Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - GRAYBAR ELECTRIC CO INC | a093015-ex322.htm |
| EX-31.2 - EXHIBIT 31.2 - GRAYBAR ELECTRIC CO INC | a093015-ex312.htm |
| EX-32.1 - EXHIBIT 32.1 - GRAYBAR ELECTRIC CO INC | a093015-ex321.htm |
| EX-31.1 - EXHIBIT 31.1 - GRAYBAR ELECTRIC CO INC | a093015-ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 000-00255
GRAYBAR ELECTRIC COMPANY, INC. | |
(Exact name of registrant as specified in its charter) | |
New York | 13-0794380 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
34 North Meramec Avenue, St. Louis, Missouri | 63105 |
(Address of principal executive offices) | (Zip Code) |
(314) 573 - 9200 | |
(Registrant’s telephone number, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |
YES x NO ¨ | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). | |
YES x NO ¨ | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. | |
Large accelerated filer¨ Accelerated filer¨ | |
Non-accelerated filerx (Do not check if a smaller reporting company) Smaller reporting company¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
YES ¨ NO x | |
Common Stock Outstanding at October 31, 2015: 15,897,937 | |
(Number of Shares) | |
Graybar Electric Company, Inc. and Subsidiaries
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2015
(Unaudited)
Table of Contents
PART I. | FINANCIAL INFORMATION | Page | ||
Item 1. | Financial Statements | |||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
PART II. | OTHER INFORMATION | |||
Item 2. | ||||
Item 6. | ||||
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries | ||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||
(Unaudited) | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
(Stated in thousands, except per share data) | 2015 | 2014 | 2015 | 2014 | ||||||||||
Gross Sales | $ | 1,590,576 | $ | 1,576,376 | $ | 4,566,880 | $ | 4,418,354 | ||||||
Cash discounts | (6,690 | ) | (6,619 | ) | (19,208 | ) | (18,422 | ) | ||||||
Net Sales | 1,583,886 | 1,569,757 | 4,547,672 | 4,399,932 | ||||||||||
Cost of merchandise sold | (1,280,928 | ) | (1,275,222 | ) | (3,692,343 | ) | (3,573,998 | ) | ||||||
Gross Margin | 302,958 | 294,535 | 855,329 | 825,934 | ||||||||||
Selling, general and administrative expenses | (244,672 | ) | (233,773 | ) | (717,648 | ) | (678,647 | ) | ||||||
Depreciation and amortization | (10,960 | ) | (9,786 | ) | (32,082 | ) | (29,140 | ) | ||||||
Other income, net | 1,187 | 739 | 6,746 | 2,897 | ||||||||||
Income from Operations | 48,513 | 51,715 | 112,345 | 121,044 | ||||||||||
Interest expense, net | (685 | ) | (364 | ) | (1,895 | ) | (1,122 | ) | ||||||
Income before Provision for Income Taxes | 47,828 | 51,351 | 110,450 | 119,922 | ||||||||||
Provision for income taxes | (19,431 | ) | (20,815 | ) | (44,414 | ) | (48,929 | ) | ||||||
Net Income | 28,397 | 30,536 | 66,036 | 70,993 | ||||||||||
Less: Net income attributable to noncontrolling interests | (86 | ) | (72 | ) | (177 | ) | (164 | ) | ||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 28,311 | $ | 30,464 | $ | 65,859 | $ | 70,829 | ||||||
Net Income per share of Common Stock | $ | 1.77 | $ | 1.93 | $ | 4.12 | $ | 4.47 | ||||||
Cash Dividends per share of Common Stock | $ | 0.30 | $ | 0.30 | $ | 0.90 | $ | 0.90 | ||||||
Average Common Shares Outstanding | 15,942 | 15,799 | 15,980 | 15,861 | ||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
3
Graybar Electric Company, Inc. and Subsidiaries | ||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||
(Unaudited) | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
(Stated in thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||
Net Income | $ | 28,397 | $ | 30,536 | $ | 66,036 | $ | 70,993 | ||||||
Other Comprehensive Income | ||||||||||||||
Foreign currency translation | (6,082 | ) | (3,665 | ) | (10,738 | ) | (3,366 | ) | ||||||
Pension and postretirement benefits liability adjustment (net of tax of $(1,881), $(1,719), $(5,644) and $(5,158), respectively) | 2,955 | 2,701 | 8,864 | 8,101 | ||||||||||
Total Other Comprehensive (Loss) Income | (3,127 | ) | (964 | ) | (1,874 | ) | 4,735 | |||||||
Comprehensive Income | $ | 25,270 | $ | 29,572 | $ | 64,162 | $ | 75,728 | ||||||
Less: Comprehensive (loss) income attributable to noncontrolling interests, net of tax | (188 | ) | (64 | ) | (261 | ) | 12 | |||||||
Comprehensive Income attributable to Graybar Electric Company, Inc. | $ | 25,458 | $ | 29,636 | $ | 64,423 | $ | 75,716 | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
4
Graybar Electric Company, Inc. and Subsidiaries | |||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||||
(Stated in thousands, except share and per share data) | September 30, 2015 | December 31, 2014 | |||||||||||
ASSETS | (Unaudited) | ||||||||||||
Current Assets | |||||||||||||
Cash and cash equivalents | $ | 42,315 | $ | 33,758 | |||||||||
Trade receivables (less allowances of $6,453 and $7,073, respectively) | 931,563 | 920,796 | |||||||||||
Merchandise inventory | 520,624 | 461,139 | |||||||||||
Other current assets | 28,811 | 44,711 | |||||||||||
Total Current Assets | 1,523,313 | 1,460,404 | |||||||||||
Property, at cost | |||||||||||||
Land | 77,530 | 67,879 | |||||||||||
Buildings | 438,526 | 429,406 | |||||||||||
Furniture and fixtures | 272,270 | 253,918 | |||||||||||
Software | 84,878 | 84,488 | |||||||||||
Capital leases | 31,866 | 25,135 | |||||||||||
Total Property, at cost | 905,070 | 860,826 | |||||||||||
Less – accumulated depreciation and amortization | (468,629 | ) | (452,163 | ) | |||||||||
Net Property | 436,441 | 408,663 | |||||||||||
Other Non-current Assets | 75,907 | 70,046 | |||||||||||
Total Assets | $ | 2,035,661 | $ | 1,939,113 | |||||||||
LIABILITIES | |||||||||||||
Current Liabilities | |||||||||||||
Short-term borrowings | $ | 140,662 | $ | 66,342 | |||||||||
Current portion of long-term debt | 7,382 | 6,241 | |||||||||||
Trade accounts payable | 733,725 | 726,632 | |||||||||||
Accrued payroll and benefit costs | 96,904 | 127,191 | |||||||||||
Other accrued taxes | 15,902 | 18,300 | |||||||||||
Other current liabilities | 78,290 | 69,148 | |||||||||||
Total Current Liabilities | 1,072,865 | 1,013,854 | |||||||||||
Postretirement Benefits Liability | 70,117 | 69,565 | |||||||||||
Pension Liability | 126,330 | 140,981 | |||||||||||
Long-term Debt | 10,480 | 11,595 | |||||||||||
Other Non-current Liabilities | 20,881 | 21,137 | |||||||||||
Total Liabilities | 1,300,673 | 1,257,132 | |||||||||||
SHAREHOLDERS’ EQUITY | |||||||||||||
Shares at | |||||||||||||
Capital Stock | September 30, 2015 | December 31, 2014 | |||||||||||
Common, stated value $20.00 per share | |||||||||||||
Authorized | 50,000,000 | 50,000,000 | |||||||||||
Issued to voting trustees | 13,760,828 | 13,159,559 | |||||||||||
Issued to shareholders | 2,771,108 | 2,714,853 | |||||||||||
In treasury, at cost | (547,260 | ) | (14,482 | ) | |||||||||
Outstanding Common Stock | 15,984,676 | 15,859,930 | 319,694 | 317,199 | |||||||||
Advance Payments on Subscriptions to Common Stock | 470 | — | |||||||||||
Retained Earnings | 565,113 | 513,672 | |||||||||||
Accumulated Other Comprehensive Loss | (153,629 | ) | (152,193 | ) | |||||||||
Total Graybar Electric Company, Inc. Shareholders’ Equity | 731,648 | 678,678 | |||||||||||
Noncontrolling Interests | 3,340 | 3,303 | |||||||||||
Total Shareholders’ Equity | 734,988 | 681,981 | |||||||||||
Total Liabilities and Shareholders’ Equity | $ | 2,035,661 | $ | 1,939,113 | |||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
5
Graybar Electric Company, Inc. and Subsidiaries | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(Unaudited) | |||||||
Nine Months Ended September 30, | |||||||
(Stated in thousands) | 2015 | 2014 | |||||
Cash Flows from Operations | |||||||
Net Income | $ | 66,036 | $ | 70,993 | |||
Adjustments to reconcile net income to cash provided by operations: | |||||||
Depreciation and amortization | 32,082 | 29,140 | |||||
Deferred income taxes | (389 | ) | (146 | ) | |||
Net gains on disposal of property | (4,946 | ) | (276 | ) | |||
Net income attributable to noncontrolling interests | (177 | ) | (164 | ) | |||
Changes in assets and liabilities: | |||||||
Trade receivables | (6,696 | ) | (80,908 | ) | |||
Merchandise inventory | (56,416 | ) | (38,564 | ) | |||
Other current assets | 16,126 | (3,692 | ) | ||||
Other non-current assets | 3,777 | 1,965 | |||||
Trade accounts payable | 3,647 | 90,846 | |||||
Accrued payroll and benefit costs | (30,948 | ) | (2,216 | ) | |||
Other current liabilities | (829 | ) | 4,846 | ||||
Other non-current liabilities | (169 | ) | (6,725 | ) | |||
Total adjustments to net income | (44,938 | ) | (5,894 | ) | |||
Net cash provided by operations | 21,098 | 65,099 | |||||
Cash Flows from Investing Activities | |||||||
Proceeds from disposal of property | 11,170 | 390 | |||||
Capital expenditures for property | (62,078 | ) | (31,775 | ) | |||
Acquisition of business, net of cash acquired | (18,093 | ) | — | ||||
Net cash used by investing activities | (69,001 | ) | (31,385 | ) | |||
Cash Flows from Financing Activities | |||||||
Net increase (decrease) in short-term borrowings | 74,320 | (8,760 | ) | ||||
Repayment of long-term debt | (2,736 | ) | (897 | ) | |||
Principal payments under capital leases | (3,969 | ) | (2,503 | ) | |||
Sale of common stock | 13,621 | 12,503 | |||||
Purchases of common stock | (10,656 | ) | (13,212 | ) | |||
Sales of noncontrolling interests’ common stock | 401 | — | |||||
Purchases of noncontrolling interests’ common stock | (103 | ) | (288 | ) | |||
Dividends paid | (14,418 | ) | (14,302 | ) | |||
Net cash provided (used) by financing activities | 56,460 | (27,459 | ) | ||||
Net Increase in Cash | 8,557 | 6,255 | |||||
Cash, Beginning of Year | 33,758 | 34,665 | |||||
Cash, End of Period | $ | 42,315 | $ | 40,920 | |||
Non-cash Investing and Financing Activities | |||||||
Acquisitions of equipment under capital leases | $ | 6,731 | $ | 3,123 | |||
Acquisition of software and maintenance under financing arrangement | — | 7,309 | |||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
6
Graybar Electric Company, Inc. and Subsidiaries | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
(Unaudited, stated in thousands) | |||||||||||||||||||||||
Graybar Electric Company, Inc. Shareholders’ Equity | |||||||||||||||||||||||
Common Stock | Common Stock Subscribed, Unissued | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders’ Equity | ||||||||||||||||||
December 31, 2013 | $ | 317,767 | $ | — | $ | 489,740 | $ | (140,363 | ) | $ | 3,637 | $ | 670,781 | ||||||||||
Net income | 70,829 | 164 | 70,993 | ||||||||||||||||||||
Other comprehensive income | 4,887 | (152 | ) | 4,735 | |||||||||||||||||||
Stock issued | 12,067 | 12,067 | |||||||||||||||||||||
Stock purchased | (13,212 | ) | (288 | ) | (13,500 | ) | |||||||||||||||||
Advance payments | 436 | 436 | |||||||||||||||||||||
Dividends declared | (14,302 | ) | (14,302 | ) | |||||||||||||||||||
September 30, 2014 | $ | 316,622 | $ | 436 | $ | 546,267 | $ | (135,476 | ) | $ | 3,361 | $ | 731,210 | ||||||||||
Graybar Electric Company, Inc. Shareholders’ Equity | |||||||||||||||||||||||
Common Stock | Common Stock Subscribed, Unissued | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders’ Equity | ||||||||||||||||||
December 31, 2014 | $ | 317,199 | $ | — | $ | 513,672 | $ | (152,193 | ) | $ | 3,303 | $ | 681,981 | ||||||||||
Net income | 65,859 | 177 | 66,036 | ||||||||||||||||||||
Other comprehensive loss | (1,436 | ) | (438 | ) | (1,874 | ) | |||||||||||||||||
Stock issued | 13,151 | 401 | 13,552 | ||||||||||||||||||||
Stock purchased | (10,656 | ) | (103 | ) | (10,759 | ) | |||||||||||||||||
Advance payments | 470 | 470 | |||||||||||||||||||||
Dividends declared | (14,418 | ) | (14,418 | ) | |||||||||||||||||||
September 30, 2015 | $ | 319,694 | $ | 470 | $ | 565,113 | $ | (153,629 | ) | $ | 3,340 | $ | 734,988 | ||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
7
Graybar Electric Company, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Stated in thousands, except share and per share data)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Graybar Electric Company, Inc. (“Graybar”, “Company”, "we", "our", or "us") is a New York corporation, incorporated in 1925. We are engaged in the distribution of electrical and communications and data networking products and are a provider of related supply chain management and logistics services. We primarily serve customers in the construction, and commercial, institutional and government ("CIG"), as well as the industrial and utility vertical markets, with products and services that support new construction, infrastructure updates, building renovation, facility maintenance, repair and operations ("MRO"), and original equipment manufacturers ("OEM"). All products sold by us are purchased by us from others, and we neither manufacture nor contract to manufacture any products that we sell. Our business activity is primarily with customers in the United States (“U.S.”). We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our accounting policies conform to generally accepted accounting principles in the U.S. ("GAAP”) and are applied on a consistent basis among all years presented. Significant accounting policies are described below.
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by Graybar pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”) applicable to interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that our disclosures are adequate to make the information presented not misleading. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect reported amounts. Our condensed consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates. Certain reclassifications were made to prior year amounts to conform to the 2015 presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2014, included in our latest Annual Report on Form 10-K.
In the opinion of management, this quarterly report includes all adjustments, consisting of normal recurring accruals and adjustments, necessary for the fair presentation of the financial statements presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of Graybar and its subsidiary companies. All material intercompany balances and transactions have been eliminated. The ownership interests that are held by owners other than the Company in subsidiaries consolidated by the Company are accounted for and reported as noncontrolling interests.
Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Subsequent Events
We have evaluated subsequent events through the time of the filing of this Quarterly Report on Form 10-Q with the Commission. Except as discussed in Note 8. Assets Held for Sale, no material subsequent events have occurred since September 30, 2015 that require recognition or disclosure in these financial statements.
8
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. Our standard shipping terms are FOB shipping point, under which product title passes to the customer at the time of shipment. We also earn revenue for services provided to customers for supply chain management and logistics services. Service revenue 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.
Outgoing Freight Expenses
We record certain outgoing freight expenses as a component of selling, general and administrative expenses.
Cash and Cash Equivalents
We account for cash on hand, deposits in banks, and other short-term, highly liquid investments with an original maturity of three months or less as cash and cash equivalents.
Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables is secured by mechanic’s lien or payment bond rights. We maintain allowances to reflect the expected uncollectability of trade receivables based on past collection history 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 our customers were to deteriorate.
Merchandise Inventory
Our inventory is stated 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 sales.
We make provisions for obsolete or excess inventories as necessary to reflect reductions in inventory value.
Vendor Allowances
Our agreements with many of our suppliers provide for us to earn volume incentives based on purchases during the agreement period. Based on the provisions of our vendor agreements, we develop vendor accrual rates by estimating the point at which we will have completed our performance under the agreement and the deferred amounts will be earned. We perform analyses and review historical trends to ensure the deferred amounts earned are appropriately recorded. Certain vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year are based on estimates of future activity levels, and could be materially impacted if actual purchase volumes differ. 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 our 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.
Property and Depreciation
Property, plant and equipment are recorded at cost. Depreciation is expensed on a straight-line basis over the estimated useful lives of the related assets. Interest costs incurred to finance expenditures for major long-term construction projects are capitalized as part of the asset's historical cost and included in property, plant and equipment, then depreciated over the useful life of the asset. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Expenditures for maintenance and repairs are charged to expense when incurred, while the costs of significant improvements, which extend the useful life of the underlying asset, are capitalized.
9
Credit Risk
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of trade receivables. We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables may be protected by mechanic’s lien or payment bond rights. We maintain allowances for potential credit losses and such losses historically have been within management’s expectations.
Fair Value
We endeavor to utilize the best available information in measuring fair value. GAAP has established a fair value hierarchy, which prioritizes the inputs used in measuring fair value. The tiers in the hierarchy include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own data inputs and assumptions. We have used fair value measurements to value our pension plan assets.
Foreign Currency Exchange Rate
The functional currency for our Canadian subsidiary is the Canadian dollar. Accordingly, its balance sheet amounts are translated at the exchange rates in effect at the end of each reporting period and its statements of income amounts are translated at the average rates of exchange prevailing during the current period. Currency translation adjustments are included in accumulated other comprehensive loss.
Goodwill
Our goodwill is not amortized, but rather tested annually for impairment. Goodwill is reviewed annually in the fourth quarter and/or when circumstances or other events might indicate that impairment may have occurred. We first perform a qualitative assessment of goodwill impairment. The qualitative assessment considers several factors including the excess fair value over carrying value as of the last quantitative impairment test, the length of time since the last fair value measurement, the current carrying value, market conditions, actual performance compared to forecasted performance, and the current business outlook. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the reporting unit is quantitatively tested for impairment. If a quantitative assessment is required, the fair value is determined using a variety of assumptions including estimated future cash flows of the reporting unit and applicable discount rates.
Definite Lived Intangible Assets
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Customer relationships, trade names and other non-contractual intangible assets with determinable lives are amortized over periods generally ranging from 5 to 20 years. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.
Income Taxes
We recognize 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. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe 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. We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages.
Other Postretirement Benefits
We account for postretirement benefits other than pensions by accruing the costs of benefits to be provided over the employees’ periods of active service. These costs are determined on an actuarial basis. Our consolidated balance sheets reflect the funded status of postretirement benefits.
10
Pension Plan
We sponsor a noncontributory defined benefit pension plan accounted for by accruing the cost to provide the benefits over the employees’ periods of active service. These costs are determined on an actuarial basis. Our consolidated balance sheets reflect the funded status of the defined benefit pension plan.
New Accounting Standards
No new accounting standards that were issued or became effective during 2015 have had or are expected to have a material impact on our consolidated financial statements except those noted below:
In April 2015, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2015-05, "Intangibles-Goodwill and Other-Internal-use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This Update provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and expensed as services are received. The Update is effective for fiscal years beginning after December 15, 2015 and interim periods. We are currently evaluating the impact of adopting this Update on our consolidated financial statements.
In February 2015, FASB issued ASU 2015-02, "Consolidation". The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We do not expect the adoption of this Update to have a material impact on the our results of operations, financial position, or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which provides guidance on a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. In July 2015, the FASB deferred the effective date of the Update for one year. The Update will now be effective for public business entities for annual reporting periods, including interim reporting periods, beginning after December 15, 2017.
The new standard provides for two alternative implementation methods. The first is to apply the new standard retrospectively to each prior reporting period presented. This method allows the use of certain practical expedients. The second method is to apply the new standard retrospectively in the year of initial adoption and record a cumulative effect adjustment for the impact of adjusting contracts open at the date of adoption. Under this transition method, we would apply this guidance retrospectively only to contracts that are not completed contracts at the date of initial application, which for us will be January 1, 2018. We would then recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. This method also requires us to disclose comparative information for the year of adoption.
We continue to determine which method we will use to implement the new standard and to assess the impact the new standard is expected to have on the consolidated financial statements or on other matters or aspects of our business.
3. INCOME TAXES
We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assets and liabilities, calculated using enacted applicable tax rates. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the condensed consolidated financial statements.
We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages. We have accrued $1,186 and $1,065 in interest and penalties at September 30, 2015 and December 31, 2014, respectively. Interest was computed on the difference between the provision for income taxes recognized in accordance with GAAP and the amount of benefit previously taken or expected to be taken in our federal, state, and local income tax returns.
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Our federal income tax returns for the tax years 2012 and forward are available for examination by the United States Internal Revenue Service (“IRS”). The statute of limitation for the 2012 federal return will expire on September 15, 2016, unless extended by consent. Our state income tax returns for 2010 through 2014 remain subject to examination by various state authorities with the latest period closing on December 31, 2019. We have not extended the statutes of limitations in any state jurisdictions with respect to years prior to 2010.
Our unrecognized tax benefits of $3,528 and $3,104 at September 30, 2015 and December 31, 2014, respectively, are uncertain tax positions that would impact our effective tax rate if recognized. We are periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes. We do not anticipate a material change in unrecognized tax benefits during the next twelve months.
4. CAPITAL STOCK
Our common stock is 100% owned by active and retired employees, and there is no public trading market for our 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 New York law, a voting trust may not have a term greater than ten years. At September 30, 2015, approximately 83% of the common stock was held in a voting trust that expires by its terms on March 15, 2017. 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 holder of our common stock or voting trust interests representing our common stock ("common stock", "common shares", or "shares") may sell, transfer or otherwise dispose of any shares without first offering us the option to purchase those shares at the price at which they were issued. Additionally, a shareholder is entitled to any cash dividends, if any, accrued for the quarter in which the purchase offer is made, adjusted pro rata for the number of days such shares were held prior to the dividend record date. We also have the option to purchase at the issue price the common shares of any shareholder who ceases to be an employee for any reason other than death or retirement on a pension (except a deferred pension), and on the first anniversary of any holder's death. In the past, we have always exercised these purchase options, and we expect to continue to do so in the foreseeable future. However, we can make no assurance that we will continue to exercise our purchase option in the future. All outstanding shares have been issued at $20.00 per share.
Cash dividends declared were $4,802 and $4,754 for the three months ended September 30, 2015 and 2014, respectively. Cash dividends declared were $14,418 and $14,302 for the nine months ended September 30, 2015 and 2014, respectively.
5. DEBT
Revolving Credit Facility
At September 30, 2015 and December 31, 2014, we along with Graybar Canada Limited, our Canadian operating subsidiary (“Graybar Canada”), had an unsecured, five-year, $550,000 revolving credit agreement maturing in June 2019 with Bank of America, N.A. and the other lenders named therein (the "Credit Agreement"), which includes a combined letter of credit sub-facility of up to $50,000, a U.S. swing line loan facility of up to $50,000, and a Canadian swing line loan facility of up to $20,000. The Credit Agreement includes a $100,000 sublimit (in U.S. or Canadian dollars) for borrowings by Graybar Canada and contains an accordion feature, which allows us to request increases to the aggregate borrowing commitments of up to $300,000.
The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on us and our subsidiaries with respect to indebtedness, liens, changes in the nature of our business, investments, mergers and acquisitions, issuance of equity securities, dispositions of assets and dissolution of certain subsidiaries, transactions with affiliates, restricted payments (subject to incurrence tests, with certain exceptions), as well as securitizations, factoring transactions, and transactions with sanctioned parties or in violation of certain U.S. or Canadian anti-corruption laws. There are also maximum leverage ratio and minimum interest coverage ratio financial covenants that we are subject to during the term of the Credit Agreement. We were in compliance with all these covenants as of September 30, 2015 and December 31, 2014.
We had total letters of credit of $5,690 and $5,725 outstanding, of which none were issued under the Credit Agreement at September 30, 2015 and December 31, 2014. The letters of credit are used primarily to support certain workers' compensation insurance policies.
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There were $140,662 and $66,342 in short-term borrowings outstanding under the Credit Agreement at September 30, 2015 and December 31, 2014, respectively.
Short-term borrowings outstanding during the nine months ended September 30, 2015 and 2014 ranged from a minimum of $35,981 and $31,089 to a maximum of $184,188 and $111,912, respectively.
At September 30, 2015, we had unused lines of credit under the Credit Agreement amounting to $409,338 available, compared to $483,658 at December 31, 2014. These lines are available to meet our short-term cash requirements and are subject to annual fees of up to 40 basis points (0.40%).
Private Placement Shelf Agreement
At September 30, 2015 and December 31, 2014, we had an uncommitted $100,000 private placement shelf agreement with Prudential Investment Management, Inc. (the "Shelf Agreement"). The Shelf Agreement allows us to issue senior promissory notes to affiliates of Prudential at fixed rate terms to be agreed upon at the time of any issuance during a three year issuance period ending in September 2017. No notes had been issued under the Shelf Agreement as of September 30, 2015 and December 31, 2014.
The Shelf Agreement contains various affirmative and negative covenants. We are also required to maintain certain financial ratios as defined in the agreement. We were in compliance with all covenants as of September 30, 2015 and December 31, 2014.
6. PENSION AND OTHER POSTRETIREMENT BENEFITS
We have a noncontributory defined benefit pension plan covering substantially all employees first hired prior to July 1, 2015 after the completion of one year of service and 1,000 hours of service. The plan provides retirement benefits based on an employee’s average earnings and years of service. These employees become 100% vested after three years of service, regardless of age. A supplemental benefit plan provides nonqualified benefits for compensation in excess of the IRS compensation limits applicable to the plan.
Our plan funding policy is to make contributions, provided that the total annual contributions will not be less than ERISA and the Pension Protection Act of 2006 minimums or greater than the maximum tax-deductible amount, to review the contribution and funding strategy on a regular basis, and to allow discretionary contributions to be made by us from time to time. The assets of the defined benefit pension plan are invested primarily in fixed income investments and equity securities. We pay nonqualified pension benefits when they are due according to the terms of the supplemental benefit plan.
We provide certain postretirement health care and life insurance benefits to retired employees. Substantially all of our employees hired or rehired prior to 2014 may become eligible for postretirement medical benefits if they reach the age and service requirements of the retiree medical plan and retire on a service pension under the defined benefit pension plan. Medical benefits are self-insured, and claims are paid through an insurance company. The cost of coverage is determined based on the annual projected plan costs. The participant's premium or cost is determined based on Company guidelines. Postretirement life insurance benefits are insured through an insurance company. We fund postretirement benefits as incurred, and accordingly, there were no assets held in the postretirement benefits plan at September 30, 2015 and December 31, 2014.
The net periodic benefit cost for the three and nine months ended September 30, 2015 and 2014 included the following components:
Pension Benefits | Postretirement Benefits | ||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||
Components of Net Periodic Benefit Cost | 2015 | 2014 | 2015 | 2014 | |||||||||
Service cost | $ | 6,402 | $ | 5,551 | $ | 626 | $ | 614 | |||||
Interest cost | 6,301 | 6,704 | 731 | 834 | |||||||||
Expected return on plan assets | (7,075 | ) | (6,656 | ) | — | — | |||||||
Amortization of: | |||||||||||||
Net actuarial loss | 5,007 | 4,410 | 261 | 317 | |||||||||
Prior service cost (gain) | 113 | 238 | (545 | ) | (545 | ) | |||||||
Net periodic benefit cost | $ | 10,748 | $ | 10,247 | $ | 1,073 | $ | 1,220 | |||||
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Pension Benefits | Postretirement Benefits | ||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
Components of Net Periodic Benefit Cost | 2015 | 2014 | 2015 | 2014 | |||||||||
Service cost | $ | 19,206 | $ | 16,654 | $ | 1,878 | $ | 1,841 | |||||
Interest cost | 18,902 | 20,113 | 2,194 | 2,502 | |||||||||
Expected return on plan assets | (21,223 | ) | (19,968 | ) | — | — | |||||||
Amortization of: | |||||||||||||
Net actuarial loss | 15,021 | 13,229 | 783 | 951 | |||||||||
Prior service cost (gain) | 339 | 714 | (1,635 | ) | (1,635 | ) | |||||||
Settlement loss | — | 789 | — | — | |||||||||
Net periodic benefit cost | $ | 32,245 | $ | 31,531 | $ | 3,220 | $ | 3,659 | |||||
A settlement loss that resulted from lump sum pension distributions was recorded during the nine months ended September 30, 2014.
We made qualified and nonqualified pension contributions totaling $10,002 during the three-month periods ended September 30, 2015 and 2014, respectively. Contributions made during the nine-month periods ended September 30, 2015 and 2014 totaled $31,536 and $32,864, respectively. Additional contributions totaling $10,002 are expected to be paid during the remainder of 2015.
7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents amounts reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2015 and 2014:
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | |||||||||||||||||||||||
Amortization of Pension and Other Postretirement Benefits Items | Amortization of Pension and Other Postretirement Benefits Items | |||||||||||||||||||||||
Actuarial Losses Recognized | Prior Service Costs Recognized | Total | Actuarial Losses Recognized | Prior Service Costs Recognized | Total | |||||||||||||||||||
Affected Line in Condensed Consolidated Statement of Income: | ||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 5,268 | $ | (432 | ) | $ | 4,836 | $ | 4,727 | $ | (307 | ) | $ | 4,420 | ||||||||||
Tax (benefit) expense | (2,049 | ) | 168 | (1,881 | ) | (1,839 | ) | 120 | (1,719 | ) | ||||||||||||||
Total reclassifications for the period, net of tax | $ | 3,219 | $ | (264 | ) | $ | 2,955 | $ | 2,888 | $ | (187 | ) | $ | 2,701 | ||||||||||
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The following table represents amounts reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 and 2014:
Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||
Amortization of Pension and Other Postretirement Benefits Items | Amortization of Pension and Other Postretirement Benefits Items | |||||||||||||||||||||||
Actuarial Losses Recognized | Prior Service Costs Recognized | Total | Actuarial Losses Recognized | Prior Service Costs Recognized | Total | |||||||||||||||||||
Affected Line in Condensed Consolidated Statement of Income: | ||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 15,804 | $ | (1,296 | ) | $ | 14,508 | $ | 14,180 | $ | (921 | ) | $ | 13,259 | ||||||||||
Tax (benefit) expense | (6,148 | ) | 504 | (5,644 | ) | (5,517 | ) | 359 | (5,158 | ) | ||||||||||||||
Total reclassifications for the period, net of tax | $ | 9,656 | $ | (792 | ) | $ | 8,864 | $ | 8,663 | $ | (562 | ) | $ | 8,101 | ||||||||||
The following table represents the activity included in accumulated other comprehensive income (loss) for the three months ended September 30, 2015 and 2014:
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | |||||||||||||||||||||||
Foreign Currency | Pension and Other Postretirement Benefits | Total | Foreign Currency | Pension and Other Postretirement Benefits | Total | |||||||||||||||||||
Beginning balance July 1, | $ | (4,208 | ) | $ | (146,568 | ) | $ | (150,776 | ) | $ | 6,968 | $ | (141,616 | ) | $ | (134,648 | ) | |||||||
Other comprehensive (loss) income before reclassifications | (5,808 | ) | — | (5,808 | ) | (3,529 | ) | — | (3,529 | ) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (net of tax $(1,881) and $(1,719)) | — | 2,955 | 2,955 | — | 2,701 | 2,701 | ||||||||||||||||||
Net current-period other comprehensive (loss) income | (5,808 | ) | 2,955 | (2,853 | ) | (3,529 | ) | 2,701 | (828 | ) | ||||||||||||||
Ending balance September 30, | $ | (10,016 | ) | $ | (143,613 | ) | $ | (153,629 | ) | $ | 3,439 | $ | (138,915 | ) | $ | (135,476 | ) | |||||||
The following table represents the activity included in accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 and 2014:
Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||
Foreign Currency | Pension and Other Postretirement Benefits | Total | Foreign Currency | Pension and Other Postretirement Benefits | Total | |||||||||||||||||||
Beginning balance January 1, | $ | 284 | $ | (152,477 | ) | $ | (152,193 | ) | $ | 6,653 | $ | (147,016 | ) | $ | (140,363 | ) | ||||||||
Other comprehensive (loss) income before reclassifications | (10,300 | ) | — | (10,300 | ) | (3,214 | ) | — | (3,214 | ) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (net of tax $(5,644) and $(5,158)) | — | 8,864 | 8,864 | — | 8,101 | 8,101 | ||||||||||||||||||
Net current-period other comprehensive (loss) income | (10,300 | ) | 8,864 | (1,436 | ) | (3,214 | ) | 8,101 | 4,887 | |||||||||||||||
Ending balance September 30, | $ | (10,016 | ) | $ | (143,613 | ) | $ | (153,629 | ) | $ | 3,439 | $ | (138,915 | ) | $ | (135,476 | ) | |||||||
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8. ASSETS HELD FOR SALE
We consider properties to be assets held for sale when all of the following criteria are met: (i) a formal commitment to a plan to sell a property has been made and exercised; (ii) the property is available for sale in its present condition; (iii) actions required to complete the sale of the property have been initiated; (iv) sale of the property is probable and we expect the sale will occur within one year; and (v) the property is being actively marketed for sale at a price that is reasonable given its current market value.
Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and depreciation of the property ceases. The net book value of assets held for sale was $7,669 at December 31, 2014. During the three months ended September 30, 2015, we sold no assets classified as held for sale and recorded no net gains on the assets held for sale. During the nine months ended September 30, 2015, we sold assets classified as held for sale with net book values of $4,669, and recorded net gains on the assets held for sale of $4,195 in other income, net. The remaining net book value of assets still held for sale at September 30, 2015 is $3,058 and is recorded in net property in the condensed consolidated balance sheets.
Subsequent to September 30, 2015, but prior to issuance of this report, we sold one of the locations included as an asset held for sale. The location had net book value of $3,000 and yielded a net gain of $496.
We review long-lived assets held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For assets classified as held and used, impairment may occur if projected undiscounted cash flows are not adequate to cover the carrying value of the assets. In such cases, additional analysis is conducted to determine the amount of the loss to be recognized. The impairment loss is calculated as the difference between the carrying amount of the asset and its estimated fair value. The analysis requires estimates of the amount and timing of projected cash flows and, where applicable, selection of an appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed necessary.
For assets held for sale, impairment occurs whenever the net book value of the property listed for sale exceeds the expected selling price less estimated selling expenses. There were no impairment charges recorded during the three and nine month periods ended September 30, 2015 and 2014.
9. COMMITMENTS AND CONTINGENCIES
Graybar and our subsidiaries are subject to various claims, disputes, and administrative and legal matters incidental to our past and current business activities. As a result, contingencies may arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible loss.
We account for loss contingencies in accordance with GAAP. Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated. With respect to a particular loss contingency, it may be probable that a loss has occurred but the estimate of the loss is a wide range. If we deem an amount within the range to be a better estimate than any other amount within the range, that amount will be accrued. However, if no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued. While we believe that none of these claims, disputes, administrative, and legal matters will have a material adverse effect on our financial position, these matters are uncertain and we cannot at this time determine whether the financial impact, if any, of these matters will be material to our results of operations in the period during which such matters are resolved or a better estimate becomes available.
10. ACQUISITION
In April 2015, we acquired 100% of the outstanding capital stock of Advantage Industrial Automation, Inc. (“AIA”), which provides control and automation solutions to industrial users, OEMs and system integrators, for $18,093 in cash, net of cash acquired. The purchase price allocation resulted in approximately $7,057 and $8,283 of tax deductible goodwill and other intangible assets, respectively.
Since the date of acquisition, the AIA results are reflected in our Condensed Consolidated Financial Statements. Pro forma results of this acquisition were not material; therefore, they are not presented.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto, and our audited consolidated financial statements, notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2014, included in our Annual Report on Form 10-K for such period as filed with the United States Securities and Exchange Commission (the “Commission”). 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 our 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 (the “PSLRA”), 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. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the PSLRA. 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. Our 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 our 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; cyber-attacks; volatility in the prices of industrial commodities; disruptions in our sources of supply; a sustained interruption in the operation of our information systems; increased funding requirements and expenses related to our pension plan; compliance with increasing governmental regulations; adverse legal proceedings or other claims; and the inability, or limitations on our ability, to raise debt or equity capital or to borrow under our existing credit facilities or any replacements thereof. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by applicable securities law. 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 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 our Annual Report on Form 10-K for the year ended December 31, 2014.
All dollar amounts, except per share data, are stated in thousands ($000s) in the following discussion and accompanying tables.
Background
Graybar Electric Company, Inc. (“Graybar”, “Company”, "we", "our", or "us") is a New York corporation, incorporated in 1925. We are engaged in the distribution of electrical and communications and data networking products and are a provider of related supply chain management and logistics services. We primarily serve customers in the construction, and commercial, institutional and government ("CIG"), as well as the industrial and utility vertical markets, with products and services that support new construction, infrastructure updates, building renovation, facility maintenance, repair and operations ("MRO"), and original equipment manufacturers ("OEMs"). All products sold by us are purchased by us from others, and we neither manufacture nor contract to manufacture any products we sell. Our business activity is primarily with customers in the United States ("U.S."). We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.
Our common stock is 100% owned by active and retired employees, and there is no public trading market for our common stock. No holder of our common stock or voting trust interests representing our common stock (“common stock”, “common shares”, or “shares”) may sell, transfer, or otherwise dispose of any shares without first offering us the option to purchase those shares at the price at which they were issued. Additionally, a shareholder is entitled to any cash dividends, if any, accrued for the quarter in which the purchase offer is made, adjusted pro rata for the number of days such shares were held prior to the dividend record date. We also have the option to purchase at the issue price the common shares of any shareholder who ceases to be an employee for any reason other than death or retirement on a pension (except a deferred pension), and on the first anniversary of any holder's death. In the past, we have always exercised these purchase options, and we expect to continue to do so in the foreseeable future. However, we can make no assurance that we will continue to exercise our purchase option in the future. All outstanding shares have been issued at $20.00 per share.
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Business Overview
We achieved our twelfth consecutive year-over-year quarterly net sales record. Our third quarter 2015 net sales of $1,583,886 exceeded third quarter 2014 net sales by 0.9%, or $14,129. The third quarter 2015 was also an all-time quarterly net sales record, surpassing the fourth quarter 2014 net sales by 0.3%, or $4,957. Year-to-date September 30, 2015 net sales were $4,547,672, a 3.4% increase, or $147,740, over prior year net sales of $4,399,932. Our orders on hand also continued to increase during the third quarter.
The gross margin rate for the third quarter of 2015 was 19.1%, which brought our year-to-date 2015 gross margin rate of 18.8% in line with 2014. Our enhanced gross margin rate for the quarter is the result of our organic gross margin improvement and diversification initiatives and our second quarter 2015 acquisition. Gross margin increased $29,395, or 3.6%, to $855,329 for the nine months ended September 30, 2015, when compared to gross margin of $825,934 for the same nine-month period last year.
As we expanded our workforce, infrastructure, and online presence to support our growing sales, we experienced an increase of $39,001, or 5.7%, to $717,648 in our selling, general, and administrative expenses for the nine months ended September 30, 2015.
While we are aware of a generalized slowdown across our industry and expect that our sales will grow slowly through the end of 2015 and into 2016, we believe that our investments in developing our sales force, expanding our number of locations, and enhancing our e-commerce offering have positioned us well for long-term growth.
Consolidated Results of Operations
The following tables set forth certain information relating to our operations stated in thousands of dollars and as a percentage of net sales for the three and nine months ended September 30, 2015 and 2014:
Three Months Ended | Three Months Ended | ||||||||||||
September 30, 2015 | September 30, 2014 | ||||||||||||
Dollars | Percent | Dollars | Percent | ||||||||||
Net Sales | $ | 1,583,886 | 100.0 | % | $ | 1,569,757 | 100.0 | % | |||||
Cost of merchandise sold | (1,280,928 | ) | (80.9 | ) | (1,275,222 | ) | (81.2 | ) | |||||
Gross Margin | 302,958 | 19.1 | 294,535 | 18.8 | |||||||||
Selling, general and administrative expenses | (244,672 | ) | (15.4 | ) | (233,773 | ) | (14.9 | ) | |||||
Depreciation and amortization | (10,960 | ) | (0.7 | ) | (9,786 | ) | (0.6 | ) | |||||
Other income, net | 1,187 | — | 739 | — | |||||||||
Income from Operations | 48,513 | 3.0 | 51,715 | 3.3 | |||||||||
Interest expense, net | (685 | ) | — | (364 | ) | — | |||||||
Income before Provision for Income Taxes | 47,828 | 3.0 | 51,351 | 3.3 | |||||||||
Provision for income taxes | (19,431 | ) | (1.2 | ) | (20,815 | ) | (1.4 | ) | |||||
Net Income | 28,397 | 1.8 | 30,536 | 1.9 | |||||||||
Less: Net income attributable to noncontrolling interests | (86 | ) | — | (72 | ) | — | |||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 28,311 | 1.8 | % | $ | 30,464 | 1.9 | % | |||||
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Nine Months Ended | Nine Months Ended | ||||||||||||
September 30, 2015 | September 30, 2014 | ||||||||||||
Dollars | Percent | Dollars | Percent | ||||||||||
Net Sales | $ | 4,547,672 | 100.0 | % | $ | 4,399,932 | 100.0 | % | |||||
Cost of merchandise sold | (3,692,343 | ) | (81.2 | ) | (3,573,998 | ) | (81.2 | ) | |||||
Gross Margin | 855,329 | 18.8 | 825,934 | 18.8 | |||||||||
Selling, general and administrative expenses | (717,648 | ) | (15.8 | ) | (678,647 | ) | (15.4 | ) | |||||
Depreciation and amortization | (32,082 | ) | (0.7 | ) | (29,140 | ) | (0.7 | ) | |||||
Other income, net | 6,746 | 0.1 | 2,897 | — | |||||||||
Income from Operations | 112,345 | 2.4 | 121,044 | 2.7 | |||||||||
Interest expense, net | (1,895 | ) | — | (1,122 | ) | — | |||||||
Income before Provision for Income Taxes | 110,450 | 2.4 | 119,922 | 2.7 | |||||||||
Provision for income taxes | (44,414 | ) | (1.0 | ) | (48,929 | ) | (1.1 | ) | |||||
Net Income | 66,036 | 1.4 | 70,993 | 1.6 | |||||||||
Less: Net income attributable to noncontrolling interests | (177 | ) | — | (164 | ) | — | |||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 65,859 | 1.4 | % | $ | 70,829 | 1.6 | % | |||||
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net sales totaled $1,583,886 for the quarter ended September 30, 2015, compared to $1,569,757 for the quarter ended September 30, 2014, an increase of $14,129, or 0.9%. Net sales in our construction and CIG vertical markets increased for the three months ended September 30, 2015 compared to the same three-month period of 2014 by 3.1% and 1.0%, respectively, while net sales in our industrial and utility vertical market declined by 4.6%.
Gross margin increased $8,423, or 2.9%, to $302,958 from $294,535 primarily due to our focus on gross margin rate improvement initiatives as well as increased net sales in the third quarter of 2015, compared to the same period of 2014. Our gross margin as a percent of net sales totaled 19.1% for the three months ended September 30, 2015, up from 18.8% for the three months ended September 30, 2014.
Selling, general and administrative expenses increased $10,899, or 4.7%, to $244,672 in the third quarter of 2015 from $233,773 in the third quarter of 2014, due primarily to higher compensation-related expenses associated with our sales force expansion initiative and normal compensation increases for our existing workforce for the three months ended September 30, 2015. Selling, general and administrative expenses as a percentage of net sales totaled 15.4% for the three months ended September 30, 2015, up from 14.9% for the three months ended September 30, 2014.
Depreciation and amortization expenses for the three months ended September 30, 2015 increased $1,174, or 12.0%, to $10,960 from $9,786 in the third quarter of 2014, due to an increase in property, at cost. Total property, at cost, at September 30, 2015 was $905,070, an increase of $66,846, or 8.0%, when compared to total property, at cost, at September 30, 2014 of $838,224. As a result, depreciation and amortization expenses as a percentage of net sales totaled 0.7% for the three months ended September 30, 2015, up from 0.6% for the same period of 2014.
Other income, net totaled $1,187 for the three-month period ended September 30, 2015, compared to $739 for the three months ended September 30, 2014. 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 our business activities. The increase in other income, net for the three months ended September 30, 2015 compared to the same three-month period in 2014 was primarily due to increases in net gains on the disposal of personal property of $543.
Income before provision for income taxes totaled $47,828 for the three months ended September 30, 2015, a decrease of $3,523, or 6.9%, from $51,351 for the three months ended September 30, 2014. The decrease was primarily due to increases in selling, general, and administrative expenses and depreciation and amortization expenses, partially offset by an increase in gross margin.
Our total provision for income taxes decreased $1,384, or 6.6%, to $19,431 for the three months ended September 30, 2015, compared to $20,815 for the same period of 2014. Our effective tax rate was 40.6% for the three months ended September 30, 2015, compared to 40.5% for the same period of 2014. The increase in the effective tax rate was attributable to
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changes in anticipated pretax income. The effective tax rate for the three months ended September 30, 2015 was higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.
Net income attributable to Graybar Electric Company, Inc. for the three months ended September 30, 2015 decreased $2,153, or 7.1%, to $28,311 from $30,464 for the three months ended September 30, 2014.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net sales totaled $4,547,672 for the nine-month period ended September 30, 2015, compared to $4,399,932 for the nine-month period ended September 30, 2014, an increase of $147,740, or 3.4%. Net sales in our construction and CIG vertical markets increased for the nine months ended September 30, 2015 compared to the same nine-month period of 2014 by 3.9% and 5.8%, respectively, while net sales in our industrial and utility vertical market declined by 0.6%.
Gross margin increased $29,395, or 3.6%, to $855,329 from $825,934 primarily due to increased net sales in the first nine months of 2015, compared to the same period of 2014. Our gross margin as a percent of net sales remained at 18.8% for the nine months ended September 30, 2015 and 2014.
Selling, general and administrative expenses increased $39,001, or 5.7%, to $717,648, for the nine-month period ended September 30, 2015, compared to $678,647 for the nine-month period ended September 30, 2014, due primarily to higher compensation-related expenses associated with our salesforce expansion initiative and normal compensation increases for our existing workforce for the nine months ended September 30, 2015. Selling, general and administrative expenses as a percentage of net sales totaled 15.8% for the nine months ended September 30, 2015, up from 15.4% for the same period of 2014.
Depreciation and amortization expenses for the nine months ended September 30, 2015 increased $2,942, or 10.1%, to $32,082 from $29,140 for the same nine-month period in 2014, due to an increase in property, at cost. Total property, at cost, at September 30, 2015 was $905,070, an increase of $66,846, or 8.0%, when compared to total property, at cost, at September 30, 2014 of $838,224. As a result, depreciation and amortization expenses as a percentage of net sales remained constant at 0.7% for the nine months ended September 30, 2015 and 2014.
Other income, net totaled $6,746 for the nine-month period ended September 30, 2015, compared to $2,897 for the nine months ended September 30, 2014. 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 our business activities. The increase in other income, net for the nine months ended September 30, 2015 compared to the same nine-month period in 2014 was primarily due to increases in net gains on the disposal of real and personal property of $4,670, partially offset by a decrease in miscellaneous income items of $735.
Income before provision for income taxes totaled $110,450 for the nine months ended September 30, 2015, a decrease of $9,472, or 7.9%, from $119,922 for the nine months ended September 30, 2014. The decrease was primarily due to increases in selling, general and administrative expenses and depreciation and amortization expenses, partially offset by increases in gross margin and other income, net.
Our total provision for income taxes decreased $4,515, or 9.2%, to $44,414 for the nine months ended September 30, 2015, compared to $48,929 for the same period in 2014. Our year-to-date effective tax rate was 40.2% for the nine months ended September 30, 2015, compared to 40.8% for the same period in 2014. The decrease in the effective tax rate was attributable to U.S. Internal Revenue Service ("IRS") audit-related adjustments that were recorded during the nine months ended September 30, 2014 that did not repeat during the nine months ended September 30, 2015. The effective tax rate for the nine months ended September 30, 2015 was higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes, while the effective tax rate for nine months ended September 30, 2014 was higher due to the IRS audit and state and local income taxes.
Net income attributable to Graybar Electric Company, Inc. for the nine-month period ended September 30, 2015 decreased $4,970, or 7.0%, to $65,859 from $70,829 for the nine months ended September 30, 2014.
Financial Condition and Liquidity
We manage our liquidity and capital levels so that we have the capacity to invest in the growth of our business, meet debt service obligations, finance anticipated capital expenditures, make benefit payments, fund acquisitions, make dividend payments, finance information technology needs, and finance other miscellaneous cash outlays. We believe that maintaining a
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strong financial condition enables us to competitively access multiple financing channels, maintain an optimal cost of capital and enable our company to invest in strategic long-term growth plans.
We have historically funded our working capital requirements using cash flows generated by the collection of trade receivables and trade accounts payable terms with our suppliers, supplemented by short-term bank lines of credit. Capital expenditures have been financed primarily by cash from working capital management, short-term bank lines of credit and long-term debt.
Cash and cash equivalents were $42,315 at September 30, 2015, compared to $33,758 at December 31, 2014, an increase of $8,557, or 25.3%. Our short term borrowings increased significantly during the nine-month period to $140,662 at September 30, 2015 from $66,342 at December 31, 2014, in part, because we have strategically invested in expanding our service offering by adding new locations, expanding our sales force, and through an acquisition. Short-term borrowings at September 30, 2015 were down $43,526, or 23.6%, when compared to June 30, 2015. In addition, current assets exceeded current liabilities by $450,448 at September 30, 2015, an increase of $3,898, or 0.9%, from $446,550 at December 31, 2014.
Operating Activities
Cash provided by operations for the nine months ended September 30, 2015 was $21,098, compared to $65,099 for the nine months ended September 30, 2014, a decline of $44,001, or 67.6%. Cash flows provided by operations for September 30, 2015 was a result of increased inventory levels during the nine months ended September 30, 2015 to support our expected growth of sales during 2015, as well as an increase in trade receivables and a decrease in accrued payroll benefits, partially offset by an increase in trade accounts payable.
Merchandise inventory turnover decreased modestly for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, as a result of increased merchandise inventory levels partially offset by higher sales volume at September 30, 2015 compared to September 30, 2014. The average number of days of sales in trade receivables for the nine-month period ended September 30, 2015 remains unchanged compared to the same nine-month period ended September 30, 2014.
Investing Activities
Net cash used by investing activities totaled $69,001 for the nine months ended September 30, 2015, compared to $31,385 for the same nine-month period in 2014, an increase of $37,616, or 119.9%. In the first quarter of 2015, we purchased a new regional distribution center in southern California for $23,392, while disposing of a regional distribution center in northern California that had been classified as an asset held for sale and provided proceeds of $8,214. During the second quarter of 2015, we acquired Advantage Industrial Automation, Inc. for $18,093, net of cash acquired. For further discussion of the acquisition, refer to Note 10, "Acquisition", of the notes to the condensed consolidated financial statements.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2015 totaled $56,460, compared to net cash used by financing activities of $27,459 for the nine months ended September 30, 2014, an increase of $83,919, or 305.6%. The increase was primarily due to the increase in our short term borrowings for the nine months ended September 30, 2015 to fund our operating and investing activities.
Liquidity
We had a $550,000 revolving credit facility with $409,338 in available capacity at September 30, 2015, compared to $483,658 at December 31, 2014. At September 30, 2015 and December 31, 2014, we also had an uncommitted $100,000 private placement shelf agreement that allows us to issue senior promissory notes to affiliates of Prudential at fixed rate terms to be agreed upon at the time of any issuance during a three year issuance period ending in September 2017. No notes had been issued under the shelf agreement as of September 30, 2015 and December 31, 2014. For further discussion related to our revolving credit facility and our private placement shelf agreement, refer to Note 5, "Debt", of the notes to the condensed consolidated financial statements located in Item 1.
We had total letters of credit of $5,690 and $5,725 outstanding, of which none were issued under the $550,000 revolving credit facility at September 30, 2015 and December 31, 2014. The letters of credit are used primarily to support certain workers' compensation insurance policies.
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New Accounting Standards Updates
Our adoption of new accounting standards are discussed in Note 2, "Summary of Significant Accounting Policies", of the notes to the condensed consolidated financial statements located in Item 1., "Financial Statements", of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the policies, procedures, controls, or risk profile from those provided in Item 7A., “Quantitative and Qualitative Disclosures About Market Risk”, of our Annual Report on Form 10-K for the year ended December 31, 2014.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2015, was performed under the supervision and with the participation of management. Based on that evaluation, our management, including the Principal Executive Officer and Principal Financial Officer, concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds.
Our common stock is 100% owned by active and retired employees, and there is no public trading market for our 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 New York 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 September 30, 2015, approximately 83% 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 holder of our common stock or voting trust interests representing our common stock ("common stock", "common shares", or "shares") may sell, transfer, or otherwise dispose of any shares without first offering us the option to purchase those shares at the price at which they were issued. Additionally, a shareholder is entitled to any cash dividends, if any, accrued for the quarter in which the purchase offer is made, adjusted pro rata for the number of days such shares were held prior to the dividend record date. We also have the option to purchase at the issue price the common shares of any shareholder who ceases to be an employee for any cause other than death or retirement on a pension (except a deferred pension), and on the first anniversary of any holder's death. In the past, we have always exercised these purchase options, and we expect to continue to do so in the foreseeable future. However, we can make no assurance that we will continue to exercise our purchase option in the future. All outstanding shares 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:
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | |||||
July 1 to July 31, 2015 | 35,807 | $20.00 | N/A | |||||
August 1 to August 31, 2015 | 55,218 | $20.00 | N/A | |||||
September 1 to September 30, 2015 | 43,056 | $20.00 | N/A | |||||
Total | 134,081 | $20.00 | N/A | |||||
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Item 6. Exhibits.
(a) | Exhibits furnished in accordance with provisions of Item 601 of Regulation S-K. | ||||||
(3) | (i) | Articles of Incorporation | |||||
(a) | Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 13, 2013 (Commission File No. 000-00255) and incorporated herein by reference. | ||||||
(ii) | Bylaws | ||||||
(a) | By-laws as amended through March 12, 2015, filed as Exhibit 3(ii) to the Company's Current Report on Form 8-K dated March 12, 2015 (Commission File No. 000-00255) and incorporated herein by reference. | ||||||
(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. | ||||||
101.INS | XBRL Instance Document | ||||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GRAYBAR ELECTRIC COMPANY, INC. | |||
November 4, 2015 | /s/ KATHLEEN M. MAZZARELLA | ||
Date | Kathleen M. Mazzarella | ||
President and Chief Executive Officer (Principal Executive Officer) | |||
November 4, 2015 | /s/ RANDALL R. HARWOOD | ||
Date | Randall R. Harwood | ||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |||
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EXHIBIT INDEX
Exhibits
(3(i)) | Articles of Incorporation | |||
(a) | Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 13, 2013 (Commission File No. 000-00255) and incorporated herein by reference. | |||
(3(ii)) | Bylaws | |||
(a) | By-laws as amended through March 12, 2015, filed as Exhibit 3(ii) to the Company's Current Report on Form 8-K dated March 12, 2015 (Commission File No. 000-00255) and incorporated herein by reference. | |||
(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. | ||
(32.1 | ) | 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. | ||
101.INS | XBRL Instance Document | |||
101.SCH | XBRL Taxonomy Extension Schema Document | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||
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