10-K 1 a1231201210k.htm FORM 10-K 12.31.2012 10K


 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 
 x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 000-00255
GRAYBAR ELECTRIC COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
13-0794380
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
34 North Meramec Avenue, St. Louis, Missouri
63105
(Address of principal executive offices)
(Zip Code)
 
 
(314) 573 – 9200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
 
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $1.00 Per Share with a
 
Stated Value of $20.00
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES £            NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES £           NO x
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 such shorter period that the registrant was required to submit and post such files).
YES x           NO £
        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ 
 
        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 filer x (Do not check if a smaller reporting company)         Smaller reporting company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES £            NO x
The aggregate stated value of the Common Stock beneficially owned with respect to rights of disposition by persons who are not affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant on June 30, 2012, was approximately $256,384,460.  Pursuant to a Voting Trust Agreement, dated as of March 16, 2007, approximately 83% of the outstanding shares of Common Stock was held of record by five Trustees who were each directors or officers of the registrant and who collectively exercised the voting rights with respect to such shares at such date.  The registrant is 100% owned by its active and retired employees, and there is no public trading market for the registrant’s Common Stock.  See Item 5 of this Annual Report on Form 10-K.
 
The number of shares of Common Stock outstanding at March 1, 2013 was 15,601,738.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the documents listed below have been incorporated by reference into the indicated Part of this Annual Report on Form 10-K:  Information Statement relating to the 2013 Annual Meeting of Shareholders – Part III, Items 10-14




Graybar Electric Company, Inc. and Subsidiaries
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2012

Table of Contents

 
 
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Supplemental Item
 
 
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
Item 15.
 
 
 
Signatures
 
 
Index to Exhibits
 
 
Certifications
 
 
 

2



PART I

The following discussion should be read in conjunction with the accompanying audited consolidated financial statements of Graybar Electric Company, Inc. (“Graybar” or the “Company”), the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2012, included in this Annual Report on Form 10-K.  The results shown herein are not necessarily indicative of the results to be expected in any future periods. 

Certain statements, other than purely historical information, including estimates, projections, statements relating to the Company’s 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 (the “Exchange Acts”).  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.  The Company intends 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.  The Company’s 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 the Company’s 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 metal commodities, disruptions in the Company’s sources of supply, a sustained interruption in the operation of the Company’s information systems, increased funding requirements and expenses related to the Company's pension plan, adverse legal proceedings or other claims, and the inability, or limitations on the Company’s 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.  The Company undertakes 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 the Company, including additional factors that could materially impact our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission (the “SEC” or “Commission”).  Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of this Annual Report on Form 10-K for the year ended December 31, 2012.

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

Item 1.  Business

The Company

Graybar Electric Company, Inc. is engaged in the distribution of electrical, communications and data networking (“comm/data”) products, and the provision of related supply chain management and logistics services, primarily to electrical and comm/data contractors, industrial plants, federal, state and local governments, commercial users, telephone companies, and power utilities in North America.  All products sold by the Company are purchased by the Company from others, and the Company neither manufactures nor contracts to manufacture any products that it sells.  The Company’s business activity is primarily with customers in the United States of America (“US”).  Graybar also has subsidiary operations with distribution facilities in Canada and Puerto Rico.

The Company was incorporated under the laws of the State of New York on December 11, 1925 to purchase the wholesale distribution business of Western Electric Company, Incorporated.  Graybar is one hundred percent (100%) owned by its active and retired employees, and there is no public trading market for its common stock.  The location of the principal executive offices of the Company is 34 North Meramec Avenue, St. Louis, Missouri 63105 and its telephone number is (314) 573-9200.

The Company maintains an internet website at: http://www.graybar.com.  Graybar’s filings with the SEC, including its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, are accessible free of charge on our website at: http://www.graybar.com/company/about/sec-filings, as soon as reasonably practicable after we file the reports with the SEC.  Additionally, a copy of the Company’s SEC filings can be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 on official business days or by calling the SEC at 1-800-SEC-0330.  A copy of our electronically filed materials can also be obtained at: http://www.sec.gov.


3



Suppliers

Graybar distributes approximately one million products purchased from over 4,300 manufacturers and suppliers through the Company’s network of distribution facilities.  The relationship between the Company and its suppliers is customarily a nonexclusive national or regional distributorship, terminable upon 30 to 90 days notice by either party.  The Company maintains long-standing relationships with a number of its principal suppliers.

The Company purchased approximately fifty-two percent (52%) of the products it sold during 2012 from its top 25 suppliers.  However, the Company generally deals with more than one supplier for any product category, and there are alternative sources of comparable products available for nearly all product categories.

Products

The Company stocks approximately 95,000 of the products it distributes and, therefore, is able to supply its customers locally with a wide variety of electrical and comm/data products.  The products distributed by the Company consist primarily of wire and cable, lighting fixtures, power distribution equipment, comm/data products for wide and local area networks, conduit, boxes and fittings, wiring devices, motor controls, industrial automation, lamps, industrial enclosures, tools and test equipment, station apparatus, fuses, and transformers.

Order Backlog
 
The Company had orders on hand totaling $712,981 and $661,493 on December 31, 2012 and 2011, respectively.  The Company expects that approximately ninety-five percent (95%) of the orders it had on hand at December 31, 2012 will be filled within the twelve-month period ending December 31, 2013.  Generally, orders placed by customers and accepted by the Company have resulted in sales.  However, customers from time to time request cancellation and the Company has historically allowed such cancellations.

Sales And Distribution

Graybar sells its products primarily through a network of sales offices and distribution facilities located in thirteen geographical districts throughout the US.  The Company operates multiple distribution facilities in each district, each of which carries an inventory of products and operates as a wholesale distributor for the territory in which it is located.  Some districts have sales offices that do not carry an inventory.  In addition, the Company maintains seven national zone warehouses and nine district service centers containing inventories of both standard and specialized products.  Both the national zone warehouses and district service centers replenish local inventories carried at the Company’s US distribution facilities and make shipments directly to customers.  The Company also has subsidiary operations with distribution facilities located in Canada and Puerto Rico. The sales and distribution facilities operated by the Company at December 31, 2012 are shown below:
 
US Locations
 
 
District
Number of Sales and
Distribution Facilities*
National
Zone Warehouses
Atlanta
21
Austell, GA
Boston
11
Fresno, CA
California
21
Joliet, IL
Chicago
19
Richmond, VA
Dallas
13
Springfield, MO
Minneapolis
17
Stafford, TX
New York
11
Youngstown, OH
Phoenix
11
 
Pittsburgh
19
 
Richmond
18
 
Seattle
11
 
St. Louis
17
 
Tampa
19
 
*Includes District Service Centers
 
International Locations
 
 
 
Number of
Distribution Facilities
 
Graybar Electric Canada, Ltd.
  Halifax, Nova Scotia, Canada
30
 
Graybar International, Inc.
  Carolina, Puerto Rico
1
 
 


4



When the specialized nature or size of a particular shipment warrants, the Company has products shipped directly from its suppliers to the place of use; otherwise, orders are filled from the Company’s inventory.  On a dollar volume basis, approximately fifty-seven percent (57%) of customer orders were filled from the Company’s inventory in 2012 and 2011 and the remainder were shipped directly from the supplier to the place of use. 

The Company generally finances its inventory through the collection of trade receivables and trade accounts payable terms with its suppliers.  The Company’s short-term borrowing facilities are also used to finance inventory when necessary.  Historically, the Company has not used long-term borrowings to finance inventory. 

 The Company distributes its products to approximately 116,000 customers, which fall into three principal classes.  The following list shows the approximate percentage of the Company’s total sales attributable to each of these classes for the last three years:
 
Percentage of Sale
For the Years Ended December 31,
Class of Customers
2012
2011
2010
Electrical Contractors
46.5%
45.5%
45.2%
Data and Voice Communications
20.4%
20.0%
20.6%
Commercial & Industrial
21.6%
21.6%
19.4%

At December 31, 2012, the Company employed approximately 3,000 persons in sales capacities.  Approximately 1,300 of these sales personnel were outside sales representatives working to generate sales with current and prospective customers.  The remainder of the sales personnel were sales and marketing managers, inside sales representatives, and advertising, quotation, and counter personnel.

Competition

The Company believes that it is one of the four largest wholesale distributors of electrical and comm/data products in the US.  This market is highly competitive, and the Company estimates that the five largest wholesale distributors account for approximately thirty-one percent (31%) of the total market.  The balance of the market is made up of several thousand independent distributors operating on a local, regional, or national basis and of manufacturers who sell their products directly to end users.

The Company’s pricing structure for the products it sells reflects the costs associated with the services that it provides, and the Company believes its prices are generally competitive.  The Company believes that, while price is an important customer consideration, it is the service that Graybar is able to provide customers that distinguishes the Company from many of its competitors, whether they are distributors or manufacturers selling direct.  Graybar views its ability to quickly supply its customers with a broad range of electrical and comm/data products through conveniently located distribution facilities as a competitive advantage that customers value.  However, if a customer is not looking for one distributor to provide a wide range of products and does not require prompt delivery or other services, a competitor of the Company that does not provide these benefits may be in a position to offer a lower price.

Foreign Sales

Sales by the Company to customers in foreign countries were made primarily by Company subsidiaries in Canada and  Puerto Rico and accounted for approximately six percent (6%) of consolidated sales in each of 2012, 2011, and 2010.  Limited export activities are handled primarily from Company facilities in Texas, Florida, California, Virginia and New Jersey.  Long-lived assets located outside the US represented approximately two percent (2%) of the Company’s consolidated total assets at the end of 2012, 2011, and 2010.  The Company does not have significant foreign currency exposure and does not believe there are any other significant risks attendant to its foreign operations.

Employees

At December 31, 2012, the Company employed approximately 7,500 persons on a full-time basis.  Approximately 100 of these persons were covered by union contracts.  The Company has not had a material work stoppage and considers its relations with its employees to be good.


5



Item 1A.  Risk Factors

Our liquidity, financial condition, and results of operations are subject to various risks, including, but not limited to, those discussed below.  The risks outlined below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our liquidity, financial condition, and results of operations.

Our sales fluctuate with general economic conditions, particularly in the residential, commercial, and industrial building construction industries.  Our operating locations are widely distributed geographically across the US and, to a lesser extent, Canada.  Customers for both electrical and comm/data products are similarly diverse – we have approximately 116,000 customers and our largest customer accounts for only four percent (4%) of our total sales.  While our geographic and customer concentrations are relatively low, our results of operations are, nonetheless, dependent on favorable conditions in both the general economy and the construction industry.  In addition, conditions in the construction industry are greatly influenced by the availability of project financing and the cost of borrowing. 
 
The Company’s results of operations are impacted by changes in commodity prices, primarily copper and steel.  Many of the products sold by the Company are subject to wide and frequent price fluctuations because they are composed primarily of copper or steel, two industrial metal commodities that have been subject to price volatility during the past several years.  Examples of such products include copper wire and cable and steel conduit, enclosures, and fittings.  The Company’s gross margin rate, or mark-up percentage, on these products is relatively constant over time, though not necessarily in the short term.  Therefore, as the cost of these products to the Company declines, pricing to our customers decreases by a similar percentage.  This impacts our results of operations by lowering both sales and gross margin.  Rising copper and steel prices have the opposite effect, increasing both sales and gross margin, assuming the quantities of the affected products sold remain constant.

The impact of commodity price fluctuations on the value of our merchandise inventory is reduced by the Company’s use of the last-in, first-out (“LIFO”) inventory cost method, which matches current product costs to current sales.
 
We purchase all of the products we sell to our customers from other parties.  As a wholesale distributor, our business and financial results are dependent on our ability to purchase products from manufacturers not controlled by our Company that we, in turn, sell to our customers.  Approximately fifty-two percent (52%) of our purchases are made from only 25 manufacturers.  A sustained disruption in our ability to source product from one or more of the largest of these vendors might have a material impact on our ability to fulfill customer orders resulting in lost sales and, in rare cases, damages for late or non-delivery.

Our daily activities are highly dependent on the uninterrupted operation of our information systems.  We are a recognized industry leader for our use of information technology in all areas of our business – sales, customer service, inventory management, finance, accounting, and human resources.  We maintain redundant information systems as part of our disaster recovery program and, if necessary, are able to operate in many respects using a paper-based system to help mitigate a complete interruption in our information processing capabilities.  Nonetheless, our information systems remain vulnerable to natural disasters, wide-area telecommunications or power utility outages, terrorist or cyber-attack, or other major disruptions.  A sustained interruption in the functioning of our information systems, however unlikely, could lower operating income by negatively impacting sales, expenses, or both.

We may experience losses or be subject to increased funding and expenses related to our pension plan. A decline in the market value of plan assets or the interest rates used to measure the required minimum funding levels and the pension obligation may increase the funding requirements of our defined benefit pension plan, the pension obligation itself, and pension expenses. Government regulations may accelerate the timing and amounts required to fund the plan. Demographic changes in our workforce, including longer life expectancies, increased numbers of retirements, and retiree age at retirement may also cause funding requirements, pension expenses, and the pension obligation to be higher than expected. Any or all of these factors could have a negative impact on our liquidity, financial position, and/or our results of operations.

We are subject to legal proceedings and other claims arising out of the conduct of our business.  These proceedings and claims relate to public and private sector transactions, product liability, contract performance, and employment matters.  On the basis of information currently available to us, we do not believe that existing proceedings and claims will have a material impact on our financial position or results of operations.  However, litigation is unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial position or our results of operations in a particular period.

More specifically, with respect to asbestos litigation, as of December 31, 2012, approximately 2,905 individual cases and

6



46 class actions are pending that allege actual or potential asbestos-related injuries resulting from the use of or exposure to products allegedly sold by us.  Additional claims will likely be filed against us in the future.  Our insurance carriers have historically borne virtually all costs and liability with respect to this litigation and are continuing to do so.  Accordingly, our future liability with respect to pending and unasserted claims is dependent on the continued solvency of our insurance carriers.  Other factors that could impact this liability are: the number of future claims filed against us; the defense and settlement costs associated with these claims; changes in the litigation environment, including changes in federal or state law governing the compensation of asbestos claimants; adverse jury verdicts in excess of historic settlement amounts; and bankruptcies of other asbestos defendants.  Because any of these factors may change, our future exposure is unpredictable and it is possible that we may incur costs that would have a material adverse impact on our liquidity, financial position, or results of operations in future periods.

Our financing arrangements and loan agreements contain financial covenants and certain other restrictions on our activities and those of our subsidiaries.  Our senior unsecured notes and revolving credit facility impose contractual limits on our ability, and the ability of our subsidiaries with respect to indebtedness, liens, changes in the nature of business, investments, mergers and acquisitions, the issuance of equity securities, the disposition of assets and the dissolution of certain subsidiaries, transactions with affiliates, restricted payments (subject to incurrence tests, with certain exceptions), as well as securitizations and factoring transactions.  In addition, we are required to maintain acceptable financial ratios relating to debt leverage, interest coverage, net worth, asset performance, and certain other customary covenants.  Our failure to comply with these obligations may cause an event of default triggering an acceleration of the debt owed to our creditors or limit our ability to obtain additional credit under these facilities.  While we expect to remain in compliance with the terms of our credit agreements, our failure to do so could have a negative impact on our ability to borrow funds and maintain acceptable levels of cash flow from financing activities.

The value of our common stock is dependent primarily upon the regular payment of dividends, which are paid at the discretion of the Board of Directors.  The purchase price for our common stock under the Company’s purchase option is the same as the issue price.  Accordingly, as long as Graybar exercises its option to purchase, appreciation in the value of an investment in our common stock is dependent solely on the Company’s ability and willingness to declare stock dividends.  Although cash dividends have been paid on the common stock each year since 1929, as with any corporation’s common stock, payment of dividends is subject to the discretion of the Board of Directors.
 
There is no public trading market for our common stock.  The Company’s common stock is one hundred percent (100%) owned by its active and retired employees.  Common stock may not be sold by the holder thereof, except after first offering it to the Company.  The Company has always exercised this purchase option in the past and expects that it will continue to do so.  As a result, no public trading market for our common stock exists, nor is one expected to develop.  This lack of a public trading market for the Company’s common stock may limit Graybar’s ability to raise large amounts of equity capital.

Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

As of December 31, 2012, the Company had seven national zone warehouses ranging in size from approximately 160,000 to 240,000 square feet.  The lease arrangement used to finance three of the national zone warehouses was terminated in March 2012, the Company paid the balance owed on the facilities, and all security interests granted on the facilities were released. This is discussed further in Note 13 of the Notes to the Consolidated Financial Statements, located in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.  As a result, at December 31, 2012, five of the national zone warehouses are owned and two are leased.  The remaining lease terms on these two leased facilities are approximately one and four years, respectively.
 
The Company also had nine district service centers ranging in size from 116,000 to 210,000 square feet as of December 31, 2012Four of the nine district service centers are owned and the others are leased.  The remaining lease terms on the leased district service centers are between two and seven years.

Graybar operates in thirteen geographical districts, each of which maintains multiple distribution facilities that consist primarily of warehouse space.  A small portion of each distribution facility is used for offices.  Some districts have sales offices that do not carry an inventory of products. The number of distribution and sales facilities, excluding service centers, in a district varies from ten to twenty-one and totals 199 for all districts.  The facilities range in size from approximately 1,000 to 130,000 square feet, with the average being approximately 32,000 square feet.  The Company owns 114 of these distribution facilities

7



and leases 85 of them for varying terms, with the majority having a remaining lease term of less than five years.

The Company maintains thirty distribution facilities in Canada, of which nineteen are owned and eleven are leased.  The majority of the leased facilities have a remaining lease term of less than five years.  The facilities range in size from approximately 2,000 to 60,000 square feet.  The Company also has a 22,000 square foot facility in Puerto Rico, the lease on which expires in 2014.

The Company’s headquarters are located in St. Louis, Missouri in an 83,000 square foot building owned by the Company.  In August 2011, the Company purchased the 200,000 square foot operations and administration center in St. Louis that the Company had been leasing since 2001. 

Item 3.  Legal Proceedings

There are presently no pending legal proceedings that are expected to have a material impact on the Company or its subsidiaries.

Item 4.  Mine Safety Disclosures

Not applicable.

Supplemental Item.  Executive Officers of the Registrant

The following table lists the name, age as of March 1, 2013, position, offices and certain other information with respect to the executive officers of the Company.  The term of office of each executive officer will expire upon the appointment of his or her successor by the Board of Directors.

Name
Age
Business experience last five years
M. W. Geekie
51
Employed by XTRA Corporation, General Counsel and Secretary, August 2005 to February 2008; Employed by Company in 2008; Deputy General Counsel, February 2008 to August 2008; Senior Vice President, Secretary and General Counsel, August 2008 to present.
L. R. Giglio
58
Employed by Company in 1978; Senior Vice President, Operations, April 2002 to present.
R. R. Harwood
56
Employed by the Company in 1978; District Vice President - Dallas District, October 2004 to December 2012; Senior Vice President and Chief Financial Officer, January 2013 to present.

R. C. Lyons
56
Employed by Company in 1979; District Vice President – Tampa District, July 2003 to March 2011; Senior Vice President - North America Business, April 2011 to present.
K. M. Mazzarella
52
Employed by Company in 1980; Senior Vice President – Human Resources and Strategic Planning, December 2005 to April 2008; Senior Vice President – Sales and Marketing, Comm/Data, April 2008 to February 2010; Senior Vice President – Sales and Marketing, March 2010 to November 2010; Executive Vice President, Chief Operating Officer, December 2010 to May 2012; President and Chief Executive Officer, June 2012 to present; Chairman of the Board, January 2013 to present.
B. L. Propst
43
Employed by Company in 2002; Senior Corporate Counsel, March 2004 to March 2008; Vice President – Human Resources, April 2008 to June 2009; Senior Vice President – Human Resources, June 2009 to present.
J. N. Reed
55
Employed by Company in 1980; Vice President and Treasurer, April 2000 to present.
D. R. Sheff
42
Employed by Company in 1993; Director, Field Accounting Operations, July 2005 to August 2008; Assistant Controller, September 2008 to present.

     





8



 PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s capital stock is one hundred percent (100%) owned by its active and retired employees, and there is no public trading market for its 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 state law, a voting trust may not have a term greater than ten years.  The 2007 Voting Trust Agreement expires by its terms on March 15, 2017.  At December 31, 2012, approximately eighty-two percent (82%) of the common stock was held in this 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 shareholder may sell, transfer, or otherwise dispose of shares of common stock or the voting trust interests issued with respect thereto (“common stock”, “common shares”, or “shares”) without first offering the Company the option to purchase such shares at the price at which the shares were issued.  The Company also has the option to purchase at the issue price the common stock of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension.  The Company has always exercised its purchase option and expects to continue to do so.  All outstanding shares of the Company 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
October 1 to October 31, 2012
30,457
$20.00
N/A
November 1 to November 30, 2012
37,627
$20.00
N/A
December 1 to December 31, 2012
84,566
$20.00
N/A
Total
152,650
$20.00
N/A
   
Capital Stock at December 31, 2012
Title of Class
Number of
Security
Holders
Number of Shares (A)
Voting Trust Interests issued with respect to Common Stock
5,056
12,780,261

 
Common Stock
961
2,720,163

 
Total
6,017
15,500,424

 
(A)  Adjusted for the declaration of a twenty percent (20%) stock dividend in 2012, shares related to which were issued on February 1, 2013.
  
Dividend Data (in dollars per share)
Year Ended 
December 31,
Period
2012

2011

First Quarter
$
0.30

$
0.30

Second Quarter
0.30

0.30

Third Quarter
0.30

0.30

Fourth Quarter *
2.10

1.10

Total
$
3.00

$
2.00

* On December 13, 2012, in addition to the $0.30 cash dividend declared for the quarter and the $0.80 special cash dividend, both of which were also declared in 2011, the Board of Directors declared an additional special cash dividend of $1.00.

On December 13, 2012, a twenty percent (20%) stock dividend was declared to shareholders of record on January 2, 2013.  Shares representing this dividend were issued on February 1, 2013.

9




On December 8, 2011, a ten percent (10%) stock dividend was declared to shareholders of record on January 3, 2012.  Shares representing this dividend were issued on February 1, 2012.
 
Company Performance

The following graph shows a five-year comparison of cumulative total shareholders’ returns for the Company’s common stock, the Standard & Poor’s 500 Composite Stock Index, and a Comparable Company Index consisting of public firms selected by Graybar as being representative of our line of business. 


 
2007

2008

2009

2010

2011

2012

Graybar
$
100.00

$
131.23

$
172.22

$
208.00

$
251.21

$
335.26

S&P 500
$
100.00

$
61.51

$
75.94

$
85.65

$
85.65

$
97.13

Comparable Company Index
$
100.00

$
79.20

$
101.72

$
145.63

$
174.44

$
198.99

    
The comparison above assumes $100.00 invested on December 31, 2007 and reinvestment of dividends (including the $1.10 per share cash dividend paid by the Company on January 3, 2008).

The companies included in the Comparable Company Index are Anixter International Inc., Applied Industrial Technologies, Inc., W. W. Grainger, Inc., Owens & Minor, Inc., Park-Ohio Holdings Corp., Watsco, Inc., and WESCO International, Inc. Interline Brands, Inc. had previously been included in the Comparable Company Index, but has been removed because its equity is no longer publicly-traded.

The market value of the Company’s stock, in the absence of a public trading market, assumes continuation of the Company’s practice of issuing and purchasing offered securities at $20.00 per share.
 

10



Item 6.  Selected Financial Data
 
This summary should be read in conjunction with the accompanying consolidated financial statements and the notes to the consolidated financial statements included in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
 
Five Year Summary of Selected Consolidated Financial Data
(Stated in thousands, except for per share data)
For the Years Ended December 31,
2012

2011

2010

2009

2008

Gross Sales
$
5,434,509

$
5,395,239

$
4,634,231

$
4,395,718

$
5,423,122

Cash Discounts
(21,228
)
(20,439
)
(17,854
)
(17,836
)
(22,968
)
Net Sales
$
5,413,281

$
5,374,800

$
4,616,377

$
4,377,882

$
5,400,154

Gross Margin
$
1,018,362

$
995,259

$
866,641

$
854,950

$
1,045,219

Net Income attributable to
Graybar Electric Company, Inc.
$
86,291

$
81,425

$
41,998

$
37,277

$
87,400

Average common shares outstanding (A)
15,580

15,451

15,374

15,454

15,360

Net Income attributable to
Graybar Electric Company, Inc.
per share of Common Stock (A)
$
5.54

$
5.27

$
2.73

$
2.41

$
5.69

Cash Dividends per share of Common Stock
$
3.00

$
2.00

$
2.00

$
2.00

$
2.00

Total assets
$
1,685,937

$
1,704,739

$
1,519,438

$
1,431,953

$
1,556,199

Total liabilities (B)
$
1,085,721

$
1,133,345

$
960,631

$
893,784

$
1,048,608

Shareholders’ equity (B)
$
600,216

$
571,394

$
558,807

$
538,169

$
507,591

Working capital (C)
$
424,697

$
393,733

$
415,724

$
424,993

$
431,126

Long-term debt
$
1,990

$
10,345

$
64,859

$
80,959

$
113,633

(A)  All periods adjusted for the declaration of a twenty percent (20%) stock dividend declared in December 2012, a ten percent (10%) stock dividend declared in December 2011, a ten percent (10%) stock dividend declared in December 2010, a ten percent (10%) stock dividend declared in December 2009, and a twenty percent (20%) stock dividend declared in December 2008.  Prior to these adjustments, the average common shares outstanding for the years ended December 31, 2011, 2010, 2009, and 2008 were 12,876, 11,647, 10,644, and 9,617, respectively.
(B)  All periods adjusted for the January 1, 2009 adoption of accounting and disclosure requirements under generally accepted accounting principles in the US (“US GAAP”) issued by the Financial Accounting Standards Board ("FASB") regarding noncontrolling interests in consolidated financial statements.
(C)  Working capital is defined as total current assets less total current liabilities.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s Discussion and Analysis provides a narrative on the Company’s results of operations, financial condition, liquidity, and cash flows for the three-year period ended December 31, 2012.  This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes to the consolidated financial statements included in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
 
Business Overview
 
The North American economy grew modestly during 2012 with US real gross domestic product increasing at a rate of approximately 2.3% over 2011 and Canadian real gross domestic product increasing approximately 1.8%.  Although some US fiscal issues were resolved, many remained unsettled through the end of 2012 and thus, uncertainty persists around government spending and future overall economic growth.  Expected gross domestic product for 2013 is anticipated to fall within a range between 1.6% and 2.0%, with the overall construction industry forecast to experience very modest growth, while continued moderate improvement in the residential construction industry is expected.
     Graybar's net sales increased 0.7% during the year ended December 31, 2012, compared to the same period of 2011.  Gross margin rose 2.3% during the year ended December 31, 2012, compared to the same period in 2011.  Product costs remained steady and price inflation had little impact on net sales growth during the year ended December 31, 2012, compared to the same period in 2011.  This low level of product cost volatility and price inflation, combined with changes in the mix of products sold contributed to an increase in gross margin as a percent of net sales to 18.8% during the year ended December 31, 2012, compared to 18.5% during the same period of 2011.


11



The Company expects organic growth in sales and gross margin to moderately outpace the forecasted rate of growth of the gross domestic product during 2013.  The Company believes that continued market competition will cause gross margin as a percent of sales to remain relatively consistent with the rates achieved during 2012. 
Consolidated Results of Operations

The following table sets forth certain information relating to the operations of the Company stated in thousands of dollars and as a percentage of net sales for the years ended December 31, 2012, 2011, and 2010
 
2012
 
2011
 
2010
 
Dollars

Percent

 
Dollars

 
Percent

 
Dollars

 
Percent

Net Sales
$
5,413,281

100.0
 %
 
$
5,374,800

 
100.0
 %
 
$
4,616,377

 
100.0
 %
Cost of merchandise sold
(4,394,919
)
(81.2
)
 
(4,379,541
)
 
(81.5
)
 
(3,749,736
)
 
(81.2
)
Gross Margin
1,018,362

18.8

 
995,259

 
18.5

 
866,641

 
18.8

Selling, general and
     administrative expenses
(871,374
)
(16.1
)
 
(822,678
)
 
(15.3
)
 
(753,988
)
 
(16.3
)
Depreciation and amortization
(32,449
)
(0.6
)
 
(33,140
)
 
(0.6
)
 
(39,725
)
 
(0.9
)
Other income, net
33,143

0.6

 
3,769

 
0.1

 
4,608

 
0.1

Income from Operations
147,682

2.7

 
143,210

 
2.7

 
77,536

 
1.7

Interest expense, net
(2,234
)

 
(10,021
)
 
(0.2
)
 
(8,062
)
 
(0.2
)
Income before provision for income taxes
145,448

2.7

 
133,189

 
2.5

 
69,474

 
1.5

Provision for income taxes
(58,850
)
(1.1
)
 
(51,298
)
 
(1.0
)
 
(27,181
)
 
(0.6
)
Net Income
86,598

1.6

 
81,891

 
1.5

 
42,293

 
0.9

Net income attributable to noncontrolling interests
(307
)

 
(466
)
 

 
(295
)
 

Net Income attributable to
     Graybar Electric Company, Inc.
$
86,291

1.6
 %
 
$
81,425

 
1.5
 %
 
$
41,998

 
0.9
 %
  
2012 Compared to 2011

Net sales totaled $5,413,281 for the year ended December 31, 2012, compared to $5,374,800 for the year ended December 31, 2011, an increase of $38,481, or 0.7%.  Net sales to the electrical market sector during the year ended December 31, 2012 increased 3.5%, while net sales to the comm/data market sector decreased 5.3%, compared to the year ended December 31, 2011.

Gross margin increased $23,103, or 2.3%, to $1,018,362 for the year ended December 31, 2012, from $995,259 for the year ended December 31, 2011. The increase was primarily due to a change in sales mix as well as a modest increase in net sales for the year ended December 31, 2012, compared to the year ended December 31, 2011. The Company’s gross margin as a percent of net sales was 18.8% for the year ended December 31, 2012, up from 18.5% in 2011, primarily due to lower product costs.

Selling, general and administrative expenses increased $48,696, or 5.9%, to $871,374 for the year ended December 31, 2012, compared to $822,678 for the year ended December 31, 2011, mainly due to higher employment-related costs.  Selling, general and administrative expenses as a percentage of net sales for the year ended December 31, 2012 were 16.1%, up from 15.3% in 2011.

Depreciation and amortization expenses for the year ended December 31, 2012 decreased $691, or 2.1%, to $32,449 from $33,140 for the year ended December 31, 2011.  This decrease was due primarily to a decrease in software amortization.  Depreciation and amortization expenses as a percentage of net sales remained consistent at 0.6% for the years ended December 31, 2012 and 2011.

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 the Company’s business activities.  Other income, net totaled $33,143 for the year ended December 31, 2012, compared to $3,769 for the year ended December 31, 2011.  The increase in other income, net for the year ended December 31, 2012 was due to a substantial increase in net gains on the sale of property of $30,638, partially offset by impairment losses of $1,066 recorded on other property held for sale. For the year ended December 31, 2011, other income, net included losses on the sale property of $140 and property impairment losses of $312, primarily on assets that were held for sale.

Income from operations totaled $147,682 for the year ended December 31, 2012, an increase of $4,472, or 3.1%, from $143,210 for the year ended December 31, 2011.  The increase was due to higher net sales and gross margin, higher other

12



income, net and lower depreciation and amortization expenses, partially offset by increases in selling, general and administrative expenses.

Interest expense, net decreased $7,787, or 77.7%, to $2,234 for the year ended December 31, 2012 from $10,021 for the year ended December 31, 2011.  This decrease was due to the additional interest expense associated with the settlement of the interest rate swap totaling $3,257 during the fourth quarter of 2011, as well as lower levels of outstanding long-term debt during the year ended December 31, 2012, compared to 2011. Long-term debt outstanding, including current portion, was $11,995 at December 31, 2012, compared to $51,835 at December 31, 2011.

The increase in income from operations and lower interest expense, net resulted in income before provision for income taxes of $145,448 for the year ended December 31, 2012, an increase of $12,259, or 9.2%, compared to $133,189 for the year ended December 31, 2011.
 
The Company’s total provision for income taxes increased $7,552, or 14.7%, to $58,850 for the year ended December 31, 2012 from $51,298 for the year ended December 31, 2011, as a result of higher income before provision for income taxes.  The Company’s effective tax rate was 40.5% for the year ended December 31, 2012, up from 38.5% for the year ended December 31, 2011.  The effective tax rates for the years ended December 31, 2012 and 2011 were higher than the 35.0% US federal statutory rate primarily due to state and local income taxes.

Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2012 increased $4,866, or 6.0%, to $86,291 from $81,425 for the year ended December 31, 2011.

2011 Compared to 2010

Net sales totaled $5,374,800 for the year ended December 31, 2011, compared to $4,616,377 for the year ended December 31, 2010, an increase of $758,423, or 16.4%.  Net sales to the electrical and comm/data market sectors during the year ended December 31, 2011 increased 15.2% and 19.1%, respectively, compared to the year ended December 31, 2010.

Gross margin increased $128,618, or 14.8%, to $995,259 from $866,641, due to higher net sales for the year ended December 31, 2011, compared to the year ended December 31, 2010.  The Company’s gross margin as a percent of net sales was 18.5% for the year ended December 31, 2011, down from 18.8% in 2010, primarily due to price competition and rising product costs.

Selling, general and administrative expenses increased $68,690, or 9.1%, to $822,678 for the year ended December 31, 2011, compared to $753,988 for the year ended December 31, 2010, mainly due to higher employment-related costs.  Selling, general and administrative expenses as a percentage of net sales for the year ended December 31, 2011 were 15.3%, down from 16.3% in 2010.

Depreciation and amortization expenses for the year ended December 31, 2011 decreased $6,585, or 16.6%, to $33,140 from $39,725 for the year ended December 31, 2010.  This decrease was due primarily to a decrease in software amortization.  Depreciation and amortization expenses as a percentage of net sales decreased to 0.6% for the year ended December 31, 2011, compared to 0.9% of net sales the year ended December 31, 2010.

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 the Company’s business activities.  Other income, net totaled $3,769 for the year ended December 31, 2011, compared to $4,608 for the year ended December 31, 2010.  Losses on the sale of property were $140 for the year ended December 31, 2011, compared to gains on the disposal of property of $1,177 for the year ended December 31, 2010.  Other income, net for the year ended December 31, 2011, included property impairment losses of $312, primarily on assets that were held for sale.

Income from operations totaled $143,210 for the year ended December 31, 2011, an increase of $65,674, or 84.7%, from $77,536 for the year ended December 31, 2010.  The increase was due to higher net sales and gross margin and lower depreciation and amortization expenses, partially offset by increases in selling, general and administrative expenses and lower other income, net.

Interest expense, net increased $1,959, or 24.3%, to $10,021 for the year ended December 31, 2011 from $8,062 for the year ended December 31, 2010.  This increase was due to the settlement of the interest rate swap totaling $3,257 during the fourth quarter of 2011, partially offset by a lower level of outstanding long-term debt during the year ended December 31, 2011, compared to 2010.
 

13



The increase in income from operations and higher interest expense, net resulted in income before provision for income taxes of $133,189 for the year ended December 31, 2011, an increase of $63,715, or 91.7%, compared to $69,474 for the year ended December 31, 2010.
 
The Company’s total provision for income taxes increased $24,117, or 88.7%, to $51,298 for the year ended December 31, 2011 from $27,181 for the year ended December 31, 2010, as a result of higher income before provision for income taxes.  The Company’s effective tax rate was 38.5% for the year ended December 31, 2011, down from 39.1% for the year ended December 31, 2010.  The effective tax rates for the years ended December 31, 2011 and 2010 were higher than the 35.0% US federal statutory rate primarily due to state and local income taxes.

Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2011 increased $39,427, or 93.9%, to $81,425 from $41,998 for the year ended December 31, 2010.

Financial Condition and Liquidity
 
The Company has historically funded its working capital requirements using cash flows generated by the collection of trade receivables and trade accounts payable terms with its suppliers, supplemented by short-term bank lines of credit.  Capital assets have been financed primarily by short-term bank lines of credit and long-term debt. 
Cash Flow Information
For the Years Ended December 31,
2012

2011

2010

Net cash provided (used) by operations
$
59,857

$
94,908

$
(10,240
)
Net cash used by investing activities
(26,805
)
(60,996
)
(29,120
)
Net cash used by financing activities
(67,345
)
(44,301
)
(42,148
)
Net Decrease in Cash
$
(34,293
)
$
(10,389
)
$
(81,508
)
 
Operating Activities
       
Net cash provided by operations was $59,857 for the year ended December 31, 2012, compared to $94,908 for the year ended December 31, 2011.  Positive cash flows from operations for the year ended December 31, 2012 were primarily attributable to net income of $86,598, and a decrease in trade receivables of $33,587, partially offset by an increase in merchandise inventory of $20,629 and a decrease in trade accounts payable of $58,136.
 
Trade receivables decreased during 2012 compared to the year ended December 31, 2011.  The average number of days of sales outstanding at December 31, 2012, measured using annual sales, decreased moderately, compared to the average number of days at December 31, 2011.  Average days of sales outstanding for the three month period ended December 31, 2012, decreased moderately, compared to the same three month period of 2011.  Average inventory turnover increased moderately for the year ended December 31, 2012, compared to the same period of 2011.  Merchandise inventory turnover for the three month period ended December 31, 2012, improved modestly, compared to the same three month period of 2011.

Current assets exceeded current liabilities by $424,697 at December 31, 2012, an increase of $30,964, or 7.9%, from $393,733 at December 31, 2011.

Investing Activities

Net cash used by investing activities totaled $26,805 for the year ended December 31, 2012, compared to $60,996 used during the year ended December 31, 2011.  Capital expenditures for property were $61,362 and $62,162, and proceeds from the disposal of property were $34,079 and $296, for the years ended December 31, 2012 and 2011, respectively.  The proceeds received in 2012 were primarily from the sale of real property, and the proceeds received in 2011 were primarily from the sale of personal property.  Cash received from the Company’s investment in affiliated company was $478 and $870, for the years ended December 31, 2012 and 2011, respectively, and relates to the Company’s membership in Graybar Financial Services, LLC, which was terminated and dissolved in September 2012.
 
Financing Activities
 
Net cash used by financing activities totaled $67,345 for the year ended December 31, 2012, compared to $44,301 used during the year ended December 31, 2011.

Cash provided by short-term borrowings was $28,554 for the year ended December 31, 2012, compared to $22,867 for the year ended December 31, 2011.  The Company made payments on long-term debt, including current portion, of $38,851 and

14



capital lease obligations of $2,960 during the year ended December 31, 2012.  The Company made payments on long-term debt, including current portion, of $43,864 and capital lease obligations of $3,306 during the year ended December 31, 2011
 
Cash provided by the sale of common stock amounted to $11,925 and $11,121, and purchases of treasury stock were $11,172 and $9,264, for the years ended December 31, 2012 and 2011, respectively.  Cash paid to purchase noncontrolling interest stock was $2,863 and $109, for the years ended December, 2012 and 2011, respectively. There were no sales of noncontrolling interest stock for the year ended December 31, 2012. Cash provided by the sale of noncontrolling interest stock was $512 for the year ended December 31, 2011. Cash dividends paid were $51,978 and $22,258, for the years ended December 31, 2012 and 2011, respectively. The increase in cash dividends paid for the year ended December 31, 2012 was due to an additional special cash dividend of $1.00 per share as well as the decision to pay the fourth quarter cash dividend in 2012 as opposed to 2013.

Cash and cash equivalents were $37,674 at December 31, 2012, a decrease of $34,293, or 47.7%, from $71,967 at December 31, 2011.

Liquidity

On December 31, 2012 and 2011, the Company and Graybar Canada Limited, the Company's Canadian operating subsidiary (“Graybar Canada”), had available an unsecured, five-year, $500,000 revolving credit agreement maturing in September 2016 with Bank of America, N.A. and other lenders named therein, which includes a combined letter of credit sub-facility of up to $50,000, a US swing line loan facility of up to $50,000, and a Canadian swing line loan facility of up to $20,000 (the "Credit Agreement"). The Credit Agreement also includes a $100,000 sublimit (in US or Canadian dollars) for borrowings by Graybar Canada and contains an accordion feature, which allows the Company to request increases in the aggregate borrowing commitments of up to $200,000. There were $71,116 and $42,562 in short-term borrowings outstanding at December 31, 2012 and 2011, respectively.

At December 31, 2012, the Company had total letters of credit of $8,938 outstanding, of which $763 were issued under the $500,000 revolving credit facility.  The letters of credit are used primarily to support certain workers compensation insurance policies.

Short-term borrowings outstanding during the years ended December 31, 2012 and 2011 ranged from a minimum of $35,105 and $13,800 to a maximum of $111,032 and $91,548, respectively. 

At December 31, 2012, the Company had available to it unused lines of credit amounting to $428,884, compared to $457,438 at December 31, 2011.  These lines are available to meet the short-term cash requirements of the Company, and certain committed lines of credit have annual fees of up to 35 basis points (0.35%) of the committed lines of credit as of December 31, 2012 and 2011.

Prior to March 2012, the Company had a lease agreement with an independent lessor, which provided $28,720 of financing for five of the Company’s distribution facilities.  The agreement carried a five-year term expiring July 2013.  The financing structure used with this lease qualified as a silo of a variable interest entity.  In accordance with US GAAP, the Company, as the primary beneficiary, consolidated the silo in its financial statements. At December 31, 2011, the consolidated silo included in the Company’s consolidated financial statements had a net property balance of $15,118, long-term debt of $27,715, and a noncontrolling interest of $1,005. Under the terms of the lease agreement, the amount guaranteed by the Company as the residual fair value of the property subject to the lease arrangement was $28,720 at December 31, 2011.

In December 2011, the Company notified the independent lessor of its intent to prepay and terminate the lease arrangement. As a result, the Company reclassified the $27,715 lease arrangement from long-term debt to current portion of long-term debt as of December 31, 2011. In March 2012, the Company terminated the lease arrangement, prepaid the $27,715 balance owed on the debt portion of the lease arrangement and purchased the $1,005 noncontrolling interest in the consolidated silo.
 
The revolving credit agreement and certain other note agreements contain various affirmative and negative covenants.  The Company is also required to maintain certain financial ratios as defined in the agreements.  The Company was in compliance with all covenants under these agreements as of December 31, 2012 and 2011.


15



Contractual Obligations and Commitments
 
The Company had the following contractual obligations as of December 31, 2012:
 
 
 

Payments due by period
Contractual obligations
Total

2013

2014
and
2015

2016
and
2017

 
After
2017

Long-term debt obligations
$
7,631

$
7,631

$

$

$

Capital lease obligations
4,768

2,730

1,905

133


Operating lease obligations
78,397

18,800

27,215

17,082

15,300

Purchase obligations
592,679

592,679




Total
$
683,475

$
621,840

$
29,120

$
17,215

$
15,300

 
Long-term debt and capital lease obligations consist of both principal and interest payments.

The Company also had letters of credit of $8,938 outstanding, of which $763 were issued under the $500,000 revolving credit facility.  At December 31, 2012, the Company had $428,884 available in unused lines of credit.

Purchase obligations consist of open purchase orders issued in the normal course of business.  Many of these purchase obligations may be cancelled with limited or no financial penalties.
 
The table above does not include $168,023 of accrued, unfunded pension obligations, $92,518 of accrued, unfunded employment-related benefit obligations, of which $83,836 is related to the Company’s postretirement benefit plan, and $3,530 in contingent payments for uncertain tax positions because it is not certain when these obligations will be settled or paid.
 
The Company also expects to make contributions totaling approximately $40,800 to its defined benefit pension plan during 2013 that are not included in the table.  The Company contributed $40,600 to its defined benefit pension plan in 2012.
 
Critical Accounting Policies
 
The consolidated financial statements are prepared in accordance with US GAAP, which require the Company to make estimates and assumptions (see Note 2 in notes to the consolidated financial statements located in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K).  The Company believes the following accounting policies have the potential to have a more significant impact on its financial statements either because of the significance of the financial statement item to which they relate or because they involve a higher degree of judgment and complexity.
 
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.  The Company’s standard shipping terms are FOB shipping point, under which product title passes to the customer at the time of shipment.  The Company does, however, fulfill some customer orders based on shipping terms of FOB destination, whereby title passes to the customer at the time of delivery.  The Company also earns revenue for services provided to customers for supply chain management and logistics services.  Service revenue, which accounts for less than one percent (1%) of net sales, 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.
 
Allowance for Doubtful Accounts
 
The Company performs ongoing credit evaluations of its customers, and a significant portion of its trade receivables is secured by mechanic’s lien or payment bond rights.  The Company maintains 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 the Company’s customers were to deteriorate.
 



16



Income Taxes
 
The Company recognizes 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.  The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, a valuation allowance is established.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.  The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages. 
 
Merchandise Inventory
 
The Company values its inventories 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.  In assessing the ultimate realization of inventories, the Company makes judgments as to its return rights to suppliers and future demand requirements.  If actual future demand, market conditions, or supplier return provisions are less favorable than those projected by management, additional inventory write-downs may be required.
 
Pension and Postretirement Benefits Plans
 
The Company’s pension and postretirement benefits obligations and expenses are determined based on the selection of certain assumptions developed by the Company and used by its actuaries in calculating such amounts.  For the Company’s pension obligation, the most significant assumptions are the expected long-term rate of return on plan assets and the interest rate used to discount plan liabilities.  For the Company’s postretirement benefits plan liability, the most significant assumption is the interest rate used to discount the plan obligations. 
 
The following tables present key assumptions used to measure the pension and postretirement benefits obligations at December 31: 
 
Pension Benefits
    Postretirement Benefits
 
2012
2011
2012
2011
Discount rate
3.95%
4.75%
3.51%
4.25%
Expected return on plan assets
6.25%
6.25%
       
While management believes that the assumptions selected by the Company are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension and postretirement benefits obligations and future pension and postretirement benefits expense.  For example, holding all other assumptions constant, a one percent (1%) decrease in the discount rate used to calculate both pension expense for 2012 and the pension liability as of December 31, 2012 would have increased pension expense by $7,000 and the pension liability by $73,200, respectively.  Similarly, a one percent (1%) decrease in the discount rate would have increased 2012 postretirement benefits expense by $200 and the December 31, 2012 postretirement benefits liability by $7,300.  
 
The Company's expected long-term rate of return on plan assets will decrease to 6.00% for 2013. A decrease in the expected long-term rate of return on plan assets could result in higher pension expense and increase or accelerate the Company’s contributions to the defined benefit pension plan in future years.  As an example, holding all other assumptions constant, a one percent (1%) decrease in the assumed rate of return on plan assets would have increased 2012 pension expense by $4,000.

For measurement of the postretirement benefits net periodic cost, an 8.00% annual rate of increase in per capita cost of covered health care benefits was assumed for 2012.  The rate was assumed to decrease to 5.00% in 2019 and to remain at that level thereafter. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have had a material effect on 2012, 2011 and 2010 postretirement benefit obligations or net periodic benefit cost.
 
Supplier Volume Incentives
 
The Company’s agreements with many of its suppliers provide for the Company to earn volume incentives based on

17



purchases during the agreement period.  These agreements typically provide for the incentives to be paid quarterly or annually in arrears.  The Company estimates amounts to be received from suppliers at the end of each reporting period based on the earnout level that the Company believes is probable of being achieved.  The Company records the incentive ratably over the year as a reduction of cost of merchandise sold as the related inventory is sold.  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 the Company’s 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.
 
New Accounting Standards
 
        No new accounting standards that were issued or became effective during 2012 have had or are expected to have a material impact on the Company’s consolidated financial statements.
 
In February 2013, the FASB issued Accounting Standards Update (“ASU” or “Update”) 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”).  The update requires that the Company present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification.  The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2012.  The Company does not anticipate that this guidance will have an impact on its financial position or results from operations.

In September 2011, the FASB issued ASU No. 2011- 08, "Intangibles-Goodwill and Other: Testing Goodwill for Impairment". This ASU amends the guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. This Update does not change how goodwill is calculated or assigned to reporting units nor does it revise the requirement to test goodwill annually for impairment. This guidance was adopted early by Graybar for the annual period ending December 31, 2011 and all reporting periods thereafter.
 
In May 2011, the FASB issued ASU No. 2011- 04, "Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS". This Update amends the guidance on fair value measurements to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and International Financial Reporting Standards ("IFRS"). This ASU does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The Company adopted this Update as of January 1, 2012 and the adoption did not have a material impact on the Company's results of operations, financial position, or cash flows during the year ended December 31, 2012.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010
 
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively the "Acts") were enacted by the US Congress in March 2010.  The Acts have both short- and long-term implications for benefit plan standards.  Implementation of this legislation is planned to occur in phases through 2018. 
 
The Company’s healthcare costs have increased due to the Acts’ raising of the maximum eligible age for covered dependents to receive benefits. The Company anticipates that the elimination of the lifetime dollar limits per covered individual, as well as other standard requirements of the Acts, will also cause the Company’s healthcare costs to increase in the future. Beginning in 2013, the Company will bear increased costs due to annual fees imposed by the Acts. The planned enactment of the excise tax on “high cost” healthcare plans in 2018 may also cause the Company's healthcare costs to increase further.
 
The Company expects the general trend in healthcare costs to continue to rise and the effects of the Acts, and any future legislation, could materially impact the cost of providing healthcare benefits for many employers, including the Company.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the risk of loss arising from adverse changes in market rates and prices, including interest rates, foreign currency exchange rates, commodity prices, and equity prices.  The Company’s primary exposures to market risk are interest rate risk associated with debt obligations, foreign currency exchange rate risk, and commodity risk.

18



 
Interest Rate Risk
 
The Company’s interest expense is sensitive to changes in the general level of interest rates.  Changes in interest rates have different impacts on the fixed-rate and variable-rate portions of the Company’s debt portfolio.  A change in market interest rates on the fixed-rate portion of the debt portfolio impacts the fair value of the financial instrument, but has no impact on interest incurred or cash flows.  A change in market interest rates on the variable-rate portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the fair value of the financial instrument.  To mitigate the cash flow impact of interest rate fluctuations on the cost of financing its capital assets, the Company generally endeavors to maintain a significant portion of its long-term debt as fixed-rate in nature.
 
Based on $71,116 in variable-rate debt outstanding at December 31, 2012, a one percent (1%) increase in interest rates would increase the Company’s interest expense by $711 per annum.
 
The following table provides information about financial instruments that are sensitive to changes in interest rates.  The table presents principal payments on debt and related weighted-average interest rates by expected maturity dates:
 
 
 

 

 

 

 

 

December 31, 2012
 
Debt Instruments
2013
2014
2015
2016
2017
After
2017
Total

Fair
Value

 
 

 

 
 
 
 
 
 
Long-term, fixed-rate debt
$
10,005

1,446

412

132



$
11,995

$
11,780

Weighted-average interest rate
5.76
%
3.38
%
2.92
%
2.79
%


 
 
 
 

 

 

 

 

 

 

 

Short-term, variable-rate borrowings
$
71,116






$
71,116

$
71,116

Weighted-average interest rate
1.88
%





 
 
 
The fair value of long-term debt is estimated by discounting cash flows using current borrowing rates available for debt of similar maturities.
 
 Foreign Currency Exchange Rate Risk
 
The functional currency for the Company’s Canadian subsidiary is the Canadian dollar.  Accordingly, its balance sheet amounts are translated at the exchange rates in effect at year-end and its income and expenses are translated using average exchange rates prevailing during the year.  Currency translation adjustments are included in accumulated other comprehensive loss.  Exposure to foreign currency exchange rate fluctuations is not material.
 
Commodity Risk
 
The Company has a moderate level of primary exposure to commodity price risk on products it purchases for resale, such as wire and cable, steel conduit, and many other products that contain copper or steel or both.  Graybar does not purchase commodities directly, however.
 
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS:
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2012, included in our Annual Report on Form 10-K for such period as filed with the SEC, should be read in conjunction with our accompanying audited consolidated financial statements and the notes thereto.
 
Certain statements, other than purely historical information, including estimates, projections, statements relating to the Company’s 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 ("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 similar expressions. 

19



The Company intends 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.  The Company’s 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 the Company’s 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 metal commodities, disruptions in the Company’s sources of supply, a sustained interruption in the operation of the Company’s information systems, increased funding requirements and expenses related to the Company's pension plan, adverse legal proceedings or other claims, and the inability, or limitations on the Company’s 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.  The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  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 SEC.  Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of this Annual Report on Form 10-K for the year ended December 31, 2012.

Item 8.  Financial Statements and Supplementary Data







[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] 

20



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
The Board of Directors and Shareholders
Graybar Electric Company, Inc.
 
We have audited the accompanying consolidated balance sheets of Graybar Electric Company, Inc. (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Graybar Electric Company, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
 
 
/s/ Ernst & Young LLP
 
 
St. Louis, Missouri
March 14, 2013
 
 

21



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
For the Years Ended December 31,
(Stated in thousands, except per share data)
2012

2011

2010

Net Sales
$
5,413,281

$
5,374,800

$
4,616,377

Cost of merchandise sold
(4,394,919
)
(4,379,541
)
(3,749,736
)
Gross Margin
1,018,362

995,259

866,641

Selling, general and administrative expenses
(871,374
)
(822,678
)
(753,988
)
Depreciation and amortization
(32,449
)
(33,140
)
(39,725
)
Other income, net
33,143

3,769

4,608

Income from Operations
147,682

143,210

77,536

Interest expense, net
(2,234
)
(10,021
)
(8,062
)
Income before provision for income taxes
145,448

133,189

69,474

Provision for income taxes
(58,850
)
(51,298
)
(27,181
)
Net Income
86,598

81,891

42,293

Net income attributable to noncontrolling interests
(307
)
(466
)
(295
)
Net Income attributable to Graybar Electric Company, Inc.
$
86,291

$
81,425

$
41,998

Net Income attributable to Graybar Electric Company, Inc.
per share of Common Stock (A)
$
5.54

$
5.27

$
2.73

(A)  Adjusted for the declaration of a twenty percent (20%) stock dividend in December 2012, shares related to which were issued in February 2013.  Prior to the adjustment, the average common shares outstanding were 12,876 and 12,812 for the years ended December 31, 2011 and 2010, respectively.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
 

22



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income

 
For the Years Ended December 31,
(Stated in thousands)
2012

2011

2010

Net Income
$
86,598

$
81,891

$
42,293

Other Comprehensive Income
 
 
 
Foreign currency translation
1,802

(1,520
)
2,807

Unrealized gain less realized loss from interest rate swap
 
 
 
(net of tax of $-, $1,831, and $102, respectively)

2,876

161

Pension and postretirement benefits liability adjustment
 
 
 
(net of tax of $11,735, $31,454, and $1,646, respectively)
(18,433
)
(49,405
)
(2,586
)
Total Other Comprehensive (Loss) Income
(16,631
)
(48,049
)
382

Comprehensive Income
$
69,967

$
33,842

$
42,675

Less: comprehensive income attributable to noncontrolling interests,
          net of tax
(126
)
(438
)
(421
)
Comprehensive Income attributable to
       Graybar Electric Company, Inc.
$
69,841

$
33,404

$
42,254


The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.


23



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
 
 
December 31,
(Stated in thousands, except share and per share data)
 
 
2012

2011

ASSETS
 
 
 

 

       Current Assets
 
 
 
 

Cash and cash equivalents
 
 
$
37,674

$
71,967

Trade receivables (less allowances of $6,868 and $7,764, respectively)
764,130

797,717

Merchandise inventory
 
 
416,753

396,124

Other current assets
 
 
25,442

23,507

Total Current Assets
 
 
1,243,999

1,289,315

       Property, at cost
 
 
 
 
Land
 
 
65,821

64,691

Buildings
 
 
393,399

374,008

Furniture and fixtures
 
 
212,650

188,929

Software
 
 
76,906

76,906

Capital leases
 
 
11,463

12,546

Total Property, at cost
 
 
760,239

717,080

Less – accumulated depreciation and amortization
(402,233
)
(386,150
)
Net Property
 
 
358,006

330,930

       Other Non-current Assets
 
 
83,932

84,494

Total Assets
 
 
$
1,685,937

$
1,704,739

LIABILITIES
 
 
 
 
       Current Liabilities
 
 
 
 
Short-term borrowings
 
 
$
71,116

$
42,562

Current portion of long-term debt
 
 
10,005

41,490

Trade accounts payable
 
 
555,868

614,004

Accrued payroll and benefit costs
 
 
109,250

117,965

Other accrued taxes
 
 
11,748

15,329

Dividends payable
 
 

12,943

Other current liabilities
 
 
61,315

51,289

Total Current Liabilities
 
 
819,302

895,582

Postretirement Benefits Liability
 
 
77,036

71,699

Pension Liability
 
 
167,223

136,668

Long-term Debt
 
 
1,990

10,345

Other Non-current Liabilities
 
 
20,170

19,051

Total Liabilities
1,085,721

1,133,345

SHAREHOLDERS’ EQUITY
 
 
 

 

 
Shares at December 31,
 
 
 
Capital Stock
2012

2011

 
 
Common, stated value $20.00 per share
 
 
 

 
Authorized
20,000,000

20,000,000

 

 
Issued to voting trustees
12,844,501

10,611,982

 

 
Issued to shareholders
2,740,489

2,285,255

 

 
In treasury, at cost
(84,566
)
(15,725
)
 

 
Outstanding Common Stock
15,500,424

12,881,512

310,008

257,630

Common shares subscribed
660,775

610,949

13,215

12,219

Less subscriptions receivable
(660,775
)
(610,949
)
(13,215
)
(12,219
)
Retained Earnings
 
 
453,770

458,139

Accumulated Other Comprehensive Loss
 
 
(166,814
)
(150,364
)
Total Graybar Electric Company, Inc. Shareholders’ Equity
596,964

565,405

Noncontrolling Interests
 
 
3,252

5,989

Total Shareholders’ Equity
 
 
600,216

571,394

Total Liabilities and Shareholders’ Equity
$
1,685,937

$
1,704,739

 
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
 

24



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

 
For the Years Ended December 31,
(Stated in thousands)
2012

2011

2010

Cash Flows from Operations
 
 
 

Net Income
$
86,598

$
81,891

$
42,293

Adjustments to reconcile net income to cash provided
by operations:
 

 

 
Depreciation and amortization
32,449

33,140

39,725

Deferred income taxes
9,877

424

10,627

Net (gains) losses on disposal of property
(30,638
)
140

(1,177
)
Losses on impairment of property
1,066

312


Net income attributable to noncontrolling interests
(307
)
(466
)
(295
)
Changes in assets and liabilities:
 
 
 
Trade receivables
33,587

(119,505
)
(100,812
)
Merchandise inventory
(20,629
)
(5,774
)
(80,728
)
Other current assets
(4,108
)
(7,616
)
11,462

Other non-current assets
4,115

(33,547
)
(2,429
)
Trade accounts payable
(58,136
)
93,649

69,076

Accrued payroll and benefit costs
(8,715
)
22,454

28,572

Other current liabilities
7,855

(3,520
)
(11,662
)
Other non-current liabilities
6,843

33,326

(14,892
)
Total adjustments to net income
(26,741
)
13,017

(52,533
)
Net cash provided (used) by operations
59,857

94,908

(10,240
)
Cash Flows from Investing Activities
 
 
 
Proceeds from disposal of property
34,079

296

3,880

Capital expenditures for property
(61,362
)
(62,162
)
(33,624
)
Investment in affiliated company
478

870

624

Net cash used by investing activities
(26,805
)
(60,996
)
(29,120
)
Cash Flows from Financing Activities
 
 
 
Net increase in short-term borrowings
28,554

22,867

4,463

Repayment of long-term debt
(38,851
)
(43,864
)
(32,160
)
Proceeds from long-term debt


8,528

Principal payments under capital leases
(2,960
)
(3,306
)
(1,968
)
Sales of common stock
11,925

11,121

9,799

Purchases of treasury stock
(11,172
)
(9,264
)
(10,448
)
Sales of noncontrolling interests’ common stock

512


Purchases of noncontrolling interests’ common stock
(2,863
)
(109
)
(151
)
Dividends paid
(51,978
)
(22,258
)
(20,211
)
Net cash used by financing activities
(67,345
)
(44,301
)
(42,148
)
Net Decrease in Cash
(34,293
)
(10,389
)
(81,508
)
Cash, Beginning of Year
71,967

82,356

163,864

Cash, End of Year
$
37,674

$
71,967

$
82,356

Supplemental Cash Flow Information:
 

 

 

Non-cash Investing and Financing Activities:
 

 

 

Acquisition of equipment under capital leases
$
1,971

$
2,332

$
5,009

Cash Paid During the Year for:
 

 

 

Interest, net of amounts capitalized
$
2,376

$
10,880

$
8,562

Income taxes, net of refunds
$
58,018

$
55,136

$
15,037

 
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
 

25



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
  
 
Graybar Electric Company, Inc.
Shareholders’ Equity
 
 
(Stated in thousands)
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
 
Total
Shareholders’
Equity
Balance, December 31, 2009
$
211,970

$
423,920

$
(102,599
)
$
4,878

$
538,169

Net income
 

41,998

 

295

42,293

Other comprehensive income
 

 

256

126

382

Stock issued
9,799

 

 



9,799

Stock purchased
(10,448
)
 

 

(151
)
(10,599
)
Dividends declared
21,079

(42,316
)
 

 

(21,237
)
Balance, December 31, 2010
$
232,400

$
423,602

$
(102,343
)
$
5,148

$
558,807

Net income
 

81,425

 

466

81,891

Other comprehensive income
 

 

(48,021
)
(28
)
(48,049
)
Stock issued
11,121

 

 

512

11,633

Stock purchased
(9,264
)
 

 

(109
)
(9,373
)
Dividends declared
23,373

(46,888
)
 

 

(23,515
)
Balance, December 31, 2011
$
257,630

$
458,139

$
(150,364
)
$
5,989

$
571,394

Net income
 

86,291

 

307

86,598

Other comprehensive loss
 

 

(16,450
)
(181
)
(16,631
)
Stock issued
11,925

 

 



11,925

Stock purchased
(11,172
)
 

 

(2,863
)
(14,035
)
Dividends declared
51,625

(90,660
)
 

 

(39,035
)
Balance, December 31, 2012
$
310,008

$
453,770

$
(166,814
)
$
3,252

$
600,216

 
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
 

26



Graybar Electric Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
as of December 31, 2012 and 2011 and
for the Years Ended December 31, 2012, 2011, and 2010
(Stated in thousands, except share and per share data)
 

1. DESCRIPTION OF THE BUSINESS
 
Graybar Electric Company, Inc. (“Graybar” or the “Company”) is a New York corporation, incorporated in 1925.  The Company is engaged in the distribution of electrical, communications and data networking (“comm/data”) products and the provision of related supply chain management and logistics services, primarily to electrical and comm/data contractors, industrial plants, federal, state and local governments, commercial users, telephone companies, and power utilities in North America.  All products sold by the Company are purchased by the Company from others, and the Company neither manufactures nor contracts to manufacture any products that it sells.  The Company’s business activity is primarily with customers in the United States of America (“US”).  Graybar also has subsidiary operations with distribution facilities in Canada and Puerto Rico.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The Company’s accounting policies conform to generally accepted accounting principles in the US (“US GAAP”) and are applied on a consistent basis among all years presented. Significant accounting policies are described below.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Graybar Electric Company, Inc. 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 US 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.

Reclassifications
 
Certain reclassifications have been made to prior years' financial information to conform to the December 31, 2012 presentation.
 
Subsequent Events
 
        The Company has evaluated subsequent events through the time of the filing of this Annual Report on Form 10-K with the United States Securities and Exchange Commission (“SEC” or the “Commission”).  No material subsequent events have occurred since December 31, 2012 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.  The Company’s standard shipping terms are FOB shipping point, under which product title passes to the customer at the time of shipment.  The Company does, however, fulfill some customer orders based on shipping terms of FOB destination, whereby title passes to the customer at the time of delivery.  The Company also earns revenue for services provided to customers for supply chain management and logistics services.  Service revenue, which accounts for less than one percent (1%) of net sales, 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.
 

27



Outgoing Freight Expenses                                                                                        
 
The Company records certain outgoing freight expenses as a component of selling, general and administrative expenses.  These costs totaled $44,672, $40,896, and $35,683 for the years ended December 31, 2012, 2011, and 2010, respectively.
  
Cash and Cash Equivalents
 
The Company accounts 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
 
The Company performs ongoing credit evaluations of its customers, and a significant portion of its trade receivables is secured by mechanic’s lien or payment bond rights.  The Company maintains 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 the Company’s customers were to deteriorate.
 
Merchandise Inventory
 
The Company’s 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. 
 
The Company makes provisions for obsolete or excess inventories as necessary to reflect reductions in inventory value. 
 
Supplier Volume Incentives
 
The Company’s agreements with many of its suppliers provide for the Company to earn volume incentives based on purchases during the agreement period.  These agreements typically provide for the incentives to be paid quarterly or annually in arrears.  The Company estimates amounts to be received from suppliers at the end of each reporting period based on the earnout level that the Company believes is probable of being achieved.  The Company records the incentive ratably over the year as a reduction of cost of merchandise sold as the related inventory is sold.  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 the Company’s 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 the Company to concentrations of credit risk consist primarily of trade receivables.  The Company performs ongoing credit evaluations of its customers, and a significant portion of its trade receivables is secured by mechanic’s lien or payment bond rights.  The Company maintains allowances for potential credit losses and such losses historically have been within management’s expectations.
 
Fair Value
 
The Company endeavors to utilize the best available information in measuring fair value.  US 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.  The Company has used fair

28



value measurements to value its pension plan assets.
 
Foreign Currency Exchange Rate
 
The functional currency for the Company’s Canadian subsidiary is the Canadian dollar.  Accordingly, its balance sheet amounts are translated at the exchange rates in effect at year-end and its statements of income amounts are translated at the average rates of exchange prevailing during the year.  Currency translation adjustments are included in accumulated other comprehensive loss.
 
Goodwill
 
The Company’s goodwill and indefinite-lived intangible assets are 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.  The Company performs either a qualitative or quantitative 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 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.  As of December 31, 2012, the Company has completed its annual impairment test and concluded that there is no impairment of the Company’s goodwill.  At December 31, 2012 and 2011, the Company had $6,680 of goodwill included in other non-current assets in its consolidated balance sheets.
 
Income Taxes
 
The Company recognizes 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.  The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, a valuation allowance is established.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.  The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages.
 
Other Postretirement Benefits
 
The Company accounts 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.  The Company’s consolidated balance sheets reflect the funded status of postretirement benefits.
 
Pension Plan
 
The Company sponsors 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.  The Company’s 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 2012 have had or are expected to have a material impact on the Company’s consolidated financial statements.

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU” or “Update”) 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”).  The update requires that the Company present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification.  The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2012.  The Company does not anticipate that this guidance will have an impact on its financial position or results from operations.

29



 
In September 2011, the FASB issued ASU No. 2011- 08, "Intangibles-Goodwill and Other: Testing Goodwill for Impairment". This ASU amends the guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. This Update does not change how goodwill is calculated or assigned to reporting units nor does it revise the requirement to test goodwill annually for impairment. This guidance was adopted early by Graybar for the annual period ending December 31, 2011 and all reporting periods thereafter.

In May 2011, the FASB issued ASU No. 2011- 04, "Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS". This Update amends the guidance on fair value measurements to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and International Financial Reporting Standards ("IFRS"). This ASU does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The Company adopted this Update as of January 1, 2012 and the adoption did not have a material impact on the Company's results of operations, financial position, or cash flows during the year ended December 31, 2012.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010
 
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively the "Acts") were enacted by the US Congress in March 2010.  The Acts have both short- and long-term implications for benefit plan standards.  Implementation of this legislation is planned to occur in phases through 2018. 
 
The Company’s healthcare costs have increased due to the Acts’ raising of the maximum eligible age for covered dependents to receive benefits. The Company anticipates that the elimination of the lifetime dollar limits per covered individual, as well as other standard requirements of the Acts, will also cause the Company’s healthcare costs to increase in the future. Beginning in 2013, the Company will bear increased costs due to annual fees imposed by the Acts. The planned enactment of the excise tax on “high cost” healthcare plans in 2018 may also cause the Company's healthcare costs to increase further.
 
The Company expects the general trend in healthcare costs to continue to rise and the effects of the Acts, and any future legislation, could materially impact the cost of providing healthcare benefits for many employers, including the Company.

3. CASH DISCOUNTS AND DOUBTFUL ACCOUNTS

The following table summarizes the activity in the allowances for cash discounts and doubtful accounts:
 
 
Beginning Balance

Provision (Charged to Expense)

Deductions

Ending Balance

For the Year Ended December 31, 2012
 
 
 
 
Allowance for cash discounts
$
1,498

$
21,228

$
(21,315
)
$
1,411

Allowance for doubtful accounts
6,266

4,379

(5,188
)
5,457

        Total
$
7,764

$
25,607

$
(26,503
)
$
6,868

 
 
 
 
 
For the Year Ended December 31, 2011
 
 
 
 
Allowance for cash discounts
$
1,373

$
20,440

$
(20,315
)
$
1,498

Allowance for doubtful accounts
5,926

5,537

(5,197
)
6,266

Total
$
7,299

$
25,977

$
(25,512
)
$
7,764

 
 
 
 
 
For the Year Ended December 31, 2010
 
 
 
 
Allowance for cash discounts
$
1,201

$
17,854

$
(17,682
)
$
1,373

Allowance for doubtful accounts
5,016

6,401

(5,491
)
5,926

Total
$
6,217

$
24,255

$
(23,173
)
$
7,299



30



4. INVENTORY

The Company’s inventory is stated at the lower of cost (determined using the last-in, first-out (“LIFO”) cost method) or market.  Had the first-in, first-out (“FIFO”) method been used, merchandise inventory would have been approximately $150,912 and $148,513 greater than reported under the LIFO method at December 31, 2012 and 2011, respectively.  The Company did not liquidate any portion of previously-created LIFO layers in 2012, 2011, and 2010
 
Reserves for excess and obsolete inventories were $3,500 and $3,800 at December 31, 2012 and 2011, respectively.  The change in the reserve for excess and obsolete inventories, included in cost of merchandise sold, was $(300), $(700), and $600 for the years ended December 31, 2012, 2011, and 2010, respectively.

5. PROPERTY AND DEPRECIATION

The Company provides for depreciation and amortization using the straight-line method over the following estimated useful asset lives:
Classification
Estimated Useful Asset Life
Buildings
42 years
Leasehold improvements
Over the shorter of the asset’s life or the lease term
Furniture, fixtures, equipment and software
3 to 14 years
Assets held under capital leases
Over the shorter of the asset’s life or the lease term
 
Depreciation expense was $28,937, $27,728, and $25,273 in 2012, 2011, and 2010, respectively.
 
At the time property is retired or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to other income, net.
 
Assets held under capital leases, consisting primarily of information technology equipment, are recorded in property with the corresponding obligations carried in long-term debt.  The amount capitalized is the present value at the beginning of the lease term of the aggregate future minimum lease payments.  Assets held under leases which were capitalized during the year ended December 31, 2012 and 2011 were $1,971 and $2,332, respectively. 
 
The Company capitalizes interest expense on major construction and development projects while in progress.  Interest capitalized in 2012, 2011, and 2010 was $56, $13, and $120, respectively.
 
The Company capitalizes qualifying internal and external costs incurred to develop or obtain software for internal use during the application development stage.  Costs incurred during the pre-application development and post-implementation stages are expensed as incurred.  The Company capitalized software and software development costs of $7,583 and $2,619 in 2012 and 2011, respectively, and the amounts are recorded in furniture and fixtures.
 
The Company considers 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 the Company expects 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, the Company records 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 $3,034 and $6,074 at December 31, 2012 and 2011, respectively, and is recorded in net property in the consolidated balance sheet. During 2012, the Company sold assets classified as held for sale for $33,486 and recorded net gains on the assets held for sale of $30,738 in other income, net.

The Company reviews 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 to be 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. 

31




The Company recorded impairment losses totaling $1,066 and $312 to account for the expected losses on those assets held for sale where the net book value of the property listed for sale exceeded the estimated selling price less estimated selling expenses for the years ended December 31, 2012 and 2011, respectively.  The impairment losses are included in other income, net in the consolidated statements of income for the years ended December 31, 2012 and 2011.  The Company did not record any impairment charges in 2010

6. INCOME TAXES
 
The Company determines its deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of its assets and liabilities calculated using enacted applicable tax rates.  The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, a valuation allowance is established.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.
 
The Company’s unrecognized tax benefits of $3,530, $3,746, and $3,843 as of December 31, 2012, 2011, and 2010, respectively, are uncertain tax positions that would impact the Company’s effective tax rate if recognized.  The Company is periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes.  The Company does not anticipate a material change in unrecognized tax benefits during the next twelve months.
 
The Company’s uncertain tax benefits, and changes thereto, during 2012, 2011, and 2010 were as follows: 
 
2012

2011

2010

Balance at January 1:
$
3,746

$
3,843

$
3,754

Additions based on tax positions related to current year
600

593

699

Additions based on tax positions of prior years


119

Reductions for tax positions of prior years
(570
)
(579
)
(693
)
Settlements
(246
)
(111
)
(36
)
Balance at December 31:
$
3,530

$
3,746

$
3,843

 
The Company classifies interest expense and penalties as part of its provision for income taxes based upon applicable federal and state interest/underpayment percentages.  The Company has accrued $1,195 and $1,239 in interest and penalties in its statement of financial position at December 31, 2012 and 2011, respectively.  Interest was computed on the difference between the provision for income taxes recognized in accordance with US GAAP and the amount of benefit previously taken or expected to be taken in the Company’s federal, state, and local income tax returns. 
 
The Company’s federal income tax returns for the tax years 2008 and forward are available for examination by the United States Internal Revenue Service (“IRS”).  The Company's 2008 and 2009 federal income tax returns are currently under audit examination by the IRS. This examination commenced during June 2011 and is expected to be completed during 2013. Since the audit process has not yet concluded, the audit outcome cannot yet be evaluated. The Company has agreed to extend its federal statute of limitations for the 2008 tax year until September 30, 2013.  The federal statute of limitations for the 2008 tax year will expire on September 30, 2013, unless extended.  The Company’s state income tax returns for 2008 through 2012 remain subject to examination by various state authorities with the latest period closing on December 31, 2017.  The Company has not extended the statutes of limitations in any other state jurisdictions with respect to years prior to 2008.  Such statutes of limitations will expire on or before December 31, 2013 unless extended.

A reconciliation between the “statutory” federal income tax rate and the effective tax rate in the consolidated statements of income is as follows: 
For the Years Ended December 31,
2012

2011

2010

“Statutory” federal tax rate
35.0
%
35.0
 %
35.0
%
State and local income taxes, net of federal benefit
3.9

3.6

2.7

Other, net                 
1.6

(0.1
)
1.4

Effective tax rate
40.5
%
38.5
 %
39.1
%

32



The components of income before taxes and the provision for income taxes recorded in the consolidated statements of income are as follows: 
 
For the Years Ended
Components of Income before Taxes
2012

2011

2010

Domestic
$
133,300

$
121,770

$
61,338

Foreign
12,148

11,419

8,136

Income before taxes
$
145,448

$
133,189

$
69,474



For the Years Ended
Components of Income Tax Provision
2012

2011

2010

Current expense
 
 
 
US Federal
$
38,642

$
41,052

$
11,562

State
6,848

6,343

2,189

Foreign
3,366

3,579

2,733

Total Current expense
$
48,856

$
50,974

$
16,484

Deferred expense
 
 
 
US Federal
$
9,090

246

9,428

State
786

178

1,198

Foreign
118

(100
)
71

Total Deferred expense
$
9,994

$
324

$
10,697

Total Income Tax Provision
$
58,850

$
51,298

$
27,181

 
Deferred income taxes are provided based upon differences between the financial statement and tax bases of assets and liabilities.  The following deferred tax assets (liabilities) were recorded at December 31: 
Assets (Liabilities)
2012

2011

Postretirement benefits
$
32,257

$
30,731

Payroll accruals
3,095

2,519

Bad debt reserves
2,178

2,662

Other deferred tax assets
10,359

13,916

Pension
55,665

44,464

Inventory
3,174

2,861

       Subtotal
106,728

97,153

less: valuation allowances
(285
)
(306
)
       Deferred tax assets
106,443

96,847

Fixed assets
(32,999
)
(26,614
)
Computer software
(3,708
)
(2,778
)
Other deferred tax liabilities
(2,184
)
(1,477
)
Deferred tax liabilities
(38,891
)
(30,869
)
Net deferred tax assets
$
67,552

$
65,978

 
Deferred tax assets included in other current assets were $3,678 and $5,931 at December 31, 2012 and 2011, respectively.  Deferred tax assets included in other non-current assets were $64,260 and $60,047 at December 31, 2012 and 2011, respectively.  Deferred tax liabilities included in other current liabilities were $386 at December 31, 2012. There were no deferred tax liabilities included in other current liabilities at December 31, 2011. The Company’s deferred tax assets include foreign net operating losses of $285 and $306 as of December 31, 2012 and 2011 that expire in 2020.  The Company’s deferred tax assets also include state net operating loss carryforwards of $1,821 and $2,251 as of December 31, 2012 and 2011, respectively, that expire between 2012 and 2030.  The Company’s deferred tax assets also include capital loss carryforwards of $2,261 at December 31, 2011.  There were no capital loss carryforwards at December 31, 2012. The Company's valuation allowance against deferred tax assets was $285 and $306 for the year ended December 31, 2012 and 2011, respectively. Due to uncertainties regarding the utilization of the Company's foreign net operating losses, a full valuation allowance remains applied against the total deferred tax benefit at December 31, 2012.

The Company has undistributed earnings of non-US subsidiaries of approximately $54,440 as of December 31, 2012. The Company has not made a provision for US federal and state income taxes on these accumulated but undistributed earnings, as such earnings are considered to be indefinitely reinvested outside the US. 
7. CAPITAL STOCK
 

33



The Company’s capital stock is one hundred percent (100%) owned by its active and retired employees, and there is no public trading market for its 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 state law, a voting trust may not have a term greater than ten years. At December 31, 2012, approximately eighty-two percent (82%) of the common stock was held in a voting trust that expires by its terms on March 15, 2017. 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 shareholder may sell, transfer, or otherwise dispose of shares of common stock or the voting trust interests issued with respect thereto ("common stock", "common shares", or "shares") without first offering the Company the option to purchase such shares at the price at which the shares were issued. The Company also has the option to purchase at the issue price the common stock of any holder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension. The Company has always exercised its purchase option and expects to continue to do so. All outstanding shares of the Company have been issued at $20.00 per share.
 
During 2012, the Company offered eligible employees and qualified retirees the right to subscribe to 964,300 shares of common stock at $20.00 per share in accordance with the provisions of the Company’s Three-Year Common Stock Purchase Plan dated June 10, 2010.  This resulted in the subscription of 660,775 shares totaling $13,215.  Subscribers under the Plan elected to make payments under one of the following options: (i) all shares subscribed for on or before January 11, 2013; or (ii) all shares subscribed for in installments paid through payroll deductions (or in certain cases where a subscriber is no longer on the Company’s payroll, through direct monthly payments) over an eleven-month period.
 
Common shares were delivered to subscribers as of January 11, 2013, in the case of shares paid for prior to January 11, 2013.  Shares will be issued and delivered to subscribers on a quarterly basis, as of the tenth day of March, June, September, and December, to the extent full payments for shares are made in the case of subscriptions under the installment method.
 
Shown below is a summary of shares purchased and retired by the Company during the three years ended December 31: 
 
Shares of Common Stock
 
 
Purchased

Retired

2012
558,599

658,890

2011
463,189

474,219

2010
522,405

520,458

 
The Company amended its Certificate of Incorporation to authorize a new class of 10,000,000 shares of Delegated Authority Preferred Stock (“preferred stock”), par value one cent ($0.01), on June 10, 2004.  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 the Board of Directors of the Company.  There were no shares of preferred stock outstanding at December 31, 2012 and 2011.
 
On December 13, 2012, the Company declared a twenty percent (20%) common stock dividend.  Each shareholder was entitled to one share of common stock for every five shares held as of January 2, 2013.  The stock was issued February 1, 2013.  On December 8, 2011, the Company declared a ten percent (10%) common stock dividend.  Each shareholder was entitled to one share of common stock for every ten shares held as of January 3, 2012.  The stock was issued on February 1, 2012.  On December 9, 2010, the Company declared a ten percent (10%) common stock dividend.  Each shareholder was entitled to one share of common stock for every ten shares held as of January 3, 2011. The stock was issued February 4, 2011.  

8. NET INCOME PER SHARE OF COMMON STOCK
 
The per share computations for periods presented have been adjusted to reflect the new number of shares as of December 31, 2012, as a result of the stock dividend declared on December 13, 2012 payable to shareholders of record on January 2, 2013.  Shares representing this dividend were issued on February 1, 2013.  The computation of net income per share of common stock is based on the average number of common shares outstanding during each year, adjusted in all periods presented for the declaration of a twenty percent (20%) stock dividend declared in 2012, a ten percent (10%) stock dividend declared in 2011, and a ten percent (10%) stock dividend declared in 2010.  The average number of shares used in computing net income per share of common stock at December 31, 2012, 2011, and 2010 was 15,579,571, 15,451,314, and 15,373,756, respectively.
 
9. LONG-TERM DEBT AND BORROWINGS UNDER SHORT-TERM CREDIT AGREEMENTS
 

34



 
December 31,
Long-term Debt
2012

2011

Variable-rate lease arrangement, secured by facilities
$

$
27,715

6.59% senior note, unsecured, due in semiannual installments of $3,750 beginning in
   October 2003 through April 2013
3,750

11,250

6.65% senior note, unsecured, due in annual installments of $3,636 beginning in June 2003
   through June 2013
3,636

7,273

2.38% to 4.97% capital leases, secured by equipment, various maturities
4,609

5,597

 
$
11,995

$
51,835

Less current portion
(10,005
)
(41,490
)
Long-term Debt
$
1,990

$
10,345

 
Long-term Debt matures as follows:
 
2013
$
10,005

2014
1,446

2015
412

2016
132

2017

After 2017

 
$
11,995

 
The net book value of property securing various long-term debt instruments at December 31, 2011 was $16,847. In December 2011, the Company notified the independent lessor of the variable lease arrangement of its intent to prepay and terminate the lease arrangement due in July 2013. As a result, the Company reclassified the $27,715 lease arrangement from long-term debt to current portion of long-term debt as of December 31, 2011. In March 2012, the Company terminated the lease arrangement, prepaid the $27,715 balance owed on the debt portion of the lease arrangement, and purchased the $1,005 noncontrolling interest in the consolidated silo. As a result, there was no property securing various long-term debt instruments at December 31, 2012.

The Company had a revolving credit agreement with a group of thirteen banks at an interest rate based on the London Interbank Offered Rate (“LIBOR”) that consisted of an unsecured, $200,000 five-year facility that was to expire in May 2012. On September 28, 2011, the Company and Graybar Canada Limited, the Company's Canadian operating subsidiary (“Graybar Canada”), entered into a new unsecured, five-year, $500,000 revolving credit facility maturing in September 2016 with Bank of America, N.A. and other lenders named therein, which includes a combined letter of credit ("L/C") sub-facility of up to $50,000, a US swing line loan facility of up to $50,000, and a Canadian swing line loan facility of up to $20,000 (the "Credit Agreement"). The Credit Agreement also includes a $100,000 sublimit (in US or Canadian dollars) for borrowings by Graybar Canada and contains an accordion feature, which allows the Company to request increases in the aggregate borrowing commitments of up to $200,000. This Credit Agreement replaced the revolving credit agreement that had been due to expire in May 2012, which was terminated upon the closing of the new revolving credit facility.

Interest on the Company's borrowings under the revolving credit facility is based on, at the borrower's election, either (i) the base rate (as defined in the Credit Agreement), or (ii) LIBOR, in each case plus an applicable margin, as set forth in the pricing grid detailed in the Credit Agreement and described below. In connection with any borrowing, the applicable borrower also selects the term of the loan, up to six months, or an automatically renewing term with the consent of the lenders. Swing line loans, which are short-term loans, bear interest at a rate based on, at the borrower's election, either the base rate or on the daily floating Eurodollar rate. In addition to interest payments, there are also certain fees and obligations associated with borrowings, swing line loans, letters of credit, and other administrative matters.

The obligations of Graybar Canada under the new revolving credit facility are secured by the guaranty of the Company and any material US subsidiaries of the Company. Under no circumstances will Graybar Canada use its borrowings to benefit Graybar or its operations, including without limitation, the repayment of any of the Company's obligations under the revolving credit facility.

The Credit Agreement provides for a quarterly commitment fee ranging from 0.2% to 0.35% per annum, subject to adjustment based upon the Company's consolidated leverage ratio for a fiscal quarter, and letter of credit fees ranging from 1.05% to 1.65% per annum payable quarterly, also subject to such adjustment. Borrowings can be either base rate loans plus a margin ranging from 0.05% to 0.65% or LIBOR loans plus a margin ranging from 1.05% to 1.65%, subject to adjustment based upon the Company's consolidated leverage ratio. Availability under the Credit Agreement is subject to the accuracy of

35



representations and warranties, the absence of an event of default, and, in the case of Canadian borrowings denominated in Canadian dollars, the absence of a material adverse change in the national or international financial markets, which would make it impracticable to lend Canadian dollars.

The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to indebtedness, liens, changes in the nature of business, investments, mergers and acquisitions, the issuance of equity securities, the disposition of assets and the dissolution of certain subsidiaries, transactions with affiliates, restricted payments (subject to incurrence tests, with certain exceptions), as well as securitizations and factoring transactions. There are also maximum leverage ratio and minimum interest coverage ratio financial covenants to which the Company will be subject during the term of the Credit Agreement.

The Credit Agreement also provides for customary events of default, including a failure to pay principal, interest or fees when due, failure to comply with covenants, the fact that any representation or warranty made by any of the credit parties is materially incorrect, the occurrence of an event of default under certain other indebtedness of the Company and its subsidiaries (including existing senior notes), the commencement of certain insolvency or receivership events affecting any of the credit parties, certain actions under the Employee Retirement Income Security Act (ERISA), and the occurrence of a change in control of any of the credit parties (subject to certain permitted transactions as described in the Credit Agreement). Upon the occurrence of an event of default, the commitments of the lenders may be terminated and all outstanding obligations of the credit parties under the Credit Agreement may be declared immediately due and payable.

The Company also has letters of credit of $8,938 outstanding, of which $763 were issued under the $500,000 revolving credit facility. 

Short-term borrowings of $71,116 and $42,562 outstanding at December 31, 2012 and 2011, respectively, were drawn under the revolving credit facility.

Short-term borrowings outstanding during the years ended December 31, 2012 and 2011 ranged from a minimum of $35,105 and $13,800 to a maximum of $111,032 and $91,548, respectively.  The average daily amount of borrowings outstanding under short-term credit agreements during 2012 and 2011 amounted to approximately $67,000 and $52,000 at weighted-average interest rates of 1.88% and 1.86%, respectively.  The weighted-average interest rate for amounts outstanding at December 31, 2012 was 1.66%.

At December 31, 2012, the Company had available to it unused lines of credit amounting to $428,884, compared to $457,438 at December 31, 2011.  These lines are available to meet the short-term cash requirements of the Company, and certain committed lines of credit have annual fees of up to 35 basis points (0.35%) of the committed lines of credit as of December 31, 2012 and 2011.
 
The carrying amount of the Company’s outstanding long-term, fixed-rate debt exceeded its fair value by $215 and $925 at December 31, 2012 and 2011, respectively.  The fair value of the long-term, fixed-rate debt is estimated by using yields obtained from independent pricing sources for similar types of borrowings.  The fair value of the Company’s variable-rate short- and long-term debt approximates its carrying value at December 31, 2012 and 2011, respectively.
 
The revolving credit agreement and certain other note agreements contain various affirmative and negative covenants.  The Company is also required to maintain certain financial ratios as defined in the agreements.  The Company was in compliance with all covenants as of December 31, 2012 and 2011.

10. PENSION AND OTHER POSTRETIREMENT BENEFITS
 
The Company has a noncontributory defined benefit pension plan covering substantially all full-time employees.  The plan provides retirement benefits based on an employee’s average earnings and years of service.  Employees become one hundred percent (100%) vested after three years of service regardless of age.  The Company’s 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 contribution and funding strategy on a regular basis, and to allow discretionary contributions to be made by the Company from time to time.  The assets of the defined benefit pension plan are invested primarily in fixed income and equity securities, money market funds, and other investments.
 
The Company provides certain postretirement health care and life insurance benefits to retired employees.  Substantially all of the Company’s employees 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 under the defined benefit pension plan.  Benefits are provided through insurance coverage with premiums based on the benefits paid during the year.  The Company funds

36



postretirement benefits on a pay-as-you-go basis, and accordingly, there were no assets held in the postretirement benefits plan at December 31, 2012 and 2011.
 
The following table sets forth information regarding the Company’s pension and other postretirement benefits as of December 31, 2012 and 2011
 
Pension Benefits
Postretirement Benefits
 
2012

2011

2012

2011

Projected benefit obligation
$
(598,917
)
$
(527,458
)
$
(83,836
)
$
(78,999
)
Fair value of plan assets
430,894

389,490



Funded status
$
(168,023
)
$
(137,968
)
$
(83,836
)
$
(78,999
)
 
The accumulated benefit obligation for the Company’s defined benefit pension plan was $499,499 and $448,948 at December 31, 2012 and 2011, respectively.

Amounts recognized in the consolidated balance sheet for the years ended December 31 consist of the following: 
 
Pension Benefits
Postretirement Benefits
 
2012

2011

2012

2011

Current accrued benefit cost
$
(800
)
$
(1,300
)
$
(6,800
)
$
(7,300
)
Non-current accrued benefit cost
(167,223
)
(136,668
)
(77,036
)
(71,699
)
Net amount recognized
$
(168,023
)
$
(137,968
)
$
(83,836
)
$
(78,999
)
 
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, net of tax, consist of the following: 
 
Pension Benefits
Postretirement Benefits
 
2012

2011

2012

2011

Net actuarial loss
$
164,064

$
148,118

$
20,233

$
18,235

Prior service cost (gain)
2,415

3,258

(7,858
)
(9,190
)
Accumulated other comprehensive loss
$
166,479

$
151,376

$
12,375

$
9,045

 
Amounts estimated to be amortized from accumulated other comprehensive loss into net periodic benefit costs in 2013, net of tax, consist of the following: 
 
Pension Benefits
Postretirement Benefits
Net actuarial loss
$
15,458

$
1,161

Prior service cost (gain)
855

(1,344
)
Accumulated other comprehensive loss
$
16,313

$
(183
)
 
Weighted-average assumptions used to determine the actuarial present value of the pension and postretirement benefit obligations as of December 31 are: 
 
Pension Benefits
Postretirement Benefits
 
2012

2011

2012

2011

Discount rate
3.95
%
4.75
%
3.51
%
4.25
%
Rate of compensation increase
4.25
%
4.50
%


Health care cost trend on covered charges


8% / 5%

8% / 5%

 
For measurement of the postretirement benefit obligation, an 8.00% annual rate of increase in the per capita cost of covered health care benefits was assumed at December 31, 2012.  This rate is assumed to decrease to 5.00% at January 1, 2019 and remain at that level thereafter. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have had a material effect on the postretirement benefit obligations as of December 31, 2012 and 2011.
 

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The following presents information regarding the plans for the years ended December 31: 
 
Pension Benefits
Postretirement Benefits
 
2012

2011

2012

2011

Employer contributions
$
40,600

$
41,461

$
5,843

$
5,138

Participant contributions
$

$

$
1,107

$
1,739

Benefits paid
$
(37,417
)
$
(27,195
)
$
(6,950
)
$
(6,877
)
 
The Company expects to make contributions totaling $40,800 to its defined benefit pension plan during 2013.
 
Estimated future defined benefit pension and other postretirement benefit plan payments to plan participants for the years ending December 31 are as follows: