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 ACTOF 1934 | ||||
For the quarterly period ended: | September 30, 2008 | ||||
OR | |||||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 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) ofthe Securities Exchange Act of 1934 | |||
during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filing requirements | |||
for the past 90 days. | |||
YESx | NO¨ | ||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler 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¨ | NOx |
Common Stock Outstanding at October 31, 2008: | 8,010,399 | |
(Number of | ||
Shares) |
Graybar Electric Company, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended September 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 | 12-20 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 | |
Item 4T. | Controls and Procedures | 21 | |
PART II. | OTHER INFORMATION | ||
Item 1A. | Risk Factors | 22 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22-23 | |
Item 6. | Exhibits | 24 | |
Signatures | 25 | ||
Exhibit Index | 26 | ||
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 |
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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)
September 30, | December 31, | ||||||||||
2008 | 2007 | ||||||||||
ASSETS | |||||||||||
Current Assets | |||||||||||
Cash and cash equivalents | $ | 38,410 | $ | 66,167 | |||||||
Trade receivables (less allowances of $7,664 and $8,248, respectively) | 790,625 | 702,869 | |||||||||
Merchandise inventory | 420,213 | 397,076 | |||||||||
Other current assets | 23,224 | 20,135 | |||||||||
Total Current Assets | 1,272,472 | 1,186,247 | |||||||||
Property, at cost | |||||||||||
Land | 42,553 | 42,633 | |||||||||
Buildings | 321,018 | 310,120 | |||||||||
Furniture and fixtures | 168,491 | 162,445 | |||||||||
Software | 76,906 | 76,906 | |||||||||
Capital Leases | 2,413 | 2,413 | |||||||||
Total Property, at cost | 611,381 | 594,517 | |||||||||
Less – accumulated depreciation and amortization | (307,880 | ) | (286,549 | ) | |||||||
Net Property | 303,501 | 307,968 | |||||||||
Other Non-current Assets | 34,274 | 37,813 | |||||||||
Total Assets | $ | 1,610,247 | $ | 1,532,028 | |||||||
LIABILITIES | |||||||||||
Current Liabilities | |||||||||||
Short-term borrowings | $ | 24,506 | $ | 19,201 | |||||||
Current portion of long-term debt | 32,333 | 60,061 | |||||||||
Trade accounts payable | 591,328 | 515,035 | |||||||||
Accrued payroll and benefit costs | 82,213 | 117,283 | |||||||||
Other accrued taxes | 14,729 | 12,766 | |||||||||
Dividends payable | --- | 7,327 | |||||||||
Other current liabilities | 62,177 | 60,283 | |||||||||
Total Current Liabilities | 807,286 | 791,956 | |||||||||
Postretirement Benefits Liability | 75,202 | 75,436 | |||||||||
Pension Liability | 51,918 | 52,938 | |||||||||
Long-term Debt | 117,629 | 115,419 | |||||||||
Other Non-current Liabilities | 13,170 | 16,662 | |||||||||
Total Liabilities | 1,065,205 | 1,052,411 | |||||||||
SHAREHOLDERS’ EQUITY | |||||||||||
Shares at | |||||||||||
September 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 | 6,701,103 | 6,313,724 | |||||||||
Issued to shareholders | 1,706,679 | 1,652,392 | |||||||||
In treasury, at cost | (364,139 | ) | (34,481 | ) | |||||||
Outstanding Common Stock | 8,043,643 | 7,931,635 | 160,873 | 158,633 | |||||||
Advance Payments on Subscriptions to Common Stock | 706 | --- | |||||||||
Retained Earnings | 445,908 | 386,217 | |||||||||
Accumulated Other Comprehensive Loss | (62,445 | ) | (65,233 | ) | |||||||
Total Shareholders’ Equity | 545,042 | 479,617 | |||||||||
Total Liabilities and Shareholders’ Equity | $ | 1,610,247 | $ | 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 | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Gross Sales | $ | 1,455,639 | $ | 1,370,173 | $ | 4,169,941 | $ | 3,942,935 | ||||
Cash discounts | (5,996 | ) | (5,507 | ) | (16,905 | ) | (15,253 | ) | ||||
Net Sales | 1,449,643 | 1,364,666 | 4,153,036 | 3,927,682 | ||||||||
Cost of merchandise sold | (1,187,325 | ) | (1,101,715 | ) | (3,366,331 | ) | (3,162,923 | ) | ||||
Gross Margin | 262,318 | 262,951 | 786,705 | 764,759 | ||||||||
Selling, general and administrative expenses | (217,988 | ) | (205,396 | ) | (642,987 | ) | (615,911 | ) | ||||
Depreciation and amortization | (9,587 | ) | (8,831 | ) | (28,475 | ) | (26,400 | ) | ||||
Other income (loss), net | 739 | (305 | ) | 1,670 | 2,387 | |||||||
Income from Operations | 35,482 | 48,419 | 116,913 | 124,835 | ||||||||
Interest expense, net | (3,150 | ) | (4,331 | ) | (9,635 | ) | (13,489 | ) | ||||
Income before Provision for Income Taxes | 32,332 | 44,088 | 107,278 | 111,346 | ||||||||
Provision for income taxes: | ||||||||||||
Current | (14,911 | ) | (5,074 | ) | (44,934 | ) | (34,755 | ) | ||||
Deferred | 2,150 | (12,458 | ) | 4,593 | (10,366 | ) | ||||||
Total provision for income taxes | (12,761 | ) | (17,532 | ) | (40,341 | ) | (45,121 | ) | ||||
Net Income | $ | 19,571 | $ | 26,556 | $ | 66,937 | $ | 66,225 | ||||
Net Income per Share of Common Stock (A) | $ | 2.44 | $ | 3.36 | $ | 8.36 | $ | 8.40 | ||||
Cash Dividends per Share of Common | ||||||||||||
Stock (B) | $ | 0.30 | $ | 0.30 | $ | 0.90 | $ | 0.90 | ||||
Average Common Shares Outstanding (A) | 8,011 | 7,904 | 8,010 | 7,880 |
(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 6,587 and 6,567 for the three and nine month periods endedSeptember 30, 2007. | |
(B) | Cash dividends declared were $2,417 and $1,983 for the three months ended September 30, 2008 and 2007,respectively. Cash dividends declared |
were $7,246 and $5,949 for the nine months ended September 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 Nine Months Ended September 30, | 2008 | 2007 | ||||
Cash Flows from Operations | ||||||
Net Income | $ | 66,937 | $ | 66,225 | ||
Adjustments to reconcile net income to cash provided by operations: | ||||||
Depreciation and amortization | 28,475 | 26,400 | ||||
Deferred income taxes | (4,593 | ) | 10,366 | |||
Net gains on disposal of property | (25 | ) | (1,025 | ) | ||
Loss on impairment of property | --- | 1,727 | ||||
Changes in assets and liabilities: | ||||||
Trade receivables | (87,756 | ) | (35,473 | ) | ||
Merchandise inventory | (23,137 | ) | (22,210 | ) | ||
Other current assets | (3,089 | ) | 7,561 | |||
Other non-current assets | 3,539 | (34,797 | ) | |||
Trade accounts payable | 76,293 | 73,768 | ||||
Accrued payroll and benefit costs | (35,070 | ) | (38,332 | ) | ||
Other current liabilities | 12,087 | (2,843 | ) | |||
Other non-current liabilities | (4,746 | ) | 8,517 | |||
Total adjustments to net income | (38,022 | ) | (6,341 | ) | ||
Net cash flow provided by operations | 28,915 | 59,884 | ||||
Cash Flows from Investing Activities | ||||||
Proceeds from disposal of property | 327 | 7,869 | ||||
Capital expenditures for property | (25,368 | ) | (18,974 | ) | ||
Net cash flow used by investing activities | (25,041 | ) | (11,105 | ) | ||
Cash Flows from Financing Activities | ||||||
Net increase in short-term borrowings | 5,305 | 28,147 | ||||
Repayment of long-term debt | (24,974 | ) | (54,035 | ) | ||
Principal payments under capital leases | (335 | ) | (314 | ) | ||
Sale of common stock | 9,539 | 8,759 | ||||
Purchases of treasury stock | (6,593 | ) | (4,783 | ) | ||
Dividends paid | (14,573 | ) | (12,443 | ) | ||
Net cash flow used by financing activities | (31,631 | ) | (34,669 | ) | ||
Net (Decrease) Increase in Cash | (27,757 | ) | 14,110 | |||
Cash, Beginning of Year | 66,167 | 52,210 | ||||
Cash, End of Period | $ | 38,410 | $ | 66,320 |
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 Nine Months Ended September 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 | --- | --- | 66,225 | --- | 66,225 | |||||||||
Foreign currency translation | --- | --- | --- | 6,031 | 6,031 | |||||||||
Unrealized gain from interest | ||||||||||||||
rate swap (net of $4 tax) | --- | --- | --- | 6 | 6 | |||||||||
Comprehensive income | 72,262 | |||||||||||||
Stock issued | 8,146 | --- | --- | --- | 8,146 | |||||||||
Stock repurchased | (4,783 | ) | --- | --- | --- | (4,783 | ) | |||||||
Advance payments | --- | 613 | --- | --- | 613 | |||||||||
Dividends declared | --- | --- | (5,949 | ) | --- | (5,949 | ) | |||||||
Balance, September 30, 2007 | $ | 132,143 | $ | 613 | $ | 402,748 | $ | (22,898 | ) | $ | 512,606 | |||
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 | 66,937 | 66,937 | ||||||||||||
Foreign currency translation | --- | --- | --- | (2,202 | ) | (2,202 | ) | |||||||
Unrealized gain from interest | ||||||||||||||
rate swap (net of $36 tax) | --- | --- | --- | 57 | 57 | |||||||||
Prior service gain | ||||||||||||||
(net of $(349) tax) | --- | --- | --- | (548 | ) | (548 | ) | |||||||
Actuarial loss | ||||||||||||||
(net of $3,490 tax) | --- | --- | --- | 5,481 | 5,481 | |||||||||
Comprehensive income | 69,725 | |||||||||||||
Stock issued | 8,833 | --- | --- | --- | 8,833 | |||||||||
Stock repurchased | (6,593 | ) | --- | --- | --- | (6,593 | ) | |||||||
Advance payments | --- | 706 | --- | --- | 706 | |||||||||
Dividends declared | --- | --- | (7,246 | ) | --- | (7,246 | ) | |||||||
Balance, September 30, 2008 | $ | 160,873 | $ | 706 | $ | 445,908 | $ | (62,445 | ) | $ | 545,042 |
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 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 September 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
7
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 September 30, 2008 and December 31, 2007.
Note 4
The Company had two lease agreements 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.
On July 23, 2008, the Company renewed the remaining lease arrangement for an additional five-year term and reclassified the debt associated with the lease from current portion of long-term debt to long-term debt. The financing structure used with this lease 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 September 30, 2008, the consolidated silo included in the Company’s condensed financial statements had a net property balance of $17,046, 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 renewal agreement, the amount guaranteed by the Company as the residual fair value of the property subject to the lease arrangement was $28,720 at September 30, 2008, an increase from $24,412 at December 31, 2007.
Note 5
The Company has a revolving credit agreement with a group of thirteen banks at an interest rate based on the London Interbank Offered Rate (LIBOR) that consists of an unsecured $200,000 five-year facility expiring in May 2012. There were no amounts outstanding under the credit agreement at September 30, 2008 and December 31, 2007.
Note 6
The Company made contributions to its qualified defined benefit pension plan totaling $6,200 and $25,000 during the three and nine month periods ended September 30, 2008, respectively. Contributions made during the three and nine month periods ended September 30, 2007 totaled $38,000 and $55,500, respectively. Additional contributions totaling $17,500 are expected to be paid in the fourth quarter of 2008.
Note 7
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
8
(“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.
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 September 30, 2008 and December 31, 2007, respectively.
Note 8
Comprehensive income for the three months ended September 30, 2008 and 2007 was $19,823 and $27,801, respectively. Comprehensive income for the nine months ended September 30, 2008 and 2007 was $69,725 and $72,262, respectively. Comprehensive income is comprised of net income, foreign currency translation adjustments related to the Company’s operations outside of the United States, amortization of gains and losses related to the Company’s pension and postretirement liabilities, 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 $4,505 and $6,945 at September 30, 2008 and December 31, 2007, respectively, are uncertain tax positions that would impact the Company’s effective tax rate if recognized.
The Company 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 nine month period ended September 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 September 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. It would, however, 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 $1,256 and $2,807 in interest and penalties in its balance sheet at September 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.
9
The Company’s federal income tax returns for the tax years 2005 and forward are subject to examination by the United States Internal Revenue Service. The federal statute of limitations for the 2005 tax year will expire on September 15, 2009. The Company’s state income tax returns for 2003 through 2007 remain subject to examination by various state authorities with the latest period closing on October 15, 2012. In October 2008, the Company received notice that its 2007 federal income tax return will be subject to an examination by the Internal Revenue Service. Such examination is scheduled to commence in December 2008.
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 FASB Statement of Financial Accounting Standards (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 a t 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
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under accounting pronouncements that require or permit fair value measurements, but the standard does not require any new fair value measurements. In February 2008, the FASB amended SFAS 157 to exclude leasing transactions and to delay the effective date by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted the provisions of SFAS 157 as of January 1, 2008. In October 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3), which clar ifies the application of SFAS 157 in an inactive market and demonstrates how the fair value of a financial asset is determined when the market for that asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of FSP 157-3 did not have a material impact on the Company’s results of operations or financial position since the Company does not have any financial assets, the fair value of which was impacted by inactive markets.
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
10
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 $3,979 as of September 30, 2008.
Note 12
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 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.
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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 (“SEC”). 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, 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”, “project”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and similar expressions. The Company intends such forward-looking statements to be cov ered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse impact on the Company’s operations and future prospects on a consolidated basis include, but are not limited to: disruptions in our sources of supply, industry consolidation, changes in general economic conditions, a sustained interruption in the operation of our information systems, adverse legal proceedings or other claims, and the inability to raise debt or equity capital. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be p laced on such statements. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially impact our financial results, is included herein and in our other filings with the SEC. Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of our annual report on Form 10-K for the year ended December 31, 2007, as well as Part II, Item 1A., “Risk Factors”, included herein.
All dollar amounts are stated in thousands ($000) in the following discussion.
Background
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.
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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.
Overview
The Company experienced moderate growth in sales for the nine months ended September 30, 2008, compared to the same period in 2007 despite the general slowing of the economy in much of its North American trading area. Growth in electrical market sales was moderate, but declines in residential electrical construction continued to have a modest negative impact on overall electrical market sales. 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 markets for steel- and copper-based products sold by the Company.
Income from operations declined moderately due to a modest increase in gross margin, which was more than offset by increases in operating expenses. Income from operations for the nine month period ended September 30, 2008 declined 6.3%, but was offset by a 28.6% decrease in interest expense, net and a lower effective tax rate, resulting in a 1.1% increase in net income for the nine months ended September 30, 2008, compared to the same period in 2007.
The Company expects general economic conditions to deteriorate during the coming months as an already slowing economy absorbs the impact of the much-publicized turmoil in global credit and financial markets. The reduced availability of credit to finance capital projects undertaken or constructed by our customers may slow the Company’s organic revenue growth in the near term. In addition, price deflation in the market for copper-based products, particularly wire and cable, could further dampen the Company’s outlook for revenue and gross margin growth.
The Company believes, however, that its low debt level and attention to working capital management, combined with expectations for continued positive income from operations, position it well to weather the anticipated economic downturn.
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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 nine month periods ended September 30, 2008 and 2007.
Three Months Ended | Three Months Ended | |||||||||
September 30, 2008 | September 30, 2007 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Net Sales | $ | 1,449,643 | 100.0 | % | $ | 1,364,666 | 100.0 | % | ||
Cost of merchandise sold | (1,187,325 | ) | (81.9 | ) | (1,101,715 | ) | (80.7 | ) | ||
Gross Margin | 262,318 | 18.1 | 262,951 | 19.3 | ||||||
Selling, general and administrative expenses | (217,988 | ) | (15.1 | ) | (205,396 | ) | (15.1 | ) | ||
Depreciation and amortization | (9,587 | ) | (0.7 | ) | (8,831 | ) | (0.6 | ) | ||
Other income (loss), net | 739 | 0.1 | (305 | ) | (0.1 | ) | ||||
Income from Operations | 35,482 | 2.4 | 48,419 | 3.5 | ||||||
Interest expense, net | (3,150 | ) | (0.2 | ) | (4,331 | ) | (0.3 | ) | ||
Income before Provision for Income Taxes | 32,332 | 2.2 | 44,088 | 3.2 | ||||||
Provision for income taxes | (12,761 | ) | (0.9 | ) | (17,532 | ) | (1.3 | ) | ||
Net Income | $ | 19,571 | 1.3 | % | $ | 26,556 | 1.9 | % | ||
Nine Months Ended | Nine Months Ended | |||||||||
September 30, 2008 | September 30, 2007 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Net Sales | $ | 4,153,036 | 100.0 | % | $ | 3,927,682 | 100.0 | % | ||
Cost of merchandise sold | (3,366,331 | ) | (81.1 | ) | (3,162,923 | ) | (80.5 | ) | ||
Gross Margin | 786,705 | 18.9 | 764,759 | 19.5 | ||||||
Selling, general and administrative expenses | (642,987 | ) | (15.5 | ) | (615,911 | ) | (15.7 | ) | ||
Depreciation and amortization | (28,475 | ) | (0.7 | ) | (26,400 | ) | (0.7 | ) | ||
Other income, net | 1,670 | 0.1 | 2,387 | 0.1 | ||||||
Income from Operations | 116,913 | 2.8 | 124,835 | 3.2 | ||||||
Interest expense, net | (9,635 | ) | (0.2 | ) | (13,489 | ) | (0.4 | ) | ||
Income before Provision for Income Taxes | 107,278 | 2.6 | 111,346 | 2.8 | ||||||
Provision for income taxes | (40,341 | ) | (1.0 | ) | (45,121 | ) | (1.1 | ) | ||
Net Income | $ | 66,937 | 1.6 | % | $ | 66,225 | 1.7 | % |
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
Net sales totaled $1,449,643 for the three months ended September 30, 2008, compared to $1,364,666 for the three months ended September 30, 2007, an increase of $84,977, or 6.2% . 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 September 30, 2008 increased 7.0%, while net sales to the comm/data market rose 3.7% for the three months ended September 30, 2008, compared to the same period in 2007.
Gross margin decreased $633, or 0.2%, to $262,318 in the third quarter of 2008 from $262,951 during the same period of 2007, as higher net sales were recorded at a lower gross margin rate. The Company’s gross margin rate on net sales decreased to 18.1% during the three months ended September 30, 2008, down from 19.3% for the same three month period in 2007, mainly due to increased price competition and markdowns on inventory, primarily copper wire and cable.
Selling, general and administrative expenses increased $12,592, or 6.1%, to $217,988, in the third quarter of 2008 from $205,396 in the third quarter of 2007, mainly due to increased compensation costs resulting from a moderate increase in total salary expense and higher
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employee benefit expenses. Selling, general and administrative expenses as a percentage of net sales in the third quarter of 2008 were 15.1%, unchanged from the third quarter of 2007.
Depreciation and amortization expenses for the three months ended September 30, 2008 increased $756, or 8.6%, to $9,587 from $8,831 in the third quarter of 2007, primarily due to recent investments in information technology assets. Depreciation and amortization expenses as a percentage of net sales was 0.7% for the three months ended September 30, 2008, up from 0.6% for the three months ended September 30, 2007.
Other income, net, totaled $739 for the three months ended September 30, 2008, compared to a loss of $(305) for the three months ended September 30, 2007. Other income, net, consists primarily of gains (losses) on the disposal of property, 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 $(17) for the three months ended September 30, 2008, compared to net gains on the disposal of property of $289 and a property impairment loss of $(1,305) for the three months ended September 30, 2007.
Income from operations totaled $35,482 for the three months ended September 30, 2008, a decrease of $12,937, or 26.7%, from $48,419 for the three months ended September 30, 2007. The decrease was due to increases in selling, general and administrative expenses, higher depreciation and amortization expenses, and lower gross margin, partially offset by higher other income, net.
Interest expense, net declined $1,181, or 27.3%, to $3,150 for the three months ended September 30, 2008 from $4,331 for the three months ended September 30, 2007. This reduction was mainly due to a lower level of outstanding long-term debt during the third quarter of 2008, compared to the same period of 2007.
Income before provision for income taxes was $32,332 for the three months endedSeptember 30, 2008, a decrease of $11,756, or 26.7%, compared to $44,088 for the three months ended September 30, 2007. This was attributable to the increases in selling, general and administrative expenses, higher depreciation and amortization expenses, and lower gross margin, partially offset by higher other income, net, and lower interest expense, net.
The Company’s total provision for income taxes was $12,761 for the three months ended September 30, 2008, a decrease of $4,771, or 27.2%, compared to $17,532 recognized during the same three month period of 2007. The Company’s effective tax rate decreased slightly to 39.5% for the three months ended September 30, 2008, down from 39.8% for the same three month 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 September 30, 2008 decreased $6,985, or 26.3%, to $19,571 from $26,556 for the three months ended September 30, 2007.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Net sales totaled $4,153,036 for the nine months ended September 30, 2008, compared to $3,927,682 for the nine months ended September 30, 2007, an increase of $225,354, or 5.7% . Increases in net sales were recorded in both of the primary market sectors in which the Company operates. Net sales to the electrical market increased 4.9% and net sales to the comm/data
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market rose 6.3% for the nine months ended September 30, 2008, compared to the same period in 2007. Net sales have been positively impacted by a moderate level of inflation, particularly in the markets for steel- and copper-based products sold by the Company during the nine months ended September 30, 2008.
Gross margin increased $21,946, or 2.9%, to $786,705 from $764,759, due to higher net sales volume, partially offset by higher costs of merchandise sold recorded during the nine months ended September 30, 2008, compared to the same period in 2007. The Company’s gross margin rate on net sales decreased to 18.9% during the nine months ended September 30, 2008, down from 19.5% for the same nine month period in 2007, largely due to increased price competition during the second and third quarters of 2008 and inventory markdowns during the third quarter of 2008, primarily on copper wire and cable.
Selling, general and administrative expenses increased $27,076, or 4.4%, to $642,987, for the nine months ended September 30, 2008, compared to $615,911 for the nine months ended September 30, 2007, mainly due to increased compensation costs and higher operating expenses. Selling, general and administrative expenses as a percentage of net sales for the nine months ended September 30, 2008 were 15.5%, down from 15.7% for the nine months ended September 30, 2007.
Depreciation and amortization expenses for the nine months ended September 30, 2008 increased $2,075, or 7.9%, to $28,475 from $26,400 for the same nine month period 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 nine months ended September 30, 2008, compared to the same period of 2007.
Other income, net, totaled $1,670 for the nine months ended September 30, 2008, compared to $2,387 for the nine months ended September 30, 2007. Other income, net, consists primarily of gains on the disposal of property, impairment charges related primarily 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 $25 and $1,025 for the nine months ended September 30, 2008 and 2007, respectively. Other income, net, for the nine months ended September 30, 2007 included property impairment losses of $(1,727) on assets that have since been disposed.
Income from operations totaled $116,913 for the nine months ended September 30, 2008, a decrease of $7,922, or 6.3%, from $124,835 for the nine months ended September 30, 2007. The decrease was due to higher gross margin, offset by increases in selling, general and administrative expenses, higher depreciation and amortization expenses, and lower other income, net.
Interest expense, net declined $3,854, or 28.6%, to $9,635 for the nine months ended September 30, 2008 from $13,489 for the nine months ended September 30, 2007. This reduction was mainly due to a lower level of outstanding long-term debt during the nine months ended September 30, 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 $107,278 for the nine months ended September 30, 2008, a decrease of $4,068 or 3.7%, compared to $111,346 for the nine months ended September 30, 2007.
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The Company’s total provision for income taxes decreased $4,780, or 10.6%, for the nine months ended September 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 37.6% for the nine months ended September 30, 2008, down from 40.5% for the same period in 2007. This decrease was primarily due to reductions in unrecognized tax benefits, interest, and penalties, each of which had a favorable impact on income tax expense. The effective tax rates for the nine month periods ended September 30, 2008 and 2007, were higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.
Net income for the nine months ended September 30, 2008 increased $712, or 1.1%, to $66,937 from $66,225 for the nine months ended September 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 $28,915 for the nine months ended September 30, 2008, compared to $59,884 for the nine months ended September 30, 2007. Positive cash flows from operations for the nine months ended September 30, 2008 were primarily due to net income of $66,937, and increases in trade accounts payable of $76,293 and other current liabilities totaling $12,087, partially offset by an increase in trade receivables of $87,756, a $23,137 increase in merchandise inventory, and a $35,070 decrease in accrued payroll and benefit costs.
The average number of days of sales in trade receivables at September 30, 2008 increased modestly from the average number of days at September 30, 2007. Merchandise inventory levels were moderately higher at September 30, 2008 when compared to December 31, 2007 to support the growth in net sales. Average inventory turnover decreased slightly during the nine months ended September 30, 2008, compared to the same period of 2007.
Current assets exceeded current liabilities by $465,186 at September 30, 2008, an increase of $70,895, or 18.0%, from $394,291 at December 31, 2007.
Investing Activities
Capital expenditures for property were $25,368 and $18,974, and proceeds from the disposal of property were $327 and $7,869, for the nine months ended September 30, 2008 and 2007, respectively. The proceeds received resulted primarily from the sale of personal property for the nine month period ended September 30, 2008 and from the sale of real property during the nine month period ended September 30, 2007.
Financing Activities
Cash flows used by financing activities totaled $31,631 for the nine months ended September 30, 2008, compared to $34,669 for the nine months ended September 30, 2007.
The Company reduced long-term debt by $24,974 and capital lease obligations by $335 for the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the excess of cash provided by operations over investing activities and an increase in short-term
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borrowing of $28,147 enabled the Company to reduce long-term debt by $54,035, and capital lease obligations by $314.
Cash provided by the sale of common stock amounted to $9,539 and $8,759, and purchases of treasury stock were $6,593 and $4,783 for the nine months ended September 30, 2008 and 2007, respectively. Cash dividends paid were $14,573 and $12,443 for the nine months ended September 30, 2008 and 2007, respectively.
Liquidity
The Company has a revolving credit agreement with a group of thirteen banks at an interest rate based on the London Interbank Offered Rate (LIBOR) that consists of an unsecured $200,000 five-year facility expiring in May 2012. There were no amounts outstanding under the credit agreement at September 30, 2008 and December 31, 2007.
As has been widely reported, many domestic and international financial institutions, including insurance companies and investment and commercial banks, have experienced extreme solvency and liquidity pressures during the past several months. This financial distress resulted, primarily, from the decline in the value of debt securities collateralized by real property that the institutions held as investments. Several large financial institutions have been acquired by competitors, received capital injections from their national governments, or ceased operations as a result of these nearly unprecedented financial market conditions. This restructuring of the financial services industry has impacted two banks that participate in the Company’s revolving credit facility.
While the Company expects it will continue to have full access to this facility, given the ongoing disruptions in the credit and financial markets, there can be no guarantee that a borrowing request made by the Company under the revolving credit agreement will be fully funded by all bank participants. Additionally, LIBOR has been highly volatile and remains at elevated levels, relative to interest rates on US Treasury securities. Therefore, use of this revolving credit facility may result in higher than anticipated interest expense to the Company.
At September 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 trade receivable securitization program is obligated to purchase the undivided interest in the trade receivables from GCC under the terms of the program.
The Company accounts for the securitization as an on-balance sheet financing arrangement because the Company has maintained effective control of the trade receivables through a call option that gives GCC the unilateral right to repurchase the undivided interests. Accordingly, the trade receivables and related debt are included in the accompanying 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 September 30, 2008 and December 31, 2007.
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Given the prevailing turmoil in the credit markets, particularly as it relates to asset-backed securities, 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 September 30, 2008, the Company had available to it unused lines of credit amounting to $429,038, 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 nine months ended September 30, 2008 and 2007 ranged from a minimum of $15,240 and $13,871 to a maximum of $70,028 and $49,355, 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 September 30, 2008 and December 31, 2007.
The Company had two lease agreements 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.
On July 23, 2008, the Company renewed the remaining lease arrangement for an additional five-year term and reclassified the debt associated with the lease from current portion of long-term debt to long-term debt. The financing structure used with this lease 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 September 30, 2008, the consolidated silo included in the Company’s condensed financial statements had a net property balance of $17,046, 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 renewal agreement, the amount guaranteed by the Company as the residual fair value of the property subject to the lease arrangement was $28,720 at September 30, 2008, an increase from $24,412 at December 31, 2007.
New Accounting Pronouncements
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
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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 derivative 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 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 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 October 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3), which clarifies the application of SFAS 157 in an inactive market and demonstrates how the fair value of a financial asset is determined when the market for that asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of FSP 157-3 did not have a material impact on the Company’s results of operations or financial position since the Company does not have any financial assets, the fair value of which was impacted by inactive markets.
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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 September 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 provide reasonable assurance that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act 1934, as amended (“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 1A. Risk Factors
Recent events in the global credit and financial markets could have a negative impact on the Company’s liquidity, financial position, or results of operations.
As has been widely reported, many domestic and international financial institutions, including insurance companies and investment and commercial banks, have experienced extreme solvency and liquidity pressures recently. This financial distress has resulted, primarily, from the decline in the value of debt securities collateralized by real property that the institutions held as investments. Several large financial institutions have been acquired by competitors, received capital injections from their national governments, or ceased operations as a result of these nearly unprecedented financial market conditions.
Interbank lending and credit availability have been greatly diminished as a result of these events. The spillover effects of the disruptions in the credit and financial markets are expected to pose serious risks to continued global economic growth and negatively impact general economic conditions in the Company’s North American trading area.
The current turmoil in global financial markets has not impaired the Company’s ability to access its credit facilities to finance its operations. Poor credit market conditions may, however, adversely impact the availability of construction project financing, upon which real estate developers and our construction contractor customers depend, resulting in project cancellations or delays. Our commercial and industrial customers may also face limitations when trying to access the credit markets to fund ongoing operations or capital projects. Credit constraints experienced by our customers may result in lost revenue and gross margin to the Company and, in some cases, higher than expected bad debt losses. Our suppliers’ ability to deliver products may also be affected by financing constraints caused by current credit market conditions, which could negatively impact our revenue and cost of merchandise sold, at least until alternate sources of supply are arranged. The Company continues to carefully monitor both its customers and suppliers for signs of deterioration in their financial condition.
The prices of industrial metals and energy commodities, as well as equity securities, have also been subject to severe downward pressure and extreme volatility recently. Further deflation in the price of commodity-based products, particularly copper wire and cable, or a settling of industrial metals prices at current market levels, could also dampen the Company’s revenue and gross margin prospects into the future.
The disruption in global credit and financial markets may also adversely impact the market value of investments held within the Company’s defined benefit pension plan. A significant decline in the value of these investments may require the Company to increase its contributions to its pension plan to meet future funding requirements and adversely impact the Company’s cash flow, results of operations, and financial position.
The Company is unable to predict the likely duration and severity of the current financial and commodity market distress or any resulting economic downturn.
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
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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 |
July 1 to July 31, 2008 | 41,567 | $20.00 | N/A |
August 1 to August 31, 2008 | 34,402 | $20.00 | N/A |
September 1 to September 30, 2008 | 25,438 | $20.00 | N/A |
Total | 101,407 | $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 | ) | 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.
November 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 Exhibit4(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 toExhibit 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 Exhibit9.01(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 – PrincipalExecutive Officer |
31.2 | – | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – PrincipalFinancial Officer |
32.1 | – | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 ofthe 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 ofthe Sarbanes-Oxley Act of 2002 – |
Principal Financial Officer |
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