UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended: | June 30, 2008 | ||||
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: | 0-255 |
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, MO | 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 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 July 31, 2008: | 8,001,372 | |
(Number of Shares) |
Graybar Electric Company, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended June 30, 2008
(Unaudited)
Table of Contents
PART I. | FINANCIAL INFORMATION | Page(s) | |
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheets | 3 | ||
Condensed Consolidated Statements of Income | 4 | ||
Condensed Consolidated Statements of Cash Flows | 5 | ||
Condensed Consolidated Statements of Changes in Shareholders’ Equity | 6 | ||
Notes to Condensed Consolidated Financial Statements | 7-11 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of | ||
Operations | 12-19 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 | |
Item 4T. | Controls and Procedures | 20 | |
PART II. | OTHER INFORMATION | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 21 | |
Item 4. | Submission of Matters to a Vote of Security Holders | 21 | |
Item 6. | Exhibits | 22 | |
Signatures | 23 | ||
Exhibit Index | 24 | ||
Exhibit (3.1) – Restated Certificate of Incorporation | |||
Exhibit (3.2) – Certificate of Amendment of Certificate of Incorporation | |||
Exhibit (3.3) – Bylaws | |||
Exhibit (31.1) – Section 302 Certification – Principal Executive Officer | |||
Exhibit (31.2) – Section 302 Certification – Principal Financial Officer | |||
Exhibit (32.1) – Section 906 Certification – Principal Executive Officer | |||
Exhibit (32.2) – Section 906 Certification – Principal Financial Officer |
PART I. – FINANCIAL INFORMATION
Item 1. Financial Statements
Graybar Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Stated in thousands except share and per share data)
(Unaudited)
June 30, | December 31, | ||||||||||
2008 | 2007 | ||||||||||
ASSETS | |||||||||||
Current Assets | |||||||||||
Cash and cash equivalents | $ | 44,250 | $ | 66,167 | |||||||
Trade receivables | 761,985 | 702,869 | |||||||||
Merchandise inventory | 405,115 | 397,076 | |||||||||
Other current assets | 20,849 | 20,135 | |||||||||
Total Current Assets | 1,232,199 | 1,186,247 | |||||||||
Property, at cost | |||||||||||
Land | 42,602 | 42,633 | |||||||||
Buildings | 316,883 | 310,120 | |||||||||
Furniture and fixtures | 165,732 | 162,445 | |||||||||
Software | 76,906 | 76,906 | |||||||||
Capital Leases | 2,413 | 2,413 | |||||||||
Total Property, at cost | 604,536 | 594,517 | |||||||||
Less – accumulated depreciation and amortization | (300,417 | ) | (286,549 | ) | |||||||
Net Property | 304,119 | 307,968 | |||||||||
Other Non-current Assets | 35,232 | 37,813 | |||||||||
Total Assets | $ | 1,571,550 | $ | 1,532,028 | |||||||
LIABILITIES | |||||||||||
Current Liabilities | |||||||||||
Short-term borrowings | $ | 20,833 | $ | 19,201 | |||||||
Current portion of long-term debt | 32,343 | 60,061 | |||||||||
Trade accounts payable | 574,440 | 515,035 | |||||||||
Accrued payroll and benefit costs | 65,186 | 117,283 | |||||||||
Other accrued taxes | 14,791 | 12,766 | |||||||||
Dividends payable | --- | 7,327 | |||||||||
Other current liabilities | 64,209 | 60,283 | |||||||||
Total Current Liabilities | 771,802 | 791,956 | |||||||||
Postretirement Benefits Liability | 75,113 | 75,436 | |||||||||
Pension Liability | 51,835 | 52,938 | |||||||||
Long-term Debt | 132,184 | 115,419 | |||||||||
Other Non-current Liabilities | 13,321 | 16,662 | |||||||||
Total Liabilities | 1,044,255 | 1,052,411 | |||||||||
SHAREHOLDERS’ EQUITY | |||||||||||
Shares at | |||||||||||
June 30, | December 31, | ||||||||||
Capital Stock | 2008 | 2007 | |||||||||
Common, stated value $20.00 per share | |||||||||||
Authorized | 15,000,000 | 15,000,000 | |||||||||
Issued to voting trustees | 6,614,149 | 6,313,724 | |||||||||
Issued to shareholders | 1,691,522 | 1,652,392 | |||||||||
In treasury, at cost | (262,732 | ) | (34,481 | ) | |||||||
Outstanding Common Stock | 8,042,939 | 7,931,635 | 160,859 | 158,633 | |||||||
Advance Payments on Subscriptions to Common Stock | 379 | --- | |||||||||
Retained Earnings | 428,754 | 386,217 | |||||||||
Accumulated Other Comprehensive Loss | (62,697 | ) | (65,233 | ) | |||||||
Total Shareholders’ Equity | 527,295 | 479,617 | |||||||||
Total Liabilities and Shareholders’ Equity | $ | 1,571,550 | $ | 1,532,028 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
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Graybar Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Stated in thousands except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Gross Sales | $ | 1,426,288 | $ | 1,344,721 | $ | 2,714,302 | $ | 2,572,762 | ||||
Cash discounts | (5,569 | ) | (5,263 | ) | (10,909 | ) | (9,746 | ) | ||||
Net Sales | 1,420,719 | 1,339,458 | 2,703,393 | 2,563,016 | ||||||||
Cost of merchandise sold | (1,147,350 | ) | (1,076,834 | ) | (2,179,006 | ) | (2,061,208 | ) | ||||
Gross Margin | 273,369 | 262,624 | 524,387 | 501,808 | ||||||||
Selling, general and administrative expenses | (213,131 | ) | (202,716 | ) | (424,999 | ) | (410,515 | ) | ||||
Depreciation and amortization | (9,645 | ) | (8,873 | ) | (18,888 | ) | (17,569 | ) | ||||
Other income, net | 320 | 539 | 931 | 2,692 | ||||||||
Income from Operations | 50,913 | 51,574 | 81,431 | 76,416 | ||||||||
Interest expense, net | (3,088 | ) | (4,460 | ) | (6,485 | ) | (9,158 | ) | ||||
Income before Provision for Income Taxes | 47,825 | 47,114 | 74,946 | 67,258 | ||||||||
Provision for income taxes: | ||||||||||||
Current | (18,139 | ) | (20,844 | ) | (30,023 | ) | (29,681 | ) | ||||
Deferred | (1,270 | ) | 1,459 | 2,443 | 2,092 | |||||||
Total provision for income taxes | (19,409 | ) | (19,385 | ) | (27,580 | ) | (27,589 | ) | ||||
Net Income | $ | 28,416 | $ | 27,729 | $ | 47,366 | $ | 39,669 | ||||
Net Income per Share of Common Stock (A) | $ | 3.55 | $ | 3.52 | $ | 5.91 | $ | 5.04 | ||||
Cash Dividends per Share of Common | ||||||||||||
Stock (B) | $ | 0.30 | $ | 0.30 | $ | 0.60 | $ | 0.60 | ||||
Average Common Shares Outstanding (A) | 8,005 | 7,880 | 8,009 | 7,871 |
(A) | Adjusted for the declaration of a twenty percent (20%) stock dividend in December 2007. Prior to the adjustment, the average common shares outstanding were 6,567 and 6,559 for the three and six month periods ended June 30, 2007. |
(B) | Cash dividends declared were $2,414 and $1,992 for the three months ended June 30, 2008 and 2007 respectively. Cash dividends declared were $4,829 and $3,967 for the six months ended June 30, 2008 and 2007, respectively. |
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 Statements of Cash Flows
(Stated in thousands)
(Unaudited)
For the Six Months Ended June 30, | 2008 | 2007 | ||||
Cash Flows from Operations | ||||||
Net Income | $ | 47,366 | $ | 39,669 | ||
Adjustments to reconcile net income to cash provided by operations: | ||||||
Depreciation and amortization | 18,888 | 17,569 | ||||
Deferred income taxes | (2,443 | ) | (2,092 | ) | ||
Net gains on disposal of property | (42 | ) | (737 | ) | ||
Loss on impairment of property | --- | 422 | ||||
Changes in assets and liabilities: | ||||||
Trade receivables | (59,116 | ) | (31,046 | ) | ||
Merchandise inventory | (8,039 | ) | (15,355 | ) | ||
Other current assets | (714 | ) | (1,366 | ) | ||
Other non-current assets | 2,581 | (10,251 | ) | |||
Trade accounts payable | 59,405 | 79,435 | ||||
Accrued payroll and benefit costs | (52,097 | ) | (52,850 | ) | ||
Other current liabilities | 11,203 | 8,528 | ||||
Other non-current liabilities | (4,767 | ) | 8,168 | |||
Total adjustments to net income | (35,141 | ) | 425 | |||
Net cash flow provided by operations | 12,225 | 40,094 | ||||
Cash Flows from Investing Activities | ||||||
Proceeds from disposal of property | 352 | 1,556 | ||||
Capital expenditures for property | (15,734 | ) | (10,648 | ) | ||
Net cash flow used by investing activities | (15,382 | ) | (9,092 | ) | ||
Cash Flows from Financing Activities | ||||||
Net increase in short-term borrowings | 1,632 | 6,543 | ||||
Repayment of long-term debt | (10,619 | ) | (10,665 | ) | ||
Principal payments under capital leases | (222 | ) | (208 | ) | ||
Sale of common stock | 7,170 | 6,742 | ||||
Purchases of treasury stock | (4,565 | ) | (2,649 | ) | ||
Dividends paid | (12,156 | ) | (10,461 | ) | ||
Net cash flow used by financing activities | (18,760 | ) | (10,698 | ) | ||
Net (Decrease) Increase in Cash | (21,917 | ) | 20,304 | |||
Cash, Beginning of Year | 66,167 | 52,210 | ||||
Cash, End of Period | $ | 44,250 | $ | 72,514 |
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 Changes in Shareholders’ Equity
For the Six Months Ended June 30, 2008 and 2007
(Stated in thousands)
(Unaudited)
Common | Accumulated | |||||||||||||
Stock | Other | Total | ||||||||||||
Common | Subscribed, | Retained | Comprehensive | Shareholders’ | ||||||||||
Stock | Unissued | Earnings | Loss | Equity | ||||||||||
Balance, December 31, 2006 | $ | 128,780 | $ | --- | $ | 342,878 | $ | (28,935 | ) | $ | 442,723 | |||
Cumulative impact of change | ||||||||||||||
in accounting for | ||||||||||||||
uncertainties in income | ||||||||||||||
taxes (Note 9) | --- | --- | (406 | ) | --- | (406 | ) | |||||||
January 1, 2007, as adjusted | 128,780 | --- | 342,472 | (28,935 | ) | 442,317 | ||||||||
Net income | --- | --- | 39,669 | --- | 39,669 | |||||||||
Foreign currency translation | --- | --- | --- | 4,285 | 4,285 | |||||||||
Unrealized gain from interest | ||||||||||||||
rate swap (net of $323 tax) | --- | --- | --- | 507 | 507 | |||||||||
Comprehensive income | 44,461 | |||||||||||||
Stock issued | 6,393 | --- | --- | --- | 6,393 | |||||||||
Stock repurchased | (2,649 | ) | --- | --- | --- | (2,649 | ) | |||||||
Advance payments | --- | 349 | --- | --- | 349 | |||||||||
Dividends declared | --- | --- | (3,967 | ) | --- | (3,967 | ) | |||||||
Balance, June 30, 2007 | $ | 132,524 | $ | 349 | $ | 378,174 | $ | (24,143 | ) | $ | 486,904 | |||
Common | Accumulated | |||||||||||||
Stock | Other | Total | ||||||||||||
Common | Subscribed, | Retained | Comprehensive | Shareholders’ | ||||||||||
Stock | Unissued | Earnings | Loss | Equity | ||||||||||
Balance, December 31, 2007 | $ | 158,633 | $ | --- | $ | 386,217 | $ | (65,233 | ) | $ | 479,617 | |||
Net income | 47,366 | 47,366 | ||||||||||||
Foreign currency translation | --- | --- | --- | (890 | ) | (890 | ) | |||||||
Unrealized gain from interest | ||||||||||||||
rate swap (net of $88 tax) | --- | --- | --- | 138 | 138 | |||||||||
Prior service gain | ||||||||||||||
(net of $(232) tax) | --- | --- | --- | (365 | ) | (365 | ) | |||||||
Actuarial loss | ||||||||||||||
(net of $2,326 tax) | --- | --- | --- | 3,653 | 3,653 | |||||||||
Comprehensive income | 49,902 | |||||||||||||
Stock issued | 6,791 | --- | --- | --- | 6,791 | |||||||||
Stock repurchased | (4,565 | ) | --- | --- | --- | (4,565 | ) | |||||||
Advance payments | --- | 379 | --- | --- | 379 | |||||||||
Dividends declared | --- | --- | (4,829 | ) | --- | (4,829 | ) | |||||||
Balance, June 30, 2008 | $ | 160,859 | $ | 379 | $ | 428,754 | $ | (62,697 | ) | $ | 527,295 |
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
Notes to Condensed Consolidated Financial Statements
(Stated in thousands except share and per share data)
(Unaudited)
Note 1
The condensed consolidated financial statements included herein have been prepared by Graybar Electric Company, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission applicable to interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that its disclosures are adequate to make the information presented not misleading. The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts. The Company’s condensed consolidated financial statements include amounts that are based on management’s b est estimates and judgments. Actual results could differ from those estimates. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.
In the opinion of the Company, this quarterly report includes all adjustments, consisting of normal recurring accruals and adjustments, necessary for the fair presentation of the financial statements presented. Such interim financial information is subject to year-end adjustments. Results for interim periods are not necessarily indicative of results to be expected for the full year.
Note 2
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. An actual valuation of inventory under the LIFO method can be made only at a year-end based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and cost and are subject to the final year-end LIFO inventory valuation.
Note 3
At June 30, 2008 and December 31, 2007, the Company had a $215,000 trade receivable securitization program that expires in October 2009. 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 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 condensed consolidated
7
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 June 30, 2008 and December 31, 2007.
Given the prevailing turmoil in the market for asset-backed securities and collateralized debt obligations, there can be no assurance that an asset-backed commercial paper facility of the type employed by the Company will be available upon the expiration of the existing trade receivable securitization program.
Note 4
The Company had two lease arrangements with an independent lessor, which provided $58,777 of financing for eight of the Company’s distribution facilities. The agreements carried five-year terms expiring July 2008 and December 2009. The Company terminated the lease agreement expiring in December 2009 on September 28, 2007 by exercising its purchase option. The independent lessor conveyed clear title to three distribution facilities to the Company in exchange for a cash payment of $30,479, which included the outstanding principal owed on the three properties totaling $30,057, unpaid interest, and other closing costs.
The financing structure used in the remaining lease arrangement qualifies as a silo of a variable interest entity and, therefore, is accounted for under Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities–an interpretation of ARB No. 51” (FIN 46), and its subsequent revision FIN 46R.
As of June 30, 2008, the consolidated silo included in the Company’s condensed financial statements had a net property balance of $17,219, long-term debt of $27,715, and a minority interest of $1,005. At December 31, 2007, the consolidated silo included in the Company’s financial statements had a net property balance of $17,203, long-term debt of $27,715, and a minority interest of $1,005.
Under the terms of the lease arrangement, the Company’s maximum exposure to loss at June 30, 2008 and December 31, 2007, in respect of the properties subject to the lease agreement, is $24,412, the amount guaranteed by the Company as the residual fair value of the property.
On July 23, 2008 the Company renewed the lease for an additional five-year term. The lease renewal was executed subsequent to the date of the Company’s condensed consolidated financial statements as of and for the six months ended June 30, 2008, but prior to their issuance. The debt associated with the lease renewal was classified as long-term debt at June 30, 2008.
Note 5
The Company had a revolving credit agreement with a group of banks at an interest rate based on the London Interbank Offered Rate (LIBOR) that consisted of an unsecured $150,000, 364-day facility that was to have expired in July 2007. Prior to expiration, the Company executed a new, unsecured LIBOR-based revolving credit agreement that consists of a $200,000 five-year facility expiring in May 2012. There were no amounts outstanding under the credit agreement at June 30, 2008 and December 31, 2007.
Note 6
The Company made contributions to its qualified defined benefit pension plan totaling $8,800 and $18,800 during the three and six month periods ended June 30, 2008, respectively.
8
Contributions made during the three and six month periods ended June 30, 2007 totaled $10,000 and $17,500, respectively. Additional contributions totaling $13,700 are expected to be paid during the remainder of 2008.
Note 7
The 1997 Voting Trust Agreement expired on March 31, 2007 and was succeeded by the 2007 Voting Trust Agreement, which expires on March 15, 2017. Approximately eighty percent (80%) and seventy-nine percent (79%) of the Company’s issued and outstanding shares of common stock was deposited with the Voting Trustees and held under the 2007 Voting Trust Agreement by their beneficial owners as of June 30, 2008 and December 31, 2007, respectively.
Note 8
Comprehensive income for the three months ended June 30, 2008 and 2007 was $31,481 and $31,848, respectively. Comprehensive income for the six months ended June 30, 2008 and 2007 was $49,902 and $44,461, respectively. Comprehensive income is comprised of net income, foreign currency translation adjustments related to the Company’s operations outside of the United States, pension and postretirement adjustments, and changes in the fair value of the Company’s interest rate swap agreement.
Note 9
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), on January 1, 2007. Under FIN 48, the Company had $6,980 of unrecognized tax benefits recorded in its balance sheet as of January 1, 2007. Of this amount, $406 was recorded as a reduction to the January 1, 2007 balance of retained earnings. The Company’s unrecognized tax benefits of $4,673 and $6,945 at June 30, 2008 and December 31, 2007, respectively, are uncertain tax positions that would impact the Company’s effective tax rate if recognized.
The Company effectively settled income tax-related issues during the first quarter of 2008 and approximately $2,600 of unrecognized tax benefits related to uncertain tax positions were recognized. This resulted in a lower effective tax rate for the six month period ending June 30, 2008, compared to the same period of 2007.
There were no tax positions for which the ultimate deductibility was highly certain, but for which there was uncertainty about the timing of such deductibility included in the balance sheet at June 30, 2008 and December 31, 2007. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages. The Company has accrued $1,267 and $2,807 in interest and penalties in its balance sheet at June 30, 2008 and December 31, 2007, respectively. Interest was computed on the difference between the provision for income taxes recognized in accordance with FIN 48 and the amount of benefit previously taken or expected to be taken in the Company’s federal, state, and local income tax returns.
The Company’s federal income tax returns for the tax years 2004 and forward are subject to examination by the United States Internal Revenue Service. The federal statute of limitations for
9
the 2004 tax year will expire on September 15, 2008. The Company’s state income tax returns for 2003 through 2006 remain subject to examination by various state authorities with the latest period closing on October 15, 2011.
Note 10
The Company and its subsidiaries are subject to various claims, disputes, administrative, and legal matters incidental to the Company’s past and current business activities. As a result, contingencies arise from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible loss.
The Company accounts for loss contingencies in accordance with the provisions of SFAS No. 5, “Accounting for Contingencies”. 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 the Company deems some amount within the range to be a better estimate than any other amount within the range, that amount shall 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 the Company believes that none of these claims, disputes, administrative, and legal matters will have a material adverse effect on its financial position, these matters are uncertain and the Company cannot at this time determine whether the financial impact, if any, of these matters will be material to its results of operations during the period in which such matters are resolved or a better estimate becomes available.
Note 11
The FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60” (SFAS 163), in May 2008. SFAS 163 is primarily directed at the insurance industry and, therefore, the Company does not expect that the adoption of SFAS 163 will have a material impact on its consolidated financial statements.
The FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), in May 2008. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). The Company does not expect that SFAS 162 will result in a change in its current practices.
The FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161), in March 2008. SFAS 161 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and requires expanded disclosures about the Company’s derivative instruments and hedging activities, but does not change the scope of SFAS 133. SFAS 161 also amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (SFAS 107), by clarifying that derivative instruments are subject to the concentration-of-credit-risk disclosures of SFAS 107. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect SFAS 161 to have a significant impact on its financial statements because of the Company’s limited use of derivati ve instruments and hedging activities.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51” (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
10
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141R). This statement revises SFAS No. 141, “Business Combinations”, and will change the accounting treatment and disclosure for certain specific items in a business combination. Under SFAS 141R, an acquiring entity will be required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, if the Company were to engage in a business combination, it will be recorded and disclosed following existing U.S. GAAP until January 1, 2009. SFAS 141R may have an impact on the accounting for business combinations, if any, the Company may consummate after SFAS 141R is adopted.
In February 2008, the FASB issued Staff Position No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1), and Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1 removes leasing transactions accounted for under SFAS No. 13, “Accounting for Leases”, from the scope of SFAS 157. FSP 157-2 delays the effective date of SFAS No. 157, “Fair Value Measurements” (SFAS 157), for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. The Company does not expect either FSP 157-1 or FSP 157-2 to have a material impact on its financial statements.
In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. The Company adopted the provisions of SFAS 157 as of January 1, 2008. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers 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 in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company is party to an interest rate swap, which is required to be measured at fair value on a recurring basis. The Company endeavors to utilize the best available information in measuring fair value. The interest rate swap is classified in its entirety based on the lowest level of input that is significant to the fair value measurement, in this case, Level 2 in the fair value hierarchy. The fair value of the Company’s financial liability relating to the interest rate swap is $3,846 as of June 30, 2008.
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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, 2007, included in our annual report on Form 10-K for such period as filed with the U.S. Securities and Exchange Commission. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements (as such term is defined in the federal securities laws) and is based on current expectations, which involve risks and uncertainties. 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 ar e outlined in Item 1A., “Risk Factors”, of our annual report on Form 10-K for the year ended December 31, 2007.
All dollar amounts are stated in thousands ($000) in the following discussion.
Overview
Graybar Electric Company, Inc. (“Graybar” or the “Company”) is a New York corporation, incorporated in 1925. The Company is engaged in the distribution of electrical, telecommunications and networking products, and the provision of related supply chain management and logistics services, primarily to construction contractors, industrial plants, telephone companies, power utilities, federal, state, and local governments, and commercial users in North America. All products sold by Graybar are purchased by the Company from others. The Company’s business activity is primarily with customers in the United States. Graybar also has subsidiary operations with distribution facilities in Canada and Puerto Rico. The Company’s capital stock is one hundred percent (100%) owned by its employees and retirees, and there is no public market for its stock.
The Company experienced moderate growth in both sales and gross margin for the six months ended June 30, 2008, compared to the same period in 2007, despite a slowing general economy in much of its North American trading area. Growth in electrical market sales was modest, as declining residential construction continued to have a negative impact on that sector. Comm/data market sales continued to grow at a solid rate as a result of the Company’s competitive performance in this sector, coupled with continued growth in the overall comm/data market. Net sales have been positively impacted by a moderate level of inflation, particularly in the market for steel- and copper-based products sold by the Company.
The Company achieved moderate growth in income from operations due to the combination of growth in gross margin and a lesser increase in operating expenses. Income from operations for the six month period ended June 30, 2008 rose 6.6% which, coupled with a 29.2% decrease in interest expense, net, and a low effective tax rate, led to a 19.4% increase in net income for the six months ended June 30, 2008.
Continued profitable, though slowing, sales growth is expected for the balance of 2008.
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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 three and six month periods ended June 30, 2008 and 2007.
Three Months Ended | Three Months Ended | |||||||||
June 30, 2008 | June 30, 2007 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Net Sales | $ | 1,420,719 | 100.0 | % | $ | 1,339,458 | 100.0 | % | ||
Cost of merchandise sold | (1,147,350 | ) | (80.8 | ) | (1,076,834 | ) | (80.4 | ) | ||
Gross Margin | 273,369 | 19.2 | 262,624 | 19.6 | ||||||
Selling, general and administrative expenses | (213,131 | ) | (15.0 | ) | (202,716 | ) | (15.1 | ) | ||
Depreciation and amortization | (9,645 | ) | (0.7 | ) | (8,873 | ) | (0.7 | ) | ||
Other income, net | 320 | 0.1 | 539 | 0.1 | ||||||
Income from Operations | 50,913 | 3.6 | 51,574 | 3.9 | ||||||
Interest expense, net | (3,088 | ) | (0.2 | ) | (4,460 | ) | (0.3 | ) | ||
Income before Provision for Income Taxes | 47,825 | 3.4 | 47,114 | 3.6 | ||||||
Provision for income taxes | (19,409 | ) | (1.4 | ) | (19,385 | ) | (1.5 | ) | ||
Net Income | $ | 28,416 | 2.0 | % | $ | 27,729 | 2.1 | % | ||
Six Months Ended | Six Months Ended | |||||||||
June 30, 2008 | June 30, 2007 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Net Sales | $ | 2,703,393 | 100.0 | % | $ | 2,563,016 | 100.0 | % | ||
Cost of merchandise sold | (2,179,006 | ) | (80.6 | ) | (2,061,208 | ) | (80.4 | ) | ||
Gross Margin | 524,387 | 19.4 | 501,808 | 19.6 | ||||||
Selling, general and administrative expenses | (424,999 | ) | (15.8 | ) | (410,515 | ) | (16.0 | ) | ||
Depreciation and amortization | (18,888 | ) | (0.7 | ) | (17,569 | ) | (0.7 | ) | ||
Other income, net | 931 | 0.1 | 2,692 | 0.1 | ||||||
Income from Operations | 81,431 | 3.0 | 76,416 | 3.0 | ||||||
Interest expense, net | (6,485 | ) | (0.2 | ) | (9,158 | ) | (0.4 | ) | ||
Income before Provision for Income Taxes | 74,946 | 2.8 | 67,258 | 2.6 | ||||||
Provision for income taxes | (27,580 | ) | (1.0 | ) | (27,589 | ) | (1.1 | ) | ||
Net Income | $ | 47,366 | 1.8 | % | $ | 39,669 | 1.5 | % |
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Net sales totaled $1,420,719 for the three months ended June 30, 2008, compared to $1,339,458 for the three months ended June 30, 2007, an increase of $81,261, or 6.1% . Increases in net sales were recorded in both of the primary market sectors in which the Company operates. Net sales to the electrical market for the three months ended June 30, 2008 increased 4.7%, while net sales to the comm/data market rose 7.4% for the three months ended June 30, 2008, compared to the same period in 2007. Net sales growth was aided by price inflation in the markets for steel- and copper-based products sold by the Company during the three months ended June 30, 2008.
Gross margin increased $10,745, or 4.1%, to $273,369 from $262,624, partly due to higher net sales volume in the second quarter of 2008, compared to the same period in 2007. The Company’s gross margin rate on net sales decreased to 19.2% during the three months ended June 30, 2008, down from 19.6% for the same three month period in 2007, primarily due to the Company’s reduced ability to pass product cost increases through to its customers in the form of higher prices.
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Selling, general and administrative expenses increased $10,415, or 5.1%, to $213,131, in the second quarter of 2008 from $202,716 in the second quarter of 2007, mainly due to increased compensation costs resulting from a moderate increase in total salary expense and higher employee benefit expenses. Selling, general and administrative expenses as a percentage of net sales were 15.0% in the second quarter of 2008, down from 15.1% in the second quarter of 2007.
Depreciation and amortization expenses for the three months ended June 30, 2008 increased $772, or 8.7%, to $9,645 from $8,873 in the second quarter of 2007, primarily due to recent investments in information technology assets. Depreciation and amortization expenses as a percentage of net sales remained at 0.7% for the three months ended June 30, 2008, compared to the same period of 2007.
Other income, net totaled $320 for the three months ended June 30, 2008, compared to $539 for the three months ended June 30, 2007. Other income, net consists primarily of gains (losses) on the disposal of property, asset impairment charges primarily related 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 $(119) for the three months ended June 30, 2008 compared to net losses on the disposal of property of $(187) and a property impairment loss of $(422) for the three months ended June 30, 2007.
Income from operations totaled $50,913 for the three months ended June 30, 2008, a decrease of $661, or 1.3%, from $51,574 for the three months ended June 30, 2007. The decrease was due to increases in selling, general and administrative expenses, higher depreciation and amortization expenses, and lower other income, net, partially offset by higher gross margin.
Interest expense, net declined $1,372, or 30.8%, to $3,088 for the three months ended June 30, 2008 from $4,460 for the three months ended June 30, 2007. This reduction was mainly due to a lower level of outstanding long-term debt in the second quarter of 2008, compared to the same period of 2007.
Income before provision for income taxes was $47,825 for the three months ended June 30, 2008, an increase of $711, or 1.5%, compared to $47,114 for the three months ended June 30, 2007. This was attributable to 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.
The Company’s total provision for income taxes was $19,409 for the three months ended June 30, 2008, roughly flat compared to the $19,385 recognized during the same three month period of 2007. The Company’s effective tax rate decreased to 40.6% for the three months ended June 30, 2008, down from 41.1% for the same period in 2007. The 2008 and 2007 effective tax rates were higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.
Net income for the three months ended June 30, 2008 increased $687, or 2.5%, to $28,416 from $27,729 for the three months ended June 30, 2007.
Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
Net sales totaled $2,703,393 for the six months ended June 30, 2008, compared to $2,563,016 for the six months ended June 30, 2007, an increase of $140,377, or 5.5% . 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 3.8% and net sales to the comm/data market rose 7.7% for the six months ended June 30, 2008, compared to the same period in 2007. Net sales have been
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positively impacted by a moderate level of inflation, particularly in the market for steel- and copper-based products sold by the Company during the six months ended June 30, 2008.
Gross margin increased $22,579, or 4.5%, to $524,387 from $501,808, partly due to the higher net sales volume recorded during the six months ended June 30, 2008, compared to the same period in 2007. The Company’s gross margin rate on net sales decreased to 19.4% during the six months ended June 30, 2008, down from 19.6% for the same six month period in 2007, largely due to increased pricing pressures, particularly during the second quarter of 2008.
Selling, general and administrative expenses increased $14,484, or 3.5%, to $424,999, for the six months ended June 30, 2008, compared to $410,515 for the six months ended June 30, 2007, mainly due to increased compensation costs resulting from a moderate increase in total salary expense and higher employee benefit expenses. Selling, general and administrative expenses as a percentage of net sales for the six months ended June 30, 2008 were 15.8%, down from 16.0% for the six months ended June 30, 2007.
Depreciation and amortization expenses for the six months ended June 30, 2008 increased $1,319, or 7.5%, to $18,888 from $17,569 for the same six months 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 six months ended June 30, 2008, compared to the same period of 2007.
Other income, net totaled $931 for the six months ended June 30, 2008, compared to $2,692 for the six months ended June 30, 2007. Other income, net consists primarily of gains on the disposal of property, asset impairment charges primarily related to assets held for sale, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities. Gains on the disposal of property were $42 and $737 for the six months ended June 30, 2008 and 2007, respectively. Other income, net for the six months ended June 30, 2007 included a property impairment loss of $(422) on assets that have since been disposed.
Income from operations totaled $81,431 for the six months ended June 30, 2008, an increase of $5,015, or 6.6%, from $76,416 for the six months ended June 30, 2007. The increase was due to higher gross margin, partially offset by a lesser increase in selling, general and administrative expenses, higher depreciation and amortization expenses, and lower other income, net.
Interest expense, net declined $2,673, or 29.2%, to $6,485 for the six months ended June 30, 2008 from $9,158 for the six months ended June 30, 2007. This reduction was mainly due to a lower level of outstanding long-term debt in 2008, compared to the same period of 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 $74,946 for the six months ended June 30, 2008, an increase of $7,688, or 11.4%, compared to $67,258 for the six months ended June 30, 2007.
The Company’s total provision for income taxes decreased $9, or 0.1%, for the six months ended June 30, 2008, compared to the same period in 2007, as a result of a lower effective tax rate. The Company’s effective tax rate decreased to 36.8% for the six months ended June 30, 2008, down from 41.0% for the same period in 2007. This decrease was primarily due to a reduction in unrecognized tax benefits, interest, and penalties, which had a favorable impact on income tax expense. The effective tax rates for the six month periods ended June 30, 2008 and
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2007, were higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.
Net income for the six months ended June 30, 2008 increased $7,697, or 19.4%, to $47,366 from $39,669 for the six months ended June 30, 2007.
Financial Condition and Liquidity
The Company has historically funded its capital requirements using cash flows provided by operations, stock issuances to its employees, and long-term debt.
Operating Activities
Cash flows provided by operations were $12,225 for the six months ended June 30, 2008, compared to $40,094 for the six months ended June 30, 2007. Positive cash flows from operations for the six months ended June 30, 2008 were primarily due to net income of $47,366, and increases in trade accounts payable of $59,405 and other current liabilities totaling $11,203, partially offset by an increase in trade receivables of $59,116, an $8,039 increase in merchandise inventory, and a $52,097 decrease in accrued payroll and benefit costs.
The average number of days of sales in trade receivables at June 30, 2008 decreased modestly from the average number of days at June 30, 2007. Merchandise inventory levels were slightly higher at June 30, 2008 when compared to December 31, 2007 to support the growth in net sales. Average inventory turnover increased moderately during the six months ended June 30, 2008, compared to the same period of 2007.
Current assets exceeded current liabilities by $460,397 at June 30, 2008, an increase of $66,106, or 16.8%, from $394,291 at December 31, 2007.
Investing Activities
Capital expenditures for property were $15,734 and $10,648, and proceeds from the disposal of property were $352 and $1,556, for the six months ended June 30, 2008 and 2007, respectively. The proceeds received resulted primarily from the sale of personal property for the six month period ended June 30, 2008 and sale of real property for the six month period ended June 30, 2007.
Financing Activities
Cash flows used by financing activities totaled $18,760 for the six months ended June 30, 2008, compared to $10,698 for the six months ended June 30, 2007.
The Company reduced long-term debt by $10,619 and capital lease obligations by $222 for the six months ended June 30, 2008. During the six months ended June 30, 2007, the excess of cash provided by operations over investing activities and a modest increase in short-term borrowing enabled the Company to reduce long-term debt by $10,665, and capital lease obligations by $208.
Cash provided by the sale of common stock amounted to $7,170 and $6,742, and purchases of treasury stock were $4,565 and $2,649 for the six months ended June 30, 2008 and 2007, respectively. Cash dividends paid were $12,156 and $10,461 for the six months ended June 30, 2008 and 2007, respectively.
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Liquidity
The Company had a revolving credit agreement with a group of banks at an interest rate based on the London Interbank Offered Rate (LIBOR) that consisted of an unsecured $150,000, 364-day facility that was to have expired in July 2007. Prior to expiration, the Company executed a new, unsecured LIBOR-based revolving credit agreement that consists of a $200,000 five-year facility expiring in May 2012. There were no amounts outstanding under the credit agreement at June 30, 2008 and December 31, 2007.
At June 30, 2008 and December 31, 2007, the Company had a $215,000 trade receivable securitization program that expires in October 2009. 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 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 condensed 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 June 30, 2008 and December 31, 2007.
Given the prevailing turmoil in the market for asset-backed securities and collateralized debt obligations, there can be no assurance that an asset-backed commercial paper facility of the type employed by the Company will be available upon the expiration of the existing trade receivable securitization program.
At June 30, 2008, the Company had available to it unused lines of credit amounting to $433,767, compared to $436,575 at December 31, 2007. 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 50 basis points (0.5%) of the committed lines of credit.
Short-term borrowings outstanding during the six months ended June 30, 2008 and 2007 ranged from a minimum of $15,240 and $12,994 to a maximum of $70,028 and $48,193, 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 June 30, 2008 and December 31, 2007.
The Company had two lease arrangements with an independent lessor, which provided $58,777 of financing for eight of the Company’s distribution facilities. The agreements carried five-year terms expiring July 2008 and December 2009. The Company terminated the lease arrangement expiring in December 2009 on September 28, 2007 by exercising its purchase
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option. The independent lessor conveyed clear title to three distribution facilities to the Company in exchange for a cash payment of $30,479, which included the outstanding principal owed on the three properties totaling $30,057, unpaid interest, and other closing costs.
The financing structure used in the remaining lease arrangement qualifies as a silo of a variable interest entity and, therefore, is accounted for under Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51” (FIN 46), and its subsequent revision FIN 46R.
As of June 30, 2008, the consolidated silo included in the Company’s condensed financial statements had a net property balance of $17,219, long-term debt of $27,715, and a minority interest of $1,005. At December 31, 2007, the consolidated silo included in the Company’s financial statements had a net property balance of $17,203, long-term debt of $27,715, and a minority interest of $1,005.
Under the terms of the lease arrangement, the Company’s maximum exposure to loss at June 30, 2008 and December 31, 2007, in respect of the properties subject to the lease arrangement, is $24,412, the amount guaranteed by the Company as the residual fair value of the property.
On July 23, 2008 the Company renewed the lease for an additional five-year term. The lease renewal was executed subsequent to date of the Company’s condensed consolidated financial statements as of and for the six months ended June 30, 2008, but prior to their issuance. The debt associated with the lease renewal was classified as long-term debt at June 30, 2008.
New Accounting Pronouncements
The FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts –an interpretation of FASB Statement No. 60” (SFAS 163), in May 2008. SFAS 163 is primarily directed at the insurance industry and, therefore, the Company does not expect that the adoption of SFAS 163 will have a material impact on its consolidated financial statements.
The FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), in May 2008. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Company does not expect that SFAS 162 will result in a change in its current practices.
The FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161), in March 2008. SFAS 161 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and requires expanded disclosures about the Company’s derivative instruments and hedging activities, but does not change the scope of SFAS 133. SFAS 161 also amends SFAS No.107, “Disclosures about Fair Value of Financial Instruments” (SFAS 107), by clarifying that derivative instruments are subject to the concentration-of-credit-risk disclosures of SFAS 107. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect SFAS 161 to have a significant impact on its financial statements because of the Company’s limited use of derivativ e instruments and hedging activities.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51” (SFAS 160). SFAS 160 establishes new
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accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141R). This statement revises SFAS No. 141, “Business Combinations”, and will change the accounting treatment and disclosure for certain specific items in a business combination. Under SFAS 141R, an acquiring entity will be required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, if the Company were to engage in a business combination, it will be recorded and disclosed following existing U.S. generally accepted accounting principles (U.S. GAAP) until January 1, 2009. SFAS 141R may have an impact on the accounting for business combinations, if any, the Company may consummate after SFAS 141R is adopted.
In February 2008, the FASB issued Staff Position No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1), and Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1 removes leasing transactions accounted for under SFAS No. 13, “Accounting for Leases”, from the scope of SFAS 157. FSP 157-2 delays the effective date of SFAS No. 157, “Fair Value Measurements” (SFAS 157), for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. The Company does not expect either FSP 157-1 or FSP 157-2 to have a material impact on its financial statements.
In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. The Company adopted the provisions of SFAS 157 as of January 1, 2008. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers 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 in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company is party to an interest rate swap, which is required to be measured at fair value on a recurring basis. The Company endeavors to utilize the best available information in measuring fair value. The interest rate swap is classified in its entirety based on the lowest level of input that is significant to the fair value measurement, in this case, Level 2 in the fair value hierarchy. The fair value of the Company’s financial liability relating to the interest rate swap is $3,846 as of June 30, 2008.
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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 the Company’s annual report on Form 10-K for the year ended December 31, 2007.
Item 4T. Controls and Procedures
(a) | Evaluation of disclosure controls and procedures |
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2008, was performed under the supervision and with the participation of the Company’s management. Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed or submitted by the Company 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 the Company’s internal control over financial reporting that occurred during the period covered by this report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. | |
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PART II. – OTHER INFORMATION
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds
The Company’s capital stock is one hundred percent (100%) owned by its employees and retirees, and there is no public market for its stock. 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 ceases to be an employee of the Company for any cause other than retirement on a Company pension. All outstanding shares of the Company have been issued at $20.00 per share. The Company has always exercised its repurchase option and expects to continue to do so.
The following table sets forth information regarding purchases of common stock by the Company pursuant to the foregoing provisions:
Issuer Purchases of Equity Securities | |||
Average | Total Number of Shares | ||
Total Number of | Price Paid | Purchased as Part of Publicly | |
Period | Shares Purchased | per Share | Announced Plans or Programs |
April 1 to April 30, 2008 | 61,642 | $20.00 | N/A |
May 1 to May 31, 2008 | 36,848 | $20.00 | N/A |
June 1 to June 30, 2008 | 25,471 | $20.00 | N/A |
Total | 123,961 | $20.00 | N/A |
Item 4. Submission of Matters to a Vote of Security Holders
(a) | The annual meeting of shareholders of Graybar Electric Company, Inc. was held June 12, 2008 in St. Louis. |
(b) | All of the nominees named in the Information Statement filed with the Commission and mailed to shareholders in accordance with the provisions of Regulation 14-C were elected. The names of the nominees elected follow; all received 6,429,184 votes, no negative votes were cast. |
1 | . | R. A. Cole | 8 | . | R. C. Lyons | |
2 | . | D. B. D’Alessandro | 9 | . | K. M. Mazzarella | |
3 | . | D. E. DeSousa | 10 | . | R. L. Nowak | |
4 | . | T. F. Dowd | 11 | . | R. D. Offenbacher | |
5 | . | L. R. Giglio | 12 | . | R. A. Reynolds, Jr. | |
6 | . | T. S. Gurganous | 13 | . | K. B. Sparks | |
7 | . | F. H. Hughes |
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Item 6. Exhibits
(a) | Exhibits furnished in accordance with provisions of Item 601 of Regulation S-K. | ||
(3) | Articles of Incorporation and Bylaws | ||
3.1 | Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 4(i) to the Company’s Registration Statement on Form S-1 (Registration No. 333-15761)) | ||
3.2 | Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 4(ii) to the Company’s Registration Statement on Form S-2 (Registration No. 133-118575)) | ||
3.3 | Bylaws as amended through June 14, 2007 (incorporated by reference to Exhibit 9.01(d)(3)(ii) to the Company’s Current Report on Form 8-K dated June 14, 2007 (Commission File No. 0-255)) | ||
(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 | ||
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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.
August 7, 2008 | GRAYBAR ELECTRIC COMPANY, INC. | |
Date | ||
/s/ R. A. REYNOLDS, JR. | ||
R. A. Reynolds, Jr. | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ D. B. D’ALESSANDRO | ||
D. B. D’Alessandro | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
/s/ MARTIN J. BEAGEN | ||
Martin J. Beagen | ||
Vice President and Controller | ||
(Principal Accounting Officer) |
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EXHIBIT INDEX
3.1 | – | Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 4(i) to the Company’s Registration Statement on Form S-1 (Registration No. 333-15761)) |
3.2 | – | Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 4(ii) to the Company’s Registration Statement on Form S-2 (Registration No. 333-118575)) |
3.3 | – | Bylaws as amended through June 14, 2007 (incorporated by reference to Exhibit 9.01(d)(3)(ii) to the Company’s Current Report on Form 8-K dated June 14, 2007 (Commission File No. 0-255)) |
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 |
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