UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Graybar Electric Company, Inc. and Subsidiaries

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2009

Table of Contents

2

PART I

The following discussion should be read in conjunction with the accompanying audited consolidated financial statements of Graybar Electric Company, Inc. (“Graybar” or the “Company”), the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2009, included in this Annual Report on Form 10-K.  The results shown herein are not necessarily indicative of the results to be expected in any future periods. 

Certain statements, other than purely historical information, including estimates, projections, statements relating to the Company’s business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by the words “believes”, “projects”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and other similar expressions.  The Company intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse impact on the Company’s operations and future prospects on a consolidated basis include, but are not limited to: general economic conditions, particularly in the residential, commercial, and industrial building construction industries, volatility in the prices of industrial metal commodities, disruptions in the Company’s sources of supply, a sustained interruption in the operation of the Company’s information systems, adverse legal proceedings or other claims, and the inability to raise debt or equity capital.  These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning the Company, including additional factors that could materially impact our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission (the “SEC” or “Commission”).  Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of this Annual Report on Form 10-K for the year ended December 31, 2009.

All dollar amounts are stated in thousands ($000s) in the following discussion except for per share data.

Item 1.  Business

The Company

Graybar Electric Company, Inc. is engaged in the distribution of electrical, communications and data networking (“comm/data”) products, and the provision of related supply chain management and logistics services, primarily to electrical and comm/data contractors, industrial plants, telephone companies, federal, state and local governments, commercial users, and power utilities in North America.  All products sold by the Company are purchased by the Company from others.  The Company’s business activity is primarily with customers in the United States of America (“US”).  Graybar also has subsidiary operations with distribution facilities in Canada and Puerto Rico.

The Company was incorporated under the laws of the State of New York on December 11, 1925 to purchase the wholesale distribution business of Western Electric Company, Incorporated.  Graybar is one hundred percent (100%) owned by its active and retired employees and there is no public trading market for its common stock.  The location of the principal executive offices of the Company is 34 North Meramec Avenue, St. Louis, Missouri 63105 and its telephone number is (314) 573-9200.

The Company maintains an internet website at http://www.graybar.com.  Graybar’s filings with the SEC, including its Annual Report on this Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, are accessible free of charge on our website within the “About Us” page under “SEC Filings” as soon as reasonably practicable after we file the reports with the SEC.  Additionally, a copy of the Company’s SEC filings can be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. or by calling the SEC at 1-800-SEC-0330.  A copy of our electronically filed materials can also be obtained at http://www.sec.gov.

Suppliers

Graybar distributes approximately one million products (“stockkeeping units” or “SKUs”) purchased primarily from nearly 4,300 manufacturers and suppliers through the Company’s network of distribution facilities.  The relationship between the Company and its suppliers is customarily a nonexclusive national or regional distributorship, terminable upon 30 to 90 days notice by either party.  The Company maintains long-standing relationships with a number of its principal suppliers.

3

The Company purchased approximately fifty-one (51%) of the products it distributes from its top 25 suppliers during 2009.  However, the Company generally deals with more than one supplier for any product category and there are alternative sources of comparable products available for nearly all product categories.

Products Distributed

The Company stocks approximately 110,000 of the products it distributes and, therefore, is able to supply its customers locally with a wide variety of electrical and comm/data products.  The products distributed by the Company consist primarily of wire, cable, conduit, wiring devices, switchgear, industrial automation, tools, motor controls, transformers, lamps, lighting fixtures, power transmission equipment, telephone station apparatus, key systems, digital and internet protocol (“IP”) private branch exchanges (“PBX”), data products for local or wide area networks, fiber optic products, and security/access control products.

On December 31, 2009 and 2008, the Company had orders on hand that totaled $526,608 and $605,320, respectively.  The Company expects that approximately eighty-five percent (85%) of the orders it had on hand at December 31, 2009 will be filled within the twelve-month period ending December 31, 2010.  Generally, orders placed by customers and accepted by the Company have resulted in sales.  However, customers from time to time request cancellation and the Company has historically allowed such cancellations.

Marketing

Graybar sells its products primarily through a network of distribution facilities located in thirteen geographical districts throughout the US.  The Company operates multiple distribution facilities in each district, each of which carries an inventory of products and operates as a wholesale distributor for the territory in which it is located.  In addition, the Company maintains seven national zone warehouses and five district service centers containing inventories of both standard and specialized products.  Both the national zone warehouses and district service centers replenish local inventories carried at the Company’s US distribution facilities and make shipments directly to customers.  The Company also has subsidiary operations with distribution facilities located in Canada and Puerto Rico.

The distribution facilities operated by the Company at December 31, 2009 are shown below:

When the specialized nature or size of a particular shipment warrants, the Company has products shipped directly from its suppliers to the place of use, otherwise, orders are filled from the Company’s inventory.  On a dollar volume basis, approximately fifty-five percent (55%) and fifty-six percent (56%) of the orders were filled from the Company’s inventory in 2009 and 2008, respectively, and the remainder were shipped directly from the supplier to the place of use.  The Company generally finances its inventory through the collection of trade receivables and trade accounts payable terms with its suppliers.  The Company’s short-term borrowing facilities are also used to finance inventory when necessary.  Currently, the Company does not use long-term borrowings for inventory financing.  There was no inventory pledged as collateral for any borrowings at December 31, 2009 and 2008.

4

The Company distributes its products to approximately 130,000 customers, which fall into three principal classes.  The following list shows the estimated percentage of the Company’s total sales attributable to each of these classes for the last three years:

At December 31, 2009, the Company employed approximately 2,800 persons in sales capacities.  Approximately 1,200 of these sales personnel were outside sales representatives working to generate sales with current and prospective customers.  The remainder of the sales personnel were sales and marketing managers, inside sale representatives, and advertising, quotation, and counter personnel.

Competition

The Company believes that it is one of the three largest wholesale distributors of electrical and comm/data products in the US.  The field is highly competitive, and the Company estimates that the five largest wholesale distributors account for approximately twenty-five percent (25%) of the total market.  The balance of the market is made up of several thousand independent distributors operating on a local, regional, or national basis and manufacturers who sell their products directly to end users.

The Company’s pricing structure for the products it sells reflects the costs associated with the services that it provides and its prices are generally competitive.  The Company believes that, while price is an important customer consideration, it is the service that Graybar is able to provide customers that distinguishes the Company from many of its competitors, whether they are distributors or manufacturers selling direct.  Graybar views its ability to quickly supply its customers with a broad range of electrical and comm/data products through conveniently located distribution facilities as a competitive advantage that customers value.  However, if a customer is not looking for one distributor to provide a wide range of products and does not require prompt delivery or other services, a competitor of the Company that does not provide these benefits may be in a position to offer a lower price.

Foreign Sales

Sales by the Company to customers in foreign countries were made primarily by Company subsidiaries in Canada and Puerto Rico and accounted for approximately five percent (5%) of consolidated revenues in each of 2009, 2008, and 2007.  Limited export activities are handled primarily from Company facilities in Texas, Arizona and California.  Long-lived assets located outside the US represented approximately one percent (1%) of the Company’s consolidated assets at the end of each of the last three years.  The Company does not have significant foreign currency exposure and does not believe there are any other significant risks attendant to its foreign operations.

Employees

At December 31, 2009, the Company employed approximately 6,900 persons on a full-time basis.  Approximately 110 of these persons were covered by union contracts.  The Company has not had a material work stoppage and considers its relations with its employees to be good.

Item 1A.  Risk Factors

Our liquidity, financial condition and results of operations are subject to various risks, including, but not limited to, those discussed below.  The risks outlined below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our liquidity, financial condition, and results of operations.

Our sales fluctuate with general economic conditions, particularly in the residential, commercial, and industrial building construction industries.  Our operating locations are widely distributed geographically across the US and, to a lesser extent, Canada.  Customers for both electrical and comm/data products are similarly diverse – we have over 130,000 customers and our largest customer accounts for only three percent (3%) of our total revenue.  While our geographic and customer concentrations are relatively low, our results of operations are, nonetheless, dependent on favorable conditions in both the general economy and the construction industry.  In addition, conditions in the construction industry are greatly influenced by the availability of project financing and the cost of borrowing.  The credit and financial market crisis that began in September 2008 abated somewhat during 2009, but credit availability continues to be tight throughout North America, particularly for building construction.  Since we derive a substantial portion of our sales from electrical and comm/data contractors, our revenue could be negatively impacted should debt-financing for construction projects continue to be limited, interest rates rise, or other general economic conditions deteriorate to levels that further depress construction activity.

5

The Company’s results from operations are impacted by changes in commodity prices, primarily copper and steel.  Many of the products sold by the Company are subject to wide and frequent price fluctuations because they are composed primarily of copper or steel, two industrial metal commodities that have been subject to extreme price volatility during the past several years.  Examples of such products include copper wire and cable and steel conduit, enclosures, and fittings.  The Company’s gross margin rate, or mark-up percentage, on these products is relatively constant over time, though not necessarily in the short term.  Therefore, as the cost of these products to the Company declines, pricing to our customers decreases by a similar percentage.  This impacts our results of operations by lowering both revenue and gross margin.  Rising copper and steel prices have the opposite effect, increasing both revenue and gross margin, assuming the quantities of the affected products sold remain constant.

The impact of commodity price fluctuations on the value of our merchandise inventory is not material given the Company’s use of the last-in, first-out (“LIFO”) inventory cost method, which matches current product costs to current revenues.

We purchase one hundred percent (100%) of the products we sell to our customers from other parties.  As a wholesale distributor, our business and financial results are dependent on our ability to purchase products from manufacturers not controlled by our Company that we, in turn, sell to our customers.  Approximately fifty-one percent (51%) of our purchases are made from only 25 manufacturers.  A sustained disruption in our ability to source product from one or more of the largest of these vendors might have a material impact on our ability to fulfill customer orders resulting in lost revenue and, in rare cases, damages for late or non-delivery.

Our daily activities are highly dependent on the uninterrupted operation of our information systems.  We are a recognized industry leader for our use of information technology in all areas of our business – sales, customer service, inventory management, finance, accounting, and human resources.  We maintain redundant information systems as part of our disaster recovery program and are able to operate in many respects using a paper-based system to help mitigate a complete interruption in our information processing capabilities.  Nonetheless, our information systems remain vulnerable to natural disasters, wide-area telecommunications or power utility outages, terrorist attack, or other major disruptions.  A sustained interruption in the functioning of our information systems, however unlikely, could lower operating income by negatively impacting revenue, expenses, or both.

We are subject to legal proceedings and other claims arising out of the conduct of our business.  These proceedings and claims relate to public and private sector transactions, product liability, contract performance, and employment matters.  On the basis of information currently available to us, we do not believe that existing proceedings and claims will have a material impact on our financial position or results of operations.  However, litigation is unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial position or our results of operations in a particular period.

More specifically, with respect to asbestos litigation, as of December 31, 2009, approximately 2,400 individual cases and 150 class actions are pending that allege actual or potential asbestos-related injuries resulting from the use of or exposure to products allegedly sold by us.  Additional claims will likely be filed against us in the future.  Our insurance carriers have historically borne virtually all costs and liability with respect to this litigation and are continuing to do so.  Accordingly, our future liability with respect to pending and unasserted claims is dependent on the continued solvency of our insurance carriers.  Other factors that could impact this liability are: the number of future claims filed against us; the defense and settlement costs associated with these claims; changes in the litigation environment, including changes in federal or state law governing the compensation of asbestos claimants; adverse jury verdicts in excess of historic settlement amounts; and bankruptcies of other asbestos defendants.  Because any of these factors may change, our future exposure is unpredictable and it is possible that we may incur costs that would have a material adverse impact on our liquidity, financial position or results of operations in future periods.

Our financing arrangements and loan agreements contain financial covenants and certain other restrictions on our activities and those of our subsidiaries.  Our senior unsecured notes, revolving credit facility, and trade receivable securitization program impose contractual limits on our ability, and the ability of most of our subsidiaries, to make investments, pay dividends, incur debt, dispose of property, and issue equity securities.  In addition, we are required to maintain acceptable financial ratios relating to debt leverage, interest coverage, net worth, asset performance, and certain other customary covenants.  Our failure to comply with these obligations may cause an event of default triggering an acceleration of the debt owed to our creditors or limit our ability to obtain additional credit under these facilities.  While we expect to remain in compliance with the terms of our credit agreements, our failure to do so could have a negative impact on our ability to borrow funds and maintain acceptable levels of cash flow from financing activities.

There is no public trading market for our common stock.  The Company’s common stock is one hundred percent (100%) owned by its active and retired employees.  Common stock may not be sold by the holder thereof, except after first offering it to the Company.  The Company has always exercised this purchase option in the past and expects that it will continue to do so.  As a result, no public trading market for our common stock exists, nor is one expected to develop.  This lack of a public trading market for the Company’s common stock may limit Graybar’s ability to raise large amounts of equity capital.

6

Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

As of December 31, 2009, the Company had seven national zone warehouses ranging in size from approximately 160,000 to 240,000 square feet.  The lease arrangement used to finance three of the national zone warehouses is discussed in Note 8 of the Notes to the Consolidated Financial Statements, located in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.  Of the remaining four national zone warehouses, two are owned and two are leased.  The remaining lease terms on these two leased facilities are approximately two and four years.

The Company also had five district service centers ranging in size from 116,000 to 210,000 square feet as of December 31, 2009.  Three of the five district service centers are owned and the others are leased.  The remaining lease terms on the leased district service centers are approximately two and ten years.

Graybar operates in thirteen geographical districts, each of which maintains multiple distribution facilities that consist primarily of warehouse space.  A small portion of each distribution facility is used for offices.  The number of distribution facilities in a district varies from ten to twenty-one and totals 203 for all districts.  The distribution facilities range in size from 5,000 to 170,000 square feet, with the average being approximately 33,000 square feet.  The Company owns 121 of these distribution facilities and leases 82 of them for varying terms, with the majority having a remaining lease term of less than five years.

The Company maintains twenty-eight distribution facilities in Canada, of which ten are owned and eighteen are leased.  The majority of the leased facilities have a remaining lease term of less than five years.  The facilities range in size from approximately 5,000 to 60,000 square feet.  The Company has entered into an agreement to purchase nine of these facilities in January 2011 at a price to be determined by agreement of the parties or through an appraisal process.  The Company also has a 22,000 square foot facility in Puerto Rico, the lease on which expires in 2011.

The Company’s headquarters are located in St. Louis, Missouri in an 88,000 square foot building owned by the Company.  The Company also leases a 200,000 square foot operations and administration center in St. Louis.  The Company has options to purchase this facility in 2011, 2016, and at the expiration of the lease in 2021.

As of December 31, 2009, the Company had granted mortgages or other security interests on nine buildings securing $35,849 in debt.  Seven of the nine facilities are subject to security interests totaling $28,720 under a lease arrangement with an independent lessor.  The other two facilities are subject to first mortgages securing fixed-rate notes, of which $7,129 in principal remains outstanding.

Item 3.  Legal Proceedings

There are presently no pending legal proceedings that are expected to have a material impact on the Company or its subsidiaries.

Item 4.  Reserved

7

Supplemental Item.  Executive Officers of the Registrant

The following table lists the name, age as of March 1, 2010, position, offices and certain other information with respect to the executive officers of the Company.  The term of office of each executive officer will expire upon the appointment of his or her successor by the Board of Directors.

On March 1, 2010, D. E. DeSousa, an officer, director, and Senior Vice President – U.S. Business of the Company announced his intention to retire as an officer and director, and from his employment with the Company. 

8

PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s capital stock is one hundred percent (100%) owned by its active and retired employees and there is no public trading market for its common stock.  Since 1928, substantially all of the issued and outstanding shares of common stock have been held of record by voting trustees under successive voting trust agreements.  Under applicable state law, a voting trust may not have a term greater than ten years.  The 2007 Voting Trust Agreement expires by its terms on March 15, 2017.  At December 31, 2009, approximately eighty-one (81%) of the common stock was held in this voting trust.  The participation of shareholders in the voting trust is voluntary at the time the voting trust is created but is irrevocable during its term.  Shareholders who elect not to participate in the voting trust hold their common stock as shareholders of record.

No shareholder may sell, transfer or otherwise dispose of shares of common stock or the voting trust interests issued with respect thereto (“common stock”, “common shares”, or “shares”) without first offering the Company the option to purchase such shares at the price at which the shares were issued.  The Company also has the option to purchase at the issue price the common stock of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension.  The Company has always exercised its purchase option and expects to continue to do so.  All outstanding shares of the Company have been issued at $20.00 per share.

The following table sets forth information regarding purchases of common stock by the Company, all of which were made pursuant to the foregoing provisions:

(A)  Adjusted for the declaration of a ten percent (10%) stock dividend in 2009, shares related to which were issued on February 1, 2010.

On December 10, 2009, a ten percent (10%) stock dividend was declared to shareholders of record on January 4, 2010.  Shares representing this dividend were issued on February 1, 2010.

On December 11, 2008, a twenty percent (20%) stock dividend was declared to shareholders of record on January 5, 2009.  Shares representing this dividend were issued on February 2, 2009.

9

Company Performance

The following graph shows a five-year comparison of cumulative total shareholders’ returns for the Company’s common stock, the Standard & Poor’s 500 Composite Stock Index, and a Comparable Company Index of companies selected by the Company as being representative of the Company’s line of business and is used for comparison purposes in prior years.

The comparison above assumes $100.00 invested on December 31, 2004 and reinvestment of dividends (including the $1.10 per share cash dividend paid by the Company on January 2, 2005).

The companies included in the Comparable Company Index are Anixter International Inc., Applied Industrial Technologies, Inc., W. W. Grainger, Inc., Interline Brands, Inc., Owens & Minor, Inc., Park-Ohio Holdings Corp., Watsco, Inc., and WESCO International, Inc.  Building Materials Holding Company had previously been included in the Comparable Company Index, but has been removed because its equity is no longer publicly-traded.

The market value of the Company’s stock, in the absence of a public trading market, assumes continuation of the Company’s practice of issuing and purchasing offered securities at $20.00 per share.

10

Item 6.  Selected Financial Data

This summary should be read in conjunction with the accompanying consolidated financial statements and the notes to the consolidated financial statements included in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Five Year Summary of Selected Consolidated Financial Data

(Stated in thousands except for per share data)

(A)  2005 results reflect the adoption of a new accounting standard related to the consolidation of variable interest entities issued by the Financial Accounting Standards Board (“FASB”). 

(B)   All periods adjusted for the declaration of a ten percent (10%) stock dividend declared in December 2009, a twenty percent (20%) stock dividend declared in December 2008, a twenty percent (20%) stock dividend declared in December 2007, a ten percent (10%) stock dividend declared in December 2006, and a five percent (5%) stock dividend declared in December 2005.  Prior to these adjustments, the average common shares outstanding for the years ending December 31, 2008, 2007, 2006, and 2005 were 9,617, 7,888, 6,442, and 5,818, respectively.

(C)  All periods adjusted for the January 1, 2009 adoption of accounting and disclosure requirements under generally accepted accounting principles in the US (“US GAAP”) issued by the FASB regarding noncontrolling interests in consolidated financial statements.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis provides a narrative on the Company’s results of operations, financial condition, liquidity, and cash flows for the three-year period ended December 31, 2009.  This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes to the consolidated financial statements included in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

Business Overview

The credit and financial market crisis that began in September 2008 abated somewhat during 2009, but credit availability continues to be tight throughout North America, particularly for building construction.  Spending on new construction and capital expenditures on plant and equipment during the year ended December 31, 2009 was well below the level of 2008 and had a considerable negative impact on the Company’s results of operations for the year ended December 31, 2009.

11

        Net sales declined 18.9% and gross margin decreased 18.2% during the year ended December 31, 2009, compared to the year ended December 31, 2008.  The Company believes that approximately two percentage points (2%) of the net sales decline is attributable to product price deflation.  Selling, general and administrative expenses also declined, but to a lesser extent than gross margin, resulting in a 52.3% decrease in income from operations during the year ended December 31, 2009, compared to 2008.

        The Company expects little, if any, improvement in the market for products sold by the Company during the first half of 2010, although the general economy appears to have entered the recovery stage following the recession that began in 2008.  As a result, the Company anticipates continued negative year-over-year comparisons of both net sales and gross margin for most of 2010, but a return to positive growth late in the year.

Consolidated Results of Operations

The following table sets forth certain information relating to the operations of the Company stated in thousands of dollars and as a percentage of net sales for the years ended December 31, 2009, 2008, and 2007:

2009 Compared to 2008

Net sales totaled $4,377,882 for the year ended December 31, 2009, compared to $5,400,154 for year ended December 31, 2008, a decrease of $1,022,272 or 18.9%.  Net sales to the electrical and comm/data market sectors during the year ended December 31, 2009 decreased 20.8% and 15.7%, respectively, compared to the year ended December 31, 2008.

        Gross margin decreased $190,269, or 18.2%, to $854,950 from $1,045,219, due to lower net sales for the year ended December 31, 2009, compared to the year ended December 31, 2008.  The Company’s gross margin rate on net sales was 19.5% for the year ended December 31, 2009, compared to 19.3% in 2008.

        Selling, general and administrative expenses decreased $112,084, or 13.1%, to $745,886, for the year ended December 31, 2009, compared to $857,970 for the year ended December 31, 2008, mainly due to lower employee compensation and benefit costs.  Selling, general and administrative expenses as a percentage of net sales for the year ended December 31, 2009 were 17.0%, up from 15.9% in 2008.

        Depreciation and amortization expenses for the year ended December 31, 2009 increased $1,372, or 3.6%, to $39,352 from $37,980 for the year ended December 31, 2008.  This increase was due primarily to an increase in information technology assets.  Depreciation and amortization expenses as a percentage of net sales increased to 0.9% for the year ended December 31, 2009, compared to 0.7% of net sales for the year ended December 31, 2008.

        Other income, net consists primarily of gains on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to the Company’s business activities.  Other income, net totaled $2,786 for the year ended December 31, 2009, compared to $2,856 for the year ended December 31, 2008.  Other income, net includes property impairment losses of $(576) for the year ended December 31, 2009, compared to property impairment losses of $(340) in the prior year.  The impairment losses were primarily on assets that were held for sale and expected to be disposed of within twelve months.  Gains on the sale of real and personal property, net of losses, were $524 for the year ended December 31, 2009, compared to losses on the disposal of property of $(108) for the year ended December 31, 2008.

        Income from operations totaled $72,498 for the year ended December 31, 2009, a decrease of $79,627, or 52.3%, from $152,125 for the year ended December 31, 2008.  The decrease was due to lower net sales and gross margin, higher depreciation and amortization expenses, and lower other income, net, partially offset by decreases in selling, general and administrative expenses.

12

        Interest expense, net declined $2,572, or 20.5%, to $9,967 for the year ended December 31, 2009 from $12,539 for the year ended December 31, 2008.  This reduction was mainly due to a lower level of outstanding long-term debt during the year ended December 31, 2009, compared to 2008.

        The decrease in income from operations and lower interest expense, net resulted in income before provision for income taxes of $62,531 for the year ended December 31, 2009, a decrease of $77,055, or 55.2%, compared to $139,586 for the year ended December 31, 2008.

        The Company’s total provision for income taxes decreased $26,937, or 51.8%, to $25,089 for the year ended December 31, 2009 from $52,026 the year ended December 31, 2008, as a result of lower income before provision for income taxes.  The Company’s effective tax rate increased to 40.1% for the year ended December 31, 2009, up from 37.3% for the year ended December 31, 2008.  The Company settled income tax-related issues during the year ended December 31, 2008, and approximately $2,600 of unrecognized tax benefits related to uncertain tax positions were released, producing a lower effective tax rate for that period.  The effective tax rates for the years ended December 31, 2009 and 2008 were higher than the 35.0% US federal statutory rate primarily due to state and local income taxes.

        Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2009 decreased $50,123, or 57.3%, to $37,277 from $87,400 for the year ended December 31, 2008.

2008 Compared to 2007

Net sales totaled $5,400,154 for the year ended December 31, 2008, compared to $5,258,301 for the year ended December 31, 2007, an increase of $141,853, or 2.7%.  Increases in net sales were recorded in both of the primary market sectors in which the Company operates.  Net sales to the electrical market increased 2.3% and net sales to the comm/data market rose 2.7% for the year ended December 31, 2008, compared to 2007.  Net sales declined during the quarter ended December 31, 2008, compared to the same period of 2007, partially reducing the moderate growth in net sales recorded by the Company during the first three quarters of 2008.

Gross margin increased $12,901, or 1.2%, to $1,045,219 from $1,032,318, due to higher net sales volume, partially offset by higher costs of merchandise sold recorded during the year ended December 31, 2008, compared to 2007.  The Company’s gross margin rate on net sales decreased to 19.3% during the year ended December 31, 2008, down from 19.6% for the year ended December 31, 2007, largely due to increased price competition during the last half of 2008 and inventory markdowns during the fourth quarter of 2008, primarily on copper wire and cable.

Selling, general and administrative expenses increased $19,277, or 2.3%, to $857,970 for the year ended December 31, 2008, compared to $838,693 for the year ended December 31, 2007, mainly due to increased compensation costs and higher operating expenses.  Selling, general and administrative expenses as a percentage of net sales for the years ended December 31, 2008 and 2007 was 15.9%.

Depreciation and amortization expenses for the year ended December 31, 2008 increased $1,629, or 4.5%, to $37,980 from $36,351 in 2007, primarily due to higher levels of information technology assets and leasehold improvements.  Depreciation and amortization expenses as a percentage of net sales remained at 0.7% for the year ended December 31, 2008, compared to the year ended December 31, 2007.

Other income, net totaled $2,856 for the year ended December 31, 2008, compared to $4,852 for the year ended December 31, 2007.  Other income, net, consists primarily of gains on the disposal of property, impairment charges related mainly to assets held for sale, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities.  Losses on the disposal of property were $(108) for the year ended December 31, 2008, compared to gains of $1,483 for the year ended December 31, 2007.  Other income, net, for the year ended December 31, 2008 included property impairment losses of $(340), primarily on assets that were held for sale and expected to be disposed of within twelve months.  Other income, net, for the year ended December 31, 2007 included property impairment losses of $(1,727).

Income from operations totaled $152,125 for the year ended December 31, 2008, a decrease of $10,001, or 6.2%, from $162,126 for the year ended December 31, 2007.  The decrease was due to higher gross margin, more than offset by increases in selling, general and administrative expenses, higher depreciation and amortization expenses, and lower other income, net.

Interest expense, net declined $4,541, or 26.6%, to $12,539 for the year ended December 31, 2008 from $17,080 for the year ended December 31, 2007.  This reduction was mainly due to a lower level of outstanding long-term debt during the year ended December 31, 2008, compared to 2007.

The increase in gross margin, combined with increased selling, general and administrative expenses, higher depreciation and amortization expenses, lower other income, net, and lower interest expense, net, resulted in income before provision for income taxes of $139,586 for the year ended December 31, 2008, a decrease of $5,460, or 3.8%, compared to $145,046 for the year ended December 31, 2007.

13

The Company’s total provision for income taxes decreased $9,392 or 15.3%, for the year ended December 31, 2008, compared to the year ended December 31, 2007, as a result of a lower effective tax rate.  The Company’s effective tax rate decreased to 37.3% for the year ended December 31, 2008, down from 42.3% in 2007.  This decrease was primarily due to reductions in unrecognized tax benefits, interest, and penalties, each of which had a favorable impact on income tax expense.  The effective tax rates for the years ended December 31, 2008 and 2007 were higher than the 35.0% US federal statutory rate primarily due to state and local income taxes.

Net income attributable to Graybar Electric Co, Inc. for the year ended December 31, 2008 increased $3,979, or 4.8%, to $87,400 from $83,421 for the year ended December 31, 2007.

Financial Condition and Liquidity

The Company has historically funded its working capital requirements using cash flows generated by the collection of trade receivables and trade accounts payable terms with its suppliers, supplemented by short-term bank lines of credit.  Capital assets are financed primarily by common stock issuances to the Company’s employees and long-term debt.

Operating Activities

Net cash provided by operations was $114,365 for the year ended December 31, 2009, compared to $148,628 for the year ended December 31, 2008.  Positive cash flows from operations for the year ended December 31, 2009 were primarily due to net income of $37,442, adjusted for non-cash depreciation and amortization expenses of $39,352, a decrease in trade receivables of $82,378, and a decrease in merchandise inventory of $64,191, partially offset by decreases in trade accounts payable of $60,218 and accrued payroll and benefit costs of $53,645.

Trade receivables decreased during 2009, due primarily to an 18.9% decline in net sales for the year ended December 31, 2009, compared to the year ended December 31, 2008.  As a result of this sales decrease, the average number of days of sales outstanding at December 31, 2009, measured using annual sales, increased moderately, compared to the average number of days at December 31, 2008.  Average days of sales outstanding for the three month period ended December 31, 2009, however, remained flat, compared to the same three month period of 2008.  Average inventory turnover declined moderately for the year ending December 31, 2009, compared to the same period of 2008.  Merchandise inventory turnover for the three month period ended December 31, 2009, however, improved moderately, compared to the same three month period of 2008.

Current assets exceeded current liabilities by $424,993 at December 31, 2009, a decrease of $6,133, or 1.4%, from $431,126 at December 31, 2008.

Investing Activities

Net cash used by investing activities totaled $25,012 for the year ended December 31, 2009, compared to $45,045 for the year ended December 31, 2008.  Capital expenditures for property were $27,263 and $46,121, and proceeds from the disposal of property were $1,633 and $448, for the years ended December 31, 2009 and 2008, respectively.  The proceeds received resulted primarily from the sale of real property in 2009 and from the sale of personal property in 2008.  Cash received from the Company’s investment in affiliated company was $618 and $628, for the years ended December 31, 2009 and 2008, respectively, and relates to the Company’s membership in Graybar Financial Services, LLC.

Financing Activities

Net cash flows used by financing activities totaled $55,932 for the year ended December 31, 2009, compared to $39,307 for the year ended December 31, 2008.

Cash used to decrease short-term borrowings was $5,217 for the year ended December 31, 2009, compared to cash provided by short-term borrowings of $1,248 for the year ended December 31, 2008.  The Company reduced net long-term debt (including current portion) by $28,262 and capital lease obligations by $801 during the year ended December 31, 2009.  The Company reduced long-term debt, net of proceeds, by $28,939 and capital lease obligations by $451 during the year ended December 31, 2008. 

14

Cash provided by the sale of common stock amounted to $11,392 and $10,866, and purchases of treasury stock were $11,901 and $8,413, for the years ended December 31, 2009 and 2008, respectively.  Cash paid to purchase noncontrolling interest stock was $109 and $99, and cash provided by the sale of noncontrolling interest stock was $464 and $0 for the years ended December 31, 2009 and 2008, respectively.  Cash dividends paid were $17,675 and $14,573, for the years ended December 31, 2009 and 2008, respectively.

Cash and cash equivalents were $163,864 at December 31, 2009, an increase of $33,421, or 25.6%, from $130,443 at December 31, 2008.

Liquidity

The Company has a revolving credit agreement with a group of thirteen banks at an interest rate based on the London Interbank Offered Rate (“LIBOR”) that consists of an unsecured $200,000 five-year facility expiring in May 2012.  There were no amounts outstanding under this credit agreement at December 31, 2009 and 2008.  The credit and financial market crisis which began in September 2008 severely impacted two banks that participate in the Company’s revolving credit facility.  The Company expects, however, that it will continue to have full access to this facility

At December 31, 2008, the Company had a $215,000 trade receivable securitization program that was scheduled to expire in October 2009.  Prior to expiration, the Company amended the program agreement, effective October 9, 2009, to reduce the program to a $100,000 facility that expires in October 2010.  The trade receivable 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 trade receivables to an unrelated multi-seller commercial paper conduit.  In the event that a dislocation in the market for the conduit’s receivables-backed commercial paper develops and the conduit is unable to purchase the undivided interest offered by GCC, the agent bank for the trade receivable securitization program is obligated to purchase the undivided interest in the trade receivables from GCC under the terms of the program.

        The Company accounts for the securitization as an on-balance sheet financing arrangement because the Company has maintained effective control of the trade receivables through a call option that gives GCC the unilateral right to repurchase the undivided interests.  Accordingly, the trade receivables 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 trade receivable securitization program at December 31, 2009 and 2008.

At December 31, 2009, the Company had available to it unused lines of credit amounting to $310,504, compared to $427,283 at December 31, 2008.  These lines are available to meet the short-term cash requirements of the Company and certain committed lines of credit have annual fees of up to 92 basis points (0.92%) of the committed lines of credit.

Short-term borrowings outstanding during the years ended December 31, 2009 and 2008 ranged from a minimum of $11,189 and $15,240 to a maximum of $65,858 and $70,028, respectively.

The revolving credit agreement, the trade receivable securitization program, and certain other note agreements contain various covenants that limit the Company’s ability to make investments, pay dividends, incur debt, dispose of property, and issue equity securities.  The Company is also required to maintain certain financial ratios as defined in the agreements.  The Company was in compliance with all covenants under these agreements as of December 31, 2009 and 2008.

The Company has a lease agreement with an independent lessor, which provides $28,720 of financing for five of the Company’s distribution facilities.  The agreement carries a five-year term expiring July 2013.  The financing structure used with this lease qualifies as a silo of a variable interest entity.  In accordance with US GAAP, the Company, as the primary beneficiary, consolidates the silo in its financial statements.

        As of December 31, 2009, the consolidated silo included in the Company’s consolidated financial statements had a net property balance of $16,299, long-term debt of $27,715, and a noncontrolling interest of $1,005.  At December 31, 2008, the consolidated silo included in the Company’s consolidated financial statements had a net property balance of $16,862, long-term debt of $27,715, and a noncontrolling interest of $1,005.

        Under the terms of the lease agreement, the amount guaranteed by the Company as the residual fair value of the property subject to the lease arrangement was $28,720 at December 31, 2009 and 2008.

15

Contractual Obligations and Commitments

The Company has the following contractual obligations as of December 31, 2009:

Long-term debt and capital lease obligations consist of both principal and interest payments.

Purchase obligations consist primarily of open inventory purchase orders made in the normal course of business.  Many of these obligations may be cancelled with limited or no financial penalties.

The table above does not include $78,299 of accrued, unfunded pension cost, $82,567 of accrued, unfunded employment-related benefits cost, of which $74,336 is related to the Company’s postretirement benefit plan, and $3,754 in contingent payments for uncertain tax positions because it is not certain when these obligations will be settled or paid.

The Company also expects to make contributions totaling approximately $40,600 to its defined benefit pension plan during 2010 that are not included in the table.  The Company contributed $35,097 to its defined benefit pension plan in 2009.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with US GAAP, which require the Company to make estimates and assumptions (see Note 2 in notes to the consolidated financial statements located in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K).  The Company believes the following accounting policies have the potential to have a more significant impact on its financial statements either because of the significance of the financial statement item to which they relate or because they involve a higher degree of judgment and complexity.

Revenue Recognition

Revenue is recognized when evidence of a customer arrangement exists, prices are fixed and determinable, product title, ownership and risk of loss transfers to the customer, and collectability is reasonably assured.  Revenues recognized are primarily for product sales, but also include freight and handling charges.  The Company’s standard shipping terms are FOB shipping point, under which, product title passes to the customer at the time of shipment.  The Company does, however, fulfill some customer orders based on shipping terms of FOB destination, whereby title passes to the customer at the time of delivery.  The Company also earns revenue for services provided to customers for supply chain management and logistical services.  Service revenue, which accounts for less than one percent (1%) of net sales, is recognized when services are rendered and completed.  Revenue is reported net of all taxes assessed by governmental authorities as a result of revenue-producing transactions, primarily sales tax.

Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations of its customers and a significant portion of its trade receivables is secured by mechanic’s lien or payment bond rights.  The Company maintains allowances to reflect the expected uncollectability of trade receivables based on past collection history, the economic environment, and specific risks identified in the receivables portfolio.  Although actual credit losses have historically been within management’s expectations, additional allowances may be required if the financial condition of the Company’s customers were to deteriorate.

Income Taxes

The Company recognizes deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns.  Uncertainty exists regarding tax positions taken in previously filed tax returns still subject to examination and positions expected to be taken in future returns.  A deferred tax asset or liability results from the temporary difference between an item’s carrying value as reflected in the financial statements and its tax basis, and is calculated using enacted applicable tax rates.  The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, a valuation allowance is established.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.  The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages. 

16

Merchandise Inventory

The Company values its inventories at the lower of cost (determined using the last-in, first-out (“LIFO”) cost method) or market.  LIFO accounting is a method of accounting that, compared with other inventory accounting methods, generally provides better matching of current costs with current revenues.  In assessing the ultimate realization of inventories, the Company makes judgments as to its return rights to suppliers and future demand requirements.  If actual future demand, market conditions, or supplier return provisions are less favorable than those projected by management, additional inventory write-downs may be required.

Pension and Postretirement Benefits Plans

The Company’s pension and postretirement benefits obligations and expenses are determined based on the selection of certain assumptions developed by the Company and used by actuaries in calculating such amounts.  For the Company’s pension obligation, the most significant assumptions are the expected long-term rate of return on plan assets and the discount rate used to discount plan liabilities.  For the Company’s postretirement benefits plan liability, the most significant assumption is the interest rate used to discount the plan obligations.  The following tables present key assumptions used to measure the pension and postretirement benefit obligation for 2009:

While management believes that the assumptions selected by the Company are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension and postretirement benefits obligations and future pension and postretirement benefits expense.  For example, holding all other assumptions constant, a one percent (1%) decrease in the discount rate used to calculate both pension expense for 2009 and the pension liability as of December 31, 2009 would have increased pension expense by $3,667 and the pension liability by $37,820, respectively.  Similarly, a one percent (1%) decrease in the discount rate would have increased 2009 postretirement benefits expense by $78 and the December 31, 2009 postretirement benefits liability by $4,970. 

A decrease in the expected long-term rate of return on plan assets could result in higher pension expense and increase or accelerate the Company’s contributions to the pension plan in future years.  As an example, holding all other assumptions constant, a one percent (1%) decrease in the assumed rate of return on plan assets would have increased 2009 pension expense by $3,323.

Supplier Volume Incentives

The Company’s agreements with many of its suppliers provide for the Company to earn volume incentives based on purchases during the agreement period.  These agreements typically provide for the incentives to be paid in arrears.  The Company estimates amounts to be received from suppliers at the end of each reporting period based on the earnout level that the Company believes is probable of being achieved.  The Company records the incentive ratably over the year as a reduction of cost of merchandise sold as the related inventory is sold.  Changes in the estimated amount of incentives are treated as changes in estimate and are recognized in earnings in the period in which the change in estimate occurs.  In the event that the operating performance of the Company’s suppliers were to decline, however, there can be no assurance that amounts earned would be paid or that the volume incentives would continue to be included in future agreements.

New Accounting Standards

        Other than as noted below, no new accounting standards that were issued or became effective during 2009 have had or are expected to have a material impact on the Company’s consolidated financial statements.

        In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements”.  The Update amends the guidance on fair value measurements that requires companies to disclose separately the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  In addition, the Update requires companies to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs, that is, Level 3 assets in the fair value hierarchy.  The disclosures related to Level 1 and Level 2 fair value measurements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity of Level 3 assets.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  

In October 2009, the FASB issued guidance on revenue arrangements with multiple deliverables that for the Company is effective for 2010, although early adoption is permitted.  The guidance revises the criteria for separating, measuring, and allocating arrangement consideration to each deliverable in a multiple element arrangement.  The guidance requires companies to allocate revenue using the relative selling price of each deliverable, which must be estimated if the Company does not have a history of selling the deliverable on a stand-alone basis or third-party evidence of a selling price.  The Company is assessing the potential effect of this guidance on its consolidated financial statements, although it believes it will not be material due to the Company’s limited use of multiple deliverable arrangements.

17

In June 2009, the FASB issued authoritative guidance establishing two levels of US GAAP, authoritative and non-authoritative, and making the FASB Accounting Standards Codification (“ASC”) the source of authoritative US GAAP to be applied by non-governmental entities, except for rules and interpretative releases of the SEC.  This guidance was effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption changed certain disclosure references to US GAAP, but did not have any other impact on the Company’s consolidated financial statements.

The Company adopted new accounting guidance on subsequent events in June 2009.  This new guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  The Company has included this disclosure in Note 2 in the notes to the consolidated financial statements located in Item 8.  “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K. 

Effective January 1, 2009, and in accordance with accounting standards issued by the FASB in December 2007, the Company’s minority interests were recharacterized as noncontrolling interests and are reported as a separate component of shareholders’ equity.  No purchases or sales of equity interests resulted in a change in control and such transactions were, therefore, accounted for as equity transactions.  Net income attributable to the noncontrolling interests is separately identified and included in net income in the income statement.

        The Company has reclassified its noncontrolling interests to shareholders’ equity for all periods presented.  The Company also adjusted its net income to include the net income attributable to the noncontrolling interests.  Consolidated comprehensive income was also adjusted to include the comprehensive income attributable to the noncontrolling interests.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest expense is sensitive to changes in the general level of interest rates.  Changes in interest rates have different impacts on the fixed-rate and variable-rate portions of the Company’s debt portfolio.  A change in market interest rates on the fixed-rate portion of the debt portfolio impacts the fair value of the financial instrument, but has no impact on interest incurred or cash flows.  A change in market interest rates on the variable-rate portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the fair value of the financial instrument.  To mitigate the cash flow impact of interest rate fluctuations on the cost of financing its capital assets, the Company generally maintains a significant portion of its long-term debt as fixed-rate in nature.

Based on $42,947 in variable-rate debt outstanding at December 31, 2009, a one percent (1%) increase in interest rates would increase the Company’s interest expense by $429 per annum.

The following table provides information about financial instruments that are sensitive to changes in interest rates.  The table presents principal payments on debt (in thousands) and related weighted-average interest rates by expected maturity dates.

The fair value of long-term debt is estimated by discounting cash flows using current borrowing rates available for debt of similar maturities.

18

The Company entered into a swap agreement to manage interest rates on amounts due under a leveraged lease arrangement in September 2000.  The swap agreement, which expires in July 2013, is based on a notional amount of $28,720.  The agreement calls for an exchange of interest payments, with the Company being paid a LIBOR-based floating rate and paying a fixed rate of 6.92%.  There is no exchange of the notional amount upon which the payments are based.  The fair value of the swap agreement at December 31, 2009 and 2008 was approximately $(4,969) and $(6,402), respectively.  The negative value of this agreement reflects the current low level of interest rates compared to market interest rates in September 2000, when the agreement was entered into.  A one percent (1%) increase in LIBOR for all maturities through July 2013 would have increased the fair value of the swap agreement by approximately $902 and $1,400 as of December 31, 2009 and 2008, respectively.

Foreign Exchange Rate Risk

The functional currency for the Company’s Canadian subsidiary is the Canadian dollar.  Accordingly, its balance sheet amounts are translated at the exchange rates in effect at year-end and its income and expenses are translated using average exchange rates.  Currency translation adjustments are included in accumulated other comprehensive loss.  Exposure to foreign currency exchange rate fluctuations is not material.

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS:

Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2009, included in our Annual Report on Form 10-K for such period as filed with the SEC, should be read in conjunction with our accompanying audited consolidated financial statements and the notes thereto.

Certain statements, other than purely historical information, including estimates, projections, statements relating to the Company’s business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by the words “believes”, “projects”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and similar expressions.  The Company intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse impact on the Company’s operations and future prospects on a consolidated basis include, but are not limited to: general economic conditions, particularly in the residential, commercial, and industrial building construction industries, volatility in the prices of industrial metal commodities, disruptions in the Company’s sources of supply, a sustained interruption in the operation of the Company’s information systems, adverse legal proceedings or other claims, and the inability to raise debt or equity capital.  These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially impact our financial results, is included herein and in our other filings with the SEC.  Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of this Annual Report on Form 10-K for the year ended December 31, 2009.

Item 8.  Financial Statements and Supplementary Data

19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Graybar Electric Company, Inc.

We have audited the accompanying consolidated balance sheets of Graybar Electric Company, Inc. (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Graybar Electric Company, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2009, the Company changed its method of accounting for its noncontrolling interests.

                                                                                                                                /s/ Ernst & Young LLP

St. Louis, Missouri

March 9, 2010

20

Graybar Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income

(A)  Adjusted for the declaration of a ten percent (10%) stock dividend in December 2009, shares related to which were issued in February 2010.  Prior to the adjustment, the average common shares outstanding were 9,617 and 9,466 for the years ended December 31, 2008 and 2007, respectively.

The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.

21

Graybar Electric Company, Inc. and Subsidiaries

Consolidated Balance Sheets