UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||||||
Washington, D.C. 20549 |
FORM 10-K
| |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
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) |
Securities registered pursuant to Section 12(b) of the Act: | None | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
N/A | N/A | N/A | |
Securities registered pursuant to Section 12(g) of the Act: | Common Stock - Par Value $1.00 Per Share with a | ||
Stated Value of $20.00 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. |
YES |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. |
YES |
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 |
Indicate by check mark whether the registrant has submitted electronically |
YES |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, |
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
Emerging growth company |
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the |
The aggregate stated value of the Common Stock beneficially owned with respect to rights of disposition by persons who are not affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant on June 30, |
The number of shares of Common Stock outstanding at March 1, |
DOCUMENTS INCORPORATED BY REFERENCE |
Portions of the documents listed below have been incorporated by reference into the indicated Part of this Annual Report on Form 10-K: Information Statement relating to the |
Graybar Electric Company, Inc. and Subsidiaries
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017
Table of Contents
Page | ||||
PART I | ||||
Item 1. | 3 | |||
Item | 5 | |||
Item 1B. | 7 | |||
Item 2. | 8 | |||
Item 3. | 8 | |||
Item 4. | 8 | |||
Supplemental Item | 8 | |||
PART II | ||||
Item 5. | 9 | |||
Item 6. | 9 | |||
Item 7. | 10 | |||
Item 7A. | 15 | |||
Item 8. | 17 | |||
Item 9. | ||||
Item 9A. | ||||
Item 9B. | ||||
PART III | ||||
Item 10. | 50 | |||
Item 11. | 50 | |||
Item 12. | 50 | |||
Item 13. | 50 | |||
Item 14. | 50 | |||
PART IV | ||||
Item 15. | 51 | |||
53 |
PART I
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the accompanying audited consolidated financial statements of Graybar Electric Company, Inc. and its Subsidiariessubsidiaries (collectively referred to as “Graybar” or the “Company” and sometimes referred to as "we", "our", or "us"), the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2017,2020, included in this Annual Report on Form 10-K. 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 (the “PSLRA”), Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes”, “projects”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and other similar expressions. We intend 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. Our 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 our 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 pricesongoing impact of industrial commodities;the coronavirus (COVID-19) pandemic; a sustained interruption in the operation of our information systems; volatility in the prices of industrial commodities; cyber-attacks; increased funding requirements and expenses related to our pension plan; disruptions in our sources of supply; the inability, or limitations on our ability to borrow under our existing credit facilities or any replacements thereof; adverse legal proceedings or other claims; compliance with changing governmental regulations; and the inability, or limitations on our 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. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by applicable securities law. 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 United States Securities and Exchange Commission (the “SEC” or “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 this Annual Report on Form 10-K.
All dollar amounts in this Annual Report on Form 10-K are stated in thousands ($000s)millions except for share and per share data.
Item 1. Business
The Company
Graybar is a leading North American distributor of electrical and communications and data networking products and is a provider of related supply chain management and logistics services. We primarily serve customers in the construction, industrial & utility, and commercial, institutional and government ("CIG"), and industrial & utility vertical markets ("vertical" or "verticals"), with products and services that support new construction, infrastructure updates, building renovation, facility maintenance, repair and operations ("MRO"), and original equipment manufacturers ("OEM").
Through a network of 289292 locations across the United States and Canada, our 8,500 employeeswe serve approximately 145,000146,000 customers. Our business is primarily based in the United States ("U.S."). We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.
We distribute approximatelyover one million products purchased from approximately 4,5004,200 manufacturers and suppliers. We purchase all of the products we sell from others, and we neither manufacture nor contract to manufacture any products we sell.
We generally finance our inventory through the collection of trade receivables and trade accounts payable terms with our suppliers. We use short-term borrowing facilities to finance inventory purchases and other operating expenses when necessary, and we have not historically used long-term borrowings for this purpose.
In addition to our extensive product offering, we provide a wide range of supply chain management services that when combined with our network of locations are designed to deliver convenience, cost savings and improved efficiency for our customers.
We were incorporated in 1925 under the laws of the State of New York. Our active and retired employees own 100% of our common stock. There is no public trading market for our common stock.
Our internet address is
www.graybar.com.Competition
Our industry is comprised of thousands of local and regional distributors, along with several large national and global distributors. Graybar is among the largest distributors of electrical and communications and data networking products to the construction, CIG, and industrial & utility and CIG verticals in North America. Our industry is highly competitive, and we estimate that the top five distributors account for approximately 30%35% of the total U.S. market. Some of our largest competitors have greater global geographic scope, which may provide them an advantage, particularly with certain multi-national customers.
Our industry is influenced by economic and regulatory factors that impact rates of new construction, as well as customers' or end users' decisions to invest in renovation and expansion of facilities and infrastructure. The industry is also affected by changes in technology, both in the products that are typically sold through distribution and in the ways customers choose to transact business with distributors. Driven by customers' omnichannel buying preferences and their desire to increase efficiency and productivity, digitalization is becoming increasingly important to both manufacturers and distributors in our industry.
Our pricing reflects the value associated with the products and services that we provide. We consider our prices to be generally competitive. We believe that, while price is an important customer consideration, the services we provide distinguish us from many of our competitors, whether they are distributors or manufacturers selling directly to our customer base. We view our ability to quickly supply our customers with a broad range of products through conveniently located distribution facilities as a competitive advantage that customers value. However, if a customer is not looking for one distributor to provide a wide range of products and does not require prompt delivery or other services, a competitor that does not provide this level of service may be in a position to offer lower prices.
Markets Served
Graybar serves a wide range of customers within certain primary verticals. The largest of these verticals is construction, which accounted for more than half of our sales in 2017.2020. Customers within this vertical include various types of contractors and installers that perform new construction and renovation of commercial and industrial facilities and utility infrastructure.
The other verticals we serve are theCIG and industrial & utilityutility. The CIG vertical includes a broad range of commercial office, warehouse, and CIG.retail facilities, federal, state, and local governmental agencies, and the education and health care sectors. The industrial & utility vertical includes customers and products for MRO, OEM, broadband utility and electrical transmission and distribution infrastructure. The CIG vertical includes a broad range of commercial office, warehouse, and retail facilities, federal, state, and local governmental agencies, education and health care sectors.
Year Ended December 31, | 2017 | 2016 | 2015 |
Construction | 59.6% | 58.9% | 56.2% |
Industrial & Utility | 21.7% | 20.7% | 21.4% |
Commercial, Institutional & Government | 18.7% | 20.4% | 22.4% |
Products and Suppliers
We distribute approximatelyover one million products purchased from approximately 4,5004,200 manufacturers and suppliers. Approximately 105,000110,000 of these products are stocked in our warehouses, allowing us in most cases to provide customers with convenient, local access to the items they need every day. When the specialized nature or size of a particular shipment warrants, we arrange to ship products directly from our suppliers; otherwise, orders are filled from our own on-hand inventory. On a dollar volume basis, we filled approximately 50%60% of customer orders from ourthis on-hand inventory in both 20172020 and 2016.2019.
Approximately 50% of the products we sold during 20172020 were purchased from our top 25 suppliers. However, we generally have the ability to purchase from more than one supplier for any product type, which allows us to offer alternative sources of comparable products for nearly all products. The products we distribute can be generally identified as follows:
•Building and Industrial Wire and Cable | • | |
• | • Fluorescent Lighting | |
• | • Wiring Devices | |
• | • Fasteners | |
• | ||
• | ||
• Conduit and Tray | • LED, Incandescent and Fluorescent Lamps | |
• | • Electronic Equipment | |
• | • Miscellaneous MRO | |
• Data Cables and Data Cords |
These products may be sold into any of the verticals we target, depending on a customer's or end user's needs. Our salesforce is empowered to sell any of these products or related services to any customer, in some cases with the support of specialists who are trained in specific industries and/or new technologies.
Maintaining strong relationships with our suppliers is important to our business, and we enjoy longstanding relationships with several of our suppliers (or their predecessors). However, most of our supplier agreements are nonexclusive national or regional distributorships, terminable upon 30 to 90 days' notice by either party.
Sales and Distribution
We sell products and services manufactured or provided by others primarily through a network of sales offices and distribution facilities located in thirteen geographical districts throughout the U.S. We operate multiple distribution facilities in each district, each of which carries an inventory of products and operates as a wholesale distributor for the territory in which it is located. Some districts have sales offices that do not carry inventory. In addition, we have seven national distribution centers and eleventwenty regional distribution centers containing inventories of both standard and specialized products. Both the national distribution centers andThe regional distribution centers replenish inventories carried at our other U.S. distribution facilities and make shipments directly to customers. We also have subsidiary operations with distribution facilities located in the U.S. and Canada and a single distribution facility in Puerto Rico.
Human Capital
At December 31, 2017,2020, we employed approximately 4,3008,200 people on a full-time basis, of which approximately 4,100 people were in sales capacities. Approximately 2,700 of these sales personnel were inside and outside sales representatives working to generate sales with current and prospective customers. The remainder provided support services to our customers and our salesforce and consisted of customer service representatives.
Item 1A. Risk Factors
Our liquidity, financial condition, and results of operations are subject to various risks, including, but not limited to, those discussed below. The risks outlined below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our liquidity, financial condition, and results of operations.
Our sales fluctuate with general economic conditions, particularly in the residential, commercial, and industrial building construction industries.
Our operating locations are widely distributed geographically across the U.S. and, to a lesser extent, Canada. Customers for our products and services are similarly diverse – we have approximatelyA pandemic, epidemic or other public health emergency, such as the current outbreak of coronavirus disease 2019 (COVID-19), could continue to have a material adverse effect on our business, results of operations, financial condition and cash flows. Although we are a company operating as an essential business supporting critical infrastructure, as defined by the U.S. Department of Homeland Security, and continue to operate across our footprint consistent with federal guidelines and with state and local orders to date, COVID-19 has negatively impacted on our net sales, operations, supply chain, transportation networks and
customers and is expected to have further negative impacts on these aspects of our business. Preventative and precautionary measures that governments take or reinstate, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures that we and our customers are taking may reduce our gross margin. The ongoing pandemic, and a meaningful expansion in its duration or scope, including the continued emergence of new strains of COVID-19, will increase the risk of further slowdowns in construction activities, resulting in reduced demand for the products and services we provide our customers.
A continued economic downturn resulting from the COVID-19 epidemic and related response would adversely affect demand for the products and services we provide to our customers. If our customers are directly impacted by business curtailments or weak market conditions, this may result in higher than expected bad debt losses, which could impact our results of operations and our cash flows from operating activities. In the event that our operating performance or that of our suppliers were to decline, our vendor allowances would also be reduced, which would negatively impact our results of operation and our financial condition.
Our daily activities are highly dependent on the uninterrupted operation of our information systems. We are a recognized industry leader for our use of information technology in all areas of our business – sales, customer service, inventory management, finance, accounting, and human resources. We maintain redundant information systems as part of our disaster recovery program and, if necessary, are able to operate in many respects using a paper-based system to help mitigate a complete interruption in our information processing capabilities. Nonetheless, our information systems remain vulnerable to natural disasters, wide-area telecommunications or power utility outages, terrorist or cyber-attacks, or other major disruptions. A sustained interruption in the functioning of our information systems, however unlikely, could lower operating income by negatively impacting sales, expenses, or both.
Our results of operations are impacted by changes in industrial commodity prices.
Many of the products we sell are subject to wide and frequent price fluctuations because they are composed primarily of copper, steel, or petroleum-based resins, including poly-vinyl chlorides ("PVC"), industrial commodities that have been subject to price volatility during the past several years. Examples of such products include wire and cable, conduit, enclosures, and fittings. Our gross margin rate on these products is relatively constant over time, though not necessarily in the short term. Therefore, as the cost of these products to us declines, pricing to our customers may decrease. This impacts our results of operations by lowering both overall sales and gross margin.Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with evolving regulations relating to obligations to protect systems, assets and data from the threat of cyber-attacks.
Cyber-attacks designed to gain access to sensitive information by breaching mission-critical systems of large organizations are constantly evolving, and high profile electronic security breaches leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies, despite widespread recognition of the cyber-attack threat and improved data protection methods. While we have invested in the protection of our information technology and maintain what we believe are adequate security procedures and controls over financial and other individually identifiable customer, employee and vendor data provided to us, our business model is evolving rapidly and increasingly requires us to receive, retain and transmit certain information, including individually identifiable information, that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us. All of these risks are also applicable where we rely on outside vendors to provide services, which may operate in a cloud environment. We are dependent on these third party vendors to operate secure and reliable systems. A breach in our systems or those of our third party providersthat results in the unauthorized release of individually identifiable customer or other sensitive data could have a material adverse effect on our reputation and lead to financial losses from remedial actions, loss of business or potential liability. An electronic security breach resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we already incur to protect against such risks. While we also seek to obtain assurances that third parties we interact with will protectWe may experience losses or be subject to increased funding and expenses related to our pension plan.
A decline in the market value of plan assets or a change in the interest rates used to measure the required minimum funding levels and the pension obligation may increase the funding requirements of our defined benefit pension plan, the pension obligation itself, and pension expenses. Government regulations may accelerate the timing and amounts required to fund the plan. Demographic changes in our workforce, including longer life expectancies, increased numbers of retirements, and age at retirement may also cause funding requirements, pension expenses, and the pension obligation to be higher than expected. Any or all of these factors could have a negative impact on our liquidity, financial position, and/or our results of operations.We purchase all of the products we sell to our customers from other parties.
As a wholesale distributor, our business and financial results are dependent on our ability to purchase products from manufacturers not controlled by us that we, in turn, sell to ourcustomers. Approximately 50% of our purchases are made from only 25 manufacturers. A sustained disruption in our ability to source productproducts from one or more of the largest of these vendors might have a material impact on our ability to fulfill customer orders, resulting in lost sales and, in rare cases, damages for late or non-delivery.
Our borrowing agreements contain financial covenants and certain other restrictions on our activities and those of our subsidiaries.
Our amended revolving credit facility andWe are subject to legal proceedings and other claims arising out of the conduct of our business.
These proceedings and claims relate to public and private sector transactions, product liability, contract performance, and employment matters. On the basis of information currently available to us, we do not believe that existing proceedings and claims will have a material impact on our financial position or results of operations. However, litigation is unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial position or our results of operations in a particular period.More specifically, with respect to asbestos litigation, as of December 31, 2017, 3,3272020, 3,424 individual cases and 6667 multiple-plaintiff cases are pending that allege actual or potential asbestos-related injuries resulting from the use of or exposure to products allegedly sold by us. Additional claims will likely be filed against us in the future. Our insurance carriers have historically borne virtually all costs and liability with respect to this litigation and are continuing to do so. Accordingly, our future liability with respect to pending and unasserted claims is dependent on the continued solvency of our insurance carriers. Other factors that could impact this liability are: the number of future claims filed against us; the defense and settlement costs associated with these claims; changes in the litigation environment, including changes in federal or state law governing the compensation of asbestos claimants; adverse jury verdicts in excess of historic settlement amounts; and bankruptcies of other asbestos defendants. Because any of these factors may change, our future exposure is unpredictable, and it is possible that we may incur costs that would have a material adverse impact on our liquidity, financial position, or results of operations in future periods.
Compliance with changing government regulations may result in increased costs and risks to the company.
Our public company and multi-national customers are increasingly subject toThe value to our shareholders of our common stock is dependent primarily upondepends on the regular payment of dividends, which are paid at the discretion of our Board of Directors.
There is no public trading market for our common stock.
Our common stock is 100% owned by active and retired employees. Common stock may not be sold by the holder thereof, except after first offering it to us. We have always exercised this purchase option in the past and expect to continue to do so. As a result, no public trading market for our common stock exists, nor is one expected to develop. This lack of a public trading market for our common stock may limit our ability to raise large amounts of equity capital, which could constrain our long-term business growth.Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We operate in
thirteen geographical districts in the U.S., each of which maintains multiple distribution facilities that consist primarily of warehouse space. A small portion of each distribution facility is used for offices. Some districts have sales offices that do not carry an inventory of products. The number of facilities, excluding theWe also have
We also have three U.S. subsidiaries with eightseven owned facilities and fourteenfifteen leased distribution facilities. The leased facilities have remaining lease terms between one and nineseven years. The facilities range in size from 5,0001,000 to 42,000 square feet.
We maintain
Our headquarters are located in St. Louis, Missouri in an
83,000 square foot building owned by us. We also own a 200,000 square foot operations and administration center in St. Louis.Item 3. Legal Proceedings
There are presently no pending legal proceedings that are expected to have a material impact on the Company or its subsidiaries.
Item 4. Mine Safety Disclosures
Not applicable.
Supplemental Item. Executive Officers of the Registrant
The following table lists the name, age as of March 1, 2018,2021, position, offices and certain other information with respect to our executive officers. The term of office of each executive officer will expire upon the appointment of his or her successor by the Board of Directors.
Name | Age | Business experience last five years |
S. S. Clifford | 50 | Senior Vice President and Chief Financial Officer, June 2019 to present; Senior Vice President - Supply Chain Management, February 2015 to |
D. E. DeSousa | 62 | Senior Vice President, General Manager, August 2020 to present, Vice President, Western Region, May 2017 to July 2020, Vice President - |
M. W. Geekie | 59 | Senior Vice President, Secretary and General Counsel, August 2008 to present. |
R. R. Harwood | 64 | Senior Vice President and Chief Strategy Officer, June 2019 to present; Senior Vice President and Chief Financial Officer, January 2013 to |
W. P. Mansfield | 58 | Senior Vice President - Marketing, May 2017 to present; Senior Vice President - Sales and Marketing, April 2014 to April |
D. G. Maxwell | 62 | Senior Vice President - Sales, May 2017 to present; Regional Vice President, January 2015 to April |
K. M. Mazzarella | 60 | Chairman of the Board, January 2013 to present; President and Chief Executive Officer, June 2012 to present. |
B. L. Propst | 51 | Senior Vice President |
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is 100% owned by active and retired employees, and there is no public trading market for our 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 New York law, a voting trust may not have a term greater than ten years. Accordingly, aA new Voting Trust Agreement was established effective March 3, 2017, which expires by its terms on March 1, 2027. At December 31, 2017,2020, approximately
No holder of our common stock or voting trust interests representing our common stock ("common stock", "common shares", or "shares") may sell, transfer or otherwise dispose of any shares without first offering us the option to purchase those shares at the price at which they were issued. Additionally, before the shareholder action described in the next sentence became effective, a shareholder was entitled to any cash dividends accrued for the quarter in which the purchase offer is made, adjusted pro rata for the number of days such shares were held prior to the dividend record date. On June 8, 2017, the shareholders voted to remove this adjustment for accruing dividends on the common stock. We also have the option to purchase at the issue price the common shares of any shareholder who ceases to be an employee for any reason other than death or "retirement" (as defined in our amended restated certificate of incorporation), and on the first anniversary of any holder's death. In the past, we have always exercised these purchase options, and we expect to continue to do so in the foreseeable future. However, we can make no assurance that we will continue to exercise our purchase option in the future. All outstanding shares have been issued at $20.00 per share.
The following table sets forth information regarding purchases of common stock by the Company for the three months ended December 31, 2020, all of which were made pursuant to the foregoing provisions:
Issuer Purchases of Equity Securities | |||
Period | Total Number of | Average | Total Number of Shares |
October 1 to October 31, 2020 | 65,447 | $20.00 | N/A |
November 1 to November 30, 2020 | 39,874 | $20.00 | N/A |
December 1 to December 31, 2020 | 57,047 | $20.00 | N/A |
Total | 162,368 | $20.00 | N/A |
Capital Stock at December 31, 2020 | |||
Title of Class | Number of | Number of Shares | |
Voting Trust Interests issued with respect to Common Stock | 5,409 | 18,699,421 | |
Common Stock | 1,689 | 3,904,998 | |
Total | 7,098 | 22,604,419 |
Dividend Data (in dollars per share) | Year Ended December 31, | ||||
Period | 2020 | 2019 | |||
First Quarter | $ | 0.30 | $ | 0.30 | |
Second Quarter | 0.30 | 0.30 | |||
Third Quarter | 0.30 | 0.30 | |||
Fourth Quarter | 3.10 | 4.10 | |||
Total | $ | 4.00 | $ | 5.00 |
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 |
October 1 to October 31, 2017 | 46,403 | $20.00 | N/A |
November 1 to November 30, 2017 | 42,489 | $20.00 | N/A |
December 1 to December 31, 2017 | 24,243 | $20.00 | N/A |
Total | 113,135 | $20.00 | N/A |
Capital Stock at December 31, 2017 | ||||||
Title of Class | Number of Security Holders | Number of Shares | ||||
Voting Trust Interests issued with respect to Common Stock | 4,783 | 15,905,251 | ||||
Common Stock | 2,170 | 3,479,087 | ||||
Total | 6,953 | 19,384,338 |
Dividend Data (in dollars per share) | Year Ended December 31, | |||||
Period | 2017 | 2016 | ||||
First Quarter | $ | 0.30 | $ | 0.30 | ||
Second Quarter | 0.30 | 0.30 | ||||
Third Quarter | 0.30 | 0.30 | ||||
Fourth Quarter | 1.10 | 2.10 | ||||
Total | $ | 2.00 | $ | 3.00 |
On December 13, 2017, our Board of Directors declared a 10% stock dividend to shareholders of record on December 18, 2017. Shares representing this dividend were issued on February 2, 2018.
Item 6. Selected Financial Data
For the Years Ended December 31, | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||
Gross Sales | $ | 6,662,385 | $ | 6,413,206 | $ | 6,136,343 | $ | 6,004,179 | $ | 5,682,084 | |||||
Cash Discounts | (31,158 | ) | (28,174 | ) | (26,044 | ) | (25,318 | ) | (22,943 | ) | |||||
Net Sales | $ | 6,631,227 | $ | 6,385,032 | $ | 6,110,299 | $ | 5,978,861 | $ | 5,659,141 | |||||
Gross Margin | $ | 1,261,307 | $ | 1,208,363 | $ | 1,154,745 | $ | 1,118,547 | $ | 1,044,156 | |||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 71,608 | $ | 93,079 | $ | 91,068 | $ | 87,428 | $ | 81,063 | |||||
Average common shares outstanding(A) | 19,367 | 19,125 | 18,901 | 18,762 | 18,866 | ||||||||||
Net Income attributable to Graybar Electric Company, Inc. per share of Common Stock(A) | $ | 3.70 | $ | 4.87 | $ | 4.82 | $ | 4.66 | $ | 4.30 | |||||
Cash Dividends per share of Common Stock | $ | 2.00 | $ | 3.00 | $ | 3.00 | $ | 4.00 | $ | 2.40 | |||||
Total assets | $ | 2,261,357 | $ | 2,099,232 | $ | 2,049,543 | $ | 1,939,113 | $ | 1,779,505 | |||||
Total liabilities | $ | 1,499,809 | $ | 1,368,343 | $ | 1,361,397 | $ | 1,257,132 | $ | 1,108,724 | |||||
Shareholders’ equity | $ | 761,548 | $ | 730,889 | $ | 688,146 | $ | 681,981 | $ | 670,781 | |||||
Working capital(B) | $ | 495,496 | $ | 440,233 | $ | 445,443 | $ | 444,138 | $ | 445,196 | |||||
Long-term debt | $ | 7,048 | $ | 7,271 | $ | 10,272 | $ | 11,595 | $ | 2,731 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis provides a narrative description of the Company’s results of operations, financial condition, liquidity, and cash flows for the three-year periodyears ended December 31, 2017.2020 and 2019. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes to the consolidated financial statements included in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Business Overview
Our net sales totaled $6,631,227, an increase of $246,195, or 3.9%, compared to net sales of $6,385,032 for the year ended December 31, 2016. 2020 were impacted by the COVID-19 pandemic (the “pandemic”), which has contributed to ongoing volatility and instability in the financial markets and overall economy. With effective expense and cash flow management, we were able to mitigate the impact of the pandemic on our operating results, which enabled us to continue investing in strategic priorities focused on growth and productivity.
Net sales in our construction vertical increased 5.1%, while net sales in our industrial & utility vertical increased 9.2%. Our CIG vertical net sales decreased 5.0%.
Our non-operating expenses increased $34.8 million to $58.5 million for the year ended December 31, 20172020 from $23.7 million for the same period last year. The increase was 19.0% comparedprimarily due to 18.9% at December 31, 2016 asa non-cash pension settlement charge of $27.7 million that we recognized in 2020 because the cost of all settlements during the year was greater than the sum of the service and interest cost components of the annual net periodic pension cost.
As a result, of our pricing and product diversification initiatives and our acquisition of Cape Electrical Supply LLC ("Cape Electric") in 2016.
In this uncertain business environment, we remain focused on protecting our company and those we serve from potential risks, while we identify and pursue new opportunities for growth. We expect continued economic instability over the next several months due to the effects ofongoing disruption caused by the TCJA. As a result,pandemic. Because our net income for the year ended December 31, 2017 was $71,608, comparedbusiness operations are producing positive results and our financial condition remains strong, we believe Graybar is positioned to $93,079 for the year ended December 31, 2016, a decrease of $21,471, or 23.1%. Despitesuccessfully navigate this short-term negative impact, we anticipate that the TCJA will reduce our effective tax rate, improve liquidity, and provide opportunities to invest in and to grow our business.challenging economic environment.
Consolidated Results of Operations
The following table sets forth certain information relating to our operations stated in thousandsmillions of dollars and as a percentage of net sales for the years ended December 31, 2017, 2016,2020, 2019, and 2015: 2018:
2020 | 2019 | 2018 | |||||||||||||||
Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||||||
Net Sales | $ | 7,265.7 | 100.0 | % | $ | 7,523.9 | 100.0 | % | $ | 7,202.5 | 100.0 | % | |||||
Cost of merchandise sold | (5,896.2) | (81.2) | (6,094.9) | (81.0) | (5,821.6) | (80.8) | |||||||||||
Gross Margin | 1,369.5 | 18.8 | 1,429.0 | 19.0 | 1,380.9 | 19.2 | |||||||||||
Selling, general and | (1,098.9) | (15.1) | (1,159.9) | (15.4) | (1,125.0) | (15.6) | |||||||||||
Depreciation and amortization | (52.8) | (0.7) | (50.5) | (0.7) | (49.6) | (0.7) | |||||||||||
Other income, net | 7.0 | 0.1 | 5.0 | 0.1 | 3.4 | — | |||||||||||
Income from Operations | 224.8 | 3.1 | 223.6 | 3.0 | 209.7 | 2.9 | |||||||||||
Non-operating expenses | (58.5) | (0.8) | (23.7) | (0.3) | (30.6) | (0.4) | |||||||||||
Income before Provision for Income Taxes | 166.3 | 2.3 | 199.9 | 2.7 | 179.1 | 2.5 | |||||||||||
Provision for income taxes | (44.2) | (0.6) | (55.0) | (0.7) | (35.4) | (0.5) | |||||||||||
Net Income | 122.1 | 1.7 | 144.9 | 2.0 | 143.7 | 2.0 | |||||||||||
Net income attributable to noncontrolling interests | (0.3) | — | (0.4) | — | (0.4) | — | |||||||||||
Net Income attributable to | $ | 121.8 | 1.7 | % | $ | 144.5 | 2.0 | % | $ | 143.3 | 2.0 | % |
2017 | 2016 | 2015 | |||||||||||||||||
Dollars | Percent of Net Sales | Dollars | Percent of Net Sales | Dollars | Percent of Net Sales | ||||||||||||||
Net Sales | $ | 6,631,227 | 100.0 | % | $ | 6,385,032 | 100.0 | % | $ | 6,110,299 | 100.0 | % | |||||||
Cost of merchandise sold | (5,369,920 | ) | (81.0 | ) | (5,176,669 | ) | (81.1 | ) | (4,955,554 | ) | (81.1 | ) | |||||||
Gross Margin | 1,261,307 | 19.0 | 1,208,363 | 18.9 | 1,154,745 | 18.9 | |||||||||||||
Selling, general and administrative expenses | (1,047,157 | ) | (15.8 | ) | (1,008,729 | ) | (15.8 | ) | (965,134 | ) | (15.8 | ) | |||||||
Depreciation and amortization | (48,890 | ) | (0.7 | ) | (47,852 | ) | (0.7 | ) | (43,242 | ) | (0.7 | ) | |||||||
Other income, net | 6,545 | 0.1 | 5,347 | 0.1 | 8,199 | 0.1 | |||||||||||||
Income from Operations | 171,805 | 2.6 | 157,129 | 2.5 | 154,568 | 2.5 | |||||||||||||
Interest expense, net | (4,257 | ) | (0.1 | ) | (3,630 | ) | (0.1 | ) | (2,227 | ) | — | ||||||||
Income before provision for income taxes | 167,548 | 2.5 | 153,499 | 2.4 | 152,341 | 2.5 | |||||||||||||
Provision for income taxes | (95,613 | ) | (1.4 | ) | (60,186 | ) | (0.9 | ) | (61,009 | ) | (1.0 | ) | |||||||
Net Income | 71,935 | 1.1 | 93,313 | 1.5 | 91,332 | 1.5 | |||||||||||||
Net income attributable to noncontrolling interests | (327 | ) | — | (234 | ) | — | (264 | ) | — | ||||||||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 71,608 | 1.1 | % | $ | 93,079 | 1.5 | % | $ | 91,068 | 1.5 | % |
2020 Compared to 2016
Net sales totaled $6,631,227$7,265.7 million for the year ended December 31, 2017,2020, compared to $6,385,032$7,523.9 million for the year ended December 31, 2016, an increase2019, a decrease of $246,195,$258.2 million, or 3.9%3.4%. For the year ended December 31, 2017,2020, net sales in our construction, vertical increased by 5.1%, while net sales in ourCIG, and industrial & utility vertical increased 9.2%. Our CIG vertical net salesverticals decreased 5.0% from 2016.
Gross margin increased $52,944,decreased $59.5 million, or 4.4%4.2%, to $1,261,307$1,369.5 million for the year ended December 31, 2017,2020, from $1,208,363$1,429.0 million for the year ended December 31, 2016.2019. The increase resulted from an increasedecrease in gross margin was primarily due to decreased net sales for the year ended December 31, 2017,2020, compared to the year ended December 31, 2016, as well as our pricing and product diversification initiatives and our acquisition of Cape Electric in 2016.2019. Our gross margin rate was
SG&A expenses ("SG&A") increased $38,428,decreased $61.0 million, or 3.8%5.3%, to $1,047,157$1,098.9 million for the year ended December 31, 2017,2020, compared to $1,159.9 million for the year ended December 31, 2019, mainly due to higher employment-related costs.lower compensation and benefit-related costs and lower travel and entertainment expenses as a result of our response to the pandemic. SG&A expenses as a percentage of net sales remained consistent at 15.8% for the years ended December 31, 2017 and 2016.
Depreciation and amortization for the year ended December 31, 2020, increased $2.3 million, or 4.6%, to an increase in property, at cost. Total$52.8 million from $50.5 million for the year ended December 31, 2019. Although depreciation and amortization increased, total property, at cost, at December 31, 20172020 was $964,199, an increase$1,007.2 million, a decrease of $23,592,$15.2 million, or 2.5%1.5%, when compared to total property, at cost, at December 31, 20162019 of $940,607.$1,022.4 million. Depreciation as a percentage of net sales remained consistent at 0.7% for the years ended December 31, 20172020 and 2016.
Other income, net totaled $6,545$7.0 million for the year ended December 31, 2017,2020, compared to $5,347$5.0 million for the year ended December 31, 2016.2019. Other income, net consists primarily of gains or losses on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities. The increase in other income, net was primarily due to a favorable settlementgain on sale of a prior claim partially offset by reduced net gains on the disposal of real and personal property in 2017classified as comparedan asset held for sale.
Non-operating expenses increased $34.8 million to 2016. Net gains on the disposal of real and personal property was $118$58.5 million for the year ended December 31, 2017, compared to net gains on the disposal of real and personal property of $1,8112020, from $23.7 million for the year ended December 31, 2016.
2019. The increase in non-service cost components of net periodic benefit costs was primarily due to a non-cash pension settlement charge of $27.7 million recognized during the year ended December 31, 2020. The decrease in interest expense, net was due to lower interest rates for the year ended December 31, 2016. The increase was due to higher interest rates on our short-term borrowings for the year ended December 31, 2017,2020, compared to the year ended December 31, 2016.
Income before provision for income taxes increased $14,049,decreased $33.6 million, or 9.2%16.8%, to $167,548$166.3 million for the year ended December 31, 2017,2020, compared to $153,499$199.9 million for the year ended December 31, 2016.2019. The increase in income before provision for income taxesdecrease was primarily due to our growth in gross marginlower net sales and increased other income, net which outpaced our increases inthe non-cash pension settlement charge of $27.7 million offset by lower SG&A and Depreciation.
Our provision for income taxes increased $35,427,decreased $10.8 million, or 58.9%19.6%, to $95,613$44.2 million for the year ended December 31, 20172020 from $60,186$55.0 million for the year ended December 31, 2016.2019. Our effective tax rate was 57.1%26.6% for the year ended December 31, 2017, up2020, down from 39.2%27.5% for the year ended December 31, 2016.2019. The increasedecrease in the effective tax rate is primarilylargely due to the enactmentreduced levels of nondeductible expenses as a result of the TCJA on December 22, 2017.
Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 20172020 decreased $21,471,$22.7 million, or 23.1%15.7%, to $71,608$121.8 million from $93,079$144.5 million for the year ended December 31, 2016.
Financial Condition and Liquidity
Summary
We manage our liquidity and capital levels so that we have the capability to invest in the growth of our business, meet debt service obligations, finance anticipated capital expenditures, pay dividends, make benefit payments, finance information technology needs, fund acquisitions and finance other miscellaneous cash outlays. We believe that maintaining a strong company financial condition enables us to competitively access multiple financing channels, maintain an optimal cost of capital and enable our company to invest in strategic long-term growth plans.
We have historically funded our working capital requirements using cash flows generated by the collection of trade receivables and trade accounts payable terms with our suppliers, supplemented by short-term bank lines of credit. Capital expenditures have been financed primarily by cash from working capital management and short-term bank lines of credit and long-term debt.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years:
Total cash provided by (used in): | 2020 | 2019 | 2018 | |||||
Operating Activities | $ | 301.7 | $ | 249.4 | $ | 42.1 | ||
Investing Activities | (50.4) | (39.4) | (42.3) | |||||
Financing Activities | (180.9) | (208.1) | 16.3 | |||||
Net Increase in Cash | $ | 70.4 | $ | 1.9 | $ | 16.1 |
Total cash provided by (used in): | 2017 | 2016 | 2015 | ||||||||
Operating Activities | $ | 45,128 | $ | 112,200 | $ | 96,853 | |||||
Investing Activities | (39,176 | ) | (91,066 | ) | (76,571 | ) | |||||
Financing Activities | (6,534 | ) | (15,726 | ) | (16,109 | ) | |||||
Net (Decrease) Increase in Cash | $ | (582 | ) | $ | 5,408 | $ | 4,173 |
Our cash was $42,757$131.2 million at December 31, 2017, a decrease2020, an increase of $582,$70.4 million, or 1.3%115.8%, from $43,339$60.8 million at December 31, 2016. Our short-term borrowings increased during the year to $169,6432019. Cash on hand at December 31, 20172020, is reflective of improved cash flows from $140,465operations as a result of effective working capital management. Short-term borrowings decreased by $88.0 million, or 63.8%, to $50.0 million at December 31, 2016, primarily due to higher working capital investment required to support operating activities due to the growth in sales, funded with short-term lines of credit.2020 from $138.0 million at December 31, 2019. Current assets exceeded current liabilities by $495,496$647.4 million at December 31, 2017,2020, an increase of $55,263,$63.7 million, or 12.6%10.9%, from $440,233$583.7 million at December 31, 2016.
Operating Activities
Cash flows fromprovided by operating activities for the year ended December 31, 2020 was $301.7 million, compared to cash flows provided by operating activities of $249.4 million for the year ended December 31, 2019. Cash provided by operations for the year ended December 31, 2017 decreased by $67,072 or 59.8%,2020 was attributable to $45,128 at December 31, 2017 when compared to $112,200net income of $122.1 million adjusted for the year ended December 31, 2016. Thenon-cash depreciation and amortization expenses of $52.8 million, non-cash operating lease expense of $33.8 million, non-cash pension settlement charge of $27.7 million, a decrease in cash flows provided by operations for December 31, 2017 was attributable tomerchandise inventory levels of $68.0 million, and an increase in trade receivablesaccounts payable of $97,410 as a result of increased sales in the fourth quarter, increased inventory levels of $62,618 to support our continued growth of sales,$48.1 million, partially offset by increasesa decrease in trade payablesaccrued payroll and benefit costs of $83,760.
The average number of days of sales in trade receivables for the year ended December 31, 20172020 increased moderately compared to the same twelve-month period in 2016 due to increased sales in the fourth quarter of 2017, as compared to the fourth quarter of 2016.2019. The days in inventory increased significantlymodestly for the year ended December 31, 2017 as a result of
Investing Activities
Net cash used by investing activities was $39,176$50.4 million for the year ended December 31, 2017,2020, compared to $91,066$39.4 million for the year ended December 31, 2016, a decrease2019, an increase of $51,890,$11.0 million, or 57.0%27.9%. The decreaseincrease in cash used by investing activities was primarily due to the acquisition of Cape Electric,Shingle & Gibb Automation, LLC, net of cash for $59,946 in 2016,acquired of $27.2 million, partially offset by higherlower capital expenditures of $12.0 million for the year ended December 31, 2017,2020, compared to the year ended December 31, 2016.2019. For further discussion of the acquisition, refer to Note 15, "Acquisitions"17, “Acquisition”, of the notes to the consolidated financial statements included in Item 8., "Financial“Financial Statements and Supplementary Data"Data” of this Annual Report on Form 10-K. Capital expenditures for the year ended December 31, 2017 totaled $41,342 compared to $35,215 for the same period last year. Proceeds on the disposal of property decreased during the year ended December 31, 2017, compared to 2016, primarily as a result of disposing of two local distribution facilities that provided proceeds of $2,153 in 2016.
Financing Activities
Net cash used by financing activities totaled $6,534$180.9 million for the year ended December 31, 2017,2020, compared to $15,726net cash used by financing activities of $208.1 million for the year ended December 31, 2016,2019, a decrease in cash used of $9,192,$27.2 million, or 58.5%13.1%. The decreaseThis was primarily due to lower cashnet payments on short-term borrowings and lower dividends paid in 2017during the year ended December 31, 2020, compared to prior year.the same period in 2019. Cash dividends paid totaled $35,373,$90.7 million, or $2.00$4.00 per share, for the year ended December 31, 2017,2020, compared to $49,925,$107.2 million, or $3.00$5.00 per share, for the year ended December 31, 2016.
Liquidity
We had a $550,000$750.0 million amended revolving credit facility with $380,357$699.6 million in available capacity at December 31, 2017,2020, compared to available capacity of $409,535$611.5 million at December 31, 2016.2019. At December 31, 20172020 and 2016,2019, we also had two uncommitted, $100,000unsecured $100.0 million private placement shelf agreements ("shelf agreement"Shelf Agreements"). The first shelf agreement allowsOne of the Shelf Agreements was expected to allow us to issue senior promissory notes to PGIM, Inc., formerly known as Prudential Investment Management, Inc., at fixed rate terms to be agreed upon at the time of any issuance during a three-year issuance period ending in August 2020. The secondIn July 2020, we amended our uncommitted, unsecured $100.0 million private placement shelf agreement allowswith PGIM, Inc. (“the Prudential Shelf Agreement”) to extend the issuance period to August 2023. Our other Shelf Agreement is expected to allow us to issue senior promissory notes to Metropolitan Life Insurance Company and MetLife Investment Advisors, LLC and each other affiliate of MetLife Investment Advisors, LLC that becomes a party to the agreement at fixed or floating rate terms to be agreed upon at the time of any issuance during a three-year issuance period ending in September 2019.
We have not issued any notes under the shelf agreementsShelf Agreements as of December 31, 20172020 and 2016.2019. For further discussion related to our revolving credit facility and our private placement shelf agreements,Shelf Agreements, refer to Note 10,12, "Debt", of the notes to the consolidated financial statements located in Item 8., "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.
We had short-term borrowings of $50.0 million and $138.0 million outstanding at December 31, 2020 and 2019, respectively. We had total letters of credit of
Contractual Obligations and Commitments
We had the following contractual obligations as of December 31, 2017:2020:
Payments due by period | ||||||||||||||
Contractual obligations | Total | 2021 | 2022 | 2024 | After | |||||||||
Finance lease obligations | $ | 9.5 | $ | 2.8 | $ | 3.6 | $ | 2.2 | $ | 0.9 | ||||
Operating lease obligations | 136.0 | 34.3 | 55.5 | 30.5 | 15.7 | |||||||||
Purchase obligations | 1,185.8 | 1,180.8 | 5.0 | — | — | |||||||||
Total | $ | 1,331.3 | $ | 1,217.9 | $ | 64.1 | $ | 32.7 | $ | 16.6 |
Payments due by period | |||||||||||||||||||
Contractual obligations | Total | 2018 | 2019 and 2020 | 2021 and 2022 | After 2022 | ||||||||||||||
Capital lease obligations | $ | 13,623 | $ | 2,597 | $ | 3,809 | $ | 3,085 | $ | 4,132 | |||||||||
Operating lease obligations | 111,843 | 28,732 | 42,053 | 21,560 | 19,498 | ||||||||||||||
Purchase obligations | 771,063 | 771,063 | — | — | — | ||||||||||||||
Total | $ | 896,529 | $ | 802,392 | $ | 45,862 | $ | 24,645 | $ | 23,630 |
Finance and operating lease obligations consist of both principal and interest payments. There were no long-term debt obligations, other than finance lease obligations, at December 31, 2017.2020.
Purchase obligations consist of open purchase orders issued in the normal course of business. Many of these purchase obligations may be cancelled with limited or no financial penalties.
The table above does not include
We also expect to make contributions totaling approximately
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"). In connection with the preparation of our financial statements we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our estimates, assumptions and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, estimates, assumptions, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material.
Our significant accounting policies are discussed in Note 2, "Summary of Significant Accounting Policies", of the notes to the consolidated financial statements located in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.
Pension and Postretirement Benefits Plans
We account for our pension and postretirement benefit obligations in accordance with the accounting standards for defined benefit pension and other postretirement plans. These standards require the use of several important assumptions, including the discount rate and expected long-term rate of return on plan assets, among others, in determining our obligations and the annual cost of our pension and postretirement benefits. These assumptions are assessed annually in consultation with independent actuaries and investment advisors as of December 31 and adjustments are made as needed.
The following table presents key assumptions used to measure the pension and postretirement benefits obligations at December 31:
Pension Benefits | Postretirement Benefits | ||||
2020 | 2019 | 2020 | 2019 | ||
Discount rate | 2.62% | 3.38% | 2.22% | 3.19% | |
Expected return on plan assets | 5.50% | 5.75% | — | — |
To determine the long-term expected rate of return, we consider macroeconomic conditions, the historical experience and expected future long-term performance of the plan assets, as well as the current and expected allocation of the plan assets. The pension plan’s asset allocation as of December 31, 2020, was approximately 71% fixed income investments, 17% equity securities and 12% other investments, in line with our policy ranges. We periodically evaluate the allocation of plan assets among the different investment classes to ensure that they are within policy guidelines and ranges. Holding all other assumptions constant, we estimate that a one percentage point decrease in the expected return on plan assets would have increased our 2020 pension expense by approximately $6.0 million. Our expected long-term rate of return on plan assets assumption will decrease to 5.00% for fiscal year 2021.
In determining the discount rate, we use yields on high-quality fixed-income investments (including among other things, Moody’s Aa corporate bond yields) that match the duration and expected cash flows of the future pension obligations. To the extent the discount rate increases or decreases, our pension and postretirement obligations are decreased or increased accordingly. Holding all other assumptions constant, we estimate that a one percentage point decrease in the discount rate used to calculate both pension
expense for 2020 and the pension liability as of December 31, 2020 would have increased pension expense by $14.4 million in 2020 and the pension liability by $119.7 million at December 31, 2020. Similarly, a one percentage point decrease in the discount rate would have increased postretirement benefits expense by $0.1 million in 2020 and the postretirement benefits liability by $6.0 million at December 31, 2020.
Merchandise Inventory
We value our inventories at the lower of cost (generally 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. In assessing the ultimate realization of inventories, we make judgments as to our return rights to suppliers and future demand requirements and record an inventory reserve for obsolete inventory. If actual future demand, market conditions, or supplier return provisions are less favorable than those projected by management, additional inventory write-downs may be required. For the years ended December 31, 2020, 2019 and 2018, there were no material differences between our estimated reserve levels and actual write-offs.
Income Taxes
We recognize 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 that are still subject to examination and positions that are 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. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe 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. We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages.
Pension Benefits | Postretirement Benefits | |||
2017 | 2016 | 2017 | 2016 | |
Discount rate | 3.67% | 4.15% | 3.44% | 3.78% |
Expected return on plan assets | 5.75% | 5.75% | — | — |
New Accounting Standards
New accounting standards are discussed in Note 2, "Summary of Significant Accounting Policies", of the notes to the consolidated financial statements located in Item 8., "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, including commodity prices, foreign currency exchange rates, interest rates, and equity prices. Our primary exposures to market risk are commodity price risk, foreign currency exchange rate risk, and interest rate risk associated with debt obligations.
Commodity Price Risk
We have exposure to commodity price risk on products we purchase for resale. Examples of such products include wire and cable, conduit, enclosures, and fittings.
Foreign Currency Exchange Rate Risk
The functional currency for our Canadian subsidiary is the Canadian dollar. Accordingly, its balance sheet amounts are translated at the exchange rates in effect at year-end and its income and expenses are translated using average exchange rates prevailing during the year. Currency translation adjustments are included in accumulated other comprehensive loss. Exposure to foreign currency exchange rate fluctuations is not material.
Interest Rate Risk
Our interest expense is sensitive to changes in the general level of market interest rates. Changes in interest rates have different impacts on the fixed-rate and variable-rate portions of our debt portfolio. A change in market interest rates on the fixed-rate portion of our debt portfolio impacts the fair value of the financial instrument, but has no impact on interest incurred or cash flows. A change in market interest rates on the variable-rate portion of our debt portfolio impacts the interest incurred and cash flows, but does not impact the fair value of the financial instrument.
Based on $169,643$50.0 million in variable-rate debt outstanding at December 31, 2017,2020, a 1%one percentage point increase in interest rates would increase our interest expense by $1,696$0.5 million per year.
The following table provides information about financial instruments that are sensitive to changes in interest rates. The table presents principal payments on debt and related weighted-average interest rates by expected maturity dates:
December 31, 2020 | |||||||||||||||||||||||||||||
Debt Instruments | 2021 | 2022 | 2023 | 2024 | 2025 | After 2026 | Total | Fair | |||||||||||||||||||||
Long-term, fixed-rate debt | $ | 2.3 | $ | 1.8 | $ | 1.2 | $ | 1.2 | $ | 0.8 | $ | 0.7 | $ | 8.0 | $ | 6.7 | |||||||||||||
Weighted-average interest rate | 5.03 | % | 5.54 | % | 6.63 | % | 7.26 | % | 8.04 | % | 12.95 | % | |||||||||||||||||
Short-term, variable-rate borrowings | $ | 50.0 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 50.0 | $ | 50.0 | |||||||||||||
Weighted-average interest rate | 1.15 | % |
December 31, 2017 | ||||||||||||||||||||||||
Debt Instruments | 2018 | 2019 | 2020 | 2021 | 2022 | After 2022 | Total | Fair Value | ||||||||||||||||
Long-term, fixed-rate debt | $ | 2,052 | $ | 1,383 | $ | 1,213 | $ | 1,162 | $ | 986 | $ | 2,304 | $ | 9,100 | $ | 8,363 | ||||||||
Weighted-average interest rate | 5.44 | % | 5.71 | % | 5.66 | % | 5.64 | % | 6.05 | % | 6.89 | % | ||||||||||||
Short-term, variable-rate borrowings | $ | 169,643 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 169,643 | $ | 169,643 | ||||||||
Weighted-average interest rate | 2.16 | % |
The fair value of long-term debt is estimated by calculating future cash flows at interpolated Treasury yields with similar maturities, plus an estimate of our credit risk spread as of December 31, 2017.
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS:
For additional information related to risks associated with our future performance, see Part I, "Caution Regarding Forward-looking Statements" above and Item 1A. Risk Factors of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Graybar Electric Company, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Graybar Electric Company, Inc. and subsidiariesSubsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Defined Benefit Pension Obligation | ||
Description of the Matter | At December 31, 2020, the Company’s aggregate defined benefit pension obligation was $921.8 million and exceeded the fair value of pension plan assets of $722.0 million, resulting in an unfunded defined benefit pension obligation of $199.8 million. As discussed in Note 13 to the consolidated financial statements, the Company updates the estimates used to measure the defined benefit pension obligation and plan assets at December 31 or upon a remeasurement event. Auditing the defined benefit pension obligation was complex and required the involvement of actuarial specialists due to the judgmental nature of the actuarial assumptions (e.g., discount rate and expected return on plan assets) used in the Company’s measurement process. These assumptions have a significant effect on the projected benefit obligation. | |
How We Addressed the Matter in Our Audit | To test the defined benefit pension obligation, we performed audit procedures that included, among others, evaluating the methodology used, the significant actuarial assumptions described above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from the prior year, due to the change in service costs, interest costs, actuarial gains and losses, benefit payments, contributions and other activities. In addition, we involved a specialist to assist in evaluating management’s methodology for determining the actuarial assumptions used to measure the defined benefit pension obligation, including evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension obligation. To evaluate the expected return on plan assets, we assessed whether management’s assumptions were consistent with a range of returns for a portfolio of comparative investments. We also tested the completeness and accuracy of the underlying data, including the participant data used in the actuarial calculations. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1996.
St. Louis, MO
March 10, 2021
Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, | ||||||||
(Stated in millions, except per share data) | 2020 | 2019 | 2018 | |||||
Net Sales | $ | 7,265.7 | $ | 7,523.9 | $ | 7,202.5 | ||
Cost of merchandise sold | (5,896.2) | (6,094.9) | (5,821.6) | |||||
Gross Margin | 1,369.5 | 1,429.0 | 1,380.9 | |||||
Selling, general and administrative expenses | (1,098.9) | (1,159.9) | (1,125.0) | |||||
Depreciation and amortization | (52.8) | (50.5) | (49.6) | |||||
Other income, net | 7.0 | 5.0 | 3.4 | |||||
Income from Operations | 224.8 | 223.6 | 209.7 | |||||
Non-operating expenses | (58.5) | (23.7) | (30.6) | |||||
Income before Provision for Income Taxes | 166.3 | 199.9 | 179.1 | |||||
Provision for income taxes | (44.2) | (55.0) | (35.4) | |||||
Net Income | 122.1 | 144.9 | 143.7 | |||||
Net income attributable to noncontrolling interests | (0.3) | (0.4) | (0.4) | |||||
Net Income attributable to Graybar Electric Company, Inc. | $ | 121.8 | $ | 144.5 | $ | 143.3 | ||
Net Income attributable to Graybar Electric Company, Inc. per share of Common Stock | $ | 5.38 | $ | 6.41 | $ | 6.37 |
For the Years Ended December 31, | |||||||||
(Stated in thousands, except per share data) | 2017 | 2016 | 2015 | ||||||
Net Sales | $ | 6,631,227 | $ | 6,385,032 | $ | 6,110,299 | |||
Cost of merchandise sold | (5,369,920 | ) | (5,176,669 | ) | (4,955,554 | ) | |||
Gross Margin | 1,261,307 | 1,208,363 | 1,154,745 | ||||||
Selling, general and administrative expenses | (1,047,157 | ) | (1,008,729 | ) | (965,134 | ) | |||
Depreciation and amortization | (48,890 | ) | (47,852 | ) | (43,242 | ) | |||
Other income, net | 6,545 | 5,347 | 8,199 | ||||||
Income from Operations | 171,805 | 157,129 | 154,568 | ||||||
Interest expense, net | (4,257 | ) | (3,630 | ) | (2,227 | ) | |||
Income before Provision for Income Taxes | 167,548 | 153,499 | 152,341 | ||||||
Provision for income taxes | (95,613 | ) | (60,186 | ) | (61,009 | ) | |||
Net Income | 71,935 | 93,313 | 91,332 | ||||||
Net income attributable to noncontrolling interests | (327 | ) | (234 | ) | (264 | ) | |||
Net Income attributable to Graybar Electric Company, Inc. | $ | 71,608 | $ | 93,079 | $ | 91,068 | |||
Net Income attributable to Graybar Electric Company, Inc. per share of Common Stock(A) | $ | 3.70 | $ | 4.87 | $ | 4.82 |
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, | ||||||||
(Stated in millions) | 2020 | 2019 | 2018 | |||||
Net Income | $ | 122.1 | $ | 144.9 | $ | 143.7 | ||
Other Comprehensive Income (Loss) | ||||||||
Foreign currency translation | 2.8 | 4.8 | (8.1) | |||||
Pension and postretirement benefits liability adjustments | 1.3 | (15.0) | 17.6 | |||||
Total Other Comprehensive Income (Loss) | 4.1 | (10.2) | 9.5 | |||||
Comprehensive Income | $ | 126.2 | $ | 134.7 | $ | 153.2 | ||
Less: comprehensive income attributable to noncontrolling | 0.5 | 0.5 | 0.1 | |||||
Comprehensive Income attributable to | $ | 125.7 | $ | 134.2 | $ | 153.1 |
For the Years Ended December 31, | |||||||||||
(Stated in thousands) | 2017 | 2016 | 2015 | ||||||||
Net Income | $ | 71,935 | $ | 93,313 | $ | 91,332 | |||||
Other Comprehensive Income | |||||||||||
Foreign currency translation | 5,945 | 2,218 | (13,240 | ) | |||||||
Pension and postretirement benefits liability adjustment | |||||||||||
(net of tax of $10,047, $5,245, and $16,261, respectively) | (15,780 | ) | (8,238 | ) | (25,542 | ) | |||||
Total Other Comprehensive Loss | (9,835 | ) | (6,020 | ) | (38,782 | ) | |||||
Comprehensive Income | $ | 62,100 | $ | 87,293 | $ | 52,550 | |||||
Less: comprehensive income (loss) attributable to noncontrolling interests, net of tax | 531 | 379 | (276 | ) | |||||||
Comprehensive Income attributable to Graybar Electric Company, Inc. | $ | 61,569 | $ | 86,914 | $ | 52,826 |
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, | |||||||||
(Stated in millions, except share and per share data) | 2020 | 2019 | |||||||
ASSETS | |||||||||
Current Assets | |||||||||
Cash and cash equivalents | $ | 131.2 | $ | 60.8 | |||||
Trade receivables (less allowances of $6.9 and $6.2, respectively) | 1,109.0 | 1,096.6 | |||||||
Merchandise inventory | 588.5 | 654.2 | |||||||
Other current assets | 56.6 | 51.7 | |||||||
Total Current Assets | 1,885.3 | 1,863.3 | |||||||
Property, at cost | |||||||||
Land | 78.9 | 79.6 | |||||||
Buildings | 504.5 | 505.5 | |||||||
Furniture and fixtures | 255.7 | 250.4 | |||||||
Software | 153.5 | 168.6 | |||||||
Finance leases | 14.6 | 18.3 | |||||||
Total Property, at cost | 1,007.2 | 1,022.4 | |||||||
Accumulated depreciation and amortization | (600.6) | (597.2) | |||||||
Net Property | 406.6 | 425.2 | |||||||
Operating Lease Right-of-use Assets | 118.8 | 117.5 | |||||||
Other Non-current Assets | 140.5 | 111.7 | |||||||
Total Assets | $ | 2,551.2 | $ | 2,517.7 | |||||
LIABILITIES | |||||||||
Current Liabilities | |||||||||
Short-term borrowings | $ | 50.0 | $ | 138.0 | |||||
Current portion of long-term debt | 2.3 | 3.8 | |||||||
Trade accounts payable | 884.1 | 832.3 | |||||||
Accrued payroll and benefit costs | 121.7 | 151.1 | |||||||
Other accrued taxes | 44.2 | 24.7 | |||||||
Current operating lease liabilities | 31.2 | 28.6 | |||||||
Other current liabilities | 104.4 | 101.1 | |||||||
Total Current Liabilities | 1,237.9 | 1,279.6 | |||||||
Postretirement Benefits Liability | 74.1 | 69.4 | |||||||
Pension Liability | 197.9 | 164.6 | |||||||
Long-term Debt | 5.7 | 7.8 | |||||||
Non-current Operating Lease Liabilities | 95.9 | 96.2 | |||||||
Other Non-current Liabilities | 4.7 | 2.3 | |||||||
Total Liabilities | 1,616.2 | 1,619.9 | |||||||
SHAREHOLDERS’ EQUITY | |||||||||
Shares at December 31, | |||||||||
Capital Stock | 2020 | 2019 | |||||||
Common, stated value $20.00 per share | |||||||||
Authorized | 50,000,000 | 50,000,000 | |||||||
Issued to voting trustees | 18,755,472 | 18,665,064 | |||||||
Issued to shareholders | 3,905,994 | 3,872,159 | |||||||
In treasury, at cost | (57,047) | (62,700) | |||||||
Outstanding Common Stock | 22,604,419 | 22,474,523 | 452.1 | 449.5 | |||||
Common shares subscribed | 1,052,817 | 997,275 | 21.1 | 19.9 | |||||
Less subscriptions receivable | (1,052,817) | (997,275) | (21.1) | (19.9) | |||||
Retained Earnings | 725.1 | 694.0 | |||||||
Accumulated Other Comprehensive Loss | (246.7) | (250.6) | |||||||
Total Graybar Electric Company, Inc. Shareholders’ Equity | 930.5 | 892.9 | |||||||
Noncontrolling Interests | 4.5 | 4.9 | |||||||
Total Shareholders’ Equity | 935.0 | 897.8 | |||||||
Total Liabilities and Shareholders’ Equity | $ | 2,551.2 | $ | 2,517.7 |
December 31, | ||||||||||
(Stated in thousands, except share and per share data) | 2017 | 2016 | ||||||||
ASSETS | ||||||||||
Current Assets | ||||||||||
Cash and cash equivalents | $ | 42,757 | $ | 43,339 | ||||||
Trade receivables (less allowances of $5,989 and $5,025, respectively) | 1,061,590 | 964,180 | ||||||||
Merchandise inventory | 579,350 | 516,732 | ||||||||
Other current assets | 34,227 | 24,148 | ||||||||
Total Current Assets | 1,717,924 | 1,548,399 | ||||||||
Property, at cost | ||||||||||
Land | 79,787 | 78,440 | ||||||||
Buildings | 470,784 | 454,587 | ||||||||
Furniture and fixtures | 300,705 | 286,615 | ||||||||
Software | 87,313 | 87,313 | ||||||||
Capital leases | 25,610 | 33,652 | ||||||||
Total Property, at cost | 964,199 | 940,607 | ||||||||
Less – accumulated depreciation and amortization | (539,275 | ) | (512,535 | ) | ||||||
Net Property | 424,924 | 428,072 | ||||||||
Other Non-current Assets | 118,509 | 122,761 | ||||||||
Total Assets | $ | 2,261,357 | $ | 2,099,232 | ||||||
LIABILITIES | ||||||||||
Current Liabilities | ||||||||||
Short-term borrowings | $ | 169,643 | $ | 140,465 | ||||||
Current portion of long-term debt | 2,052 | 4,155 | ||||||||
Trade accounts payable | 835,931 | 752,171 | ||||||||
Accrued payroll and benefit costs | 119,349 | 121,421 | ||||||||
Other accrued taxes | 17,228 | 16,926 | ||||||||
Other current liabilities | 78,225 | 73,028 | ||||||||
Total Current Liabilities | 1,222,428 | 1,108,166 | ||||||||
Postretirement Benefits Liability | 70,747 | 70,628 | ||||||||
Pension Liability | 169,225 | 160,950 | ||||||||
Long-term Debt | 7,048 | 7,271 | ||||||||
Other Non-current Liabilities | 30,361 | 21,328 | ||||||||
Total Liabilities | 1,499,809 | 1,368,343 | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||||
Shares at December 31, | ||||||||||
Capital Stock | 2017 | 2016 | ||||||||
Common, stated value $20.00 per share | ||||||||||
Authorized | 50,000,000 | 50,000,000 | ||||||||
Issued to voting trustees | 15,912,467 | 14,606,830 | ||||||||
Issued to shareholders | 3,496,114 | 2,850,551 | ||||||||
In treasury, at cost | (24,243 | ) | (18,854 | ) | ||||||
Outstanding Common Stock | 19,384,338 | 17,438,527 | 387,687 | 348,771 | ||||||
Common shares subscribed | 923,156 | 896,456 | 18,463 | 17,929 | ||||||
Less subscriptions receivable | (923,156 | ) | (896,456 | ) | (18,463 | ) | (17,929 | ) | ||
Retained Earnings | 619,916 | 575,380 | ||||||||
Accumulated Other Comprehensive Loss | (250,154 | ) | (196,600 | ) | ||||||
Total Graybar Electric Company, Inc. Shareholders’ Equity | 757,449 | 727,551 | ||||||||
Noncontrolling Interests | 4,099 | 3,338 | ||||||||
Total Shareholders’ Equity | 761,548 | 730,889 | ||||||||
Total Liabilities and Shareholders’ Equity | $ | 2,261,357 | $ | 2,099,232 |
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, | ||||||||
(Stated in millions) | 2020 | 2019 | 2018 | |||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 122.1 | $ | 144.9 | $ | 143.7 | ||
Adjustments to reconcile net income to cash provided | ||||||||
Depreciation and amortization | 52.8 | 50.5 | 49.6 | |||||
Non-cash operating lease expense | 33.8 | 30.1 | — | |||||
Deferred income taxes | (10.2) | (3.7) | 3.4 | |||||
Net gains on disposal of assets | (3.0) | (1.5) | — | |||||
Losses on impairment of assets | 0.3 | 0.3 | 0.3 | |||||
Non-cash pension settlement charge | 27.7 | — | — | |||||
Net income attributable to noncontrolling interests | (0.3) | (0.4) | (0.4) | |||||
Changes in assets and liabilities: | ||||||||
Trade receivables | (5.2) | 92.2 | (125.4) | |||||
Merchandise inventory | 68.0 | 4.5 | (101.9) | |||||
Other current assets | (4.9) | 2.4 | 2.1 | |||||
Other non-current assets | (1.1) | (1.7) | (9.0) | |||||
Trade accounts payable | 48.1 | (62.8) | 59.7 | |||||
Accrued payroll and benefit costs | (30.2) | (7.1) | 38.8 | |||||
Other current liabilities | 25.1 | 5.8 | 5.6 | |||||
Other non-current liabilities | (21.3) | (4.1) | (24.4) | |||||
Total adjustments to net income | 179.6 | 104.5 | (101.6) | |||||
Net cash provided by operating activities | 301.7 | 249.4 | 42.1 | |||||
Cash Flows from Investing Activities | ||||||||
Proceeds from disposal of property | 7.9 | 3.7 | 0.7 | |||||
Capital expenditures for property | (31.1) | (43.1) | (43.0) | |||||
Acquisition of business, net of cash acquired | (27.2) | — | — | |||||
Net cash used by investing activities | (50.4) | (39.4) | (42.3) | |||||
Cash Flows from Financing Activities | ||||||||
Net (decrease) increase in short-term borrowings | (88.0) | (97.0) | 65.4 | |||||
Principal payments under finance arrangements | (3.9) | (3.7) | (4.0) | |||||
Sales of common stock | 19.1 | 18.5 | 17.8 | |||||
Purchases of common stock | (16.5) | (19.2) | (15.7) | |||||
Sales of noncontrolling interests’ common stock | — | 0.8 | — | |||||
Purchases of noncontrolling interests’ common stock | (0.9) | (0.3) | (0.3) | |||||
Dividends paid | (90.7) | (107.2) | (46.9) | |||||
Net cash (used) provided by financing activities | (180.9) | (208.1) | 16.3 | |||||
Net Increase in Cash | 70.4 | 1.9 | 16.1 | |||||
Cash, Beginning of Year | 60.8 | 58.9 | 42.8 | |||||
Cash, End of Year | $ | 131.2 | $ | 60.8 | $ | 58.9 | ||
Supplemental Cash Flow Information: | ||||||||
Non-cash Investing and Financing Activities: | ||||||||
Acquisitions of equipment under finance leases | $ | 0.3 | $ | 2.0 | $ | 3.1 | ||
Acquisitions of assets under operating leases | $ | 35.3 | $ | 55.9 | $ | — | ||
Acquisition of software and maintenance under financing arrangement | $ | — | $ | — | $ | 5.0 | ||
Cash Paid During the Year for: | ||||||||
Interest, net of amounts capitalized | $ | 3.8 | $ | 6.1 | $ | 6.3 | ||
Income taxes, net of refunds | $ | 55.3 | $ | 60.7 | $ | 38.3 |
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements
For the Years Ended December 31, | |||||||||||
(Stated in thousands) | 2017 | 2016 | 2015 | ||||||||
Cash Flows from Operations | |||||||||||
Net Income | $ | 71,935 | $ | 93,313 | $ | 91,332 | |||||
Adjustments to reconcile net income to cash provided by operations: | |||||||||||
Depreciation and amortization | 48,890 | 47,852 | 43,242 | ||||||||
Deferred income taxes | 14,168 | 19,540 | 4,173 | ||||||||
Net gains on disposal of property | (118 | ) | (1,811 | ) | (5,918 | ) | |||||
Net income attributable to noncontrolling interests | (327 | ) | (234 | ) | (264 | ) | |||||
Changes in assets and liabilities, net of acquisitions: | |||||||||||
Trade receivables | (97,410 | ) | (18,608 | ) | (3,409 | ) | |||||
Merchandise inventory | (62,618 | ) | 16,503 | (54,080 | ) | ||||||
Other current assets | (10,079 | ) | 7,245 | 10,698 | |||||||
Other non-current assets | (2,459 | ) | 1,137 | (149 | ) | ||||||
Trade accounts payable | 83,760 | (25,534 | ) | 36,011 | |||||||
Accrued payroll and benefit costs | (2,072 | ) | 9,839 | (16,783 | ) | ||||||
Other current liabilities | 9,858 | 4,303 | (14,596 | ) | |||||||
Other non-current liabilities | (8,400 | ) | (41,345 | ) | 6,596 | ||||||
Total adjustments to net income | (26,807 | ) | 18,887 | 5,521 | |||||||
Net cash provided by operations | 45,128 | 112,200 | 96,853 | ||||||||
Cash Flows from Investing Activities | |||||||||||
Proceeds from disposal of property | 2,166 | 4,095 | 15,701 | ||||||||
Capital expenditures for property | (41,342 | ) | (35,215 | ) | (74,179 | ) | |||||
Acquisition of business, net of cash acquired | — | (59,946 | ) | (18,093 | ) | ||||||
Net cash used by investing activities | (39,176 | ) | (91,066 | ) | (76,571 | ) | |||||
Cash Flows from Financing Activities | |||||||||||
Net increase in short-term borrowings | 29,178 | 35,487 | 38,636 | ||||||||
Repayment of long-term debt | — | (1,853 | ) | (3,656 | ) | ||||||
Principal payments under capital leases | (4,271 | ) | (4,810 | ) | (4,704 | ) | |||||
Sales of common stock | 17,389 | 17,007 | 15,723 | ||||||||
Purchases of treasury stock | (13,687 | ) | (11,272 | ) | (14,365 | ) | |||||
Sales of noncontrolling interests’ common stock | 627 | — | 401 | ||||||||
Purchases of noncontrolling interests’ common stock | (397 | ) | (360 | ) | (109 | ) | |||||
Dividends paid | (35,373 | ) | (49,925 | ) | (48,035 | ) | |||||
Net cash used by financing activities | (6,534 | ) | (15,726 | ) | (16,109 | ) | |||||
Net (Decrease) Increase in Cash | (582 | ) | 5,408 | 4,173 | |||||||
Cash, Beginning of Year | 43,339 | 37,931 | 33,758 | ||||||||
Cash, End of Year | $ | 42,757 | $ | 43,339 | $ | 37,931 | |||||
Supplemental Cash Flow Information: | |||||||||||
Non-cash Investing and Financing Activities: | |||||||||||
Acquisitions of equipment under capital leases | $ | 1,945 | $ | 427 | $ | 7,354 | |||||
Cash Paid During the Year for: | |||||||||||
Interest, net of amounts capitalized | $ | 4,219 | $ | 3,737 | $ | 2,024 | |||||
Income taxes, net of refunds | $ | 78,411 | $ | 36,848 | $ | 52,076 |
Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Graybar Electric Company, Inc. | |||||||||||||||
Shareholders’ Equity | |||||||||||||||
(Stated in millions) | Common | Retained | Accumulated | Noncontrolling | Total | ||||||||||
Balance, December 31, 2017 | $ | 387.7 | $ | 619.9 | $ | (250.1) | $ | 4.1 | $ | 761.6 | |||||
Net income |
| 143.3 |
| 0.4 | 143.7 | ||||||||||
Other comprehensive income (loss) |
|
| 9.8 | (0.3) | 9.5 | ||||||||||
Adoption of ASC 606, net of tax | 0.8 | 0.8 | |||||||||||||
Stock issued | 17.8 |
|
|
| 17.8 | ||||||||||
Stock purchased | (15.7) |
|
| (0.3) | (16.0) | ||||||||||
Dividends declared | 39.0 | (85.9) |
|
| (46.9) | ||||||||||
Balance, December 31, 2018 | $ | 428.8 | $ | 678.1 | $ | (240.3) | $ | 3.9 | $ | 870.5 | |||||
Net income |
| 144.5 |
| 0.4 | 144.9 | ||||||||||
Other comprehensive (loss) income |
|
| (10.3) | 0.1 | (10.2) | ||||||||||
Stock issued | 18.5 |
|
| 0.8 | 19.3 | ||||||||||
Stock purchased | (19.2) |
|
| (0.3) | (19.5) | ||||||||||
Dividends declared | 21.4 | (128.6) |
|
| (107.2) | ||||||||||
Balance, December 31, 2019 | $ | 449.5 | $ | 694.0 | $ | (250.6) | $ | 4.9 | $ | 897.8 | |||||
Net income |
| 121.8 |
| 0.3 | 122.1 | ||||||||||
Other comprehensive income |
|
| 3.9 | 0.2 | 4.1 | ||||||||||
Stock issued | 19.1 |
|
|
| 19.1 | ||||||||||
Stock purchased | (16.5) |
|
| (0.9) | (17.4) | ||||||||||
Dividends declared |
| (90.7) |
|
| (90.7) | ||||||||||
Balance, December 31, 2020 | $ | 452.1 | $ | 725.1 | $ | (246.7) | $ | 4.5 | $ | 935.0 |
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries
Graybar Electric Company, Inc. Shareholders’ Equity | |||||||||||||||||||
(Stated in thousands) | Common Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders’ Equity | ||||||||||||||
Balance, December 31, 2014 | $ | 317,199 | $ | 513,672 | $ | (152,193 | ) | $ | 3,303 | $ | 681,981 | ||||||||
Net income | 91,068 | 264 | 91,332 | ||||||||||||||||
Other comprehensive loss | (38,242 | ) | (540 | ) | (38,782 | ) | |||||||||||||
Stock issued | 15,723 | 401 | 16,124 | ||||||||||||||||
Stock purchased | (14,365 | ) | (109 | ) | (14,474 | ) | |||||||||||||
Dividends declared | 7,925 | (55,960 | ) | (48,035 | ) | ||||||||||||||
Balance, December 31, 2015 | $ | 326,482 | $ | 548,780 | $ | (190,435 | ) | $ | 3,319 | $ | 688,146 | ||||||||
Net income | 93,079 | 234 | 93,313 | ||||||||||||||||
Other comprehensive (loss) income | (6,165 | ) | 145 | (6,020 | ) | ||||||||||||||
Stock issued | 17,007 | 17,007 | |||||||||||||||||
Stock purchased | (11,272 | ) | (360 | ) | (11,632 | ) | |||||||||||||
Dividends declared | 16,554 | (66,479 | ) | (49,925 | ) | ||||||||||||||
Balance, December 31, 2016 | $ | 348,771 | $ | 575,380 | $ | (196,600 | ) | $ | 3,338 | $ | 730,889 | ||||||||
Net income | 71,608 | 327 | 71,935 | ||||||||||||||||
Other comprehensive (loss) income | (10,039 | ) | 204 | (9,835 | ) | ||||||||||||||
Adoption of ASU 2018-02 | 43,515 | (43,515 | ) | — | |||||||||||||||
Stock issued | 17,389 | 627 | 18,016 | ||||||||||||||||
Stock purchased | (13,687 | ) | (397 | ) | (14,084 | ) | |||||||||||||
Dividends declared | 35,214 | (70,587 | ) | (35,373 | ) | ||||||||||||||
Balance, December 31, 2017 | $ | 387,687 | $ | 619,916 | $ | (250,154 | ) | $ | 4,099 | $ | 761,548 |
Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
as of December 31, 20172020 and 20162019 and
for the Years Ended December 31, 2017, 2016,2020, 2019, and 2015
(Stated in thousands,millions, except share and per share data)
1. DESCRIPTION OF THE BUSINESS
Graybar Electric Company, Inc. (“Graybar”, “Company”, "we", "our", or "us") is a New York corporation, incorporated in 1925. We are engaged in the distribution of electrical and communications and data networking products and are a provider of related supply chain management and logistics services. We primarily serve customers in the construction, industrial & utility, and commercial, institutional and government ("CIG"), and industrial & utility vertical markets, with products and services that support new construction, infrastructure updates, building renovation, facility maintenance, repair and operations ("MRO"), and original equipment manufacturers ("OEM"). We purchase all of the products we sell from others, and we neither manufacture nor contract to manufacture any products we sell. Our business activity is primarily based in the United States (“U.S.”). We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our accounting policies conform to generally accepted accounting principles in the U.S. ("GAAP”) and are applied on a consistent basis among all years presented. Significant accounting policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of Graybar 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 are in subsidiaries consolidatedowned by the Company and are accounted for and reported as noncontrolling interests.
Estimates
The preparation of financial statements in accordance with 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
We have evaluated subsequent events through the time of the filing of this Annual Report on Form 10-K with the Commission. No material subsequent events have occurred since December 31, 20172020 that require recognition or disclosure in our financial statements.
Revenue Recognition
Sales revenue is recognized when evidenceperformance obligations are satisfied, which is typically upon delivery of a customer arrangement exists, prices are fixedthe product to the customer. Sometimes product is purchased from the manufacturer and determinable,drop-shipped to the customer. We generally take control of the goods when shipped by the manufacturer and then recognize revenue when control of the product title, ownership and risk of loss transfers to the customer, and collectability is reasonably assured.customer. Revenues recognized are primarily for product sales, but may also include freight and handling charges. Our standard warehouse shipping terms are FOB shipping point, under which product titlecontrol passes to the customer at the time of shipment. We also earn revenue for professional services, provided to customers for supply chain managementgeneral contracting services, and logisticsstorage services. ServiceSuch service revenue which accounts forrepresented less than
Outgoing Freight Expenses
We record certain95% of outgoing freight expenses as a component of selling, general and administrative expenses. These costs totaled $
Cash and Cash Equivalents
We account 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
We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables is secured by mechanic’s lien or payment bond rights. We maintain allowances to reflect the expected uncollectability of trade receivables based on past collection history andpooled on the aging of the receivables, specific risks identified in the receivables portfolio.portfolio based on current conditions, and expected future economic conditions when necessary. Although actual credit losses have historically been within management’s expectations, additional allowances may be required if the financial condition of our customers were to deteriorate.
Merchandise Inventory
Our inventory, comprised entirely of finished goods, is stated at the lower of cost (determined(generally 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.
We make provisions for obsolete or excess inventories as necessary to reflect reductions in inventory value.
Vendor Allowances
Our agreements with many of our suppliers provide for us to earn volume incentives based on purchases during the agreement period. Based on the provisions of our vendor agreements, we develop vendor accrual rates by estimating the point at which we will have completed our performance under the agreementagreements and the deferred amounts that will be earned. We perform analyses and review historical trends to ensure the deferred amounts earned are appropriately recorded. Certain vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year are based on estimates of future activity levels, and could be materially impacted if actual purchase volumes differ. 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 our 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.
Fair Value
We endeavor to utilize the best available information in measuring fair value. 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. We have used fair value measurements to value our pension plan assets.
Foreign Currency Exchange Rate
The functional currency for our 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
Our goodwill is not amortized, but rather tested annually for impairment. Goodwill is reviewed annually in the fourth quarter and/orand when circumstances or other events might indicate that impairment may have occurred. We first perform a qualitative 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 then 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 using applicable discount rates.
Definite Lived Intangible Assets
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Customer relationships, trade names and other non-contractual intangible assets with determinable lives are amortized over periods generally ranging from 3 to 20 years. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.
Income Taxes
We recognize 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. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe 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. We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages.
Other Postretirement Benefits
We account for postretirement benefits other than pension benefits by accruing the costs of benefits to be provided over the eligible employees’ periods of active service. These costs are determined on an actuarial basis. Our consolidated balance sheets reflect the funded status of postretirement benefits.
Pension Plan
We sponsor a noncontributory defined benefit pension plan accounted for by accruing the cost to provide the benefits over the eligible employees’ periods of active service. These costs are determined on an actuarial basis. Our consolidated balance sheets reflect the funded status of the defined benefit pension plan.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and non-current operating lease liabilities on our consolidated balance sheets. Amounts related to finance leases are included in property and equipment, current portion of long-term debt, and long-term debt on our consolidated balance sheets. ROU assets and lease liabilities are recognized and measured on the date the underlying asset is made available to us.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. We use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
For certain leases, such as real estate and information technology (IT) equipment, we account for the lease and non-lease components as a single lease component. For all other leases, we account for the lease and non-lease components separately. We have
elected as an accounting policy not to apply the recognition requirements for short-term leases. Therefore, leases with a term of twelve months or less are not recorded on the consolidated balance sheets. Lease expenses associated with short-term leases are immaterial and are recorded in the consolidated statements of income in selling, general and administrative expenses. Additionally, for certain vehicle leases, we apply a portfolio approach to account for the operating lease ROU assets and liabilities.
Non-Operating Expenses
Non-operating expenses are comprised of interest expense, net and non-service cost components of the net periodic benefit cost for the pension and other postretirement benefit plans. The non-service cost components include interest cost, expected return on plan assets, amortization of net actuarial gains/losses, amortization of prior service costs/gains, and charges due to settlement of certain plan liabilities.
New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU” or “Update”) 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which introduced new guidance for the accounting standardsfor credit losses on certain financial instruments. The amendments in this ASU were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and required a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. Periods presented prior to the adoption date are not adjusted.
We adopted this Update as of January 1, 2020. We determined that were issued or became effective during 2017our trade receivables are financial instruments subject to this Update. We have had orevaluated the accounting policies applicable to our allowance for doubtful accounts and have developed new methods to include three components into our allowance to comply with requirements of the ASU: 1) a reserve derived from historical loss rates based upon the aging of our trade receivables, 2) a reserve based upon specifically-identified trade receivables in our portfolio that are expectedconsidered higher risk based on current conditions, and 3) an additional reserve, as necessary, to consider the impact of future economic conditions. The adoption of this Update did not have a material impact on our consolidated financial statements except those noted below.
In FebruaryAugust 2018, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU" or "Update") No. 2018-02, Income Statement - Reporting Comprehensive IncomeASU 2018-13, "Fair Value Measurement (Topic 220)820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-02"2018-13"), that makes minor changes to the disclosure requirements on fair value measurements in Topic 820. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. We adopted this Update as of January 1, 2020. The adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15") requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which allows entitiesimplementation costs to reclassifycapitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. We adopted this Update as of January 1, 2020. The adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14") that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities. Early adoption is permitted. We adopted this Update as of December 31, 2020. The adoption did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”) that provides temporary relief to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from accumulatedLIBOR and other comprehensive incomeinterbank offered rates to retained earnings the stranded tax effects resulting from the new federal corporate tax rate enacted in the Tax Cuts and Jobs Act ("TCJA") enacted on December 22, 2017. The ASU
3. REVENUE
On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers (Topic 606), in the first quarter of 2018Customers” ("ASC Topic 606") using the modified retrospective transition method.method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, "Revenue Recognition" ("ASC Topic 605").
We recorded an increase to opening retained earnings of $0.8 million (net of tax of $0.3 million) as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact primarily related to the recognition of bill and hold transactions that were deferred under ASC Topic 605. The modified retrospective approach requiresimpact to net sales as a result of applying ASC Topic 606 for the year ended December 31, 2018 was an increase of $0.2 million.
In accordance with the new revenue standard to all existing contracts not yet completedrequirement, the disclosure impact of adoption on our consolidated statement of income for the year ended December 31, 2018 and the consolidated balance sheet as of December 31, 2018 was as follows:
Consolidated Statements of Income
For the Year Ended December 31, 2018 | ||||||||
As Reported | Balance without Adoption | Effect of Change | ||||||
Net sales | $ | 7,202.5 | $ | 7,202.3 | $ | 0.2 | ||
Cost of merchandise sold | 5,821.6 | 5,821.6 | — |
Consolidated Balance Sheet
As of December 31, 2018 | ||||||||
As Reported | Balance without Adoption | Effect of Change | ||||||
Merchandise inventory | $ | 658.7 | $ | 668.2 | $ | (9.5) | ||
Other current assets | 54.1 | 54.4 | (0.3) | |||||
Other non-current liabilities | 8.7 | 19.4 | (10.7) | |||||
Retained earnings | 678.1 | 677.2 | 0.9 |
The following table summarizes the effective datepercentages of our net sales attributable to each of our vertical markets for the years ended December 31, 2020, 2019 and recording a cumulative-effect adjustment2018:
For the Years Ended December 31, | ||||||||
2020 | 2019 | 2018 | ||||||
Construction | 58.1 | % | 58.4 | % | 58.2 | % | ||
CIG | 26.8 | 26.5 | 26.2 | |||||
Industrial & Utility | 15.1 | 15.1 | 15.6 | |||||
Total net sales | 100.0 | % | 100.0 | % | 100.0 | % |
Certain reclassifications have been made to retained earningsthe vertical market assigned to customers in the prior years’ information to conform to the December 31, 2020 presentation.
We had no material contract assets, contract liabilities, or deferred contract costs recorded on the consolidated balance sheet as of December 31, 2020 and 2019. In addition, for the years ended December 31, 2020, 2019 and 2018, revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the fiscalperiod is not material.
Revenue expected to be recognized in any future year of adoption. This will result in a cumulative adjustment to retained earnings of $1,074 effective January 1, 2018. The adjustment reflects the acceleration of revenue and cost related to certain billremaining performance obligations is not material. As permitted in ASC Topic 606, we have elected to omit disclosure related to performance obligations for revenue pertaining to contracts that have an original expected duration of one year or less, to contracts where revenue is recognized as invoiced and hold transactions.to contracts with variable consideration related to wholly unsatisfied performance obligations.
4. CASH DISCOUNTS AND DOUBTFUL ACCOUNTS
The following table summarizes the activity in the allowances for cash discounts and doubtful accounts:
Beginning Balance | Provision (Charged to Expense) | Deductions | Ending Balance | ||||||||
For the Year Ended December 31, 2020 | |||||||||||
Allowance for cash discounts | $ | 2.2 | $ | 35.1 | $ | (34.4) | $ | 2.9 | |||
Allowance for doubtful accounts | 4.0 | 2.6 | (2.6) | 4.0 | |||||||
Total | $ | 6.2 | $ | 37.7 | $ | (37.0) | $ | 6.9 | |||
For the Year Ended December 31, 2019 | |||||||||||
Allowance for cash discounts | $ | 2.2 | $ | 35.8 | $ | (35.8) | $ | 2.2 | |||
Allowance for doubtful accounts | 3.7 | 7.0 | (6.7) | 4.0 | |||||||
Total | $ | 5.9 | $ | 42.8 | $ | (42.5) | $ | 6.2 | |||
For the Year Ended December 31, 2018 | |||||||||||
Allowance for cash discounts | $ | 2.0 | $ | 33.2 | $ | (33.0) | $ | 2.2 | |||
Allowance for doubtful accounts | 4.0 | 2.9 | (3.2) | 3.7 | |||||||
Total | $ | 6.0 | $ | 36.1 | $ | (36.2) | $ | 5.9 |
Beginning Balance | Provision (Charged to Expense) | Deductions | Ending Balance | ||||||||||||
For the Year Ended December 31, 2017 | |||||||||||||||
Allowance for cash discounts | $ | 1,731 | $ | 31,158 | $ | (30,873 | ) | $ | 2,016 | ||||||
Allowance for doubtful accounts | 3,294 | 3,550 | (2,871 | ) | 3,973 | ||||||||||
Total | $ | 5,025 | $ | 34,708 | $ | (33,744 | ) | $ | 5,989 | ||||||
For the Year Ended December 31, 2016 | |||||||||||||||
Allowance for cash discounts | $ | 1,736 | $ | 28,174 | $ | (28,179 | ) | $ | 1,731 | ||||||
Allowance for doubtful accounts | 4,143 | 2,272 | (3,121 | ) | 3,294 | ||||||||||
Total | $ | 5,879 | $ | 30,446 | $ | (31,300 | ) | $ | 5,025 | ||||||
For the Year Ended December 31, 2015 | |||||||||||||||
Allowance for cash discounts | $ | 1,764 | $ | 26,044 | $ | (26,072 | ) | $ | 1,736 | ||||||
Allowance for doubtful accounts | 5,309 | 2,545 | (3,711 | ) | 4,143 | ||||||||||
Total | $ | 7,073 | $ | 28,589 | $ | (29,783 | ) | $ | 5,879 |
5. INVENTORY
Our inventory, comprised entirely of finished goods, is stated at the lower of cost (determined(generally determined using the LIFO cost method) or market. Inventories valued using the LIFO method comprised 89% and 90% of the total inventories at both December 31, 20172020 and 2016.2019, respectively. Had the first-in, first-out (“FIFO”) method been used, merchandise inventory would have been
Reserves for excess and obsolete inventories were $9,220$8.6 million and $6,553$9.2 million at December 31, 20172020 and 2016,2019, respectively. The change in the reserve for excess and obsolete inventories, included in cost of merchandise sold, was
6. PROPERTY AND DEPRECIATION
We provide for depreciation and amortization using the straight-line method over the following estimated useful asset lives:
Classification | Estimated Useful Asset Life |
Buildings | 42 years |
Leasehold improvements | Over the shorter of the asset’s life or the lease term |
Furniture, fixtures, equipment and software | 3 to 14 years |
Assets held under | Over the shorter of the asset’s life or the lease term |
Depreciation expense was $38,824, $39,332,$36.7 million, $36.1 million, and $38,588$37.3 million in 2017, 2016,2020, 2019, and 2015,2018, respectively.
At the time property is retired or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to other income, net.
We consider 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 we expect 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, we record 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 ofWe did 0t have assets classified as held for sale at December 31, 2020, compared to assets held for sale was
We review 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.
7. LEASES
We have operating and finance leases for sale, impairment occurs whenevercorporate offices, warehouse buildings, sales offices, branch locations, vehicles, and certain equipment. Our leases have remaining lease terms of one to ten years, some of which may include options to extend the net book valueleases for up to five years, and some of which may include options to terminate the leases within one year. In addition to fixed lease payments, we incur variable lease charges that are recognized as incurred. These charges are primarily for maintenance and real estate taxes on leased facilities.
The components of the property listedlease expense for sale exceeds the expected selling price less estimated selling expenses. Thereyears ended December 31, 2020 and 2019, were no impairment charges recorded during 2017as follows:
For the Years Ended December 31, | ||||||
2020 | 2019 | |||||
Operating lease cost | $ | 37.9 | $ | 33.9 | ||
Finance lease cost: | ||||||
Amortization of right-of-use assets | 2.1 | 2.2 | ||||
Interest on lease liabilities | 0.6 | 0.7 | ||||
Total finance lease cost | 2.7 | 2.9 | ||||
Variable lease cost | 10.6 | 9.5 | ||||
Total lease cost | $ | 51.2 | $ | 46.3 |
Supplemental balance sheet information at December 31, 2020 and 2016. 2019, related to leases was as follows:
December 31, | ||||||||
2020 | 2019 | |||||||
Operating leases: | ||||||||
Operating lease right-of-use assets | $ | 118.8 | $ | 117.5 | ||||
Current operating lease liabilities | $ | 31.2 | $ | 28.6 | ||||
Non-current operating lease liabilities | 95.9 | 96.2 | ||||||
Total operating lease liabilities | $ | 127.1 | $ | 124.8 | ||||
Finance leases: | ||||||||
Property, at cost | $ | 14.6 | $ | 18.3 | ||||
Accumulated depreciation and amortization | (8.1) | (9.9) | ||||||
Net property | $ | 6.5 | $ | 8.4 | ||||
Current obligations of finance leases | $ | 2.3 | $ | 2.1 | ||||
Finance leases, net of current obligations | 5.7 | 7.8 | ||||||
Total finance lease liabilities | $ | 8.0 | $ | 9.9 | ||||
Weighted average remaining lease term: | ||||||||
Operating leases | 4.7 years | 5.0 years | ||||||
Finance leases | 4.4 years | 5.1 years | ||||||
Weighted average discount rate: | ||||||||
Operating leases | 2.9% | 3.3% | ||||||
Finance leases | 7.3% | 7.0% |
Supplemental cash flow and other information for the years ended December 31, 2020 and 2019, related to leases was as follows:
For the Years Ended December 31, | ||||||
2020 | 2019 | |||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||
Operating cash flows from operating leases | $ | 37.3 | $ | 33.5 | ||
Operating cash flows from finance leases | 0.6 | 0.7 | ||||
Financing cash flows from finance leases | 2.2 | 2.1 | ||||
Right-of-use assets obtained in exchange for lease liabilities: | ||||||
Operating leases(A) | $ | 35.3 | $ | 55.9 | ||
Finance leases | 0.3 | 2.0 |
(A) Includes $1.6 million of operating leases established on December 1, 2020 as a result of the acquisition of Shingle & Gibb Automation, LLC. See Note 17, “Acquisition”, for further information.
Future minimum lease payments under non-cancellable leases as of December 31, 2020, were as follows:
December 31, 2020 | ||||||
Operating | Finance | |||||
Future minimum lease payments | ||||||
2021 | $ | 34.3 | $ | 2.8 | ||
2022 | 30.8 | 2.1 | ||||
2023 | 24.7 | 1.5 | ||||
2024 | 18.6 | 1.3 | ||||
2025 | 11.9 | 0.9 | ||||
Thereafter | 15.7 | 0.9 | ||||
Total future minimum lease payments | $ | 136.0 | $ | 9.5 | ||
Less: imputed interest | (8.9) | (1.5) | ||||
Total lease obligation | $ | 127.1 | $ | 8.0 | ||
Less: current obligations | (31.2) | (2.3) | ||||
Long-term lease obligation | $ | 95.9 | $ | 5.7 |
8. GOODWILL AND OTHER INTANGIBLE ASSETS
In 2020, goodwill and other intangible assets increased due to the acquisition of Shingle & Gibb Automation, LLC. See Note 17, “Acquisition”, for further information.
Goodwill
The changes in the carrying amount of goodwill, included in other non-current assets in our consolidated balance sheets, for the yearyears ended December 31 2017 and 2016, were as follows:
2020 | 2019 | ||||
Beginning balance | $ | 30.1 | $ | 30.1 | |
Goodwill acquired | 7.0 | — | |||
Ending balance | $ | 37.1 | $ | 30.1 |
2017 | 2016 | |||||
Beginning Balance | $ | 30,114 | $ | 13,737 | ||
Goodwill Acquired | — | 16,377 | ||||
Ending Balance | $ | 30,114 | $ | 30,114 |
As of December 31, 2017,2020, we have completed our annual impairment test and concluded that there is no impairment of our goodwill.
Other Intangible Assets
Other intangible assets, included in other non-current assets in our consolidated balance sheets, consist of the following:
As of December 31, 2020 | |||||||||
Weighted | Gross Carrying | Accumulated | Net Carrying | ||||||
Customer relationships | 8.5 to 14 years | $ | 30.5 | $ | (8.4) | $ | 22.1 | ||
Trade name | 15 to 20 years | 18.2 | (3.6) | 14.6 | |||||
Non-compete agreements | 3 to 7 years | 0.7 | (0.3) | 0.4 | |||||
Other intangible assets | 10 years | 0.1 | (0.1) | — | |||||
Total | $ | 49.5 | $ | (12.4) | $ | 37.1 |
As of December 31, 2017 | As of December 31, 2019 | ||||||||||||||||||
Weighted Average Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted | Gross Carrying | Accumulated | Net Carrying | ||||||||||||
Customer relationships | 8.5 to 10.8 years | $ | 17,163 | $ | (3,272 | ) | $ | 13,891 | 8.5 to 10.8 years | $ | 16.7 | $ | (6.7) | $ | 10.0 | ||||
Trade name | 15 to 20 years | 14,263 | (1,292 | ) | 12,971 | 15 to 20 years | 14.3 | (2.8) | 11.5 | ||||||||||
Non-compete agreements | 3 to 5 years | 281 | (149 | ) | 132 | 3 to 5 years | 0.3 | (0.3) | — | ||||||||||
Other intangible assets | 10 years | 162 | (47 | ) | 115 | 10 years | 0.1 | (0.1) | — | ||||||||||
Total | Total | $ | 31,869 | $ | (4,760 | ) | $ | 27,109 | $ | 31.4 | $ | (9.9) | $ | 21.5 |
As of December 31, 2016 | ||||||||||
Weighted Average Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||
Customer relationships | 8.5 to 10.8 years | $ | 17,163 | $ | (1,538 | ) | $ | 15,625 | ||
Trade name | 15 to 20 years | 14,263 | (543 | ) | 13,720 | |||||
Non-compete agreements | 3 to 5 years | 281 | (84 | ) | 197 | |||||
Other intangible assets | 10 years | 162 | (4 | ) | 158 | |||||
Total | $ | 31,869 | $ | (2,169 | ) | $ | 29,700 |
We did not incur losses related to our other intangible assets were acquired induring the acquisitionyear ended December 31, 2020. We incurred losses of Cape Electric. See Note 15, "Acquisitions", for further information on$0.5 million related to our acquisitions.
Estimated future amortization expense related to our intangible assets for the years ending December 31 are as follows:
2021 | $ | 3.7 | |
2022 | 3.7 | ||
2023 | 3.7 | ||
2024 | 3.6 | ||
2025 | 3.5 | ||
After 2025 | 18.9 | ||
$ | 37.1 |
9. INCOME TAXES
The components of income before taxes and the provision for income taxes recorded in the consolidated statements of income are as follows:
For the Years Ended December 31, | ||||||||
Components of Income before Taxes | 2020 | 2019 | 2018 | |||||
Domestic | $ | 151.1 | $ | 185.1 | $ | 163.3 | ||
Foreign | 15.2 | 14.8 | 15.8 | |||||
Income before taxes | $ | 166.3 | $ | 199.9 | $ | 179.1 |
For the Years Ended December 31, | ||||||||
Components of Income Tax Provision | 2020 | 2019 | 2018 | |||||
Current expense | ||||||||
U.S. Federal | $ | 38.5 | $ | 41.9 | $ | 20.5 | ||
State | 11.4 | 12.4 | 6.9 | |||||
Foreign | 4.5 | 4.4 | 4.6 | |||||
Total current expense | $ | 54.4 | $ | 58.7 | $ | 32.0 | ||
Deferred (benefit) expense | ||||||||
U.S. Federal | $ | (7.8) | $ | (3.0) | $ | 2.5 | ||
State | (2.3) | (0.8) | 0.8 | |||||
Foreign | (0.1) | 0.1 | 0.1 | |||||
Total deferred (benefit) expense | $ | (10.2) | $ | (3.7) | $ | 3.4 | ||
Total income tax provision | $ | 44.2 | $ | 55.0 | $ | 35.4 |
2018 | $ | 2,579 | |
2019 | 2,547 | ||
2020 | 2,505 | ||
2021 | 2,493 | ||
2022 | 2,493 | ||
After 2022 | 14,492 | ||
$ | 27,109 |
A reconciliation between the year ended December 31, 2017.
For the Years Ended December 31, | ||||||||
2020 | 2019 | 2018 | ||||||
Statutory U.S. federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||
State and local income taxes, net of federal benefit | 4.3 | 4.5 | 3.1 | |||||
Deemed repatriation of foreign earnings | — | — | (1.0) | |||||
Effect of tax rate changes | — | — | (5.1) | |||||
Nondeductible meals and entertainment | 0.5 | 1.4 | 1.4 | |||||
Other, net | 0.8 | 0.6 | 0.4 | |||||
Effective tax rate | 26.6 | % | 27.5 | % | 19.8 | % |
We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assets and liabilities calculated using enacted applicable tax rates. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements. The following deferred tax assets (liabilities) were recorded at December 31:
Assets (Liabilities) | 2020 | 2019 | |||
Pension | $ | 47.2 | $ | 38.7 | |
Operating lease liabilities | 31.3 | 30.6 | |||
Postretirement benefits | 20.8 | 19.6 | |||
Inventory | 12.3 | 14.9 | |||
Other deferred tax assets | 5.2 | 5.0 | |||
Payroll accruals | 7.6 | 2.9 | |||
Bad debt reserves | 0.8 | 1.0 | |||
Subtotal | 125.2 | 112.7 | |||
Less: valuation allowances | (0.6) | (0.4) | |||
Deferred tax assets | 124.6 | 112.3 | |||
Fixed assets | (34.5) | (32.2) | |||
Operating lease right-of-use assets | (29.1) | (28.7) | |||
Other deferred tax liabilities | (4.9) | (4.5) | |||
Computer software | (2.4) | (2.9) | |||
Deferred tax liabilities | (70.9) | (68.3) | |||
Net deferred tax assets | $ | 53.7 | $ | 44.0 |
Deferred income taxes included in non-current assets (liabilities) at December 31 were:
2020 | 2019 | ||||
Deferred tax assets included in other non-current assets | $ | 54.1 | $ | 44.5 | |
Deferred tax liabilities included in other non-current liabilities | (0.4) | (0.5) | |||
Total | $ | 53.7 | $ | 44.0 |
Operating loss and tax credit carryforwards included in net deferred tax assets at December 31 were:
2020 | 2019 | ||||
U.S. Federal(A) | $ | 0.5 | $ | 0.4 | |
State(A) | 0.3 | 0.3 | |||
Foreign(B) | — | 0.1 |
(A)Expires between 2023 and 2030
(B)Indefinite life
We have placed a partial valuation allowance on certain state net operating losses of less than $0.1 million and a full valuation allowance on U.S. federal tax credits of $0.5 million that are not expected to be utilized prior to expiration.
We have no material undistributed earnings of non-U.S. subsidiaries as of December 31, 2020, due to the one-time transition tax and global intangible low-taxed income (“GILTI”) provisions enacted under the Tax Cuts and Jobs Act (“TCJA”). No additional income taxes have been provided for any outside basis differences inherent in these foreign entities, as these amounts continue to be indefinitely reinvested in foreign operations. We have made an accounting policy election to treat GILTI as a period cost rather than accounting for it as part of deferred taxes. Due to the high-tax exception election made in 2019 and 2020, our GILTI period cost was immaterial in each year.
Our federal income tax returns for the tax years 2017 and forward are available for examination by the United States Internal Revenue Service (“IRS”). The statute of limitation for the 2017 federal return will expire on October 15, 2021, unless extended by consent. Our state income tax returns for 2016 through 2020 remain subject to examination by various state authorities with the latest period closing on December 31, 2025. We have not extended the statutes of limitations in any state jurisdictions with respect to years prior to 2016.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss utilization and carryback periods, modifications to net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (QIP). The CARES Act did not have a material impact on our income tax provision for 2020.
Our unrecognized tax benefits of $
Our uncertain tax benefits, and changes thereto, during 2017, 2016,2020, 2019, and 20152018 were as follows:
2020 | 2019 | 2018 | ||||||
Balance at January 1, | $ | 1.9 | $ | 2.6 | $ | 2.3 | ||
Additions based on tax positions related to current year | 0.2 | 0.2 | 1.1 | |||||
Reductions for tax positions of prior years | (0.1) | (0.1) | (0.8) | |||||
Settlements | (0.3) | (0.8) | — | |||||
Balance at December 31, | $ | 1.7 | $ | 1.9 | $ | 2.6 |
2017 | 2016 | 2015 | |||||||||
Balance at January 1, | $ | 1,755 | $ | 2,247 | $ | 3,104 | |||||
Additions based on tax positions related to current year | 437 | 397 | 464 | ||||||||
Additions based on tax positions of prior years | 291 | — | — | ||||||||
Reductions for tax positions of prior years | (165 | ) | (889 | ) | (252 | ) | |||||
Settlements | — | — | (1,069 | ) | |||||||
Balance at December 31, | $ | 2,318 | $ | 1,755 | $ | 2,247 |
We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages. We have accrued $
For the Years Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
“Statutory” federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
State and local income taxes, net of federal benefit | 4.0 | 3.3 | 3.8 | |||||
Deemed repatriation of foreign earnings | 3.3 | — | — | |||||
Effect of tax rate changes | 13.5 | — | — | |||||
Other, net | 1.3 | 0.9 | 1.2 | |||||
Effective tax rate | 57.1 | % | 39.2 | % | 40.0 | % |
For the Years Ended December 31, | |||||||||||
Components of Income before Taxes | 2017 | 2016 | 2015 | ||||||||
Domestic | $ | 155,268 | $ | 143,567 | $ | 143,144 | |||||
Foreign | 12,280 | 9,932 | 9,197 | ||||||||
Income before taxes | $ | 167,548 | $ | 153,499 | $ | 152,341 |
For the Years Ended December 31, | |||||||||||
Components of Income Tax Provision | 2017 | 2016 | 2015 | ||||||||
Current expense | |||||||||||
U.S. Federal | $ | 66,475 | $ | 33,030 | $ | 46,174 | |||||
State | 11,396 | 4,821 | 7,996 | ||||||||
Foreign | 3,574 | 2,795 | 2,666 | ||||||||
Total current expense | $ | 81,445 | $ | 40,646 | $ | 56,836 | |||||
Deferred expense (benefit) | |||||||||||
U.S. Federal | 15,332 | 16,676 | 3,224 | ||||||||
State | (1,139 | ) | 3,008 | 958 | |||||||
Foreign | (25 | ) | (144 | ) | (9 | ) | |||||
Total deferred expense (benefit) | $ | 14,168 | $ | 19,540 | $ | 4,173 | |||||
Total income tax provision | $ | 95,613 | $ | 60,186 | $ | 61,009 |
Assets (Liabilities) | 2017 | 2016 | |||||
Postretirement benefits | $ | 19,768 | $ | 29,788 | |||
Payroll accruals | 1,866 | 2,618 | |||||
Bad debt reserves | 1,023 | 1,322 | |||||
Other deferred tax assets | 4,772 | 5,251 | |||||
Pension | 37,988 | 47,847 | |||||
Inventory | 12,123 | 11,336 | |||||
Subtotal | 77,540 | 98,162 | |||||
Less: valuation allowances | (23 | ) | (136 | ) | |||
Deferred tax assets | 77,517 | 98,026 | |||||
Fixed assets | (27,156 | ) | (40,887 | ) | |||
Computer software | (3,240 | ) | (5,724 | ) | |||
Other deferred tax liabilities | (2,622 | ) | (3,043 | ) | |||
Deferred tax liabilities | (33,018 | ) | (49,654 | ) | |||
Net deferred tax assets | $ | 44,499 | $ | 48,372 |
2017 | 2016 | ||||||
Deferred tax assets included in other non-current assets | $ | 44,860 | $ | 48,666 | |||
Deferred tax liabilities included in other non-current liabilities | (361 | ) | (294 | ) |
2017 | 2016 | ||||||
Foreign net operating losses(1) | $ | 187 | $ | 239 | |||
State net operating losses(2) | 504 | 529 |
10. CAPITAL STOCK
Our common stock is 100% owned by active and retired employees, and there is no public trading market for our 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 New York law, a voting trust may not have a term greater than ten years. Accordingly, aA new Voting Trust Agreement was established effective March 3, 2017, which expires by its terms on March 1, 2027. At December 31, 2017,2020, approximately
No holder of our common stock or voting trust interests representing our common stock ("common stock", "common shares", or "shares") may sell, transfer or otherwise dispose of any shares without first offering us the option to purchase those shares at the price at which they were issued. Additionally, before the shareholder action described in the next sentence became effective, a shareholder was entitled to any cash dividends accrued for the quarter in which the purchase offer is made, adjusted pro rata for the number of days such shares were held prior to the dividend record date. On June 8, 2017, the shareholders voted to remove this adjustment for accruing dividends on the common stock. We also have the option to purchase at the issue price the common shares of any shareholder who ceases to be an employee for any reason other than death or "retirement" (as defined in our amended restated certificate of incorporation), and on the first anniversary of any holder's death. In the past, we have always exercised these purchase options and we expect to continue
to do so in the foreseeable future. However, we can make no assurance that we will continue to exercise our purchase option in the future. All outstanding shares have been issued at $20.00 per share.
During 2017,2020, eligible employees and qualified retirees subscribed for 923,1561,052,817 shares totaling $18,463.$21.1 million. Subscribers elected to make payments under one of the following options: (i) all shares subscribed for on or before January 5, 2018;15, 2021; or (ii) all shares subscribed for in installments paid through payroll deductions (or in certain cases where a subscriber is no longer on our payroll, through direct monthly payments) over an eleven-month period.
Common shares were delivered to subscribers as of
JanuaryShown below is a summary of shares purchased and retired by the Company during the three years ended December 31:
Shares of Common Stock | |||||||||
Purchased | Retired | ||||||||
2020 | 824,685 | 830,338 | |||||||
2019 | 962,023 | 957,495 | |||||||
2018 | 786,754 | 752,825 |
Shares of Common Stock | ||||
Purchased | Retired | |||
2017 | 684,347 | 678,958 | ||
2016 | 563,590 | 610,626 | ||
2015 | 718,269 | 666,861 |
We also have authorized
10,000,000 shares of Delegated Authority Preferred Stock (“preferred stock”), par value one centOn December 13, 2017, our Board of Directors declared a 10% common stock dividend. Each shareholder was entitled to one share of common stock for every ten shares held as of December 18, 2017. The stock was issued on February 2, 2018. On December 8, 2016,12, 2019, our Board of Directors declared a 5% common stock dividend. Each shareholder was entitled to one share of common stock for every twenty shares held as of December 19, 2016.16, 2019. The stock was issued on February 3, 2017.7, 2020. On December 10, 2015,13, 2018, our Board of Directors declared a 2.5%at 10% common stock dividend. Each shareholder was entitled to one share of common stock for every fortyten shares held as of December 18, 2015.17, 2018. The stock was issued on February 1, 2016.
11. NET INCOME PER SHARE OF COMMON STOCK
The computation of net income per share of common stock is based on the average number of common shares outstanding during each year, adjusted in all periods presented for the declaration of a 5% stock dividend declared in 2019, and a 10% stock dividend declared in 2017, a 5% stock dividend declared in 2016, and a 2.5% stock dividend declared in 2015.2018. The average number of shares used in computing net income per share of common stock at December 31, 2017, 2016,2020, 2019, and 20152018 was
12. DEBT
December 31, | |||||
Long-term Debt | 2020 | 2019 | |||
Finance arrangements, various maturities, with a weighted average interest rate of 7.23% | $ | 8.0 | $ | 11.6 | |
Less current portion | (2.3) | (3.8) | |||
Long-term Debt | $ | 5.7 | $ | 7.8 |
Long-term Debt matures as follows: | |||
2021 | $ | 2.3 | |
2022 | 1.8 | ||
2023 | 1.2 | ||
2024 | 1.2 | ||
2025 | 0.8 | ||
After 2025 | 0.7 | ||
$ | 8.0 |
December 31, | ||||||
Long-term Debt | 2017 | 2016 | ||||
Capital leases, various maturities, with a weighted average interest rate of 5.97% | $ | 9,100 | $ | 11,426 | ||
Less current portion | (2,052 | ) | (4,155 | ) | ||
Long-term Debt | $ | 7,048 | $ | 7,271 |
Long-term Debt matures as follows: | |||
2018 | $ | 2,052 | |
2019 | 1,383 | ||
2020 | 1,213 | ||
2021 | 1,162 | ||
2022 | 986 | ||
After 2022 | 2,304 | ||
$ | 9,100 |
The carrying amount of our outstanding long-term, fixed-rate debt exceeded its fair value by $737$1.3 million and
flows at interpolated Treasury yields with similar maturities, plus an estimate of our credit risk spread. The fair value of our variable-rate short- and long-term debt approximates its carrying value at December 31, 20172020 and 2016,2019, respectively.
Revolving Credit Facility
At December 31, 20172020 and 2016,2019, we, along with Graybar Canada Limited, our Canadian operating subsidiary (“Graybar Canada”), had an unsecured, five-year $550,000, $750.0 million committed revolving credit agreement maturing in June 2019August 2023 with Bank of America, N.A. and the other lenders named therein (the "Credit Agreement"“Amended Credit Agreement”), which includes a combined letter of credit sub-facility of up to $50,000,$25.0 million, a U.S. swing lineswing-line loan facility of up to $50,000,$75.0 million, and a Canadian swing lineswing-line loan facility of up to $20,000.$20.0 million. The Amended Credit Agreement includes a $100,000$100.0 million sublimit (in U.S. or Canadian dollars) for borrowings by Graybar Canada andCanada. The Amended Credit Agreement contains an accordion feature, which allows us to request increases in the aggregate borrowing commitments of up to $300,000.
Interest on our borrowings under the Amended Credit Agreement will be based on, at the borrower’s election, either (A) in the case of Graybar as borrower (i) the base rate (as defined in the agreement) plus a margin ranging from 0.00% to 0.60%, or (ii) LIBOR plus a margin ranging from 1.00% to 1.60% or (B) in the case of Graybar Canada as borrower (i) the base rate (as defined in the agreement) plus a margin ranging from 0.00% to 0.60% or (ii) CDOR plus a margin ranging from 1.00% to 1.60%, in either case, as determined by the pricing grid set forth in the Amended Credit Agreement, subject to adjustment based upon the consolidated leverage ratio. In connection with such a borrowing, the applicable borrower will also select the term of the loan, up to six months, or automatically renew with the consent of the lenders. Swing line loans, which are daily loans, will bear interest at a rate based on, at the borrower’s election, either (i) the base rate or (ii) the daily floating Eurodollar rate (or CDOR, in the case of Graybar Canada). In addition to interest payments, there are certain fees and obligations associated with borrowings, swing-line loans, letters of credit and other administrative matters.
Borrowings of Graybar Canada may be in U.S. dollars or Canadian dollars. The obligations of Graybar Canada are secured by the guaranty of Graybar and any material domestic subsidiaries of Graybar (as defined in the Credit Agreement)defined). Under no circumstances will Graybar Canada use its borrowings to benefit Graybar or its operations, including without limitation to repay any of Graybar’s obligations under the facility.
The Amended Credit Agreement provides for a quarterly commitment fee ranging from 0.25% to 0.40% per annum, subject to adjustment based upon the consolidated leverage ratio for a fiscal quarter, and letter of credit fees ranging from 1.00% to 1.60% per annum payable quarterly, subject to such adjustment. Borrowings can be either
The Amended Credit Agreement also provides for customary events of default, including a failure to pay principal, interest or fees when due, failure to comply with covenants, the fact that any representation or warranty made by any of the credit parties is materially incorrect, failure to comply with covenants, the occurrence of an event of default under certain other indebtedness by us and our subsidiaries, the commencement of certain insolvency or receivership events affecting any of the credit parties, certain actions under the Employee Retirement Income Security Act of 1974 ("ERISA") and the occurrence of a change in control of any of the credit parties (subject to certain permitted transactions as described in the Amended Credit Agreement). Upon the occurrence of an event of default, the commitments of the lenders may be terminated and all outstanding obligations of the credit parties under the Amended Credit Agreement may be declared immediately due and payable.
The Amended Credit Agreement contains customary affirmative and negative covenants customary for credit facilities of this type, including limitations on us and our subsidiaries with respect to indebtedness (with specified, limited exceptions), liens, changes in the nature of our business, investments, mergers and acquisitions, issuance of equity securities, dispositions of assets and dissolution of certain subsidiaries, transactions with affiliates, restricted payments (subject to incurrence tests, with certain exceptions)exceptions, including payments under senior notes), as well as securitizations, factoring transactions, and transactions with sanctioned parties or in violation of certain U.S. or Canadian anti-corruption laws. There are also maximum leverage ratio and minimum interest coverage ratio financial covenants thatto which we arewill be subject to during the term of the Amended Credit Agreement. We were in compliance with all covenants under the Amended Credit Agreement as of December 31, 20172020 and 2016.
Short-term borrowings of $169,643$50.0 million and $140,465$138.0 million outstanding at December 31, 20172020 and 2016,2019, respectively, were drawn under the revolving credit facility.
Short-term borrowings outstanding during the years ended December 31, 20172020 and 20162019 ranged from a minimum of
outstanding under short-term credit agreementsthe Amended Credit Agreement during 20172020 and 20162019 amounted to approximately $166,000$191.6 million and $185,000$151.0 million at weighted-average interest rates of 2.16%1.55% and 1.52%3.42%, respectively. The weighted-average interest rate for amounts outstanding at December 31, 20172020 was 2.60%1.15%.
At December 31, 2017,2020, we had available unused committed lines of credit under the Amended Credit Agreement amounting to
Interest expense, net was $3.6 million, $5.5 million, and certain committed lines of credit have annual fees of up to 40 basis points (0.40%) of$6.9 million for the committed lines of credit as ofyears ended December 31, 20172020, 2019, and 2016.
Private Placement Shelf Agreements
We had an uncommitted, $100,000unsecured $100.0 million private placement shelf agreement with PGIM, Inc. formerly known as Prudential Investment Management, Inc. (the "Prudential Shelf Agreement"). The Prudential Shelf Agreement allows, which was expected to allow us to issue senior promissory notes to affiliates of PrudentialPGIM, Inc. at fixed rate terms to be agreed upon at the time of any issuance during a three-year issuance period ending in August 2020. At December 31, 2017 and 2016, no notes had been issued underIn July 2020, we amended the Prudential Shelf Agreement.
We remain obligated under a most favored lender clause which is designed to ensure that any notes in September 2019. Floating rate note interest ratesthe future under the Prudential Shelf Agreement and MetLife Shelf Agreement will continue to be based on London Interbank Offered Rate ("LIBOR") plus a spread. Noof equal ranking with indebtedness under our Amended Credit Agreement.
NaN notes have been issued under the MetLife Shelf Agreement, which ranks equally with the Company’s Credit Agreement and Prudential Shelf Agreement.
Each shelf agreement contains customary representations and warranties of the Company and the applicable lender. Each shelf agreement also containslender, customary events of default including: a failureand affirmative and negative covenants, customary for agreements of this type. These covenants are substantially similar to pay principal, interest or fees when due; a failure to comply with covenants;those contained in the fact that any representation or warranty made by any of the credit parties is incorrect when given; the occurrence of an event of default under theAmended Credit Agreement, or certain other indebtednesssubject to a number of usexceptions and our subsidiaries; the commencement of certain insolvency or receivership events affecting any of the credit parties; certain actions under ERISA; and the occurrence of a change in control of Graybar (subject to certain permitted transactions as describedqualifications set forth in the Credit Agreement).applicable shelf agreement. All outstanding obligations of Graybar under one or both of these agreements may be declared immediately due and payable upon the occurrence of an event of default.
We were in compliance with all covenants as of December 31, 2017 and 2016.
Letters of Credit
We had total letters of credit of $6.3 million outstanding at December 31, 2020, of which $0.4 million were issued under the future will continueAmended Credit Agreement. We had total letters of credit of $5.6 million outstanding at December 31, 2019, of which $0.5 million were issued under the Amended Credit Agreement. The letters of credit are issued primarily to be of equal ranking with indebtedness under our Credit Agreement.
13. PENSION AND OTHER POSTRETIREMENT BENEFITS
We have a noncontributory defined benefit pension plan (the "Pension Plan") covering substantially all employees first hired prior to July 1, 2015 after the completion of one year of service and 1,000 hours of service.service. The planPension Plan provides retirement benefits based on an employee’s final average earnings and years of service. These employees become 100% vested after
Our plan funding policy is to make contributions to the Pension Plan, provided that the total annual contributions will not be less than ERISA and the Pension Protection Act of 2006 minimums or greater than the maximum tax-deductible amount, to review the contribution and funding strategy on a regular basis, and to allow discretionary contributions to be made by us from time to time. The assets of the defined benefit pension planPension Plan are invested primarily in fixed income investments and equity securities. We pay nonqualified pension benefits when they are due according to the terms of the supplemental benefit plan.
We provide certain postretirement healthcare and life insurance benefits to retired employees. Substantially all of our employees hired or rehired prior to 2014 may become eligible for postretirement medical benefits if they reach the age and service requirements of the retiree medical plan and retire on a pension (except a deferred pension) under the defined benefit pension plan.Pension Plan. Medical benefits are self-insured and claims are administered through a third party administrator. The cost of coverage is determined based on the annual projected plan costs. The participant's premium or cost is determined based on Company guidelines. Postretirement life insurance benefits are insured through an insurance company. We fund postretirement benefits as incurred, and accordingly, there were no assets held in the postretirement benefits plan at December 31, 20172020 and 2016.
The following table sets forth information regarding the funded status of our pension and other postretirement benefits as of December 31, 20172020 and 2016: 2019:
Pension Benefits | Postretirement Benefits | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Change in Benefit Obligation: | |||||||||||
Benefit obligation at beginning of period | $ | 825.1 | $ | 708.8 | $ | 76.2 | $ | 72.5 | |||
Service cost | 29.2 | 25.6 | 2.1 | 2.0 | |||||||
Interest cost | 26.7 | 30.0 | 2.4 | 2.9 | |||||||
Actuarial loss | 134.7 | 117.0 | 4.9 | 3.0 | |||||||
Benefits paid from plan assets | (2.1) | (52.3) | — | — | |||||||
Benefits paid from Company assets | (1.8) | (1.7) | (5.8) | (5.8) | |||||||
Plan participants' contributions | — | — | 1.1 | 1.4 | |||||||
Administrative expenses paid | (3.2) | (2.3) | — | — | |||||||
Plan amendments | — | — | — | 0.2 | |||||||
Settlements | (86.8) | — | — | — | |||||||
Benefit Obligation at End of Period | 921.8 | 825.1 | 80.9 | 76.2 | |||||||
Change in Plan Assets: | |||||||||||
Fair value of plan assets at beginning of period | 658.4 | 588.3 | — | — | |||||||
Actual return on plan assets | 115.7 | 114.7 | — | — | |||||||
Employer contributions(A) | 41.8 | 11.7 | 4.7 | 4.4 | |||||||
Plan participants' contributions | — | — | 1.1 | 1.4 | |||||||
Benefits paid(A) | (3.9) | (54.0) | (5.8) | (5.8) | |||||||
Administrative expenses paid | (3.2) | (2.3) | — | — | |||||||
Settlements | (86.8) | — | — | — | |||||||
Fair Value of Plan Assets at End of Period | 722.0 | 658.4 | — | — | |||||||
Unfunded Status | $ | 199.8 | $ | 166.7 | $ | 80.9 | $ | 76.2 |
Pension Benefits | Postretirement Benefits | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Change in Benefit Obligation: | ||||||||||||
Benefit obligation at beginning of period | $ | 669,789 | $ | 634,068 | $ | 76,576 | $ | 75,937 | ||||
Service cost | 26,415 | 25,369 | 2,327 | 2,288 | ||||||||
Interest cost | 27,818 | 28,263 | 2,844 | 3,030 | ||||||||
Actuarial loss (gain) | 85,618 | 35,504 | (61 | ) | 889 | |||||||
Benefits paid from plan assets | (50,136 | ) | (50,422 | ) | — | — | ||||||
Benefits paid from Company assets | (1,589 | ) | (1,634 | ) | (6,427 | ) | (6,958 | ) | ||||
Plan participants' contributions | — | — | 1,540 | 1,390 | ||||||||
Administrative expenses paid | (1,603 | ) | (1,359 | ) | — | — | ||||||
Benefit Obligation at End of Period | 756,312 | 669,789 | 76,799 | 76,576 | ||||||||
Change in Plan Assets: | ||||||||||||
Fair value of plan assets at beginning of period | 507,287 | 447,258 | — | — | ||||||||
Actual return on plan assets | 69,832 | 31,810 | — | — | ||||||||
Employer contributions(1) | 61,589 | 81,634 | 4,887 | 5,568 | ||||||||
Plan participants' contributions | — | — | 1,540 | 1,390 | ||||||||
Benefits paid(1) | (51,725 | ) | (52,056 | ) | (6,427 | ) | (6,958 | ) | ||||
Administrative expenses paid | (1,603 | ) | (1,359 | ) | — | — | ||||||
Fair Value of Plan Assets at End of Period | 585,380 | 507,287 | — | — | ||||||||
Unfunded Status | $ | 170,932 | $ | 162,502 | $ | 76,799 | $ | 76,576 |
(1)(A)
The accumulated benefit obligation for our defined benefit pension planPension Plan was
Amounts recognized in the consolidated balance sheet for the years ended December 31 consist of the following:
Pension Benefits | Postretirement Benefits | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Current accrued benefit cost | $ | 1.9 | $ | 2.1 | $ | 6.8 | $ | 6.8 | |||
Non-current accrued benefit cost | 197.9 | 164.6 | 74.1 | 69.4 | |||||||
Net amount recognized | $ | 199.8 | $ | 166.7 | $ | 80.9 | $ | 76.2 |
Current accrued benefit cost for both pension benefits and postretirement benefits is included in other current liabilities in the consolidated balance sheets. Non-current accrued benefit cost for pension benefits and postretirement benefits are included in pension liability and postretirement benefits liability, respectively, in the consolidated balance sheets.
Pension Benefits | Postretirement Benefits | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Current accrued benefit cost | $ | 1,707 | $ | 1,552 | $ | 6,052 | $ | 5,948 | ||||
Non-current accrued benefit cost | 169,225 | 160,950 | 70,747 | 70,628 | ||||||||
Net amount recognized | $ | 170,932 | $ | 162,502 | $ | 76,799 | $ | 76,576 |
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, net of tax, consist of the following:
Pension Benefits | Postretirement Benefits | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Net actuarial loss | $ | 227.9 | $ | 232.4 | $ | 13.6 | $ | 10.4 | |||
Prior service cost | — | — | 0.1 | 0.1 | |||||||
Accumulated other comprehensive loss | $ | 227.9 | $ | 232.4 | $ | 13.7 | $ | 10.5 |
Pension Benefits | Postretirement Benefits | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Net actuarial loss | $ | 192,456 | $ | 177,234 | $ | 10,575 | $ | 11,093 | ||||
Prior service cost (gain) | 201 | 457 | (1,195 | ) | (2,527 | ) | ||||||
Accumulated other comprehensive loss | $ | 192,657 | $ | 177,691 | $ | 9,380 | $ | 8,566 |
The actuarial losses for the Pension Plan in 2020 and 2019 were primarily related to be amortized from accumulated other comprehensive loss into net periodicdecreases in the discount rate and changes to the lump-sum interest rates used to measure the benefit costs in 2018, net of tax, consist ofobligations compared to the following:
Pension Benefits | Postretirement Benefits | |||||
Net actuarial loss | $ | 19,965 | $ | 613 | ||
Prior service cost (gain) | 235 | (1,453 | ) | |||
Accumulated other comprehensive loss (income) | $ | 20,200 | $ | (840 | ) |
Weighted-average assumptions used to determine the actuarial present value of the pension and postretirement benefit obligations as of December 31 are:
Pension Benefits | Postretirement Benefits | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Discount rate | 2.62 | % | 3.38 | % | 2.22 | % | 3.19 | % | |||
Rate of compensation increase | 4.49 | % | 4.36 | % | — | — | |||||
Healthcare cost trend on covered charges | — | — | 5.00 | % | 5.00 | % |
Pension Benefits | Postretirement Benefits | ||||||
2017 | 2016 | 2017 | 2016 | ||||
Discount rate | 3.67 | % | 4.15 | % | 3.44% | 3.78% | |
Rate of compensation increase | 4.74 | % | 4.52 | % | — | — | |
Healthcare cost trend on covered charges | — | — | 5.5% / 5% | 6% / 5% |
The net periodic benefit cost for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 included the following components:
Pension Benefits | Postretirement Benefits | ||||||||||||||||
Components of Net Periodic Benefit Cost | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||
Selling, general, and administrative expenses: | |||||||||||||||||
Service cost | $ | 29.2 | $ | 25.6 | $ | 28.6 | $ | 2.1 | $ | 2.0 | $ | 2.3 | |||||
Total selling, general, and administrative expenses | $ | 29.2 | $ | 25.6 | $ | 28.6 | $ | 2.1 | $ | 2.0 | $ | 2.3 | |||||
Non-operating expenses: | |||||||||||||||||
Interest cost | 26.7 | 30.0 | 27.3 | 2.4 | 2.9 | 2.6 | |||||||||||
Expected return on plan assets | (32.8) | (34.1) | (31.9) | — | — | — | |||||||||||
Amortization of: | |||||||||||||||||
Net actuarial loss | 30.2 | 19.1 | 26.5 | — | 0.3 | 0.9 | |||||||||||
Prior service cost (gain) | — | — | 0.3 | 0.7 | — | (2.0) | |||||||||||
Settlement charge | 27.7 | — | — | — | — | — | |||||||||||
Total non-operating expenses | $ | 51.8 | $ | 15.0 | $ | 22.2 | $ | 3.1 | $ | 3.2 | $ | 1.5 | |||||
Net periodic benefit cost | $ | 81.0 | $ | 40.6 | $ | 50.8 | $ | 5.2 | $ | 5.2 | $ | 3.8 |
Pension Benefits | Postretirement Benefits | |||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
Service cost | $ | 26,415 | $ | 25,369 | $ | 25,607 | $ | 2,327 | $ | 2,288 | $ | 2,505 | ||||||
Interest cost | 27,818 | 28,263 | 25,203 | 2,844 | 3,030 | 2,925 | ||||||||||||
Expected return on plan assets | (30,631 | ) | (27,016 | ) | (28,297 | ) | — | — | — | |||||||||
Amortization of: | ||||||||||||||||||
Net actuarial loss | 21,503 | 19,164 | 20,028 | 788 | 709 | 1,044 | ||||||||||||
Prior service cost (gain) | 420 | 423 | 452 | (2,181 | ) | (2,181 | ) | (2,181 | ) | |||||||||
Net periodic benefit cost | $ | 45,525 | $ | 46,203 | $ | 42,993 | $ | 3,778 | $ | 3,846 | $ | 4,293 |
During 2020, we made lump-sum pension benefit distributions exceeding the settlement accounting threshold. A pension settlement charge is required when the cost of all settlements during the year is greater than the sum of the service and interest cost components of the annual net periodic pension cost. Accordingly, we recorded a non-cash pension settlement charge of $27.7 million in non-operating expenses on our consolidated statements of income. This settlement charge represented the immediate recognition into expense of a portion of the unrecognized loss within accumulated other comprehensive loss in proportion to the share of the projected benefit obligation that was settled by the lump-sum pension benefit distributions.
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31 were:
Pension Benefits | Postretirement Benefits | ||||||||||||||||
2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||
Discount rate | 3.38% / 2.72% | 4.31 | % | 3.67 | % | 3.19 | % | 4.16 | % | 3.44 | % | ||||||
Expected return on plan assets | 5.50 | % | 5.75 | % | 5.75 | % | — | — | — | ||||||||
Rate of compensation increase | 4.24 | % | 4.36 | % | 4.49 | % | — | — | — | ||||||||
Healthcare cost trend on covered charges | — | — | — | 5.00 | % | 5.00 | % | 5.50% / 5.00% |
Pension Benefits | Postretirement Benefits | ||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||
Discount rate | 4.15 | % | 4.48 | % | 4.08 | % | 3.78% | 4.09% | 3.77% |
Expected return on plan assets | 5.75 | % | 5.75 | % | 6.25 | % | — | — | — |
Rate of compensation increase | 4.52 | % | 4.44 | % | 4.47 | % | — | — | — |
Healthcare cost trend on covered charges | — | — | — | 6% / 5% | 6.5% / 5% | 7% / 5% |
A discount rate of 3.38% was used as of January 1, 2020 to determine the net periodic benefit cost for the Pension Plan, which was lowered to 2.72% effective September 30, 2020 for the remeasurement of the plan liability upon triggering settlement accounting. The expected return on plan assets assumption for the defined benefit pension planPension Plan is a long-term assumption and was determined after evaluating input from both the plan’s actuary and pension fund investment advisors, consideration of macroeconomic conditions, historical rates of return on plan assets, and anticipated current and long-term rates of return on the various classes of assets in which the plan invests.
For measurement of the postretirement benefits net periodic cost, a 6.0%5.00% annual rate of increase in per capita cost of covered healthcare benefits was assumed for 2017.2020. The rate was assumed to decline to 5.0%remain at 5.00% in 20192021 and to remain at that level thereafter. A one percent increase or decrease in the assumed healthcare cost trend rate would not have had a material effect on 2017, 2016 and 2015 net periodic benefit cost.
We expect to contribute
Estimated future defined benefit pension and other postretirement benefit plan payments to plan participants for the years ending December 31 are as follows:
Year | Pension | Postretirement | ||||
2021 | $ | 64.0 | $ | 6.9 | ||
2022 | 61.5 | 7.2 | ||||
2023 | 63.7 | 7.4 | ||||
2024 | 61.7 | 7.5 | ||||
2025 | 62.1 | 7.4 | ||||
2026 to 2030 | 301.8 | 32.8 |
Year | Pension Benefits | Postretirement Benefits | ||||||
2018 | $ | 48,665 | $ | 6,156 | ||||
2019 | 51,270 | 6,565 | ||||||
2020 | 52,701 | 6,856 | ||||||
2021 | 51,088 | 7,026 | ||||||
2022 | 52,146 | 7,003 | ||||||
After 2022 | 276,523 | 33,742 |
The investment objective of our defined benefit pension planPension Plan is to ensure that there are sufficient assets to fund regular pension benefits payable to employees over the long-term life of the plan. Our defined benefit pension planPension Plan seeks to allocate plan assets in a manner that is closely duration-matched with the actuarial projected cash flow liabilities, consistent with prudent standards for preservation of capital, tolerance of investment risk, and maintenance of liquidity. Assets of the qualified pension plan are held by Comerica Bank (the "Trustee").
Our defined benefit pension planPension Plan utilizes a liability-driven investment (“LDI”) approach to help meet these objectives. The LDI strategy employs a structured fixed-income portfolio designed to reduce volatility in the plan's future funding requirements and funding status. This is accomplished by using a blend of corporate fixed-income securities, long duration government, quasi-governmental and quasi-governmental,corporate fixed-income securities, as well as appropriate levels of equity and alternative investments designed to optimize the plan's liability hedge ratio. In practice, the value of an asset portfolio constructed primarily of fixed income securities is inversely correlated to changes in market interest rates, primarily offsetting changes in the value of the pension benefit obligation caused by changes in the interest rate used to discount plan liabilities.
Asset allocation information for the defined benefit pension planPension Plan at December 31, 20172020 and 20162019 is as follows:
Investment | 2020 | 2020 | 2019 | 2019 | ||
Equity securities-U.S. | 7 | % | 3-10 % | 6 | % | 3-10 % |
Equity securities-International | 10 | % | 2-10 % | 9 | % | 2-10 % |
Fixed income investments | 66 | % | 40-80 % | 68 | % | 40-80 % |
Hedge funds | 5 | % | 2-8 % | 5 | % | 2-8 % |
Private markets | 4 | % | 0-15 % | 4 | % | 0-15 % |
Other investments | 7 | % | 0-14 % | 8 | % | 0-14 % |
Short-term investments | 1 | % | 1-10 % | 0 | % | 1-10 % |
Total | 100 | % | 100 % | 100 | % | 100 % |
Investment | 2017 Actual Allocation | 2017 Target Allocation Range | 2016 Actual Allocation | 2016 Target Allocation Range | ||
Equity securities-U.S. | 8 | % | 3-15% | 8 | % | 3-15% |
Equity securities-International | 10 | % | 3-15% | 11 | % | 3-15% |
Fixed income investments-U.S. | 70 | % | 35-75% | 62 | % | 35-75% |
Fixed income investments-International | 3 | % | 3-10% | 5 | % | 3-10% |
Absolute return | 4 | % | 5-15% | 5 | % | 5-15% |
Real assets | 3 | % | 3-10% | 3 | % | 3-10% |
Private equity | 1 | % | 0-3% | 1 | % | 0-3% |
Short-term investments | 1 | % | 0-3% | 5 | % | 0-3% |
Total | 100 | % | 100% | 100 | % | 100% |
The following is a description of the valuation methodologies used for assets held by the defined benefit pension planPension Plan measured at fair value:
Equity securities - U.S.
Equity securities - U.S. consist of investments in U.S. corporate stocks and U.S. equity mutual funds. U.S. equity mutual funds include publicly traded mutual funds and a bank collective fund for ERISA plans. U.S. corporate stocks and U.S. equity mutual funds
are primarily large-capitalization stocks (defined as companies with market capitalization of more than $10 billion). U.S. corporate stocks and publicly traded mutual funds are valued at the closing price reported on the active public market in which the individual securities are traded and are classified as Level 1. The bank collective fund for ERISA plans is valued at the net asset value ("NAV") of units of the fund. The NAV, as provided by the Trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund.
Equity securities -– International
Equity securities - International consist of investments in international corporate stocks, and publicly traded mutual funds, and a collective investment trust, and are both primarily investments within developed and emerging markets. BothInvestments other than the collective investment trust are valued at the closing price reported on the active public market in which the individual securities are traded and are classified as Level 1.
Fixed income investments
Fixed income investments - U.S.
Hedge funds
Hedge funds consist of international corporate bonds. International corporate bonds are valued at the closing price reported on the active market in which they are traded and thus are classified as Level 1.
Private markets
Private markets consist of private equity investments. Private markets is an asset class that is generally characterized as requiring long-term commitments and where liquidity is typically limited. Private markets do not have an actively traded market with readily observable prices. The investments are limited partnerships (“LP”) and are diversified across typical private equity strategies including: buyouts, co-investments, secondary offerings, venture capital, real estate, and special situations. Valuations are developed using a natural resource fund (oil, gasvariety of proprietary model methodologies. Valuations may be derived from publicly available sources as well as information obtained from each fund's general partner based upon public market conditions and forestry)returns. All private markets investments are classified as Level 3, other than two limited partnerships valued at the NAV of units of the funds and a real estate investment trust ("REIT"(“REIT”). The natural resource fund is owned by a limited partnership ("LP"). The LP is generally characterized as requiring a long-term commitment with limited liquidity. The value of the LP is not publicly available and thus, is classified as Level 3. The REIT is a commingled trust. The commingled trust is valued at the NAV of units of the trust. The NAV, as provided by the Trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund. Audited financial statements are produced on an annual basis for the LPprivate markets investments.
Other investments
Other investments consist of investments in a diversified mutual fund, a private debt fund, and REIT.
Short-term investments
Short-term investments consist of cash and cash equivalents in a short-term fund which is valued at the NAV of units of the fund. The NAV, as provided by the Trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund.
The methods described above may produce fair value calculations that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our defined benefit pension planPension Plan valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
There have been no changes in the methodologies for determining fair value at December 31, 20172020 or 2016.
The following tables set forth, by level within the fair value hierarchy, the defined benefit pension planPension Plan assets measured at fair value as of December 31, 20172020 and 2016: 2019:
December 31, 2020 | ||||||||||||||
Investment | Investments | Level 1 | Level 2 | Level 3 | Total | |||||||||
Equity securities - U.S. | $ | 17.3 | $ | 30.6 | $ | — | $ | — | $ | 47.9 | ||||
Equity securities - International | 24.9 | 45.4 | — | — | 70.3 | |||||||||
Fixed income investments | 317.4 | 162.5 | — | — | 479.9 | |||||||||
Hedge funds | 36.0 | — | — | — | 36.0 | |||||||||
Private markets | 15.6 | — | — | 13.8 | 29.4 | |||||||||
Other investments | 22.1 | 21.2 | — | 11.4 | 54.7 | |||||||||
Short-term investments | 3.8 | — | — | — | 3.8 | |||||||||
Total | $ | 437.1 | $ | 259.7 | $ | — | $ | 25.2 | $ | 722.0 |
December 31, 2019 | ||||||||||||||
Investment | Investments | Level 1 | Level 2 | Level 3 | Total | |||||||||
Equity securities - U.S. | $ | 14.0 | $ | 26.0 | $ | — | $ | — | $ | 40.0 | ||||
Equity securities - International | 20.7 | 37.9 | — | — | 58.6 | |||||||||
Fixed income investments | 312.7 | 135.2 | — | — | 447.9 | |||||||||
Hedge funds | 32.0 | — | — | — | 32.0 | |||||||||
Private markets | 17.0 | — | — | 11.0 | 28.0 | |||||||||
Other investments | 17.7 | 20.4 | — | 11.4 | 49.5 | |||||||||
Short-term investments | 2.4 | — | — | — | 2.4 | |||||||||
Total | $ | 416.5 | $ | 219.5 | $ | — | $ | 22.4 | $ | 658.4 |
December 31, 2017 | |||||||||||||||
Investment | Investments Measured at NAV | Level 1 | Level 2 | Level 3 | Total | ||||||||||
Equity securities - U.S. | $ | 11,488 | $ | 34,950 | $ | — | $ | — | $ | 46,438 | |||||
Equity securities - International | — | 59,632 | — | — | 59,632 | ||||||||||
Fixed income investments - U.S. | 296,232 | 114,447 | — | — | 410,679 | ||||||||||
Fixed income investments - International | — | 17,210 | — | — | 17,210 | ||||||||||
Absolute return | 24,444 | — | — | — | 24,444 | ||||||||||
Real assets | 15,565 | — | — | 197 | 15,762 | ||||||||||
Private equity | — | — | — | 7,461 | 7,461 | ||||||||||
Short-term investments | 3,754 | — | — | — | 3,754 | ||||||||||
Total | $ | 351,483 | $ | 226,239 | $ | — | $ | 7,658 | $ | 585,380 |
December 31, 2016 | |||||||||||||||
Investment | Investments Measured at NAV | Level 1 | Level 2 | Level 3 | Total | ||||||||||
Equity securities - U.S. | $ | 9,827 | $ | 30,952 | $ | — | $ | — | $ | 40,779 | |||||
Equity securities - International | — | 55,619 | — | — | 55,619 | ||||||||||
Fixed income investments - U.S. | 99,383 | 218,712 | — | — | 318,095 | ||||||||||
Fixed income investments - International | — | 27,346 | — | — | 27,346 | ||||||||||
Absolute return | 25,479 | — | — | — | 25,479 | ||||||||||
Real assets | 14,852 | — | — | 195 | 15,047 | ||||||||||
Private equity | — | — | — | 1,942 | 1,942 | ||||||||||
Short-term investments | 22,980 | — | — | — | 22,980 | ||||||||||
Total | $ | 172,521 | $ | 332,629 | $ | — | $ | 2,137 | $ | 507,287 |
The tables below set forth a summary of changes in the fair value of the defined benefit pension plan'sPension Plan's Level 3 assets for the years ended December 31, 20172020 and 2016:2019:
December 31, 2020 | ||||||||
Private Markets | Other Investments | Total | ||||||
Balance, beginning of year | $ | 11.0 | $ | 11.4 | $ | 22.4 | ||
Unrealized gains | 1.0 | 0.6 | 1.6 | |||||
Purchases | 2.5 | — | 2.5 | |||||
Sales | (0.7) | (0.6) | (1.3) | |||||
Balance, end of year | $ | 13.8 | $ | 11.4 | $ | 25.2 |
December 31, 2019 | ||||||||
Private Markets | Other Investments | Total | ||||||
Balance, beginning of year | $ | 6.0 | $ | 4.4 | $ | 10.4 | ||
Realized gains | 0.1 | — | 0.1 | |||||
Unrealized gains | 0.7 | 0.8 | 1.5 | |||||
Purchases | 4.4 | 6.8 | 11.2 | |||||
Sales | (0.2) | (0.6) | (0.8) | |||||
Balance, end of year | $ | 11.0 | $ | 11.4 | $ | 22.4 |
December 31, 2017 | |||||||||
Real Assets | Private Equity | Total | |||||||
Balance, beginning of year | $ | 195 | $ | 1,942 | $ | 2,137 | |||
Realized gains | — | 96 | 96 | ||||||
Unrealized gains (losses) | 2 | (100 | ) | (98 | ) | ||||
Purchases | — | 6,891 | 6,891 | ||||||
Sales | — | (1,368 | ) | (1,368 | ) | ||||
Balance, end of year | $ | 197 | $ | 7,461 | $ | 7,658 |
December 31, 2016 | |||||||||
Real Assets | Private Equity | Total | |||||||
Balance, beginning of year | $ | 456 | $ | 2,704 | $ | 3,160 | |||
Realized gains | 12 | 181 | 193 | ||||||
Unrealized losses | (19 | ) | (150 | ) | (169 | ) | |||
Purchases | — | 121 | 121 | ||||||
Sales | (254 | ) | (914 | ) | (1,168 | ) | |||
Balance, end of year | $ | 195 | $ | 1,942 | $ | 2,137 |
14. PROFIT SHARING AND SAVINGS PLAN
We provide a defined contribution profit sharing and savings plan (the "Plan") covering substantially all of our eligible employees with an individual account for each participant. Employees may make voluntary before-tax and/or after-tax contributions to the saving portion of the plan,Plan, ranging from 2% to 50% of pay, subject to limitations imposed by federal tax law, ERISA, and the Pension Protection Act of 2006. AllSubstantially all employees hired or rehired after July 1, 2015 are eligible to receive a Company matching contribution beginning the first month after the completion of one year of service and 1,000 hours of service.service. Effective July 1, 2019, eligible employees receive Company matching contributions beginning the first month after the completion of six months of service and 500 hours of service. The Company match is equal to 50% of an eligible employee's before-tax or Roth payroll contribution, up to 6% of pay per payroll period, with a maximum match per payroll period of 3%. The matching contribution expense recognized by us was $907$3.8 million, $2.7 million, and $363$1.8 million for the years ended December 31, 20172020, 2019 and 2016,2018, respectively.
Annual contributions made by us to the profit-sharing portion of the planPlan are determined by the Board of Directors at theirits discretion, and are generally based on the profitability of the Company. Expense recognized by us under the profit-sharing portion of the planPlan was $43,235, $41,365,$46.8 million, $56.8 million, and $40,020$67.4 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
15. COMMITMENTS AND CONTINGENCIES
Rental expense was $27,326, $25,133,$40.3 million, $36.4 million, and $22,685$29.4 million in 2017, 2016,2020, 2019, and 2015,2018, respectively. FutureFor future minimum rental payments required under operating leases that have either initial or remaining noncancelable lease terms in excess of one year as of December 31, 2017 are as follows:
For the Years Ending December 31, | Minimum Rental Payments | ||
2018 | $ | 25,968 | |
2019 | 20,476 | ||
2020 | 12,985 | ||
2021 | 8,964 | ||
2022 | 5,713 | ||
After 2022 | 10,679 |
We are subject to various claims, disputes, and administrative and legal matters incidental to our past and current business activities. As a result, contingencies can arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible loss.
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 we deem an 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 we believe that
none of these claims, disputes or administrative and legal matters will have a material adverse effect on our financial position, these matters are uncertain and we cannot at this time determine whether the financial impact, if any, of these matters will be material to our results of operations in the period in which such matters are resolved or a better estimate becomes available.16. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of December 31 are as follows:
2020 | 2019 | ||||
Currency translation | $ | (5.1) | $ | (7.7) | |
Pension liability | (227.9) | (232.4) | |||
Postretirement benefits liability | (13.7) | (10.5) | |||
Accumulated other comprehensive loss | $ | (246.7) | $ | (250.6) |
2017 | 2016 | |||||
Currency translation | $ | (4,602 | ) | $ | (10,343 | ) |
Pension liability | (192,657 | ) | (177,691 | ) | ||
Postretirement benefits liability | (9,380 | ) | (8,566 | ) | ||
Adoption of ASU 2018-02 | (43,515 | ) | — | |||
Accumulated other comprehensive loss | $ | (250,154 | ) | $ | (196,600 | ) |
The following table represents the total amounts of actuarial losses recognized that were reclassified from accumulated other comprehensive loss for the years ended December 31, 20172020 and 2016:2019:
2020 | 2019 | |||||
Amortization of Pension | Amortization of Pension | |||||
Actuarial Losses | Actuarial Losses | |||||
Affected Line in Consolidated | ||||||
Non-operating expenses(A) | $ | 58.6 | $ | 19.4 | ||
Tax benefit | (15.1) | (5.0) | ||||
Total reclassifications for the period, net of tax | $ | 43.5 | $ | 14.4 |
2017 | 2016 | |||||||||||||||||||||||
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 Consolidated Statement of Income: | ||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 22,291 | $ | (1,761 | ) | $ | 20,530 | $ | 19,873 | $ | (1,758 | ) | $ | 18,115 | ||||||||||
Tax (benefit) expense | (8,671 | ) | 685 | (7,986 | ) | (7,731 | ) | 684 | (7,047 | ) | ||||||||||||||
Total reclassifications for the period, net of tax | $ | 13,620 | $ | (1,076 | ) | $ | 12,544 | $ | 12,142 | $ | (1,074 | ) | $ | 11,068 |
(A) A settlement charge of $27.7 million is included in 2020 non-operating expenses.
The following table represents the activity included in accumulated other comprehensive loss for the years ended December 31, 20172020 and 2016:2019:
2020 | 2019 | ||||||||||||||||
Foreign | Pension and | Total | Foreign | Pension and | Total | ||||||||||||
Beginning balance January 1, | $ | (7.7) | $ | (242.9) | $ | (250.6) | $ | (12.4) | $ | (227.9) | $ | (240.3) | |||||
Other comprehensive income before reclassifications | 2.6 | — | 2.6 | 4.7 | — | 4.7 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss (net of tax $(15.1) and $(5.0)) | — | 43.5 | 43.5 | — | 14.4 | 14.4 | |||||||||||
Actuarial loss, (net of tax $14.6 and $10.2) | — | (42.2) | (42.2) | — | (29.4) | (29.4) | |||||||||||
Net current-period other comprehensive income (loss) | 2.6 | 1.3 | 3.9 | 4.7 | (15.0) | (10.3) | |||||||||||
Ending balance December 31, | $ | (5.1) | $ | (241.6) | $ | (246.7) | $ | (7.7) | $ | (242.9) | $ | (250.6) |
2017 | 2016 | ||||||||||||||||||||||||
Foreign Currency | Pension and Other Postretirement Benefits | Total | Foreign Currency | Pension and Other Postretirement Benefits | Total | ||||||||||||||||||||
Beginning balance January 1, | $ | (10,343 | ) | $ | (186,257 | ) | $ | (196,600 | ) | $ | (12,416 | ) | $ | (178,019 | ) | $ | (190,435 | ) | |||||||
Other comprehensive income before reclassifications | 5,741 | — | 5,741 | 2,073 | — | 2,073 | |||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (net of tax $(7,986) and $(7,047)) | — | 12,544 | 12,544 | — | 11,068 | 11,068 | |||||||||||||||||||
Actuarial loss, (net of tax $18,033 and $12,292) | — | (28,324 | ) | (28,324 | ) | — | (19,306 | ) | (19,306 | ) | |||||||||||||||
Net current-period other comprehensive income (loss) | 5,741 | (15,780 | ) | (10,039 | ) | 2,073 | (8,238 | ) | (6,165 | ) | |||||||||||||||
Adoption of ASU 2018-02 | — | (43,515 | ) | (43,515 | ) | — | — | — | — | ||||||||||||||||
Ending balance December 31, | $ | (4,602 | ) | $ | (245,552 | ) | $ | (250,154 | ) | $ | (10,343 | ) | $ | (186,257 | ) | $ | (196,600 | ) |
17. ACQUISITION
On JulyDecember 1, 2016,2020, we purchased Cape Electric,Shingle & Gibb Automation, LLC, a regional distributor serving electrical contractorsleading control and large engineering construction firms, as well asautomation solutions provider with a successful track record of distributing, developing, and implementing advanced industrial institutional and utility customers,automation systems, for approximately $59,946a preliminary purchase price of $27.2 million in cash, net of cash acquired. The acquisition will help Graybar accelerate growth, diversify our business, extend our reach, and enhance our profitability. The preliminary purchase price allocation resulted in $16,377$7.0 million and $23,586$18.1 million of tax deductible goodwill and other intangible assets, respectively.
Since the date of acquisition, Cape Electric and AdvantageShingle & Gibb Automation, LLC. results are reflected in our consolidated financial statements. Pro forma results of these acquisitionsthe acquisition were not material; therefore, they are not presented.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth selected quarterly financial data for the years ended December 31, 20172020 and 2016:2019:
2020 | |||||||||||
For the Quarter Ended | March 31, | June 30, | September 30, | December 31, | |||||||
Net sales | $ | 1,773.2 | $ | 1,763.0 | $ | 1,877.9 | $ | 1,851.6 | |||
Gross margin | $ | 340.4 | $ | 333.3 | $ | 355.2 | $ | 340.6 | |||
Net income attributable to the Company | $ | 21.4 | $ | 37.1 | $ | 34.5 | $ | 28.8 | |||
Net income attributable to the Company per share of common stock | $ | 0.94 | $ | 1.64 | $ | 1.52 | $ | 1.28 |
2019 | |||||||||||
For the Quarter Ended | March 31, | June 30, | September 30, | December 31, | |||||||
Net sales | $ | 1,777.8 | $ | 1,948.0 | $ | 1,981.4 | $ | 1,816.7 | |||
Gross margin | $ | 338.7 | $ | 367.7 | $ | 377.8 | $ | 344.8 | |||
Net income attributable to the Company | $ | 34.3 | $ | 47.0 | $ | 48.8 | $ | 14.4 | |||
Net income attributable to the Company | $ | 1.51 | $ | 2.08 | $ | 2.17 | $ | 0.65 |
2017 | |||||||||||||||
For the Quarter Ended | March 31, | June 30, | September 30, | December 31, | |||||||||||
Net sales | $ | 1,530,571 | $ | 1,712,880 | $ | 1,700,843 | $ | 1,686,933 | |||||||
Gross margin | $ | 299,829 | $ | 322,893 | $ | 321,984 | $ | 316,601 | |||||||
Net income (loss) attributable to the Company | $ | 17,681 | $ | 33,334 | $ | 29,434 | $ | (8,841 | ) | ||||||
Net income (loss) attributable to the Company per share of common stock(A) | $ | 0.91 | $ | 1.72 | $ | 1.52 | $ | (0.45 | ) |
(A)
All periods adjusted for a2016 | |||||||||||||||
For the Quarter Ended | March 31, | June 30, | September 30, | December 31, | |||||||||||
Net sales | $ | 1,465,480 | $ | 1,630,521 | $ | 1,689,619 | $ | 1,599,412 | |||||||
Gross margin | $ | 279,647 | $ | 305,599 | $ | 318,758 | $ | 304,359 | |||||||
Net income attributable to the Company | $ | 15,045 | $ | 25,635 | $ | 30,129 | $ | 22,270 | |||||||
Net income attributable to the Company per share of common stock(A) | $ | 0.79 | $ | 1.34 | $ | 1.57 | $ | 1.17 |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed in the reports that we file and submit under the Exchange Act is accumulated and communicated to Company management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20172020 was performed under the supervision and with the participation of management. Based on that evaluation, our management, including the Principal Executive Officer and Principal Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 20172020 to ensure that information required to be disclosed in the reports filed or submitted by us 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.
Management of the Company, including its Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls will prevent or detect all errors. A control system, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the control system’s objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, have been detected. These inherent limitations include the realities that disclosure requirements may be misinterpreted and judgments in decision-making may be inexact.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management of the Company conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued in May 2013. Based on that evaluation, management of the Company concluded that our internal control over financial reporting was effective as of December 31,Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that have occurred during our last fiscal quarter that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On March 9, 2021, our board of directors adopted the Graybar Long Term Incentive Plan, referred to below as the LTIP. The LTIP provides for cash-based bonus awards to those management or highly-compensated employees selected by our board of directors to participate in the LTIP. The purpose of the LTIP is to attract, retain and reward key employees of Graybar and our affiliates and to promote long-term growth and value creation.
On March 9, 2021, the board granted certain officers, including our named executive officers, each an award under and subject to the terms and conditions of the LTIP described below. The awards establish a three-year performance period ending on December 31, 2023 using net sales and EBITDA (as defined) growth targets. Subject to the terms and conditions of each named executive officer’s award agreement, and assuming satisfaction for calendar year 2021 of the time-based component of the awards, such officers may receive a bonus ranging from approximately twenty-three percent of, to up to four times, 2020 salary.
The following is a brief summary of the LTIP. A copy of the LTIP and form of LTIP award will be included as exhibits to our quarterly report on Form 10-Q for the quarter ending March 31, 2021. The following summary is qualified in its entirety by reference to the LTIP and form of LTIP award.
The LTIP provides for the grant of cash-based awards. Subject to the provisions of the LTIP, the board, or its designated committee, may determine the award recipients, sometimes referred to as “participants”, the payment amounts or range of payment amounts, and other terms of any such award, including, without limitation, the length of the performance period, any time-based or performance-based criteria, targets to be achieved during any performance period and the extent to which an award may be subject to forfeiture, in whole or in part. The performance-based criteria may include net sales or EBITDA growth targets and such other performance targets as the board or committee may determine.
Bonuses under the LTIP will be paid in cash in accordance with the terms of the award, which will require the participants to enter into customary restrictive covenants as a condition for eligibility. Unless otherwise provided in an award agreement, awards will be comprised of two weighted components: time-based targets and performance-based targets. The time-based bonus will be paid annually if a participant remains actively employed without demotion (as defined in the LTIP) with Graybar or its affiliates during an applicable calendar year. The performance-based targets will provide for the potential for bonus compensation based on the achievement of certain corporate performance metrics during the performance period specified under each award. Bonus payments of performance-based awards will be earned following the completion of the performance period specified in if and to the extent that corporate performance meets or exceeds the threshold for payment. A participant’s failure to comply with the restrictive covenants during a performance period will result in forfeiture of any performance-based bonus.
Participants who retire, become disabled or pass away during a performance period will receive payment of their performance bonus and the current year time-based bonus, each on a pro-rata basis based upon the number of days that they were actively employed during the performance period.
Participants who are terminated following a change of control or who terminate their services for “good reason” within 60 days following a change of control will receive payment of their bonus, assuming 100% achievement of the performance targets, on a pro-rata basis within 90 days of the termination date.
All other bonus payments will be made on or before March 15 of the year following the year the payment is earned. Performance measures will be calculated as determined by the board, which retains discretion to interpret the LTIP. All bonus payments under the LTIP will be designed to comply with Section 409A of the Internal Revenue Code of 1986, as amended.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information with respect to the directors of the Company who are nominees for election at the 20182021 annual meeting of shareholders that is required to be included pursuant to this Item 10 will be included under the caption “Proposal 1: Nominees for Election as Directors” and “Information About the Board of Directors and Corporate Governance Matters” in the Company’s Definitive Information Statement relating to the 20182021 Annual Meeting (the “Information Statement”) to be filed with the SEC pursuant to Rule 14c-5 under the Exchange Act, and is incorporated herein by reference.
The information with respect to our audit committee and audit committee financial expert, and nominating committee required to be included pursuant to this Item 10 will be included under the caption “Information About the Board of Directors and Corporate Governance Matters” in our Information Statement and is incorporated herein by reference.
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer (collectively “Covered Officers”). This code of ethics is appended to our business conduct guidelines for all employees. The business conduct guidelines and specific code for Covered Officers may be accessed at:
www.graybar.com/store/en/gb/cm/company/Item 11. Executive Compensation
The information with respect to executive compensation, our advisory compensation committee, and the compensation committee interlocks and insider participation required to be included pursuant to this Item 11 will be included under the captions “Information About the Board of Directors and Corporate Governance Matters” and “Compensation Discussion and Analysis” in the Information Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information with respect to the security ownership of beneficial owners of more than 5% of the Common Stock and of directors and executive officers of the Company required to be included pursuant to this Item 12, will be included under the captions “Beneficial Ownership of More Than 5% of the Outstanding Common Stock” and “Beneficial Ownership of Management” in the Information Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
At the date of this report, there are no reportable transactions, business relationships or indebtedness of the type required to be included pursuant to this Item 13 between the Company and any beneficial owner of more than 5% of the Common Stock, the directors or nominees for director of the Company, the executive officers of the Company or the members of the immediate families of such individuals. If there is any change in that regard prior to the filing of the Information Statement, such information will be included under the caption “Transactions with Related Persons” in the Information Statement and shall be incorporated herein by reference.
The information with respect to director independence and to corporate governance required to be included pursuant to this Item 13 will be included under the captions “Proposal 1: Nominees for Election as Directors” and “Information about the Board of Directors and Corporate Governance Matters” in the Information Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information with respect to principal accounting fees and services required to be included pursuant to this Item 14 will be included under the caption “Relationship with Independent Registered Public Accounting Firm” in our Information Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) | ||||||||
List of documents filed as part of this report: | ||||||||
1. | Financial Statements | |||||||
All Consolidated Financial Statements of the Company as set forth under Item 8 of this Annual Report on Form 10-K. | ||||||||
2. | Financial Statement Schedule | |||||||
None. | ||||||||
3. | Exhibits | |||||||
3.1 | ||||||||
3.2 | ||||||||
4 | ||||||||
4.2 | ||||||||
9 | Voting Trust Agreement dated as of March 3, 2017, included at Exhibit 4.2 above. | |||||||
10.1 | ||||||||
10.2 | ||||||||
10.3 | ||||||||
10.5 | ||||||||
10.6 | ||||||||
10.7 | ||||
10.8 | ||||
10.9 | ||||
10.10 | ||||
10.11 | ||||
21 | ||||
31.1 | ||||
31.2 | ||||
32.1 | ||||
32.2 | ||||
101.INS | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL 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 | |||
104 | Cover Page Interactive Data File (formatted in Inline XBRL contained in Exhibit 101) | |||
* Compensation arrangement |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 9th10th day of March 2018.
GRAYBAR ELECTRIC COMPANY, INC. | |||
By | /s/ K. M. | ||
(K. M. Mazzarella, Chairman of the Board, President and Chief Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on March 9, 2018.
/s/ K. M. | Director, Chairman of the Board, President and Chief Executive Officer | |
(K. M. Mazzarella) | (Principal Executive Officer) | |
/s/ | Director, Senior Vice President and Chief Financial Officer | |
( | (Principal Financial Officer and Principal Accounting Officer) | |
/s/ D. A. | Director | |
(D. A. Bender) | ||
/s/ | Director | |
( | ||
/s/ M. W. | Director | |
(M. W. Geekie) | ||
/s/ R. | Director | |
(R. | ||
/s/ R. H. Harvey | Director | |
(R. H. Harvey) | ||
/s/ W. P. | Director | |
(W. P. Mansfield) | ||
/s/ D. G. | Director | |
(D. G. Maxwell) | ||
/s/ B. L. | Director | |
(B. L. Propst) |