CONFORMED
---------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Commission File Number 0-255
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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GRAYBAR ELECTRIC COMPANY, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 13 - 0794380
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34 NORTH MERAMEC AVENUE, ST. LOUIS, MO 63105
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(Address of principal executive offices) (Zip Code)
POST OFFICE BOX 7231, ST. LOUIS, MO 63177
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(Mailing Address) (Zip Code)
Registrant's telephone number, including area code: (314) 573 - 9200
--------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
------ ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES NO X
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act)
YES NO X
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Common Stock Outstanding at October 31, 2005: 5,520,530
--------------------
(Number of Shares)
Item 1. Financial Statements PART I
------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
SEPTEMBER 30, 2005 DECEMBER 31, 2004
-------------------------- -------------------------
CURRENT ASSETS
Cash and cash equivalents $ 9,084 $ 9,961
-------------------------- -------------------------
Trade receivables 644,384 624,728
-------------------------- -------------------------
Merchandise inventory 451,638 473,212
-------------------------- -------------------------
Other current assets 9,063 26,379
-------------------------- -------------------------
Total current assets 1,114,169 1,134,280
-------------------------- -------------------------
PROPERTY
Land 40,144 29,944
-------------------------- -------------------------
Buildings and permanent fixtures 302,508 242,579
-------------------------- -------------------------
Furniture and fixtures 176,723 167,852
-------------------------- -------------------------
Software 76,906 76,906
-------------------------- -------------------------
Capital leases 5,637 22,936
-------------------------- -------------------------
Less-Accumulated depreciation 268,901 248,711
-------------------------- -------------------------
Net property 333,017 291,506
-------------------------- -------------------------
OTHER ASSETS 27,643 25,586
-------------------------- -------------------------
TOTAL ASSETS $ 1,474,829 $ 1,451,372
========================== =========================
CURRENT LIABILITIES
Short-term borrowings $ 99,826 $ 67,757
-------------------------- -------------------------
Current portion of long-term debt 32,135 49,019
-------------------------- -------------------------
Trade accounts payable 443,347 490,183
-------------------------- -------------------------
Other accrued taxes 17,617 10,147
-------------------------- -------------------------
Accrued payroll and benefit costs 31,957 48,506
-------------------------- -------------------------
Dividends payable --- 6,117
-------------------------- -------------------------
Other payables and accruals 73,447 65,962
-------------------------- -------------------------
Total current liabilities 698,329 737,691
-------------------------- -------------------------
POSTRETIREMENT BENEFITS LIABILITY 77,779 77,470
-------------------------- -------------------------
PENSION LIABILITY 37,488 37,488
-------------------------- -------------------------
LONG-TERM DEBT 254,637 205,603
-------------------------- -------------------------
OTHER NON-CURRENT LIABILITIES 2,572 756
-------------------------- -------------------------
TOTAL LIABILITIES 1,070,805 1,059,008
-------------------------- -------------------------
2
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------- -------------------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Preferred:
----------
Par value $.01 per share
Authorized 10,000,000
shares
SHARES
------
2005 2004
---- ----
Issued to shareholders --- ---
------------- -------------
In treasury, at cost --- ---
------------- -------------
Outstanding --- --- --- ---
------------- ------------- ------------------------- -------------------------
Common:
-------
Stated value $20 per share
Authorized 15,000,000 shares
SHARES
------
2005 2004
---- ----
Issued to voting trustees 5,513,860 5,298,699
------------- -------------
Issued to shareholders 279,025 276,641
------------- -------------
In treasury, at cost (261,825) (26,978)
------------- -------------
Outstanding 5,531,060 5,548,362 110,621 110,967
------------- ------------- ------------------------- -------------------------
Advance payments on subscriptions
to common stock
341 ---
------------------------- -------------------------
Retained earnings 318,603 308,780
------------------------- -------------------------
Accumulated other comprehensive income (loss) (25,541) (27,383)
------------------------- -------------------------
TOTAL SHAREHOLDERS' EQUITY 404,024 392,364
------------------------- -------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,474,829 $ 1,451,372
========================= =========================
See accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
QUARTER ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
-------------------------- --------------------------
GROSS SALES, net of returns and allowances $ 1,134,570 $ 1,076,462
-------------------------- --------------------------
Less - Cash discounts 4,219 3,980
-------------------------- --------------------------
NET SALES 1,130,351 1,072,482
-------------------------- --------------------------
COST OF MERCHANDISE SOLD 914,814 872,641
-------------------------- --------------------------
Gross margin 215,537 199,841
-------------------------- --------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 186,341 177,923
-------------------------- --------------------------
DEPRECIATION AND AMORTIZATION 9,158 8,757
-------------------------- --------------------------
Income from operations 20,038 13,161
-------------------------- --------------------------
OTHER INCOME, net 1,464 829
-------------------------- --------------------------
INTEREST EXPENSE 6,528 5,766
-------------------------- --------------------------
Income before provision for income taxes 14,974 8,224
-------------------------- --------------------------
PROVISION FOR INCOME TAXES
Current 3,099 497
-------------------------- --------------------------
Deferred 3,040 3,131
-------------------------- --------------------------
Total provision for income taxes 6,139 3,628
-------------------------- --------------------------
NET INCOME $ 8,835 $ 4,596
========================== ==========================
NET INCOME PER SHARE OF COMMON STOCK $ 1.60 $ .81
========================== ==========================
DIVIDENDS
Common - $.30 per share 1,660 1,694
-------------------------- --------------------------
$ 1,660 $ 1,694
========================== ==========================
See accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
-------------------------- --------------------------
GROSS SALES, net of returns and allowances $ 3,179,352 $ 3,062,422
-------------------------- --------------------------
Less - Cash discounts 11,588 9,722
-------------------------- --------------------------
NET SALES 3,167,764 3,052,700
-------------------------- --------------------------
COST OF MERCHANDISE SOLD 2,554,400 2,457,401
-------------------------- --------------------------
Gross margin 613,364 595,299
-------------------------- --------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 536,907 527,000
-------------------------- --------------------------
DEPRECIATION AND AMORTIZATION 25,786 27,364
-------------------------- --------------------------
Income from operations 50,671 40,935
-------------------------- --------------------------
OTHER INCOME, net 4,225 2,332
-------------------------- --------------------------
INTEREST EXPENSE 20,222 17,698
-------------------------- --------------------------
Income before provision for income taxes 34,674 25,569
-------------------------- --------------------------
PROVISION FOR INCOME TAXES
Current 3,099 4,133
-------------------------- --------------------------
Deferred 11,117 6,606
-------------------------- --------------------------
Total provision for income taxes 14,216 10,739
-------------------------- --------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ 20,458 $ 14,830
-------------------------- --------------------------
Cumulative effect of change in accounting principle,
net of $3,587 tax benefit $ (5,634) $ ---
-------------------------- --------------------------
NET INCOME $ 14,824 $ 14,830
========================== ==========================
INCOME PER SHARE OF COMMON STOCK
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE 2) $ 3.69 $ 2.58
-------------------------- --------------------------
NET INCOME PER SHARE OF COMMON STOCK (NOTE 2) $ 2.67 $ 2.58
========================== ==========================
DIVIDENDS
Preferred - $.25 per share $ --- $ 1
-------------------------- --------------------------
Common - $.90 per share 5,001 5,150
-------------------------- --------------------------
$ 5,001 $ 5,151
========================== ==========================
See accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
NINE MONTHS ENDED SEPTEMBER 30,
2005 2004
-------------------------- --------------------------
CASH FLOWS FROM OPERATIONS
Income before cumulative effect of change
in accounting principle $ 20,458 $ 14,830
-------------------------- --------------------------
Adjustments to reconcile income before cumulative effect of change in
accounting principle to cash provided (used) by operations:
Depreciation and amortization 25,786 27,364
-------------------------- --------------------------
Deferred income taxes 11,117 6,606
-------------------------- --------------------------
Gain on sale of property (1,421) ---
-------------------------- --------------------------
Changes in assets and liabilities:
Trade receivables (19,656) (90,598)
-------------------------- --------------------------
Merchandise inventory 21,574 (5,795)
-------------------------- --------------------------
Other current assets 17,316 (70)
-------------------------- --------------------------
Other assets 1,530 1,591
-------------------------- --------------------------
Trade accounts payable (46,836) (28,649)
-------------------------- --------------------------
Accrued payroll and benefit costs (16,549) 9,049
-------------------------- --------------------------
Other accrued liabilities 2,971 24,866
-------------------------- --------------------------
Total adjustments to income (4,168) (55,636)
-------------------------- --------------------------
Net cash provided (used) by operations 16,290 (40,806)
-------------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property 9,845 68
-------------------------- --------------------------
Capital expenditures for property (18,995) (13,820)
-------------------------- --------------------------
Net cash used by investing activities (9,150) (13,752)
-------------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term borrowings 32,069 72,594
-------------------------- --------------------------
Repayment of long-term debt (27,691) (13,520)
-------------------------- --------------------------
Principal payments under capital leases (1,272) (2,065)
-------------------------- --------------------------
Sale of common stock 4,692 330
-------------------------- --------------------------
Purchase of treasury stock (4,697) (4,955)
-------------------------- --------------------------
Dividends paid (11,118) (11,620)
-------------------------- --------------------------
Net cash (used) provided by financing activities (8,017) 40,764
-------------------------- --------------------------
NET DECREASE IN CASH (877) (13,794)
-------------------------- --------------------------
CASH, BEGINNING OF YEAR 9,961 19,161
-------------------------- --------------------------
CASH, END OF THIRD QUARTER $ 9,084 $ 5,367
========================== ==========================
See accompanying Notes to Consolidated Financial Statements
6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 2005 AND 2004
---------------------------
(Dollars Stated in Thousands)
COMMON ACCUMULATED
STOCK OTHER
COMMON PREFERRED SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK STOCK UNISSUED EARNINGS INCOME (LOSS) TOTAL
------------ ------------- --------------- -------------- ------------------- ---------------
December 31, 2003 $117,427 $ 43 $ 45 $ 306,030 $ (35,962) $ 387,583
---------------
Net Income 14,830 14,830
Currency Translation Adjustments 818 818
Unrealized Gain/(Loss) from
Interest Rate Swap (net of tax
of $21) 32 32
---------------
Comprehensive Income 15,680
---------------
Stock Issued 335 335
Stock Redeemed (4,912) (43) (4,955)
Advance Payments (5) (5)
Dividends Declared (5,151) (5,151)
------------ -------------- -------------- -------------- ------------------- ---------------
September 30, 2004 $112,850 $ 0 $ 40 $ 315,709 $ (35,112) $ 393,487
============ ============== ============== ============== =================== ===============
COMMON ACCUMULATED
STOCK OTHER
COMMON PREFERRED SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK STOCK UNISSUED EARNINGS INCOME (LOSS) TOTAL
------------ ------------- --------------- -------------- ------------------- ---------------
December 31, 2004 $ 110,967 $ 0 $ 0 $ 308,780 $ (27,383) $ 392,364
---------------
Net Income 14,824 14,824
Currency Translation Adjustments 1,162 1,162
Unrealized Gain/(Loss) from
Interest Rate Swap (net of tax
of $342) 680 680
---------------
Comprehensive Income 16,666
---------------
Stock Issued 4,351 4,351
Stock Redeemed (4,697) (4,697)
Advance Payments 341 341
Dividends Declared (5,001) (5,001)
------------ -------------- -------------- -------------- ------------------- ---------------
September 30, 2005 $ 110,621 $ 0 $ 341 $ 318,603 $ (25,541) $ 404,024
============ ============== ============== ============== =================== ===============
See accompanying Notes to Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
-------------------------------
(Dollars Stated in Thousands)
(Except for Share and Per Share Data)
Note 1
- ------
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed 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, the quarterly report includes all
adjustments, consisting of normal recurring accruals, necessary for the fair
presentation of the financial statements presented. Such interim financial
information is subject to year-end adjustments and independent audit.
Results for interim periods are not necessarily indicative of results to be
expected for the full year.
Note 2
- ------
NINE MONTHS 2005 NINE MONTHS 2004
------------------------ -------------------------
Earnings for Nine Months Before Cumulative
Effect of Change in Accounting Principle $ 20,458 $ 14,830
------------------------ -------------------------
Cumulative Effect of Change in Accounting Principle $ (5,634) $ ---
------------------------ -------------------------
Earnings for Nine Months $ 14,824 $ 14,830
------------------------ -------------------------
Dividends on Preferred Stock --- 1
------------------------ -------------------------
Available for Common Stock $ 14,824 $ 14,829
------------------------ -------------------------
Average Common Shares Outstanding 5,547,521 5,747,729
------------------------ -------------------------
Earnings Per Share Before Cumulative Effect
of Change in Accounting Principle $ 3.69 $ 2.58
------------------------ -------------------------
Earnings Per Share $ 2.67 $ 2.58
------------------------ -------------------------
Note 3
- ------
At September 30, 2005 the Company had a $200 million accounts
receivable securitization program that expires in October 2006. The
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 receivables to an unrelated multi-seller
commercial paper conduit. The Company accounts for the securitization as an
on-balance sheet financing arrangement because the Company has maintained
effective control of the accounts receivable through a call option that
gives GCC the unilateral right to repurchase the undivided interests.
Accordingly, the accounts receivable and related debt are included in the
accompanying consolidated balance sheets. GCC has granted a security
interest in its trade receivables to the commercial paper conduit.
Borrowings outstanding under the securitization program were $80,000 and
$50,000 at September 30, 2005 and December 31, 2004, respectively.
8
Note 4
- ------
The Company has two lease arrangements with an independent lessor which
provide $73,478 of financing for ten of the Company's distribution
facilities. Each of the agreements carries a five-year term. The Company has
the option, with the consent of the lenders to the lessor, to renew the
leases for an additional five-year term or to purchase the property for a
price including the outstanding lease balance. If the Company elects not to
renew the lease or purchase the property, or such lenders refuse to consent
to a renewal, the Company may elect to remarket the property and arrange for
its sale to a third party.
The leasing structures used in these two lease arrangements qualify as
silos of a variable interest entity under FASB Interpretation No. 46 (FIN
No. 46). As of January 1, 2005, the Company has adopted the provisions of
FIN No. 46 and accordingly, as the primary beneficiary, has consolidated
these silos in its financial statements. The impact of consolidation
increased the Company's property by $64,257, the net book value of the
leased property as if the interpretations of FIN No. 46 had been in place
from the inception of these leases. Additionally, the Company has increased
long-term debt by $70,906, and recorded a minority interest in the silos of
$2,572 at the date of adoption. The Company has recorded a cumulative effect
of change in accounting principle of $(5,634), net of income tax effect of
$3,587, to affect the consolidation. The Company has treated the adoption of
FIN No. 46 as a non-cash item in its consolidated statements of cash flows.
In June 2005 the Company sold one of the distribution facilities that
had previously been included in one of the lease arrangements prior to the
expiration of the lease term. As a result of the sale, the Company
substituted a letter of credit in the amount of $6,600 in favor of the
lenders to the lessor pending completion of a replacement property
transaction. During the third quarter of 2005, the Company substituted two
properties in a replacement transaction, granted mortgages on two other
properties as additional security, and cancelled the $6,600 letter of
credit.
As of September 30, 2005, the consolidated silos included in the
Company's financial statements have a net property balance of $57,862,
long-term debt of $70,906, and a minority interest of $2,572. Under the
terms of the lease arrangements, the Company's maximum exposure to loss at
September 30, 2005, in respect of the properties subject to the two lease
arrangements, is $62,455, the amount guaranteed by the Company as the
residual fair value of the property.
Had the provisions of FIN No. 46 been applied retrospectively, rather
than as the cumulative effect of a change in accounting principle, net
income and net income per share on a pro forma basis would be as follows:
Actual Pro forma
------------------------------------- -----------------------------------
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
-------------- -------------- -------------- --------------
Net income $ 14,824 $ 14,830 $ 20,458 $ 13,912
Net income per share of
common stock $ 2.67 $ 2.58 $ 3.69 $ 2.42
9
Note 5
- ------
The Company has a Credit Agreement with a group of banks at an interest
rate based on the London Interbank Offered Rate (LIBOR) that had previously
consisted of an $85,000, 364-day facility that expired in July 2005. Upon
expiration, the Company amended the credit agreement to consist of a
$100,000, 364-day facility that expires in July 2006. There were no
borrowings outstanding under the Credit Agreement at September 30, 2005.
Note 6
- ------
The Company has included the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) in accordance with FASB
Staff Position (FSP) No. FAS 106-2 in its third quarter 2005 financial
statements. The prescription drug benefit included in the Company's retiree
welfare plan was deemed to be actuarially equivalent to the Medicare
prescription drug benefit and eligible for the federal subsidy available to
plan sponsors. Eligibility for the federal subsidy has reduced the Company's
postretirement benefit obligation by approximately $6.0 million. The Act
will also reduce the annual postretirement benefit cost recorded in fiscal
year 2005 by $0.4 million. Results for the quarter ending September 30, 2005
include $0.2 million of expense reduction related to the Act.
Note 7
- ------
Comprehensive income is reported in the Consolidated Statements of
Changes in Shareholders' Equity. Comprehensive income for the quarters ended
September 30, 2005 and 2004 was $11,234 and $4,731, respectively.
Note 8
- ------
During the nine months ended September 30, 2005, the Company made
contributions totaling $22,500 to its defined benefit pension plan.
Additional contributions totaling $7,500 are expected to be paid during the
remainder of 2005.
10
Item 2. MANAGEMENT'S DISCUSSION & ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Dollars Stated in Thousands)
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, 2004, included in
our Annual Report on Form 10-K for such period as filed with the U.S.
Securities and Exchange Commission. The results shown herein are not
necessarily indicative of the results to be expected in any future periods.
This discussion contains forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) based on current
expectations which involve risks and uncertainties. Actual results and the
timing of events could differ materially from the forward-looking statements
as a result of a number of factors.
OVERVIEW
- --------
Graybar Electric Company, Inc. is engaged internationally in the
distribution of electrical, telecommunications and networking products and
the provision of related supply chain management and logistics services,
primarily to contractors, industrial plants, telephone companies, power
utilities, and commercial users.
Modest sales growth and continued attention to controlling expenses
resulted in improved financial results for the first nine months of 2005
when compared to the same period of 2004. Income from operations increased
23.8% and income before cumulative effect of change in accounting principle
increased 38.0%. Net income for nine months 2005 was $14,824 after a
$(5,634) charge for the cumulative effect of the change in accounting
principle resulting from adoption of FASB Interpretation Number 46 in the
first quarter of 2005.
With an improved economy and enhanced service capabilities resulting from
the recent upgrade of its computer systems to an Enterprise Resource
Planning system, the Company believes it is positioned to grow profitably
and expand its future business opportunities.
Moderate, profitable sales growth is expected for the remainder of 2005.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain information relating to the
operations of the Company expressed as a percentage of net sales:
Nine Months Ended September 30: 2005 2004
---- ----
Net Sales 100.0% 100.0%
Cost of Merchandise Sold (80.6) (80.5)
----------- -----------
Gross Margin 19.4 19.5
Selling, General and Administrative Expenses (17.0) (17.3)
Depreciation and amortization (.8) (.9)
----------- -----------
Income from operations 1.6 1.3
Other Income, net .1 .1
Interest Expense (.6) (.6)
----------- -----------
Income Before Provision for Income Taxes 1.1 .8
Provision for Income Taxes (.4) (.3)
----------- -----------
Income Before Cumulative Effect of Change in Accounting Principle .7 .5
Cumulative Effect of Change in Accounting Principle (.2) --
----------- -----------
Net Income .5% .5%
=========== ===========
11
MANAGEMENT'S DISCUSSION & ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Dollars Stated in Thousands)
RESULTS OF OPERATIONS (Continued)
- ---------------------
Net sales in the first nine months of 2005 increased $115,064, or 3.8%,
to $3,167,764 compared to $3,052,700 in the first nine months of 2004. The
higher net sales resulted from the combined effect of an increase in
electrical market sales experienced by the Company, which were partially
offset by a decrease in sales to customers in the communications market. The
increase in electrical market sales resulted from the generally improved
economic conditions that are prevalent on an industry-wide basis in the
electrical market sectors in which the Company operates. The decline in
communications market sales was due largely to increased competitive
pressures and the lingering effects of the excess of infrastructure and
network capacity in the communications market served by the Company.
Electrical market sales increased 5.5% and communications market sales
decreased 1.8% when comparing the first nine months of 2005 to the first
nine months of 2004.
Gross margin increased $18,065, or 3.0%, in the first nine months of 2005
compared to the first nine months of 2004 primarily due to the overall
increase in net sales. Gross margin as a percentage of net sales decreased
when comparing the first nine months of 2005 to the first nine months of
2004 due largely to lower margins on copper and steel-based products sold by
the Company that were subject to pricing inflation in 2004.
Selling, general and administrative expenses increased $9,907, or 1.9%,
when comparing the first nine months of 2005 to the first nine months of
2004 due largely to increases in transportation and other general operating
expenses of approximately $7,126 and increased employee compensation and
benefit costs of approximately $2,781.
Depreciation and amortization decreased from $27,364 in the first nine
months of 2004 to $25,786 in the first nine months of 2005 primarily due to
lower depreciation expense on capital leases.
Other income, net includes gains on sale of property of $1,421 and $0 and
accounts receivable interest charges to customers of $1,311 and $1,584 in
the first nine months of 2005 and the first nine months of 2004,
respectively.
Interest expense increased $2,524, or 14.3%, when comparing the first
nine months of 2005 to the first nine months of 2004 primarily due to a
reclassification of rent to interest expense related to the adoption of FASB
Interpretation No. 46 (FIN No. 46), discussed below.
The combined effect of the increases in gross margin and other income,
together with the decrease in depreciation and amortization and increases in
selling, general and administrative expenses and interest expense, resulted
in an increase in pretax earnings of $9,105 in the first nine months of 2005
compared to the same period in 2004.
As of January 1, 2005, the Company has adopted the provisions of FIN No.
46, which apply to the leasing structures used in two lease arrangements
between the Company and an independent lessor. The leasing structures used
in these two lease arrangements qualify as variable interest entities under
FIN No. 46 and the Company's interests in the variable interest entities are
required to be consolidated in the Company's financial statements beginning
in the first quarter of 2005. The Company has recorded a cumulative effect
of change in accounting principle of $(5,634), net of income tax benefit of
$3,587, in its consolidated financial statements in the first quarter of
2005 as a result of adoption of FIN No. 46.
12
MANAGEMENT'S DISCUSSION & ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Dollars Stated in Thousands)
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
At September 30, 2005, current assets exceeded current liabilities by
$415,840, up $19,251 from December 31, 2004. The increase in trade
receivables from December 31, 2004 to September 30, 2005 resulted primarily
from the increase in sales experienced by the Company. The average number of
days of sales in accounts receivable at September 30, 2005 decreased
slightly from the average number of days at December 31, 2004. Merchandise
inventory levels were lower at September 30, 2005 when compared to December
31, 2004. Average inventory turnover increased slightly when comparing
September 30, 2005 to December 31, 2004.
At September 30, 2005, the Company had available to it unused lines of
credit amounting to $236,010. These lines are available to meet short-term
cash requirements of the Company. Short-term borrowings outstanding during
2005 through September 30 ranged from a minimum of $25,983 to a maximum of
$205,804.
The Company has funded its capital requirements from operations, stock
issuances to its employees and long-term debt. During the first nine months
of 2005, cash provided by operations amounted to $16,290 compared to $40,806
cash used by operations in the first nine months of 2004. Cash provided from
the sale of common stock and proceeds received on stock subscriptions
amounted to $4,692 in the first nine months of 2005.
Capital expenditures for property for the nine-month periods ended
September 30, 2005 and 2004 were $18,995 and $13,820, respectively.
Purchases of treasury stock for the nine-month periods ended September 30,
2005 and 2004 were $4,697 and $4,955, respectively. Dividends paid for the
nine-month periods ended September 30, 2005 and 2004 were $11,118 and
$11,620, respectively.
13
Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------
There have been no material changes in the policies, procedures, controls
or risk profile from that 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, 2004.
Item 4. CONTROLS AND PROCEDURES
-----------------------
An evaluation was performed under the supervision and with the
participation of the Company's management of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of
September 30, 2005. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective.
14
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits furnished in accordance with provisions of
Item 601 of Regulation S-K.
(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
(b) Reports on Form 8-K.
Form 8-K was filed with the Commission on July 14, 2005
reporting a change in the Company's Principal Accounting
Officer. Form 8-Ks were also filed on July 26, 2005 and
September 30, 2005, each reporting an entry into a
Material Definitive Agreement.
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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 10, 2005 GRAYBAR ELECTRIC COMPANY, INC.
--------------------
(Date)
/S/ R. A. REYNOLDS, JR.
-----------------------------------
R. A. REYNOLDS, JR.
PRESIDENT AND
PRINCIPAL EXECUTIVE OFFICER
/S/ D. B. D'ALESSANDRO
-----------------------------------
D. B. D'ALESSANDRO
SENIOR VICE PRESIDENT AND
PRINCIPAL FINANCIAL OFFICER
/S/ MARTIN J. BEAGEN
-----------------------------------
MARTIN J. BEAGEN
VICE PRESIDENT
AND CONTROLLER
16