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

Our accounting policies conform to generally accepted accounting principles in the U.S. ("GAAP”) and are applied on a consistent basis among all years presented. Significant accounting policies are described below.

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

The condensed consolidated financial statements include the accounts of Graybar and its subsidiary companies.  All material intercompany balances and transactions have been eliminated.  The ownership interests that are held by owners other than the Company in subsidiaries consolidated by the Company are accounted for and reported as noncontrolling interests.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  Actual results could differ from these estimates.

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

We account for cash on hand, deposits in banks, and other short-term, highly liquid investments with an original maturity of three months or less as cash and cash equivalents.

We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables is secured by mechanic’s lien or payment bond rights.  We maintain allowances to reflect the expected uncollectability of trade receivables based on past collection history and specific risks identified in the receivables portfolio.  Although actual credit losses have historically been within management’s expectations, additional allowances may be required if the financial condition of our customers were to deteriorate.

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

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

Property, plant and equipment are recorded at cost. Depreciation is expensed on a straight-line basis over the estimated useful lives of the related assets. Interest costs incurred to finance expenditures for major long-term construction projects are capitalized as part of the asset's historical cost and included in property, plant and equipment, then depreciated over the useful life of the asset. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Expenditures for maintenance and repairs are charged to expense when incurred, while the costs of significant improvements, which extend the useful life of the underlying asset, are capitalized.

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

We endeavor to utilize the best available information in measuring fair value.  GAAP has established a fair value hierarchy, which prioritizes the inputs used in measuring fair value.  The tiers in the hierarchy include:  Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own data inputs and assumptions.  We have used fair value measurements to value our pension plan assets.

The functional currency for our Canadian subsidiary is the Canadian dollar.  Accordingly, its balance sheet amounts are translated at the exchange rates in effect at the end of each reporting period and its statements of income amounts are translated at the average rates of exchange prevailing during the current period.  Currency translation adjustments are included in accumulated other comprehensive loss.

Our goodwill is not amortized, but rather tested annually for impairment.  Goodwill is reviewed annually in the fourth quarter and/or when circumstances or other events might indicate that impairment may have occurred.  We first perform a qualitative assessment of goodwill impairment. The qualitative assessment considers several factors including the excess fair value over carrying value as of the last quantitative impairment test, the length of time since the last fair value measurement, the current carrying value, market conditions, actual performance compared to forecasted performance, and the current business outlook. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the reporting unit is then quantitatively tested for impairment. If a quantitative assessment is required, the fair value is determined using a variety of assumptions including estimated future cash flows of the reporting unit and applicable discount rates. 

The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Customer relationships, trade names and other non-contractual intangible assets with determinable lives are amortized over periods generally ranging from 53 to 20 years. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.

We recognize deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns.  Uncertainty exists regarding tax positions taken in previously filed tax returns still subject to examination and positions expected to be taken in future returns.  A deferred tax asset or liability results from the temporary difference between an item’s carrying value as reflected in the financial statements and its tax basis, and is calculated using enacted applicable tax rates.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, a valuation allowance is established.  Changes in the valuation

 

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

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

No new accounting standards that were issued or became effective during 20172018 have had or are expected to have a material impact on our condensed consolidated financial statements except those noted below:

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$2,426 and $1,755$2,318 at September 30, 2017March 31, 2018 and December 31, 2016,2017, 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.

Our federal income tax returns for the tax years 2014 and forward are available for examination by the United States Internal Revenue Service (“IRS”).  The statute of limitations for the 2014 federal return will expire on September 15, 2018, unless extended by consent. Our state income tax returns for 20122013 through 20162017 remain subject to examination by various state authorities with the latest period closing on December 31, 2021.2022.  We have not extended the statutes of limitations in any state jurisdictions with respect to years prior to 2012.2013.

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, 2017March 31, 2018 and December 31, 2016.2017.

  

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.plan and otherwise eligible compensation deferred.

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.

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.

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 duringin which such matters are resolved or a better estimate becomes available.

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

Graybar Electric Company, Inc. (“Graybar”, “Company”, "we", "our", or "us") is a New York corporation, incorporated in 1925.  We are engaged in the distribution of electrical and communications and data networking products and are a provider of related supply chain management and logistics services. We primarily serve customers in the construction, industrial & utility and commercial, institutional and government ("CIG") 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"). AllWe purchase all the products sold by us are purchased by uswe sell from others, and we neither manufacture nor contract to manufacture any products we sell.  Our business activity is primarily with customersbased 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, before the shareholder action described in the next sentence became effective, a shareholder was 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" (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.

Selling, general and administrative expenses ("SG&A") increased $5,78310,366, or 2.3%4.1%, to $260,752$263,361 in the thirdfirst quarter of 2018 from $252,995 in the first quarter of 2017 from $254,969 in the third quarter of 2016, due primarily to growth in headcounthigher compensation and normal compensation increases.  Selling, general and administrative expensesbenefit related costs.  SG&A as a percentage of net sales totaled 15.3%16.1% for the three months ended March 31, 2018, compared to 16.5% for the three months ended September 30,March 31, 2017, compared to 15.1%.

Our total provision for income taxes decreased $963,$3,881, or 4.6%32.4%, to $19,761$8,115 for the three months ended September 30, 2017,March 31, 2018, compared to $20,724$11,996 for the same period of 2016.2017.  The decrease in our provision for income taxes is due to lower pretaxthe reduction of the U.S. federal corporate income tax rate to 21% as part of the enactment of the Tax Cuts and Jobs Act ("TCJA") signed into law in the fourth quarter of 2017. As a result of the TCJA, our effective tax rate was 27.7% for the three months ended September 30, 2017 asMarch 31, 2018, compared to the same period in 2016. Our effective tax rate was 40.1% for the three months ended September 30, 2017, compared to 40.7%40.4% for the same period of 2016. The effective tax rate for the three months ended September 30, 2017 and 2016 was higher than the 35.0% U.S. federal statutory rate primarily due to state and local income taxes.2017.

Net income attributable to Graybar Electric Company, Inc. for the three months ended September 30, 2017March 31, 2018 decreasedincreased $6953,412, or 2.3%19.3%, to $29,43421,093 from $30,12917,681 for the three months ended September 30, 2016March 31, 2017.

We manage our liquidity and capital levels so that we have the capacitycapability 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, 2017March 31, 2018 were $51,806,$62,780, compared to $43,339$42,757 at December 31, 2016,2017, an increase of $8,467,$20,023, or 19.5%46.8%. Our short-term borrowings increased significantly, $76,139,by $10,357, or 54.2%6.1%, during the nine-monththree-month period to $216,604$180,000 at September 30, 2017March 31, 2018 from $140,465$169,643 at December 31, 2016,2017, primarily due to higher working capital investment required to support operating activities due to the growth in sales and funding of employee benefits, and additional voluntary pension contributions, all funded via short-term lines of credit. Current assets exceeded current liabilities by $489,672$512,969 at September 30, 2017,March 31, 2018, an increase of $49,439,$17,473, or 11.2%3.5%, from $440,233$495,496 at December 31, 2016.2017.

The average number of days of sales in trade receivables for the nine-monththree-month period ended September 30, 2017 decreased modestlyMarch 31, 2018 increased moderately compared to the same nine-monththree-month period ended September 30, 2016. Merchandise inventory turnover improved modestly forMarch 31, 2017, due to increased trade receivables in the nine months ended September 30, 2017,first quarter of 2018, as compared to the ninefirst quarter of 2017. The days in inventory increased significantly for the three months ended September 30, 2016.March 31, 2018, compared to the three months ended March 31, 2017, due to higher merchandise inventory levels to support sales growth.

Net cash used by investing activities totaled $24,659$7,762 for the ninethree months ended September 30, 2017,March 31, 2018, compared to $81,465$6,119 for the same nine-monththree-month period in 2016, a decrease2017, an increase of $56,806,$1,643, or 69.7%26.9%. The decreaseincrease was due to the purchase of Cape Electric for $59,946 during the nine months ended September 30, 2016, partially offset by slightly higher capital expenditures in the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 30, 2016.March 31, 2017. Proceeds on the disposal of property decreasedincreased during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2016 primarily as a result of disposing of a local distribution facility that provided proceeds of $1,686the same period in the first quarter of 2016.2017.

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.