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"), as well as the industrial and 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"). All products sold by us are purchased by us from others, and we neither manufacture nor contract to manufacture any products that we sell.  Our business activity is primarily with customers in the United States (“U.S.”).  We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.

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.

In the opinion of management, this quarterly report includes all adjustments, consisting of normal recurring accruals and adjustments, necessary for the fair presentation of the financial statements presented.  Results for interim periods are not necessarily indicative of results to be expected for the full year.

The condensed 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 in subsidiaries consolidated by the Company are accounted for and reported as noncontrolling interests.

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.

Revenue is recognized when evidence of a customer arrangement exists, prices are fixed and determinable, product title, ownership and risk of loss transfers to the customer, and collectability is reasonably assured.  Revenues recognized are primarily for product sales, but also include freight and handling charges.  Our standard shipping terms are FOB shipping point, under which product title passes to the customer at the time of shipment.  We also earn revenue for services provided to customers for supply chain management and logistics services.  Service revenue is recognized when services are rendered and completed.  Revenue is reported net of all taxes assessed by governmental authorities as a result of revenue-producing transactions, primarily sales tax.

We record certain outgoing freight expenses as a component of selling, general and administrative expenses. 

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.

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 and specific risks identified in the receivables portfolio.  Although actual credit losses have historically been within management’s expectations, additional allowances may be required if the financial condition of our customers were to deteriorate.

Our inventory is stated at the lower of cost (determined using the last-in, first-out (“LIFO”) cost method) or market.  LIFO accounting is a method of accounting that, compared with other inventory accounting methods, generally provides better matching of current costs with current sales. 

We make provisions for obsolete or excess inventories as necessary to reflect reductions in inventory value. 

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.

Financial instruments that potentially expose us to concentrations of credit risk consist primarily of trade receivables.  We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables may be protected by mechanic’s lien or payment bond rights.  We maintain allowances for potential credit losses, and such losses historically have been within management’s expectations.

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.

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.

Our goodwill is not amortized, but rather tested annually for impairment.  Goodwill is reviewed annually in the fourth quarter and/or when circumstances or other events might indicate that impairment may have occurred.  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 and applicable discount rates. 

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 5 to 20 years. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.

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 condensed 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.

 

We account for postretirement benefits other than pensions by accruing the costs of benefits to be provided over the employees’ periods of active service.  These costs are determined on an actuarial basis.  Our condensed consolidated balance sheets reflect the funded status of postretirement benefits.

We sponsor a noncontributory defined benefit pension plan accounted for by accruing the cost to provide the benefits over the employees’ periods of active service.  These costs are determined on an actuarial basis.  Our condensed consolidated balance sheets reflect the funded status of the defined benefit pension plan.

No new accounting standards that were issued or became effective during 20162017 have had or are expected to have a material impact on our condensed consolidated financial statements except those noted below:

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, whichwith amendments in 2015 and 2016 ("ASU 2014-09"). The guidance was initially effective January 1, 2017 and early adoption was not permitted. The amended guidance provides guidance onfor a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. In July 2015, the FASB deferredone-year deferral of the effective date to January 1, 2018, with an option of applying the Update for one year. The Update will now bestandard on the original effective for public business entities for annual reporting periods, including interim reporting periods, beginning after December 15, 2017.date.

The new standard providesand related amendments provide for two alternative implementation methods.methods:  a full retrospective approach and a modified retrospective approach. The first is to applyfull retrospective approach applies the new standard retrospectively to each prior reporting period presented.  This method allows the use of certain practical expedients. The second method is to applymodified retrospective approach applies the new standard retrospectively in the year of initial adoption and recordrecords a cumulative effect adjustment for the impact of adjusting contracts open at the date of adoption.  Under this transition method, we would apply this guidance retrospectively only to contracts that are not completed contracts at the date of initial application, which for us will be January 1, 2018.  We would then recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. This method also requires us to disclose comparative information for the year of adoption.

In March 2016, FASB issuedOur primary source of revenues is from customer purchase orders in the construction, industrial & utility, and CIG markets for electrical and comm/data products. Revenue is currently recognized when evidence of a customer arrangement exists, prices are fixed and determinable, product title, ownership and risk of loss transfers to the customer, and collectability is reasonably assured. Given the scope of work required to implement the recognition and disclosure requirements under the new standard, we are currently assessing our revenue streams and reporting disclosures to determine the potential impact related to the adoption of ASU 2016-08 "Revenue from Contracts2014-09. We do however believe that, upon adoption of ASU 2014-09, the timing of revenue related to our sales will remain relatively consistent with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)". The amendments incurrent practices. At the time of this Update do not changefiling, we believe we will be adopting ASU 2014-09 under the core principlemodified retrospective approach although we continue to assess all potential impacts of the guidance stated in ASU 2014-09. Instead, the amendments in this ASUand given normal ongoing business dynamics, preliminary conclusions are intendedsubject to further clarify the implementation guidance on principal versus agent considerations. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09.

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 condensed consolidated financial statements.

Our federal income tax returns for the tax years 2013 and forward are available for examination by the United States Internal Revenue Service (“IRS”).  The statute of limitations for the 2013 federal return will expire on September 15, 2017, unless extended by consent. Our state income tax returns for 20112012 through 20152016 remain subject to examination by various state authorities with the latest period closing on December 31, 2020.2021.  We have not extended the statutes of limitations in any state jurisdictions with respect to years prior to 2011.

  

Graybar and our subsidiaries are subject to various claims, disputes, and administrative and legal matters incidental to our past and current business activities.  As a result, contingencies may arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible loss.

We account for loss contingencies in accordance with GAAP.  Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated.  With respect to a particular loss contingency, it may be probable that a loss has occurred but the estimate of the loss is a wide range.  If 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, 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 during which such matters are resolved or a better estimate becomes available.

In April 2015,July 2016, we acquired 100% of the outstanding capital stock of Advantage Industrial Automation, Inc. (“Advantage”), which provides control and automation solutions to industrial users, OEMs and system integrators, for $18,093 in cash, net of cash acquired. The purchase price allocation resulted in approximately $7,057 and $8,283 of tax deductible goodwill and other intangible assets, respectively.

All dollar amounts, except per share data, are stated in thousands ($000s) in the following discussion and accompanying tables.

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"), as well as the industrial and 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 ("OEMs"). All products sold by us are purchased by us from others, and we neither manufacture nor contract to manufacture any products we sell.  Our business activity is primarily with customers in the United States ("U.S.").  We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.

Our common stock is 100% owned by active and retired employees, and there is no public trading market for our common stock.  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, a shareholder is entitled to any cash dividends, if any, 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. 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 on a pension (except a deferred pension), 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.

Selling, general and administrative expenses ("SG&A") increased $10,29713,313, or 4.2%5.4%, to $258,045 in the first quarter of 2017 from $254,969244,732 in the thirdfirst quarter of 2016 from $244,672 in the third quarter of 2015, due primarily to an increasegrowth in employee benefit costs,headcount and normal compensation increases and increases in management and sales incentive accruals for the three months ended September 30, 2016.increases.  Selling, general and administrative expenses as a percentage of net sales totaled 15.1%16.8% for the three months ended September 30, 2016March 31, 2017, compared to 15.4%16.7% for the three months ended September 30, 2015March 31, 2016.

Depreciation and amortization expenses for the three months ended September 30, 2016March 31, 2017 increased $1,323565, or 12.1%5.0%, to $12,283$11,876 from $10,96011,311 in the thirdfirst quarter of 20152016, due to an increase in property, at cost. Total property, at cost, at September 30, 2016March 31, 2017 was $934,625,$945,350, an increase of $29,555,$30,504, or 3.3%, when compared to total property, at cost, at September 30, 2015March 31, 2016 of $905,070.$914,846. Depreciation and amortization expenses as a percentage of net sales totaled 0.7%0.8% for the three months ended September 30, 2016March 31, 2017 and 20152016.

Interest expense, net increased $530,$140, or 77.4%21.3%, to $1,215$797 for the three months ended September 30, 2016March 31, 2017, compared to $685$657 for the same period of 2015.2016. The increase was primarily due to higher levels of average outstanding short-term borrowings.

Net income attributable to Graybar Electric Company, Inc. for the three months ended September 30, 2016March 31, 2017 increased $1,8182,636, or 6.4%17.5%, to $30,12917,681 from $28,31115,045 for the three months ended September 30, 2015March 31, 2016.

We manage our liquidity and capital levels so that we have the capacity 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, short-term bank lines of credit and long-term debt.

Our cash and cash equivalents at September 30, 2016March 31, 2017 were $51,111,$69,529, compared to $37,931$43,339 at December 31, 2015,2016, an increase of $13,180,$26,190, or 34.7%60.4%. Our short-term borrowings increased significantly, $168,871,$26,036, or 160.9%18.5% during the nine-monththree-month period to $273,849$166,501 at September 30, 2016March 31, 2017 from $104,978$140,465 at December 31, 2015,2016, primarily due to the financing of strategic investments in merchandise inventory to support the growth of sales, funding of employee benefits and our acquisition of Cape Electric in the third quarter,additional voluntary pension contributions, all funded via short-term lines of credit. In addition, cash collections, as measured by days sales outstanding, declined modestly for the quarter ended September 30, 2016. Finally, currentCurrent assets exceeded current liabilities by $447,960$455,533 at September 30, 2016,March 31, 2017, an increase of $2,517,$15,300, or 0.6%3.5%, from $445,443$440,233 at December 31, 2015.2016.

Merchandise inventory turnover declined moderately for the nine months ended September 30, 2016, compared to the nine months ended September 30, 2015, as a result of increased merchandise inventory levels, partially offset by higher sales volume at September 30, 2016 compared to September 30, 2015. The average number of days of sales in trade receivables for the nine-monththree-month period ended September 30, 2016 increased moderatelyMarch 31, 2017 remained flat compared to the same nine-monththree-month period ended September 30, 2015.March 31, 2016. Merchandise inventory turnover improved modestly for the three months ended March 31, 2017, compared to the three months ended March 31, 2016.

Net cash used by investing activities totaled $81,465$6,119 for the ninethree months ended September 30, 2016,March 31, 2017, compared to $69,001$4,242 for the same nine-monththree-month period in 2015,2016, an increase of $12,464,$1,877, or 18.1%44.2%. The increase was primarily due to slightly higher capital expenditures in the acquisition of Cape Electric, net of cash, for $59,946,three months ended March 31, 2017, compared to the three months ended March 31, 2016, partially offset by lower capital expenditures inproceeds on the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. In the first quarterdisposal of 2015, we purchased a new regional distribution center in southern California for $23,392. In the second quarter of 2016, we acquired two properties for a total of $3,279.property. Proceeds on the disposal of property decreased during the ninethree months ended September 30, 2016March 31, 2017, compared to 2015.2016. In the first quarter of 2016 we disposed of a local distribution facility that provided proceeds of $1,686, compared to first quarter of 2015 when we disposed of a regional distribution center in northern California that provided proceeds of $8,214. Both facilities had been classified as an asset held for sale.$1,686.

Our adoption of new accounting standards are discussed in Note 2, "Summary of Significant Accounting Policies", of the notes to the condensed consolidated financial statements located in Item 1., "Financial Statements", of this Quarterly Report on Form 10-Q.