UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 000-00255
GRAYBAR ELECTRIC COMPANY, INC. | |
(Exact name of registrant as specified in its charter) | |
New York | 13-0794380 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
34 North Meramec Avenue, St. Louis, Missouri | 63105 |
(Address of principal executive offices) | (Zip Code) |
(314) 573 - 9200 | |
(Registrant’s telephone number, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |
YES x NO ¨ | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). | |
YES x NO ¨ | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. | |
Large accelerated filer¨ Accelerated filer¨ | |
Non-accelerated filerx (Do not check if a smaller reporting company) Smaller reporting company¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
YES ¨ NO x | |
Common Stock Outstanding at October 31, 2013: 15,468,427 | |
(Number of Shares) |
Graybar Electric Company, Inc. and Subsidiaries
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2013
(Unaudited)
Table of Contents
PART I. | FINANCIAL INFORMATION | Page | ||
Item 1. | Financial Statements | |||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
PART II. | OTHER INFORMATION | |||
Item 2. | ||||
Item 6. | ||||
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries | ||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||
(Unaudited) | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
(Stated in thousands, except per share data) | 2013 | 2012 | 2013 | 2012 | ||||||||||
Gross Sales | $ | 1,492,586 | $ | 1,394,800 | $ | 4,254,256 | $ | 4,067,016 | ||||||
Cash discounts | (6,135 | ) | (5,508 | ) | (16,775 | ) | (16,060 | ) | ||||||
Net Sales | 1,486,451 | 1,389,292 | 4,237,481 | 4,050,956 | ||||||||||
Cost of merchandise sold | (1,208,788 | ) | (1,133,046 | ) | (3,460,021 | ) | (3,289,222 | ) | ||||||
Gross Margin | 277,663 | 256,246 | 777,460 | 761,734 | ||||||||||
Selling, general and administrative expenses | (220,791 | ) | (213,396 | ) | (652,950 | ) | (635,618 | ) | ||||||
Depreciation and amortization | (9,251 | ) | (8,059 | ) | (27,268 | ) | (24,013 | ) | ||||||
Other income, net | 451 | 915 | 1,653 | 32,988 | ||||||||||
Income from Operations | 48,072 | 35,706 | 98,895 | 135,091 | ||||||||||
Interest expense, net | (407 | ) | (416 | ) | (1,171 | ) | (1,876 | ) | ||||||
Income before Provision for Income Taxes | 47,665 | 35,290 | 97,724 | 133,215 | ||||||||||
Provision for income taxes | (18,946 | ) | (15,210 | ) | (39,100 | ) | (53,849 | ) | ||||||
Net Income | 28,719 | 20,080 | 58,624 | 79,366 | ||||||||||
Less: Net income attributable to noncontrolling interests | (86 | ) | (68 | ) | (154 | ) | (211 | ) | ||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 28,633 | $ | 20,012 | $ | 58,470 | $ | 79,155 | ||||||
Net Income per share of Common Stock (A) | $ | 1.85 | $ | 1.29 | $ | 3.76 | $ | 5.08 | ||||||
Cash Dividends per share of Common Stock (B) | $ | 0.30 | $ | 0.30 | $ | 0.90 | $ | 0.90 | ||||||
Average Common Shares Outstanding (A) | 15,507 | 15,568 | 15,565 | 15,595 |
(A) | Adjusted for the declaration of a twenty percent (20%) stock dividend in 2012, shares related to which were issued in February 2013. Prior to the adjustment, the average common shares outstanding were 12,973 and 12,996 for the three and nine months ended September 30, 2012, respectively. |
(B) | Cash dividends declared were $4,665 and $3,896 for the three months ended September 30, 2013 and 2012, respectively. Cash dividends declared were $14,041 and $11,729 for the nine months ended September 30, 2013 and 2012, respectively. |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
3
Graybar Electric Company, Inc. and Subsidiaries | ||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||
(Unaudited) | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
(Stated in thousands) | 2013 | 2012 | 2013 | 2012 | ||||||||||
Net Income | $ | 28,719 | $ | 20,080 | $ | 58,624 | $ | 79,366 | ||||||
Other Comprehensive Income | ||||||||||||||
Foreign currency translation | 1,637 | 3,067 | (2,545 | ) | 2,842 | |||||||||
Pension and postretirement benefits liability adjustment (net of tax of $2,661, $2,142, $7,983 and $6,428, respectively) | 4,179 | 3,365 | 12,537 | 10,097 | ||||||||||
Total Other Comprehensive Income | 5,816 | 6,432 | 9,992 | 12,939 | ||||||||||
Comprehensive Income | $ | 34,535 | $ | 26,512 | $ | 68,616 | $ | 92,305 | ||||||
Comprehensive income attributable to noncontrolling interests, net of tax | (204 | ) | (166 | ) | (112 | ) | (66 | ) | ||||||
Comprehensive Income attributable to Graybar Electric Company, Inc. | $ | 34,331 | $ | 26,346 | $ | 68,504 | $ | 92,239 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
4
Graybar Electric Company, Inc. and Subsidiaries | |||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||||
(Stated in thousands, except share and per share data) | September 30, 2013 | December 31, 2012 | |||||||||||
ASSETS | (Unaudited) | ||||||||||||
Current Assets | |||||||||||||
Cash and cash equivalents | $ | 46,974 | $ | 37,674 | |||||||||
Trade receivables (less allowances of $7,009 and $6,868, respectively) | 846,252 | 782,390 | |||||||||||
Merchandise inventory | 468,060 | 416,753 | |||||||||||
Other current assets | 29,964 | 25,442 | |||||||||||
Total Current Assets | 1,391,250 | 1,262,259 | |||||||||||
Property, at cost | |||||||||||||
Land | 66,909 | 65,821 | |||||||||||
Buildings | 405,329 | 393,399 | |||||||||||
Furniture and fixtures | 228,453 | 212,650 | |||||||||||
Software | 76,906 | 76,906 | |||||||||||
Capital leases | 14,201 | 11,463 | |||||||||||
Total Property, at cost | 791,798 | 760,239 | |||||||||||
Less – accumulated depreciation and amortization | (419,674 | ) | (402,233 | ) | |||||||||
Net Property | 372,124 | 358,006 | |||||||||||
Other Non-current Assets | 77,058 | 83,932 | |||||||||||
Total Assets | $ | 1,840,432 | $ | 1,704,197 | |||||||||
LIABILITIES | |||||||||||||
Current Liabilities | |||||||||||||
Short-term borrowings | $ | 90,246 | $ | 71,116 | |||||||||
Current portion of long-term debt | 2,425 | 10,005 | |||||||||||
Trade accounts payable | 666,564 | 573,252 | |||||||||||
Accrued payroll and benefit costs | 81,472 | 109,250 | |||||||||||
Other accrued taxes | 14,807 | 11,748 | |||||||||||
Other current liabilities | 70,528 | 61,315 | |||||||||||
Total Current Liabilities | 926,042 | 836,686 | |||||||||||
Postretirement Benefits Liability | 77,570 | 77,036 | |||||||||||
Pension Liability | 154,636 | 167,223 | |||||||||||
Long-term Debt | 2,614 | 1,990 | |||||||||||
Other Non-current Liabilities | 23,180 | 21,046 | |||||||||||
Total Liabilities | 1,184,042 | 1,103,981 | |||||||||||
SHAREHOLDERS’ EQUITY | |||||||||||||
Shares at | |||||||||||||
Capital Stock | September 30, 2013 | December 31, 2012 | |||||||||||
Common, stated value $20.00 per share | |||||||||||||
Authorized | 50,000,000 | 20,000,000 | |||||||||||
Issued to voting trustees | 13,337,764 | 12,844,501 | |||||||||||
Issued to shareholders | 2,793,836 | 2,740,489 | |||||||||||
In treasury, at cost | (589,844 | ) | (84,566 | ) | |||||||||
Outstanding Common Stock | 15,541,756 | 15,500,424 | 310,835 | 310,008 | |||||||||
Advance Payments on Subscriptions to Common Stock | 415 | — | |||||||||||
Retained Earnings | 498,199 | 453,770 | |||||||||||
Accumulated Other Comprehensive Loss | (156,780 | ) | (166,814 | ) | |||||||||
Total Graybar Electric Company, Inc. Shareholders’ Equity | 652,669 | 596,964 | |||||||||||
Noncontrolling Interests | 3,721 | 3,252 | |||||||||||
Total Shareholders’ Equity | 656,390 | 600,216 | |||||||||||
Total Liabilities and Shareholders’ Equity | $ | 1,840,432 | $ | 1,704,197 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
5
Graybar Electric Company, Inc. and Subsidiaries | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(Unaudited) | |||||||
Nine Months Ended September 30, | |||||||
(Stated in thousands) | 2013 | 2012 | |||||
Cash Flows from Operations | |||||||
Net Income | $ | 58,624 | $ | 79,366 | |||
Adjustments to reconcile net income to cash provided by operations: | |||||||
Depreciation and amortization | 27,268 | 24,013 | |||||
Deferred income taxes | (2,835 | ) | 3,000 | ||||
Net losses (gains) on disposal of property | 324 | (30,732 | ) | ||||
Loss on impairment of property | — | 257 | |||||
Net income attributable to noncontrolling interests | (154 | ) | (211 | ) | |||
Changes in assets and liabilities: | |||||||
Trade receivables | (63,862 | ) | 16,072 | ||||
Merchandise inventory | (51,307 | ) | (58,738 | ) | |||
Other current assets | (2,431 | ) | 3,355 | ||||
Other non-current assets | (365 | ) | (2,135 | ) | |||
Trade accounts payable | 93,312 | 8,041 | |||||
Accrued payroll and benefit costs | (27,778 | ) | (37,367 | ) | |||
Other current liabilities | 10,761 | 14,194 | |||||
Other non-current liabilities | 10,601 | 7,111 | |||||
Total adjustments to net income | (6,466 | ) | (53,140 | ) | |||
Net cash provided by operations | 52,158 | 26,226 | |||||
Cash Flows from Investing Activities | |||||||
Proceeds from disposal of property | 162 | 33,577 | |||||
Capital expenditures for property | (40,014 | ) | (30,662 | ) | |||
Net cash (used) provided by investing activities | (39,852 | ) | 2,915 | ||||
Cash Flows from Financing Activities | |||||||
Net increase in short-term borrowings | 19,130 | 33,114 | |||||
Repayment of long-term debt | (7,386 | ) | (35,101 | ) | |||
Principal payments under capital leases | (2,308 | ) | (2,186 | ) | |||
Sale of common stock | 11,347 | 10,501 | |||||
Purchases of common stock | (10,105 | ) | (8,119 | ) | |||
Sales of noncontrolling interests' common stock | 487 | — | |||||
Purchases of noncontrolling interests’ common stock | (130 | ) | (2,855 | ) | |||
Dividends paid | (14,041 | ) | (24,672 | ) | |||
Net cash used by financing activities | (3,006 | ) | (29,318 | ) | |||
Net Increase (Decrease) in Cash | 9,300 | (177 | ) | ||||
Cash, Beginning of Year | 37,674 | 71,967 | |||||
Cash, End of Period | $ | 46,974 | $ | 71,790 | |||
Non-cash Investing and Financing Activities | |||||||
Acquisitions of equipment under capital leases | $ | 2,738 | $ | 1,674 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
6
Graybar Electric Company, Inc. and Subsidiaries | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
(Unaudited, stated in thousands) | |||||||||||||||||||||||
Graybar Electric Company, Inc. Shareholders’ Equity | |||||||||||||||||||||||
Common Stock | Common Stock Subscribed, Unissued | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders’ Equity | ||||||||||||||||||
December 31, 2011 | $ | 257,630 | $ | — | $ | 458,139 | $ | (150,364 | ) | $ | 5,989 | $ | 571,394 | ||||||||||
Net income | 79,155 | 211 | 79,366 | ||||||||||||||||||||
Other comprehensive income | 13,084 | (145 | ) | 12,939 | |||||||||||||||||||
Stock issued | 10,106 | 10,106 | |||||||||||||||||||||
Stock purchased | (8,119 | ) | (2,855 | ) | (10,974 | ) | |||||||||||||||||
Advance payments | 395 | 395 | |||||||||||||||||||||
Dividends declared | (11,729 | ) | (11,729 | ) | |||||||||||||||||||
September 30, 2012 | $ | 259,617 | $ | 395 | $ | 525,565 | $ | (137,280 | ) | $ | 3,200 | $ | 651,497 | ||||||||||
Graybar Electric Company, Inc. Shareholders’ Equity | |||||||||||||||||||||||
Common Stock | Common Stock Subscribed, Unissued | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders’ Equity | ||||||||||||||||||
December 31, 2012 | $ | 310,008 | $ | — | $ | 453,770 | $ | (166,814 | ) | $ | 3,252 | $ | 600,216 | ||||||||||
Net income | 58,470 | 154 | 58,624 | ||||||||||||||||||||
Other comprehensive income | 10,034 | (42 | ) | 9,992 | |||||||||||||||||||
Stock issued | 10,932 | 487 | 11,419 | ||||||||||||||||||||
Stock purchased | (10,105 | ) | (130 | ) | (10,235 | ) | |||||||||||||||||
Advance payments | 415 | 415 | |||||||||||||||||||||
Dividends declared | (14,041 | ) | (14,041 | ) | |||||||||||||||||||
September 30, 2013 | $ | 310,835 | $ | 415 | $ | 498,199 | $ | (156,780 | ) | $ | 3,721 | $ | 656,390 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
7
Graybar Electric Company, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Stated in thousands, except share and per share data)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Graybar Electric Company, Inc. (“Graybar” or the “Company”) is a New York corporation, incorporated in 1925. The Company is engaged in the distribution of electrical, communications and data networking (“comm/data”) products and the provision of related supply chain management and logistics services, primarily to electrical and comm/data contractors, industrial plants, federal, state and local governments, commercial users, telephone companies, and power utilities in North America. All products sold by the Company are purchased by the Company from others, and the Company neither manufactures nor contracts to manufacture any products that it sells. The Company’s business activity is primarily with customers in the United States of America (“U.S.”). Graybar also has subsidiary operations with distribution facilities in Canada and Puerto Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s accounting policies conform to generally accepted accounting principles in the U.S. (“U.S. GAAP”) and are applied on a consistent basis among all periods presented. Significant accounting policies are described below.
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Graybar Electric Company, Inc., without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”) applicable to interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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 best estimates and judgments. Actual results could differ from those estimates. Certain reclassifications were made to prior year amounts to conform to the 2013 presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2012, included in the Company’s latest Annual Report on Form 10-K.
In the opinion of management, this quarterly report includes all adjustments, consisting of normal recurring accruals and adjustments, necessary for the fair presentation of the financial statements presented. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Graybar Electric Company, Inc. and its subsidiary companies. All material intercompany balances and transactions have been eliminated. The ownership interests that are held by owners other than the Company in subsidiaries consolidated by the Company are accounted for and reported as noncontrolling interests.
Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Subsequent Events
The Company has evaluated subsequent events through the time of the filing of this Quarterly Report on Form 10-Q with the Commission. No material subsequent events have occurred since September 30, 2013 that require recognition or disclosure in these financial statements.
8
Revenue Recognition
Revenue is recognized when evidence of a customer arrangement exists, prices are fixed and determinable, product title, ownership and risk of loss transfers to the customer, and collectability is reasonably assured. Revenues recognized are primarily for product sales, but also include freight and handling charges. The Company’s standard shipping terms are FOB shipping point, under which product title passes to the customer at the time of shipment. The Company does, however, fulfill some customer orders based on shipping terms of FOB destination, whereby title passes to the customer at the time of delivery. The Company also earns revenue for services provided to customers for supply chain management and logistics services. Service revenue is recognized when services are rendered and completed. Revenue is reported net of all taxes assessed by governmental authorities as a result of revenue-producing transactions, primarily sales tax.
Outgoing Freight Expenses
The Company records certain outgoing freight expenses as a component of selling, general and administrative expenses.
Cash and Cash Equivalents
The Company accounts for cash on hand, deposits in banks, and other short-term, highly liquid investments with an original maturity of three months or less as cash and cash equivalents.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers, and a significant portion of its trade receivables is secured by mechanic’s lien or payment bond rights. The Company maintains allowances to reflect the expected uncollectability of trade receivables based on past collection history and specific risks identified in the receivables portfolio. Although actual credit losses have historically been within management’s expectations, additional allowances may be required if the financial condition of the Company’s customers were to deteriorate.
Merchandise Inventory
The Company’s inventory is stated at the lower of cost (determined using the last-in, first-out (“LIFO”) cost method) or market. LIFO accounting is a method of accounting that, compared with other inventory accounting methods, generally provides better matching of current costs with current sales.
The Company makes provisions for obsolete or excess inventories as necessary to reflect reductions in inventory value.
Supplier Volume Incentives
The Company’s agreements with many of its suppliers provide for the Company to earn volume incentives based on purchases during the agreement period. These agreements typically provide for the incentives to be paid quarterly or annually in arrears. The Company estimates amounts to be received from suppliers at the end of each reporting period based on the earnout level that the Company believes is probable of being achieved. The Company records the incentive ratably over the year as a reduction of cost of merchandise sold as the related inventory is sold. Changes in the estimated amount of incentives are treated as changes in estimate and are recognized in earnings in the period in which the change in estimate occurs. In the event that the operating performance of the Company’s suppliers were to decline, however, there can be no assurance that amounts earned would be paid or that the volume incentives would continue to be included in future agreements.
Property and Depreciation
Property, plant and equipment are recorded at cost. Depreciation is expensed on a straight-line basis over the estimated useful lives of the related assets. Interest costs incurred to finance expenditures for major long-term construction projects are capitalized as part of the asset's historical cost and included in property, plant and equipment, then depreciated over the useful life of the asset. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Expenditures for maintenance and repairs are charged to expense when incurred, while the costs of significant improvements, which extend the useful life of the underlying asset, are capitalized.
9
Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade receivables. The Company performs ongoing credit evaluations of its customers, and a significant portion of its trade receivables is secured by mechanic’s lien or payment bond rights. The Company maintains allowances for potential credit losses, and such losses historically have been within management’s expectations.
Fair Value
The Company endeavors to utilize the best available information in measuring fair value. U.S. GAAP has established a fair value hierarchy, which prioritizes the inputs used in measuring fair value. The tiers in the hierarchy include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own data inputs and assumptions. The Company has used fair value measurements to value its pension plan assets.
Foreign Currency Exchange Rate
The functional currency for the Company’s Canadian subsidiary is the Canadian dollar. Accordingly, its balance sheet amounts are translated at the exchange rates in effect at the end of each reporting period and its statements of income amounts are translated at the average rates of exchange prevailing during the current period. Currency translation adjustments are included in accumulated other comprehensive loss.
Goodwill
The Company’s goodwill and indefinite-lived intangible assets are not amortized, but rather tested annually for impairment. Goodwill is reviewed annually in the fourth quarter and/or when circumstances or other events might indicate that impairment may have occurred. The Company performs either a qualitative or quantitative assessment of goodwill impairment. The qualitative assessment considers several factors including the excess fair value over carrying value as of the last quantitative impairment test, the length of time since the last fair value measurement, the current carrying value, market conditions, actual performance compared to forecasted performance, and the current business outlook. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the reporting unit is quantitatively tested for impairment. If a quantitative assessment is required, the fair value is determined using a variety of assumptions including estimated future cash flows of the reporting unit and applicable discount rates.
Income Taxes
The Company recognizes deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns. Uncertainty exists regarding tax positions taken in previously filed tax returns still subject to examination and positions expected to be taken in future returns. A deferred tax asset or liability results from the temporary difference between an item’s carrying value as reflected in the financial statements and its tax basis, and is calculated using enacted applicable tax rates. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, a valuation allowance is established. Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements. The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages.
Other Postretirement Benefits
The Company accounts for postretirement benefits other than pensions by accruing the costs of benefits to be provided over the employees’ periods of active service. These costs are determined on an actuarial basis. The Company’s consolidated balance sheets reflect the funded status of postretirement benefits.
Pension Plan
The Company sponsors a noncontributory defined benefit pension plan accounted for by accruing the cost to provide the benefits over the employees’ periods of active service. These costs are determined on an actuarial basis. The Company’s consolidated balance sheets reflect the funded status of the defined benefit pension plan.
10
New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which provides guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward exists. The requirements are effective for annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods. The Company continues to evaluate the impact that the adoption of this guidance will have on the Company’s financial condition or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). The Update requires that the Company present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. The Company adopted this Update as of January 1, 2013, and the adoption did not have any impact on the Company's results of operations, financial position, or cash flows during the three and nine months ended September 30, 2013, other than additional disclosures contained in Note 7.
3. INCOME TAXES
The Company determines its deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of its assets and liabilities, calculated using enacted applicable tax rates. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, a valuation allowance is established. Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the condensed consolidated financial statements.
The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages. The Company has accrued $1,332 and $1,195 in interest and penalties in its condensed consolidated balance sheets at September 30, 2013 and December 31, 2012, respectively. Interest was computed on the difference between the provision for income taxes recognized in accordance with U.S. GAAP 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 2008 and forward are available for examination by the United States Internal Revenue Service (“IRS”). The IRS completed its examination of the Company's 2008 and 2009 federal income tax returns. On May 1, 2013, the Company received the revenue agent's report, commonly referred to as a “30-day letter”. The Company disputes some of the proposed adjustments raised in the revenue agent's report and has filed a protest. In July, the Company received the revenue agent's rebuttal and is currently awaiting appeal proceedings. The Company continues to believe its reserve for uncertain tax benefits is adequate at September 30, 2013. The Company has agreed to extend its federal statute of limitations for the 2008 tax year until May 31, 2014. In addition, an examination by the IRS of the Company's 2010 and 2011 federal income tax returns commenced in April 2013.
The Company's state income tax returns for 2009 through 2012 remain subject to examination by various state authorities, with the latest period closing on December 31, 2017. The Company has not extended the statutes of limitations with respect to years prior to 2009. Such statutes of limitations will expire on or before December 31, 2013, unless extended.
The Company’s unrecognized tax benefits of $3,767 and $3,530 at September 30, 2013 and December 31, 2012, respectively, are uncertain tax positions that would impact the Company’s effective tax rate if recognized. The Company is periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes. The Company does not anticipate a material change in its unrecognized tax benefits during the next twelve months.
4. CAPITAL STOCK
The Company's capital stock is one hundred percent (100%) owned by its active and retired employees, and there is no public trading market for its common stock. Since 1928, substantially all of the issued and outstanding shares of common stock have been held of record by voting trustees under successive voting trust agreements. Under applicable state law, a voting trust may not have a term greater than ten years. At September 30, 2013, approximately eighty-three percent (83%) of the common stock was held in a voting trust that expires by its terms on March 15, 2017. The participation of shareholders in
11
the voting trust is voluntary at the time the voting trust is created, but is irrevocable during its term. Shareholders who elect not to participate in the voting trust hold their common stock as shareholders of record.
No shareholder may sell, transfer, or otherwise dispose of shares of common stock or the voting trust interests issued with respect thereto (“common stock”, “common shares”, or “shares”) without first offering the Company the option to purchase such shares at the price at which the shares were issued. The Company also has the option to purchase at the issue price the common stock of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension. The Company has always exercised its purchase option and expects to continue to do so. All outstanding shares of the Company have been issued at $20.00 per share.
At the Company’s annual meeting of shareholders on June 13, 2013, the shareholders approved an amendment
to the Company’s amended Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 20,000,000 to 50,000,000 shares.
5. REVOLVING CREDIT FACILITY
On September 30, 2013 and December 31, 2012, the Company and Graybar Canada Limited, the Company's Canadian operating subsidiary (“Graybar Canada”), had an unsecured, five-year, $500,000 revolving credit agreement maturing in September 2016 with Bank of America, N.A. and other lenders named therein, which includes a combined letter of credit sub-facility of up to $50,000, a U.S. swing line loan facility of up to $50,000, and a Canadian swing line loan facility of up to $20,000 (the "Credit Agreement"). The Credit Agreement also includes a $100,000 sublimit (in U.S. or Canadian dollars) for borrowings by Graybar Canada and contains an accordion feature, which allows the Company to request increases in the aggregate borrowing commitments of up to $200,000.
On May 29, 2013, the Company and Graybar Canada Limited amended the Credit Agreement to clarify that the Canadian Dealer Offered Rate ("CDOR") would replace Canadian LIBOR, which was discontinued by the British Bankers' Association after May 31, 2013. Effective on the amendment date, borrowings by the Canadian borrower denominated in Canadian dollars under the Credit Agreement bear interest based on, at the Canadian borrower's election, either (i) the base rate (as defined in the Credit Agreement), or (ii) CDOR, in each case plus an applicable margin, as set forth in the pricing grid detailed in the Credit Agreement. Borrowings by the Company are unaffected by this amendment to the Credit Agreement.
At September 30, 2013, the Company had total letters of credit of $6,913 outstanding, of which $738 were issued under the $500,000 revolving credit facility. At December 31, 2012, the Company had total letters of credit of $8,938 outstanding, of which $763 were issued under the $500,000 revolving credit facility. The letters of credit are used primarily to support certain workers compensation insurance policies.
There were $90,246 and $71,116 in short-term borrowings outstanding under the revolving credit facility at September 30, 2013 and December 31, 2012, respectively.
6. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit pension plan covering substantially all full-time employees. The plan provides retirement benefits based on an employee’s average earnings and years of service. Employees become one hundred percent (100%) vested after three years of service, regardless of age. The Company’s plan funding policy is to make contributions provided that the total annual contributions will not be less than the Employee Retirement Income Security Act ("ERISA") and the Pension Protection Act of 2006 minimums or greater than the maximum tax-deductible amount, to review contribution and funding strategy on a regular basis, and to allow discretionary contributions to be made by the Company from time to time. The assets of the defined benefit pension plan are invested primarily in fixed income and equity securities, money market funds, and other investments.
The Company provides certain postretirement health care and life insurance benefits to retired employees. Substantially all of the Company’s employees may become eligible for postretirement medical benefits if they reach the age and service requirements of the retiree medical plan and retire on a service pension under the defined benefit pension plan. Benefits are provided through insurance coverage, with premiums based on the benefits paid during the year. The Company funds postretirement benefits on a pay-as-you-go basis, and accordingly, there were no assets held in the postretirement benefits plan at September 30, 2013 and December 31, 2012.
12
The net periodic benefit cost for the three and nine months ended September 30, 2013 and 2012 included the following components:
Pension Benefits | Postretirement Benefits | ||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||
Components of Net Periodic Benefit Cost | 2013 | 2012 | 2013 | 2012 | |||||||||
Service cost | $ | 6,030 | $ | 5,554 | $ | 661 | $ | 584 | |||||
Interest cost | 5,979 | 6,224 | 718 | 838 | |||||||||
Expected return on plan assets | (5,977 | ) | (5,918 | ) | — | — | |||||||
Amortization of: | |||||||||||||
Net actuarial loss | 6,593 | 5,279 | 449 | 430 | |||||||||
Prior service cost (gain) | 343 | 346 | (545 | ) | (546 | ) | |||||||
Net periodic benefit cost | $ | 12,968 | $ | 11,485 | $ | 1,283 | $ | 1,306 | |||||
Pension Benefits | Postretirement Benefits | ||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
Components of Net Periodic Benefit Cost | 2013 | 2012 | 2013 | 2012 | |||||||||
Service cost | $ | 18,089 | $ | 16,661 | $ | 1,983 | $ | 1,752 | |||||
Interest cost | 17,936 | 18,672 | 2,154 | 2,516 | |||||||||
Expected return on plan assets | (17,931 | ) | (17,753 | ) | — | — | |||||||
Amortization of: | |||||||||||||
Net actuarial loss | 19,778 | 15,837 | 1,346 | 1,290 | |||||||||
Prior service cost (gain) | 1,031 | 1,036 | (1,635 | ) | (1,636 | ) | |||||||
Net periodic benefit cost | $ | 38,903 | $ | 34,453 | $ | 3,848 | $ | 3,922 |
The Company made contributions to its defined benefit pension plan totaling $10,000 during each of the three-month periods ended September 30, 2013 and 2012. Contributions made during the nine-month periods ended September 30, 2013 and 2012 each totaled $30,000. Additional contributions totaling $10,800 are expected to be paid during the remainder of 2013.
7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables represent amounts reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2013 and 2012:
Three Months Ended September 30, 2013 | Three Months Ended September 30, 2012 | |||||||||||||||||||||||
Amortization of Pension and Other Postretirement Benefits Items | Amortization of Pension and Other Postretirement Benefits Items | |||||||||||||||||||||||
Actuarial Losses Recognized | Prior Service Costs Recognized | Total | Actuarial Losses Recognized | Prior Service Costs Recognized | Total | |||||||||||||||||||
Affected Line in Condensed Consolidated Statement of Income: | ||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 7,042 | $ | (202 | ) | $ | 6,840 | $ | 5,707 | $ | (200 | ) | $ | 5,507 | ||||||||||
Tax (benefit) expense | (2,740 | ) | 79 | (2,661 | ) | (2,220 | ) | 78 | (2,142 | ) | ||||||||||||||
Total reclassifications for the period, net of tax | $ | 4,302 | $ | (123 | ) | $ | 4,179 | $ | 3,487 | $ | (122 | ) | $ | 3,365 |
13
The following tables represent amounts reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2013 and 2012:
Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Amortization of Pension and Other Postretirement Benefits Items | Amortization of Pension and Other Postretirement Benefits Items | |||||||||||||||||||||||
Actuarial Losses Recognized | Prior Service Costs Recognized | Total | Actuarial Losses Recognized | Prior Service Costs Recognized | Total | |||||||||||||||||||
Affected Line in Condensed Consolidated Statement of Income: | ||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 21,124 | $ | (604 | ) | $ | 20,520 | $ | 17,125 | $ | (600 | ) | $ | 16,525 | ||||||||||
Tax (benefit) expense | (8,219 | ) | 236 | (7,983 | ) | (6,662 | ) | 234 | (6,428 | ) | ||||||||||||||
Total reclassifications for the period, net of tax | $ | 12,905 | $ | (368 | ) | $ | 12,537 | $ | 10,463 | $ | (366 | ) | $ | 10,097 |
The following tables represent the activity included in accumulated other comprehensive income (loss) for the three months ended September 30, 2013 and 2012:
Three Months Ended September 30, 2013 | Three Months Ended September 30, 2012 | |||||||||||||||||||||||
Foreign Currency | Pension and Other Postretirement Benefits | Total | Foreign Currency | Pension and Other Postretirement Benefits | Total | |||||||||||||||||||
Beginning balance July 1 | $ | 8,018 | $ | (170,496 | ) | $ | (162,478 | ) | $ | 10,075 | $ | (153,689 | ) | $ | (143,614 | ) | ||||||||
Other comprehensive income before reclassifications | 1,519 | — | 1,519 | 2,969 | — | 2,969 | ||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | — | 4,179 | 4,179 | — | 3,365 | 3,365 | ||||||||||||||||||
Net current-period other comprehensive income | 1,519 | 4,179 | 5,698 | 2,969 | 3,365 | 6,334 | ||||||||||||||||||
Ending balance September 30 | $ | 9,537 | $ | (166,317 | ) | $ | (156,780 | ) | $ | 13,044 | $ | (150,324 | ) | $ | (137,280 | ) |
The following tables represent the activity included in accumulated other comprehensive income (loss) for the nine months ended September 30, 2013 and 2012:
Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Foreign Currency | Pension and Other Postretirement Benefits | Total | Foreign Currency | Pension and Other Postretirement Benefits | Total | |||||||||||||||||||
Beginning balance January 1 | $ | 12,040 | $ | (178,854 | ) | $ | (166,814 | ) | $ | 10,057 | $ | (160,421 | ) | $ | (150,364 | ) | ||||||||
Other comprehensive (loss) income before reclassifications | (2,503 | ) | — | (2,503 | ) | 2,987 | — | 2,987 | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | — | 12,537 | 12,537 | — | 10,097 | 10,097 | ||||||||||||||||||
Net current-period other comprehensive (loss) income | (2,503 | ) | 12,537 | 10,034 | 2,987 | 10,097 | 13,084 | |||||||||||||||||
Ending balance September 30 | $ | 9,537 | $ | (166,317 | ) | $ | (156,780 | ) | $ | 13,044 | $ | (150,324 | ) | $ | (137,280 | ) |
14
8. ASSETS HELD FOR SALE
The Company considers properties to be assets held for sale when all of the following criteria are met: i) a formal commitment to a plan to sell a property has been made and exercised; ii) the property is available for sale in its present condition; iii) actions required to complete the sale of the property have been initiated; iv) sale of the property is probable and the Company expects the sale will occur within one year; and v) the property is being actively marketed for sale at a price that is reasonable given its current market value.
Upon designation as an asset held for sale, the Company records the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and depreciation of the property ceases. The net book value of assets held for sale was $7,660 and $3,034 at September 30, 2013 and December 31, 2012, respectively, and is recorded in net property in the condensed consolidated balance sheets.
The Company reviews long-lived assets held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For assets classified as held and used, impairment may occur if projected undiscounted cash flows are not adequate to cover the carrying value of the assets. In such cases, additional analysis is conducted to determine the amount of the loss to be recognized. The impairment loss is calculated as the difference between the carrying amount of the asset and its estimated fair value. The analysis requires estimates of the amount and timing of projected cash flows and, where applicable, selection of an appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed necessary.
For assets held for sale, impairment occurs whenever the net book value of the property listed for sale exceeds the expected selling price less estimated selling expenses. The Company recorded no impairment charges during the three- and nine-month periods ended September 30, 2013. The Company recorded impairment losses totaling $257 to account for the expected losses on two of the properties held for sale during the nine-month period ended September 30, 2012. There were no impairment charges recorded during the three-month period ended September 30, 2012. The impairment losses are included in other income, net in the condensed consolidated statement of income for the nine months ended September 30, 2012.
9. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are subject to various claims, disputes, and administrative and legal matters incidental to the Company’s past and current business activities. As a result, contingencies may arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible loss.
The Company accounts for loss contingencies in accordance with U.S. GAAP. Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated. With respect to a particular loss contingency, it may be probable that a loss has occurred, but the estimate of the loss is a wide range. If the Company deems some amount within the range to be a better estimate than any other amount within the range, that amount will be accrued. However, if no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued. While the Company believes that none of these claims, disputes, and 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 in the period during which such matters are resolved or a better estimate becomes available.
15
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, 2012, included in our Annual Report on Form 10-K for such period as filed with the United States ("U.S.") Securities and Exchange Commission (the “Commission”). The results shown herein are not necessarily indicative of the results to be expected in any future periods.
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements generally are identified by the words “believes”, “projects”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and similar expressions. The Company intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the PSLRA. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse impact on the Company’s operations and future prospects on a consolidated basis include, but are not limited to: general economic conditions, particularly in the residential, commercial, and industrial building construction industries; volatility in the prices of industrial metal commodities; disruptions in the Company’s sources of supply; a sustained interruption in the operation of the Company’s information systems; increased funding or expenses related to Company's pension plan; adverse legal proceedings or other claims; and the inability, or limitations on the Company’s ability, to raise debt or equity capital. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially impact our financial results, is included herein and in our other filings with the Commission. Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
All dollar amounts, except per share data, are stated in thousands ($000s) in the following discussion and accompanying tables.
Background
Graybar Electric Company, Inc. (“Graybar” or the “Company”) is a New York corporation, incorporated in 1925. The Company is engaged in the distribution of electrical, communications and data networking (“comm/data”) products, and the provision of related supply chain management and logistics services, primarily to electrical and comm/data contractors, industrial plants, federal, state, and local governments, commercial users, telephone companies, and power utilities in North America. All products sold by the Company are purchased by the Company from others, and the Company neither manufactures nor contracts to manufacture any products it sells. The Company’s business activity is primarily with customers in the U.S. 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 active and retired employees, and there is no public trading market for its common 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 shares were issued. The Company also has the option to purchase at the issue price the common stock of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension. The Company has always exercised its purchase option and expects to continue to do so. All outstanding shares of the Company have been issued at $20.00 per share.
Business Overview
The U.S. economy expanded slowly in the third quarter of 2013. Slow economic growth is expected to continue through the end of the year, weighed down by high unemployment rates and the recent U.S. government shutdown.
16
Graybar's net sales rose 4.6% during the nine months ended September 30, 2013, compared to the same period in 2012 while gross margin increased 2.1% during the nine months ended September 30, 2013, when compared to the same period in 2012. Growth in net sales and gross margin improved to 7.0% and 8.4%, respectively, during the third quarter of 2013, compared to the same period in 2012. For the three and nine months ended September 30, 2013, gross margin increased due primarily to an increase in net sales.
The Company expects its rate of organic growth in net sales to slightly outpace the forecasted rate of growth of the U.S. gross domestic product during the fourth quarter of 2013.
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 months ended September 30, 2013 and 2012:
Three Months Ended | Three Months Ended | ||||||||||||
September 30, 2013 | September 30, 2012 | ||||||||||||
Dollars | Percent | Dollars | Percent | ||||||||||
Net Sales | $ | 1,486,451 | 100.0 | % | $ | 1,389,292 | 100.0 | % | |||||
Cost of merchandise sold | (1,208,788 | ) | (81.3 | ) | (1,133,046 | ) | (81.6 | ) | |||||
Gross Margin | 277,663 | 18.7 | 256,246 | 18.4 | |||||||||
Selling, general and administrative expenses | (220,791 | ) | (14.9 | ) | (213,396 | ) | (15.3 | ) | |||||
Depreciation and amortization | (9,251 | ) | (0.6 | ) | (8,059 | ) | (0.6 | ) | |||||
Other income, net | 451 | — | 915 | 0.1 | |||||||||
Income from Operations | 48,072 | 3.2 | 35,706 | 2.6 | |||||||||
Interest expense, net | (407 | ) | — | (416 | ) | (0.1 | ) | ||||||
Income before Provision for Income Taxes | 47,665 | 3.2 | 35,290 | 2.5 | |||||||||
Provision for income taxes | (18,946 | ) | (1.3 | ) | (15,210 | ) | (1.1 | ) | |||||
Net Income | 28,719 | 1.9 | 20,080 | 1.4 | |||||||||
Less: Net income attributable to noncontrolling interests | (86 | ) | — | (68 | ) | — | |||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 28,633 | 1.9 | % | $ | 20,012 | 1.4 | % | |||||
Nine Months Ended | Nine Months Ended | ||||||||||||
September 30, 2013 | September 30, 2012 | ||||||||||||
Dollars | Percent | Dollars | Percent | ||||||||||
Net Sales | $ | 4,237,481 | 100.0 | % | $ | 4,050,956 | 100.0 | % | |||||
Cost of merchandise sold | (3,460,021 | ) | (81.7 | ) | (3,289,222 | ) | (81.2 | ) | |||||
Gross Margin | 777,460 | 18.3 | 761,734 | 18.8 | |||||||||
Selling, general and administrative expenses | (652,950 | ) | (15.4 | ) | (635,618 | ) | (15.7 | ) | |||||
Depreciation and amortization | (27,268 | ) | (0.6 | ) | (24,013 | ) | (0.6 | ) | |||||
Other income, net | 1,653 | — | 32,988 | 0.8 | |||||||||
Income from Operations | 98,895 | 2.3 | 135,091 | 3.3 | |||||||||
Interest expense, net | (1,171 | ) | — | (1,876 | ) | — | |||||||
Income before Provision for Income Taxes | 97,724 | 2.3 | 133,215 | 3.3 | |||||||||
Provision for income taxes | (39,100 | ) | (0.9 | ) | (53,849 | ) | (1.3 | ) | |||||
Net Income | 58,624 | 1.4 | 79,366 | 2.0 | |||||||||
Less: Net income attributable to noncontrolling interests | (154 | ) | — | (211 | ) | — | |||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 58,470 | 1.4 | % | $ | 79,155 | 2.0 | % |
17
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
Net sales totaled $1,486,451 for the quarter ended September 30, 2013, compared to $1,389,292 for the quarter ended September 30, 2012, an increase of $97,159, or 7.0%. Net sales to the electrical and comm/data market sectors for the three months ended September 30, 2013 increased 9.5% and 1.2%, respectively, compared to the same three-month period of 2012.
Gross margin increased $21,417, or 8.4%, to $277,663 from $256,246 primarily due to increased net sales in the third quarter of 2013, compared to the same period of 2012. The Company’s gross margin as a percent of net sales totaled 18.7% for the three months ended September 30, 2013, up from 18.4% for the three months ended September 30, 2012.
Selling, general and administrative expenses increased $7,395, or 3.5%, to $220,791 in the third quarter of 2013 from $213,396 in the third quarter of 2012, due primarily to higher employment related expenses for the three months ended September 30, 2013. Selling, general and administrative expenses as a percentage of net sales were 14.9% in the third quarter of 2013, down from 15.3% of net sales in the third quarter of 2012.
Depreciation and amortization expenses for the three months ended September 30, 2013 increased $1,192, or 14.8%, to $9,251 from $8,059 in the third quarter of 2012 due to an increase in property, at cost. Depreciation and amortization expenses as a percentage of net sales totaled 0.6% for the three months ended September 30, 2013 and 2012.
Other income, net totaled $451 for the three months ended September 30, 2013, compared to $915 for the three months ended September 30, 2012. Other income, net consists primarily of gains and losses on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to the Company’s business activities. The decrease in other income, net was due to losses on personal property during the three month period ended September 30, 2013.
Income from operations totaled $48,072 for the three months ended September 30, 2013, an increase of $12,366, or 34.6%, from $35,706 for the three months ended September 30, 2012. The increase was due primarily to gains in gross margin outpacing the increases in selling, general and administrative expenses and depreciation and amortization expenses.
Interest expense, net declined $9, or 2.2%, to $407 for the three months ended September 30, 2013 from $416 for the three months ended September 30, 2012. This reduction was due to a lower level of outstanding long-term debt in the third quarter of 2013, compared to the same period of 2012. Long-term debt outstanding, including the current portion, was $5,039 at September 30, 2013, compared to $16,222 at September 30, 2012.
The increase in income from operations and lower interest expense, net resulted in income before provision for income taxes of $47,665 for the three months ended September 30, 2013, an increase of $12,375, or 35.1%, compared to $35,290 for the three months ended September 30, 2012.
The Company’s total provision for income taxes increased $3,736, or 24.6%, to $18,946 for the three months ended September 30, 2013, compared to $15,210 for the same period of 2012. The Company’s effective tax rate was 39.7% for the three months ended September 30, 2013, compared to 43.1% for the same period of 2012. This decrease was attributable to an increase in pretax income for the three months ended September 30, 2013, compared to the three months ended September 30, 2012.
Net income attributable to Graybar Electric Company, Inc. for the three months ended September 30, 2013 increased $8,621, or 43.1%, to $28,633 from $20,012 for the three months ended September 30, 2012.
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
Net sales totaled $4,237,481 for the nine-month period ended September 30, 2013, compared to $4,050,956 for the nine-month period ended September 30, 2012, an increase of $186,525, or 4.6%. Net sales to the electrical market sector for the nine months ended September 30, 2013, increased 6.8%, while net sales to the comm/data sector decreased 0.6%, compared to the same nine-month period of 2012.
Gross margin increased $15,726, or 2.1%, to $777,460 from $761,734 primarily due to increased net sales in the first nine months of 2013, compared to the same period of 2012. The Company’s gross margin as a percent of net sales decreased to 18.3% for the nine months ended September 30, 2013 from 18.8% for the same period of 2012.
18
Selling, general and administrative expenses increased $17,332, or 2.7%, to $652,950, for the nine-month period ended September 30, 2013, compared to $635,618 for the nine-month period ended September 30, 2012, mainly due to higher employment-related costs. Selling, general and administrative expenses as a percentage of net sales for the nine-month period ended September 30, 2013 were 15.4%, down from 15.7% for the same nine-month period of 2012.
Depreciation and amortization expenses for the nine months ended September 30, 2013 increased $3,255, or 13.6%, to $27,268 from $24,013 for the same nine-month period in 2012 due to an increase in property, at cost. Depreciation and amortization expenses as a percentage of net sales totaled 0.6% for the nine months ended September 30, 2013 and 2012.
Other income, net totaled $1,653 for the nine-month period ended September 30, 2013, compared to $32,988 for the nine months ended September 30, 2012. Other income, net consists primarily of gains on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to the Company’s business activities. The decrease in other income, net was due to substantial net gains on the disposal of property for the nine months ended September 30, 2012 that were not repeated in the nine months ended September 30, 2013. Losses on the disposal of property were $324 for the nine months ended September 30, 2013, compared to gains on the disposal of property of $30,732 for the same period of 2012. There were also $257 in impairment losses recorded during the nine months ended September 30, 2012. There were no impairment losses recorded for the nine months ended September 30, 2013.
Income from operations totaled $98,895 for the nine-month period ended September 30, 2013, a decrease of $36,196, or 26.8%, from $135,091 for the nine-month period ended September 30, 2012. The decrease was due to the substantial decrease in other income, net, as well as increases in selling, general and administrative expenses and depreciation and amortization expenses.
Interest expense, net declined $705, or 37.6%, to $1,171 for the nine-month period ended September 30, 2013 from $1,876 for the nine months ended September 30, 2012. This reduction was due to a lower level of outstanding long-term debt during the nine months ended September 30, 2013, compared to the same period of 2012. Long-term debt outstanding, including the current portion, was $5,039 at September 30, 2013, compared to $16,222 at September 30, 2012.
The decrease in income from operations and lower interest expense, net resulted in income before provision for income taxes of $97,724 for the nine-month period ended September 30, 2013, a decrease of $35,491, or 26.6%, compared to $133,215 for the nine-month period ended September 30, 2012.
The Company’s total provision for income taxes decreased $14,749, or 27.4%, to $39,100 for the nine months ended September 30, 2013, compared to $53,849 for the same period in 2012. The Company’s year-to-date effective tax rate was 40.0% for the nine months ended September 30, 2013, compared to 40.4% for the same period in 2012. This decrease was attributable to changes in forecasted levels of pretax income for the nine months ended September 30, 2013, compared to September 30, 2012.
Net income attributable to Graybar Electric Company, Inc. for the nine-month period ended September 30, 2013 decreased $20,685, or 26.1%, to $58,470 from $79,155 for the nine months ended September 30, 2012.
Financial Condition and Liquidity
The Company has historically funded its working capital requirements using cash flows generated by the collection of trade receivables and trade accounts payable terms with its suppliers, supplemented by short-term bank lines of credit. Capital assets have been financed primarily by short-term bank lines of credit and long-term debt.
Operating Activities
Net cash provided by operations was $52,158 for the nine-month period ended September 30, 2013, compared to $26,226 provided during the nine months ended September 30, 2012. Positive cash flows from operations for the nine months ended September 30, 2013 were primarily due to net income of $58,624, an increase in trade accounts payable of $93,312, partially offset by an increase in trade receivables of $63,862, an increase in merchandise inventory of $51,307 and a decrease in accrued payroll and benefit costs of $27,778.
The average number of days of sales in trade receivables for the three-month period ended September 30, 2013 decreased modestly compared to the same three-month period ended September 30, 2012. Merchandise inventory turnover improved modestly for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, due to
19
higher sales volume partially offset by increased merchandise inventory levels at September 30, 2013 compared to September 30, 2012.
Current assets exceeded current liabilities by $465,208 at September 30, 2013, an increase of $39,635, or 9.3%, from $425,573 at December 31, 2012.
Investing Activities
Net cash used by investing activities totaled $39,852 for the nine months ended September 30, 2013, compared to net cash provided by investing activities of $2,915 for the same period of 2012. Capital expenditures for property were $40,014 and $30,662, and proceeds from the disposal of property were $162 and $33,577, for the nine months ended September 30, 2013 and 2012, respectively. The increase in capital expenditures in 2013 was partially due to investments in nine new locations. The proceeds received for the nine months ended September 30, 2013 were primarily from the sale of personal property. Proceeds received during the nine months ended September 30, 2012 were primarily from the sale of real property.
Financing Activities
Net cash used by financing activities totaled $3,006 for the nine months ended September 30, 2013, compared to $29,318 used by financing activities for the nine months ended September 30, 2012.
Cash provided by short-term borrowings was $19,130 and $33,114 for the nine months ended September 30, 2013 and 2012, respectively. The Company made payments due on long-term debt of $7,386 and on capital lease obligations of $2,308 during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, the Company made payments on long-term debt of $35,101 and capital lease obligations of $2,186.
Cash provided by the sale of common stock amounted to $11,347 and $10,501, and purchases of stock to be held in treasury were $10,105 and $8,119, for the nine months ended September 30, 2013 and 2012, respectively. Cash dividends paid were $14,041 and $24,672 for the nine months ended September 30, 2013 and 2012, respectively. The decrease in cash dividends paid for the nine months ended September 30, 2013, was due to the decision to pay the fourth quarter 2012 cash dividend in 2012 as opposed to the first quarter of 2013.
Cash paid for noncontrolling interests' common stock totaled $130 and $2,855 during the nine months ended September 30, 2013 and 2012, respectively. Cash provided by the sale of noncontrolling interests' common stock was $487 for the nine months ended September 30, 2013. There were no sales of noncontrolling interests' common stock for the same period in 2012.
Cash and cash equivalents were $46,974 at September 30, 2013, compared to $37,674 at December 31, 2012, an increase of $9,300, or 24.7%.
Liquidity
On September 30, 2013 and December 31, 2012, the Company and Graybar Canada Limited, the Company's Canadian operating subsidiary (“Graybar Canada”), had an unsecured, five-year, $500,000 revolving credit agreement maturing in September 2016 with Bank of America, N.A. and other lenders named therein, which includes a combined letter of credit sub-facility of up to $50,000, a U.S. swing line loan facility of up to $50,000, and a Canadian swing line loan facility of up to $20,000 (the "Credit Agreement"). The Credit Agreement also includes a $100,000 sublimit (in U.S. or Canadian dollars) for borrowings by Graybar Canada and contains an accordion feature, which allows the Company to request increases in the aggregate borrowing commitments of up to $200,000. There were $90,246 and $71,116 in short-term borrowings outstanding under the revolving credit facility at September 30, 2013 and December 31, 2012, respectively.
On May 29, 2013, the Company and Graybar Canada Limited amended the Credit Agreement to clarify that the Canadian Dealer Offered Rate ("CDOR") would replace Canadian LIBOR, which was discontinued by the British Bankers' Association after May 31, 2013. Effective on the amendment date, borrowings by the Canadian borrower denominated in Canadian dollars under the Credit Agreement bear interest based on, at the Canadian borrower's election, either (i) the base rate (as defined in the Credit Agreement), or (ii) CDOR, in each case plus an applicable margin, as set forth in the pricing grid detailed in the Credit Agreement. Borrowings by the Company are unaffected by this amendment to the Credit Agreement.
At September 30, 2013, the Company had total letters of credit of $6,913 outstanding, of which $738 were issued under the $500,000 revolving credit facility. At December 31, 2012, the Company had total letters of credit of $8,938 outstanding, of
20
which $763 were issued under the $500,000 revolving credit facility. The letters of credit are used primarily to support certain workers compensation insurance policies.
At September 30, 2013, the Company had unused lines of credit amounting to $409,754 available, compared to $428,884 at December 31, 2012. These lines are available to meet the short-term cash requirements of the Company, and certain committed lines of credit had annual fees of up to 35 basis points (0.35%) of the committed lines of credit.
Short-term borrowings outstanding during the nine months ended September 30, 2013 and 2012 ranged from a minimum of $27,530 and $35,105 to a maximum of $126,188 and $111,032, respectively.
The revolving credit facility contains various affirmative and negative covenants. The Company is also required to maintain certain financial ratios as defined in the agreement. Senior notes that were outstanding prior to their maturity during the first six months of 2013 also contained similar covenants and ratios. The Company was in compliance with all these covenants as of September 30, 2013 and December 31, 2012.
New Accounting Standards Updates
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which provides guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward exists. The requirements are effective for annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods. The Company continues to evaluate the impact that the adoption of this guidance will have on the Company’s financial condition or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). The Update requires that the Company present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. The Company adopted this Update as of January 1, 2013, and the adoption did not have any impact on the Company's results of operations, financial position, or cash flows during the three and nine months ended September 30, 2013, other than additional disclosures contained in Note 7 in the Notes to Condensed Consolidated Financial Statements.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively the "Acts") were enacted by the U.S. Congress in March 2010. The Acts have both short- and long-term implications for benefit plan standards. Implementation of this legislation is planned to occur in phases through 2018.
The Company’s healthcare costs have increased due to the Acts’ raising of the maximum eligible age for covered dependents to receive benefits. Moreover, the elimination of the lifetime dollar limits per covered individual, as well as other standard requirements of the Acts, will also likely cause the Company’s healthcare costs to increase in the future. In 2013, the Company is accruing for increased costs due to annual fees imposed by the Acts. The excise tax on “high cost” healthcare plans in 2018 may cause the Company's healthcare costs to increase further.
The Company expects the general trend in healthcare costs to continue to rise, and the effects of the Acts, and any future legislation, could materially impact the cost of providing healthcare benefits for many employers, including the Company.
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, 2012.
21
Item 4. 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, 2013, 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 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 Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
22
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 active and retired employees, and there is no public trading market for its common stock. Since 1928, substantially all of the issued and outstanding shares of common stock have been held of record by voting trustees under successive voting trust agreements. Under applicable state law, a voting trust may not have a term greater than ten years. The 2007 Voting Trust Agreement expires by its terms on March 15, 2017. At September 30, 2013, approximately eighty-three percent (83%) of the common stock was held in this voting trust. The participation of shareholders in the voting trust is voluntary at the time the voting trust is created, but is irrevocable during its term. Shareholders who elect not to participate in the voting trust hold their common stock as shareholders of record.
No shareholder may sell, transfer, or otherwise dispose of shares of common stock or the voting trust interests issued with respect thereto (“common stock”, “common shares”, or “shares”) without first offering the Company the option to purchase such shares at the price at which the shares were issued. The Company also has the option to purchase at the issue price the common stock of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension. The Company has always exercised its purchase option and expects to continue to do so. All outstanding shares of the Company have been issued at $20.00 per share.
The following table sets forth information regarding purchases of common stock by the Company pursuant to the foregoing provisions:
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | |||||
July 1 to July 31, 2013 | 87,163 | $20.00 | N/A | |||||
August 1 to August 31, 2013 | 45,233 | $20.00 | N/A | |||||
September 1 to September 30, 2013 | 21,600 | $20.00 | N/A | |||||
Total | 153,996 | $20.00 | N/A |
23
Item 6. Exhibits.
(a) | Exhibits furnished in accordance with provisions of Item 601 of Regulation S-K. | ||||||
(3) | (i) | Articles of Incorporation | |||||
(a) | Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 13, 2013 (Commission File No. 000-00255) and incorporated herein by reference. | ||||||
(ii) | Bylaws | ||||||
(a) | By-laws as amended through March 14, 2013, filed as Exhibit 3.2 to the Company's Current Report on Form 8-K dated March 14, 2013 (Commission File No. 000-00255) and incorporated herein by reference. | ||||||
(10) | Material Contracts | ||||||
(i) | Graybar Electric Company, Inc. Supplemental Benefit Plan, amended and restated, entered into between the Company and certain employees effective January 1, 2014, filed as Exhibit 10(ii) to the Company's Current Report on Form 8-K dated September 12, 2013 (Commission File No. 000-00255) and incorporated by reference.* | ||||||
(ii) | Form of Deferral Agreement under Graybar Electric Company, Inc. Supplemental Benefit Plan.* | ||||||
(31) | Rule 13a-14(a)/15d-14(a) Certifications | ||||||
(31.1) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer. | ||||||
(31.2) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer. | ||||||
(32) | Section 1350 Certifications | ||||||
(32.1) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer. | ||||||
(32.2) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer. | ||||||
101.INS | XBRL Instance Document | ||||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
* Compensation agreement |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GRAYBAR ELECTRIC COMPANY, INC. | |||
November 4, 2013 | /s/ KATHLEEN M. MAZZARELLA | ||
Date | Kathleen M. Mazzarella | ||
President and Chief Executive Officer (Principal Executive Officer) | |||
November 4, 2013 | /s/ RANDALL R. HARWOOD | ||
Date | Randall R. Harwood | ||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
25
EXHIBIT INDEX
Exhibits
(3(i)) | Articles of Incorporation | |||
(a) | Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 13, 2013 (Commission File No. 000-00255) and incorporated herein by reference. | |||
(3(ii)) | Bylaws | |||
(a) | By-laws as amended through March 14, 2013, filed as Exhibit 3.2 to the Company's Current Report on Form 8-K dated March 14, 2013 (Commission File No. 000-00255) and incorporated herein by reference. | |||
(10) | Material Contracts | |||
(i) | Graybar Electric Company, Inc. Supplemental Benefit Plan, amended and restated, entered into between the Company and certain employees effective January 1, 2014, filed as Exhibit 10(ii) to the Company's Current Report on Form 8-K dated September 12, 2013 (Commission File No. 000-00255) and incorporated by reference.* | |||
(ii) | Form of Deferral Agreement under Graybar Electric Company, Inc. Supplemental Benefit Plan.* | |||
(31.1 | ) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer. | ||
(31.2 | ) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer. | ||
(32.1 | ) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer. | ||
(32.2 | ) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer. | ||
101.INS* | XBRL Instance Document | |||
101.SCH* | XBRL Taxonomy Extension Schema Document | |||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||
* Compensation agreement |
26