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 September 30, 2015
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to _______
 
Commission file number 1-5684

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

Illinois
 
36-1150280
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 Grainger Parkway, Lake Forest, Illinois
 
60045-5201
(Address of principal executive offices)
 
(Zip Code)
(847) 535-1000
(Registrant’s telephone number including area code)
 
Not Applicable
(Former name, former address and former fiscal year; if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]  No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]  Accelerated filer [  ]   Non-accelerated filer [  ]   Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]  No [X]
 
There were 62,788,526 shares of the Company’s Common Stock outstanding as of September 30, 2015.

1




 
TABLE OF CONTENTS
 
 
 
Page No.
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
Condensed Consolidated Statements of Earnings 
    for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Comprehensive
    Earnings for the Three and NIne Months Ended September 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Balance Sheets
    as of September 30, 2015 and December 31, 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows
    for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial
    Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 
 
 
 
EXHIBITS
 
 


2



PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except for share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
2,532,900

 
$
2,562,263

 
$
7,495,126

 
$
7,453,994

Cost of merchandise sold
1,471,021

 
1,459,479

 
4,266,073

 
4,194,553

Gross profit
1,061,879

 
1,102,784

 
3,229,053

 
3,259,441

Warehousing, marketing and administrative expenses
721,150

 
717,271

 
2,180,359

 
2,178,838

Operating earnings
340,729

 
385,513

 
1,048,694

 
1,080,603

Other income and (expense):
 

 
 

 
 
 
 
Interest income
464

 
630

 
934

 
1,684

Interest expense
(13,899
)
 
(2,377
)
 
(19,719
)
 
(7,997
)
Loss from equity method investment
(5,972
)
 

 
(10,273
)
 

Other non-operating income
225

 
87

 
950

 
431

Other non-operating expense
(2,100
)
 
(1,218
)
 
(4,814
)
 
(2,048
)
Total other expense
(21,282
)
 
(2,878
)
 
(32,922
)
 
(7,930
)
Earnings before income taxes
319,447

 
382,635

 
1,015,772

 
1,072,673

Income taxes
122,825

 
149,585

 
379,769

 
411,491

Net earnings
196,622

 
233,050

 
636,003

 
661,182

Less: Net earnings attributable to noncontrolling interest
4,421

 
2,728

 
12,239

 
8,292

Net earnings attributable to W.W. Grainger, Inc.
$
192,201

 
$
230,322

 
$
623,764

 
$
652,890

Earnings per share:
 

 
 

 
 
 
 
Basic
$
2.94

 
$
3.33

 
$
9.33

 
$
9.42

Diluted
$
2.92

 
$
3.30

 
$
9.24

 
$
9.30

Weighted average number of shares outstanding:
 

 
 

 
 

 
 

Basic
64,720,037

 
68,296,018

 
66,188,236

 
68,481,681

Diluted
65,289,144

 
69,111,945

 
66,849,766

 
69,375,083

Cash dividends paid per share
$
1.17

 
$
1.08

 
$
3.42

 
$
3.09

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

3



W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
196,622

 
$
233,050

 
$
636,003

 
$
661,182

Other comprehensive earnings (losses):
 

 
 

 
 

 
 

Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $0, $2,731, $0 and $2,806, respectively
(53,062
)
 
(73,472
)
 
(120,016
)
 
(65,297
)
Net investment hedge, net of tax (expense) benefit of $0, $(2,615), $0 and $(2,360), respectively

 
4,191

 

 
3,782

Net foreign currency translation (loss)
(53,062
)
 
(69,281
)
 
(120,016
)
 
(61,515
)
Defined postretirement benefit plan:
 
 
 
 
 
 
 
Reclassification adjustments related to amortization, net of tax benefit (expense) of $510, $636, $1,531 and $(415), respectively
(813
)
 
(959
)
 
(2,436
)
 
4,054

Derivative instrument change in fair value of cash flow hedge
256

 
356

 
983

 
379

Comprehensive earnings, net of tax
143,003

 
163,166

 
514,534

 
604,100

Less: Comprehensive earnings (losses) attributable to noncontrolling interest
 
 
 
 
 
 
 
Net earnings
4,421

 
2,728

 
12,239

 
8,292

Foreign currency translation adjustments
1,521

 
(6,376
)
 
(281
)
 
(3,346
)
Comprehensive earnings attributable to W.W. Grainger, Inc.
$
137,061

 
$
166,814

 
$
502,576

 
$
599,154

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

4



W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share amounts)
 
 
(Unaudited)
 
 
ASSETS
Sep 30, 2015
 
Dec 31, 2014
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
258,151

 
$
226,644

Accounts receivable (less allowances for doubtful
 

 
 

accounts of $21,821 and $22,121, respectively)
1,291,365

 
1,172,924

Inventories – net
1,367,533

 
1,356,396

Prepaid expenses and other assets
83,859

 
102,669

Deferred income taxes
63,506

 
61,387

Prepaid income taxes
40,272

 
47,529

Total current assets
3,104,686

 
2,967,549

PROPERTY, BUILDINGS AND EQUIPMENT
3,283,369

 
3,115,130

Less: Accumulated depreciation and amortization
1,910,377

 
1,790,784

Property, buildings and equipment – net
1,372,992

 
1,324,346

DEFERRED INCOME TAXES
23,641

 
16,718

GOODWILL
678,311

 
506,905

OTHER ASSETS AND INTANGIBLES – NET
627,523

 
467,531

TOTAL ASSETS
$
5,807,153

 
$
5,283,049


5




W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands of dollars, except for share and per share amounts)
 
 
(Unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Sep 30, 2015
 
Dec 31, 2014
CURRENT LIABILITIES
 
 
 
Short-term debt
$
211,686

 
$
56,896

Current maturities of long-term debt
149,901

 
23,404

Trade accounts payable
582,477

 
554,088

Accrued compensation and benefits
182,002

 
191,696

Accrued contributions to employees’ profit sharing plans
98,458

 
178,076

Accrued expenses
308,634

 
245,300

Income taxes payable
16,039

 
12,256

Total current liabilities
1,549,197

 
1,261,716

LONG-TERM DEBT (less current maturities)
1,450,624

 
403,333

DEFERRED INCOME TAXES AND TAX UNCERTAINTIES
127,713

 
95,455

EMPLOYMENT-RELATED AND OTHER NON-CURRENT LIABILITIES
233,567

 
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
988,513

 
948,340

Retained earnings
6,730,068

 
6,335,990

Accumulated other comprehensive losses
(217,861
)
 
(96,673
)
Treasury stock, at cost – 46,870,693 and 42,227,178 shares, respectively
(5,194,299
)
 
(4,032,615
)
Total W.W. Grainger, Inc. shareholders’ equity
2,361,251

 
3,209,872

Noncontrolling interest
84,801

 
74,229

Total shareholders' equity
2,446,052

 
3,284,101

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
5,807,153

 
$
5,283,049

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

6



W.W. Grainger, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
$
636,003

 
$
661,182

Provision for losses on accounts receivable
6,416

 
7,479

Deferred income taxes and tax uncertainties
(6,906
)
 
(2,897
)
Depreciation and amortization
164,200

 
147,751

(Gains) losses from non-cash charges and sales of assets
(709
)
 
15,157

Stock-based compensation
35,627

 
38,859

Losses from equity method investment
10,273

 

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

 
 

Accounts receivable
(69,784
)
 
(163,072
)
Inventories
12,627

 
(19,755
)
Prepaid expenses and other assets
27,858

 
17,670

Trade accounts payable
19,126

 
(5,542
)
Accrued liabilities
(102,951
)
 
(45,887
)
Current income taxes payable
2,451

 
4,408

Employment-related and other non-current liabilities
2,401

 
9,257

Other – net
(702
)
 
(1,777
)
Net cash provided by operating activities
735,930

 
662,833

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Additions to property, buildings and equipment
(253,197
)
 
(240,196
)
Proceeds from sales of property, buildings and equipment
12,351

 
9,062

Equity method investment
(15,687
)
 

Net cash paid for business acquisitions, net of divestitures
(463,302
)
 
(10,606
)
Other – net
(206
)
 
6,816

Net cash used in investing activities
(720,041
)
 
(234,924
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net increase in commercial paper
177,000

 

Borrowings under lines of credit
48,032

 
76,016

Payments against lines of credit
(65,764
)
 
(92,595
)
Proceeds from issuance of long-term debt
1,241,356

 
111,647

Payments of long-term debt
(33,938
)
 
(163,968
)
Proceeds from stock options exercised
53,688

 
41,461

Excess tax benefits from stock-based compensation
24,415

 
29,442

Purchase of treasury stock
(1,177,241
)
 
(317,420
)
Cash dividends paid
(230,948
)
 
(215,265
)
Net cash provided by (used in) financing activities
36,600

 
(530,682
)
Exchange rate effect on cash and cash equivalents
(20,982
)
 
(8,137
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
31,507

 
(110,910
)
Cash and cash equivalents at beginning of year
226,644

 
430,644

Cash and cash equivalents at end of period
$
258,151

 
$
319,734

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

7



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

1.    BACKGROUND AND BASIS OF PRESENTATION
 
W.W. Grainger, Inc. is a broad-line distributor of maintenance, repair and operating 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.

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


8

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

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for fiscal years and interim reporting periods within those fiscal years, beginning after December 15, 2015. Prospective adoption is required. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

3.    DIVIDEND
 
On October 28, 2015, the Company’s Board of Directors declared a quarterly dividend of $1.17 per share, payable December 1, 2015, to shareholders of record on November 9, 2015.

4.    ACQUISITION

As previously announced, on September 1, 2015, the Company acquired all of the issued share capital of Cromwell Group (Holdings) Limited (Cromwell). With sales of approximately £285 million ($437 million) for fiscal year ending August 31, 2015, prior to the acquisition, Cromwell was the largest independent MRO distributor in the United Kingdom, serving more than 35,000 industrial and manufacturing customers worldwide with more than 80,000 products. The initial aggregate purchase price for the acquisition under the definitive share purchase agreement was £310 million ($476 million), subject to customary adjustment based on, among other things, the amount of cash, debt and working capital in the business as of August 31, 2015. The adjustment is expected to be finalized in the fourth quarter of 2015. The acquisition was partially funded with newly issued debt in the United Kingdom. Goodwill and intangibles recorded totaled approximately $353 million. The purchase price allocation has not been finalized and is subject to change as the Company obtains additional information during the measurement period related to the valuation of the acquired assets and liabilities. Disclosure of pro forma results was not required.

5.    SHORT-TERM AND LONG-TERM DEBT
 
At September 30, 2015, there was $182 million of commercial paper outstanding, issued for general working capital needs. The commercial paper will fully mature on November 3, 2015.

On June 11, 2015, the Company issued $1 billion of unsecured 4.60% Senior Notes (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 September 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, which are classified as level 2 inputs within the fair value hierarchy.

On August 26, 2015, the Company entered into an agreement for a five year term loan of £160 million and revolving credit facility of up to £20 million. Proceeds of the term loan were used to partially fund the acquisition of Cromwell and to pay certain costs related to the acquisition. Under the agreement, the principal amount of the term loan will be repaid semi-annually in installments of £4 million beginning February 29, 2016, through February 29, 2020. The remaining outstanding amount will be paid August 26, 2020. Cromwell has the right to obtain advances under the revolving credit facility which will be used for general corporate and working capital purposes. The revolver must generally be paid at the conclusion of each interest period as defined in the facility agreement. The loans will bear interest at the London Interbank Offered Rate plus a margin of 0.75% each year. The margin may be adjusted within a range of 0.75% to 3.0% each year depending on the Company's debt rating. As of September 30, 2015, there was no balance outstanding on the revolving credit facility.

9

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

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

7.    EQUITY METHOD INVESTMENT

In May 2015, the Company invested in a limited liability company established to produce refined coal, which is then sold to a utility to produce electricity.  The production and sale of refined coal is eligible for renewable energy tax credits under Section 45 of the Internal Revenue Code.  Under the terms of the investment, effective control lies with a co-investor who manages the day-to-day operations of the entity.  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 September 30, 2015, the investment balance was $5 million and is included on the balance sheet under Other assets and intangibles-net. During the nine months of 2015, the Company recorded $10 million in equity losses and the tax benefit of energy tax credits is reflected in the Company’s effective tax rate. The investment contributed $6 million to net earnings for the nine months of 2015.

8.    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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
2,532

 
$
2,251

 
$
7,596

 
$
6,754

Interest cost
2,412

 
2,637

 
7,236

 
7,911

Expected return on assets
(2,594
)
 
(2,059
)
 
(7,782
)
 
(6,178
)
Amortization of transition asset

 
(36
)
 

 
(107
)
Amortization of unrecognized losses
378

 
195

 
1,134

 
585

Amortization of prior service credits
(1,700
)
 
(1,813
)
 
(5,100
)
 
(5,440
)
Net periodic benefit costs
$
1,028

 
$
1,175

 
$
3,084

 
$
3,525

 
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 nine months ended September 30, 2015, the Company contributed $0.9 million and $3.0 million, respectively, to the trust.

10

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

9.    SEGMENT INFORMATION
 
The Company has two reportable segments: the United States and Canada. The United States segment reflects the results of the Company's U.S. operating segment. The Canada segment reflects the results for Acklands – Grainger Inc., the Company’s Canadian operating segment. Other businesses include Zoro, the single channel business in the United States, and operations in Europe, Asia and Latin America. Cromwell, the newly acquired business, has been included in other businesses. 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 September 30, 2015
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
2,039,488

 
$
213,132

 
$
354,692

 
$
2,607,312

Intersegment net sales
(73,393
)
 
(21
)
 
(998
)
 
(74,412
)
Net sales to external customers
$
1,966,095

 
$
213,111

 
$
353,694

 
$
2,532,900

Segment operating earnings
$
359,414

 
$
3,587

 
$
14,260

 
$
377,261

  
 
Three Months Ended September 30, 2014
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
2,045,077

 
$
278,271

 
$
300,760

 
$
2,624,108

Intersegment net sales
(56,634
)
 
(39
)
 
(5,172
)
 
(61,845
)
Net sales to external customers
$
1,988,443

 
$
278,232

 
$
295,588

 
$
2,562,263

Segment operating earnings
$
386,499

 
$
27,466

 
$
5,162

 
$
419,127


 
Nine Months Ended September 30, 2015
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
6,041,576

 
$
687,128

 
$
971,389

 
$
7,700,093

Intersegment net sales
(201,978
)
 
(74
)
 
(2,915
)
 
(204,967
)
Net sales to external customers
$
5,839,598

 
$
687,054

 
$
968,474

 
$
7,495,126

Segment operating earnings
$
1,095,036

 
$
22,474

 
$
38,943

 
$
1,156,453

  
 
Nine Months Ended September 30, 2014
 
United States
 
Canada
 
Other Businesses
 
Total
Total net sales
$
5,935,343

 
$
796,614

 
$
874,592

 
$
7,606,549

Intersegment net sales
(146,860
)
 
(127
)
 
(5,568
)
 
(152,555
)
Net sales to external customers
$
5,788,483

 
$
796,487

 
$
869,024

 
$
7,453,994

Segment operating earnings
$
1,105,286

 
$
67,974

 
$
13,180

 
$
1,186,440



11

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

 
United States
 
Canada
 
Other Businesses
 
Total
Segment assets:
 
 
 
 
 
 
 
September 30, 2015
$
2,194,560

 
$
337,019

 
$
520,676

 
$
3,052,255

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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Operating earnings:
 
 
 
Total operating earnings for operating segments
$
377,261

 
$
419,127

 
$
1,156,453

 
$
1,186,440

Unallocated expenses and eliminations
(36,532
)
 
(33,614
)
 
(107,759
)
 
(105,837
)
Total consolidated operating earnings
$
340,729

 
$
385,513

 
$
1,048,694

 
$
1,080,603

 
 
Sep 30, 2015
 
Dec 31, 2014
Assets:
 
Total assets for operating segments
$
3,052,255

 
$
2,921,850

Other current and non-current assets
2,484,149

 
2,113,900

Unallocated assets
270,749

 
247,299

Total consolidated assets
$
5,807,153

 
$
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.

Intersegment net sales for the U.S. segment increased by $55 million for the nine 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.

Segment assets for Canada decreased by $57 million at September 30, 2015 compared to December 31, 2014, primarily due to foreign exchange. The increase in segment assets for other businesses in the same period was primarily driven by the Cromwell acquisition.

Other current and non-current assets increased by $370 million at September 30, 2015 compared to December 31, 2014, primarily due to higher goodwill and intangible balances, as a result of the Cromwell acquisition.

12

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

10.    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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net earnings attributable to W.W. Grainger, Inc. as reported
$
192,201

 
$
230,322

 
$
623,764

 
$
652,890

Distributed earnings available to participating securities
(676
)
 
(788
)
 
(2,187
)
 
(2,350
)
Undistributed earnings available to participating securities
(1,138
)
 
(1,825
)
 
(4,012
)
 
(5,603
)
Numerator for basic earnings per share – Undistributed and distributed earnings available to common shareholders
190,387

 
227,709

 
617,565

 
644,937

Undistributed earnings allocated to participating securities
1,138

 
1,825

 
4,012

 
5,603

Undistributed earnings reallocated to participating securities
(1,129
)
 
(1,803
)
 
(3,972
)
 
(5,532
)
Numerator for diluted earnings per share – Undistributed and distributed earnings available to common shareholders
$
190,396

 
$
227,731

 
$
617,605

 
$
645,008

Denominator for basic earnings per share – weighted average shares
64,720,037

 
68,296,018

 
66,188,236

 
68,481,681

Effect of dilutive securities
569,107

 
815,927

 
661,530

 
893,402

Denominator for diluted earnings per share – weighted average shares adjusted for dilutive securities
65,289,144

 
69,111,945

 
66,849,766

 
69,375,083

Earnings per share two-class method
 

 
 

 
 
 
 
Basic
$
2.94

 
$
3.33

 
$
9.33

 
$
9.42

Diluted
$
2.92

 
$
3.30

 
$
9.24

 
$
9.30



11.    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.

13

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 (July)
2015 Forecast (October)
 
2015 Forecast (July)
2015 Forecast (October)
GDP
2.2%
2.5%
 
1.5%
1.0%
Industrial Production
1.5%
1.3%
 
(1.8)%
(1.0)%
Exports
2.2%
1.7%
 
2.9%
2.1%
Business Investment
5.3%
3.5%
 
(2.1)%
(2.7)%
Business Inventory
2.7%
4.2%
 
Oil Prices
$55/barrel
$46/barrel
 
$55/barrel
$46/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 have slowed in 2015 and the month of August showed a sharp decline due to three factors: weak global demand, lower oil prices and the strengthening U.S. dollar. 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 has also had a significant impact on business investment in industries such as energy 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 0.9% in manufacturing employment levels from September 2014 to September 2015. According to the Federal Reserve, manufacturing output increased 1.4% from September 2014 to September 2015. Grainger’s heavy and light manufacturing customer end-markets performed consistent with these indicators as sales to these customer end-markets in aggregate increased in the low single digits for the nine months of 2015.
According to Global Insight, the Canadian economy has deteriorated in 2015 as the Canadian dollar weakened relative to the U.S. dollar to new 11-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 nine months of 2015.

14

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

Outlook
On October 16, 2015, Grainger revised the 2015 sales growth guidance from a range of 0 to 2 percent to a range of -0.5 to 0.5 percent and also revised the 2015 earnings per share guidance from a range of $12.00 to $12.50 to a range of $11.60 to $11.80. The revised sales and earnings per share guidance reflects expectations of continued economic weakness.

Matters Affecting Comparability
There were 64 sales days in the third quarter of 2015 and 2014. Grainger completed the Cromwell Group (Holdings) Limited acquisition in the third quarter of 2015, the WFS Enterprises, Inc. (WFS) acquisition in the third quarter of 2014 and announced plans in the fourth quarter of 2014 to close the business in Brazil. All of these transactions were immaterial individually and in the aggregate.

Results of Operations – Three Months Ended September 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 September 30,
 
As a Percent of Net Sales
 
Percent Increase/(Decrease)
 
2015
 
2014
 
Net sales
100.0
 %
 
100.0
 %
 
(1.1
)%
Cost of merchandise sold
58.1

 
57.0

 
0.8

Gross profit
41.9

 
43.0

 
(3.7
)
Operating expenses
28.4

 
28.0

 
0.5

Operating earnings
13.5

 
15.0

 
(11.6
)
Other income (expense)
(0.8
)
 
(0.1
)
 
639.5

Income taxes
4.9

 
5.8

 
(17.9
)
Noncontrolling interest
0.2

 
0.1

 
62.0

Net earnings attributable to W.W. Grainger, Inc.
7.6
 %
 
9.0
 %
 
(16.6
)%

Grainger’s net sales of $2,533 million for the third quarter of 2015 decreased 1% compared with sales of $2,562 million for the comparable 2014 quarter. The 1% decrease for the quarter consisted of the following:
 
Percent Increase/(Decrease)
Volume
1
Business acquisitions
2
Foreign exchange
(3)
Price
(1)
Total
(1)%

The decrease in net sales was driven by negative growth to natural resources, contractors, resellers and heavy manufacturing customers. The sales decline was partially offset by growth to the light manufacturing, government, commercial services and retail customer end markets. Refer to the Segment Analysis below for further details.

Gross profit of $1,062 million for the third quarter of 2015 decreased 4%. The gross profit margin during the third quarter of 2015 decreased 1.1 percentage points when compared to the same period in 2014, primarily driven by faster growth with lower margin customers, price deflation versus slight cost inflation and smaller supplier rebates tied to lower-than-expected volume.


15

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

Operating expenses of $721 million for the third quarter of 2015 increased 1% from $717 million for the comparable 2014 quarter. Operating expenses in 2015 included $11 million in costs associated with the anticipated closing of 26 branches in the United States and other restructuring costs. Excluding these charges, operating expenses decreased 1%, driven primarily by lower payroll and benefits, partially offset by $43 million in incremental growth and infrastructure spending.

Operating earnings for the third quarter of 2015 were $341 million, a decrease of 12% compared to the third quarter of 2014. Excluding the charges mentioned above, operating earnings decreased 9%, driven by lower sales and gross profit margins.

Net earnings attributed to W.W. Grainger, Inc. for the third quarter of 2015 decreased 17% to $192 million from $230 million in the third quarter of 2014. Diluted earnings per share of $2.92 in the third quarter of 2015 were down 12% versus the $3.30 for the third quarter of 2014, due to lower earnings, partially offset by lower average shares outstanding.

The table below reconciles reported diluted earnings per share determined in accordance with generally accepted accounting principles (GAAP) in the United States to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
%
Diluted earnings per share reported
$2.92
 
$3.30
(12
)%
U.S. Branch closures
0.06
 
 
Restructuring
0.05
 
 
Subtotal
$0.11
 
 
Diluted earnings per share adjusted
$3.03
 
$3.30
(8
)%

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

The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 9 to the Condensed Consolidated Financial Statements.

United States
Net sales were $2,039 million for the third quarter of 2015, a decrease of $6 million, or flat, when compared with net sales of $2,045 million for the same period in 2014. The drivers of net sales for the period consisted of the following:
 
Percent Increase/(Decrease)
Intercompany sales to Zoro
1
Price
(1)
Total
0%

Sales to natural resource customers were down in the high teens and the heavy manufacturing and reseller customer end markets were down in the mid-single digits. Contractor customers were down in the low single digits and commercial, light manufacturing, retail and government customers were up in the low single digits. 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.


16

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

The gross profit margin for the third quarter of 2015 decreased 1.2 percentage points compared to the same period in 2014, primarily driven by faster growth with large customers which carry lower margins, price deflation exceeding cost deflation and higher sales to Zoro reflecting the lower transfer price used to account for these intercompany sales. Excluding sales to Zoro, the gross profit margin decreased 0.9 percentage point versus prior year.

Operating expenses were flat in the third quarter of 2015 versus the third quarter of 2014. Operating expenses in 2015 included $9 million in costs relating to the announcement of branch closures and restructuring. Excluding these charges, operating expenses decreased 2 percent driven by lower payroll and benefits, partially offset by $30 million of incremental spending on growth initiatives such as new sales representatives, eCommerce and inventory management solutions.

Operating earnings of $359 million for the third quarter of 2015 decreased 7% from $386 million for the third quarter of 2014. Excluding the charges mentioned above, operating earnings decreased 5%, driven primarily by lower gross profit margins.

Canada
Net sales were $213 million for the third quarter of 2015, a decrease of $65 million, or 23%, when compared with $278 million for the same period in 2014. In local currency, sales decreased 8%. The 23% decrease for the quarter consisted of the following:
 
Percent Increase/(Decrease)
Volume
(17)
Foreign exchange
(15)
Business acquisition
4
Price
5
Total
(23)%

Sales performance in Canada was driven by declines in the oil and gas, construction, commercial, transportation, retail, heavy manufacturing, government and light manufacturing customer end markets, partially offset by growth to customers in mining, utilities and forestry end markets. The Alberta region, which represents more than one-third of the sales in the Canadian business, decreased 26% versus prior year as it was negatively impacted by lower oil prices. Sales growth for the remaining regions in aggregate was down 3% in local currency.

The gross profit margin decreased 1.3 percentage points in the third quarter of 2015 versus the third quarter of 2014, partially due to lower margins from WFS. Excluding the impact of WFS, gross margins decreased 0.8 percentage point primarily due to the effect of unfavorable foreign exchange from products sourced from the United States and lower supplier rebates, partially offset by price increases.

Operating expenses decreased 5% in the third quarter of 2015 versus the third quarter of 2014. In local currency, operating expenses increased 14%, primarily due to $6 million of incremental spending related to information technology investments, $3 million of incremental costs from WFS and restructuring costs of $1 million. Excluding the information technology spending and restructuring costs, operating expenses increased 3% due to higher payroll and benefits.

Operating earnings of $4 million for the third quarter of 2015 were down $24 million, or 87%, versus the third quarter of 2014. In local currency, operating earnings decreased by 84%. Excluding the information technology spending and restructuring costs mentioned above, operating earnings decreased by 52% driven by lower sales, lower gross profit margins and negative operating expense leverage.


17

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

Other Businesses
Net sales for other businesses, which include Zoro U.S. and operations in Europe, Asia, Latin America, and the newly acquired Cromwell, were $355 million for the third quarter of 2015, an increase of $54 million, or 18%, when compared with net sales of $301 million for the same period in 2014. The drivers of net sales for the quarter consisted of the following:
 
Percent Increase/(Decrease)
Volume/Price
22
Business acquisition
12
Foreign exchange
(16)
Total
18%

Operating earnings of $14 million for the third quarter of 2015 were up $9 million compared to the third quarter of 2014. The earnings performance for the quarter versus prior year was primarily driven by improved earnings from Zoro U.S. and the business in Japan as well as contribution from Cromwell, partially offset by startup costs for the single channel online business in Europe.

Other Income and Expense
Other income and expense was $21 million of expense in the third quarter of 2015 compared to $3 million of expense in the third quarter of 2014. The increase in expense was driven by higher interest expense from the $1 billion in long-term debt issued in June, as well as operating losses from the 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 38.4% and 39.1% for the three months ended September 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, partially offset by a higher proportion of earnings from the United States versus other jurisdictions with lower tax rates.


18

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

Matters Affecting Comparability
There were 191 sales days in the nine months of 2015 and 2014. Grainger completed the Cromwell acquisition in the third quarter of 2015, WFS acquisition in the third quarter of 2014 and announced plans in the fourth quarter of 2014 to close the business in Brazil. All of these transactions were immaterial individually and in the aggregate.

Results of Operations – Nine Months Ended September 30, 2015
The following table is included as an aid to understanding the changes in Grainger’s Condensed Consolidated Statements of Earnings:
 
Nine Months Ended September 30,
 
As a Percent of Net Sales
 
Percent Increase/(Decrease)
 
2015
 
2014
 
Net sales
100.0
 %
 
100.0
 %
 
0.6
 %
Cost of merchandise sold
56.9

 
56.3

 
1.7

Gross profit
43.1

 
43.7

 
(0.9
)
Operating expenses
29.1

 
29.2

 
0.1

Operating earnings
14.0

 
14.5

 
(3.0
)
Other income (expense)
(0.4
)
 
(0.1
)
 
315.2

Income taxes
5.1

 
5.5

 
(7.7
)
Noncontrolling interest
0.2

 
0.1

 
47.6

Net earnings attributable to W.W. Grainger, Inc.
8.3
 %
 
8.8
 %
 
(4.5
)%

Grainger’s net sales of $7,495 million for the nine months of 2015 increased 1% compared with sales of $7,454 million for the comparable 2014 period. The 1% increase for the period consisted of the following:
 
Percent Increase/(Decrease)
Volume
3
Business acquisitions
1
Foreign exchange
(3)
Total
1%

The increase in net sales for the nine 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 $3,229 million for the nine months of 2015 decreased 1%. The gross profit margin during the nine months of 2015 decreased 0.6 percentage point when compared to the same period in 2014, primarily driven by faster growth with lower margin customers, price deflation versus cost inflation and smaller supplier rebates tied to lower-than-expected volume.

Operating expenses of $2,180 million for the nine months of 2015 were flat versus $2,179 million for the comparable 2014 period. Operating expenses in 2015 included $15 million in costs associated with the anticipated closing of 26 branches in the United States and other restructuring costs. 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 flat versus the comparable 2014 period, primarily driven by $101 million in incremental growth and infrastructure spending, offset by lower payroll and benefits.
 
Operating earnings for the nine months of 2015 were $1,049 million, a decrease of $32 million or 3%, compared to the nine months of 2014. Excluding the charges in both years mentioned above, operating earnings decreased 3%, primarily due to lower gross profit margins.


19

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 nine months of 2015 decreased by 4% to $624 million from $653 million in the nine months of 2014. Diluted earnings per share of $9.24 in the nine months of 2015 were 1% lower than the $9.30 for the nine months of 2014, due to lower earnings, partially offset by lower average shares outstanding.

The table below reconciles reported diluted earnings per share determined in accordance with generally accepted accounting principles (GAAP) in the United States to adjusted diluted earnings per share, a non-GAAP measure. Management believes adjusted diluted earnings per share is an important indicator of operations because it excludes items that may not be indicative of core operating results. Because non-GAAP financial measures are not standardized, it may not be possible to compare this financial measure with other companies' non-GAAP financial measures having the same or similar names.
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
%
Diluted earnings per share reported
$9.24
 
$9.30
(1
)%
U.S. Branch closures
0.06
 
 
Restructuring
0.10
 
 
Retirement plan transition
 
0.15
 
Subtotal
$0.16
 
$0.15
 
Diluted earnings per share adjusted
$9.40
 
$9.45
(1
)%

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

The following comments at the segment and business unit level include external and intersegment net sales and operating earnings. See Note 9 to the Condensed Consolidated Financial Statements.

United States
Net sales were $6,042 million for the nine months of 2015, an increase of $107 million, or 2%, when compared with net sales of $5,935 million for the same period in 2014. The 2% increase for the period 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 commercial service, light manufacturing and government customers and low single digit growth to retail customers. Resellers were down in the mid-single digits and the natural resources customer end market was down in the low double 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 nine months of 2015 decreased 0.7 percentage point compared to the same period in 2014, primarily driven by faster growth with large customers which carry lower margins, price deflation exceeding cost deflation and higher sales to Zoro reflecting the lower transfer price used to account for these intercompany sales. Excluding sales to Zoro, gross profit margins decreased 0.4 percentage point versus prior year.

Operating expenses were up 1% in the nine months of 2015 versus the nine months of 2014, driven by $75 million of incremental spending on growth initiatives such as new sales representatives, eCommerce and inventory management solutions and also costs related to branch closures and restructuring, partially offset by lower payroll and benefits. Excluding the charges related to branch closures and restructuring, operating expenses were flat versus prior year.

20

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


Operating earnings of $1,095 million for the nine months of 2015 decreased 1% from $1,105 million for the nine months of 2014. Excluding the charges related to branch closures and restructuring, operating earnings were flat driven by positive operating expense leverage, offset by lower sales and lower gross profit margins.

Canada
Net sales were $687 million for the nine months of 2015, a decrease of $110 million, or 14%, when compared with $797 million for the same period in 2014. In local currency, sales decreased 2%. The 14% decrease for the period consisted of the following:
 
Percent Increase/(Decrease)
Foreign Exchange
(12)
Volume
(12)
Business acquisition
6
Price
4
Total
(14)%

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

The gross profit margin decreased 1.0 percentage point in the nine months of 2015 versus the nine months 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, partially offset by price increases and higher freight revenue.

Operating expenses in the nine months of 2015 were down 1% versus the nine months of 2014. In local currency, operating expenses increased 13%, primarily due to incremental costs from WFS and spending related to information technology investments.

Operating earnings of $22 million for the nine months of 2015 were down $46 million, or 67%, versus the nine months of 2014. In local currency, operating earnings decreased by 62%, driven by lower sales, negative operating expense leverage and lower gross profit margins.

Other Businesses
Net sales for other businesses, which include Zoro U.S. and operations in Europe, Asia, Latin America, and the newly acquired Cromwell, were $971 million for the nine months of 2015, an increase of $96 million, or 11%, when compared with net sales of $875 million for the same period in 2014. The drivers of net sales for the period consisted of the following:
 
Percent Increase/(Decrease)
Volume/Price
22
Business acquisition
4
Foreign exchange
(15)
Total
11%

Operating earnings of $39 million in the nine months of 2015 increased $26 million compared to the nine months of 2014. Operating earnings in 2015 included $5 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. Excluding these charges, operating earnings increased by $17 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.


21

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

Other Income and Expense
Other income and expense was $33 million of expense in the nine months of 2015 compared to $8 million of expense in the nine months of 2014. The increase in expense was driven by higher interest expense from the $1 billion in long-term debt issued in June, as well as operating losses from the 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 37.4% and 38.4% for the nine months ended September 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, partially offset by a higher proportion of earnings from the United States versus other jurisdictions with lower tax rates.

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 $736 million and $663 million for the nine months ended September 30, 2015 and 2014, respectively. Higher cash flows from operating activities was driven primarily by lower accounts receivable balances tied to lower sales, partially offset by lower net earnings.

Net cash used in investing activities was $720 million and $235 million for the nine months ended September 30, 2015 and 2014, respectively. The higher use of cash was driven by the Cromwell acquisition in September of 2015. 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 $37 million for the nine months ended September 30, 2015, compared to $531 million used in financing activities for the nine months ended September 30, 2014. Financing activity for the 2015 period was primarily driven by proceeds from the issuance of $1 billion in long-term debt in June and the £160 million term loan in August. 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 September 30, 2015, was $1,836 million, an increase of $139 million when compared to $1,697 million at December 31, 2014. The working capital assets to working capital liabilities ratio increased to 2.5 at September 30, 2015, from 2.4 at December 31, 2014. The increase primarily related to higher accounts receivable balances from the Cromwell acquisition and lower profit sharing accruals due to the timing of annual payments and lower business performance.

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 42.6% at September 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 repurchase 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 5 to the Condensed Consolidated Financial Statements.

22

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; unanticipated weather conditions; and Grainger's ability to realize the cost savings, synergies and other strategic benefits of the Cromwell acquisition.

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.

23


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 third 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 11 to the Condensed Consolidated Financial Statements included under Item 1.



24


W.W. Grainger, Inc. and Subsidiaries


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities – Third 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
July 1 – July 31
451,484
$234.42
451,484
13,258,998
Aug. 1 – Aug. 31
1,449,225
$223.32
1,449,225
11,809,773
Sept. 1 – Sept. 30
1,480,704
$217.71
1,480,704
10,329,069
Total
3,381,413
$222.35
3,381,413
 
 
(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)
 
 
 
 
 
 
2.1
Share Purchase Agreement, dated as of July 30, 2015, by and among W.W. Grainger, Inc., GWW UK Holdings Limited, Gregory Family Office Limited and Michael Gregory (incorporated by reference to Exhibit 2.1 to W.W. Grainger, Inc.’s Current Report on Form 8-K filed with the SEC on July 31, 2015, File No. 001-05684)
 
 
(10)
Material Contracts
 
 
 
(a) (i) Credit Agreement, dated as of August 22, 2013, by and among W.W. Grainger, Inc., the borrowing subsidiaries parties thereto, the lenders parties thereto, and U.S. Bank National Association, as Administrative Agent
 
 
 
(a) (ii) Amendment No. 1, dated as of April 7, 2015, to Credit Agreement, dated as of August 22, 2013, by and among W.W. Grainger, Inc., the borrowing subsidiaries parties thereto, the lenders parties thereto, and U.S. Bank National Association, as Administrative Agent
 
 
(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.

25



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:
October 29, 2015
 
 
 
By:
 
 
 
/s/ R. L. Jadin
 
 
 
R. L. Jadin, Senior Vice President
and Chief Financial Officer
Date:
October 29, 2015
 
 
 
By:
 
 
 
/s/ W. Lomax
 
 
 
W. Lomax, Vice President
and Controller


26

EXECUTION VERSION

$600,000,000
CREDIT AGREEMENT
dated as of August 22, 2013
by and among
W.W. GRAINGER, INC.,
as the Company,
the Borrowing Subsidiaries parties hereto,
the Lenders referred to herein,
U.S. BANK NATIONAL ASSOCIATION,
as Administrative Agent
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Syndication Agent
and
BANK OF AMERICA, N.A., THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.,
HSBC BANK USA, NATIONAL ASSOCIATION, JPMORGAN CHASE BANK, N.A.
and
THE NORTHERN TRUST COMPANY,
as Co-Documentation Agents
and
U.S. BANK NATIONAL ASSOCIATION
and
WELLS FARGO SECURITIES, LLC
as Joint Lead Arrangers and Joint Book Runners







TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1

 
 
Section 1.1    Definitions
1

Section 1.2    General
18

Section 1.3    Other Definitions and Provisions
18

ARTICLE II
REVOLVING CREDIT FACILITY
19

 
 
Section 2.1    Revolving Credit Loans and Competitive Bid Loans
19

Section 2.2    Procedure for Advance of Competitive Bid Loans
20

Section 2.3    Procedure for Advances of Revolving Credit Loans
22

Section 2.4    Repayment of Loans
23

Section 2.5    Noteless Agreement; Evidence of Indebtedness
24

Section 2.6    Permanent Reduction of the Aggregate Commitment
25

Section 2.7    Termination of Credit Facility
25

Section 2.8    Increase of Aggregate Commitment
26

Section 2.9    Defaulting Lenders
27

Section 2.10 Designation of Borrowing Subsidiaries
29

ARTICLE III
GENERAL LOAN PROVISIONS
30

 
 
Section 3.1    Interest
30

Section 3.2    Notice and Manner of Conversion or Continuation of Loans
34

Section 3.3    Facility Fees
34

Section 3.4    Manner of Payment
35

Section 3.5    Crediting of Payments and Proceeds
36

Section 3.6    Adjustments
36

Section 3.7    Nature of Obligations of Lenders Regarding Loans; Assumption by the Administrative Agent
37

Section 3.8    Changed Circumstances
37

Section 3.9    Indemnity
42

Section 3.10  Capital Requirements
43

Section 3.11 Taxes
44

Section 3.12   Mitigation of Loss; Replacement of Lenders
48


i



ARTICLE IV
CONDITIONS OF CLOSING AND BORROWING
49

 
 
Section 4.1    Conditions to Closing and Initial Loans
49

Section 4.2    Conditions to All Loans
51

ARTICLE V
REPRESENTATIONS AND WARRANTIES
52

 
 
Section 5.1    Existence and Power
52

Section 5.2    Authorization; No Contravention
52

Section 5.3    Governmental Authorization
53

Section 5.4    Binding Effect
53

Section 5.5    Litigation
53

Section 5.6    No Default
53

Section 5.7    ERISA Compliance
53

Section 5.8    Use of Proceeds; Margin Regulations
54

Section 5.9    Title to Properties
54

Section 5.10   Taxes
54

Section 5.11   Financial Condition
54

Section 5.12   Environmental Matters
55

Section 5.13   Regulated Entities
55

Section 5.14   No Burdensome Restrictions
55

Section 5.15   Subsidiaries
55

Section 5.16   Insurance
55

Section 5.17   Full Disclosure
56

ARTICLE VI
AFFIRMATIVE COVENANTS
56

 
 
Section 6.1    Financial Statements
56

Section 6.2    Certificates; Other Information
57

Section 6.3    Notices
58

Section 6.4    Preservation of Existence, Etc
59

Section 6.5    Maintenance of Property
60

Section 6.6    Insurance
60

Section 6.7    Payment of Obligations
60

Section 6.8    Compliance with Laws
60

Section 6.9    Compliance with ERISA
60

Section 6.10   Inspection of Property and Books and Records
61

Section 6.11   Environmental Laws
61

Section 6.12   Use of Proceeds
61

Section 6.13   PATRIOT Act Compliance
61


ii



ARTICLE VII
NEGATIVE COVENANTS
61

 
 
Section 7.1    Limitation on Liens
61

Section 7.2    Disposition of Assets
63

Section 7.3    Consolidations and Mergers
63

Section 7.4    Loans and Investments
63

Section 7.5    Limitation on Subsidiary Debt
64

Section 7.6    Transactions with Affiliates
64

Section 7.7    Use of Proceeds
64

Section 7.8    ERISA
65

Section 7.9    Change in Business
65

Section 7.10   Restriction on Subsidiary Dividends
65

ARTICLE VIII
EVENTS OF DEFAULT
65

 
 
Section 8.1    Events of Default
65

Section 8.2    Remedies
67

Section 8.3    Rights Not Exclusive
67

ARTICLE IX
THE ADMINISTRATIVE AGENT
68

 
 
Section 9.1    Appointment
68

Section 9.2    Delegation of Duties
68

Section 9.3    Exculpatory Provisions
68

Section 9.4    Reliance by the Administrative Agent
69

Section 9.5    Notice of Default
69

Section 9.6    Non-Reliance on the Administrative Agent and Other Lenders
70

Section 9.7    Indemnification
70

Section 9.8    The Administrative Agent in Its Individual Capacity
71

Section 9.9    Resignation of the Administrative Agent; Successor Administrative Agent
71

Section 9.10  No Other Duties, Etc.
71


iii



ARTICLE X
MISCELLANEOUS
72

 
 
Section 10.1    Notices
72

Section 10.2    Expenses; Indemnity
73

Section 10.3    Set-off
74

Section 10.4    Governing Law
74

Section 10.5    Jurisdiction and Venue
74

Section 10.6    Reserved
74

Section 10.7    Reversal of Payments
75

Section 10.8    Accounting Matters
75

Section 10.9    Successors and Assigns; Participations
75

Section 10.10  Amendments, Waivers and Consents
78

Section 10.11  Performance of Duties
79

Section 10.12  All Powers Coupled with Interest
79

Section 10.13  Survival of Indemnities
79

Section 10.14  Titles and Captions
79

Section 10.15  Severability of Provisions
79

Section 10.16  Counterparts
79

Section 10.17  Term of Agreement
79

Section 10.18  Advice of Counsel
79

Section 10.19  No Strict Construction
79

Section 10.20  PATRIOT Act Notice
80

Section 10.21  Inconsistencies with Other Documents; Independent Effect of Covenants
80

ARTICLE XI
GUARANTY
80


iv



EXHIBITS
Exhibit A-1
-
Form of Revolving Credit Note
Exhibit A-2
-
Form of Competitive Bid Note
Exhibit B
-
Form of Notice of Borrowing
Exhibit C-1
-
Form of Competitive Bid Request
Exhibit C-2
-
Form of Invitation to Bid
Exhibit C-3
-
Form of Competitive Bid
Exhibit C-4
-
Form of Competitive Bid Accept/Reject Letter
Exhibit D
-
Form of Notice of Account Designation
Exhibit E
-
Form of Notice of Prepayment
Exhibit F
-
Form of Lender Addition and Acknowledgment Agreement
Exhibit G
-
Form of Notice of Conversion/Continuation
Exhibit H
-
Form of Assignment and Acceptance
Exhibit I
-
Form of Borrowing Subsidiary Agreement
Exhibit J
-
Form of Borrowing Subsidiary Termination
SCHEDULES
Schedule 1.1
-
Lenders and Commitments
Schedule 5.5
-
Litigation
Schedule 5.7
-
ERISA
Schedule 5.15
-
Subsidiaries and Material Equity Investments
Schedule 5.16
-
Insurance Matters
Schedule 7.1
-
Existing Liens

v



CREDIT AGREEMENT, dated as of the 22nd day of August, 2013, by and among W.W. GRAINGER, INC., an Illinois corporation (the “Company”), the subsidiaries who may become a party to this Agreement (the “Borrowing Subsidiaries” and together with the Company, the “Borrowers”), the lenders who are or may become a party to this Agreement (the “Lenders”), and U.S. BANK NATIONAL ASSOCIATION, a national banking association, as administrative agent for the Lenders (the “Administrative Agent”).
STATEMENT OF PURPOSE
The Company has requested, and the Lenders have agreed, to extend certain credit facilities to the Borrowers on the terms and conditions of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1    Definitions. The following terms when used in this Agreement shall have the meanings assigned to them below:
Absolute Rate” means, as to any Competitive Bid made by a Lender pursuant to Section 2.2(b), the fixed percentage rate per annum (expressed in the form of a decimal to no more than four (4) decimal places) specified by the Lender making such Competitive Bid.
Absolute Rate Loan” means any Competitive Bid Loan bearing interest at the Absolute Rate determined in accordance with Section 2.2.
Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of fifty percent (50%) of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity.
Administrative Agent” means U.S. Bank National Association in its capacity as Administrative Agent hereunder, and any successor thereto appointed pursuant to Section 9.9.
Administrative Agent’s Office” means the office of the Administrative Agent specified in or determined in accordance with the provisions of Section 10.1(c).



1



Affiliate” means, with respect to any Person, any other Person (other than a Subsidiary of the Company) which directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person or any of its Subsidiaries. The term “control” means (a) the power to vote twenty-five percent (25%) or more of the securities or other equity interests of a Person having ordinary voting power, or (b) the possession, directly or indirectly, of any other power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.
Aggregate Commitment” means the aggregate Dollar Amount of the Lenders’ Commitments hereunder, as such amount may be reduced or otherwise modified at any time or from time to time pursuant to the terms hereof. On the Closing Date, the Aggregate Commitment shall be Six Hundred Million Dollars ($600,000,000).
Agreed Currencies” means (i) Dollars, (ii) any other Eligible Currency which the Company requests the Administrative Agent to include as an Agreed Currency hereunder for purposes of Loans to the Company and which is acceptable to the Administrative Agent and (iii) any other Eligible Currency which the Company requests the Administrative Agent to include as an Agreed Currency hereunder for purposes of Loans to any Borrowing Subsidiary and which is acceptable to the Lenders who have agreed to make Loans to such Borrowing Subsidiary.
Agreement” means this Credit Agreement, as amended, restated, supplemented or otherwise modified from time to time.
Applicable Law” means all applicable provisions of constitutions, laws, statutes, ordinances, rules, treaties, regulations, permits, licenses, approvals, interpretations and orders of courts or Governmental Authorities and all orders and decrees of all courts and arbitrators.
Applicable Margin” shall have the meaning assigned thereto in Section 3.1(c).
Approximate Equivalent Amount” of any currency with respect to any amount of Dollars shall mean the Equivalent Amount of such currency with respect to such amount of Dollars on or as of such date, rounded up to the nearest amount of such currency as determined by the Administrative Agent from time to time.
Asset Sale” shall have the meaning assigned thereto in Section 7.2.
Assignment and Acceptance” shall have the meaning assigned thereto in Section 10.9.
Bankruptcy Code” means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. §101, et seq.).




2



Base Rate” means, at any time, the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 1/2 of 1% and (c) the LIBOR Rate for a one month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) for Dollars plus 1.00%, provided that, for the avoidance of doubt, the LIBOR Rate for any day shall be based on the rate reported by the applicable financial information service at approximately 11:00 a.m. London time on such day; each change in the Base Rate shall take effect simultaneously with the corresponding change or changes in the Prime Rate or the Federal Funds Rate or the LIBOR Rate.
Base Rate Loan” means any Loan bearing interest at a rate based upon the Base Rate as provided in Section 3.1(a).
Benefited Lender” shall have the meaning assigned thereto in Section 3.6.
Borrowers” means, individually and collectively, the Company and each other Borrowing Subsidiary.
Borrowing Subsidiary” means each Subsidiary that has been designated as a Borrowing Subsidiary pursuant to Section 2.10 and that has not ceased to be a Borrowing Subsidiary as provided in such Section.
Borrowing Subsidiary Agreement” means a Borrowing Subsidiary Agreement substantially in the form of Exhibit I.
Borrowing Subsidiary Termination” means a Borrowing Subsidiary Termination substantially in the form of Exhibit J.
Business Day” means (a) for all purposes other than as set forth in clauses (b) through (c) below, any day other than a Saturday, Sunday or legal holiday on which banks in Chicago, Illinois and New York, New York, are open for the conduct of their commercial banking business, (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, any LIBOR Rate Loan in any Agreed Currency, any day that is a Business Day described in clause (a) and that is also a day for trading by and between banks in deposits in such Agreed Currency in the London interbank market or such other exchange or payment system on which such Agreed Currency is typically traded, and (c) when used in connection with a Loan to any Borrower organized in a jurisdiction other than the United States or the United Kingdom, any day that is a Business Day described in clause (a) and that is also a day on which commercial banks in the jurisdiction of organization of such Borrower are open for general business.
Capital Lease” means any lease of any property by the Company or any of its Subsidiaries, as lessee, that should, in accordance with GAAP, be classified and accounted for as a capital lease on a Consolidated balance sheet of the Company and its Subsidiaries; provided that all leases of any Person that are or would be characterized as operating leases in accordance with GAAP on January 1, 2013 (whether or not such operating leases were in effect on such date) shall continue to be accounted for as operating leases (and not as Capital Leases) for purposes of this Agreement regardless of any change in GAAP following January 1, 2013 that would otherwise require such leases to be recharacterized as Capital Leases.

3



Change of Control” means any one or more of the following:
(a)the acquisition or holding by any person, entity or “group” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than by any Exempt Person, the Company, any Subsidiary, or any employee benefit plan of the Company or a Subsidiary of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then-outstanding common stock or the combined voting power of the Company’s then-outstanding voting securities entitled to vote generally in the election of directors (“Voting Power”); provided that no such person, entity or group shall be deemed to own beneficially any securities held by the Company or a Subsidiary or any employee benefit plan (or any related trust) of the Company or a Subsidiary; or
(b)    individuals who, as of the Closing Date, constitute the board of directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the board of directors of the Company; provided that any individual who becomes a director after the Closing Date whose election or nomination for election by the Company’s shareholders was approved by at least a majority of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest (as such terms are used in Rule 14a-11 under the Exchange Act) relating to the election of the directors of the Company) shall be deemed to be members of the Incumbent Board.
Closing Date” means the date of this Agreement or such later Business Day upon which each condition described in Section 4.1 shall be satisfied or waived in all respects in a manner acceptable to the Administrative Agent, in its sole discretion.
Co-Documentation Agents” means Bank of America, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., HSBC Bank USA, National Association, JPMorgan Chase Bank, N.A. and The Northern Trust Company, in each capacity as co-documentation agent hereunder, and any successor thereto.
Code” means the Internal Revenue Code of 1986, and the rules and regulations thereunder, each as amended or modified from time to time.
Commitment” means, as to any Lender, the obligation of such Lender to make Loans to the Borrowers hereunder in an aggregate principal Dollar Amount at any time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 1.1 hereto, as the same may be reduced or modified at any time or from time to time pursuant to the terms hereof.
Commitment Percentage” means, as to any Lender at any time, the ratio of (a) the amount of the Commitment of such Lender to (b) the Aggregate Commitment of all of the Lenders.
Company” means W.W. Grainger, Inc., an Illinois corporation, in its capacity as a Borrower hereunder.
Competitive Bid” means an offer by a Lender to make a Competitive Bid Loan pursuant to Section 2.2.

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Competitive Bid Facility” means the competitive bid facility established pursuant to Section 2.2.
Competitive Bid Interest Period” shall have the meaning assigned thereto in Section 3.1(b)(ii).
Competitive Bid Loan” means any competitive bid loan made to the Company pursuant to Section 2.2, and all such competitive bid loans collectively as the context requires.
Competitive Bid Notes” means the separate Competitive Bid Notes made by the Company payable to the order of each of the Lenders, substantially in the form of Exhibit A-2 hereto, and any amendments and supplements thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part.
Competitive Bid Request” shall have the meaning assigned thereto in Section 2.2(a).
Competitive Margin” means, as to any LIBOR Competitive Bid Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four (4) decimal places) to be added to or subtracted from the LIBOR Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan.
Consolidated” means, when used with reference to financial statements or financial statement items of the Company and its Subsidiaries, such statements or items on a consolidated basis in accordance with applicable principles of consolidation under GAAP.
Consolidated Tangible Net Worth” means, at any date, on a Consolidated basis for the Company and its Subsidiaries, in accordance with GAAP, Consolidated stockholders equity of the Company and its Subsidiaries minus the aggregate amount of any intangible assets of the Company and its Subsidiaries, including, without limitation, goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks and brand names.









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Contingent Obligation” means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Debt, lease, dividend, letter of credit or other obligation (the “primary obligations”) of another Person (the “primary obligor”), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a “Guaranty Obligation”); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered; or (d) in respect of any Hedging Agreement. The amount of any Contingent Obligation shall (a) in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, (b) in the case of Hedging Agreements, be determined in accordance with the definition of “Hedging Agreement” herein and (c) in the case of other Contingent Obligations, be equal to the maximum reasonably anticipated liability in respect thereof.
Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound.
Credit Facility” means the collective reference to the Revolving Credit Facility and the Competitive Bid Facility.

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Debt” means, with respect to the Company and its Subsidiaries at any date and without duplication, the sum of the following calculated in accordance with GAAP: (a) all liabilities, obligations and indebtedness for borrowed money including, but not limited to, obligations evidenced by bonds, debentures, notes or other similar instruments of any such Person, (b) all liabilities for the deferred purchase price of property acquired by such Person, except trade payables arising in the ordinary course of business not more than ninety (90) days past due, (c) all obligations of any such Person as lessee under Capital Leases, (d) all Debt of any other Person secured by a Lien on any asset of any such Person, (e) all Contingent Obligations of any such Person, (f) all obligations, contingent or otherwise, of any such Person relative to the face amount of letters of credit, whether or not drawn, including, without limitation, and banker’s acceptances issued for the account of any such Person, (g) all obligations of any such Person to redeem, repurchase, exchange, defease or otherwise make payments in respect of capital stock or other securities or partnership interests of such Person, and (h) all net payment obligations incurred by any such Person pursuant to Hedging Agreements. Debt shall exclude indebtedness owed by the Company to a Subsidiary and indebtedness owed by a Subsidiary to the Company or another Subsidiary.
Debt Rating” shall have the meaning assigned thereto in Section 3.1(c).
Defaulting Lender” means any Lender, as determined by the Administrative Agent, that has (a) failed to fund any portion of its Loans within one Business Day of the date required in the determination of the Administrative Agent to be funded by it hereunder, (b) notified the Company, the Administrative Agent or any Lender in writing that it does not intend to comply with any of its funding obligations under this Agreement or has made a public statement to the effect that it does not intend to comply with its funding obligations (i) under this Agreement or (ii) under other agreements in which it is obligated to extend credit unless, in the case of this clause (ii), such obligation is the subject of a good faith dispute, (c) failed, within one Business Day after request by the Administrative Agent, to confirm that it will comply with the terms of this Agreement relating to its obligations to fund prospective Loans, (d) otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (e) (i) become or is insolvent or has a parent company that has become or is insolvent or (ii) become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian, appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment or has a parent company that has become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment; provided, that a Lender shall not become a Defaulting Lender solely as the result of (x) the acquisition or maintenance of an ownership interest in such Lender or a Person controlling such Lender or (y) the exercise of control over a Lender or a Person controlling such Lender, in each case, by a Governmental Authority or an instrumentality thereof.

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Dollar Amount” means, on any date of determination, (a) with respect to any amount in Dollars, such amount, and (b) with respect to any amount in an Agreed Currency, the equivalent in Dollars of such amount, determined by the Administrative Agent pursuant to Section 2.4(e) using the Exchange Rate with respect to such Agreed Currency at the time in effect.
Dollars” or “$” means, unless otherwise qualified, dollars in lawful currency of the United States.
Eligible Assignee” means, with respect to any assignment of the rights, interest and obligations of a Lender hereunder, a Person that is at the time of such assignment (a) a commercial bank organized under the laws of the United States or any state thereof, having combined capital and surplus in excess of $1,000,000,000, (b) a commercial bank organized under the laws of any other country that is a member of the Organization of Economic Cooperation and Development, or a political subdivision of any such country, having combined capital and surplus in excess of $1,000,000,000 so long as such commercial bank is rated at least A- by Standard & Poor’s or A3 by Moody’s, (c) already a Lender hereunder (whether as an original party to this Agreement or as the assignee of another Lender), (d) the successor (whether by transfer of assets, merger or otherwise) to all or substantially all of the commercial lending business of the assigning Lender, (e) an Affiliate of the assigning Lender that is sufficiently creditworthy that there is no reasonable doubt as to its ability to performs its obligations hereunder or (f) any other Person that has been approved in writing as an Eligible Assignee by the Company (other than upon the occurrence and during the continuance of any Event of Default) and the Administrative Agent.
Eligible Currency” means any currency other than Dollars that is readily available, freely traded, in which deposits are customarily offered to banks in the London interbank market, convertible into Dollars in the international interbank market available to the Lenders in such market and as to which a Dollar Amount may be readily calculated. If, after the designation by the Administrative Agent of any currency as an Agreed Currency, currency control or other exchange regulations are imposed in the country in which such currency is issued, or any other event occurs, in each case with the result that different types of such currency are introduced, such country’s currency is, (i) in the determination of the Administrative Agent, no longer readily available or freely traded, (ii) as to which, in the determination of the Administrative Agent, a Dollar Amount is not readily calculable, or (iii) no longer a currency in which the Required Lenders are willing to make Loans (each of (i), (ii) and (iii), a “Disqualifying Event”), then the Administrative Agent shall promptly notify the Lenders and the Company, and such country’s currency shall no longer be an Agreed Currency until such time as the Disqualifying Event(s) no longer exist, but in any event within five (5) Business Days after receipt of such notice from the Administrative Agent, the Company shall repay all Loans in such currency to which the Disqualifying Event applies or convert such Loans into the Dollar Amount of Loans in Dollars, subject to the other terms contained in Article II.
Employee Benefit Plan” means any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained for employees of the Company or any ERISA Affiliate or (b) has at any time within the preceding six (6) years been maintained for the employees of the Company or any current or former ERISA Affiliate.

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Environmental Claims” means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation or proceedings relating in any way to any actual or alleged violation of or liability under any Environmental Law or relating to any permit issued, or any approval given, under any such Environmental Law, including, without limitation, any and all claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages, contribution, indemnification cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to human health or the environment.
Environmental Laws” means any and all federal, foreign, state, provincial and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations and orders of courts or Governmental Authorities, relating to the protection of human health or the environment, including, but not limited to, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Materials.
Equivalent Amount” of any currency at any date means the equivalent in Dollars of such currency, calculated on the same basis as the Exchange Rate.
ERISA” means the Employee Retirement Income Security Act of 1974, and the rules and regulations thereunder, each as amended, or modified from time to time.
ERISA Affiliate” means any Person who together with the Company is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA.
Eurodollar Reserve Percentage” means, for any day, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) in respect of eurocurrency liabilities or any similar category of liabilities for a member bank of the Federal Reserve System in New York City.
Event of Default” means any of the events specified in Section 8.1, provided that any requirement for passage of time, giving of notice, or any other condition, has been satisfied.
Exchange Act” means the Securities Exchange Act of 1934, and regulations promulgated thereunder.

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Exchange Rate” means on any day, for purposes of determining the Dollar Amount of any other currency, the rate at which such other currency may be exchanged into Dollars at the time of determination on such day on the Reuters WRLD Page for such currency. In the event that such rate does not appear on any Reuters WRLD Page, the Exchange Rate shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Administrative Agent and the Company, or, in the absence of such an agreement, such Exchange Rate shall instead be the arithmetic average of the spot rates of exchange of the Administrative Agent in the market where its foreign currency exchange operations in respect of such currency are then being conducted, at or about such time as the Administrative Agent shall elect after determining that such rates shall be the basis for determining the Exchange Rate, on such date for the purchase of Dollars for delivery two (2) Business Days later; provided that if at the time of any such determination, for any reason, no such spot rate is being quoted, the Administrative Agent, after consultation with the Company, may use any reasonable method it deems appropriate to determine such rate, and such determination shall be presumed correct absent manifest error and provided further, that in connection with any determination of such rate, upon the written request of the Company, the Administrative Agent shall notify the Company of the sources used to determine such rate.
Exempt Person” means any of the following:
(a)any descendant of W.W. Grainger, or any spouse, widow or widower of such descendant (such descendants, spouses, widows and widowers collectively defined as the “Grainger Family Members”);
(b)    any descendant of E.O. Slavik or any spouse, widow or widower of any such descendant (such descendants, spouses, widows and widowers collectively defined as the “Slavik Family Members” and with the Grainger Family Members collectively defined as the “Family Members”);
(c)    any trust which is in existence on the date of this Agreement and which has been established by one or more Grainger Family Members, any estate of a Grainger Family Member who died on or before the date of this Agreement, and The Grainger Foundation (such trusts, estates and named entity collectively defined as the “Grainger Family Entities”);
(d)    any trust which is in existence on the date of this Agreement and which has been established by one or more Slavik Family Members, any estate of a Slavik Family Member who died on or before the date of this Agreement, Mark IV Properties, Inc., and Mountain Capital Corporation (such trusts, estates and named entities collectively defined as the “Slavik Family Entities” and with the Grainger Family Entities collectively defined as the “Existing Family Entities”);

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(e)    any estate of a Family Member who dies after the date hereof, or any trust established after the date hereof by one or more Family Members or Existing Family Entities; provided that one or more Family Members, Existing Family Entities or charitable organizations which qualify as exempt organizations under Section 501(c) of the Code (“Charitable Organizations”), collectively, are the beneficiaries of at least fifty percent (50%) of the actuarially-determined beneficial interests in such estate or trust;
(f)    any Charitable Organization which is established by one or more Family Members or Existing Family Entities (a “Family Charitable Organization”);
(g)    any corporation of which a majority of the voting power and a majority of the equity interest is held, directly or indirectly, by or for the benefit of one or more Family Members, Existing Family Entities, estates or trusts described in clause (e) above, or Family Charitable Organizations; and
(h)    any partnership or other entity or arrangement of which a majority of the voting interest and a majority of the economic interest is held, directly or indirectly, by or for the benefit of one or more Family Members, Existing Family Entities, estates or trusts described in clause (e) above, or Family Charitable Organizations.
FATCA” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with) and any current or future regulations or official interpretations thereof.
Federal Funds Rate” means, the rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) representing the daily effective federal funds rate as quoted by the Administrative Agent and confirmed in Federal Reserve Board Statistical Release H.15 (519) or any successor or substitute publication selected by the Administrative Agent. If, for any reason, such rate is not available, then “Federal Funds Rate” shall mean a daily rate which is determined, in the opinion of the Administrative Agent, to be the rate at which federal funds are being offered for sale in the national federal funds market at 9:00 a.m. (Chicago time). Rates for weekends or holidays shall be the same as the rate for the most immediately preceding Business Day.
Fee Letters” means each of the U.S. Bank Fee Letter and the Joint Fee Letter.
FRB” means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions.
GAAP” means generally accepted accounting principles, as recognized by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained on a consistent basis for the Company and its Subsidiaries throughout the period indicated and (subject to Section 10.8) consistent with the prior financial practice of the Company and its Subsidiaries.

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Governmental Authority” means any nation or government, any state or other political subdivision thereof, any central. bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.
Guaranty Obligations” shall have the meaning assigned thereto in definition of Contingent Obligation.
Hazardous Materials” means any substances or materials (a) which are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants, chemical substances or mixtures or toxic substances under any Environmental Law, (b) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human health or the environment and are or become regulated by any Governmental Authority, (c) the presence of which require investigation or remediation under any Environmental Law or common law, (d) the discharge or emission or release of which requires a permit or license under any Environmental Law or other Governmental Approval, (e) which are deemed to constitute a nuisance or a trespass which pose a health or safety hazard to Persons or neighboring properties, (f) which consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance, or (g) which contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
Hedging Agreement” means any agreement with respect to any Interest Rate Contract, agreement, commodity swap, forward foreign exchange agreement, currency swap agreement, cross-currency rate swap agreement, currency option agreement or other agreement or arrangement designed to alter the risks of any Person arising from fluctuations in rates, currency values or commodity prices, all as amended, restated, supplemented or otherwise modified from time to time.
Independent Auditor” shall have the meaning assigned thereto in Section 6.1(a).
Insolvency Proceeding” means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code.
Interest Rate Contract” means any interest rate swap agreement, interest rate cap agreement, interest rate floor agreement, interest rate collar agreement, interest rate option or any other agreement regarding the hedging of interest rate risk exposure executed in connection with hedging the interest rate exposure of any Person and any confirming letter executed pursuant to such agreement, all as amended, restated, supplemented or otherwise modified from time to time.
Investments” shall have the meaning assigned thereto in Section 7.4.

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Joint Fee Letter” means that certain Fee Letter, dated as of July 10, 2013, by and among the Company, the Administrative Agent, Wells Fargo Bank, National Association and Wells Fargo Securities, LLC, as amended, restated, supplemented or otherwise modified, renewed or replaced from time to time.
Lender” means each Person executing this Agreement as a Lender set forth on the signature pages hereto and each Person that hereafter becomes a party to this Agreement as a Lender pursuant to Section 10.9.
Lender Addition and Acknowledgment Agreement” shall have the meaning assigned thereto in Section 2.8(a).
Lending Office” means, with respect to any Lender, the office of such Lender maintaining such Lender’s Commitment Percentage of the Loans.
“LIBOR Competitive Bid Loan” means any Competitive Bid Loan denominated in Dollars and bearing interest at a rate determined by reference to the LIBOR Rate at the sole discretion of the Lender of such Competitive Bid Loan.
LIBOR Interest Period” shall have the meaning assigned thereto in Section 3.1(b)(i).
LIBOR Rate” means the rate of interest per annum determined on the basis of the rate for deposits in the applicable Agreed Currency in minimum Dollar Amounts of at least $5,000,000 for a period equal to the applicable LIBOR Interest Period which appears on the Reuters Screen for such Agreed Currency at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of the applicable LIBOR Interest Period. If, for any reason, such rate does not appear on the applicable Reuters Screen for such Agreed Currency, then “LIBOR” shall be determined by the Administrative Agent to be the arithmetic average of the rate per annum at which deposits in the applicable Agreed Currency in minimum Dollar Amounts of at least $5,000,000 would be offered by first class banks in the London interbank market to the Administrative Agent at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of the applicable LIBOR Interest Period for a period equal to such LIBOR Interest Period.
LIBOR Rate Loan” means any Loan bearing interest at a rate based upon the LIBOR Rate as provided in Section 3.1(a).
Lien” means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement), the interest of a lessor under a capital lease, or any financing lease having substantially the same economic effect as any of the foregoing, but not including the interest of a lessor under an operating lease.

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Loan Documents” means, collectively, this Agreement, the Notes, and each other document, instrument, certificate and agreement executed and delivered by the Company or any Subsidiary thereof in connection with this Agreement or otherwise referred to herein or contemplated hereby (excluding any Hedging Agreement), all as may be amended, restated, supplemented or otherwise modified from time to time.
Loans” means the collective reference to the Revolving Credit Loans and the Competitive Bid Loans, and “Loan” means any of such Loans.
Margin Stock” means “margin stock” as such term is defined in Regulation U of the FRB.
Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect upon, the operations, properties or financial condition of the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company or any Subsidiary to perform its obligations under any Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or any Subsidiary of any Loan Document.
Maximum Foreign Currency Amount” means $200,000,000.
Maximum Foreign Borrowing Subsidiary Amount” means $200,000,000.
Moody’s” means Moody’s Investors Service, Inc. or any successor thereto.
Multiemployer Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate is making, or is accruing an obligation to make, or has accrued an obligation to make contributions within the preceding six (6) years.
Non-Excluded Taxes” shall have the meaning assigned thereto in Section 3.11(a).
Non-U.S. Borrower” shall have the meaning assigned thereto in Section 3.8(e).
Notes” means the collective reference to the Revolving Credit Notes and Competitive Bid Notes and “Note” means any of such Notes.
Notice of Account Designation” shall have the meaning assigned thereto in Section 2.3(b).
Notice of Borrowing” shall have the meaning assigned thereto in Section 2.3(a).
Notice of Conversion/Continuation” shall have the meaning assigned thereto in Section 3.2.
Notice of Prepayment” shall have the meaning assigned thereto in Section 2.4(c).

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Obligations” means, in each case, whether now in existence or hereafter arising: (a) the principal of and interest on (including interest accruing after the filing of any bankruptcy or similar petition) the Loans, (b) all existing or future payment and other obligations owing by any of the Borrowers under any Hedging Agreement (which such Hedging Agreement is permitted hereunder) with any Person that is a Lender hereunder at the time such Hedging Agreement is executed (all such obligations with respect to any such Hedging Agreement, “Hedging Obligations”) and (c) all other fees and commissions (including attorneys’ fees), charges, indebtedness, loans, liabilities, financial accommodations, obligations, covenants and duties owing by any of the Borrowers or any of their Subsidiaries to the Lenders or the Administrative Agent, in each case under or in respect of this Agreement, any Note, or any of the other Loan Documents of every kind, nature and description, direct or indirect, absolute or contingent, due or to become due, contractual, liquidated or unliquidated, and whether or not evidenced by any note.
OFAC” means the U.S. Department of the Treasury’s Office of Foreign Assets Control, and any successor thereto.
Organization Documents” means, for any Person, as applicable, the certificate or articles of incorporation or charter of such Person, the operating agreement or bylaws of such Person, any certificate of determination or instrument relating to the rights of preferred shareholders of such Person, any shareholder rights agreement for such Person, and all applicable resolutions of the board of directors or managers (or any committee thereof) of such Person.
Original Currency” is defined in Section 3.4(b).
Other Taxes” shall have the meaning assigned thereto in Section 3.11(b).
PATRIOT Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act of 2001), as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder.
PBGC” means the Pension Benefit Guaranty Corporation or any successor agency.
Pension Plan” means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of the Code and which (a) is maintained for the employees of the Company or any ERISA Affiliates or (b) has at any time within the preceding six (6) years been maintained for the employees of the Company or any of its current or former ERISA Affiliates.
Permitted Acquisition” means an Acquisition (i) with respect to which the target (or its board of directors or equivalent governing body) has not announced that it will oppose such Acquisition or commenced any litigation which alleges that such Acquisition violates or will violate any Applicable Law and (ii) which occurs when no Event of Default or Unmatured Event of Default exists or will result therefrom.

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Person” means an individual, corporation, limited liability company, partnership, association, trust, business trust, joint venture, joint stock company, pool, syndicate, sole proprietorship, unincorporated organization, Governmental Authority or any other form of entity or group thereof.
Pre-Approved Borrowing Subsidiary” means each Wholly-Owned Subsidiary formed under the laws of (i) the United States, any state thereof or the District of Columbia, (ii) the Netherlands or (iii) the United Kingdom, and for which the requirements set forth in the first sentence of Section 2.10(a) have been satisfied.
Prime Rate” means, at any time, the rate of interest per annum publicly announced from time to time by U.S. Bank National Association or its parent as its prime rate. Each change in the Prime Rate shall be effective as of the opening of business on the day such change in such prime rate occurs. The parties hereto acknowledge that the rate announced publicly by U.S. Bank National Association or its parent as its prime rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks.
Register” shall have the meaning assigned thereto in Section 10.9(d).
Replaced Lender” shall have the meaning assigned thereto in Section 3.12(c).
Replacement Lender” shall have the meaning assigned thereto in Section 3.12(c).
Required Lenders” means, at any date, any combination of Lenders whose Commitment Percentages aggregate more than fifty percent (50%) of the Aggregate Commitment or, if the Credit Facility has been terminated pursuant to Section 8.2, any combination of Lenders holding more than fifty percent (50%) of the aggregate Loans.
Responsible Officer” means any of the following: (i) the Chief Executive Officer of the Company, (ii) the Chairman of the Board of the Company, (iii) the President of the Company, (iv) the Senior Vice President and Chief Financial Officer of the Company, and (v) the Vice President and Treasurer of the Company, or any other officer of the Company reasonably acceptable to the Administrative Agent.
Revolving Credit Facility” means the revolving credit facility established pursuant to Article II.
Revolving Credit Loans” means any revolving loan made to the Borrowers pursuant to Section 2.1, and all such revolving loans collectively as the context requires.
Revolving Credit Notes” means the collective reference to the Revolving Credit Notes made by the Borrowers payable to the order of each Lender, substantially in the form of Exhibit A-1 hereto, evidencing the Revolving Credit Facility, and any amendments, supplements and modifications thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part; “Revolving Credit Note” means any of such Revolving Credit Notes.

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Revolving Credit Termination Date” means the earliest of the dates referred to in Section 2.7.
Sanctioned Country” means a country subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/enforcement/ofac/sanctions/index.html, or as otherwise published from time to time.
Sanctioned Person” means (i) a Person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/
enforcement/ofac/sdn/index.html, or as otherwise published from time to time, or (ii) (A) an agency of the government of a Sanctioned Country, (B) an organization controlled by a Sanctioned Country, or (C) a Person resident in a Sanctioned Country, to the extent subject to a sanctions program administered by OFAC.
SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
Standard & Poor’s” means Standard & Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc. or any successor thereto.
Subsidiary” means as to any Person, any corporation, partnership, limited liability company or other entity of which more than fifty percent (50%) of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation, partnership, limited liability company or other entity is at the time owned by such Person (irrespective of whether, at the time, capital stock or other ownership interests of any other class or classes of such corporation, partnership, limited liability company or other entity shall have or might have voting power by reason of the happening of any contingency). Unless otherwise qualified, references to “Subsidiary” or “Subsidiaries” herein shall refer to those of the Company.
Surety Instruments” means all letters of credit (including standby and commercial), banker’s acceptances, bank guaranties, surety bonds and similar instruments.
Syndication Agent” means Wells Fargo Bank, National Association, in its capacity as syndication agent hereunder, and any successor thereto.
Taxes” shall have the meaning assigned thereto in Section 3.11(a).
Threshold Amount” means the Dollar Amount of $100,000,000.
United States” means the United States of America.
Unmatured Event of Default” means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default.

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U.S. Bank Fee Letter” means that certain Fee Letter, dated as of July 10, 2013, by and between the Company and the Administrative Agent, as amended, restated, supplemented or otherwise modified, renewed or replaced from time to time.
Wholly-Owned” means, with respect to a Subsidiary, that all of the shares of capital stock or other ownership interests of such Subsidiary are, directly or indirectly, owned or controlled by the Company and/or one or more of its Wholly-Owned Subsidiaries (except for directors’ qualifying shares or other shares required by Applicable Law to be owned by a Person other than the Company).
Section 1.2    General. Unless otherwise specified, a reference in this Agreement to a particular article, section, subsection, Schedule or Exhibit is a reference to that article, section, subsection, Schedule or Exhibit of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter.
Section 1.3    Other Definitions and Provisions.
(a)    Use of Capitalized Terms. Unless otherwise defined therein, all capitalized terms defined in this Agreement shall have the defined meanings when used in this Agreement, the Notes and the other Loan Documents or any certificate, report or other document made or delivered pursuant to this Agreement.
(b)    Miscellaneous. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

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ARTICLE II    

REVOLVING CREDIT FACILITY
Section 2.1    Revolving Credit Loans and Competitive Bid Loans.
(a)    Revolving Credit Loans. Subject to the terms and conditions of this Agreement, including, without limitation, the Company’s termination and repayment of all amounts referred to in Section 4.1(e) and in reliance upon the representations and warranties set forth herein, each Lender severally agrees to make Revolving Credit Loans to the Borrowers in Agreed Currencies from time to time from the Closing Date through, but not including, the Revolving Credit Termination Date as requested by the Company in accordance with the terms of Section 2.3; provided, that (a)  the aggregate principal Dollar Amount of all outstanding Revolving Credit Loans (after giving effect to any amount requested) shall not exceed the Aggregate Commitment less the sum of all outstanding Competitive Bid Loans, (b) the principal Dollar Amount of outstanding Revolving Credit Loans from any Lender to the Borrowers shall not at any time exceed such Lender’s Commitment, (c) the aggregate outstanding principal Dollar Amount of all Revolving Credit Loans in Agreed Currencies other than Dollars shall not exceed the Maximum Foreign Currency Amount and (d) the aggregate outstanding principal Dollar Amount of all Revolving Credit Loans made to Borrowing Subsidiaries formed under the laws of jurisdictions not located in the United States shall not exceed the Maximum Foreign Borrowing Subsidiary Amount. Each Revolving Credit Loan by a Lender shall be in a principal Dollar Amount equal to such Lender’s Commitment Percentage of the aggregate principal Dollar Amount of Revolving Credit Loans requested on such occasion. Subject to the terms and conditions hereof, the Borrowers may borrow, repay and reborrow Revolving Credit Loans hereunder until the Revolving Credit Termination Date. All Base Rate Loans shall be made in Dollars.
(b)    Competitive Bid Loans. Subject to the terms and conditions of this Agreement, the Company may, prior to the Revolving Credit Termination Date and pursuant to the procedures set forth in Section 2.2, request the Lenders to make offers to make Competitive Bid Loans in Dollars to the Company; provided, that the aggregate principal amount of all outstanding Competitive Bid Loans (after giving effect to any amount requested and the use of proceeds thereof) shall not exceed the Aggregate Commitment less the sum of all outstanding Revolving Credit Loans. The Lenders may, but shall have no obligation to, make such offers and the Company may, but shall have no obligation to, accept any such offers in the manner set forth in Section 2.2. All Competitive Bid Loans shall be made in Dollars.

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Section 2.2    Procedure for Advance of Competitive Bid Loans.
(a)    Competitive Bid Request. In order to request Competitive Bids, the Company shall deliver to the Administrative Agent a duly completed Competitive Bid Request in the form of Exhibit C-1 hereto (a “Competitive Bid Request”) to be received by the Administrative Agent not later than 11:00 a.m. (Chicago time) (i) five (5) Business Days before each proposed LIBOR Competitive Bid Loan and (ii) two (2) Business Days before each proposed Absolute Rate Loan; provided that, the Company may not submit more than two (2) Competitive Bid Requests during any period of five (5) consecutive Business Days. Notwithstanding the foregoing, the Company may not submit more than six (6) Competitive Bid Requests during any calendar month. A Competitive Bid Request that does not conform substantially to the form of Exhibit C-1 may be rejected in the Administrative Agent’s sole discretion, and the Administrative Agent shall promptly notify the Company of such rejection by telephone promptly confirmed by telecopy. Such request shall in each case refer to this Agreement and specify (i) whether the borrowing then being requested is to be a LIBOR Competitive Bid Loan or an Absolute Rate Loan, (ii) the date of such borrowing (which shall be a Business Day), (iii) the aggregate principal amount of such borrowing which shall be in Dollars in a minimum principal amount of $2,000,000 or a whole multiple of $500,000 in excess thereof and (iv) the Competitive Bid Interest Periods with respect to each LIBOR Competitive Bid Loan and each Absolute Rate Loan which Competitive Bid Interest Periods may not expire on a date later than the first Business Day prior to the Revolving Credit Termination Date; provided, that the Company may not request bids for more than three (3) different durations of Competitive Bid Interest Periods in the same Competitive Bid Request. Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Administrative Agent shall invite by telecopier (in the form set forth in Exhibit C-2 hereto) the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Bid Loans pursuant to the Competitive Bid Request.
(b)    Competitive Bids.
(i)    Each Lender may, in its sole discretion, make up to three (3) Competitive Bids to the Company in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Administrative Agent via telecopier or e-mail, in the form of Exhibit C-3 hereto, (A) not later than 10:30 a.m. (Chicago time) three (3) Business Days before any proposed LIBOR Competitive Bid Loan and (B) not later than 10:30 a.m. (Chicago time) on the same Business Day as a proposed Absolute Rate Loan, and any Competitive Bid received by the Administrative Agent after such time can be rejected by the Administrative Agent. Competitive Bids that do not conform substantially to the form of Exhibit C-3 or otherwise include additional conditions to funding shall be rejected by the Administrative Agent and the Administrative Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (A) the principal amount of the Competitive Bid Loan or Competitive Bid Loans that the Lender is willing to make to the Company which shall be in a minimum principal amount of $2,000,000 or a whole multiple of $500,000 in excess thereof and may equal the entire principal amount of the Competitive Bid Loan requested by the Company, (B) the Competitive Bid Rate or Competitive Bid Rates at which the Lender is prepared to make the Competitive Bid Loan or Loans and (C) the Competitive Bid Interest Period with respect thereto. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable.

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(ii)    If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Company at least one quarter (1/4) of an hour earlier than the latest time at which the other Lenders are required to submit their bids to the Administrative Agent pursuant to clause (i) above.
(iii)    The Administrative Agent shall notify the Company by telecopier or electronic mail, (A) not later than 11:00 a.m. (Chicago time) three (3) Business Days before a proposed LIBOR Competitive Bid Loan and (B) not later than 11:00 a.m. (Chicago time) on the same Business Day of each proposed Absolute Rate Loan, of all the Competitive Bids made, the Competitive Bid Rate or Competitive Bid Rates, the principal amount of each Competitive Bid Loan in respect of which a Competitive Bid was made, the Competitive Bid Interest Period applicable to each such LIBOR Competitive Bid Loan, and the identity of the Lender that made each bid. The Administrative Agent shall send a copy of all Competitive Bids to the Company for its records as soon as practicable after completion of the bidding process set forth in this Section 2.2.
(iv)    All notices required by this Section 2.2 shall be given in accordance with Section 10.1.
(c)    Acceptance/Rejection.
(i)    The Company may, in its sole and absolute discretion, subject only to the provisions of this paragraph (c), accept or reject any Competitive Bid referred to in paragraph (b) above. The Company shall notify the Administrative Agent by telephone, confirmed by telecopier or e-mail in the form of Exhibit C-4 hereto (a “Competitive Bid Accept/Reject Letter”), whether and to what extent it has decided to accept or reject any or all of the bids referred to in paragraph (b) above, (A) not later than 11:30 a.m. (Chicago time) three (3) Business Days before a proposed LIBOR Competitive Bid Loan and (B) not later than 11:30 a.m., Chicago time, on the day of each proposed Absolute Rate Loan; provided, that (1) the failure by the Company to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (b) above, (2) the acceptance of bids by the Company shall be made on the basis of ascending order (from lowest to highest) of bids for LIBOR Competitive Bid Loans or Absolute Rate Loans within each Competitive Bid Interest Period and the Company shall not accept a bid made at a particular Competitive Bid Rate for a particular Competitive Bid Interest Period if the Company has rejected a bid made at a lower Competitive Bid Rate for the same Competitive Bid Interest Period, (3) if Competitive Bids are made by two (2) or more Lenders for the same Competitive Bid Rate and the same Competitive Bid Interest Period, the principal dollar amount accepted shall be allocated among such Lenders by the Company (after consultation with the Administrative Agent) in integral multiples of not less than $1,000,000, (4) the aggregate amount of the Competitive Bids accepted by the Company shall not exceed the principal amount specified in the Competitive Bid Request and (5) except pursuant to clause (4) above, no bid shall be accepted for a Competitive Bid Loan unless such Competitive Bid Loan is in a minimum principal amount of $2,000,000 or a whole multiple of $500,000 in excess thereof. A notice given by the Company pursuant to this paragraph (c) shall be irrevocable.

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(ii)    The Administrative Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopy, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Bid Loan in respect of which its bid has been accepted.
(d)    Disbursement of Competitive Bid Loans. Not later than 2:00 p.m. (Chicago time) on the proposed borrowing date, each Lender whose Competitive Bid was accepted will make available to the Administrative Agent, for the account of the Company, at the Administrative Agent’s Office in funds immediately available to the Administrative Agent, such Lender’s Competitive Bid Loan to be made on such borrowing date. After receipt thereof from the applicable Lenders, the Administrative Agent shall disburse not later than 3:30 p.m. (Chicago time) the proceeds of each borrowing accepted pursuant to Section 2.2(c) in immediately available funds by crediting such proceeds to the deposit account or accounts specified in the most recent Notice of Account Designation delivered by the Company or as may be agreed upon by the Company and the Administrative Agent from time to time. The Administrative Agent shall not be obligated to disburse the proceeds of any Competitive Bid Loan accepted pursuant to Section 2.2(c) until the applicable Lender shall have made available to the Administrative Agent its Competitive Bid Loan.
(e)    Administrative Agent’s Fee. For each Competitive Bid Request received by the Administrative Agent hereunder, the Company shall pay to the Administrative Agent a fee in the amount of $1,500.
Section 2.3    Procedure for Advances of Revolving Credit Loans.
(a)    Requests for Borrowing. The Company or the applicable Borrowing Subsidiary shall give the Administrative Agent irrevocable prior written notice substantially in the form attached hereto as Exhibit B (a “Notice of Borrowing”) not later than 11:00 a.m. (Chicago time) (i) on the same Business Day as each Base Rate Loan, (ii) at least three (3) Business Days before each LIBOR Rate Loan in Dollars and (iii) at least four (4) Business Days before each LIBOR Rate Loan in any Agreed Currency other than Dollars, of its intention to borrow, specifying (A) the date of such borrowing, which shall be a Business Day, (B) the amount of such borrowing, which shall be, (x) with respect to Base Rate Loans in an aggregate principal Dollar Amount of $3,000,000 or a whole multiple Dollar Amount of $1,000,000 in excess thereof, and (y) with respect to LIBOR Rate Loans in an aggregate principal Dollar Amount of $5,000,000 or a whole multiple Dollar Amount of $1,000,000 in excess thereof, (C) whether the Loans are to be LIBOR Rate Loans or Base Rate Loans, (D) in the case of a LIBOR Rate Loan, the duration of the LIBOR Interest Period applicable thereto and (E) the Agreed Currency applicable thereto. A Notice of Borrowing received after 11:00 a.m. (Chicago time) shall be deemed received on the next Business Day. The Administrative Agent shall promptly notify the Lenders of each Notice of Borrowing.

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(b)    Disbursement of Revolving Credit Loans. Not later than 2:00 p.m. (Chicago time) on the proposed borrowing date, each Lender will make available to the Administrative Agent, for the account of the applicable Borrower, at the office of the Administrative Agent in funds immediately available to the Administrative Agent, such Lender’s Commitment Percentage of the Revolving Credit Loans to be made on such borrowing date. The Company hereby irrevocably authorizes the Administrative Agent to disburse the proceeds of each borrowing requested pursuant to this Section 2.3 in immediately available funds by crediting or wiring such proceeds to the deposit account of the Company or Borrowing Subsidiary identified in the most recent notice substantially in the form of Exhibit D hereto (a “Notice of Account Designation”) delivered by the Company to the Administrative Agent or as may be otherwise agreed upon by the Company and the Administrative Agent from time to time. Subject to Section 3.7 hereof, the Administrative Agent shall not be obligated to disburse the portion of the proceeds of any Revolving Credit Loan requested pursuant to this Section 2.3 to the extent that any Lender has not made available to the Administrative Agent its Commitment Percentage of such Loan.
Section 2.4    Repayment of Loans.
(a)    Repayment on Termination Date. The Borrowers hereby agree to repay the outstanding principal amount of (i) all Revolving Credit Loans in full on the Revolving Credit Termination Date, and (ii) each Competitive Bid Loan on the expiration date of the applicable Competitive Bid Interest Period.
(b)    Mandatory Repayment of Revolving Credit and Competitive Bid Loans. If at any time (i) the outstanding principal Dollar Amount of all Loans exceeds the Aggregate Commitment or (ii) the aggregate outstanding principal Dollar Amount of the Revolving Credit Loans in Agreed Currencies other than Dollars exceeds 105% of the Maximum Foreign Currency Amount (including as a result of fluctuations in currency exchange rates), the Borrowers agree to repay immediately upon notice from the Administrative Agent, by payment to the Administrative Agent for the account of the Lenders, Loans in an amount equal to such excess with each such repayment applied first to the principal amount of outstanding Revolving Credit Loans, and second to the principal amount of outstanding Competitive Bid Loans, in the inverse order of maturity of any such Competitive Bid Loans.

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(c)    Optional Repayments. The Borrowers may at any time and from time to time repay the Loans, in whole or in part, upon at least three (3) Business Days’ irrevocable notice to the Administrative Agent with respect to LIBOR Rate Loans and Competitive Bid Loans and one (1) Business Day irrevocable notice with respect to Base Rate Loans, substantially in the form attached hereto as Exhibit E (a “Notice of Prepayment”) specifying the date and amount of repayment and whether the repayment is of LIBOR Rate Loans, Base Rate Loans, Competitive Bid Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender. If any such notice is given, the amount specified in such notice shall be due and payable on the date set forth in such notice. Partial repayments shall be in an aggregate Dollar Amount of (i) $3,000,000 or a whole multiple of $1,000,000 in excess thereof with respect to Base Rate Loans, (ii) $5,000,000 or a whole multiple of $1,000,000 in excess thereof with respect to LIBOR Rate Loans and (iii) $2,000,000 or a whole multiple of $500,000 in excess thereof with respect to Competitive Bid Loans. Each such repayment shall be accompanied by any amount required to be paid pursuant to Section 3.9.
(d)    Limitation on Repayment of LIBOR Rate Loans and Competitive Bid Loans. The Borrowers may not repay any LIBOR Rate Loan or any Competitive Bid Loan on any day other than on the last day of the LIBOR Interest Period or Competitive Bid Interest Period, respectively, applicable thereto unless such repayment is accompanied by any amount required to be paid pursuant to Section 3.9.
(e)    Determination of Dollar Amounts. The Administrative Agent will determine the Dollar Amount of: (a) each Loan denominated in an Agreed Currency other than Dollars as of the date four (4) Business Days prior to the Borrowing Date or, if applicable, date of conversion/continuation, and (b) all outstanding Loans denominated in an Agreed Currency other than Dollars on and as of the last Business Day of each month and, if an Event of Default has occurred and is continuing, on any other Business Day elected by the Administrative Agent in its discretion or upon instruction by the Required Lenders. Each day upon or as of which the Administrative Agent determines Dollar Amounts as described in the preceding clauses (a) and (b) is herein described as a “Computation Date” with respect to each Loan for which a Dollar Amount is determined on or as of such day.
Section 2.5    Noteless Agreement; Evidence of Indebtedness. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrowers to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(b)    The Administrative Agent shall also maintain accounts in which it will record (a) the amount of each Loan made hereunder, the Agreed Currency thereof and the LIBOR Interest Period with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrowers to each Lender hereunder, and (c) the amount of any sum received by the Administrative Agent hereunder from the Borrowers and each Lender’s share thereof.

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(c)    The entries maintained in the accounts maintained pursuant to paragraphs (a) and (b) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Administrative Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrowers to repay the Obligations in accordance with their terms.
(d)    Any Lender may request that its Loans be evidenced by a promissory note representing its Revolving Credit Loans and Competitive Bid Loans, respectively (each a “Note”). In such event, the Borrowers shall prepare, execute and deliver to such Lender such Note or Notes payable to the order of such Lender in a form supplied by the Administrative Agent. Thereafter, the Loans evidenced by any such Note and interest thereon shall at all times (prior to any assignment pursuant to Section 10.9) be represented by such Notes, except to the extent that any such Lender subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in clauses (a) and (b) above.
Section 2.6    Permanent Reduction of the Aggregate Commitment.
(a)    Voluntary Reduction. The Company shall have the right at any time and from time to time, upon at least five (5) Business Days prior written notice to the Administrative Agent, to permanently reduce, without premium or penalty, (i) the entire Aggregate Commitment at any time or (ii) portions of the Aggregate Commitment, from time to time, in an aggregate principal Dollar Amount not less than $5,000,000 or any whole multiple of $1,000,000 in excess thereof. The amount of each partial permanent reduction shall be applied pro rata to reduce the Lenders’ Commitments in accordance with their respective Commitment Percentages.
(b)    Corresponding Payment. Each permanent reduction permitted or required pursuant to this Section 2.6 shall be accompanied by a payment of principal sufficient to reduce the aggregate outstanding Revolving Credit Loans and Competitive Bid Loans, as applicable, after such reduction to the Aggregate Commitment as so reduced. Any reduction of the Aggregate Commitment to zero shall be accompanied by payment of all outstanding Revolving Credit Loans and Competitive Bid Loans and shall result in the termination of the Commitments and the Credit Facility. If the reduction of the Aggregate Commitment requires the repayment of any LIBOR Rate Loan or Competitive Bid Loan, such repayment shall be accompanied by any amount required to be paid pursuant to Section 3.9.
Section 2.7    Termination of Credit Facility. The Credit Facility shall terminate on the earliest of (a) August 22, 2018, (b) the date of termination by the Company pursuant to Section 2.6 or (c) the date of termination by the Administrative Agent on behalf of the Lenders pursuant to Section 8.2(a).

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Section 2.8    Increase of Aggregate Commitment. At any time prior to the Revolving Credit Termination Date, the Company shall have the right from time to time upon not less than thirty (30) days’ prior written notice to the Administrative Agent to increase the Aggregate Commitment; provided that (i) as of the date of each such request and on the date each such increase takes effect, (A) the representations and warranties contained in Article V shall be true and correct (other than the representations and warranties contained in Section 5.5 and Section 5.11(b)) and (B) no Unmatured Event of Default or Event of Default shall have occurred and be continuing, or would result from such increase, (ii) no Lender shall have any obligation to increase its Commitment, (iii) the Company shall only be permitted to request such an increase on three (3) separate occasions, (iv) each such requested increase shall be in a minimum principal Dollar Amount of $30,000,000 or any whole multiple of $10,000,000 in excess thereof and (v) in no event shall the Aggregate Commitment at any time exceed $900,000,000; provided further that:
(a)    Any increase in the Aggregate Commitment which is accomplished by increasing the Commitment(s) of any Lender or Lenders who are at the time of such increase party to this Agreement (which Lender or Lenders shall consent to such increase in their sole and absolute discretion) shall be accomplished as follows: (i) this Agreement will be amended by the Company, the Administrative Agent and those Lender(s) whose Commitment(s) is or are being increased (but without any requirement that the consent of any other Lenders be obtained) to reflect the revised Commitment amounts of each of the Lenders, (ii) the Administrative Agent will deliver an updated Schedule 1.1 to the Company and each of the Lenders reflecting the revised Aggregate Commitment amount and Commitment Percentage of each of the Lenders, (iii) the outstanding Revolving Credit Loans will be reallocated on the effective date of such increase among the Lenders in accordance with their revised Commitment Percentages (and the Lenders agree to make all payments and adjustments necessary to effect the reallocation and the Company shall pay any and all costs required pursuant to Section 3.9 in connection with such reallocation as if such reallocation were a repayment), (iv) if requested, the Company will deliver new Revolving Credit Note(s) to the Lender or Lenders whose Commitment(s) is or are being increased reflecting the revised Commitment amount of such Lender(s) and (v) the Company and each such Lender shall execute and deliver to the Administrative Agent, a Lender Addition and Acknowledgment Agreement (“Lender Addition and Acknowledgment Agreement”) substantially in the form of Exhibit F attached hereto;

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(b)    Any increase in the Aggregate Commitment which is accomplished by addition of a new Lender under this Agreement shall be accomplished as follows: (i) such new Lender shall be subject to the consent of the Administrative Agent and the Company, which consent shall not be unreasonably withheld, (ii) this Agreement will be amended by the Company, the Administrative Agent and such new Lender (but without any requirement that the consent of any other Lenders be obtained) to reflect the addition of such new Lender as a Lender hereunder, (iii) the Administrative Agent will deliver an updated Schedule 1.1 to the Company, and each of the Lenders reflecting the revised Aggregate Commitment amount and Commitment Percentage of each of the Lenders, (iv) the outstanding Revolving Credit Loans will be reallocated on the effective date of such increase among the Lenders in accordance with their revised Commitment Percentages (and the Lenders agree to make all payments and adjustments necessary to effect the reallocation and the Company shall pay any and all costs required pursuant to Section 3.9 in connection with such reallocation as if such reallocation were a repayment), (v) if requested the Company will deliver a Revolving Credit Note to such new Lender and (vi) the Company and each such new Lender shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, a Lender Addition and Acknowledgment Agreement substantially in the form of Exhibit F attached hereto.
(c)    Notwithstanding anything to the contrary contained in this Agreement, upon any voluntary reduction of the Aggregate Commitment pursuant to Section 2.6(a), the Company shall no longer have the option to request an increase in the Aggregate Commitment pursuant to this Section 2.8.
Section 2.9    Defaulting Lenders. Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:
(a)    facility fees shall cease to accrue on the Commitment of such Defaulting Lender pursuant to Section 3.3;
(b)    the Commitment and Commitment Percentage of such Defaulting Lender shall not be included in determining whether all Lenders or the Required Lenders have taken or may take any action hereunder (including any consent to any amendment or waiver pursuant to Section 10.10); and

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(c)    any amount payable to such Defaulting Lender hereunder (whether on account of principal, interest, fees or otherwise but excluding Section 3.12) shall, in lieu of being distributed to such Defaulting Lender, be retained by the Administrative Agent in a segregated account and, subject to any applicable requirements of law, be applied at such time or times as may be determined by the Administrative Agent (i) first, to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder, (ii) second, to the funding of any Revolving Credit Loan which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent, (iii) third, if so determined by the Administrative Agent and the Company, held in such account as cash collateral for future funding obligations of the Defaulting Lender under this Agreement, (iv) fourth, to the payment of any amounts owing to the Company or any other Borrower or the Lenders as a result of any judgment of a court of competent jurisdiction obtained by the Company or any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement, (v) fifth, if so determined by the Administrative Agent, distributed to the Lenders other than the Defaulting Lender until the ratio of the outstanding credit exposure of such Lenders with respect to Revolving Credit Loans to the aggregate outstanding exposure of all Lenders with respect to Revolving Credit Loans equals such ratio immediately prior to the Defaulting Lender’s failure to fund any portion of any Loans and (vi) sixth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction.
Nothing contained in the foregoing shall be deemed to constitute a waiver by the Borrowers of any of its rights or remedies (whether in equity or law), including against any Lender which fails to fund any of its Loans hereunder at the time or in the amount required to be funded under the terms of this Agreement.

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Section 2.10    Designation of Borrowing Subsidiaries.
(a)    The Company may at any time and from time to time designate any Wholly-Owned Subsidiary as a Borrowing Subsidiary by (i) delivery to the Administrative Agent of (A) a Borrowing Subsidiary Agreement executed by such Subsidiary and the Company, (B) such supporting resolutions, charter documents, incumbency certificates, opinions of counsel, completed tax forms to be filed in the relevant jurisdiction, and other documents or information, in form, content and scope reasonably satisfactory to the Administrative Agent, as may be required by the Administrative Agent in its reasonable discretion (including, without limitation, information necessary to evaluate (a) any withholding tax as may arise in respect of any Revolving Credit Loans made to such Subsidiary, and (b) the manner in which Revolving Credit Loans may be made available to such Subsidiary, including in Dollars or the requested Agreed Currency) and (C) promissory notes signed by such Subsidiary to the extent any Lender so requires; and (ii) delivery to each Lender of any deliveries from such Subsidiary which may be required under Section 10.20 or any other “know your customer” regulations to which such Lender is subject, including, if applicable, the Money Laundering Regulations 2003 of the United Kingdom (as amended), which deliveries must be reasonably satisfactory to each Lender. Upon satisfaction of clauses (i) and (ii) in the immediately preceding sentence, such Subsidiary shall for all purposes of this Agreement be a Borrowing Subsidiary and a party to this Agreement; provided, that each Lender shall only be required to lend to any such Borrowing Subsidiary that is not a Pre-Approved Borrowing Subsidiary to the extent that such Lender is satisfied, in its reasonable discretion, that (A) the laws and regulations of the jurisdictions in which such Subsidiary is organized and is located permit extensions of credit and other financial accommodations from the U.S. into such jurisdictions and such Lender would not be subject to regulatory or legal limitations, restrictions, penalties or costs as a result of lending to such Subsidiary, (B) no gross-up payment shall be required to be paid or withholding tax shall accrue or shall otherwise be payable in connection with the making of Loans to such Subsidiary (provided, that to the extent any such taxes ultimately accrue or are otherwise payable, or any gross-up amounts ultimately are required to be paid, then all such taxes and gross-up amounts shall solely be for the account of the Company and the applicable Borrower, and the Administrative Agent and the Lenders shall have no liability, payment or reimbursement obligations with respect thereto) and (C) such Lender would not be subject to any material financial disadvantage arising out of or attributable to the jurisdictions in which such Subsidiary is organized and is located or the nature of such Subsidiary’s activities. The Administrative Agent shall have the right to adjust the provisions of this Article II and Article III of this Agreement as it may reasonably determine and as may be acceptable to the Company to enable the Lenders that are able to make Loans to a Borrowing Subsidiary pursuant to the immediately preceding sentence to make Loans to such Borrowing Subsidiary in the relevant Agreed Currencies on a non-pro rata basis with Lenders that are not so able, with such adjustments to be made in a manner that, to the extent practicable, are reasonably equitable to all the Lenders. The Administrative Agent shall also have the right to adjust the provisions of Article I, this Article II and Article III of this Agreement as it may reasonably determine and as may be acceptable to the Company to enable the Lenders to make Loans in the relevant Agreed Currencies.

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(b)     As soon as practicable upon receipt of a Borrowing Subsidiary Agreement, the Administrative Agent shall send a copy thereof to each Lender. The Company shall guarantee the Obligations of such Borrowing Subsidiary pursuant to Article XI hereof. Each Subsidiary that is or becomes a Borrowing Subsidiary pursuant to this Section 2.10 hereby irrevocably appoints the Company as its agent for all purposes relevant to this Agreement and each related document, including service of process. For the avoidance of doubt, no Subsidiary shall become a Borrowing Subsidiary hereunder if the extension of Loans to such Subsidiary by the Lenders would violate any applicable law.
(c)    The Company may at any time execute and deliver to the Administrative Agent a Borrowing Subsidiary Termination with respect to any Borrowing Subsidiary, whereupon such Subsidiary shall cease to be a Borrowing Subsidiary and a party to this Agreement. Notwithstanding the preceding sentence, no Borrowing Subsidiary Termination will become effective as to any Borrowing Subsidiary at a time when any principal of or interest on any Loan to such Borrowing Subsidiary shall be outstanding hereunder; provided that such Borrowing Subsidiary Termination shall be effective to terminate the right of such Borrowing Subsidiary to borrow any further Loans under this Agreement.
ARTICLE III    

GENERAL LOAN PROVISIONS
Section 3.1    Interest.
(a)    Interest Rate Options. Subject to the provisions of this Section 3.1, at the election of the applicable Borrower, (i) Revolving Credit Loans shall bear interest at (A) the Base Rate plus the Applicable Margin for Base Rate Loans as set forth in Section 3.1(c) or (B) the LIBOR Rate plus the Applicable Margin for LIBOR Rate Loans as set forth in Section 3.1(c) (provided that the LIBOR Rate shall not be available until three (3) Business Days after the Closing Date unless the Company shall have delivered to the Administrative Agent prior to funding of the Loans on the Closing Date a LIBOR funding indemnity letter in form and substance reasonably satisfactory to the Administrative Agent) and (ii) any Competitive Bid Loan shall bear interest at (A) the LIBOR Rate plus the Competitive Margin specified by the Lender making such Competitive Bid Loan or (B) the Absolute Rate specified by the Lender making such Competitive Bid Loan. The applicable Borrower shall select the rate of interest and LIBOR Interest Period or Competitive Bid Loan Interest Period, if any, applicable to any Loan at the time a Notice of Borrowing or Competitive Bid Request is given pursuant to Section 2.2 or Section 2.3 or at the time a Notice of Conversion/Continuation is given pursuant to Section 3.2. Each Loan or portion thereof bearing interest based on the Base Rate shall be a “Base Rate Loan”, and each Loan or portion thereof bearing interest based on the LIBOR Rate shall be a “LIBOR Rate Loan”. Any Loan or any portion thereof as to which the applicable Borrower has not duly specified an interest rate as provided herein shall be deemed a Base Rate Loan.

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(b)    Interest Periods.
(i)    In connection with each LIBOR Rate Loan, the applicable Borrower, by giving notice at the times described in Section 3.1(a), shall elect an interest period (each, a “LIBOR Interest Period”) to be applicable to such Loan, which LIBOR Interest Period shall be a period of one (1), two (2), three (3), six (6) or, subject to approval of all of the Lenders, twelve (12) months with respect to each LIBOR Rate Loan; provided that:
(A)    each LIBOR Interest Period shall commence on the date of advance of or conversion to any LIBOR Rate Loan and, in the case of immediately successive LIBOR Interest Periods, each successive LIBOR Interest Period shall commence on the date on which the immediately preceding LIBOR Interest Period expires;
(B)    if any LIBOR Interest Period would otherwise expire on a day that is not a Business Day, such LIBOR Interest Period shall expire on the next succeeding Business Day; provided, that if any LIBOR Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such LIBOR Interest Period shall expire on the immediately preceding Business Day;
(C)    any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall end on the last Business Day of the relevant calendar month at the end of such LIBOR Interest Period; and
(D)    no LIBOR Interest Period shall extend beyond the Revolving Credit Termination Date.
(ii)    In connection with each Competitive Bid Loan, the Company, by giving notice at the times described in Section 2.2, shall elect an interest period (each, a “Competitive Bid Interest Period”) to be applicable to such Loan, which Competitive Bid Interest Period shall be a period of such duration as accepted by the Company pursuant to Section 2.2(c); provided that:
(A)    the Competitive Bid Interest Period for an Absolute Rate Loan shall not be less than seven (7) days nor more than one hundred eighty (180) days;
(B)    the Competitive Bid Interest Period for any LIBOR Competitive Bid Loan shall be a period of one (1), two (2), three (3), or six (6) months;
(C)    the Competitive Bid Interest Period shall commence on the date of advance of any Competitive Bid Loan;

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(D)    if any Competitive Bid Interest Period would otherwise expire on a day that is not a Business Day, such Competitive Bid Interest Period shall expire on the next succeeding Business Day; and
(E)    no Competitive Bid Interest Period shall expire on a date later than the first Business Day prior to the Revolving Credit Termination Date.
(iii)    There shall be no more than six (6) LIBOR Interest Periods and Competitive Bid Interest Periods (collectively) in effect at any time.
(c)    Applicable Margin. The Applicable Margin provided for in Section 3.1(a) with respect to any Revolving Credit Loan (the “Applicable Margin”) shall be based upon the table set forth below and determined by reference to the most recently announced senior unsecured long-term, non-credit enhanced debt rating (“Debt Rating”) of the Company as determined by Standard & Poor’s and Moody’s as set forth below.
Pricing
Level
Debt Rating (Moody’s)
Debt Rating (S&P)
Applicable LIBOR Margin
Applicable Base Rate Margin
I
≥ Aa3
≥ AA-
0.615%
0.000%
II
A1
A+
0.680%
0.000%
III
A2
A
0.795%
0.000%
IV
A3
A-
0.900%
0.000%
V
≤ Baa1
≤BBB+
1.000%
0.000%

In the event that both Moody’s and Standard & Poor’s shall not have in effect a Debt Rating (other than by reason of the circumstances referred to in the last sentence of this paragraph), then such Debt Rating shall be deemed to be at Pricing Level V. In the event that either of Moody’s or Standard & Poor’s shall not have in effect a Debt Rating (other than by reason of the circumstances referred to in the last sentence of this paragraph), then such Debt Rating shall be deemed to be at the Pricing Level corresponding to the Debt Rating by Moody’s or Standard & Poor’s (whichever does have a Debt Rating in effect as of such date) that is in effect on such date. In the event that the corresponding Debt Ratings publicly announced by Standard & Poor’s and Moody’s listed above differ by (i) one level, the Applicable Margin shall be based upon the Pricing Level which corresponds to the Debt Rating which is the higher of such announced Debt Ratings, and (ii) two or more levels, the Applicable Margin shall be based upon the Pricing Level which corresponds to the Debt Rating which is one rating below the higher of such announced Debt Ratings. Any change in the Applicable Margin shall be effective on the date upon which a change in the Company’s applicable Debt Rating is announced or is made publicly available. In all cases, the Company shall notify the Administrative Agent of any change in the applicable Debt Rating within five (5) Business Days of the date upon which such change is announced or publicly made available. If the rating system of Moody’s and Standard & Poor’s shall change, or if both of such rating agencies shall cease to be in the business of rating corporate debt obligations, the Company and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agencies and, pending the effectiveness of any such amendment, the Applicable Margin shall be determined by reference to the Debt Rating most recently in effect prior to such change or cessation.

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(d)    Default Rate. Subject to Section 8.3, at the request or with the consent of the Required Lenders upon the occurrence and during the continuance of an Event of Default (except for an Event of Default under Section 8.1(a), Section 8.1(f) or Section 8.1(g), for which no such request by or consent of the Required Lenders shall be required) (i) the Borrowers shall no longer have the option to request LIBOR Rate Loans or Competitive Bid Loans, (ii) all outstanding LIBOR Rate Loans shall bear interest at a rate per annum of two percent (2%) in excess of the rate then applicable to LIBOR Rate Loans until the end of the applicable LIBOR Interest Period and thereafter at a rate equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans, (iii) all outstanding Competitive Bid Loans shall bear interest at a rate per annum equal to two percent (2%) in excess of the rate then applicable to such Competitive Bid Loan until the end of the applicable Competitive Bid Interest period and thereafter at a rate equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans, (iv) all outstanding Base Rate Loans and other Obligations arising hereunder or under any other Loan Document shall bear interest at a rate per annum equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans and (v) each Loan in an Agreed Currency other than Dollars shall be converted to a Loan in the Approximate Equivalent Amount in Dollars. Interest shall continue to accrue on the Notes after the filing by or against any Borrower of any petition seeking any relief in bankruptcy or under any act or law pertaining to insolvency or debtor relief, whether state, federal or foreign.
(e)    Interest Payment and Computation. Interest on each Base Rate Loan shall be payable in arrears on the last Business Day of each calendar quarter commencing September 30, 2013; and interest on each LIBOR Rate Loan and Competitive Bid Loan shall be payable on the last day of each LIBOR Interest Period or Competitive Bid Interest Period, respectively, applicable thereto, and if such LIBOR Interest Period or Competitive Bid Interest Period, respectively, extends over three (3) months, at the end of each three (3) month interval during such LIBOR Interest Period or Competitive Bid Interest Period, respectively. Interest on LIBOR Rate Loans and Competitive Bid Loans and all fees payable hereunder shall be computed on the basis of a 360-day year and assessed for the actual number of days elapsed and interest on Base Rate Loans shall be computed on the basis of a 365/66-day year and assessed for the actual number of days elapsed. Loans in Agreed Currencies for which it is the market convention shall be computed on the basis of a 365/66-day year and assessed for the actual number of days elapsed.
(f)    Maximum Rate. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder or under any of the Notes charged or collected pursuant to the terms of this Agreement or pursuant to any of the Notes exceed the highest rate permissible under any Applicable Law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that the Lenders have charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by Applicable Law and the Lenders shall at the Administrative Agent’s option (i) promptly refund to the Borrowers any interest received by the Lenders in excess of the maximum lawful rate or (ii) apply such excess to the principal balance of the Obligations on a pro rata basis. It is the intent hereof that the Borrowers not pay or contract to pay, and that neither the Administrative Agent nor any Lender receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by the Borrowers under Applicable Law.

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Section 3.2    Notice and Manner of Conversion or Continuation of Loans. Provided that no Unmatured Event of Default or Event of Default has occurred and is then continuing, the applicable Borrower shall have the option to (a) convert at any time following the third Business Day after the Closing Date all or any portion of any outstanding Base Rate Loans in a principal amount equal to $5,000,000 or any whole multiple of $1,000,000 in excess thereof into one or more LIBOR Rate Loans and (b) upon the expiration of any LIBOR Interest Period, (i) convert all or any part of its outstanding LIBOR Rate Loans made in Dollars in a principal amount equal to $3,000,000 or a whole multiple of $1,000,000 in excess thereof into Base Rate Loans or (ii) continue such LIBOR Rate Loans as LIBOR Rate Loans. Whenever such Borrower desires to convert or continue Loans as provided above, such Borrower shall give the Administrative Agent irrevocable prior written notice in the form attached as Exhibit G (a “Notice of Conversion/Continuation”) not later than 11:00 a.m. (Chicago time) (i) three (3) Business Days before the day on which a proposed conversion or continuation of such Loan is to be effective, if in Dollars, or (ii) four (4) Business Days before the day on which a proposed conversion or continuation of such Loan is to be effective in any Agreed Currency other than Dollars, specifying (A) the Loans to be converted or continued, and, in the case of any LIBOR Rate Loan to be converted or continued, the last day of the LIBOR Interest Period therefor, (B) the effective date of such conversion or continuation (which shall be a Business Day), (C) the principal Dollar Amount of such Loans to be converted or continued, (D) the LIBOR Interest Period to be applicable to such converted or continued LIBOR Rate Loan and (E) the Agreed Currency in which such Loan is to be continued or converted. The Administrative Agent shall promptly notify the Lenders of such Notice of Conversion/Continuation.
Section 3.3    Facility Fees. The Company agrees to pay to the Administrative Agent, for the account of the Lenders, a non-refundable facility fee at a rate per annum equal to the applicable rate based upon the table set forth below (the “Facility Fee Rate”) on the total amount of the Aggregate Commitment from the Closing Date to the Revolving Credit Termination Date. The facility fee shall be payable in arrears on the last Business Day of each calendar quarter during the term of this Agreement commencing September 30, 2013, and on the Revolving Credit Termination Date. Such facility fee shall be distributed by the Administrative Agent to the Lenders pro rata in accordance with the Lenders’ respective Commitment Percentages. The Facility Fee Rate shall be determined by reference to the most recently announced Debt Rating of the Company as determined by Standard & Poor’s and Moody’s. Changes in the Debt Rating or the failure of Moody’s or Standard & Poor’s to have in effect a Debt Rating shall have the effect as set forth in Section 3.1(c).
Pricing Level
Debt Rating (Moody’s)
Debt Rating (S&P)
Facility Fee
I
≥ Aa3
≥ AA-
0.060%
II
A1
A+
0.070%
III
A2
A
0.080%
IV
A3
A-
0.100%
V