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, 2006
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Large Accelerated Filer ( ) Accelerated Filer ( ) Non-Accelerated Filer (X)
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, 2006: 5,818,955
----------------------
(Number of Shares)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GRAYBAR ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands except for Share and Per Share Data)
(Unaudited)
SEPTEMBER 30, 2006 DECEMBER 31, 2005
-------------------------- -------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,384 $ 9,074
Trade receivables 740,334 633,980
Merchandise inventory 452,922 428,127
Other current assets 22,064 15,587
-------------------------- -------------------------
Total Current Assets 1,231,704 1,086,768
PROPERTY
Land 40,368 37,958
Buildings 305,730 301,474
Furniture and fixtures 161,911 157,470
Software 76,906 76,906
Capital leases --- 3,741
-------------------------- -------------------------
Total Property, at cost 584,915 577,549
Less - Accumulated depreciation and amortization (267,573) (257,700)
-------------------------- -------------------------
Net Property 317,342 319,849
OTHER NON-CURRENT ASSETS 37,034 36,770
-------------------------- -------------------------
TOTAL ASSETS $ 1,586,080 $ 1,443,387
========================== =========================
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ 92,725 $ 55,910
Current portion of long-term debt 31,910 32,133
Trade accounts payable 535,935 460,548
Accrued payroll and benefit costs 46,469 50,542
Other accrued taxes 14,854 12,715
Dividends payable --- 6,139
Other payables and accruals 90,109 69,892
-------------------------- -------------------------
Total Current Liabilities 812,002 687,879
POSTRETIREMENT BENEFITS LIABILITY 75,174 77,524
PENSION LIABILITY 60,081 60,081
LONG-TERM DEBT 208,948 233,527
OTHER NON-CURRENT LIABILITIES 3,053 2,941
-------------------------- -------------------------
TOTAL LIABILITIES $ 1,159,258 $ 1,061,952
-------------------------- -------------------------
2
GRAYBAR ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
(In thousands except for Share and Per Share Data)
(Unaudited)
SEPTEMBER 30, 2006 DECEMBER 31, 2005
-------------------------- -------------------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Preferred:
Par value, $0.01 per share
Authorized, 10,000,000 shares
Outstanding: None
Common:
Stated value, $20 per share
Authorized, 15,000,000 shares
SHARES
----------------------------------------
September 30, December 31,
2006 2005
------------------ ------------------
Issued to voting trustees 5,838,702 5,505,983
Issued to shareholders 280,834 309,412
In treasury, at cost (259,783) (22,992)
------------------ ------------------
Outstanding 5,859,753 5,792,403 $ 117,195 $ 115,848
Advance payments on
subscriptions to common
stock 451 ---
RETAINED EARNINGS 350,386 308,935
ACCUMULATED OTHER COMPREHENSIVE LOSS (41,210) (43,348)
-------------------------- -------------------------
TOTAL SHAREHOLDERS' EQUITY 426,822 381,435
-------------------------- -------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,586,080 $ 1,443,387
========================== =========================
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 INCOME
(In Thousands except for Per Share Data)
(Unaudited)
QUARTER ENDED SEPTEMBER 30,
----------------------------------------------------------
2006 2005
-------------------------- ---------------------------
SALES, NET OF RETURNS AND ALLOWANCES $ 1,333,554 $ 1,134,570
Less - Cash Discounts (5,093) (4,219)
-------------------------- --------------------------
Net Sales 1,328,461 1,130,351
COST OF MERCHANDISE SOLD 1,082,723 914,814
-------------------------- --------------------------
Gross Margin 245,738 215,537
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 202,294 186,341
DEPRECIATION AND AMORTIZATION 8,655 9,158
-------------------------- --------------------------
Income from Operations 34,789 20,038
OTHER INCOME, NET 524 1,464
INTEREST EXPENSE 5,758 6,528
-------------------------- --------------------------
Income Before Provision for Income Taxes 29,555 14,974
PROVISION FOR INCOME TAXES
Current 15,143 3,099
Deferred (3,467) 3,040
-------------------------- --------------------------
Total Provision for Income Taxes 11,676 6,139
-------------------------- --------------------------
NET INCOME $ 17,879 $ 8,835
========================== ==========================
NET INCOME PER SHARE OF COMMON STOCK (NOTE 3) $ 3.05 $ 1.52
========================== ==========================
COMMON STOCK DIVIDEND - $0.30 per share $ 1,761 $ 1,660
========================== ==========================
AVERAGE COMMON SHARES OUTSTANDING (NOTE 3) 5,861 5,797
========================== ==========================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of the condensed consolidated financial statements.
4
GRAYBAR ELECTRIC COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands except for Per Share Data)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
2006 2005
-------------------------- ------------------------
SALES, NET OF RETURNS AND ALLOWANCES $ 3,780,181 $ 3,179,352
Less - Cash Discounts (14,034) (11,588)
-------------------------- ------------------------
Net Sales 3,766,147 3,167,764
COST OF MERCHANDISE SOLD 3,055,118 2,554,400
-------------------------- ------------------------
Gross Margin 711,029 613,364
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 599,343 536,907
DEPRECIATION AND AMORTIZATION 25,473 25,786
-------------------------- ------------------------
Income from Operations 86,213 50,671
OTHER INCOME, NET 9,992 4,225
INTEREST EXPENSE 18,318 20,222
-------------------------- ------------------------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle 77,887 34,674
PROVISION FOR INCOME TAXES
Current 39,357 3,099
Deferred (8,218) 11,117
-------------------------- ------------------------
Total Provision for Income Taxes 31,139 14,216
-------------------------- ------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 46,748 20,458
Cumulative Effect of Change in Accounting Principle,
net of $3,587 Tax Effect (Note 3) --- (5,634)
-------------------------- ------------------------
NET INCOME $ 46,748 $ 14,824
========================== ========================
INCOME PER SHARE OF COMMON STOCK BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE 3) $ 7.97 $ 3.51
CHANGE IN ACCOUNTING PRINCIPLE (NOTE 3) --- (0.97)
-------------------------- ------------------------
NET INCOME PER SHARE OF COMMON STOCK (NOTE 3) $ 7.97 $ 2.54
========================== ========================
COMMON STOCK DIVIDEND - $0.90 per share $ 5,297 $ 5,001
========================== ========================
AVERAGE COMMON SHARES OUTSTANDING (NOTE 3) 5,864 5,825
========================== ========================
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
(In Thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
2006 2005
-------------------------- --------------------------
CASH FLOWS FROM OPERATIONS
Income before cumulative effect of change
in accounting principle $ 46,748 $ 20,458
Adjustments to reconcile income before cumulative effect of change in
accounting principle to cash provided by operations:
Depreciation and amortization 25,473 25,786
Deferred income taxes (8,218) 11,117
Gain on sale of property (9,189) (1,421)
Loss on impairment of property 1,336 ---
Changes in assets and liabilities:
Trade receivables (106,354) (19,656)
Merchandise inventory (24,795) 21,574
Other current assets (6,477) 17,316
Other non-current assets (264) 1,530
Trade accounts payable 75,387 (46,836)
Other current liabilities 34,220 3,418
Accrued payroll and benefit costs (4,073) (16,549)
Other non-current liabilities (2,238) (447)
-------------------------- --------------------------
Total adjustments to income before cumulative effect
of change in accounting principle (25,192) (4,168)
-------------------------- --------------------------
Net cash provided by operations 21,556 16,290
-------------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property 11,206 9,845
Capital expenditures for property (27,827) (18,995)
-------------------------- --------------------------
Net cash used by investing activities (16,621) (9,150)
-------------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term borrowings 36,815 32,069
Repayment of long-term debt (24,802) (27,691)
Principal payments under capital leases --- (1,272)
Sale of common stock 6,534 4,692
Purchase of treasury stock (4,736) (4,697)
Dividends paid (11,436) (11,118)
-------------------------- --------------------------
Net cash provided (used) by financing activities 2,375 (8,017)
-------------------------- --------------------------
NET INCREASE (DECREASE) IN CASH 7,310 (877)
-------------------------- --------------------------
CASH, BEGINNING OF YEAR 9,074 9,961
-------------------------- --------------------------
CASH, END OF THIRD QUARTER $ 16,384 $ 9,084
========================== ==========================
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
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In Thousands)
(Unaudited)
COMMON ACCUMULATED
STOCK OTHER
COMMON SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK UNISSUED EARNINGS LOSS TOTAL
---------------- ---------------- ---------------- ----------------- -------------------
December 31, 2004 $ 110,967 $ --- $ 308,780 $ (27,383) $ 392,364
-------------------
Net income --- --- 14,824 --- 14,824
Currency translation adjustments --- --- --- 1,162 1,162
Unrealized gain 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 $ 341 $ 318,603 $ (25,541) $ 404,024
================ ================ ================ ================= ==================
COMMON ACCUMULATED
STOCK OTHER
COMMON SUBSCRIBED, RETAINED COMPREHENSIVE
STOCK UNISSUED EARNINGS LOSS TOTAL
---------------- ---------------- ---------------- ----------------- -------------------
December 31, 2005 $ 115,848 $ --- $ 308,935 $ (43,348) $ 381,435
-------------------
Net income --- --- 46,748 --- 46,748
Currency translation adjustments --- --- --- 1,672 1,672
Unrealized gain from
interest rate swap (net of tax
of $297) --- --- --- 466 466
-------------------
Comprehensive income 48,886
-------------------
Stock issued 6,083 --- --- --- 6,083
Stock redeemed (4,736) --- --- --- (4,736)
Advance payments --- 451 --- --- 451
Dividends declared --- --- (5,297) --- (5,297)
---------------- ---------------- ---------------- ----------------- ------------------
September 30, 2006 $ 117,195 $ 451 $ 350,386 $ (41,210) $ 426,822
================ ================ ================ ================= ==================
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
(In Thousands except for Share and Per Share Data)
(Unaudited)
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 U.S. Securities and Exchange Commission applicable to interim financial
reporting. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America (U.S. GAAP) have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made herein 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 2006
presentation. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, this quarterly report includes all
adjustments, consisting of normal recurring accruals and adjustments,
necessary for the fair presentation of the financial statements presented.
Such interim financial information is subject to year-end adjustments. Results
for interim periods are not necessarily indicative of results to be expected
for the full year.
Note 2
- ------
At September 30, 2006, the Company had a $200,000 accounts receivable
securitization program that was to have expired in October 2006. Prior to
expiration, the Company amended the program agreement to consist of a $215,000
accounts receivable securitization program that expires in October 2009. 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
condensed 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 $60,000 and $20,000 at September 30,
2006 and December 31, 2005, respectively.
Note 3
- ------
The Company has two lease arrangements with an independent lessor which
provided $58,777 of financing for eight of the Company's distribution
facilities as of September 30, 2006. The agreements carry five-year terms
expiring July 2008 and December 2009. The Company has the option, with the
consent of the lessor's lenders, 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
8
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 financing structures used in these two lease arrangements qualify as
silos of a variable interest entity under Financial Accounting Standards Board
(FASB) Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities--an interpretation of ARB No. 51". The Company adopted the provisions
of FIN 46 on January 1, 2005, and in accordance therewith, as the primary
beneficiary, consolidated these silos in its financial statements as if the
interpretations of FIN 46 had been in place from the inception of these
leases. The impact of consolidation increased the Company's property by
$64,257, the net book value of the distribution facilities then financed under
the two leases. Additionally, the Company 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 also recorded a cumulative effect of change in
accounting principle of $(5,634), net of income tax effect of $3,587 during
the first quarter of 2005 to affect the consolidation. The Company has treated
the adoption of FIN 46 as a non-cash item in its consolidated statements of
cash flows.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -------------------------------------------
2006 2005 2006 2005
------------------ ------------------- -------------------- -------------------
Income Before Cumulative Effect of
Change in Accounting Principle $ 17,879 $ 8,835 $ 46,748 $ 20,458
Cumulative Effect of Change in
Accounting Principle, Net --- --- --- (5,634)
------------------ ------------------- -------------------- ------------------
Net Earnings $ 17,879 $ 8,835 $ 46,748 $ 14,824
================== =================== ==================== ==================
Available for Common Stock $ 17,879 $ 8,835 $ 46,748 $ 14,824
================== =================== ==================== ==================
Average Common Shares Outstanding 5,861,601 5,796,653* 5,863,705 5,824,897*
================== =================== ==================== ==================
Earnings Per Share Before Cumulative
Effect of Change in Accounting Principle $ 3.05 $ 1.52* $ 7.97 $ 3.51*
Cumulative Effect of Change in
Accounting Principle, Net --- --- --- (0.97)*
------------------ ------------------- -------------------- ------------------
Earnings Per Share $ 3.05 $ 1.52* $ 7.97 $ 2.54*
================== =================== ==================== ==================
<FN>
*Adjusted for the declaration of a 5% stock dividend in 2005. Prior to
adjusting for the stock dividend, the average common shares outstanding were
5,520,622 and 5,547,521 for the quarter and nine months ended September 30,
2005, respectively.
Following the disposition and substitution of properties subject to the
lease arrangements in 2005, the consolidated silos included in the Company's
financial statements have a net property balance of $42,540, long-term debt of
$56,720, and a minority interest of $2,057 at September 30, 2006 and a net
property balance of $43,446, long-term debt of $56,720 and minority interest
of $2,057 at December 31, 2005. Under the terms of the lease arrangements, the
Company's maximum exposure to loss at September 30, 2006 and December 31,
2005, in respect of the properties subject to the two lease agreements, is
$49,961, the amount guaranteed by the Company as the residual fair value of
the property.
9
Note 4
- ------
The Company entered into an agreement during the first quarter of 2006,
whereby the Company expected to sell certain real property at a sale price of
$1,950. The book value of the property on the date the sale agreement was
executed was approximately $3,100. The Company estimates that it will incur
additional costs of approximately $185 to sell the property. The transfer of
real estate had been expected to take place by the end of the second quarter
2006, but the contract to sell the property was cancelled as was allowed under
the terms of the sale agreement. The Company expects the real estate to be
sold by the second quarter of 2007.
The Company determined that the expected sale of this real property met
the criteria for recognition of an impairment loss on an asset classified as
held for sale as outlined in FASB Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
and, in accordance therewith, recorded an impairment loss of $(1,336) to
account for the expected loss on the sale in the first quarter of 2006. The
impairment loss is included in other income, net in the Consolidated
Statements of Income for the nine months ended September 30, 2006.
Gains on the sale of real property totaling $0 and $754 are included in
other income, net in the three-month periods ended September 30, 2006 and
2005, respectively. Gains on the sale of real property totaling $9,189 and
$1,421 are included in other income, net in the nine month periods ended
September 30, 2006 and 2005, respectively.
Note 5
- ------
The Company made contributions to its defined benefit pension plan
totaling $7,500 and $22,500 during the three and nine month periods ended
September 30, 2006 and 2005, respectively. Additional contributions totaling
$7,500 are expected to be paid during the remainder of 2006.
Note 6
- ------
Comprehensive income is reported in the Consolidated Statements of
Changes in Shareholders' Equity. Comprehensive income for the quarters ended
September 30, 2006 and 2005 was $17,628 and $11,234, respectively.
Note 7
- ------
The FASB issued Interpretation No. 48 (FIN 48), "Accounting for
Uncertainty in Income Taxes, an Interpretation of SFAS No. 109" in June 2006.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprise's financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
It also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. The Company
continues to evaluate the impact that FIN 48 will have on its financial
statements.
Note 8
- ------
The FASB issued Statement of Financial Accounting Standards No. 158
(SFAS 158), "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)", in September 2006. Among other items, SFAS 158 requires recognition
of the over- or under-funded status of an entity's defined benefit
postretirement plan(s) as an asset or liability in its financial statements,
requires the measurement of
10
defined benefit postretirement plan assets and obligations as of the end of
the employer's fiscal year, and requires recognition of the funded status of
defined benefit postretirement plans in other comprehensive income. SFAS 158
is effective for fiscal years ending after December 15, 2007 for employers,
such as the Company, that do not issue publicly-traded equity securities.
The Company has not yet evaluated the impact SFAS 158 will have on its
statement of financial position.
Note 9
- ------
The Company had an unsecured Credit Agreement with a group of banks at an
interest rate based on the London Interbank Offered Rate (LIBOR) that had
previously consisted of a $100,000, 364-day facility that was to have expired
in July 2006. Prior to expiration, the Company amended the Credit Agreement to
consist of a $150,000, 364-day facility that expires in July 2007. There were
no amounts outstanding under the Credit Agreement at September 30, 2006 and
December 31, 2005.
11
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, 2005, included in our
Annual Report on Form 10-K for such period as filed with the U.S. Securities
and Exchange Commission. The results shown herein are not necessarily
indicative of the results to be expected in any future periods. This
discussion contains forward-looking statements (as such term is defined in the
federal securities laws) and is based on current expectations, which involve
risks and uncertainties. Actual results and the timing of events could differ
materially from the forward-looking statements as a result of certain factors,
a number of which are outlined in Item 1A., "Risk Factors", of our Annual
Report on Form 10-K for the year ended December 31, 2005.
OVERVIEW
- --------
Graybar Electric Company, Inc. (the "Company") 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, federal and state governments and commercial
users. The Company is 100% owned by its active and retired employees, and
there is no public trading market for its common stock.
The Company experienced significant growth in both sales and gross
margin in the first nine months of 2006, compared to the first nine months of
2005, which more than offset an increase in total expense. As a result, income
from operations rose 70.1% in the first nine months of 2006, compared to the
first nine months of 2005. The combination of higher income from operations
and increases in other income, net resulted in an increase in income before
cumulative effect of change in accounting principle of 128.5% for the nine
months ended September 30, 2006, when compared to the nine months ended
September 30, 2005.
With the combined effects of favorable economic conditions and the
enhanced capabilities resulting from the upgrade of its computer systems to an
Enterprise Resource Planning (ERP) system, the Company believes it is
positioned to grow profitably and expand its business opportunities. Continued
profitable sales growth is expected for the balance of 2006.
12
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
The following table sets forth certain information relating to the
operations of the Company expressed as a percentage of net sales for the three
and nine month periods ended September 30, 2006 and 2005:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2006 2005 2006 2005
------------- ----------- ----------- -----------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Merchandise Sold (81.5) (80.9) (81.1) (80.6)
------------- ----------- ----------- -----------
Gross Margin 18.5 19.1 18.9 19.4
Selling, General and Administrative Expenses (15.2) (16.5) (16.0) (17.0)
Depreciation and Amortization (0.7) (0.8) (0.7) (0.8)
------------- ----------- ----------- -----------
Income from Operations 2.6 1.8 2.2 1.6
Other Income, net --- 0.1 0.3 0.1
Interest Expense (0.4) (0.6) (0.5) (0.6)
------------- ----------- ----------- -----------
Income Before Provision for Income Taxes and
Cumulative Effect of Change in Accounting Principle 2.2 1.3 2.0 1.1
Provision for Income Taxes (0.9) (0.5) (0.8) (0.4)
------------- ----------- ----------- -----------
Income Before Cumulative Effect of Change in Accounting
Principle 1.3 0.8 1.2 0.7
Cumulative Effect of Change in Accounting Principle --- --- --- (0.2)
------------- ----------- ----------- -----------
Net Income 1.3% 0.8% 1.2% 0.5%
============= =========== =========== ===========
The Company continued to benefit from positive general economic
conditions in North America during the three and nine month periods ended
September 30, 2006. Electrical market net sales were particularly strong in
the construction sector. Higher net sales to the comm/data market resulted
from the Company's improved competitive performance in this market, coupled
with modest growth in the overall comm/data market.
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2005
Net sales totaled $1,328,461 in the third quarter of 2006, an increase
of $198,110, or 17.5%, when compared to net sales of $1,130,351 for the third
quarter of 2005. Significant increases in net sales were recorded in both of
the primary market sectors in which the Company operates. Net sales to the
electrical market increased 18.1%, while net sales to the comm/data market
rose 14.9% during the third quarter of 2006, when compared to the same period
of 2005.
Gross margin increased $30,201, or 14.0%, due to the higher sales
volume recorded in the third quarter of 2006 compared to the same period of
2005. The Company's gross margin rate on net sales decreased to 18.5% during
the third quarter of 2006, down from 19.1% for the same period of 2005,
largely due to the increased cost of copper-based products, primarily wire and
cable.
Selling, general and administrative expenses increased $15,953, or
8.6%, in the third quarter of 2006, compared to the third quarter of 2005,
mainly due to employee compensation and benefit expenses which were
approximately $14,690, or 12.1%, higher than the same period of 2005.
13
Depreciation and amortization expenses decreased $503, or 5.5%, in the
third quarter of 2006 compared to the third quarter of 2005, mainly due to
lower amortization expense on capital leases.
Income from operations totaled $34,789 in the third quarter of 2006, an
increase of $14,751, or 73.6%, over the same period of 2005. This was due to
higher sales and gross margin and lower depreciation and amortization
expenses, partially offset by higher selling, general and administrative
expenses.
Other income, net in the third quarter of 2006 totaled $524, compared
to $1,464 in the third quarter of 2005. Accounts receivable interest charges
to customers and other interest income of $524 accounted for all of the other
income, net recorded during the quarter ended September 30, 2006. Other
income, net for the third quarter of 2005 included gains on the sale of real
property of $754 and accounts receivable interest charges to customers and
other interest income of approximately $710.
Interest expense declined $770, or 11.8%, in the third quarter of 2006
to $5,758, down from $6,528 in the third quarter of 2005. This reduction was
mainly due to lower levels of outstanding short- and long-term debt.
The combination of increased gross margin and higher selling, general
and administrative expenses, coupled with lower depreciation and amortization
expenses, lower other income, net, and lower interest expenses, resulted in
pre-tax earnings of $29,555 in the third quarter of 2006, an increase of
$14,581, or 97.4%, compared to pre-tax earnings of $14,974 in the third
quarter of 2005.
As a result of higher pre-tax earnings, the Company's total provision
for income taxes increased $5,537 to $11,676 for the quarter ended September
30, 2006. The Company's effective tax rate decreased to 39.5% in the third
quarter of 2006, down from 41.0% in the third quarter of 2005. The effective
tax rate for the quarters ended September 30, 2006 and 2005 was higher than
the 35% U.S. federal statutory rate primarily due to state and local income
taxes.
Net income totaled $17,879 in the third quarter of 2006, an increase of
$9,044, or 102.4%, over the same period of 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2005
Net sales totaled $3,766,147 for the nine months ended September 30,
2006, an increase of $598,383 or 18.9%, when compared to the same nine month
period ended September 30, 2005. Significant increases in net sales were
recorded in both of the primary market sectors in which the Company operates.
Net sales to the electrical market increased 18.9%, while net sales to the
comm/data market rose 18.9% in the nine months ended September 30, 2006,
compared to the same period of 2005.
14
Gross margin increased $97,665, or 15.9%, due to the higher net sales
volume recorded for the nine months ended September 30, 2006 compared to the
same period of 2005. The Company's gross margin rate on net sales decreased to
18.9% during the first nine months of 2006, down from 19.4% during the same
period of 2005, mainly due to the increased cost of copper-based products,
primarily wire and cable.
Selling, general and administrative expenses increased $62,436, or
11.6%, for the nine months ended September 30, 2006, compared to the nine
months ended September 30, 2005, mainly due to increased employee
compensation and benefit expenses totaling approximately $56,373.
Depreciation and amortization expenses decreased slightly to $25,473
from $25,786 mainly due to lower levels of property and equipment depreciation
and lower amortization on capital leases, when comparing the nine months ended
September 30, 2006 to the nine month period ended September 30, 2005.
Income from operations totaled $86,213 for the nine months ended
September 30, 2006, an increase of $35,542, or 70.1%, over the same nine month
period of 2005. This was due to higher sales and gross margin and lower
depreciation and amortization expenses, partially offset by higher selling,
general and administrative expenses.
Other income, net for the nine months ended September 30, 2006
totaled $9,992, compared to $4,225 for the nine months ended September 30,
2005. Gains on the sale of real property of $9,189 combined with a property
impairment loss of $(1,336) accounted for the largest part of other income,
net for the nine months ended September 30, 2006. Accounts receivable
interest charges to customers and other interest income, accounted for the
remaining $2,139 of other income, net. Other income, net for the nine months
ended September 30, 2005 included gains on sale of property of $1,421 and
accounts receivable interest charges to customers and other interest income
of $2,804.
Interest expense declined $1,904, or 9.4%, for the nine months ended
September 30, 2006 to $18,318 from $20,222 for the same nine month period in
2005. This reduction was mainly due to lower levels of outstanding short- and
long-term debt.
The combination of increased gross margin, other income, net, and
selling, general and administrative expenses, coupled with lower depreciation
and amortization and lower interest expenses, resulted in pre-tax earnings of
$77,887 for the nine months ended September 30, 2006, an increase of $43,213,
or 124.6%, compared to the nine months ended September 30, 2005.
As a result of higher pre-tax earnings, the Company's total provision
for income taxes increased $16,923 to $31,139 for the nine months ended
September 30, 2006. The Company's effective tax rate decreased to 40.0% for
the nine months ended September 30, 2006, down from 41.0% for the nine months
ended September 30, 2005. The effective tax rates for the nine months ended
September 30, 2006 and 2005 were higher than the 35% U.S. federal statutory
rate primarily due to state and local income taxes.
15
Income before cumulative effect of accounting change for the nine
months ended September 30, 2006 increased $26,290, or 128.5%, when compared to
the same nine month period of 2005.
Results for the nine months ended September 30, 2005 reflect the
Company's January 1, 2005 adoption of FASB Interpretation No. 46 (FIN 46),
which applies to the financing structures used in two lease arrangements
between the Company and an independent lessor. The financing structures used
in these two lease arrangements qualify as variable interest entities under
FIN 46 and the Company's interests in the variable interest entities were
required to be consolidated in the Company's financial statements beginning
January 1, 2005. The Company recorded a cumulative effect of change in
accounting principle of $(5,634), net of income tax effect of $3,587, in its
consolidated financial statements during the nine months ended September 30,
2005 as a consequence of the adoption of FIN 46.
Net income for the nine months ended September 30, 2006 totaled
$46,748, a $31,924, or 215.4%, increase over the same nine month period of
2005.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
The Company has funded its capital requirements from operations,
long-term debt and stock issuances to its employees.
Cash provided by operations for the nine months ended September 30,
2006 totaled $21,556, compared to $16,290 for the same period of 2005. This
$5,266 increase in cash flow from operations is mainly attributable to higher
income before cumulative effect of accounting change of $26,290 and increased
trade accounts payables and other current liabilities, partially offset by
increases in trade receivables and merchandise inventory due to higher net
sales volume.
Current assets exceeded current liabilities by $419,702 at September
30, 2006, up $20,813 from December 31, 2005. Accounts receivable increased
$106,354 due to the combined effect of higher average daily sales for the nine
months ended September 30, 2006 compared to 2005 for the same period, offset
by a moderate improvement in collections, as measured by average days of sales
outstanding. Merchandise inventory increased $24,795 from December 31, 2005,
reflecting the higher levels of inventory needed to support the growth in
sales, partially offset by a moderate improvement in average inventory
turnover during the nine months ended September 30, 2006, compared to the same
period of 2005.
Capital expenditures for property and equipment were $27,827 in the
nine month period ended September 30, 2006 compared to $18,995 for the same
period in 2005. Proceeds from the sale of property were $11,206 and $9,845, in
the nine months ended September 30, 2006 and 2005, respectively, primarily due
to the sale of real property.
The Company had available to it unused lines of credit totaling
$294,212 at September 30, 2006, compared to $288,831 at December 31, 2005.
These lines are available to meet the short-term cash requirements of the
Company. Short-term borrowings outstanding for the nine months ended September
30, 2006 ranged from a minimum of $28,630 to a maximum of $140,924, compared
to a minimum of $25,983 and a maximum of $205,804 for the nine months ended
September 30, 2005.
16
Cash provided by the sale of common stock and proceeds received on
common stock subscriptions totaled $6,534 in the nine months ended September
30, 2006, compared to $4,692 for the nine months ended September 30, 2005.
Purchases of treasury stock in the nine months ended September 30, 2006 and
2005 were $4,736 and $4,697 respectively. Dividends paid in the nine months
ended September 30, 2006 and 2005 were $11,436 and $11,118, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
The FASB issued Interpretation No. 48 (FIN 48), "Accounting for
Uncertainty in Income Taxes, an Interpretation of SFAS No. 109", in June 2006.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprise's financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
It also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. The Company
continues to evaluate the impact that FIN 48 will have on its financial
statements.
The FASB issued Statement of Financial Accounting Standards No. 158
(SFAS 158), "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)", in September 2006. Among other items, SFAS 158 requires recognition
of the over- or under-funded status of an entity's defined benefit
postretirement plan(s) as an asset or liability in its financial statements,
requires the measurement of defined benefit postretirement plan assets and
obligations as of the end of the employer's fiscal year, and requires
recognition of the funded status of defined benefit postretirement plans in
other comprehensive income. SFAS 158 is effective for fiscal years ending
after December 15, 2007 for employers, such as the Company, that do not issue
publicly-traded equity securities. The Company has not yet evaluated the
impact SFAS 158 will have on its statement of financial position.
SUBSEQUENT EVENT
- ----------------
At September 30, 2006, the Company had a $200,000 accounts receivable
securitization program that was to have expired in October 2006. Prior to
expiration, the Company amended the program agreement to consist of a $215,000
accounts receivable securitization program that expires in October 2009.
17
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, 2005.
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, 2006. 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.
18
PART II: OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No holder of Common Stock (or Voting Trust Certificates representing
shares) may sell, transfer or otherwise dispose of any shares (or the Voting
Trust Certificates) without first offering the Company the option to purchase
them within 30 days for $20.00 per share, with appropriate adjustment for
regular dividends, if any, declared and paid at the end of the quarter in
which the offer is made. The Company also has the option to purchase for
$20.00 per share, adjusted for dividends, the Common Stock (or Voting Trust
Certificates representing shares) of any shareholder who ceases to be an
employee for any reason other than death or retirement on a pension (except a
deferred pension) at any time after termination of employment until 30 days
after the holder makes an offer to sell the Common Stock to the Company. In
the event of death, such option becomes exercisable by the Company one year
from the date of death. In the past the Company has always exercised these
options and it expects to continue to do so.
The following table sets forth information regarding purchases of
Common Stock (and Voting Trust Certificates representing shares) by the
Company pursuant to the foregoing provisions:
ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE TOTAL NUMBER OF SHARES
NUMBER PRICE PURCHASED AS PART OF
OF PAID PUBLICLY ANNOUNCED PLANS OR
PERIOD SHARES PURCHASED PER SHARE PROGRAMS
- ----------------------------------------------------------------------------------------------------------------------------
July 1 to July 31, 2006 21,486 $20.00 N/A
- ----------------------------------------------------------------------------------------------------------------------------
August 1 to August 31, 31,372 $20.00 N/A
2006
- ----------------------------------------------------------------------------------------------------------------------------
September 1 to September 39,902 $20.00 N/A
30, 2006
- ----------------------------------------------------------------------------------------------------------------------------
Total 92,760 $20.00 N/A
- ----------------------------------------------------------------------------------------------------------------------------
19
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 September 14, 2006,
reporting a change in the Company's Board of Directors.
Form 8-K was filed with the Commission on October 13, 2006,
reporting the Company's entry into Material Definitive
Agreements.
20
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, 2006 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
AND PRINCIPAL ACCOUNTING OFFICER
21
EXHIBIT INDEX
-------------
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
22