Common Stock outstanding as of June 30, 2015.



	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, 2015 and 2014	3

	Condensed Consolidated Statements of Comprehensive Earnings for the Three and Six Months Ended June 30, 2015 and 2014	4

	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 6.	Exhibits	25

Signatures		26

EXHIBITS

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,
	2015			2014			2015			2014
Net sales	$	2,522,565		$	2,506,104		$	4,962,226		$	4,891,731
Cost of merchandise sold	1,449,133			1,425,418			2,795,052			2,735,074
Gross profit	1,073,432			1,080,686			2,167,174			2,156,657
Warehousing, marketing and administrative expenses	716,715			739,935			1,459,209			1,461,567
Operating earnings	356,717			340,751			707,965			695,090
Other income and (expense):
Interest income	277			413			469			1,053
Interest expense	(4,184		)	(2,757		)	(5,819		)	(5,620		)
Loss from equity method investment	(4,302		)	—			(4,302		)	—
Other non-operating income	484			177			726			345
Other non-operating expense	(306		)	(159		)	(2,714		)	(830		)
Total other expense	(8,031		)	(2,326		)	(11,640		)	(5,052		)
Earnings before income taxes	348,686			338,425			696,325			690,038
Income taxes	123,451			129,348			256,944			261,906
Net earnings	225,235			209,077			439,381			428,132
Less: Net earnings attributable to noncontrolling interest	4,687			3,162			7,818			5,564
Net earnings attributable to W.W. Grainger, Inc.	$	220,548		$	205,915		$	431,563		$	422,568
Earnings per share:
Basic	$	3.28		$	2.97		$	6.38		$	6.08
Diluted	$	3.25		$	2.94		$	6.32		$	6.00
Weighted average number of shares outstanding:
Basic	66,652,130			68,453,602			66,939,110			68,576,232
Diluted	67,317,131			69,341,885			67,647,689			69,509,125
Cash dividends paid per share	$	1.17		$	1.08		$	2.25		$	2.01

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

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,
	2015			2014			2015			2014
Net earnings	$	225,235		$	209,077		$	439,381		$	428,132
Other comprehensive earnings (losses):
Foreign currency translation adjustments:
Foreign currency translation adjustments, net of tax benefit of $0, $2,098, $0 and $75, respectively	9,061			23,309			(66,954		)	8,175
Net investment hedge, net of tax (expense) benefit of $0, $(1,987), $0 and $255, respectively	—			3,185			—			(409		)
Net foreign currency translation (loss)	9,061			26,494			(66,954		)	7,766
Defined postretirement benefit plan:
Reclassification adjustments related to amortization, net of tax benefit (expense) of $512, $(1,687), $1,021 and $(1,051), respectively	(810		)	6,031			(1,623		)	5,013
Derivative instrument change in fair value of cash flow hedge	245			(9		)	727			23
Comprehensive earnings, net of tax	233,731			241,593			371,531			440,934
Less: Comprehensive earnings (losses) attributable to noncontrolling interest
Net earnings	4,687			3,162			7,818			5,564
Foreign currency translation adjustments	(1,509		)	1,551			(1,802		)	3,030
Comprehensive earnings attributable to W.W. Grainger, Inc.	$	230,553		$	236,880		$	365,515		$	432,340

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

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, 2015		Dec 31, 2014
CURRENT ASSETS
Cash and cash equivalents	$	819,786	$	226,644
Accounts receivable (less allowances for doubtful
accounts of $20,600 and $22,121, respectively)	1,197,856		1,172,924
Inventories – net	1,302,977		1,356,396
Prepaid expenses and other assets	95,008		102,669
Deferred income taxes	60,295		61,387
Prepaid income taxes	47,824		47,529
Total current assets	3,523,746		2,967,549
PROPERTY, BUILDINGS AND EQUIPMENT	3,150,247		3,115,130
Less: Accumulated depreciation and amortization	1,825,696		1,790,784
Property, buildings and equipment – net	1,324,551		1,324,346
DEFERRED INCOME TAXES	17,360		16,718
GOODWILL	486,612		506,905
OTHER ASSETS AND INTANGIBLES – NET	474,640		467,531
TOTAL ASSETS	$	5,826,909	$	5,283,049

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, 2015			Dec 31, 2014
CURRENT LIABILITIES
Short-term debt	$	30,495		$	56,896
Current maturities of long-term debt	26,275			23,404
Trade accounts payable	498,416			554,088
Accrued compensation and benefits	155,048			191,696
Accrued contributions to employees’ profit sharing plans	70,130			178,076
Accrued expenses	255,910			245,300
Income taxes payable	10,828			12,256
Total current liabilities	1,047,102			1,261,716
LONG-TERM DEBT (less current maturities)	1,348,642			403,333
DEFERRED INCOME TAXES AND TAX UNCERTAINTIES	95,464			95,455
EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES	236,263			238,444
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; issued 109,659,219 shares	54,830			54,830
Additional contributed capital	975,147			948,340
Retained earnings	6,615,081			6,335,990
Accumulated other comprehensive losses	(162,721		)	(96,673		)
Treasury stock, at cost – 43,684,082 and 42,227,178 shares, respectively	(4,461,822		)	(4,032,615		)
Total W.W. Grainger, Inc. shareholders’ equity	3,020,515			3,209,872
Noncontrolling interest	78,923			74,229
Total shareholders' equity	3,099,438			3,284,101
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	5,826,909		$	5,283,049

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

W.W. Grainger, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)



	Six Months Ended
	June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	439,381		$	428,132
Provision for losses on accounts receivable	4,630			4,782
Deferred income taxes and tax uncertainties	1,995			(9,605		)
Depreciation and amortization	106,937			93,796
Stock-based compensation	27,043			28,988
(Gains) losses from non-cash charges and sales of assets	(51		)	14,576
Losses from equity method investment	4,302			—
Change in operating assets and liabilities – net of business acquisitions and divestitures:
Accounts receivable	(50,586		)	(98,574		)
Inventories	26,075			(13,497		)
Prepaid expenses and other current assets	6,929			(4,610		)
Trade accounts payable	(29,144		)	2,852
Accrued liabilities	(169,123		)	(127,930		)
Current income taxes payable	(847		)	1,601
Employment-related and other non-current liabilities	4,231			6,712
Other – net	(2,267		)	1,243
Net cash provided by operating activities	369,505			328,466
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings and equipment	(170,873		)	(156,210		)
Proceeds from sales of property, buildings and equipment	10,119			5,416
Equity method investment	(10,190		)	—
Net cash received for business divestitures	1,114			19,199
Other – net	(567		)	—
Net cash used in investing activities	(170,397		)	(131,595		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit	26,842			44,686
Payments against lines of credit	(46,649		)	(64,634		)
Proceeds from issuance of long-term debt and commercial paper borrowings	995,880			54,997
Payments of long-term debt and commercial paper	(30,597		)	(9,538		)
Proceeds from stock options exercised	35,549			31,816
Excess tax benefits from stock-based compensation	17,106			22,177
Purchase of treasury stock	(442,595		)	(235,847		)
Cash dividends paid	(153,906		)	(140,885		)
Net cash provided by (used in) financing activities	401,630			(297,228		)
Exchange rate effect on cash and cash equivalents	(7,596		)	1,420
NET CHANGE IN CASH AND CASH EQUIVALENTS	593,142			(98,937		)
Cash and cash equivalents at beginning of year	226,644			430,644
Cash and cash equivalents at end of period	$	819,786		$	331,707

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

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 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, 2014 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, 2014 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.

2. NEW ACCOUNTING STANDARDS

In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU which is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, changes the consolidation analysis required under U.S. GAAP for limited partnerships and other variable interest entities. Early adoption is permitted and the ASU allows for either retrospective or modified retrospective application. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In July 2015, the FASB announced a one-year delay in the effective date of 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. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU which is effective for fiscal years and interim periods beginning after December 15, 2015, changes the presentation of debt issuance costs in financial statements as a direct deduction from the related debt liability rather than as an asset. Early adoption is permitted and retrospective application is required. Effective June 30, 2015, the Company has adopted ASU 2015-03 and the Condensed Consolidated Balance Sheet was retroactively restated under the new presentation. The adoption of ASU 2015-03 did not have a material impact to the Company's consolidated financial statements, as existing debt issuance costs were immaterial.

In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU which is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, provides guidance to customers about whether a cloud computing arrangement includes a software license. Early adoption is permitted and the ASU allows for either retrospective or prospective application. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

3. DIVIDEND

On July 29, 2015, the Company’s Board of Directors declared a quarterly dividend of $1.17 per share, payable September 1, 2015, to shareholders of record on August 10, 2015.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. LONG-TERM DEBT

On June 11, 2015, the Company issued $1 billion of unsecured 4.60% Senior Notes (the "Notes") that mature on June 15, 2045. The Notes require no principal payments until the maturity date and interest is payable semi-annually on June 15 and December 15, beginning on December 15, 2015. Prior to December 15, 2044, the Company may redeem the 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 US treasury security with a maturity comparable to the remaining term of the 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 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 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 Notes.

The approximate fair value of the Company's Notes is $1 billion as of June 30, 2015, and approximates the carrying amount. The estimated fair value of the Company’s Notes was based on available external pricing data and current market rates for similar debt instruments, among other factors, and are classified as level 2 inputs within the fair value hierarchy.

5. 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.

As of June 30, 2015 and December 31, 2014, the fair value of the Company's interest rate swap included on the balance sheet as a liability under Employment-related and other noncurrent liabilities was $1 million and $2 million, respectively. 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, 2015 and December 31, 2014.

6. EQUITY METHOD INVESTMENT

In May 2015, the Company invested in a limited liability company (“LLC”) 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. The Company will fund its share of operating expenses of the entity through January 2019 and receive tax credits in proportion to its equity investment. The investment will be accounted for under the equity method of accounting. As of June 30, 2015, the investment balance was $6 million and is included on the balance sheet under Other assets and intangibles-net. During the period, the Company recorded $4 million in equity losses and the tax benefit of energy tax credits is reflected in the Company’s effective tax rate.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. 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,
	2015			2014			2015			2014
Service cost	$	2,532		$	2,252		$	5,064		$	4,503
Interest cost	2,412			2,637			4,824			5,274
Expected return on assets	(2,594		)	(2,060		)	(5,188		)	(4,119		)
Amortization of transition asset	—			(35		)	—			(71		)
Amortization of unrecognized losses	378			195			756			390
Amortization of prior service credits	(1,700		)	(1,814		)	(3,400		)	(3,627		)
Net periodic benefit costs	$	1,028		$	1,175		$	2,056		$	2,350

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. During the three and six months ended June 30, 2015, the Company contributed $1.7 million and $2.1 million, respectively, to the trust.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. 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., the Company’s Canadian business. Other businesses include Zoro, the single channel business in the United States, and operations in Europe, Asia and Latin America. These other businesses individually 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, 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



	Three Months Ended June 30, 2014
	United States			Canada			Other Businesses			Total
Total net sales	$	1,992,955		$	264,046		$	298,926		$	2,555,927
Intersegment net sales	(49,358		)	(42		)	(423		)	(49,823		)
Net sales to external customers	$	1,943,597		$	264,004		$	298,503		$	2,506,104
Segment operating earnings	$	365,099		$	19,212		$	(456	)	$	383,855



	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



	Six Months Ended June 30, 2014
	United States			Canada			Other Businesses			Total
Total net sales	$	3,890,265		$	518,342		$	573,832		$	4,982,439
Intersegment net sales	(90,225		)	(88		)	(395		)	(90,708		)
Net sales to external customers	$	3,800,040		$	518,254		$	573,437		$	4,891,731
Segment operating earnings	$	718,786		$	40,508		$	8,019		$	767,313

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	United States		Canada		Other Businesses		Total
Segment assets:
June 30, 2015	$	2,188,815	$	348,508	$	356,992	$	2,894,315
December 31, 2014	$	2,181,521	$	394,342	$	345,987	$	2,921,850

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,
	2015			2014			2015			2014
Operating earnings:
Total operating earnings for operating segments	$	394,190		$	383,855		$	779,192		$	767,313
Unallocated expenses and eliminations	(37,473		)	(43,104		)	(71,227		)	(72,223		)
Total consolidated operating earnings	$	356,717		$	340,751		$	707,965		$	695,090



	June 30, 2015		Dec 31, 2014
Assets:
Total assets for operating segments	$	2,894,315	$	2,921,850
Other current and non-current assets	2,069,484		2,113,900
Unallocated assets	863,110		247,299
Total consolidated assets	$	5,826,909	$	5,283,049

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 assets increased by $616 million at June 30, 2015 compared to December 31, 2014, primarily due to increased cash balances from the issuance of $1 billion in long-term debt.

Intersegment net sales for the U.S. segment increased by $38 million for the six months of 2015 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.

Other current and non-current assets decreased by $44 million at June 30, 2015 compared to December 31, 2014, primarily due to lower goodwill and intangible balances, as a result of foreign currency translation.

W.W. Grainger, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. 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,
	2015			2014			2015			2014
Net earnings attributable to W.W. Grainger, Inc. as reported	$	220,548		$	205,915		$	431,563		$	422,568
Distributed earnings available to participating securities	(742		)	(727		)	(1,510		)	(1,562		)
Undistributed earnings available to participating securities	(1,418		)	(1,666		)	(2,879		)	(3,765		)
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders	218,388			203,522			427,174			417,241
Undistributed earnings allocated to participating securities	1,418			1,666			2,879			3,765
Undistributed earnings reallocated to participating securities	(1,404		)	(1,645		)	(2,850		)	(3,716		)
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders	$	218,402		$	203,543		$	427,203		$	417,290
Denominator for basic earnings per share – weighted average shares	66,652,130			68,453,602			66,939,110			68,576,232
Effect of dilutive securities	665,001			888,283			708,579			932,893
Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities	67,317,131			69,341,885			67,647,689			69,509,125
Earnings per share two-class method
Basic	$	3.28		$	2.97		$	6.38		$	6.08
Diluted	$	3.25		$	2.94		$	6.32		$	6.00

10. 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.

11. SUBSEQUENT EVENTS

On July 30, 2015, the Company announced an agreement to acquire Cromwell Group (Holdings) Limited, together with its subsidiaries, a distributor of MRO products headquartered in Leicester, England, for £310 million GBP, subject to customary adjustments. The transaction is expected to be completed in early September 2015. The acquisition will be funded with debt, both in the United Kingdom and United States.

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 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 more than 2 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 Gross Domestic Product (GDP), Industrial Production, Exports and Business Investment. In the United States, sales also tend to positively correlate with Business Inventory. In Canada, sales also tend to positively correlate with oil prices. The table below provides these estimated indicators for 2015:



	United States		Canada
	2015 Forecast (April)	2015 Forecast (July)	2015 Forecast (April)	2015 Forecast (July)
GDP	2.8%	2.2%	1.9%	1.5%
Industrial Production	1.9%	1.5%	1.3%	(1.8)%
Exports	2.2%	2.2%	3.9%	2.9%
Business Investment	7.9%	5.3%	(1.2)%	(2.1)%
Business Inventory	3.1%	2.7%	—	—
Oil Prices	$48/barrel	$55/barrel	$48/barrel	$55/barrel
Source: Global Insight

In the United States, exports and business investment are two major indicators of MRO spend. According to Global Insight, export volumes slowed in the first half of 2015 due to the strengthening U.S. dollar and port slowdowns on the West Coast. For the remainder of the year, exports are projected to grow in the low single digits. The large decline in crude oil prices over the past year had a significant impact on business investment, specifically within energy-related industries where companies have reduced capital spending. The United States business was negatively impacted as it has customers in these industries, but not to the extent of the Canadian business which is heavily dependent on the natural resources sector.

The light and heavy manufacturing customer end markets, which represent approximately 30% of Grainger’s sales, have historically correlated with manufacturing employment levels and manufacturing output. The United States Department of Labor reported an increase of 1.3% in manufacturing employment levels from June 2014 to June 2015. According to the Federal Reserve, manufacturing output increased 1.8% from June 2014 to June 2015. Grainger’s heavy and light manufacturing customer end-markets performed consistent with these indicators as sales to these customer end-markets increased in the low to mid-single digits for the six months of 2015.

According to Global Insight, the Canadian economy deteriorated through the first half of 2015 as the Canadian dollar weakened relative to the U.S. dollar to new six-year lows and as oil and commodity prices remained low. As a result, the outlook for business investment is weak, especially as companies in energy-related geographies and sectors plan to further curtail capital spending, according to the Bank of Canada. These market factors led to weaker performance in the Alberta region, which represents slightly more than one-third of sales in the Canadian business and is heavily dependent on the oil and gas industries. Sales to the oil and gas sector for the Canadian business were down in the mid-teens for the six months of 2015.

Outlook

On July 17, 2015, Grainger revised the 2015 sales growth guidance from a range of 1 to 4 percent to a range of 0 to 2 percent and also revised the 2015 earnings per share guidance from a range of $12.25 to $12.95 to a range of $12.00 to $12.50. The revised sales and earnings per share guidance reflects expectations of slower macroeconomic growth.

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 2015 and 2014. Grainger completed the WFS Enterprises, Inc. (WFS) acquisition in the third quarter of 2014 and announced plans to close the business in Brazil in the fourth quarter of 2014, both of which were immaterial individually and in the aggregate.

Results of Operations – Three Months Ended June 30, 2015

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



	Three Months Ended June 30,
	As a Percent of Net Sales				Percent Increase/(Decrease)
	2015		2014		Percent Increase/(Decrease)
Net sales	100.0	%	100.0	%	0.7	%
Cost of merchandise sold	57.4		56.9		1.7
Gross profit	42.6		43.1		(0.7	)
Operating expenses	28.5		29.5		(3.1	)
Operating earnings	14.1		13.6		4.7
Other income (expense)	(0.3	)	(0.1	)	245.3
Income taxes	4.9		5.2		(4.6	)
Noncontrolling interest	0.2		0.1		48.2
Net earnings attributable to W.W. Grainger, Inc.	8.7	%	8.2	%	7.1	%

Grainger’s net sales of $2,523 million for the second quarter of 2015 increased 1% compared with sales of $2,506 million for the comparable 2014 quarter. The 1% increase for the quarter consisted of the following:



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

The increase in net sales was led by growth in sales to government, diversified commercial services and light manufacturing customers. The sales growth was partially offset by declines to the natural resources, heavy manufacturing, resellers and contractors customer end markets. Refer to the Segment Analysis below for further details.

Gross profit of $1,073 million for the second quarter of 2015 decreased 1%. The gross profit margin during the second quarter of 2015 decreased 0.5 percentage point when compared to the same period in 2014, primarily driven by faster growth with lower margin customers, lower supplier rebates tied to lower-than-expected volume and price deflation versus cost inflation driven by foreign exchange.

Operating expenses of $717 million for the second quarter of 2015 decreased 3% from $740 million for the comparable 2014 quarter. Operating expenses in 2015 included $2 million in costs associated with shutting down the business in Brazil and restructuring the business in Europe. Operating expenses in 2014 included a $14 million charge related to the transition of the employee retirement plan in Europe. Excluding these charges from both years, operating expenses decreased 2%, driven primarily by lower payroll and benefits and savings from productivity initiatives in the United States, partially offset by $25 million in incremental growth and infrastructure spending.

Operating earnings for the second quarter of 2015 were $357 million, an increase of 5% compared to the second quarter of 2014. Excluding the charges in both years mentioned above, operating earnings increased 1%, driven by higher sales and positive operating expense leverage, partially offset by lower gross profit margins.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net earnings attributed to W.W. Grainger, Inc. for the second quarter of 2015 increased by 7% to $221 million from $206 million in the second quarter of 2014. Diluted earnings per share of $3.25 in the second quarter of 2015 were up 11% versus the $2.94 for the second quarter of 2014, due to higher earnings and lower average shares outstanding.

The table below reconciles reported diluted earnings per share determined in accordance with generally accepted accounting principles (GAAP) in the United States to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.



	Three Months Ended
	June 30,
	2015	2014	%
Diluted earnings per share reported	$3.25	$2.94	11	%
Restructuring costs in Brazil and Europe	0.02	—
Retirement plan transition	—	0.15
Diluted earnings per share adjusted	$3.27	$3.09	6	%

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 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 8 to the Condensed Consolidated Financial Statements.

United States

Net sales were $2,031 million for the second quarter of 2015, an increase of $38 million, or 2%, when compared with net sales of $1,993 million for the same period in 2014. The 2% increase for the quarter consisted of the following:



	Percent Increase/(Decrease)
Volume	2
Intercompany sales to Zoro	1
Price	(1)
Total	2%

The increase in net sales was led by mid-single digit growth to government, commercial service and light manufacturing customers. Retail customers were up in the low single digits and heavy manufacturing and contractors were down in the low single digits. Net sales to resellers were down in the high single digits and the natural resources customer end market was down in the low teens. Low oil prices negatively impacted the performance of the heavy manufacturing and natural resources customer end markets. Sales to Zoro also contributed to sales growth as the U.S. business' supply chain network is Zoro's primary source of inventory.

The gross profit margin for the second quarter of 2015 decreased 0.7 percentage point compared to the same period in 2014, primarily driven by faster growth with large customers, price deflation exceeding cost deflation and the lower transfer price on intercompany sales to Zoro. Excluding sales to Zoro, the gross profit margin decreased 0.4 percentage point versus prior year.

Operating expenses were down slightly in the second quarter of 2015 versus the second quarter of 2014, driven by lower payroll and benefits and savings from productivity initiatives, partially offset by $23 million of incremental spending on growth initiatives such as new sales representatives, eCommerce and inventory management solutions.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Operating earnings of $370 million for the second quarter of 2015 increased 1% from $365 million for the second quarter of 2014, driven by higher sales and positive operating expense leverage, partially offset by lower gross margins.

Canada

Net sales were $239 million for the second quarter of 2015, a decrease of $25 million, or 9%, when compared with $264 million for the same period in 2014. In local currency, sales increased 2%. The 9% decrease for the quarter consisted of the following:



	Percent Increase/(Decrease)
Foreign exchange	(11)
Volume	(10)
Business acquisition	8
Price	4
Total	(9)%

Sales performance in Canada was driven by declines in the oil and gas, construction, reseller, commercial, retail and heavy manufacturing customer end markets, partially offset by growth from government, mining, utilities and light manufacturing customer end markets. The Alberta region, which represents more than one-third of the sales in the Canadian business, decreased 18% versus prior year as it was negatively impacted by lower oil prices. Sales growth for the remaining regions in aggregate was positive.

The gross profit margin decreased 1.1 percentage points in the second quarter of 2015 versus the second quarter of 2014, primarily due to lower margins from WFS. Excluding the impact of WFS, gross margins decreased 0.3 percentage point due to the effect of unfavorable foreign exchange from products sourced from the United States and inventory write-downs associated with transitioning to the new Toronto distribution center, partially offset by price increases and higher freight revenue.

Operating expenses decreased 3% in the second quarter of 2015 versus the second quarter of 2014. In local currency, operating expenses increased 10%, primarily due to incremental costs from WFS, one-time costs related to the relocation to the new Toronto distribution center and incremental spending related to information technology investments.

Operating earnings of $9 million for the second quarter of 2015 were down $10 million, or 51%, versus the second quarter of 2014. In local currency, operating earnings decreased by 44%, driven by lower gross profit margins and negative operating expense leverage.

Other Businesses

Net sales for other businesses, which include Zoro U.S. and operations in Europe, Asia and Latin America, were $319 million for the second quarter of 2015, an increase of $20 million, or 7%, when compared with net sales of $299 million for the same period in 2014. The drivers of net sales for the quarter consisted of the following:



	Percent Increase/(Decrease)
Volume/Price	21
Foreign exchange	(14)
Total	7%

Operating earnings were $15 million in the second quarter of 2015 versus breakeven in the second quarter of 2014. Operating earnings in 2015 included $2 million in costs associated with shutting down the business in Brazil and restructuring the business in Europe. Operating earnings in 2014 included a $14 million charge related to the transition of the employee retirement plan in Europe and a $2 million write-off of capitalized software development costs in Mexico. Excluding these charges, operating earnings increased by $2 million versus the comparable 2014 period. The earnings performance for the quarter versus prior year was primarily driven by improved earnings from Zoro U.S. and the business in Japan, partially offset by startup costs for the single channel online business in Europe.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Costs associated with the shutdown of the business in Brazil and restructuring expenses for the business in Europe are expected to continue through the second half of 2015.

Other Income and Expense

Other income and expense was $8 million of expense in the second quarter of 2015 compared to $2 million of expense in the second quarter of 2014. The increase in expense was driven by higher interest expense from the new $1 billion in long-term debt issued in early June, as well as operating losses from a new investment in a limited liability company established to produce clean energy. As discussed below, the operating losses in this investment were offset by energy tax credits that lowered Grainger's tax rate, which provided Grainger with positive net earnings and cash flow.

Income Taxes

Grainger’s tax rates were 35.4% and 38.2% for the three months ended June 30, 2015 and 2014, respectively. The decrease in the tax rate was primarily due to energy tax credits associated with the investment in the limited liability company established to produce clean energy and the related benefit for the first quarter of 2015 recorded in the second quarter. Excluding the first quarter benefit, the tax rate for the second quarter of 2015 was 36.9%. In comparison, the 2014 second quarter reflected a higher tax rate due to the effect of the retirement plan transition in Europe. Excluding the retirement plan transition cost, the tax rate was 37.7% in the 2014 second quarter. Grainger is expecting a tax rate of approximately 36.6% to 37.2% for 2015.

Matters Affecting Comparability

There were 127 sales days in the six months of 2015 and 2014. Grainger completed the WFS acquisition in the third quarter of 2014 and announced plans to close the business in Brazil in the fourth quarter of 2014, both of which were immaterial individually and in the aggregate.

Results of Operations – Six Months Ended June 30, 2014

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



	Six Months Ended June 30,
	As a Percent of Net Sales				Percent Increase/(Decrease)
	2015		2014		Percent Increase/(Decrease)
Net sales	100.0	%	100.0	%	1.4	%
Cost of merchandise sold	56.3		55.9		2.2
Gross profit	43.7		44.1		0.5
Operating expenses	29.4		29.9		(0.2	)
Operating earnings	14.3		14.2		1.9
Other income (expense)	(0.2	)	(0.1	)	130.4
Income taxes	5.2		5.4		(1.9	)
Noncontrolling interest	0.2		0.1		40.5
Net earnings attributable to W.W. Grainger, Inc.	8.7	%	8.6	%	2.1	%

Grainger’s net sales of $4,962 million for the six months of 2015 increased 1% compared with sales of $4,892 million for the comparable 2014 period. The 1% increase for the period consisted of the following:



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

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The increase in net sales for the six months of 2015 was led by growth in sales to government, light manufacturing and commercial service customers. The sales growth was partially offset by declines in the natural resources, contractors and reseller end markets. Refer to the Segment Analysis below for further details.

Gross profit of $2,167 million for the six months of 2015 was flat compared to the same period in 2014. The gross profit margin during the six months of 2015 decreased 0.4 percentage point when compared to the same period in 2014, primarily driven by faster growth with lower margin customers, lower supplier rebates tied to lower-than-expected volume and price deflation versus cost inflation driven by foreign exchange.

Operating expenses of $1,459 million for the six months of 2015 were flat to the $1,462 million for the comparable 2014 period. Operating expenses in 2015 included $4 million in costs associated with shutting down the business in Brazil and restructuring the business in Europe. Operating expenses in 2014 included a $14 million charge related to the transition of the employee retirement plan in Europe. Excluding these charges from both years, operating expenses for 2015 were slightly higher than the comparable 2014 period, primarily driven by $58 million in incremental growth and infrastructure spending, offset by lower payroll and benefits and savings from productivity initiatives in the United States.

Operating earnings for the six months of 2015 were $708 million, an increase of $13 million, compared to the six months of 2014. Excluding the charges in both years mentioned above, operating earnings were flat versus prior year. Higher sales and positive operating expense leverage were offset by lower gross profit margins.

Net earnings attributed to W.W. Grainger, Inc. for the six months of 2015 increased by 2% to $432 million from $423 million in the six months of 2014. Diluted earnings per share of $6.32 in the six months of 2015 were 5% higher than the $6.00 for the six months of 2014, due to higher earnings and lower average shares outstanding.



	Six Months Ended
	June 30,
	2015	2014	%
Diluted earnings per share reported	$6.32	$6.00	5	%
Restructuring costs in Brazil and Europe	0.05	—
Retirement plan transition	—	0.15
Diluted earnings per share adjusted	$6.37	$6.15	4	%

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Segment Analysis

The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 8 to the Condensed Consolidated Financial Statements.

United States

Net sales were $4,002 million for the six months of 2015, an increase of $112 million, or 3%, when compared with net sales of $3,890 million for the same period in 2014. The 3% increase for the period consisted of the following:



	Percent Increase/(Decrease)
Volume	3
Intercompany sales to Zoro	1
Price	(1)
Total	3%

The increase in net sales was led by mid-single digit growth to commercial service, light manufacturing and government customers. Retail and heavy manufacturing customers were up in the low single digits and net sales to contractors were down in the low single digits. Resellers were down in the mid-single digits and the natural resources customer end market was down in the high single digits. Sales to Zoro also contributed to sales growth as the U.S. business' supply chain network is Zoro's primary source of inventory.

The gross profit margin for the six months of 2015 decreased 0.6 percentage point compared to the same period in 2014, primarily driven by faster growth with large customers, price deflation exceeding cost deflation and the lower transfer price on intercompany sales to Zoro. Excluding sales to Zoro, gross profit margins decreased 0.2 percentage point versus prior year.

Operating expenses were up 1% in the six months of 2015 versus the six months of 2014, driven by $45 million of incremental spending on growth initiatives such as new sales representatives, eCommerce and inventory management solutions, partially offset by lower payroll and benefits and savings from productivity initiatives.

Operating earnings of $736 million for the six months of 2015 increased 2% from $719 million for the six months of 2014, driven by higher sales and positive operating expense leverage, partially offset by lower gross margins.

Canada

Net sales were $474 million for the six months of 2015, a decrease of $44 million, or 9%, when compared with $518 million for the same period in 2014. In local currency, sales increased 2%. The 9% decrease for the period consisted of the following:



	Percent Increase/(Decrease)
Foreign Exchange	(11)
Volume	(8)
Business acquisition	7
Price	3
Total	(9)%

Sales performance in Canada was driven by declines in the oil and gas, construction, commercial services and heavy manufacturing customer end markets, partially offset by growth from utilities, mining, government and light manufacturing customer end markets.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The gross profit margin decreased 0.9 percentage point in the six months of 2015 versus the six months of 2014, primarily due to lower margins from WFS. Excluding the impact of WFS, gross margins decreased 0.2 percentage point due to the effect of unfavorable foreign exchange from products sourced from the United States and inventory write-downs associated with transitioning to the new Toronto distribution center, partially offset by price increases and higher freight revenue.

Operating expenses in the six months of 2015 were flat versus the six months of 2014. In local currency, operating expenses increased 13%, primarily due to incremental costs from WFS, and one-time costs related to the relocation to the new Toronto distribution center.

Operating earnings of $19 million for the six months of 2015 were down $22 million, or 53%, versus the six months of 2014. In local currency, operating earnings decreased by 47%, driven by negative operating expense leverage and lower gross margins.

Other Businesses

Net sales for other businesses, which include Zoro U.S. and operations in Europe, Asia and Latin America, were $617 million for the six months of 2015, an increase of $43 million, or 7%, when compared with net sales of $574 million for the same period in 2014. The drivers of net sales for the period consisted of the following:



	Percent Increase/(Decrease)
Volume/Price	21
Foreign exchange	(14)
Total	7%

Operating earnings of $25 million in the six months of 2015 increased $17 million compared to the six months of 2014.

Operating earnings in 2015 included $4 million in costs associated with shutting down the business in Brazil and restructuring the business in Europe. Operating earnings in 2014 included a $14 million charge related to the transition of the employee retirement plan in Europe and a $2 million write-off of capitalized software development costs in Mexico. Excluding these charges, operating earnings increased by $5 million versus the comparable 2014 period. The earnings performance for the period versus prior year was primarily driven by improved earnings from Zoro U.S. and the business in Japan, partially offset by startup costs for the single channel online business in Europe. Costs associated with the shutdown of the business in Brazil and restructuring expenses for the business in Europe are expected to continue through the second half of 2015.

Other Income and Expense

Other income and expense was $12 million of expense in the six months of 2015 compared to $5 million of expense in the six months of 2014. The increase in expense was primarily driven by operating losses from a new investment in a limited liability company established to produce clean energy. As discussed below, the operating losses in this investment were offset by energy tax credits that lowered Grainger's tax rate, which provided Grainger with positive net earnings and cash flow.

Income Taxes

Grainger’s tax rates were 36.9% and 38.0% for the six months ended June 30, 2015 and 2014, respectively. The decrease in the tax rate was due to energy tax credits associated with the investment in the limited liability company established to produce clean energy. Excluding the retirement plan transition cost, the tax rate was 37.7% in the 2014 period. Grainger is expecting a tax rate of approximately 36.6% to 37.2% for 2015.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Financial Condition

Cash Flow

Cash from operating activities continues to serve as Grainger’s primary source of liquidity. Net cash provided by operating activities was $370 million and $328 million for the six months ended June 30, 2015 and 2014, respectively. Higher cash flows from operating activities was driven primarily by higher earnings and other changes in operating assets and liabilities.

Net cash used in investing activities was $170 million and $132 million for the six months ended June 30, 2015 and 2014, respectively. The higher use of cash was driven by cash expended for additions to property, buildings, and equipment, mostly related to supply chain investments. Additionally, in 2015, Grainger made a new investment in a limited liability company established to produce clean energy. The investment provided Grainger with energy tax credits that lowered the tax rate, and positively impacted net earnings and cash flow.

Net cash provided by financing activities was $402 million for the six months ended June 30, 2015, compared to $297 million used in financing activities for the six months ended June 30, 2014. Financing activity for the 2015 period was primarily driven by proceeds from the issuance of $1 billion in long-term debt in early June. This was partially offset by an increase in the purchase of treasury stock and dividends paid.

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, 2015, was $1,847 million, an increase of $150 million when compared to $1,697 million at December 31, 2014. The working capital assets to working capital liabilities ratio increased to 2.9 at June 30, 2015, from 2.4 at December 31, 2014. The increase primarily related to lower profit sharing accruals due to the timing of annual payments as well as lower accrued compensation and benefits.

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, including bank borrowings under lines of credit. Total debt as a percent of total capitalization was 31.2% at June 30, 2015, and 12.8% at December 31, 2014.

On April 16, 2015, Grainger announced plans to issue $1.8 billion in long-term debt over the next three years, to partially fund the repurchasing of $3 billion in shares. The remaining amount is expected to be funded from internally generated cash. In June 2015, Grainger issued $1 billion in long-term debt, which is the first of three expected debt issuances. The new debt is payable in 30 years and carries a 4.60% interest rate, payable semi-annually. With the new long-term debt, Grainger expects to maintain a debt to EBITDA ratio in the 1.0-1.5x range. EBITDA, which is defined as Earnings before Interest, Taxes, Depreciation and Amortization, is a non-GAAP measure and may not be defined and calculated by other companies in the same manner. See Note 4 to the Condensed Consolidated Financial Statements.

W.W. Grainger, Inc. and Subsidiaries

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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, 2014.

Forward-Looking Statements

This Form 10-Q contains statements that are not historical in nature but concern future results and business plans, strategies and objectives and other matters that may be deemed to be “forward-looking statements” under the federal securities laws. These forward-looking statements include, but are not limited to, the Company’s expected or forecasted sales, earnings, tax rate, share repurchases, long-term debt, or earnings per share, and any associated guidance.

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 which could cause Grainger's results to differ materially from those which are presented.

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

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.

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, 2014.


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 the design and operation of Grainger’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Grainger’s disclosure controls and procedures were effective as of the end of the period covered by this report.

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

Items 1A, 3, 4 and 5 not applicable.


Item 1.	Legal Proceedings

Information on specific and significant legal proceedings is set forth in Note 10 to the Condensed Consolidated Financial Statements included under Item 1.

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	213,303	$246.00	213,303	14,786,697
May 1 – May 31	495,602	$246.56	495,602	14,291,095
June 1 – June 30	580,613	$240.05	580,613	13,710,482
Total	1,289,518	$243.54	1,289,518


(A)	There were no shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock awards.


(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. Activity is reported on a trade date basis.


Item 6.	Exhibits



(a)		Exhibits (numbered in accordance with Item 601 of Regulation S-K)

		(3)	(ii) Bylaws, as amended
		(10)	Material Contracts
			(b)(i) Separation Agreement and General Release by and between Grainger and Court Carruthers dated July 22, 2015.
		(31)	Rule 13a – 14(a)/15d – 14(a) Certifications
			(a) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
			(b) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		(32)	Section 1350 Certifications
			Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS		XBRL Instance Document.
	101.SCH		XBRL Taxonomy Extension Schema Document.
	101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
	101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
	101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
	101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

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 30, 2015	By:	/s/ R. L. Jadin
			R. L. Jadin, Senior Vice President and Chief Financial Officer
Date:	July 30, 2015	By:	/s/ W. Lomax
			W. Lomax, Vice President and Controller

Exhibit 3(ii)

As Amended 06/25/2015

BY-LAWS OF

W.W. GRAINGER, INC.

ARTICLE I

OFFICES

The principal office of the corporation shall be located in the State of Illinois. The corporation may have such other offices, either within or without the State of Illinois, as the business of the corporation may require from time to time.

The registered office of the corporation required by the Illinois Business Corporation Act to be maintained in the State of Illinois may be, but need not be, identical with the principal office in the State of Illinois, and the address of the registered office may be changed from time to time by the board of directors.

ARTICLE II

SHAREHOLDERS

SECTION 1. ANNUAL MEETING. (a) The annual meeting of the shareholders shall be held on the last Wednesday of April, in each year, or at such time as may be determined by the board of directors, for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the election of the directors shall not be held on the day designated herein for any annual meeting or adjournment thereof, the board of directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as conveniently may be.

(b) At any annual meeting or adjournment thereof only such nominations or other business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the board of directors or (ii) by any shareholder (x) who is entitled to vote at the time of giving notice provided for in this Section 1(b) and remains such until the meeting and (y) who complies with the procedures and other requirements set forth in this Section 1(b). For nominations or other business to be properly brought before an annual meeting or adjournment thereof by a shareholder, the shareholder must have given timely notice thereof in proper written form to the secretary. To be timely, a shareholder’s notice must be delivered to or mailed and received at the principal office of the corporation not later than the close of business on the 90^th day and not earlier than the close of business on the 120^th day prior to the first anniversary of the prior year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or after such anniversary date, notice by the shareholder to be timely shall be delivered not earlier than the close of business on the 120^th day prior to such annual meeting and not later than the close of business on the later of (i) the 90^th day prior to such annual meeting and (ii) the 10^th day following the date of the first public announcement of the date of the meeting; further provided that in the case of such a shareholder’s nomination of one or more persons for election or reelection to the board of directors at the next annual meeting of shareholders and notwithstanding anything to the contrary in this Section 1(b), the aforementioned shareholder’s notice shall be delivered to or mailed and received at the principal office of the corporation not later than the date with respect to submission of shareholders’ proposals for such next annual meeting as set forth in the corporation’s proxy statement for the preceding annual meeting of shareholders. In no event shall the public announcement of an adjournment of an annual meeting, or such adjournment, commence a new time period (or extend any time period) for the giving of a shareholder notice as described above. To be in proper written form, a shareholder’s notice to the secretary shall set forth in writing (x) as to each person whom the shareholder proposes to nominate for election or reelection as a director (i) all information concerning the shareholder’s relationship to and transactions with such person and information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (ii) with respect to each nominee for election or reelection to the board of directors, include a completed and signed questionnaire, representation and agreement required by paragraph (c)

of this Section 1 (collectively, the information described in subclauses (i) and (ii) of clause (x) is the “Nominee Information”); (y) as to any other business the shareholder proposes to bring before the meeting a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and, if such business includes a proposal to amend the by-laws of the corporation, the text of the proposed amendment), the reasons for conducting such business at the meeting, and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the nomination or proposal is made (collectively, the information described in clause (y) is the “Other Business Information”); and (z) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the corporation’s books, and of such beneficial owner; (ii) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner and, in the case of such shareholder, his commitment to remain a shareholder through the date of the shareholders’ meeting with respect to which his shareholder’s notice was given; (iii) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the corporation or with a value derived in whole or in part from the value of any class or series of shares of the corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the corporation or otherwise directly or indirectly owned beneficially by such shareholder or beneficial owner and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the corporation, including, without limitation, any derivative instrument, swap, short interest, hedge or profit sharing arrangement (a “Derivative Instrument”); (iv) any proxy, contract, arrangement, understanding, or relationship pursuant to which such shareholder or beneficial owner has a right to vote any shares of any security of the corporation; (v) any short interest of such shareholder or beneficial owner in any security of the corporation (for purposes of this by-law, a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any agreement, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), and whether any other agreement, arrangement or understanding (including any borrowing or lending of shares) has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, such shareholder or any such beneficial owner with respect to any share of stock of the corporation; (vi) any rights to dividends on the shares of the corporation owned beneficially by such shareholder or beneficial owner that are separated or separable from the underlying shares of the corporation; (vii) any proportionate interest in shares of the corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such shareholder or beneficial owner is a general partner or, directly or indirectly, beneficially owns an interest in a general partner; (viii) any performance-related fees (other than an asset- based fee) that such shareholder or beneficial owner is entitled to based on any increase or decrease in the value of shares of the corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of such shareholder’s or beneficial owner’s immediate family sharing the same household; (ix) a description of all agreements, arrangements and understandings between such shareholder or beneficial owner, if any, and any other person or persons (including their names) in connection with or relating to the proposed action or nomination by such shareholder; (x) a representation as to whether the shareholder or the beneficial owner, if any, intends, or is or intends to be part of a group that intends, (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to approve or adopt the proposal and/or (B) otherwise to solicit proxies from shareholders in support of such proposal; and (xi) a representation that such shareholder is a holder of record of stock of the corporation, entitled to vote at such meeting, and intends to appear in person or by proxy at the shareholders’ meeting to make such nominations or bring such business before the meeting (collectively, the information described in subclauses (i) through (xi) of clause (z) is the “Shareholder/Beneficial Owner Information”).

A shareholder providing notice of a proposed nomination for election to the board of directors of the corporation or other business proposed to be brought before a meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice under this paragraph (b) shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the secretary at the principal executive office of the corporation not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof). The corporation may also require any proposed nominee for election to the board of directors of the corporation to consent to a background check (which consent shall not be unreasonably withheld) and to furnish such other information as may be reasonably required for the corporation to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable shareholder’s understanding of the qualifications and/or independence, or lack thereof, of such nominee.

(c) To be eligible to be a nominee for election or reelection as a director of the corporation, the prospective nominee, or someone acting on such prospective nominee’s behalf, must deliver (in accordance with any applicable time periods prescribed for delivery of notice under this by-law) to the secretary at the principal executive office of the corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the secretary upon written request). The prospective nominee must also provide a written representation and agreement, in the form provided by the secretary upon written request, that such prospective nominee: (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such prospective nominee, if elected as a director of the corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the corporation or (2) any Voting Commitment that could limit or interfere with such prospective nominee’s ability to comply, if elected as a director of the corporation, with such prospective nominee’s fiduciary duties under applicable law; (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein; and (C) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance if elected as a director of the corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, corporate opportunity, confidentiality and stock ownership and trading policies and guidelines of the corporation.

SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called by (i) the chairman of the board, (ii) the board of directors, or (iii) by timely notice thereof in proper written form to the secretary, by the holders (a “One Fifth Holder”) of not less than one-fifth of all the outstanding shares of the corporation entitled at the time of such call and continuously thereafter until the date of the meeting so called to vote on the matter for which the meeting is called. The purpose or purposes for which a special meeting is called shall be specified in the notice of meeting given with respect thereto pursuant to Section 5 of this Article II, and no other business may be transacted at any such meeting.

To be timely, a call by a One Fifth Holder must be delivered or mailed and received at the principal office of the corporation not later than the close of business on the 90^th day, and not earlier than the close of business on the 120^th day, before the date of the special meeting being called.

To be in proper written form, a One Fifth Holder’s notice to the secretary shall set forth in writing (x) Nominee Information as to each person whom the One Fifth Holder proposes to nominate for election or reelection as a director, provided that the corporation may require any proposed nominee to furnish such other information as may be reasonably required by the corporation, to determine the qualifications of such nominee to serve as a director of the corporation; (y) Other Business Information as to any other business the One Fifth Holder proposes to bring before the meeting; and (z) Shareholder/Beneficial Owner Information as to the One Fifth Holder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made.

shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the secretary at the principal executive office of the corporation not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof). The corporation may also require any proposed nominee for election to the board of directors of the corporation to consent to a background check (which consent shall not be unreasonably withheld) and to furnish such other information as may be reasonably required for the corporation to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable shareholder’s understanding of the qualifications and/or independence, or lack thereof, of such nominee.

SECTION 3. MEETINGS - GENERAL. (a) Only such persons who are nominated in accordance with the procedures set forth in this Article II (or in Article III, Section 8) shall be eligible to be elected as directors at a meeting of shareholders and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the applicable procedures set forth in this Article II. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Article II and, if such presiding officer determines that any proposed nomination or business is not in compliance with this Article II, to declare that such defective nomination or proposal shall be disregarded and any such nomination or business not properly brought before the meeting shall not be transacted.

(b) For purposes of this Article II, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Reuters or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act, and “group” shall have the meaning ascribed to such term under Section 13(d)(3) of the Exchange Act and the rules and regulations thereunder.

(c) Notwithstanding the foregoing provisions of this Article II, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Article II. The requirements of this Article II shall apply to all shareholder nominations and all shareholder proposals to be considered at a meeting of shareholders, whether or not such nominations or proposals are sought to be included in the corporation’s proxy statement; provided, however, that nothing in this Article II shall be deemed to affect any rights of (x) shareholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (y) the holders of any series of Preferred Stock to elect directors under specified circumstances. The foregoing notice requirements of this Article II shall be deemed satisfied with respect to a shareholder proposal if the shareholder has notified the corporation of the shareholder’s intention to present such proposal at an annual meeting in compliance with Rule 14a-8 promulgated under the Exchange Act and such shareholder’s proposal has been included in a proxy statement that has been prepared by the corporation to solicit proxies for such annual meeting. The provisions of this Article II shall also govern what constitutes timely notice for purposes of Rule 14a-4(c) of the Exchange Act.

SECTION 4. PLACE OF MEETING. The board of directors may designate any place, either within or without the State of Illinois, as the place of meeting for any annual meeting or for any special meeting called by the board of directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the corporation in the State of Illinois.

SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, or the secretary, or in the event that a special meeting has been properly called by a One Fifth Holder in accordance with Section 2 of this Article II, and notice of such meeting has not been given by the secretary within 65 days after the call of such meeting, notice thereof shall be given between the 66^th and the 75^th day after such call by the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the records of the corporation, with postage thereon prepaid.

SECTION 6. FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors of the corporation may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, in case of a meeting of shareholders, not less than ten days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days, prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or entitled to vote at a meeting of shareholders, or entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided above, such determination shall apply to any adjournment thereof.

SECTION 7. VOTING LISTS. The officer or agent having charge of the transfer books for shares of the corporation shall make within twenty days after the record date for a meeting of shareholders, or ten days before such meeting of shareholders, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the principal office of the corporation in the State of Illinois and shall be subject to inspection by any shareholder at any time during usual business hours and to copying at the shareholder's expense. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof kept in the State, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger, or transfer book or to vote at any meeting of shareholders.

SECTION 8. QUORUM. A majority of the outstanding shares of the corporation, entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders.

When any meeting is convened, the presiding officer, if directed by the Board, may adjourn the meeting without a vote of shareholders if (a) no quorum is present for the transaction of business, or (b) the Board determines that adjournment is necessary or appropriate to enable the shareholders (1) to consider fully information which the Board determines has not been made sufficiently or timely available to shareholders, or (2) otherwise to exercise effectively their voting rights. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called.

SECTION 9. PROXIES. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by delivering a valid appointment to the person so appointed or such person's agent; provided that no shareholder may name more than three persons as proxies to attend and to vote the shareholder's shares at any meeting of shareholders. Such appointment may be by any means, including means of electronic transmission, permitted by law. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy.

SECTION 10. VOTING OF SHARES. Subject to the provisions of Section 12 of this Article, each outstanding share, regardless of class, shall be entitled to one vote upon each matter submitted to vote at a meeting of shareholders.

SECTION 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine.

Shares standing in the name of a deceased person may be voted by his administrator or executor, either in person or by proxy. Shares standing in the name of a guardian, conservator, or trustee may be voted by such fiduciary, either in person or by proxy, but no guardian, conservator, or trustee shall be entitled, as such fiduciary, to vote shares held by him without a transfer of such shares into his name.

Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so be contained in an appropriate order of the court by which such receiver was appointed.

A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

Shares of its own stock belonging to this corporation shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares at any given time, but shares of its own stock held by it in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares at any given time.

SECTION 12. CUMULATIVE VOTING. In all elections for directors, every shareholder shall have the right to vote, in person or by proxy, the number of shares owned by him, for as many persons as there are directors to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principle among as many candidates as he shall see fit.

SECTION 13. VOTING BY BALLOT. Voting on any question or in any election may be by voice, unless the officer or other person presiding over the meeting shall order or any shareholder shall demand that voting be by ballot.

SECTION 14. PRESIDING OFFICERS AND ORDER OF BUSINESS. All meetings of shareholders shall be called to order and presided over by the chairman of the board, or in his absence, by the lead director or by another director designated by the board, or in the absence of such designated director or if no such designation has been made, by the senior chairman of the board, if any. The secretary of the corporation shall act as secretary of the meeting, but in the absence of the secretary of the corporation, the presiding officer may appoint a secretary of the meeting.

SECTION 15. PROCEDURAL MATTERS. At each meeting of shareholders, the presiding officer shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the Board, the presiding officer may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide shareholders of record and their proxies and other persons in attendance at the invitation of the presiding officer and making rules governing speeches and debates. The presiding officer acts in his or her absolute discretion and his or her rulings are not subject to appeal.

ARTICLE III

DIRECTORS

SECTION 1. GENERAL POWERS. The business and affairs of the corporation shall be managed under the direction of its board of directors.

SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. (a) The number of directors of the corporation shall be not less than nine nor more than fourteen. The number of directors may be fixed or changed from time to time, within the minimum and maximum, by the directors or the shareholders without amending these by-laws. Each director shall hold office until the next annual meeting of shareholders or until his successor shall have been elected and qualified. Directors need not be residents of Illinois or shareholders of the corporation.

(b) A lead director shall be annually elected by and from the independent directors.

SECTION 3. REGULAR MEETINGS. A regular meeting of the board of directors shall be held without other notice than this by-law, immediately after the annual meeting of shareholders. The board of directors may provide by resolution, the time and place, either within or without the State of Illinois, for the holding of additional regular meetings without other notice than such resolution.

SECTION 4. SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the lead director, or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or without the State of Illinois, as the place for holding any special meeting of the board of directors called by them.

SECTION 5. NOTICE. Notice of any special meeting shall be given at least two days previously thereto by written notice delivered personally, sent by United States mail, sent by a third party entity that provides delivery services in the ordinary course of business and guarantees delivery in the particular case no later than the following day, or sent by electronic transmission. If mailed, such notice shall be deemed to be delivered 24 hours after deposited in the United States mail, next-day delivery guaranteed, addressed to the director at the director’s business address, with postage thereon prepaid. If sent by delivery service, notice shall be deemed to be delivered 24 hours after delivery to the third party delivery service. If notice is sent by electronic transmission, such notice shall be deemed to be delivered upon transmission. For this purpose, “electronic transmission” may include, but shall not be limited to, a telex, wire or wireless equipment that transmits a facsimile of the notice and provides the transmitter with an electronically generated receipt, or other electronic means. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting.

SECTION 6. QUORUM. A majority of the board of directors shall constitute a quorum for transaction of business at any meeting of the board of directors, provided, that if less than a majority of the directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

SECTION 7. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors.

SECTION 8. VACANCIES. Any vacancy occurring in the board of directors and any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, vacancies arising between meetings of shareholders by reason of an increase in the number of directors or otherwise may be filled by a majority of the board of directors then remaining. A director elected by the shareholders to fill a vacancy shall hold office for the balance of the term for which elected. A director appointed by the directors to fill a vacancy shall serve until the next meeting of shareholders at which directors are to be elected.

SECTION 9. COMPENSATION. By resolution of the board of directors, the directors may be paid their expenses, if any, for attendance at each meeting of the board or of a committee thereof, and may be paid a fixed sum for attendance at meetings and/or a stated retainer as directors. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

SECTION 10. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

SECTION 11. COMMITTEES. Committees of the board of directors shall consist of an audit committee, a compensation committee, a board affairs and nominating committee, and such other committees as the board of directors by resolution may create. Each committee shall have such number of members and shall exercise such authority and carry out such duties as are set forth in resolutions of the board of directors. Committee members shall be elected annually but shall serve at the discretion of the board of directors and may be removed by the board of directors. The board of directors may increase or decrease the number of members of any committee at any time and may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member or members at any meeting of the committee. A majority of members of a committee shall constitute a quorum and, unless otherwise set forth in resolutions of the board of directors, a majority of those members present at a meeting and not disqualified from voting shall constitute the acts of the committee.

SECTION 12. INFORMAL ACTION BY DIRECTORS. (a) Any action required to be taken at a meeting of the board of directors of the corporation, or any other action which may be taken at a meeting of the board of directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof, or by all of the members of such committee, as the case may be.

(b) The consent shall be evidenced by one or more written approvals, each of which sets forth the action taken and bears the signature of one or more directors. All the approvals evidencing the consent shall be delivered to the secretary to be filed in the corporate records. The action taken shall be effective when all the directors have approved the consent unless the consent specifies a different effective date.

(c) Any such consent signed by all the directors or all the members of a committee shall have the same effect as a unanimous vote, and may be stated as such in any document filed with the Secretary of State.

SECTION 13. TELEPHONE ATTENDANCE. (a) Members of the board of directors or of any committee of the board of directors may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting shall constitute attendance and presence in person at the meeting of the person or persons so participating.

(b) The board of directors or any committee may, at its option, provide for a tape recording of any such conference telephone portion of a meeting but the lack thereof shall not affect the validity of any actions taken at such meeting.

SECTION 14. REMOVAL OF DIRECTORS. One or more of the directors may be removed, with or without cause, at a meeting of shareholders by the affirmative vote of the holders of a majority of the outstanding shares then entitled to vote at an election of directors, except that:

(1) No director shall be removed at a meeting of shareholders unless the notice of such meeting shall state that a purpose of the meeting is to vote upon the removal of one or more directors named in the notice. Only the named director or directors may be removed at such meeting;

(2) If less than the entire board is to be removed, no director may be removed, with or without cause, if the votes cast against his removal would be sufficient to elect him, if then cumulatively voted at an election of the entire board of directors; and

(3) If a director is elected by a class or series of shares, he may be removed only by the shareholders of that class or series.

SECTION 15. DIRECTOR CONFLICT OF INTEREST. If a transaction is fair to the corporation at the time it is authorized, approved or ratified, the fact that a director of the corporation is directly or indirectly a party to the transaction shall not be grounds for invalidating the transaction.

SECTION 16. NOMINATIONS OF DIRECTORS. Except for directors elected to fill vacancies pursuant to these by-laws, nominations for election for the board of directors may be made by the board of directors, by the nominating committee of the board of directors and approved by the board of directors, or by shareholders in accordance with the procedures set forth in Article II. Such nominations shall be submitted to a vote of the shareholders at the next annual meeting of shareholders or at a special meeting of shareholders called for such purpose.

ARTICLE IV

OFFICERS

SECTION 1. NUMBER. The officers of the corporation shall be a chairman of the board, a chief executive officer, one or more presidents, a chief operating officer, a chief financial officer, one or more vice presidents, a treasurer, a secretary, and such other officers and such assistant or administrative officers as may be elected or appointed as hereinafter provided. Any two or more offices may be held by the same person.

SECTION 2. ELECTION, APPOINTMENT AND TERM OF OFFICE. Officers of the corporation shall be elected or appointed annually by the board of directors, although vacancies may be filled or new offices created and filled at any meeting of the board of directors. Each officer elected or appointed by the board of directors shall hold office until the next annual election or appointment of officers by the board of directors, or until his earlier death, resignation or removal. Officers and assistant or administrative officers of the corporation may also be appointed from time to time by the chairman of the board, to serve as such at his pleasure.

SECTION 3. REMOVAL. Any officer or assistant or administrative officer of the corporation elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby. Any officer or assistant or administrative officer of the corporation appointed by the chairman of the board may be removed by the chairman of the board whenever in his judgment the best interests of the corporation would be served thereby. Any removal provided for in this Section 3 shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or assistant or administrative officer of the corporation shall not itself create contract rights.

SECTION 4. CHAIRMAN OF THE BOARD. The chairman of the board shall preside at all meetings of the shareholders and the board of directors. He shall be primarily responsible for carrying out the policies established by and the directions of the board of directors and shall perform such other duties as may be prescribed from time to time by the board of directors. He may from time to time, to the extent not delegated by the board of directors, delegate and re-delegate any part of any of the responsibilities and authority set forth herein to the senior chairman of the board, if any, to the lead director, to any other member of the board of directors, and/or to the chief executive officer. The chairman of the board must be a director of the corporation.

The chairman of the board may sign deeds, mortgages, bonds, contracts or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. The chairman of the board may delegate signing authority to other persons within the corporation as shall be deemed necessary.

SECTION 5. CHIEF EXECUTIVE OFFICER. The chief executive officer of the corporation shall oversee and direct the operations and activities of the corporation and shall perform such other duties as from time to time may be prescribed by the board of directors or delegated to him by the chairman of the board.

The chief executive officer may sign deeds, mortgages, bonds, contracts or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. The chief executive officer may delegate signing authority to other persons within the corporation as shall be deemed necessary. The chief executive officer must be a director of the corporation.

SECTION 6. PRESIDENT. The president, or if there be more than one the presidents, shall oversee and direct such operations and activities and shall perform such other duties as from time to time may be assigned by the board of directors, the chairman of the board or the chief executive officer. If there be more than one president, the board of directors may designate one or more of them as group presidents or use a similar descriptive designation.

SECTION 7. CHIEF OPERATING OFFICER. The chief operating officer shall have responsibility for the day-to-day operations of the business of the corporation and in general perform all duties incident to the office of chief operating officer and such other duties as from time to time may be assigned by the board of directors, the chairman of the board, or the chief executive officer.

SECTION 8. CHIEF FINANCIAL OFFICER. The chief financial officer shall be the principal financial officer. He shall have responsibility for administering the financial affairs of the corporation and, in general perform all duties incident to the office of the chief financial officer and such other duties as from time to time may be assigned to him by the board of directors, the chairman of the board or the chief executive officer.

SECTION 9. VICE PRESIDENTS. Each of the vice presidents shall be responsible for those activities and shall perform those duties as from time to time may be assigned by the board of directors, the chairman of the board, the chief executive officer or a president. The board of directors may designate one or more of the vice presidents as executive, group or senior vice presidents or use a similar descriptive designation.

SECTION 10. SENIOR CHAIRMAN. The senior chairman of the corporation, if any, shall consult with the chairman of the board on matters of long- and short-term strategic planning and policy and other significant matters affecting the corporation, and shall perform such other duties as may from time to time be prescribed by the board of directors, or delegated to him by the chairman of the board. The senior chairman need not be a director of the corporation.

SECTION 11. TREASURER. If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the board of directors shall determine. He shall (a) have charge and custody of and be responsible for all funds and securities of the corporation, (b) receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article V of these by-laws and (c) in general perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the board of directors, the chairman of the board, chief executive officer, or the chief financial officer.

SECTION 12. SECRETARY. The secretary shall (a) keep the minutes of the shareholders’ and of the board of directors’ meetings in one or more books provided for that purpose, (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required by law, (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all certificates for shares prior to the issue thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these by-laws, (d) keep, or cause the transfer agent to keep, a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder, (e) sign with the chairman of the board certificates for shares of the corporation, the issue of which shall have been authorized by resolution of the board of directors, (f) have general charge of the stock transfer books of the corporation and (g) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the board of directors, the chairman of the board or the chief executive officer.

SECTION 13. SALARIES. The salaries of the officers elected or appointed by the board of directors shall be fixed from time to time by the board of directors and no such officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation.

ARTICLE V

CONTRACTS, LOANS, CHECKS AND DEPOSITS

SECTION 1. CONTRACTS. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

SECTION 2. LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances.

SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors.

SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositaries as the board of directors may select.

ARTICLE VI CERTIFICATES FOR SHARES

AND THEIR TRANSFER

SECTION 1. CERTIFICATES FOR SHARES. The issued shares of the corporation shall be represented by certificates, except as and to the extent determined by, or pursuant to, resolution adopted by the board of directors. Certificates representing shares of the corporation shall be in such form as may be determined by the board of directors. Such certificates shall be signed by the chairman of the board and by the secretary or an assistant secretary, and shall be sealed with the seal of corporation. All certificates for shares shall be consecutively numbered or otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered in the books of the corporation, as shall similar information with respect to shares that are uncertificated. All certificates surrendered to the corporation for transfer shall be canceled. No new certificate shall be issued until the former certificate for a like number of shares, unless the shares are uncertificated, shall have been surrendered and canceled except that in the case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe.

SECTION 2. TRANSFERS OF SHARES. Transfers of shares of the corporation shall be made either on the books of the corporation or on the books of the duly authorized and appointed agent or agents of the corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation or proper officer of the transfer agent and, unless such shares are uncertificated, on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation or its duly authorized and appointed transfer agent or agents shall be deemed the owner thereof for all purposes as regards the corporation.

ARTICLE VII

FISCAL YEAR

The fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year.

ARTICLE VIII

DIVIDENDS

The board of directors may from time to time, declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its articles of incorporation.

ARTICLE IX

SEAL

The board of directors shall provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words, "Corporate Seal, Illinois".

ARTICLE X

WAIVER OF NOTICE

Whenever any notice whatever is required to be given under the provisions of these by-laws or under the provisions of the articles of incorporation or under the provisions of the Illinois Business Corporation Act, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein shall be deemed equivalent to the giving of such notice.

ARTICLE XI

AMENDMENTS

These by-laws may be altered, amended or repealed and new by-laws may be adopted at any meeting of the board of directors of the corporation by a majority vote of the directors present at the meeting.

ARTICLE XII

INDEMNIFICATION OF DIRECTORS AND OFFICERS

SECTION 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

SECTION 2. The corporation shall indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to the best interests of the corporation, and except that no indemnification shall be made with respect to any claim, issue or matter as to which such person has been finally adjudged to have been liable to the corporation, unless, and only to the extent that the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper.

SECTION 3. (a) Any indemnification under Sections 1 or 2 (unless ordered by a court) shall be made only as authorized in the specific case, upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 or 2. Such determination shall be made: (i) if a change in control shall have occurred, by independent legal counsel in a written opinion to the board of directors, a copy of which shall be delivered to the claimant; or (ii) if a change in control shall not have occurred: (A) by a majority vote of directors who were not parties to such action, suit or proceeding, even though less than a quorum, (B) by a committee of directors who were not parties to such action, suit or proceeding, even though less than a quorum, designated by a majority vote of the directors, (C) if there are no such directors who were not parties to such action, suit or proceeding, or if such directors so direct, by independent legal counsel in a written opinion, or (D) by the shareholders.

(b) In any event, to the extent that a present or former director or officer of the corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Sections 1 or 2 or in defense of any claim, issue or matter therein, he shall be indemnified against reasonable expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation.

(c) In the event the determination of entitlement to indemnification is to be made by independent legal counsel pursuant to subsection 3(a) hereof, the independent legal counsel shall be selected as provided in this subsection 3(c). If a change in control shall not have occurred, the independent legal counsel shall be selected by the board of directors, and the corporation shall give written notice to the claimant advising him of the identity of the independent legal counsel so selected. If a change in control shall have occurred, the independent legal counsel shall be selected by the claimant (unless the claimant shall request that such selection be made by the board of directors, in which event the preceding sentence shall apply) and the claimant shall give written notice to the corporation advising it of the identity of the independent legal counsel so selected.

SECTION 4. (a) Reasonable expenses (including attorney’s fees) incurred by an director or officer in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of (i) a statement signed by such director or officer to the effect that such director or officer acted in good faith and in a manner which he believed to be in, or not opposed to the best interests of the corporation and (ii) an undertaking by or on behalf of the director or officer to repay such amount, if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article XII.

(b) The board of directors may, by separate resolution adopted under and referring to this Article XII of the by-laws, provide for securing the payment of authorized advances by the creation of escrow accounts, the establishment of letters of credit or such other means as the board deems appropriate and with such restrictions, limitations and qualifications with respect thereto as the board deems appropriate in the circumstances.

SECTION 5. (a) The corporation is specifically authorized to enter into agreements with any of its directors or officers extending rights to indemnification and advancement of expenses to such person to the fullest extent permitted by law. The indemnification and advancement of expenses provided by or granted under this Article XII shall be separate and distinct from and shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, by-law, agreement, including, without limitation, indemnification agreements entered into between the corporation and any director or officer thereof, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. To the extent that there is a conflict or inconsistency between this Article XII, the corporation’s articles of incorporation and any indemnification agreement between the corporation and any of its directors or officers, it is the intent that the director and/or officer shall enjoy the greater benefits regardless of whether contained herein, in the articles of incorporation or in such indemnification agreement.

(b) The provisions of this Article XII shall be deemed to be a contract between the corporation and each director and officer who serves in such capacity at any time while this Article XII is in effect and all rights under this Article XII including with respect to indemnification and advancement of expenses shall immediately and fully vest at the time a person first becomes a director or officer, shall remain vested as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person, and such rights cannot be terminated or diminished in scope by the corporation, the board of directors or the shareholders of the corporation with respect to a person’s service prior to the date of such termination. Any repeal or modification of this Article XII or any repeal or modification of the Illinois Business Corporation Act or any other applicable law shall not limit any rights under this Article XII then existing or arising out of events, acts, omissions or circumstances occurring or existing prior to such repeal or modification, including, without limitation, the right to indemnification and advancement of expenses for proceedings commenced after such repeal or modification to enforce this Article XII with regard to acts, omissions, events or circumstances occurring or existing prior to such repeal or modification. If the scope of indemnity provided by this Article XII or any replacement article, or pursuant to the Illinois Business Corporation Act or any modification or replacement thereof is increased, then such person shall be entitled to such increased indemnification as is in existence at the time indemnity is provided to such person, it being the intent, subject to Section 10 of this Article XII, to indemnify persons specified in this Article XII to the fullest extent permitted by law.

SECTION 6. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article.

SECTION 7. Subject to Section 10 of this Article XII, if a claim under this Article XII is not promptly paid in full by the corporation after a written claim has been received by the corporation or if expenses pursuant to Section 4 of this Article XII have not been promptly advanced after a written request for such advancement accompanied by the statement and undertaking required by Section 4 of this Article XII has been received by the corporation, the director or officer may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim or the advancement of expenses. If successful, in whole or in part, in such suit, such director or officer shall also be entitled to be paid the reasonable expense thereof, including attorneys' fees. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the director or officer has not met the standards of conduct which make it permissible under the Illinois Business Corporation Act for the corporation to indemnify the director or officer for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its shareholders) to have made a determination, if required, prior to the commencement of such action that indemnification of the director or officer is proper in the circumstances because he or she has met the applicable standard of conduct required under the Illinois Business Corporation Act, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its shareholders) that the director or officer had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the director or officer had not met the applicable standard of conduct.

SECTION 8. For purposes of this Article XII, references to "the corporation" shall include, in addition to the surviving corporation, any merging corporation (including any corporation having merged with a merging corporation) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees or agents, so that any person who was a director or officer of such merging corporation, or was serving at the request of such merging corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article XII with respect to the surviving corporation as such person would have with respect to such merging corporation if its separate existence had continued.

SECTION 9. For purposes of this Article XII, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to "serving at the request of the corporation" shall include any service as a director, officer or employee or agent of the corporation which imposes duties on, or involves services by such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and references to "officers" shall include elected officers and appointed officers. A person who acted in good faith and in a manner he reasonably believed to be in the best interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" as referred to in this Article XII.

SECTION 10. Anything herein to the contrary notwithstanding, if the corporation purchases insurance in accordance with Section 6 of this Article XII, the corporation shall not be required to, but may (if the board of directors so determines in accordance with this Article XII) reimburse any party instituting any action, suit or proceeding if a result of the institution thereof is the denial of or limitation of payment of losses under such insurance when such losses would have been paid thereunder if a non-insured third party had instituted such action, suit or proceedings.

ARTICLE XIII

INDEMNIFICATION OF EMPLOYEES AND AGENTS

The corporation may indemnify any agent or employee of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to any such proceeding by or in the right of the corporation) whether civil, criminal, administrative or investigative, by reason of the fact that he is or was serving the corporation at its request and in the course and scope of his duties and acting in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, against expenses (including reasonable attorney's fees) actually and reasonably incurred by him in connection with the defense or settlement of such action, suit or proceeding. The standards of conduct, the provisions for payment and advances, and the terms and conditions contained in Article XII, Sections 1, 2, 3, 4, 5(a), 6, 8, 9 and 10 shall apply to any indemnification hereunder.

Exhibit 10(b)(i)

SEPARATION AGREEMENT AND RELEASE

COURT CARRUTHERS

This Separation Agreement (the "Agreement") Is entered into this 22 of July, 2015, between ACKLANDS-GRAINGER, INC., with offices at 90 West Beaver Creek Road, Richmond Hill, Ontario I4B 1E7 as well as its’ Parent Company, W.W. Grainger, Inc. (the “Company’’) and COURT CARRUTHERS, (“Carruthers”) a resident of Ontario, Canada.

FOR AND IN CONSIDERATION of the mutual terms, conditions and covenants herein, the Company and Carruthers agree as follows:

Resignation. Carruthers will resign from the office of Senior Vice President effective July 31, 2015 (the “Resignation Date”) and agrees to execute such documents as may be required to effect his resignation as an officer or director of the Company, its parent or any of its affiliates. Until December 31, 2015 (the “Separation Date”) Carruthers will receive his regular salary and benefit coverage, and in so doing will assist the Company with the transition of his responsibilities, as required. His employment status with the Company will terminate for all purposes on the earlier of December 31, 2017 or the date on which Separation Payments cease (the “Termination Date”).

Separation Payments. Subject to continued compliance by Carruthers with his obligations under section 16 hereunder, commencing on the first pay date following the Separation Date, the Company shall pay the equivalent of eighteen (18) months of salary to Carruthers, calculated at his current base rate of pay (the “Separation Payments”), less required deductions with no other allowances except as called out below. Payments shall be made on the Company’s regular pay dates and pursuant to the Company’s normal payroll processes on a pro-rated basis over a period of eighteen (18) months, or pro-rated over 24 months ending December 31, 2017, at Carruthers’ election. In the event of the death of Carruthers prior to the Termination Date, the balance of any Separation Payments to which he is entitled at that time shall be paid to the duly appointed personal representative of his estate. The Separation Payments are inclusive of any statutory entitlements.

Management Incentive Program (“MIP”). Carruthers’ current and future participation in the MIP shall be governed by way of this Section as well as the provisions of the Plan then in effect. In or about March 2016, Carruthers will receive a payment under the MIP in respect of the full year 2015, based upon his current base salary subject to the applicable percentage multiple and the actual performance of the Company, and pursuant to the terms of the Plan then in effect as would be applicable to Senior Officers of the Company. No other MIP payments will be made to Carruthers beyond those outlined above.


4.	Vacation Pay/PTO. Carruthers will be paid all vacation pay/PTO outstanding and accrued as of the Separation Date on the date of the first Separation Payment in accordance with the Company’s practice and subject to applicable United States and Canadian provisions. No additional vacation or PTO will be earned after this date.

Group Health Benefits. Carruthers’ current group health benefit coverage for health care, dental, life insurance and vision care benefits will continue, to the extent permitted by the carriers, until the earlier of the Termination Date or the date on which Carruthers becomes eligible for benefit coverage through a subsequent employer, subject to any revisions to the plans that are made generally in respect of benefits for executives of the Company. Eligibility for Grainger’s Executive Physical Examination Program shall remain available to Carruthers for the years 2015 and 2016. All other benefit coverage and Carruthers’ eligibility to participate in any other Company employee programs end on the Separation Date.

Pension Plan. The Company will, consistent with its past practice and subject to Carruthers continuing his contributions, continue its contributions to the defined contribution pension plan to the earlier of the Termination Date or the date on which Carruthers becomes eligible for membership in a pension plan through a subsequent employer. Carruthers will be contacted by the plan administrator after his participation ends regarding his options under the pension plan.

Notional Account Plan. To the extent permissible, the Company will continue to make notional contributions based on the eligible portion of the Separation Payments for the period ending on the Termination Date in accordance with the provisions of the Acklands-Grainger Inc. Notional Account Plan for Designated Executives and Senior Managers. Receipt of any Notional Account balance shall occur pursuant to the provisions of the Notional Plan. So as to insure compliance with U.S. Section 409-a, Carruthers will receive payment of all funds contained within his Notional Account 6 months after his Termination Date.

Expatriation - Long Term International Assignment. The terms of the repatriation engagement letter dated December 22, 2011, with the exception of the tax equalization provisions, shall continue to apply up to the Separation Date. Tax equalization provisions will apply to all payments pursuant to the terms of this Agreement. Should Carruthers elect to be repatriated to Canada prior to the Separation Date, the repatriation provisions of the repatriation engagement letter will be honoured. Should Carruthers return to Canada after his Separation Date but prior to September 30, 2016, Grainger will provide Carruthers with a sum, up to $25,000 against invoices for purposes of the movement of household goods between the United States and Canada.

Stock Options and Performance Share Units. Carruthers will be eligible to exercise all vested stock options pursuant to the terms of the W.W. Grainger, Inc. 2010 Incentive Plan and companion agreements. Applicable Options and Performance Share Units (i.e. awarded in 2012, 2013 and 2014) will continue to vest through the Termination Date, with any remaining unvested options or units forfeiting as of the Termination Date. Thereafter, all then vested options must be exercised on or before the expiration date of each option or within three (3) months of the Termination Date, whichever should occur first. The Special January 1, 2014 PRSU Grant shall vest by operation of this Agreement as of January 1, 2017. Performance Shares issued in 2013, 2014 and 2015 will vest by operation of this Agreement. Carruthers further understands and agrees that the non-competition provisions of performance share, restricted stock unit and/or stock option agreements to which Carruthers is a party, which provisions are incorporated herein by reference, including without limitation the W.W. Grainger, Inc. Unfair Competition Agreement dated January 1, 2015, and the W.W. Grainger, Inc. Stock Option Agreement dated April 30, 2014 (collectively, the "noncompetition provisions"), will remain in full force and effect, and are in addition to and not superseded by any other obligation set forth in this Agreement. Carruthers acknowledges and agrees that, for purposes of such agreements, his employment with the Company shall be considered terminated on the Termination Date hereunder, and the term "Date of Termination" as used in the Unfair Competition Agreement dated January 1, 2015, shall mean the Termination Date hereunder. Carruthers understands that he will not be eligible for any further grants of Stock Options or Performance Shares beyond those he has already received.

10.

Outplacement Services. Carruthers shall be provided with executive level outplacement services through one of the outplacement service providers identified by the Company. Carruthers shall have the opportunity to both interview and thereafter elect which service provider he chooses to work with from those being made available to him. Engagement of this service shall remain available to Carruthers so long as he actively begins utilization of services on or before December 31, 2016.


11.	Executive Advanced Management Program - University of Chicago. Provided that existing Executive Advanced Management Program requirements continue to be met, the Company will pay the base cost of the current program through its previously established end date.


12.	Executive Coaching. If Carruthers so requests, the Company will continue to make Executive Coaching services available to Carruthers, consistent with his current engagement schedule, through his Separation Date.


13.	Tax Preparation. The Company will continue to provide tax preparation services to Carruthers for services incurred in the preparation of his tax returns through to the year following the last scheduled year in which Carruthers is receiving payments pursuant to the terms of this Agreement.

14.

Waiver and Release of All Claims. In consideration for the promises and undertakings contained in this Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, Carruthers and his marital community, descendants, dependents, heirs, representatives, agents, attorneys, successors and assigns, hereby waive, release, and discharge the Company, W.W. Grainger, Inc., their affiliates and subsidiaries (collectively “Grainger”) from any and all complaints, claims, charges, claims for relief, demands, suits, actions, and causes of action, whether in law or in equity, whether administrative, judicial, or other, which they have asserted or could assert against Grainger at common law or under any statute, ordinance, rule, regulation, order, policy, or law, whether federal, state, provincial or local, on any grounds whatsoever, known or unknown, including any and all claims arising under the Employment Standards Act, 2000, the Human Rights Code (Ontario), Illinois’ fair employment statutes, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Civil Rights Acts of 1866 and 1871, the Immigration Reform and Control Act, the Fair Labor Standards Act, the Employee Retirement and Income Security Act, the federal Family and Medical Leave Act, the Americans with Disabilities Act, the Equal Pay Act, the Age Discrimination in Employment Act, the Older Workers’ Benefit Protection Act, and any and all actions for breach of contract, express or implied, breach of the covenant of good faith and fair dealing, express or implied, wrongful termination in violation of public policy, all other claims for wrongful termination and constructive discharge, and all other tort claims, including assault, battery, intentional or negligent infliction of emotional distress, invasion of privacy, negligence, negligent investigation, negligent hiring or retention, defamation, libel or slander, intentional or negligent misrepresentation, fraud, whistleblowing, and any and all other laws and regulations relating to employment termination, employment discrimination, harassment or retaliation, wages, hours, benefits, compensation, bonuses, incentives, and any and all claims for attorneys’ fees and costs. This waiver and release of claims includes all other claims, disputes, and causes of action arising out of Carruthers’ employment with Grainger and the end of that employment up to the date of execution of this Agreement.


15.	Officer Indemnification. The current officer indemnification coverage shall remain in full force and effect pursuant to the terms and conditions of the Individual Indemnification Agreement with Carruthers, as well as continued coverage under the Company’s Directors & Officers indemnity program subject to the terms and conditions of the program.

16.

Covenants of Carruthers. It is a condition of this Agreement that Carruthers agree to the following cooperation, non-disclosure, non-competition, non-solicitation and non-disparagement covenants. Continued payments under this Agreement are contingent upon continued compliance with these obligations. In the event of a violation of any of these covenants by Carruthers, all Separation Payments, benefits and other compensation under this Agreement will cease forthwith and the Company will have no further obligations whatsoever to Carruthers subject to any statutory entitlements.

Co-operation and Assistance. Carruthers agrees that he will make himself available, as requested and at reasonable times, to provide assistance relative to Company-related matters as well as to assist on any litigation or other or legal matter of which Carruthers has knowledge or in which he was previously involved through his Termination Date. Carruthers will be reimbursed for all approved expenses he may incur in furtherance of these efforts.

Non-Competition. Carruthers understands and agrees that the non-competition, non disclosure, non-solicitation and non-disparagement provisions of the 2015 Unfair Competition Agreement, 2014 and 2015 Stock Option Award / Performance Share / PRSU Agreements to which he is a party, and which provisions are incorporated herein by reference, will remain in full force and effect, and are in addition to and not superseded by any other obligation set forth in this Agreement. Carruthers acknowledges and agrees that, for purposes of the Unfair Competition Agreement: (i) his employment with the Company shall be considered terminated on the Termination Date hereunder; (ii) the term "Date of Termination" in the Unfair Competition Agreement dated January 1, 2015, shall mean the Termination Date hereunder; and (iii) the term "Restricted Period" in such agreement shall mean the period ending December 31, 2019. At the request of Carruthers, the Company shall consider and respond to any specific requests for a waiver of any restriction against competition in respect of a specific competitor of the Company, its parent and affiliates.


17.	Change in Control. The outstanding Change of Control Agreement dated October 27, 2010 is null and void and of no effect as of the Separation Date.

18.

References and Communications. At Carruthers' request, the Company will provide positive and mutually agreed-upon references through Jim Ryan, Chairman and C.E.O of W.W. Grainger, Inc. to prospective employers. Carruthers shall have an opportunity to review and comment on any Company press release or announcement concerning his departure. In an effort to insure that no conflict exists, Carruthers shall prior to any public disclosure relating to his future employment plans or future employer, notify Grainger of said potential engagement.

19.

Governing Law; Severability. This Agreement is governed by the laws of the Province of Ontario. In the event any provision of this Agreement is determined to be unlawful or unenforceable by a duly authorized court of competent jurisdiction, the remainder of this Agreement shall not be affected thereby and each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

20.

Entire Agreement. This Agreement sets forth the full terms of the arrangements between the Company and Carruthers and supersedes any prior oral or written understanding with respect to any entitlements on termination of employment, except in so far as other agreements are incorporated by reference in this Agreement. Carruthers specifically acknowledges and agrees that, apart from the terms of this Agreement, he has no further rights to or entitlements to any additional compensation, benefits, perquisites, notice, pay in lieu of notice, severance pay, stock options or restricted stock units of any nature or kind.


21.	Confidentiality. Both parties agree that the terms associated with the development and execution of this Agreement are strictly confidential and shall not be disclosed to any other person, except as required by law, to the parties' tax or legal advisors, or by Carruthers to his spouse, who shall be informed of the obligation of confidentiality.


22.	Independent Legal Advice. Carruthers hereby accepts and agrees to the terms and conditions of this Agreement and acknowledges having had an opportunity to obtain independent legal advice prior to execution hereof.


23.	Currency. All payments and amounts referred to in this Agreement are in Canadian funds, unless otherwise specified.


24.	Successors. This Agreement shall be binding upon any successors of the Company.


25.	Effective Date. This Agreement is conditional on the approval of the Company’s Board of Directors and shall become effective, once approved, immediately after it is signed by both parties.

IN WITNESS WHEREOF the parties have signed below on July 22, 2015.



		ACKLANDS-GRAINGER INC.


/s/ Court Carruthers		/s/ Joseph C. High
Court Carruthers		By: Joseph C. High
Date: July 22, 2015		Date: July 22, 2015

CERTIFICATION

Exhibit 31(a)

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 30, 2015



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

CERTIFICATION

Exhibit 31(b)

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 30, 2015



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, 2015, (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: