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CONFORMED
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Commission File Number 0-255
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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GRAYBAR ELECTRIC COMPANY, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 13 - 0794380
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34 NORTH MERAMEC AVENUE, ST. LOUIS, MO 63105
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(Address of principal executive offices) (Zip Code)
POST OFFICE BOX 7231, ST. LOUIS, MO 63177
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(Mailing Address) (Zip Code)
Registrant's telephone number, including area code: (314) 573 - 9200
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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
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2) of the Securities Exchange Act of 1934.
YES NO X
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Common Stock Outstanding at April 30, 2004: 5,755,660
----------------------
(Number of Shares)
Item 1. Financial Statements PART I
------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
MARCH 31, 2004 DECEMBER 31, 2003
-------------------------- -------------------------
CURRENT ASSETS
Cash $ 16,281 $ 19,161
-------------------------- -------------------------
Trade receivables 562,448 556,967
-------------------------- -------------------------
Merchandise inventory 480,669 483,333
-------------------------- -------------------------
Other current assets 15,888 17,815
-------------------------- -------------------------
Total current assets 1,075,286 1,077,276
-------------------------- -------------------------
PROPERTY
Land 29,949 27,092
-------------------------- -------------------------
Buildings and permanent fixtures 241,450 237,840
-------------------------- -------------------------
Furniture and fixtures 163,753 163,932
-------------------------- -------------------------
Software 76,906 76,339
-------------------------- -------------------------
Capital leases 23,987 23,987
-------------------------- -------------------------
Less-Accumulated depreciation 232,091 223,585
-------------------------- -------------------------
Net property 303,954 305,605
-------------------------- -------------------------
DEFERRED FEDERAL INCOME TAXES 9,555 10,402
-------------------------- -------------------------
OTHER ASSETS 27,960 28,847
-------------------------- -------------------------
$ 1,416,755 $ 1,422,130
========================== =========================
CURRENT LIABILITIES
Short-term borrowings $ 15,373 $ ---
-------------------------- -------------------------
Current portion of long-term debt 33,261 22,872
-------------------------- -------------------------
Trade accounts payable 532,279 536,179
-------------------------- -------------------------
Other accrued taxes 15,986 13,684
-------------------------- -------------------------
Accrued payroll and benefit costs 25,654 36,292
-------------------------- -------------------------
Dividends payable --- 6,469
-------------------------- -------------------------
Other payables and accruals 44,110 45,168
-------------------------- -------------------------
Total current liabilities 666,663 660,664
-------------------------- -------------------------
POSTRETIREMENT BENEFITS LIABILITY 77,936 77,636
-------------------------- -------------------------
PENSION LIABILITY 40,895 40,895
-------------------------- -------------------------
LONG-TERM DEBT 243,121 254,381
-------------------------- -------------------------
OTHER NON-CURRENT LIABILITIES 917 971
-------------------------- -------------------------
2
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
MARCH 31, 2004 DECEMBER 31, 2003
------------------------- -------------------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Preferred:
---------
Par value $20 per share
Authorized 300,000 shares
SHARES
------
2004 2003
---- ----
Issued to shareholders 2,173 2,173
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In treasury, at cost (131) (52)
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Outstanding 2,042 2,121 41 43
------------- ------------- ------------------------- -------------------------
Common:
------
Stated value $20 per share
Authorized 7,500,000 shares
SHARES
------
2004 2003
---- ----
Issued to voting trustees 5,615,080 5,609,313
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Issued to shareholders 290,413 290,389
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In treasury, at cost (116,438) (28,343)
------------- -------------
Outstanding 5,789,055 5,871,359 115,781 117,427
------------- ------------- ------------------------- -------------------------
Advance payments on subscriptions
to common stock 46 45
------------------------- -------------------------
Retained earnings 307,532 306,030
------------------------- -------------------------
Accumulated other comprehensive income (loss) (36,177) (35,962)
------------------------- -------------------------
TOTAL SHAREHOLDERS' EQUITY 387,223 387,583
------------------------- -------------------------
$ 1,416,755 $ 1,422,130
========================= =========================
See accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
QUARTER ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------------------- --------------------------
GROSS SALES, net of returns and allowances $ 942,115 $ 863,963
-------------------------- --------------------------
Less - Cash discounts 2,806 2,619
-------------------------- --------------------------
NET SALES 939,309 861,344
-------------------------- --------------------------
COST OF MERCHANDISE SOLD 748,535 688,531
-------------------------- --------------------------
Gross margin 190,774 172,813
-------------------------- --------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 169,882 160,960
-------------------------- --------------------------
DEPRECIATION AND AMORTIZATION 9,870 8,041
-------------------------- --------------------------
Income from operations 11,022 3,812
-------------------------- --------------------------
OTHER INCOME, net 761 1,929
-------------------------- --------------------------
INTEREST EXPENSE 6,377 5,484
-------------------------- --------------------------
Income before provision for income taxes 5,406 257
-------------------------- --------------------------
PROVISION FOR INCOME TAXES
Current 914 86
-------------------------- --------------------------
Deferred 1,248 13
-------------------------- --------------------------
Total provision for income taxes 2,162 99
-------------------------- --------------------------
NET INCOME $ 3,244 $ 158
========================== ==========================
NET INCOME PER SHARE OF COMMON STOCK (NOTE 2) $ .56 $ .03
========================== ==========================
DIVIDENDS
Preferred - $.25 per share $ 1 $ 1
-------------------------- --------------------------
Common - $.30 per share 1,741 1,820
-------------------------- --------------------------
$ 1,742 $ 1,821
========================== ==========================
See accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
THREE MONTHS ENDED MARCH 31,
2004 2003
-------------------------- --------------------------
CASH FLOWS FROM OPERATIONS
Net Income $ 3,244 $ 158
-------------------------- --------------------------
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 9,870 8,041
-------------------------- --------------------------
Deferred income taxes 1,248 13
-------------------------- --------------------------
Gain on sale of property --- (1,049)
-------------------------- --------------------------
Changes in assets and liabilities:
Trade receivables (5,481) 14,393
-------------------------- --------------------------
Merchandise inventory 2,664 25,027
-------------------------- --------------------------
Other current assets 1,927 (273)
-------------------------- --------------------------
Other assets 887 (2,148)
-------------------------- --------------------------
Trade accounts payable (3,900) (17,445)
-------------------------- --------------------------
Accrued payroll and benefit costs (10,638) (14,733)
-------------------------- --------------------------
Other accrued liabilities 874 3,981
-------------------------- --------------------------
(2,549) 15,807
-------------------------- --------------------------
Net cash provided by operations 695 15,965
-------------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property 31 2,559
-------------------------- --------------------------
Capital expenditures for property (8,250) (15,729)
-------------------------- --------------------------
Net cash used by investing activities (8,219) (13,170)
-------------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term borrowings 15,373 10,244
-------------------------- --------------------------
Proceeds from long-term debt --- ---
-------------------------- --------------------------
Repayment of long-term debt (203) (94)
-------------------------- --------------------------
Principal payments under capital leases (668) (1,229)
-------------------------- --------------------------
Sale of common stock 117 127
-------------------------- --------------------------
Purchase of treasury stock (1,764) (2,547)
-------------------------- --------------------------
Dividends paid (8,211) (8,623)
-------------------------- --------------------------
Net cash provided (used) by financing activities 4,644 (2,122)
-------------------------- --------------------------
NET INCREASE (DECREASE) IN CASH (2,880) 673
-------------------------- --------------------------
CASH, BEGINNING OF YEAR 19,161 20,826
-------------------------- --------------------------
CASH, END OF FIRST QUARTER $ 16,281 $ 21,499
========================== ==========================
See accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE QUARTERS ENDED
----------------------
MARCH 31, 2004 AND 2003
-----------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
COMMON ACCUMULATED
STOCK OTHER
COMMON PREFERRED SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK STOCK UNISSUED EARNINGS INCOME (LOSS) TOTAL
------------ ------------ ----------- ------------ ------------- ------------
December 31, 2002 $123,272 $ 45 $ 50 $309,434 $ (44,958) $387,843
------------
Net Income 158 158
Currency Translation Adjustments 135 135
Unrealized Gain/(Loss) from
Interest Rate Swap (net of tax
of $8) (43) (43)
------------
Comprehensive Income 250
------------
Stock Issued 128 128
Stock Redeemed (2,546) (1) (2,547)
Advance Payments (1) (1)
Dividends Declared (1,821) (1,821)
------------ ------------ ----------- ------------ ------------- ------------
March 31, 2003 $120,854 $ 44 $ 49 $307,771 $ (44,866) $383,852
============ ============ =========== ============ ============= ============
COMMON ACCUMULATED
STOCK OTHER
COMMON PREFERRED SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK STOCK UNISSUED EARNINGS INCOME (LOSS) TOTAL
------------ ------------ ----------- ------------ ------------- ------------
December 31, 2003 $117,427 $ 43 $ 45 $306,030 $ (35,962) $387,583
------------
Net Income 3,244 3,244
Currency Translation Adjustments 413 413
Unrealized Gain/(Loss) from
Interest Rate Swap (net of tax
of $398) (628) (628)
------------
Comprehensive Income 3,029
------------
Stock Issued 116 116
Stock Redeemed (1,762) (2) (1,764)
Advance Payments 1 1
Dividends Declared (1,742) (1,742)
------------ ------------ ----------- ------------ ------------- ------------
March 31, 2004 $115,781 $ 41 $ 46 $307,532 $ (36,177) $387,223
============ ============ =========== ============ ============= ============
See accompanying Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
---------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
Note 1
- ------
The condensed consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the quarterly report includes all
adjustments, consisting of normal recurring accruals, necessary for the fair
presentation of the financial statements presented. Such interim financial
information is subject to year-end adjustments and independent audit.
Results for interim periods are not necessarily indicative of
results to be expected for the full year.
Note 2
- ------
THREE MONTHS 2004 THREE MONTHS 2003
-------------------------- -------------------------
Earnings for Three Months $ 3,244 $ 158
-------------------------- -------------------------
Dividends on Preferred Stock 1 1
-------------------------- -------------------------
Available for Common Stock $ 3,243 $ 157
-------------------------- -------------------------
Average Common Shares Outstanding 5,831,002 6,100,509
-------------------------- -------------------------
Earnings Per Share $ .56 $ .03
-------------------------- -------------------------
7
Note 3
- ------
At March 31, 2004 the Company had a $200 million accounts
receivable securitization program that expires in October 2006. The
securitization program provides for the sale of certain of the
Company's trade receivables on a revolving basis to Graybar
Commerce Corporation (GCC), a wholly owned, bankruptcy remote,
special purpose subsidiary. GCC sells an undivided interest in the
receivables to an unrelated multi-seller commercial paper conduit.
The Company accounts for the securitization as an on-balance sheet
financing arrangement because the Company has maintained effective
control of the accounts receivable through a call option that gives
GCC the unilateral right to repurchase the undivided interests.
Accordingly, the accounts receivable and related debt are included
in the accompanying consolidated balance sheets. GCC has granted a
security interest in its trade receivables to the commercial paper
conduit. There were no borrowings outstanding under the
securitization program at March 31, 2004.
Note 4
- ------
The Company has two operating lease arrangements with an
independent lessor which have provided $63,684 of off-balance sheet
financing for eight of the Company's zone distribution facilities.
Each of the agreements carries a five-year term. The Company has
the option, with the consent of the lenders to the lessor, to renew
the leases for up to two additional five-year terms or to purchase
the property for a price including the outstanding lease balance.
If the Company elects not to renew the lease or purchase the
property, or such lenders refuse to consent to a renewal, the
Company may elect to remarket the property and arrange for its sale
to a third party. The Company has recorded a $917 liability for the
estimated fair value of the residual value guarantee for one of
these operating lease agreements which was renewed in 2003.
The leasing structures used in these two lease arrangements
qualify as variable interest entities under FASB Interpretation No.
46 and the Company's interests in the variable interest entities
are required to be consolidated in the Company's financial
statements beginning in the first quarter of 2005. As of March 31,
2004 the Company's maximum exposure to loss as a result of its
involvement with the two lease arrangements is $54,131, the amount
guaranteed by the Company as the residual fair value of the
property in accordance with the lease arrangements.
Note 5
- ------
The Company has elected to defer accounting for the effects
of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 in accordance with FASB Staff Position (FSP) No.
FAS 106-1. The accumulated postretirement benefit obligation and
the net periodic postretirement benefit cost do not currently
reflect the accounting impact of the Act. Authoritative guidance on
accounting for the federal subsidy is pending.
8
Item 2. MANAGEMENT'S DISCUSSION & ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Dollars Stated in Thousands)
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain information relating to the
operations of the Company expressed as a percentage of net sales:
Quarter Ended March 31: 2004 2003
---- ----
Net Sales 100.0% 100.0%
Cost of Merchandise Sold (79.7) (79.9)
---------- ----------
Gross Margin 20.3 20.1
Selling, General and Administrative Expenses (18.1) (18.7)
Depreciation and Amortization (1.0) (.9)
---------- ----------
Income from Operations 1.2 .5
Other Income, net .1 .2
Interest Expense (.7) (.6)
---------- ----------
Income Before Provision for Income Taxes .6 .1
Provision for Income Taxes (.3) -
---------- ----------
Net Income .3% .1%
========== ==========
Net sales in the first three months of 2004 increased $77,965, or
9.1%, to $939,309 compared to $861,344 in the first three months of 2003.
The higher net sales resulted from the generally improved economic
conditions that are prevalent on an industry-wide basis in the electrical
and communications market sectors in which the Company operates. Electrical
market sales increased 12.9% and communications market sales increased 3.6%
when comparing the first three months of 2004 to the first three months of
2003.
Gross margin increased $17,961, or 10.4%, from $172,813 in the
first three months of 2003 to $190,774 in first three months of 2004
primarily due to the increased sales in the electrical and communications
markets.
Selling, general and administrative expenses increased $8,922, or
5.5%, when comparing the first three months of 2004 to the first three
months of 2003 due largely to increases in employee compensation costs of
approximately $3,600 and increases in pension plan expense and health care
plan costs of approximately $1,600.
Depreciation and amortization increased from $8,041 in the first
quarter of 2003 to $9,870 in the first quarter of 2004 primarily due to
additional amortization expenses as a result of the implementation of the
Company's Enterprise Resource Planning system during 2003.
Other income, net includes gains on sale of property of $0 and
$1,049 and accounts receivable interest charges to customers of $934 and
$346 in the first three months of 2004 and the first three months of 2003,
respectively.
Interest expense increased $893, or 16.3%, when comparing the first
three months of 2004 to the first three months of 2003 primarily due to
increased levels of short-term borrowings required to finance higher levels
of accounts receivable.
9
MANAGEMENT'S DISCUSSION & ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Dollars Stated in Thousands)
RESULTS OF OPERATIONS (Continued)
- ---------------------
The combined effect of the increase in gross margin and the
decrease in other income, together with the increases in selling, general
and administrative expenses, depreciation and amortization and interest
expense, resulted in an increase in pretax earnings of $5,149 in the first
three months of 2004 compared to the same period in 2003.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
At March 31, 2004, current assets exceeded current liabilities by
$408,623, down $7,989 from December 31, 2003. The increase in accounts
receivable from December 31, 2003 to March 31, 2004 resulted primarily from
the increase in sales experienced by the Company. Merchandise inventory
levels were slightly lower at March 31, 2004 when compared to December 31,
2003 inventory levels. Average inventory turnover at March 31, 2004 was
generally unchanged from the average turnover at December 31, 2003.
The Company is converting its existing computer systems to an
Enterprise Resource Planning (ERP) system. Implementation of the new system
began in April 2003. The total project costs are expected to be
approximately $100,000. The Company is funding the project through a
combination of equipment leases and working capital. Project costs through
March 31, 2004 are approximately $97,000, of which $76,906 has been
capitalized. The Company expects that conversion to the new ERP system will
provide future benefits to its results of operations. The Company does not
have any other plans or commitments that would require significant amounts
of additional working capital.
At March 31, 2004, the Company had available to it unused lines of
credit amounting to $266,272. These lines are available to meet short-term
cash requirements of the Company. Short-term borrowings outstanding during
2004 through March 31 ranged from a minimum of $0 to a maximum of $192,223.
The Company has funded its capital requirements from operations,
stock issuances to its employees and long-term debt. During the first three
months of 2004, cash provided by operations amounted to $695 compared to
$15,965 cash provided by operations in the first three months of 2003. Cash
provided from the sale of common stock and proceeds received on stock
subscriptions amounted to $117 in the first three months of 2004.
Capital expenditures for property for the three-month periods ended
March 31, 2004 and 2003 were $8,250 and $15,729, respectively. Purchases of
treasury stock for the three-month periods ended March 31, 2004 and 2003
were $1,764 and $2,547, respectively. Dividends paid for the three-month
periods ended March 31, 2004 and 2003 were $8,211 and $8,623, respectively.
10
Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------
There have been no material changes in the policies, procedures,
controls or risk profile from that provided in Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk", of the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
Item 4. CONTROLS AND PROCEDURES
-----------------------
An evaluation was performed under the supervision and with the
participation of the Company's management of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of
March 31, 2004. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective. On
April 1, 2003, the Company began implementation of its conversion to a new
ERP platform and continued rollout and implementation to various locations
throughout 2004. In connection therewith, certain of the Company's
disclosure controls and procedures have been modified at certain locations
to reflect the new system environment.
11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits furnished in accordance with provisions of Item 601 of
Regulation S-K.
(31) Rule 13a-14(a)/15d-14(a) Certifications
31.1 - Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Principal Executive
Officer.
31.2 - Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Principal Financial
Officer.
(32) Section 1350 Certifications
32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Principal Executive Officer.
32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Principal Financial Officer.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
12
SIGNATURES
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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.
May 11, 2004 GRAYBAR ELECTRIC COMPANY, INC.
----------------------
(Date)
/S/ R. A. REYNOLDS, JR.
-----------------------------------
R. A. REYNOLDS, JR.
PRESIDENT AND
PRINCIPAL EXECUTIVE OFFICER
/S/ J. H. HINSHAW
-----------------------------------
J. H. HINSHAW
SENIOR VICE PRESIDENT AND
PRINCIPAL FINANCIAL OFFICER
/S/ J. H. KIPPER
-----------------------------------
J. H. KIPPER
VICE PRESIDENT
AND CONTROLLER
13