UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20162017
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
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| |
GRAYBAR ELECTRIC COMPANY, INC. |
(Exact name of registrant as specified in its charter) |
| |
New York | 13-0794380 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
34 North Meramec Avenue, St. Louis, Missouri | 63105 |
(Address of principal executive offices) | (Zip Code) |
|
(314) 573 - 9200 |
(Registrant’s telephone number, including area code) |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
YES x NO ¨ |
|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). |
YES x NO ¨ |
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
Large accelerated filer¨ Accelerated filer¨ |
Non-accelerated filerx (Do not check if a smaller reporting company) Smaller reporting company¨ |
Emerging growth company ¨ |
|
If an emerging growth 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
YES ¨ NO x |
|
Common Stock Outstanding at October 15, 2016: 16,575,6252017: 17,570,167 |
(Number of Shares) |
Graybar Electric Company, Inc. and Subsidiaries
Quarterly Report on Form 10-Q
For the Period Ended September 30, 20162017
(Unaudited)
Table of Contents
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PART I. | FINANCIAL INFORMATION | Page |
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| Item 1. | Financial Statements | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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PART II. | OTHER INFORMATION | |
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| Item 2. | | |
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| Item 6. | | |
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
| | Graybar Electric Company, Inc. and Subsidiaries | | | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | CONDENSED CONSOLIDATED STATEMENTS OF INCOME | | | | CONDENSED CONSOLIDATED STATEMENTS OF INCOME | | | |
| (Unaudited) | (Unaudited) |
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, |
(Stated in thousands, except per share data) | 2016 |
| | 2015 |
| 2016 |
| | 2015 |
| 2017 |
| | 2016 |
| 2017 |
| | 2016 |
|
Gross Sales | $ | 1,697,037 |
| | $ | 1,590,576 |
| $ | 4,806,245 |
| | $ | 4,566,880 |
| $ | 1,708,638 |
| | $ | 1,697,037 |
| $ | 4,967,349 |
| | $ | 4,806,245 |
|
Cash discounts | (7,418 | ) | | (6,690 | ) | (20,625 | ) | | (19,208 | ) | (7,795 | ) | | (7,418 | ) | (23,055 | ) | | (20,625 | ) |
Net Sales | 1,689,619 |
| | 1,583,886 |
| 4,785,620 |
| | 4,547,672 |
| 1,700,843 |
| | 1,689,619 |
| 4,944,294 |
| | 4,785,620 |
|
Cost of merchandise sold | (1,370,861 | ) | | (1,280,928 | ) | (3,881,616 | ) | | (3,692,343 | ) | (1,378,859 | ) | | (1,370,861 | ) | (3,999,588 | ) | | (3,881,616 | ) |
Gross Margin | 318,758 |
| | 302,958 |
| 904,004 |
| | 855,329 |
| 321,984 |
| | 318,758 |
| 944,706 |
| | 904,004 |
|
Selling, general and administrative expenses | (254,969 | ) | | (244,672 | ) | (750,266 | ) | | (717,648 | ) | (260,752 | ) | | (254,969 | ) | (776,135 | ) | | (750,266 | ) |
Depreciation and amortization | (12,283 | ) | | (10,960 | ) | (35,158 | ) | | (32,082 | ) | (12,211 | ) | | (12,283 | ) | (36,231 | ) | | (35,158 | ) |
Other income, net | 629 |
| | 1,187 |
| 3,438 |
| | 6,746 |
| 1,511 |
| | 629 |
| 5,640 |
| | 3,438 |
|
Income from Operations | 52,135 |
| | 48,513 |
| 122,018 |
| | 112,345 |
| 50,532 |
| | 52,135 |
| 137,980 |
| | 122,018 |
|
Interest expense, net | (1,215 | ) | | (685 | ) | (2,635 | ) | | (1,895 | ) | (1,217 | ) | | (1,215 | ) | (3,082 | ) | | (2,635 | ) |
Income before Provision for Income Taxes | 50,920 |
| | 47,828 |
| 119,383 |
| | 110,450 |
| 49,315 |
| | 50,920 |
| 134,898 |
| | 119,383 |
|
Provision for income taxes | (20,724 | ) | | (19,431 | ) | (48,396 | ) | | (44,414 | ) | (19,761 | ) | | (20,724 | ) | (54,220 | ) | | (48,396 | ) |
Net Income | 30,196 |
| | 28,397 |
| 70,987 |
| | 66,036 |
| 29,554 |
| | 30,196 |
| 80,678 |
| | 70,987 |
|
Less: Net income attributable to noncontrolling interests | (67 | ) | | (86 | ) | (178 | ) | | (177 | ) | (120 | ) | | (67 | ) | (229 | ) | | (178 | ) |
Net Income attributable to Graybar Electric Company, Inc. | $ | 30,129 |
| | $ | 28,311 |
| $ | 70,809 |
| | $ | 65,859 |
| $ | 29,434 |
| | $ | 30,129 |
| $ | 80,449 |
| | $ | 70,809 |
|
Net Income per share of Common Stock(A) | $ | 1.82 |
| | $ | 1.73 |
| $ | 4.28 |
| | $ | 4.02 |
| $ | 1.68 |
| | $ | 1.73 |
| $ | 4.57 |
| | $ | 4.07 |
|
Cash Dividends per share of Common Stock | $ | 0.30 |
| | $ | 0.30 |
| $ | 0.90 |
| | $ | 0.90 |
| $ | 0.30 |
| | $ | 0.30 |
| $ | 0.90 |
| | $ | 0.90 |
|
Average Common Shares Outstanding(A) | 16,573 |
| | 16,341 |
| 16,558 |
| | 16,379 |
| 17,611 |
| | 17,402 |
| 17,618 |
| | 17,386 |
|
(A)Adjusted for the declaration of a 2.5%5% stock dividend in 2015,2016, shares related to which were issued in February 2016.2017. Prior to the adjustment, the average common shares outstanding were 15,94216,573 and 15,98016,558 for the three and nine months ended September 30, 2015,2016, respectively.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
| | Graybar Electric Company, Inc. and Subsidiaries | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | |
| (Unaudited) | (Unaudited) |
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, |
(Stated in thousands) | 2016 |
| | 2015 |
| 2016 |
| | 2015 |
| 2017 |
| | 2016 |
| 2017 |
| | 2016 |
|
Net Income | $ | 30,196 |
| | $ | 28,397 |
| $ | 70,987 |
| | $ | 66,036 |
| $ | 29,554 |
| | $ | 30,196 |
| $ | 80,678 |
| | $ | 70,987 |
|
Other Comprehensive Income | | | | | | | | | | |
Foreign currency translation | (1,148 | ) | | (6,082 | ) | 4,012 |
| | (10,738 | ) | 3,616 |
| | (1,148 | ) | 6,550 |
| | 4,012 |
|
Pension and postretirement benefits liability adjustment (net of tax of $(1,762), $(1,881), $(5,286), and $(5,644), respectively) | 2,767 |
| | 2,955 |
| 8,301 |
| | 8,864 |
| |
Total Other Comprehensive Income (Loss) | 1,619 |
| | (3,127 | ) | 12,313 |
| | (1,874 | ) | |
Pension and postretirement benefits liability adjustment (net of tax of $(1,997), $(1,762), $(5,990), and $(5,286), respectively) | | 3,136 |
| | 2,767 |
| 9,408 |
| | 8,301 |
|
Total Other Comprehensive Income | | 6,752 |
| | 1,619 |
| 15,958 |
| | 12,313 |
|
Comprehensive Income | $ | 31,815 |
| | $ | 25,270 |
| $ | 83,300 |
| | $ | 64,162 |
| $ | 36,306 |
| | $ | 31,815 |
| $ | 96,636 |
| | $ | 83,300 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of tax | 25 |
| | (188 | ) | 387 |
| | (261 | ) | |
Less: Comprehensive income attributable to noncontrolling interests, net of tax | | 209 |
| | 25 |
| 457 |
| | 387 |
|
Comprehensive Income attributable to Graybar Electric Company, Inc. | $ | 31,790 |
| | $ | 25,458 |
| $ | 82,913 |
| | $ | 64,423 |
| $ | 36,097 |
| | $ | 31,790 |
| $ | 96,179 |
| | $ | 82,913 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
| | Graybar Electric Company, Inc. and Subsidiaries | Graybar Electric Company, Inc. and Subsidiaries | | |
| | | Graybar Electric Company, Inc. and Subsidiaries | | |
| | |
CONDENSED CONSOLIDATED BALANCE SHEETS | CONDENSED CONSOLIDATED BALANCE SHEETS | | | | | CONDENSED CONSOLIDATED BALANCE SHEETS | | | | |
(Stated in thousands, except share and per share data) | (Stated in thousands, except share and per share data) | | September 30, 2016 |
| | December 31, 2015 |
| (Stated in thousands, except share and per share data) | | September 30, 2017 |
| | December 31, 2016 |
|
ASSETS | | | | | (Unaudited) |
| | |
| | | | | (Unaudited) |
| | |
|
Current Assets | | | | | | | |
| | | | | | | |
|
Cash and cash equivalents | | | | | $ | 51,111 |
| | $ | 37,931 |
| | | | | $ | 51,806 |
| | $ | 43,339 |
|
Trade receivables (less allowances of $6,323 and $5,879, respectively) | | 1,019,195 |
| | 928,276 |
| |
Trade receivables (less allowances of $5,695 and $5,025, respectively) | | Trade receivables (less allowances of $5,695 and $5,025, respectively) | | 1,050,613 |
| | 964,180 |
|
Merchandise inventory | | | | | 616,294 |
| | 518,288 |
| | | | | 610,873 |
| | 516,732 |
|
Other current assets | | | | | 25,761 |
| | 31,305 |
| | | | | 22,659 |
| | 24,148 |
|
Total Current Assets | | | | | 1,712,361 |
| | 1,515,800 |
| | | | | 1,735,951 |
| | 1,548,399 |
|
Property, at cost | | | | | | | | | | | | | | |
Land | | | | | 78,592 |
| | 75,968 |
| | | | | 78,681 |
| | 78,440 |
|
Buildings | | | | | 450,872 |
| | 443,137 |
| | | | | 464,829 |
| | 454,587 |
|
Furniture and fixtures | | | | | 284,196 |
| | 271,605 |
| | | | | 295,498 |
| | 286,615 |
|
Software | | | | | 87,313 |
| | 85,423 |
| | | | | 87,313 |
| | 87,313 |
|
Capital leases | | | | | 33,652 |
| | 32,543 |
| | | | | 35,423 |
| | 33,652 |
|
Total Property, at cost | | | | | 934,625 |
| | 908,676 |
| | | | | 961,744 |
| | 940,607 |
|
Less – accumulated depreciation and amortization | Less – accumulated depreciation and amortization | | | | (503,888 | ) | | (474,810 | ) | Less – accumulated depreciation and amortization | | | | (539,639 | ) | | (512,535 | ) |
Net Property | | | | | 430,737 |
| | 433,866 |
| | | | | 422,105 |
| | 428,072 |
|
Other Non-current Assets | | | | | 106,915 |
| | 99,877 |
| | | | | 124,132 |
| | 122,761 |
|
Total Assets | | | | | $ | 2,250,013 |
| | $ | 2,049,543 |
| | | | | $ | 2,282,188 |
| | $ | 2,099,232 |
|
LIABILITIES | | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | | |
Short-term borrowings | | | | | $ | 273,849 |
| | $ | 104,978 |
| | | | | $ | 216,604 |
| | $ | 140,465 |
|
Current portion of long-term debt | | | | | 4,272 |
| | 6,558 |
| | | | | 2,157 |
| | 4,155 |
|
Trade accounts payable | | | | | 794,276 |
| | 766,089 |
| | | | | 835,939 |
| | 752,171 |
|
Accrued payroll and benefit costs | | | | | 89,747 |
| | 111,069 |
| | | | | 85,402 |
| | 121,421 |
|
Other accrued taxes | | | | | 20,624 |
| | 16,880 |
| | | | | 20,022 |
| | 16,926 |
|
Other current liabilities | | | | | 81,633 |
| | 64,783 |
| | | | | 86,155 |
| | 73,028 |
|
Total Current Liabilities | | | | | 1,264,401 |
| | 1,070,357 |
| | | | | 1,246,279 |
| | 1,108,166 |
|
Postretirement Benefits Liability | | | | | 70,091 |
| | 70,303 |
| | | | | 70,769 |
| | 70,628 |
|
Pension Liability | | | | | 123,541 |
| | 185,211 |
| | | | | 117,064 |
| | 160,950 |
|
Long-term Debt | | | | | 7,735 |
| | 10,272 |
| | | | | 7,063 |
| | 7,271 |
|
Other Non-current Liabilities | | | | | 21,718 |
| | 25,254 |
| | | | | 25,029 |
| | 21,328 |
|
Total Liabilities | | | | | 1,487,486 |
| | 1,361,397 |
| | | | | 1,466,204 |
| | 1,368,343 |
|
SHAREHOLDERS’ EQUITY | | | | | |
| | |
| | | | | |
| | |
|
| Shares at | | | | | Shares at | | | | |
Capital Stock | September 30, 2016 |
| | December 31, 2015 |
| | | | | September 30, 2017 |
| | December 31, 2016 |
| | | | |
Common, stated value $20.00 per share | | | | | | | | | | | | | | |
Authorized | 50,000,000 |
| | 50,000,000 |
| | |
| | | 50,000,000 |
| | 50,000,000 |
| | |
| | |
Issued to voting trustees | 14,322,909 |
| | 13,668,055 |
| | |
| | | 14,717,825 |
| | 14,606,830 |
| | |
| | |
Issued to shareholders | 2,778,957 |
| | 2,721,926 |
| | |
| | | 3,469,173 |
| | 2,850,551 |
| | |
| | |
In treasury, at cost | (505,514 | ) | | (65,890 | ) | | |
| | | (590,066 | ) | | (18,854 | ) | | |
| | |
Outstanding Common Stock | 16,596,352 |
| | 16,324,091 |
| | 331,927 |
| | 326,482 |
| 17,596,932 |
| | 17,438,527 |
| | 351,939 |
| | 348,771 |
|
Advance Payments on Subscriptions to Common Stock | Advance Payments on Subscriptions to Common Stock | | | | 954 |
| | — |
| Advance Payments on Subscriptions to Common Stock | | | | 966 |
| | — |
|
Retained Earnings | | | | | 604,627 |
| | 548,780 |
| | | | | 639,919 |
| | 575,380 |
|
Accumulated Other Comprehensive Loss | | | | | (178,331 | ) | | (190,435 | ) | | | | | (180,870 | ) | | (196,600 | ) |
Total Graybar Electric Company, Inc. Shareholders’ Equity | Total Graybar Electric Company, Inc. Shareholders’ Equity | | 759,177 |
| | 684,827 |
| Total Graybar Electric Company, Inc. Shareholders’ Equity | | 811,954 |
| | 727,551 |
|
Noncontrolling Interests | | | | | 3,350 |
| | 3,319 |
| | | | | 4,030 |
| | 3,338 |
|
Total Shareholders’ Equity | | | | | 762,527 |
| | 688,146 |
| | | | | 815,984 |
| | 730,889 |
|
Total Liabilities and Shareholders’ Equity | Total Liabilities and Shareholders’ Equity | | | | $ | 2,250,013 |
| | $ | 2,049,543 |
| Total Liabilities and Shareholders’ Equity | | | | $ | 2,282,188 |
| | $ | 2,099,232 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
| | Graybar Electric Company, Inc. and Subsidiaries | |
| | |
| |
| | |
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | |
| (Unaudited) | (Unaudited) |
| Nine Months Ended September 30, | Nine Months Ended September 30, |
(Stated in thousands) | 2016 |
| | 2015 |
| 2017 |
| | 2016 |
|
Cash Flows from Operations | |
| | |
| |
| | |
|
Net Income | $ | 70,987 |
| | $ | 66,036 |
| $ | 80,678 |
| | $ | 70,987 |
|
Adjustments to reconcile net income to cash provided by operations: | |
| | |
| |
| | |
|
Depreciation and amortization | 35,158 |
| | 32,082 |
| 36,231 |
| | 35,158 |
|
Deferred income taxes | 2,585 |
| | (389 | ) | (6,659 | ) | | 2,585 |
|
Net gains on disposal of property | (1,786 | ) | | (4,946 | ) | (270 | ) | | (1,786 | ) |
Net income attributable to noncontrolling interests | (178 | ) | | (177 | ) | (229 | ) | | (178 | ) |
Changes in assets and liabilities: | | | | | | |
Trade receivables | (73,623 | ) | | (6,696 | ) | (86,433 | ) | | (73,623 | ) |
Merchandise inventory | (83,059 | ) | | (56,416 | ) | (94,141 | ) | | (83,059 | ) |
Other current assets | 5,632 |
| | 16,126 |
| 1,489 |
| | 5,632 |
|
Other non-current assets | 24,369 |
| | 3,777 |
| (2,503 | ) | | 24,369 |
|
Trade accounts payable | 16,571 |
| | 3,647 |
| 83,768 |
| | 16,571 |
|
Accrued payroll and benefit costs | (21,835 | ) | | (30,948 | ) | (36,019 | ) | | (21,835 | ) |
Other current liabilities | 17,673 |
| | (783 | ) | 20,875 |
| | 17,673 |
|
Other non-current liabilities | (51,832 | ) | | (215 | ) | (24,646 | ) | | (51,832 | ) |
Total adjustments to net income | (130,325 | ) | | (44,938 | ) | (108,537 | ) | | (130,325 | ) |
Net cash (used) provided by operations | (59,338 | ) | | 21,098 |
| |
Net cash used by operations | | (27,859 | ) | | (59,338 | ) |
Cash Flows from Investing Activities | |
| | | |
| | |
Proceeds from disposal of property | 3,301 |
| | 11,170 |
| 2,015 |
| | 3,301 |
|
Capital expenditures for property | (24,820 | ) | | (62,078 | ) | (26,674 | ) | | (24,820 | ) |
Acquisition of business, net of cash acquired | (59,946 | ) | | (18,093 | ) | — |
| | (59,946 | ) |
Net cash used by investing activities | (81,465 | ) | | (69,001 | ) | (24,659 | ) | | (81,465 | ) |
Cash Flows from Financing Activities | |
| | | |
| | |
Net increase in short-term borrowings | 168,871 |
| | 74,320 |
| 76,139 |
| | 168,871 |
|
Repayment of long-term debt | (1,853 | ) | | (2,736 | ) | — |
| | (1,853 | ) |
Principal payments under capital leases | (4,116 | ) | | (3,969 | ) | (3,613 | ) | | (4,116 | ) |
Sale of common stock | 15,192 |
| | 13,621 |
| 15,558 |
| | 15,192 |
|
Purchases of common stock | (8,793 | ) | | (10,656 | ) | (11,424 | ) | | (8,793 | ) |
Sales of noncontrolling interests’ common stock | — |
| | 401 |
| 627 |
| | — |
|
Purchases of noncontrolling interests’ common stock | (356 | ) | | (103 | ) | (392 | ) | | (356 | ) |
Dividends paid | (14,962 | ) | | (14,418 | ) | (15,910 | ) | | (14,962 | ) |
Net cash provided by financing activities | 153,983 |
| | 56,460 |
| 60,985 |
| | 153,983 |
|
Net Increase in Cash | 13,180 |
| | 8,557 |
| 8,467 |
| | 13,180 |
|
Cash, Beginning of Year | 37,931 |
| | 33,758 |
| 43,339 |
| | 37,931 |
|
Cash, End of Period | $ | 51,111 |
| | $ | 42,315 |
| $ | 51,806 |
| | $ | 51,111 |
|
| | | | | | |
Non-cash Investing and Financing Activities | |
| | |
| |
| | |
|
Acquisitions of equipment under capital leases | $ | 314 |
| | $ | 6,731 |
| $ | 1,407 |
| | $ | 314 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
| | Graybar Electric Company, Inc. and Subsidiaries | Graybar Electric Company, Inc. and Subsidiaries | | | | | | | Graybar Electric Company, Inc. and Subsidiaries | | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | | | | | | | | | | | |
| (Unaudited, stated in thousands) | | | | | (Unaudited, stated in thousands) | | | | |
| | | | | | |
| Graybar Electric Company, Inc. Shareholders’ Equity | | | | | |
| Common Stock | | Common Stock Subscribed, Unissued | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Shareholders’ Equity | |
December 31, 2014 | $ | 317,199 |
| | $ | — |
| | $ | 513,672 |
| | $ | (152,193 | ) | | $ | 3,303 |
| | $ | 681,981 |
| |
Net income |
| |
| | 65,859 |
| |
|
| | 177 |
| | 66,036 |
| |
Other comprehensive loss |
| |
| |
|
| | (1,436 | ) | | (438 | ) | | (1,874 | ) | |
Stock issued | 13,151 |
| |
|
| |
|
| |
|
| | 401 |
| | 13,552 |
| |
Stock purchased | (10,656 | ) | |
|
| |
|
| |
|
| | (103 | ) | | (10,759 | ) | |
Advance payments |
|
| | 470 |
| |
|
| |
|
| |
|
| | 470 |
| |
Dividends declared |
|
| |
|
| | (14,418 | ) | |
|
| |
|
| | (14,418 | ) | |
September 30, 2015 | $ | 319,694 |
| | $ | 470 |
| | $ | 565,113 |
| | $ | (153,629 | ) | | $ | 3,340 |
| | $ | 734,988 |
| |
| | | | | | | | | | | | | | | | |
| Graybar Electric Company, Inc. Shareholders’ Equity | | | | | Graybar Electric Company, Inc. Shareholders’ Equity | | | | |
| Common Stock | | Common Stock Subscribed, Unissued | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Shareholders’ Equity |
| Common Stock | | Common Stock Subscribed, Unissued | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Shareholders’ Equity |
December 31, 2015 | $ | 326,482 |
| | $ | — |
| | $ | 548,780 |
| | $ | (190,435 | ) | | $ | 3,319 |
| | $ | 688,146 |
| $ | 326,482 |
| | $ | — |
| | $ | 548,780 |
| | $ | (190,435 | ) | | $ | 3,319 |
| | $ | 688,146 |
|
Net income |
|
| |
|
| | 70,809 |
| |
|
| | 178 |
| | 70,987 |
|
| |
| | 70,809 |
| |
|
| | 178 |
| | 70,987 |
|
Other comprehensive income |
|
| |
|
| |
|
| | 12,104 |
| | 209 |
| | 12,313 |
|
| |
| |
|
| | 12,104 |
| | 209 |
| | 12,313 |
|
Stock issued | 14,238 |
| |
|
| |
|
| |
|
| |
|
| | 14,238 |
| 14,238 |
| |
|
| |
|
| |
|
| |
|
| | 14,238 |
|
Stock purchased | (8,793 | ) | |
|
| |
|
| |
|
| | (356 | ) | | (9,149 | ) | (8,793 | ) | |
|
| |
|
| |
|
| | (356 | ) | | (9,149 | ) |
Advance payments |
|
| | 954 |
| |
|
| |
|
| |
|
| | 954 |
|
|
| | 954 |
| |
|
| |
|
| |
|
| | 954 |
|
Dividends declared |
|
| |
|
| | (14,962 | ) | |
|
| |
|
| | (14,962 | ) |
|
| |
|
| | (14,962 | ) | |
|
| |
|
| | (14,962 | ) |
September 30, 2016 | $ | 331,927 |
| | $ | 954 |
| | $ | 604,627 |
| | $ | (178,331 | ) | | $ | 3,350 |
| | $ | 762,527 |
| $ | 331,927 |
| | $ | 954 |
| | $ | 604,627 |
| | $ | (178,331 | ) | | $ | 3,350 |
| | $ | 762,527 |
|
| | | | | | | | | | | | |
| | Graybar Electric Company, Inc. Shareholders’ Equity | | | | |
| | Common Stock | | Common Stock Subscribed, Unissued | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Shareholders’ Equity |
|
December 31, 2016 | | $ | 348,771 |
| | $ | — |
| | $ | 575,380 |
| | $ | (196,600 | ) | | $ | 3,338 |
| | $ | 730,889 |
|
Net income | | | | | | 80,449 |
| | | | 229 |
| | 80,678 |
|
Other comprehensive income | | | | | | | | 15,730 |
| | 228 |
| | 15,958 |
|
Stock issued | | 14,592 |
| | | | | | | | 627 |
| | 15,219 |
|
Stock purchased | | (11,424 | ) | | | | | | | | (392 | ) | | (11,816 | ) |
Advance payments | | | | 966 |
| | | | | | | | 966 |
|
Dividends declared | |
|
| | | | (15,910 | ) | | | | | | (15,910 | ) |
September 30, 2017 | | $ | 351,939 |
| | $ | 966 |
| | $ | 639,919 |
| | $ | (180,870 | ) | | $ | 4,030 |
| | $ | 815,984 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the Condensed Consolidated Financial Statements.
Graybar Electric Company, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Stated in thousands, except share and per share data)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Graybar Electric Company, Inc. (“Graybar”, “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.
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.
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by Graybar pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”) applicable to interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that our disclosures are adequate to make the information presented not misleading. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect reported amounts. Our condensed consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates. Certain reclassifications were made to prior year amounts to conform to the 2016 presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 20152016, included in our latest Annual Report on Form 10-K.
In the opinion of management, this quarterly report includes all adjustments, consisting of normal recurring accruals and adjustments, necessary for the fair presentation of the financial statements presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
Principles of Consolidation
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.
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 Quarterly Report on Form 10-Q with the Commission. No material subsequent events have occurred since September 30, 20162017 that require recognition or disclosure in these financial statements.
Revenue Recognition
Revenue is recognized when evidence of a customer arrangement exists, prices are fixed and determinable, product title, ownership and risk of loss transfers to the customer, and collectability is reasonably assured. Revenues recognized are primarily for product sales, but also include freight and handling charges. 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.
Outgoing Freight Expenses
We record certain outgoing freight expenses as a component of selling, general and administrative expenses.
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 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.
Merchandise Inventory
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.
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 agreement and the deferred amounts 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.
Credit Risk
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.
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/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.
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 5 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 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.
Other Postretirement Benefits
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.
Pension Plan
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.
New Accounting Standards
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 February 2016,March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2017-07, “Compensation - Retirement Benefits (Topic 715)” ("ASU 2017-07"). The changes to the standard require employers to report the service cost component in the same line as other compensation costs arising from services rendered by employees during the reporting period. The other components of net benefit costs will be presented in the income statement separately from the service cost and outside of a subtotal of income from operations. In addition, only the service cost component may be eligible for capitalization where applicable. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact ASU 2017-07 will have on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” ("ASU 2016-02"). The core principle of Topic 842 requires that a lessee should recognize the assets and liabilities on the balance sheet and disclose key information about leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. We are currently evaluating the impact the provisions will have on our condensed consolidated financial statements and whether we will adopt the guidance early.
In April 2015, FASB issued ASU 2015-05, "Intangibles-Goodwill and Other-Internal-use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This Update provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and expensed as services are received. The Update is effective for fiscal years beginning after December 15, 2015 and interim periods. We adopted this Update on January 1, 2016. The adoption of this standard did not have a material impact on our results of operation, financial position, or cash flows.
In February 2015, FASB issued ASU 2015-02, "Consolidation". The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We adopted this Update on January 1, 2016. The adoption of this standard did not have a material impact on our results of operation, financial position, or cash flows.statements.
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 issued ASU 2016-08 "RevenueOur primary source of revenues is from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reportingcustomer purchase orders in the construction, industrial & utility, and CIG markets for electrical and comm/data products. Revenue Gross versus Net)". The amendments in this Update do not changeis currently recognized when evidence of a customer arrangement exists, prices are fixed and determinable, product title, ownership and risk of loss transfers to the core principlecustomer, and collectability is reasonably assured. Given the scope of the guidance stated in ASU 2014-09. Instead, the amendments in this ASU are intended 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 continue to determine which method we will usework required to implement the new standardrecognition and to assess the impactdisclosure requirements under the new standard, is expectedwe have identified and are currently assessing our revenue streams and reporting disclosures to have ondetermine the consolidated financial statements or on other matters or aspectspotential impact related to the adoption of ASU 2014-09. Upon adoption of ASU 2014-09, the timing of revenue related to our business.
sales will remain relatively consistent, in all material respects, with current practices. We intend to adopt ASU 2014-09 under the modified retrospective approach.
3. INCOME TAXES
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 unrecognized tax benefits of $2,066 and $1,755 at September 30, 2017 and December 31, 2016, respectively, are uncertain tax positions that would impact our effective tax rate if recognized. We are periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes. We do not anticipate a material change in unrecognized tax benefits during the next twelve months.
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 $963736 and $907650 in interest and penalties at September 30, 20162017 and December 31, 20152016, respectively. Interest was computed on the difference between the provision for income taxes recognized in accordance with GAAP and the amount of benefit previously taken or expected to be taken in our federal, state, and local income tax returns.
Our federal income tax returns for the tax years 20132014 and forward are available for examination by the United States Internal Revenue Service (“IRS”). The statute of limitations for the 20132014 federal return will expire on September 15, 2017,2018, 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.
Our unrecognized tax benefits of $2,387 and $2,247 at September 30, 2016 and December 31, 2015, respectively, are uncertain tax positions that would impact our effective tax rate if recognized. We are periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes. We do not anticipate a material change in unrecognized tax benefits during the next twelve months.2012.
4. 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. At September 30, 2016, approximately 84% of the common stockAccordingly, a new Voting Trust Agreement was held in a voting trust thatestablished effective March 3, 2017, which expires by its terms on March 15, 2017.1, 2027. At September 30, 2017, approximately 82% of the total shares of common stock was held in the voting trust. The participation of shareholders in the voting trust is voluntary at the time the voting trust is created, but is irrevocable during its term. Shareholders who elect not to participate in the voting trust hold their common stock as shareholders of record.
No 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 iswas 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. 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 on a pension (except a deferred pension)"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.
Cash dividends declared were $4,985$5,286 and $4,802$4,985 for the three months ended September 30, 20162017 and 20152016, respectively. Cash dividends declared were $14,962$15,910 and $14,418$14,962 for the nine months ended September 30, 20162017 and 2015,2016, respectively.
We also have authorized 10,000,000 shares of Delegated Authority Preferred Stock (“preferred stock”), par value one cent ($0.01). The preferred stock may be issued in one or more series, with the designations, relative rights, preferences, and limitations of shares of each such series being fixed by a resolution of our Board of Directors. There were no shares of preferred stock outstanding at September 30, 2017 and December 31, 2016.
5. DEBT
Revolving Credit Facility
At September 30, 20162017 and December 31, 2015,2016, we along with Graybar Canada Limited, our Canadian operating subsidiary (“Graybar Canada”), had an unsecured, five-year, $550,000 revolving credit agreement maturing in June 2019 with Bank of America, N.A. and the other lenders named therein (the "Credit Agreement"), which includes a combined letter of credit sub-facility of up to $50,000, a U.S. swing line loan facility of up to $50,000, and a Canadian swing line loan facility of up to $20,000. The Credit Agreement includes a $100,000 sublimit (in U.S. or Canadian dollars) for borrowings by Graybar Canada and contains an accordion feature, which allows us to request increases to the aggregate borrowing commitments of up to $300,000.
The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on us and our subsidiaries with respect to indebtedness, 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), 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 that we are subject to during the term of the Credit Agreement. We were in compliance with all these covenants as of September 30, 20162017 and December 31, 20152016.
We had total letters of credit of $5,460 and $4,994 outstanding, of which none were issued under the Credit Agreement at September 30, 2016 and December 31, 2015. The letters of credit are issued primarily to support certain workers' compensation insurance policies.
There were $273,849$216,604 and $104,978$140,465 in short-term borrowings outstanding under the Credit Agreement at September 30, 20162017 and December 31, 20152016, respectively.
Short-term borrowings outstanding during the nine months ended September 30, 20162017 and 20152016 ranged from a minimum of $105,014112,292 and $35,981105,014 to a maximum of $311,506229,782 and $184,188311,506, respectively.
We had total letters of credit of $5,371 and $5,244 outstanding, of which none were issued under the Credit Agreement at September 30, 2017 and December 31, 2016. The letters of credit are issued primarily to support certain workers' compensation insurance policies.
At September 30, 20162017, we had unused lines of credit under the Credit Agreement amounting to $276,151333,396 available, compared to $445,022409,535 at December 31, 20152016. These lines are available to meet our short-term cash requirements and are subject to annual fees of up to 40 basis points (0.40%).
Private Placement Shelf Agreements
At September 30, 2016 and December 31, 2015,On August 2, 2017, we had anamended our uncommitted $100,000 private placement Shelf Agreementshelf agreement with PGIM, Inc., formerly known as Prudential Investment Management, Inc. (the "Prudential Shelf Agreement"). The Prudential Shelf Agreement allows us to issue senior promissory notes to affiliates of Prudential at fixed rate terms to be agreed upon at the time of any issuance during a three year issuance period ending in September 2017.August 2020. No notes had been issued under the Prudential Shelf Agreement as of September 30, 20162017 and December 31, 20152016.
On September 22, 2016, we entered into an uncommitted $100,000 private placement shelf agreement (the “MetLife Shelf Agreement”) with Metropolitan Life Insurance Company and MetLife Investment Advisors, LLC and each other affiliate of MetLife that becomes a party to the agreement (collectively, “MetLife”). Subject to the terms and conditions set forth below, the MetLife Shelf Agreement is expected to allow the Company to issue senior promissory notes to MetLife at fixed or floating rate economic terms to be agreed upon at the time of any issuance during a three-year issuance period ending in September 2019. Floating rate note interest rates will be based on London Interbank Offered Rate ("LIBOR") plus a spread. No notes have been issued under the MetLife Shelf Agreement, which ranks equally with the Company’s Credit Agreement and Prudential Shelf Agreement. No notes had been issued under the MetLife Shelf Agreement as of September 30, 2017 and December 31, 2016.
Under these shelf agreements, the term of each note issuance will be selected by us and will not exceed 12 years and will have such other particular terms as shall be set forth, in the case of any series of notes, in the Confirmation of Acceptance with respect to such series. Any notes issued under the Prudential Shelf Agreement or under the MetLife Shelf Agreement will be guaranteed by our material domestic subsidiaries, if any, as described in the Prudential Shelf Agreement and the MetLife Shelf Agreement. Any future proceeds of any issuance under the facilities will be used for general corporate purposes, including working capital and capital expenditures, to refinance existing indebtedness and/or to fund potential acquisitions.
Each shelf agreement contains customary representations and warranties of the Company and the investor.applicable lender. Each shelf agreement also contains customary events of default, including: a failure to pay principal, interest or fees when due; a failure to comply with covenants; 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 the Credit Agreement or certain other indebtedness of Graybarus and itsour 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 described in ourthe Credit Agreement and in the applicable shelf agreement)Agreement). Upon the occurrence of an event of default, allAll outstanding obligations of Graybar under anyone or allboth of these agreements may be declared immediately due and payable.payable upon the occurrence of an event of default.
Each shelf agreement contains customary affirmative and negative covenants for facilities of this type, including limitations on Graybarus and itsour subsidiaries with respect to indebtedness, liens, changes in the nature of itsour 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), as well as securitizations, factoring transactions, and transactions with sanctioned parties or in violation of certain U.S. or Canadian anti-terrorism laws. There are also maximum leverage ratio and minimum interest coverage ratio financial covenants to whichthat we are subject to during the term of the shelf agreement. These covenants are substantially similar to those contained in the Credit Agreement, subject to a number of important exceptions and qualifications set forth in the applicable shelf agreement.agreements. We were in compliance with all covenants as of September 30, 20162017 and December 31, 20152016.
In addition, we have agreed to a most favored lender clause which is designed to ensure that any notes issued in the future under the Prudential Shelf Agreement and MetLife Shelf Agreement will continue to be of equal ranking with our indebtedness under theour Credit Agreement.
6. PENSION AND OTHER POSTRETIREMENT BENEFITS
We have a noncontributory defined benefit 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. The plan provides retirement benefits based on an employee’s average earnings and years of service. These employees become 100% vested after three years of service, regardless of age. A supplemental benefit plan provides nonqualified benefits for compensation in excess of the IRS compensation limits applicable to the plan.
Our plan funding policy is to make contributions, 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 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 health care 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 service pension (except a deferred pension) under the defined benefit pension plan. Medical benefits are self-insured and claims are administered through an insurance company. 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 September 30, 20162017 and December 31, 20152016.
The net periodic benefit cost for the three and nine months ended September 30, 20162017 and 20152016 includedincludes the following components:
| |
| Pension Benefits | | Postretirement Benefits | Pension Benefits | | Postretirement Benefits |
| Three Months Ended September 30, | | Three Months Ended September 30, | Three Months Ended September 30, | | Three Months Ended September 30, |
|
Components of Net Periodic Benefit Cost | 2016 |
| 2015 |
| | 2016 |
| 2015 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
Service cost | $ | 6,342 |
| $ | 6,402 |
| | $ | 572 |
| $ | 626 |
| $ | 6,604 |
| $ | 6,342 |
| | $ | 582 |
| $ | 572 |
|
Interest cost | 7,066 |
| 6,301 |
| | 757 |
| 731 |
| 6,954 |
| 7,066 |
| | 711 |
| 757 |
|
Expected return on plan assets | (6,754 | ) | (7,075 | ) | | — |
| — |
| (7,658 | ) | (6,754 | ) | | — |
| — |
|
Amortization of: |
| |
|
| |
|
Net actuarial loss | 4,791 |
| 5,007 |
| | 177 |
| 261 |
| 5,376 |
| 4,791 |
| | 197 |
| 177 |
|
Prior service cost (gain) | 106 |
| 113 |
| | (545 | ) | (545 | ) | 105 |
| 106 |
| | (545 | ) | (545 | ) |
Net periodic benefit cost | $ | 11,551 |
| $ | 10,748 |
| | $ | 961 |
| $ | 1,073 |
| $ | 11,381 |
| $ | 11,551 |
| | $ | 945 |
| $ | 961 |
|
| | Pension Benefits | | Postretirement Benefits | Pension Benefits | | Postretirement Benefits |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | Nine Months Ended September 30, | | Nine Months Ended September 30, |
|
Components of Net Periodic Benefit Cost | 2016 |
| 2015 |
| | 2016 |
| 2015 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
Service cost | $ | 19,026 |
| $ | 19,206 |
| | $ | 1,716 |
| $ | 1,878 |
| $ | 19,812 |
| $ | 19,026 |
| | $ | 1,745 |
| $ | 1,716 |
|
Interest cost | 21,197 |
| 18,902 |
| | 2,272 |
| 2,194 |
| 20,863 |
| 21,197 |
| | 2,133 |
| 2,272 |
|
Expected return on plan assets | (20,262 | ) | (21,223 | ) | | — |
| — |
| (22,973 | ) | (20,262 | ) | | — |
| — |
|
Amortization of: | | | | | | |
Net actuarial loss | 14,373 |
| 15,021 |
| | 531 |
| 783 |
| 16,127 |
| 14,373 |
| | 591 |
| 531 |
|
Prior service cost (gain) | 318 |
| 339 |
| | (1,635 | ) | (1,635 | ) | 315 |
| 318 |
| | (1,635 | ) | (1,635 | ) |
Net periodic benefit cost | $ | 34,652 |
| $ | 32,245 |
| | $ | 2,884 |
| $ | 3,220 |
| $ | 34,144 |
| $ | 34,652 |
| | $ | 2,834 |
| $ | 2,884 |
|
We made qualified and nonqualified pension contributions totaling $44,002$24,001 and $10,002$44,002 during the three-month periods ended September 30, 20162017 and 20152016, respectively. Contributions made during the nine-month periods ending September 30,
2017 and 2016 totaled $61,587 and 2015 totaled $81,633, and $31,536, respectively. Additional contributions totaling $2 are expected to be paid during the remainder of 20162017.
7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents amounts reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 20162017 and 20152016:
| | | | Three Months Ended September 30, 2016 | | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
| | Amortization of Pension and Other Postretirement Benefits Items | | Amortization of Pension and Other Postretirement Benefits Items | | 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 | | Actuarial Losses Recognized | | Prior Service Costs Recognized | | Total | | Actuarial Losses Recognized | | Prior Service Costs Recognized | | Total |
Affected Line in Condensed Consolidated Statement of Income: | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 4,968 |
| | $ | (439 | ) | | $ | 4,529 |
| | $ | 5,268 |
| | $ | (432 | ) | | $ | 4,836 |
| | $ | 5,573 |
| | $ | (440 | ) | | $ | 5,133 |
| | $ | 4,968 |
| | $ | (439 | ) | | $ | 4,529 |
|
Tax (benefit) expense | | (1,933 | ) | | 171 |
| | (1,762 | ) | | (2,049 | ) | | 168 |
| | (1,881 | ) | | (2,168 | ) | | 171 |
| | (1,997 | ) | | (1,933 | ) | | 171 |
| | (1,762 | ) |
Total reclassifications for the period, net of tax | | $ | 3,035 |
| | $ | (268 | ) | | $ | 2,767 |
| | $ | 3,219 |
| | $ | (264 | ) | | $ | 2,955 |
| | $ | 3,405 |
| | $ | (269 | ) | | $ | 3,136 |
| | $ | 3,035 |
| | $ | (268 | ) | | $ | 2,767 |
|
The following table represents amounts reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 20162017 and 2015:2016:
| | | | Nine Months Ended September 30, 2016 | | Nine Months Ended September 30, 2015 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| | Amortization of Pension and Other Postretirement Benefits Items | | Amortization of Pension and Other Postretirement Benefits Items | | 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 | | Actuarial Losses Recognized | | Prior Service Costs Recognized | | Total | | Actuarial Losses Recognized | | Prior Service Costs Recognized | | Total |
Affected Line in Condensed Consolidated Statement of Income: | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 14,904 |
| | $ | (1,317 | ) | | $ | 13,587 |
| | $ | 15,804 |
| | $ | (1,296 | ) | | $ | 14,508 |
| | $ | 16,718 |
| | $ | (1,320 | ) | | $ | 15,398 |
| | $ | 14,904 |
| | $ | (1,317 | ) | | $ | 13,587 |
|
Tax (benefit) expense | | (5,798 | ) | | 512 |
| | (5,286 | ) | | (6,148 | ) | | 504 |
| | (5,644 | ) | | (6,503 | ) | | 513 |
| | (5,990 | ) | | (5,798 | ) | | 512 |
| | (5,286 | ) |
Total reclassifications for the period, net of tax | | $ | 9,106 |
| | $ | (805 | ) | | $ | 8,301 |
| | $ | 9,656 |
| | $ | (792 | ) | | $ | 8,864 |
| | $ | 10,215 |
| | $ | (807 | ) | | $ | 9,408 |
| | $ | 9,106 |
| | $ | (805 | ) | | $ | 8,301 |
|
The following table represents the activity included in accumulated other comprehensive income (loss) for the three months ended September 30, 20162017 and 20152016:
| | | | Three Months Ended September 30, 2016 | | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
| | Foreign Currency | | Pension and Other Postretirement Benefits | | Total | | Foreign Currency | | Pension and Other Postretirement Benefits | | Total | | Foreign Currency | | Pension and Other Postretirement Benefits | | Total | | Foreign Currency | | Pension and Other Postretirement Benefits | | Total |
Beginning balance July 1, | | $ | (7,507 | ) | | $ | (172,485 | ) | | $ | (179,992 | ) | | $ | (4,208 | ) | | $ | (146,568 | ) | | $ | (150,776 | ) | | $ | (7,548 | ) | | $ | (179,985 | ) | | $ | (187,533 | ) | | $ | (7,507 | ) | | $ | (172,485 | ) | | $ | (179,992 | ) |
Other comprehensive income (loss) before reclassifications | | (1,106 | ) | | — |
| | (1,106 | ) | | (5,808 | ) | | — |
| | (5,808 | ) | | 3,527 |
| | — |
| | 3,527 |
| | (1,106 | ) | | — |
| | (1,106 | ) |
Amounts reclassified from accumulated other comprehensive income (net of tax $(1,762) and $(1,881)) | | — |
| | 2,767 |
| | 2,767 |
| | — |
| | 2,955 |
| | 2,955 |
| |
Amounts reclassified from accumulated other comprehensive income (net of tax $(1,997) and $(1,762)) | | | — |
| | 3,136 |
| | 3,136 |
| | — |
| | 2,767 |
| | 2,767 |
|
Net current-period other comprehensive income (loss) | | (1,106 | ) | | 2,767 |
| | 1,661 |
| | (5,808 | ) | | 2,955 |
| | (2,853 | ) | | 3,527 |
| | 3,136 |
| | 6,663 |
| | (1,106 | ) | | 2,767 |
| | 1,661 |
|
Ending balance September 30, | | $ | (8,613 | ) | | $ | (169,718 | ) | | $ | (178,331 | ) | | $ | (10,016 | ) | | $ | (143,613 | ) | | $ | (153,629 | ) | | $ | (4,021 | ) | | $ | (176,849 | ) | | $ | (180,870 | ) | | $ | (8,613 | ) | | $ | (169,718 | ) | | $ | (178,331 | ) |
The following table represents the activity included in accumulated other comprehensive income (loss) for the nine months ended September 30, 20162017 and 2015:2016:
| | | | Nine Months Ended September 30, 2016 | | Nine Months Ended September 30, 2015 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| | Foreign Currency | | Pension and Other Postretirement Benefits | | Total | | Foreign Currency | | Pension and Other Postretirement Benefits | | Total | | Foreign Currency | | Pension and Other Postretirement Benefits | | Total | | Foreign Currency | | Pension and Other Postretirement Benefits | | Total |
Beginning balance January 1, | | $ | (12,416 | ) | | $ | (178,019 | ) | | $ | (190,435 | ) | | $ | 284 |
| | $ | (152,477 | ) | | $ | (152,193 | ) | | $ | (10,343 | ) | | $ | (186,257 | ) | | $ | (196,600 | ) | | $ | (12,416 | ) | | $ | (178,019 | ) | | $ | (190,435 | ) |
Other comprehensive income (loss) before reclassifications | | 3,803 |
| | — |
| | 3,803 |
| | (10,300 | ) | | — |
| | (10,300 | ) | | 6,322 |
| | — |
| | 6,322 |
| | 3,803 |
| | — |
| | 3,803 |
|
Amounts reclassified from accumulated other comprehensive income (net of tax $(5,286) and $(5,644)) | | — |
| | 8,301 |
| | 8,301 |
| | — |
| | 8,864 |
| | 8,864 |
| |
Amounts reclassified from accumulated other comprehensive income (net of tax $(5,990) and $(5,286)) | | | — |
| | 9,408 |
| | 9,408 |
| | — |
| | 8,301 |
| | 8,301 |
|
Net current-period other comprehensive income (loss) | | 3,803 |
| | 8,301 |
| | 12,104 |
| | (10,300 | ) | | 8,864 |
| | (1,436 | ) | | 6,322 |
| | 9,408 |
| | 15,730 |
| | 3,803 |
| | 8,301 |
| | 12,104 |
|
Ending balance September 30, | | $ | (8,613 | ) | | $ | (169,718 | ) | | $ | (178,331 | ) | | $ | (10,016 | ) | | $ | (143,613 | ) | | $ | (153,629 | ) | | $ | (4,021 | ) | | $ | (176,849 | ) | | $ | (180,870 | ) | | $ | (8,613 | ) | | $ | (169,718 | ) | | $ | (178,331 | ) |
8. ASSETS HELD FOR SALE
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 of assets held for sale was $58$464 at December 31, 2015. During the three months ended September 30, 2016, and 2015, we sold no assets classified as held for sale and recorded no net gains on the assets held for sale. During the nine months ended September 30, 2016, we sold an asset classified as held for sale with a net book value of $58 and recorded a net gain on the asset held for sale of $1,627 in other income, net. During the nine months ended September 30, 2015, we sold assets classified as held for sale with a net book values of $4,669 and recorded a net gains on the assets held for sale of $4,195 in other income, net. The remaining net book value of assets still held for sale at September 30, 2016 is $553 and is recorded in net property in the condensed consolidated balance sheets. During the three months ended September 30, 2017, there were no assets that were classified as assets held for sale. During the three months ended September 30, 2016, we did not sell any assets that were classified as held for sale. During the nine months ended September 30, 2017 and 2016, we sold assets classified as held for sale with net book values of $464 and $58, respectively, and recorded net gains on the assets held for sale of $197 and $1,627, respectively, in other income, net.
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.
For assets held for sale, impairment occurs whenever the net book value of the property listed for sale exceeds the expected selling price less estimated selling expenses. There were no impairment charges recorded during the threethree- and nine monthnine-month periods ended September 30, 20162017 and 2015.2016.
9. COMMITMENTS AND CONTINGENCIES
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.
10. ACQUISITIONS
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.
On July 1, 2016, we purchased Cape Electrical Supply ("Cape Electric"), a regional distributor serving electrical contractors and large engineering construction firms, as well as industrial, institutional and utility customers, for approximately $59,946 in cash, net of cash acquired. The purchase price allocation is preliminary pending finalization of the valuation of the long lived assets including acquired intangible assets, which is expected to be completed in the fourth quarter of 2016. The preliminary purchase price allocation resulted in approximately $16,544$16,377 and $23,586 of tax deductible goodwill and other intangible assets, respectively.
Since the date of acquisition, Advantage and Cape Electric results are reflected in our Condensed Consolidated Financial Statements.condensed consolidated financial statements. Pro forma results of these acquisitionsthis acquisition are not material; therefore, they are not presented.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto, and our audited consolidated financial statements, notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 20152016, included in our Annual Report on Form 10-K for such period as filed with the United States Securities and Exchange Commission (the “Commission”). The results shown herein are not necessarily indicative of the results to be expected in any future periods.
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (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 prices of industrial commodities; cyber-attacks; a sustained interruption in the operation of our information systems; increased funding requirements and expenses related to our pension plan; the inability, or limitations on our ability to borrow under our existing credit facilities or any replacements thereof; disruptions in our sources of supply; compliance with increasing governmental regulations; adverse legal proceedings or other claims; 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 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 our Annual Report on Form 10-K for the year ended December 31, 20152016.
All dollar amounts, except per share data, are stated in thousands ($000s) in the following discussion and accompanying tables.
Background
Graybar Electric Company, Inc. (“Graybar”, “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 iswas 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. 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 on a pension (except a deferred pension)"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.
Business Overview
NetFor the third quarter of 2017, our net sales totaled $1,700,843, an increase of $11,224, or 0.7%, compared to the same period last year. Sales in our industrial & utility and construction vertical markets increased 9.9% and 0.5%, respectively, while our CIG vertical market sales decreased 7.8% for the quarter. Although gross margin rate remained constant at 18.9% for the three months ended September 30, 2017 and 2016, were $1,689,619, a record quarterrespectively, gross margin increased $3,226, or 1.0%, to $321,984 for net sales for the second consecutive quarter. This was $105,733, or 6.7% higher than the three months ended September 30, 2015. Year-to-date2017, from $318,758 for the same period of 2016 as a result of our pricing and product diversification initiatives and our acquisition in the prior year.
Our third quarter results were negatively impacted by moderate increases in selling, general and administrative expenses ("SG&A") that more than offset the modest increase in gross margin. SG&A increased $5,783, or 2.3%, to $260,752 in the third quarter of 2017 from $254,969 in the third quarter of 2016, due primarily to increases in headcount and compensation expenses. As a result, net income from the quarter was $29,434, down $695, or 2.3%, from the same three-month period in 2016.
For the nine months ended September 30, 20162017, we reported net sales totaled $4,785,620,of $4,944,294, an increase of $237,948,$158,674, or 5.2%3.3%, over year-to-date September 30, 2015 net sales of $4,547,672. Quarter-to-date net sales in our construction and CIG vertical markets increased 11.3% and 2.7%, respectively, while our industrial and utility vertical market net sales decreased 1.6%.compared to the same period last year. Year-to-date net sales in our industrial & utility and construction vertical marketmarkets increased 9.8%10.7% and 3.9%, respectively, while our industrial and utility vertical market net sales decreased 1.2% and our CIG vertical market net sales decreased 0.1%5.7%.
The gross Gross margin rate for the threenine months ended September 30, 2016 and 2015,2017 was 18.9% and 19.1%, resepctively. Gross margin increased $15,800,$944,706, an increase of $40,702, or 5.2%4.5%, to $318,758 for the three months ended September 30, 2016, when compared to gross margin of $302,958 for the same period last year. Year-to-date September 30, 2016 and 2015 gross margin rate was 18.9% and 18.8%, respectively. Year-to-date September 30, 2016 gross margin increased $48,675, or 5.7%, to $904,004 compared to gross margin of $855,329 for the same nine-month period last year. Our year-to-date improved grossGross margin rate continues to be the result of our organic gross margin improvement and product diversification initiatives.
Net income attributable to the Companywas 19.1% for the three monthsnine-month period ended September 30, 2016 increased $1,818, or 6.4%,2017 compared to $30,129 from $28,31118.9% for the three monthsnine-month period ended September 30, 2015, while net2016. Net income attributable to the Company for the nine months ended September 30, 20162017 increased $4,950,$9,640, or 7.5%13.6%, to $70,809 from $65,859 for the nine months ended September 30, 2015.$80,449.
Our performance for the three and nine months ended September 30, 2016 was the result, in part, of our sustained focusWe remain focused on achieving profitable growth and strengthening our position as a leader in the supply chain. Over the last several years, we have invested in new and expanded facilities, training and developing our people, and enhancing our technology and service capabilities.
While weWe will continue to remain focused on organic growth, we will pursue new opportunitiesenhance our value proposition to drive our long-term successgrowth, while we pursue strategic investments in technology and expandpotential acquisitions to broaden our reach by looking at new locations and exploring potential acquisitions.diversify our business.
Consolidated Results of Operations
The following tables settable sets forth certain information relating to our operations stated in thousands of dollars and as a percentage of net sales for the three and nine months ended September 30, 20162017 and 20152016:
| | | Three Months Ended | | Three Months Ended | Three Months Ended | | Three Months Ended |
| September 30, 2016 | | September 30, 2015 | September 30, 2017 | | September 30, 2016 |
| Dollars |
| | Percent |
| | Dollars |
| | Percent |
| Dollars |
| | Percent |
| | Dollars |
| | Percent |
|
Net Sales | $ | 1,689,619 |
| | 100.0 | % | | $ | 1,583,886 |
| | 100.0 | % | $ | 1,700,843 |
| | 100.0 | % | | $ | 1,689,619 |
| | 100.0 | % |
Cost of merchandise sold | (1,370,861 | ) | | (81.1 | ) | | (1,280,928 | ) | | (80.9 | ) | (1,378,859 | ) | | (81.1 | ) | | (1,370,861 | ) | | (81.1 | ) |
Gross Margin | 318,758 |
| | 18.9 |
| | 302,958 |
| | 19.1 |
| 321,984 |
| | 18.9 |
| | 318,758 |
| | 18.9 |
|
Selling, general and administrative expenses | (254,969 | ) | | (15.1 | ) | | (244,672 | ) | | (15.4 | ) | (260,752 | ) | | (15.3 | ) | | (254,969 | ) | | (15.1 | ) |
Depreciation and amortization | (12,283 | ) | | (0.7 | ) | | (10,960 | ) | | (0.7 | ) | (12,211 | ) | | (0.7 | ) | | (12,283 | ) | | (0.7 | ) |
Other income, net | 629 |
| | — |
| | 1,187 |
| | — |
| 1,511 |
| | 0.1 |
| | 629 |
| | — |
|
Income from Operations | 52,135 |
| | 3.1 |
| | 48,513 |
| | 3.0 |
| 50,532 |
| | 3.0 |
| | 52,135 |
| | 3.1 |
|
Interest expense, net | (1,215 | ) | | (0.1 | ) | | (685 | ) | | — |
| (1,217 | ) | | (0.1 | ) | | (1,215 | ) | | (0.1 | ) |
Income before Provision for Income Taxes | 50,920 |
| | 3.0 |
| | 47,828 |
| | 3.0 |
| 49,315 |
| | 2.9 |
| | 50,920 |
| | 3.0 |
|
Provision for income taxes | (20,724 | ) | | (1.2 | ) | | (19,431 | ) | | (1.2 | ) | (19,761 | ) | | (1.2 | ) | | (20,724 | ) | �� | (1.2 | ) |
Net Income | 30,196 |
| | 1.8 |
| | 28,397 |
| | 1.8 |
| 29,554 |
| | 1.7 |
| | 30,196 |
| | 1.8 |
|
Less: Net income attributable to noncontrolling interests | (67 | ) | | — |
| | (86 | ) | | — |
| (120 | ) | | — |
| | (67 | ) | | — |
|
Net Income attributable to Graybar Electric Company, Inc. | $ | 30,129 |
| | 1.8 | % | | $ | 28,311 |
| | 1.8 | % | $ | 29,434 |
| | 1.7 | % | | $ | 30,129 |
| | 1.8 | % |
| |
| Nine Months Ended | | Nine Months Ended | Nine Months Ended | | Nine Months Ended |
| September 30, 2016 | | September 30, 2015 | September 30, 2017 | | September 30, 2016 |
| Dollars |
| | Percent |
| | Dollars |
| | Percent |
| Dollars |
| | Percent |
| | Dollars |
| | Percent |
|
Net Sales | $ | 4,785,620 |
| | 100.0 | % | | $ | 4,547,672 |
| | 100.0 | % | $ | 4,944,294 |
| | 100.0 | % | | $ | 4,785,620 |
| | 100.0 | % |
Cost of merchandise sold | (3,881,616 | ) | | (81.1 | ) | | (3,692,343 | ) | | (81.2 | ) | (3,999,588 | ) | | (80.9 | ) | | (3,881,616 | ) | | (81.1 | ) |
Gross Margin | 904,004 |
| | 18.9 |
| | 855,329 |
| | 18.8 |
| 944,706 |
| | 19.1 |
| | 904,004 |
| | 18.9 |
|
Selling, general and administrative expenses | (750,266 | ) | | (15.7 | ) | | (717,648 | ) | | (15.8 | ) | (776,135 | ) | | (15.7 | ) | | (750,266 | ) | | (15.7 | ) |
Depreciation and amortization | (35,158 | ) | | (0.7 | ) | | (32,082 | ) | | (0.7 | ) | (36,231 | ) | | (0.7 | ) | | (35,158 | ) | | (0.7 | ) |
Other income, net | 3,438 |
| | — |
| | 6,746 |
| | 0.1 |
| 5,640 |
| | 0.1 |
| | 3,438 |
| | — |
|
Income from Operations | 122,018 |
| | 2.5 |
| | 112,345 |
| | 2.4 |
| 137,980 |
| | 2.8 |
| | 122,018 |
| | 2.5 |
|
Interest expense, net | (2,635 | ) | | — |
| | (1,895 | ) | | — |
| (3,082 | ) | | (0.1 | ) | | (2,635 | ) | | — |
|
Income before Provision for Income Taxes | 119,383 |
| | 2.5 |
| | 110,450 |
| | 2.4 |
| 134,898 |
| | 2.7 |
| | 119,383 |
| | 2.5 |
|
Provision for income taxes | (48,396 | ) | | (1.0 | ) | | (44,414 | ) | | (1.0 | ) | (54,220 | ) | | (1.1 | ) | | (48,396 | ) | | (1.0 | ) |
Net Income | 70,987 |
| | 1.5 |
| | 66,036 |
| | 1.4 |
| 80,678 |
| | 1.6 |
| | 70,987 |
| | 1.5 |
|
Less: Net income attributable to noncontrolling interests | (178 | ) | | — |
| | (177 | ) | | — |
| (229 | ) | | — |
| | (178 | ) | | — |
|
Net Income attributable to Graybar Electric Company, Inc. | $ | 70,809 |
| | 1.5 | % | | $ | 65,859 |
| | 1.4 | % | $ | 80,449 |
| | 1.6 | % | | $ | 70,809 |
| | 1.5 | % |
Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016
Net sales totaledincreased to $1,700,843 for the quarter ended September 30, 2017, compared to $1,689,619 for the quarter ended September 30, 2016, compared to $1,583,886 for the quarter ended September 30, 2015, an increase of $105,73311,224, or 6.7%0.7%. Net sales in our constructionindustrial & utility and CIGconstruction vertical markets increased for the three months ended September 30, 20162017, compared to the same three-month period of 20152016 by 11.3%9.9% and 2.7%0.5%, respectively, while net sales in our industrial and utilityCIG vertical market declined by 1.6%7.8%.
Gross margin increased$15,800, $3,226, or 5.2%1.0%, to $318,758$321,984 for the three months ended September 30, 2016,2017, from $302,958$318,758 for the same period of 20152016. The increase in gross margin was primarily due to pricing and product diversification initiatives and recent acquisitions, as well as increased net sales in the third quarter of 2016, compared to the same period of 2015.2017. Our gross margin as a percent of net sales totaled 18.9% for the three months ended September 30, 2016 compared to 19.1% for the three months ended September 30, 2015. The decrease in gross margin rate was primarily due to a change in sales mix18.9% for the three months ended September 30, 2016 compared to the same three month period in 2015.2017 and 2016.
Selling, general and administrative expenses ("SG&A") increased $10,2975,783, or 4.2%2.3%, to $260,752 in the third quarter of 2017 from $254,969 in the third 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%15.3% for the three months ended September 30, 20162017, compared to 15.4%15.1% for the three months ended September 30, 20152016.
Depreciation and amortization expenses for the three months ended September 30, 20162017 increaseddecreased $1,32372, or 12.1%0.6%, to $12,283$12,211 from $10,96012,283 in the third quarter of 20152016,. The decrease was due to an increase in disposals of property at cost. Total property, at cost, at September 30, 2016 was $934,625, an increaseduring the third quarter of $29,555, or 3.3%, when2017, compared to total property, at cost, at September 30, 2015the third quarter of $905,070.2016. Depreciation and amortization expenses as a percentage of net sales totaled 0.7% for the three months ended September 30, 20162017 and 20152016.
Other income, net totaled $629$1,511 for the three-month period ended September 30, 2016,2017, compared to $1,187$629 for the three months ended September 30, 2015.2016. Other income, net consists primarily of gains on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities. The decreaseincrease in other income, net was primarily due to lower net gains on the disposalfavorable settlements of personal propertyprior claims for the three months ended September 30, 20162017 compared to the same three-month period in 2015.2016.
Interest expense, net increased $530, or 77.4%, to $1,215 for the three months ended September 30, 2016 compared to $685 for the same period of 2015. The increase was primarily due to higher levels of average outstanding short-term borrowings.
Income before provision for income taxes totaled$49,315 for the three months ended September 30, 2017, a decrease of $1,605, or 3.2%, from $50,920 for the three months ended September 30, 2016, an increase of $3,092, or 6.5%, from $47,828 for the three months ended September 30, 2015. The increasedecrease was primarily due to an increase in SG&A partially offset by our growth in gross margin partially offset by increasesand increase in SG&A and depreciation and amortization expenses.other income, net.
Our total provision for income taxes increased $1,293,decreased $963, or 6.7%4.6%, to $20,724$19,761 for the three months ended September 30, 2016,2017, compared to $19,431$20,724 for the same period of 2015. Our effective tax rate was 40.7%2016. The decrease in our provision for income taxes is due to lower pretax income for the three months ended September 30, 2016,2017 as compared to 40.6%the same period in 2016. Our effective tax rate was 40.1% for the three months ended September 30, 2017, compared to 40.7% for the same period of 2015. The increase in the effective tax rate was largely attributable to an increase in state and foreign taxes.2016. The effective tax rate for the three months ended September 30, 20162017 and 20152016 was higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.
Net income attributable to Graybar Electric Company, Inc. for the three months ended September 30, 20162017 increaseddecreased $1,818695, or 6.4%2.3%, to $30,12929,434 from $28,31130,129 for the three months ended September 30, 20152016.
Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016
Net sales totaledincreased to $4,944,294 for the nine-month period ended September 30, 2017, compared to $4,785,620 for the nine-month period ended September 30, 2016, compared to $4,547,672 for the nine-month period ended September 30, 2015, an increase of $237,948,$158,674, or 5.2%3.3%. Net sales in our industrial & utility and construction vertical marketmarkets increased by 9.8%10.7% and 3.9%, respectively, for the nine months ended September 30, 20162017, compared to the same nine-month period of 2015,2016, while net sales in our industrial and utility and CIG vertical marketsmarket declined by 1.2% and 0.1%, respectively.5.7%.
Gross margin increased $48,675,$40,702, or 5.7%4.5%, to $904,004$944,706 from $855,329$904,004 primarily due to our focus on gross margin rate improvementpricing and product diversification initiatives and recent acquisitions, as well as increased net sales in the first nine months of 2016,2017, compared to the same period of 2015.2016. Our gross margin as a percent of net sales totaled 19.1% for the nine months ended September 30, 2017, up from 18.9% for the nine months ended September 30, 2016, up from 18.8% for the nine months ended September 30, 2015.2016.
Selling, general and administrative expenses increased $32,618,$25,869, or 4.5%3.4%, to $776,135, for the nine-month period ended September 30, 2017, compared to $750,266 for the nine-month period ended September 30, 2016, compared to $717,648 for the nine-month period ended September 30, 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 nine months ended September 30, 2016.2017. Selling, general and administrative expenses as a percentage of net sales decreased towere 15.7% for the nine months ended September 30, 2016 compared to 15.8% for the nine months ended September 30, 2015.2017 and 2016.
Depreciation and amortization expenses for the nine months ended September 30, 20162017 increased $3,076,$1,073, or 9.6%3.1%, to $35,158$36,231 from $32,082$35,158 for the same nine-month period in 2015,2016, due to an increase in property, at cost. Total property, at cost, at September 30, 20162017 was $934,625,$961,744, an increase of $29,555,$27,119, or 3.3%2.9%, when compared to total property, at cost, at September 30, 20152016 of $905,070.$934,625. Depreciation and amortization expenses as a percentage of net sales remained constant at 0.7% for the nine months ended September 30, 20162017 and 2015.2016.
Other income, net totaled $3,438$5,640 for the nine-month period ended September 30, 2016,2017, compared to $6,746$3,438 for the nine months ended September 30, 2015.2016. Other income, net consists primarily of gains on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities. The decreaseincrease in other income, net was primarily due to a favorable settlement of a prior claim partially offset by reduced net gains on the disposal of real and personal property of $1,517 for the nine months ended September 30, 20162017, compared to the same nine-month period in 2015.2016.
Interest expense, net increased $740,$447, or 39.1%17.0%, to $2,635$3,082 for the nine months ended September 30, 20162017, compared to $1,895$2,635 for the same period of 2015.2016. The increase was primarily due to higher levels of average outstandinginterest rates on our short-term borrowings.borrowings for the nine months ended September 30, 2017, compared to the same nine-month period in 2016.
Income before provision for income taxes totaled $134,898 for the nine months ended September 30, 2017, an increase of $15,515, or 13.0%, from $119,383 for the nine months ended September 30, 2016, an increase of $8,933, or 8.1%, from $110,450 for the nine months ended September 30, 2015.2016. The increase was primarily due to our growth in gross margin and increase in other income, net partially offset by increases in SG&A and depreciation and amortization expenses.
Our total provision for income taxes increased $3,982,$5,824, or 9.0%12.0%, to $48,396$54,220 for the nine months ended September 30, 2016,2017, compared to $44,414$48,396 for the same period in 2015. Our year-to-date effective tax rate was 40.5%2016. The increase in our provision for income taxes is due to higher pretax income for the nine months ended September 30, 2016,2017 as compared to the same period in 2016. Our year-to-date effective tax rate was 40.2% for the nine months ended September 30, 2017, compared to 40.5% for the same period in 2015. The increase in the effective tax rate was attributable to discrete events and an increase in state and foreign taxes as compared to the prior year.2016. The effective tax rate for the nine months ended September 30, 20162017 was higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.
Net income attributable to Graybar Electric Company, Inc. for the nine-month period ended September 30, 20162017 increased $4,950,$9,640, or 7.5%13.6%, to $70,809$80,449 from $65,859$70,809 for the nine months ended September 30, 2015.2016.
Financial Condition and Liquidity
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, 20162017 were $51,111,$51,806, compared to $37,931$43,339 at December 31, 2015,2016, an increase of $13,180,$8,467, or 34.7%19.5%. Our short-term borrowings increased significantly, $168,871,$76,139, or 160.9%54.2% during the nine-month period to $273,849$216,604 at September 30, 20162017 from $104,978$140,465 at December 31, 2015,2016, primarily due to the financing of strategic investments in merchandise inventoryhigher working capital investment required to support operating activities due to the growth in sales, funding of salesemployee 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$489,672 at September 30, 2016,2017, an increase of $2,517,$49,439, or 0.6%11.2%, from $445,443$440,233 at December 31, 2015.2016.
Operating Activities
Cash used by operations for the nine months ended September 30, 20162017 was $59,338,$27,859, compared to cash providedused by operations of $21,098$59,338 for the nine months ended September 30, 2015.2016. Cash flows used by operations for September 30, 2016 was attributable to increased inventory levels during the nine months ended September 30, 20162017 was attributable to an increase in trade receivables of $83,059$86,433 as a result of increased sales, increased inventory levels of $94,141 to support our continued growth of sales during 2016, as well as an increase in trade receivables of $73,623 as a result of increased sales and a modest increase in days sales outstanding for the threenine months ended September 30, 2016,2017, and a decrease in accrued payroll benefits of $21,835 and a decrease of $51,832 in other non-current liabilities as a result of additional voluntary pension contributions made during the second and third quarters of 2016. These uses were$36,019, partially offset by net income of $70,987$80,678 and an increaseincreases in trade accounts payable of $16,571.$83,768.
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-month period ended September 30, 2016 increased moderately2017 decreased modestly compared to the same nine-month period ended September 30, 2015.2016. Merchandise inventory turnover improved modestly for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016.
Investing Activities
Net cash used by investing activities totaled $81,465$24,659 for the nine months ended September 30, 2016,2017, compared to $69,001$81,465 for the same nine-month period in 2015, an increase2016, a decrease of $12,464,$56,806, or 18.1%69.7%. The increasedecrease was primarily due to the acquisitionpurchase of Cape Electric net of cash, for $59,946 during the nine months ended September 30, 2016, partially offset by lowerslightly higher capital expenditures in the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015. In the first quarter 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 $3,279.2016. Proceeds on the disposal of property decreased during the nine months ended September 30, 20162017, compared to 2015. In the first quarter2016 primarily as a result of 2016 we disposeddisposing of a local distribution facility that provided proceeds of $1,686 compared toin the 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.2016.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 20162017 totaled $153,983,$60,985, compared to $56,460$153,983 for the nine months ended September 30, 2015, an increase2016, a decrease of $97,523,$92,998, or 172.7%60.4%. The increasedecrease was primarily due to the increase in our short termlower short-term borrowings for the nine months ended September 30, 2016 when2017, compared to the nine months ended September 30, 2015, to fund our operating and investing activities.2016.
Liquidity
We had a $550,000 revolving credit facility with $276,151$333,396 in available capacity at September 30, 20162017, compared to $445,022$409,535 at December 31, 20152016. At September 30, 20162017 and December 31, 20152016, we also had antwo uncommitted $100,000 private placement shelf agreements ("shelf agreement"). The first shelf agreement that allows 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 September 2017. At September 30, 2016, we also had an uncommitted $100,000 private placementAugust 2020. The second shelf agreement that allows us to issue senior promissory notes to affiliatesMetropolitan 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 yearthree-year issuance period ending in September 2019.
We have not issued any notes under the shelf agreements as of September 30, 20162017 and December 31, 20152016. For further discussion related to our revolving credit facility and our private placement shelf agreements, refer to Note 5, "Debt", of the notes to the condensed consolidated financial statements located in Item 1.
We had total letters of credit of $5,4605,371 and $4,994$5,244 outstanding, of which none were issued under the $550,000 revolving credit facility at September 30, 20162017 and December 31, 20152016. The letters of credit are issued primarily to support certain workers' compensation insurance policies.
New Accounting Standards Updates
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the policies, procedures, controls, or risk profile from those provided in Item 7A., “Quantitative and Qualitative Disclosures About Market Risk”, of our Annual Report on Form 10-K for the year ended December 31, 20152016.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 20162017, 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 to provide reasonable assurance 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.
(b) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds.
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. The 2007Accordingly, a new Voting Trust Agreement was established effective March 3, 2017, which expires by its terms on March 15, 2017.1, 2027. At September 30, 20162017, approximately 84%82% of the common stock was held in thisthe voting trust. The participation of shareholders in the voting trust is voluntary at the time the voting trust is created, but is irrevocable during its term. Shareholders who elect not to participate in the voting trust hold their common stock as shareholders of record.
No 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 iswas 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. 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 cause other than death or retirement on a pension (except a deferred pension)"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, all of which were made pursuant to the foregoing provisions:
Issuer Purchases of Equity Securities
|
| | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
July 1 - July 31, 2016 | | 61,642 |
| | | $20.00 | | N/A |
August 1 - August 31, 2016 | | 48,160 |
| | | $20.00 | | N/A |
September 1 - September 30, 2016 | | 54,693 |
| | | $20.00 | | N/A |
Total | | 164,495 |
| | | $20.00 | | N/A |
|
| | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
July 1 - July 31, 2017 | | 100,701 |
| | | $20.00 | | N/A |
August 1 - August 31, 2017 | | 97,188 |
| | | $20.00 | | N/A |
September 1 - September 30, 2017 | | 42,697 |
| | | $20.00 | | N/A |
Total | | 240,586 |
| | | $20.00 | | N/A |
Item 6. Exhibits.
|
| | | | | | | |
| (a) | Exhibits furnished in accordance with provisions of Item 601 of Regulation S-K. |
| | | | | | |
3.1 | | (3) | | (i) | | Articles of Incorporation |
| | | | | | | |
| | | | | | (a) | |
| | |
3.2 | | | | |
| | | | (ii) | | Bylaws |
| | | | | | | |
| | | | | | (a) | |
| | |
4.2 | | |
| | |
9 | | (10) | | Material ContractVoting Trust Agreement dated as of March 3, 2017, included at Exhibit 4.2 above. |
| | |
10 | | |
| | |
31.1 | | | | | | Private Shelf Agreement, dated September 22, 2016, between the Company and Metropolitan Life Insurance Company, MetLife Investment Advisors, LLC and other MetLife affiliates. |
| | | | | | | |
| | (31) | | Rule 13a-14(a)/15d-14(a) Certifications |
| | | | | | | |
| | | | (31.1) | | | |
| | |
31.2 | | | | |
| | | | (31.2) | | | |
| | |
32.1 | | | | |
| | (32) | | Section 1350 Certifications |
| | | | | | | |
| | | | (32.1) | | | |
| | |
32.2 | | | | |
| | | | (32.2) | | | |
| | | | | | | |
| | 101.INS | | XBRL Instance Document |
| | | | | | | |
| | 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | | | | | |
| | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | | | | | |
| | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | | | | | |
| | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | | | | | |
| | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | | | |
| | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | GRAYBAR ELECTRIC COMPANY, INC. |
| | | |
| | | |
| November 1, 2016October 31, 2017 | | /s/ KATHLEEN M. MAZZARELLA |
| Date | | Kathleen M. Mazzarella |
| | | President and Chief Executive Officer (Principal Executive Officer) |
| | | |
| November 1, 2016October 31, 2017 | | /s/ RANDALL R. HARWOOD |
| Date | | Randall R. Harwood |
| | | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
EXHIBIT INDEX
Exhibits
|
| | | | |
(3(i)) |
| | Articles of Incorporation |
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| | (a) | Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 13, 2013 (Commission File No. 000-00255) and incorporated herein by reference. |
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(3(ii)) |
| | Bylaws |
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| | (a) | By-laws as amended through March 12, 2015, filed as Exhibit 3(ii) to the Company's Current Report on Form 8-K dated March 12, 2015 (Commission File No. 000-00255) and incorporated herein by reference. |
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(10 | ) | | Material Contract |
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| | | Private Shelf Agreement, dated September 22, 2016, between the Company and Metropolitan Life Insurance Company, MetLife Investment Advisors, LLC and other MetLife affiliates. |
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(31.1 | ) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer. |
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(31.2 | ) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer. |
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(32.1 | ) | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer. |
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(32.2 | ) | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer. |
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101.INS |
| | XBRL Instance Document |
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101.SCH |
| | XBRL Taxonomy Extension Schema Document |
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101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase Document |
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