10-K 1 a1231201810k.htm FORM 10-K Document


 
 
 
 
 
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, 2018
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 every Interactive Data File required to be submitted 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. x
 
        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨  Accelerated filer¨
Non-accelerated filer x         Smaller reporting company ¨
                                                                                                                                                  Emerging growth company ¨
 
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2018, was $386,188,840.  Pursuant to a Voting Trust Agreement, dated as of March 3, 2017, approximately 84% 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, 2019 was 21,595,113.
 
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 2019 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, 2018

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
 
 
Certifications
 
 
 

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PART I

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with the accompanying audited consolidated financial statements of Graybar Electric Company, Inc. and its Subsidiaries (collectively referred to as “Graybar” or the “Company” and sometimes referred to as "we", "our", or "us"), the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2018, included in this Annual Report on Form 10-K.  The results shown herein are not necessarily indicative of the results to be expected in any future periods. 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by the words “believes”, “projects”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and other similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the PSLRA.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse impact on our operations and future prospects on a consolidated basis include, but are not limited to: general economic conditions, particularly in the residential, commercial, and industrial building construction industries; volatility in the prices of industrial commodities; a sustained interruption in the operation of our information systems; cyber-attacks; increased funding requirements and expenses related to our pension plan; disruptions in our sources of supply; the inability, or limitations on our ability to borrow under our existing credit facilities or any replacements thereof; adverse legal proceedings or other claims; compliance with changing governmental regulations; and the inability, or limitations on our ability to raise debt or equity capital.  These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by applicable securities law.  Further information concerning our business, including additional factors that could materially impact our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission (the “SEC” or “Commission”).  Actual results and the timing of events could differ materially from the forward-looking statements as a result of certain factors, a number of which are outlined in Item 1A., “Risk Factors”, of this Annual Report on Form 10-K.

All dollar amounts in this Annual Report on Form 10-K are stated in millions except for share and per share data.

Item 1.  Business

The Company

Graybar is a leading North American distributor of electrical and communications and data networking products and is a provider of related supply chain management and logistics services. We primarily serve customers in the construction, industrial & utility, and commercial, institutional and government ("CIG") vertical markets ("vertical" or "verticals"), with products and services that support new construction, infrastructure updates, building renovation, facility maintenance, repair and operations ("MRO"), and original equipment manufacturers ("OEM").

Through a network of 289 locations across the United States and Canada, our 8,700 employees serve approximately 145,000 customers. Our business is primarily based in the United States ("U.S."). We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.

We distribute over one million products purchased from approximately 4,500 manufacturers and suppliers. We purchase all of the products we sell from others, and we neither manufacture nor contract to manufacture any products we sell.

We generally finance our inventory through the collection of trade receivables and trade accounts payable terms with our suppliers.  We use short-term borrowing facilities to finance inventory purchases and other operating expenses when necessary, and we have not historically used long-term borrowings for this purpose. 

In addition to our extensive product offering, we provide a wide range of supply chain management services that when combined with our network of locations are designed to deliver convenience, cost savings and improved efficiency for our customers.

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We were incorporated in 1925 under the laws of the State of New York. Our active and retired employees own 100% of our stock. There is no public trading market for our common stock. 

Our internet address is www.graybar.com. Information on our website does not constitute a part of this Annual Report on Form 10-K.

Competition

Our industry is comprised of thousands of local and regional distributors, along with several large national and global distributors. Graybar is among the largest distributors of electrical and communications and data networking products to the construction, industrial & utility, and CIG verticals in North America. Our industry is highly competitive, and we estimate that the top five distributors account for approximately 30% of the total U.S. market. Some of our largest competitors have greater global geographic scope, which may provide them an advantage, particularly with certain multi-national customers.

Our industry is influenced by economic and regulatory factors that impact rates of new construction, as well as customers' or end users' decisions to invest in renovation and expansion of facilities and infrastructure. The industry is also affected by changes in technology, both in the products that are typically sold through distribution and in the ways customers choose to transact business with distributors. Driven by customers' omnichannel buying preferences and their desire to increase efficiency and productivity, digitalization is becoming increasingly important to both manufacturers and distributors in our industry.

Our pricing reflects the value associated with the products and services that we provide. We consider our prices to be generally competitive. We believe that, while price is an important customer consideration, the services we provide distinguish us from many of our competitors, whether they are distributors or manufacturers selling directly to our customer base.  We view our ability to quickly supply our customers with a broad range of products through conveniently located distribution facilities as a competitive advantage that customers value.  However, if a customer is not looking for one distributor to provide a wide range of products and does not require prompt delivery or other services, a competitor that does not provide this level of service may be in a position to offer lower prices.

Markets Served

Graybar serves a wide range of customers within certain primary verticals. The largest of these verticals is construction, which accounted for more than half our sales in 2018. Customers within this vertical include various types of contractors and installers that perform new construction and renovation of commercial and industrial facilities and utility infrastructure.

Our next two largest verticals we serve are the industrial & utility and CIG. The industrial & utility vertical includes customers and products for MRO, OEM, broadband utility and electrical transmission and distribution infrastructure. The CIG vertical includes a broad range of commercial office, warehouse, and retail facilities, federal, state, and local governmental agencies, education and health care sectors.

The following table provides the approximate percentages of our net sales attributable to each of the verticals we serve:
Year Ended December 31,
2018
2017
2016
Construction
59.6%
59.6%
58.9%
Industrial & Utility
21.3%
21.7%
20.7%
Commercial, Institutional & Government
19.1%
18.7%
20.4%

Products and Suppliers

We distribute over one million products purchased from approximately 4,500 manufacturers and suppliers. Approximately 110,000 of these products are stocked in our warehouses, allowing us in most cases to provide customers with convenient, local access to the items they need every day. When the specialized nature or size of a particular shipment warrants, we arrange to ship products directly from our suppliers; otherwise, orders are filled from our own on-hand inventory. On a dollar volume basis, we filled approximately 55% and 50% of customer orders from our inventory in 2018 and 2017, respectively.


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Approximately 50% of the products we sold during 2018 were purchased from our top 25 suppliers.  However, we generally have the ability to purchase from more than one supplier for any product type, which allows us to offer alternative sources of comparable products for nearly all products. The products we distribute can be generally identified as follows:
LED and Incandescent Lighting
Wiring Devices
Building and Industrial Wire and Cable
Data Cables and Cords
Distribution Equipment
Fasteners
Telecommunications Material
Electronic Equipment
Communication Wire and Cable
Automation and Controls
Conduit and Tray
Enclosures
Data Connectivity
LED, Incandescent and Fluorescent Lamps
Fluorescent Lighting
MRO Supplies
Fittings
 

These products may be sold into any of the verticals we target, depending on a customer's or end user's needs. Our salesforce is empowered to sell any of these products or related services to any customer, in some cases with the support of specialists who are trained in specific industries and/or new technologies.

Maintaining strong relationships with our suppliers is important to our business, and we enjoy longstanding relationships with several of our suppliers (or their predecessors). However, most of our supplier agreements are nonexclusive national or regional distributorships, terminable upon 30 to 90 days' notice by either party.

Sales and Distribution

We sell products and services manufactured or provided by others primarily through a network of sales offices and distribution facilities located in thirteen geographical districts throughout the U.S. We operate multiple distribution facilities in each district, each of which carries an inventory of products and operates as a wholesale distributor for the territory in which it is located.  Some districts have sales offices that do not carry inventory.  In addition, we have nineteen regional distribution centers containing inventories of both standard and specialized products.  The regional distribution centers replenish inventories carried at our other U.S. distribution facilities and make shipments directly to customers.  We also have subsidiary operations with distribution facilities located in the U.S. and Canada and a single distribution facility in Puerto Rico.

The sales and distribution facilities operated by us at December 31, 2018 are shown below:
 
U.S. Locations
 
District
Number of Sales and
Distribution Facilities*
Atlanta
23
Boston
13
California
23
Chicago
22
Dallas
20
Minneapolis
21
New York
13
Phoenix
12
Pittsburgh
21
Richmond
19
Seattle
12
St. Louis
18
Tampa
20
*Includes Regional Distribution Centers
U.S. Subsidiaries
20
International Locations
32

At December 31, 2018, we employed approximately 4,400 people in sales capacities.  Approximately 2,800 of these sales personnel were inside and outside sales representatives working to generate sales with current and prospective customers.  The remaining 1,600 employees were customer service representatives who provided support services to our customers and our salesforce.

5




We had orders on hand totaling $1,221.7 million and $989.7 million on December 31, 2018 and 2017, respectively.  We expect that approximately 90% of the orders we had on hand at December 31, 2018 will be filled within the twelve-month period ending December 31, 2019.  Generally, orders placed by customers and accepted by us have resulted in sales.  However, customers from time to time request cancellation, and we have historically allowed such cancellations.

Foreign Sales

Sales to customers in foreign countries were made primarily by our subsidiaries in Canada and Puerto Rico and accounted for approximately 5% of consolidated sales in 2018, 2017, and 2016.  Long-lived assets located outside the U.S. represented approximately 1% of our consolidated total assets at the end of 2018, 2017, and 2016.  We do not have significant foreign currency exposure and, we do not believe there are any significant risks attendant to our foreign operations, other than those noted in Item 1A. Risk Factors.

Employees

At December 31, 2018, we employed approximately 8,700 people on a full-time basis.  Approximately 150 of these people were covered by union contracts.  We have not had a material work stoppage and consider our relations with our employees to be good.

Item 1A.  Risk Factors

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

Our sales fluctuate with general economic conditions, particularly in the residential, commercial, and industrial building construction industries.  Our operating locations are widely distributed geographically across the U.S. and, to a lesser extent, Canada.  Customers for our products and services are similarly diverse – we have approximately 145,000 customers, and our largest customer accounts for approximately 1% 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. 

Our results of operations are impacted by changes in industrial commodity prices.  Many of the products we sell are subject to wide and frequent price fluctuations because they are composed primarily of copper, steel, or petroleum-based resins, including poly-vinyl chlorides ("PVC"), industrial commodities that have been subject to price volatility during the past several years.  Examples of such products include wire and cable, conduit, enclosures, and fittings.  Our gross margin rate on these products is relatively constant over time, though not necessarily in the short term.  Therefore, as the cost of these products to us declines, pricing to our customers may decrease.  This impacts our results of operations by lowering both overall sales and gross margin. 

Our 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.

Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with evolving regulations relating to obligations to protect systems, assets and data from the threat of cyber-attacks. Cyber-attacks designed to gain access to sensitive information by breaching mission-critical systems of large organizations are constantly evolving, and high profile electronic security breaches leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies, despite widespread recognition of the cyber-attack threat and improved data protection methods.  While we have invested in the protection of our information technology and maintain what we believe are adequate security procedures and controls over financial and other individually

6



identifiable customer, employee and vendor data provided to us, our business model is evolving rapidly and increasingly requires us to receive, retain and transmit certain information, including individually identifiable information, that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us. All of these risks are also applicable where we rely on outside vendors to provide services, which may operate in a cloud environment. We are dependent on these third party vendors to operate secure and reliable systems. A breach in our systems or those of our third party providers that results in the unauthorized release of individually identifiable customer or other sensitive data could have a material adverse effect on our reputation and lead to financial losses from remedial actions, loss of business or potential liability.  An electronic security breach resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we already incur to protect against such risks.  While we also seek to obtain assurances that third parties we interact with will protect individually identifiable information, there is a risk that such data may be compromised. In addition, as the regulatory environment relating to a company’s obligation to protect such sensitive data becomes more strict, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions and potentially to lawsuits.
 
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 a change in the interest rates used to measure the required minimum funding levels and the pension obligation may increase the funding requirements of our defined benefit pension plan, the pension obligation itself, and pension expenses. Government regulations may accelerate the timing and amounts required to fund the plan. Demographic changes in our workforce, including longer life expectancies, increased numbers of retirements, and age at retirement may also cause funding requirements, pension expenses, and the pension obligation to be higher than expected. Any or all of these factors could have a negative impact on our liquidity, financial position, and/or our results of operations.

We purchase all of the products we sell to our customers from other parties.  As a wholesale distributor, our business and financial results are dependent on our ability to purchase products from manufacturers not controlled by us that we, in turn, sell to our customers.  Approximately 50% 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 borrowing agreements contain financial covenants and certain other restrictions on our activities and those of our subsidiaries.  Our amended revolving credit facility and private placement shelf agreements impose contractual limits on, among other things, 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 and interest coverage.  Our failure to comply with these obligations may cause an event of default and may trigger 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 amended credit facility and private placement shelf 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.

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, 2018, 3,321 individual cases and 67 multiple-plaintiff cases are pending that allege actual or potential asbestos-related injuries resulting from the use of or exposure to products allegedly sold by us.  Additional claims will likely be filed against us in the future.  Our insurance carriers have historically borne virtually all costs and liability with respect to this litigation and are continuing to do so.  Accordingly, our future liability with respect to pending and unasserted claims is dependent on the continued solvency of our insurance carriers.  Other factors that could impact this liability are: the number of future claims filed against us; the defense and settlement costs associated with these claims; changes in the litigation environment, including changes in federal or state law governing the compensation of asbestos claimants; adverse jury verdicts in excess of historic settlement amounts; and bankruptcies of other asbestos defendants.  Because any of these factors may change, our future exposure is unpredictable, and it is possible that we may incur costs that would have a material adverse impact on our liquidity, financial position, or results of operations in future periods.

Compliance with changing government regulations may result in increased costs and risks to the company. Our public company and multi-national customers are increasingly subject to government regulation globally. Existing and future laws and

7



regulations may impede our growth. These regulations and laws may cover, among other things, taxation, privacy, data protection, pricing, content, copyrights, distribution, energy consumption, environmental regulation, electronic contracts, communications and marketing, consumer protection, the design and operation of websites, and the characteristics and quality of products and services. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business. If we are not able to obtain for certain customers the information that they require in part as a result of these regulations, they may limit their business with us. These regulatory and customer-driven requirements may increase our operating costs, and, due to competitive pressures, we may not be able to increase our prices sufficiently to avoid a reduction in our income from operations.

The value to our shareholders of our common stock depends on the regular payment of dividends, which are paid at the discretion of our Board of Directors.  The purchase price for our common stock under our purchase option is the same as the issue price.  Accordingly, as long as we exercises our option to purchase, appreciation in the value of an investment in our common stock is dependent primarily on our ability and our Board of Directors' 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 our Board of Directors.
 
There is no public trading market for our common stock.  Our common stock is 100% owned by active and retired employees.  Common stock may not be sold by the holder thereof, except after first offering it to us.  We have always exercised this purchase option in the past and expect to continue to do so.  As a result, no public trading market for our common stock exists, nor is one expected to develop.  This lack of a public trading market for our common stock may limit our ability to raise large amounts of equity capital, which could constrain our long-term business growth.

Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

We operate in thirteen geographical districts in the U.S., each of which maintains multiple distribution facilities that consist primarily of warehouse space.  A small portion of each distribution facility is used for offices.  Some districts have sales offices that do not carry an inventory of products. The number of facilities, excluding the nineteen regional distribution centers, in a district varies from eleven to twenty-two and totals 218 for all districts.  The facilities range in size from 800 to 132,000 square feet, with the average being 31,000 square feet.  We own 116 of these facilities and lease 102 of them for varying terms, with the majority having a remaining lease term of less than five years.

We also have nineteen regional distribution centers ranging in size from 130,000 to 240,000 square feet.  Ten of the nineteen regional distribution centers are owned and the other nine are leased.  The remaining lease terms on the leased regional distribution centers are between one and nine years.

We also have three U.S. subsidiaries with six owned facilities and fourteen leased distribution facilities. The leased facilities have remaining lease terms between one and nine years. The facilities range in size from 5,000 to 42,000 square feet.

We maintain thirty-one distribution facilities in Canada, of which nineteen are owned and twelve are leased.  The majority of the leased facilities have a remaining lease term of less than five years.  The facilities range in size from 5,000 to 89,000 square feet.  We have a 33,000 square foot facility in Puerto Rico, the lease on which expires in 2023.

Our headquarters are located in St. Louis, Missouri in an 83,000 square foot building owned by us.  We also own a 200,000 square foot operations and administration center in St. Louis. 

Item 3.  Legal Proceedings

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

Item 4.  Mine Safety Disclosures

Not applicable.


8



Supplemental Item.  Executive Officers of the Registrant

The following table lists the name, age as of March 1, 2019, position, offices and certain other information with respect to our executive officers.  The term of office of each executive officer will expire upon the appointment of his or her successor by the Board of Directors.

Name
Age
Business experience last five years
S. S. Clifford
48
Senior Vice President - Supply Chain Management, February 2015 to present; Vice President - Chief Information Officer, April 2010 to January 2015.
M. W. Geekie
57
Senior Vice President, Secretary and General Counsel, August 2008 to present.
R. R. Harwood
62
Senior Vice President and Chief Financial Officer, January 2013 to present.
W. P. Mansfield
56
Senior Vice President - Marketing, May 2017 to present; Senior Vice President - Sales and Marketing, April 2014 to April 2017; Vice President - Marketing, April 2012 to March 2014.
D. G. Maxwell
60
Senior Vice President - Sales, May 2017 to present; Regional Vice President, January 2015 to April 2017; District Vice President - California District, July 2003 to December 2014.
K. M. Mazzarella
58
Chairman of the Board, January 2013 to present; President and Chief Executive Officer, June 2012 to present.
B. L. Propst
49
Senior Vice President – Human Resources, June 2009 to present.

 

     





9



 PART II

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

Our common stock is 100% owned by active and retired employees, and there is no public trading market for our common stock.  Since 1928, substantially all of the issued and outstanding shares of common stock have been held of record by voting trustees under successive voting trust agreements.  A new Voting Trust Agreement was established effective March 3, 2017, which expires by its terms on March 1, 2027. At December 31, 2018, approximately 83% of the common stock was held in the voting trust.  The participation of shareholders in the voting trust is voluntary at the time the voting trust is created, but is irrevocable during its term.  Shareholders who elect not to participate in the voting trust hold their common stock as shareholders of record. Shareholders may elect to participate in the voting trust at any time during the term of the voting trust.

No holder of our common stock or voting trust interests representing our common stock ("common stock", "common shares", or "shares") may sell, transfer or otherwise dispose of any shares without first offering us the option to purchase those shares at the price at which they were issued.  We also have the option to purchase at the issue price the common shares of any shareholder who ceases to be an employee for any reason other than death or "retirement" (as defined in our amended restated certificate of incorporation), and on the first anniversary of any holder's death. In the past, we have always exercised these purchase options, and we expect to continue to do so in the foreseeable future. However, we can make no assurance that we will continue to exercise our purchase option in the future.  All outstanding shares have been issued at $20.00 per share.

The following table sets forth information regarding purchases of common stock by the Company, 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, 2018
57,000
$20.00
N/A
November 1 to November 30, 2018
29,983
$20.00
N/A
December 1 to December 31, 2018
58,172
$20.00
N/A
Total
145,155
$20.00
N/A
   
Capital Stock at December 31, 2018
Title of Class
Number of
Security
Holders
Number of Shares
Voting Trust Interests issued with respect to Common Stock
5,098

 
17,708,874

 
Common Stock
1,947

 
3,732,195

 
Total
7,045

 
21,441,069

 
  
Dividend Data (in dollars per share)
Year Ended 
December 31,
Period
2018

2017

First Quarter
$
0.30

$
0.30

Second Quarter
0.30

0.30

Third Quarter
0.30

0.30

Fourth Quarter
1.50

1.10

Total
$
2.40

$
2.00

On December 13, 2018, our Board of Directors declared a 10% stock dividend to shareholders of record on December 17, 2018.  Shares representing this dividend were issued on February 1, 2019.  

On December 13, 2017, our Board of Directors declared a 10% stock dividend to shareholders of record on December 18, 2017. Shares representing this dividend were issued on February 2, 2018.


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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 millions, except for per share data)
For the Years Ended December 31,
2018
2017
2016
2015
2014
Gross Sales
$
7,235.7

$
6,662.4

$
6,413.2

$
6,136.3

$
6,004.2

Cash Discounts
(33.2
)
(31.2
)
(28.2
)
(26.0
)
(25.3
)
Net Sales
$
7,202.5

$
6,631.2

$
6,385.0

$
6,110.3

$
5,978.9

Gross Margin
$
1,380.9

$
1,261.3

$
1,208.4

$
1,154.7

$
1,118.5

Net Income attributable to
Graybar Electric Company, Inc.
$
143.3

$
71.6

$
93.1

$
91.1

$
87.4

Average common shares outstanding(A)
21.4

21.3

21.0

20.8

20.6

Net Income attributable to
Graybar Electric Company, Inc.
per share of Common Stock(A)
$
6.69

$
3.36

$
4.43

$
4.38

$
4.24

Cash Dividends per share of Common Stock
$
2.40

$
2.00

$
3.00

$
3.00

$
4.00

Total Assets
$
2,491.2

$
2,261.4

$
2,099.2

$
2,049.5

$
1,939.1

Total Liabilities
$
1,620.7

$
1,499.8

$
1,368.3

$
1,361.4

$
1,257.1

Shareholders’ Equity
$
870.5

$
761.6

$
730.9

$
688.1

$
682.0

Working Capital(B)(C)
$
542.0

$
486.7

$
432.4

$
436.7

$
438.8

Long-term Debt
$
10.0

$
7.0

$
7.3

$
10.3

$
11.6

(A)All periods adjusted for the declaration of a 10% stock dividend declared in December 2018, a 10% stock dividend declared in December 2017, a 5% stock dividend declared in December 2016, and a 2.5% stock dividend declared in December 2015.  Prior to these adjustments, the average common shares outstanding for the years ended December 31, 2017, 2016, 2015, and 2014 were 19.4 million shares, 17.4 million shares, 16.4 million shares, and 15.8 million shares, respectively.
(B)All periods adjusted for certain balance sheet reclassifications to conform to the December 31, 2018 presentation.
(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 description of the Company’s results of operations, financial condition, liquidity, and cash flows for the three-year period ended December 31, 2018. 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
 
We set records for the financial results of the Company for the year ended December 31, 2018. Our 2018 net sales totaled $7,202.5 million, an increase of $571.3 million, or 8.6%, compared to net sales of $6,631.2 million for the year ended December 31, 2017. In 2018, net sales in our construction, CIG, and industrial & utility verticals increased 10.3%, 6.9%, and 5.6%, respectively. We believe our continued investments in people, technology and service innovation contributed significantly to our strong sales performance for 2018.

Gross margin increased $119.6 million, or 9.5%, to $1,380.9 million for the year ended December 31, 2018, when compared to gross margin of $1,261.3 million for the same twelve-month period last year.  Gross margin rate was 19.2% for the year ended December 31, 2018, compared to 19.0% at December 31, 2017. The increase in gross margin rate was due to our ongoing gross margin rate improvement initiatives.

We also set a new annual net income record for the Company. Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2018 was $143.3 million, which was $71.7 million, or 100.1%, higher than net income attributable to Graybar Electric Company, Inc. of $71.6 million for the year ended December 31, 2017. The increase in net income attributable to Graybar Electric Company, Inc. was due to a lower corporate income tax rate as a result of the passage of the Tax Cuts and Jobs Act ("TCJA") and ongoing tax planning initiatives.


11



We remain focused on growing our business and delivering an exceptional customer experience, while we invest in new opportunities for growth and innovation. We also continue to improve our operational efficiency, which allows us to work faster, smarter and more productively and produces better results for our Company and customers. Our efforts to drive growth and efficiency are enabled by technology that helps improve our performance and strengthen our position as a leader in the supply chain.

Consolidated Results of Operations

The following table sets forth certain information relating to our operations stated in millions of dollars and as a percentage of net sales for the years ended December 31, 2018, 2017, and 2016
 
2018
 
2017
 
2016
 
Dollars
Percent of Net Sales
 
Dollars
 
Percent of Net Sales
 
Dollars
 
Percent of Net Sales
Net Sales
$
7,202.5

100.0
 %
 
$
6,631.2

 
100.0
 %
 
$
6,385.0

 
100.0
 %
Cost of merchandise sold
(5,821.6
)
(80.8
)
 
(5,369.9
)
 
(81.0
)
 
(5,176.6
)
 
(81.1
)
Gross Margin
1,380.9

19.2

 
1,261.3

 
19.0

 
1,208.4

 
18.9

Selling, general and
     administrative expenses
(1,125.0
)
(15.6
)
 
(1,026.6
)
 
(15.5
)
 
(986.3
)
 
(15.5
)
Depreciation and amortization
(49.6
)
(0.7
)
 
(48.9
)
 
(0.7
)
 
(47.9
)
 
(0.7
)
Other income, net
3.4


 
6.5

 
0.1

 
5.3

 
0.1

Income from Operations
209.7

2.9

 
192.3

 
2.9

 
179.5

 
2.8

Non-operating expenses
(30.6
)
(0.4
)
 
(24.8
)
 
(0.4
)
 
(26.0
)
 
(0.4
)
Income before provision for income taxes
179.1

2.5

 
167.5

 
2.5

 
153.5

 
2.4

Provision for income taxes
(35.4
)
(0.5
)
 
(95.6
)
 
(1.4
)
 
(60.2
)
 
(0.9
)
Net Income
143.7

2.0

 
71.9

 
1.1

 
93.3

 
1.5

Net income attributable to noncontrolling interests
(0.4
)

 
(0.3
)
 

 
(0.2
)
 

Net Income attributable to
     Graybar Electric Company, Inc.
$
143.3

2.0
 %
 
$
71.6

 
1.1
 %
 
$
93.1

 
1.5
 %
  
2018 Compared to 2017

Net sales totaled $7,202.5 million for the year ended December 31, 2018, compared to $6,631.2 million for the year ended December 31, 2017, an increase of $571.3 million, or 8.6%.  For the year ended December 31, 2018, net sales in our construction, CIG, and industrial & utility verticals increased by 10.3%, 6.9%, and 5.6%, respectively, compared to the year ended December 31, 2017.

Gross margin increased $119.6 million, or 9.5%, to $1,380.9 million for the year ended December 31, 2018, from $1,261.3 million for the year ended December 31, 2017. The increase resulted from higher net sales for the year ended December 31, 2018, compared to the year ended December 31, 2017. Our gross margin rate was 19.2% for the year ended December 31, 2018, compared to 19.0% for the year ended December 31, 2017. The increase in gross margin rate was due to our ongoing gross margin rate improvement initiatives.

Selling, general and administrative ("SG&A") expenses increased $98.4 million, or 9.6%, to $1,125.0 million for the year ended December 31, 2018, compared to $1,026.6 million for the year ended December 31, 2017, mainly due to higher compensation and benefit-related costs. SG&A expenses as a percentage of net sales were 15.6% for the year ended December 31, 2018, compared to 15.5% for the year ended December 31, 2017.

Depreciation and amortization for the year ended December 31, 2018, increased $0.7 million, or 1.4%, to $49.6 million from $48.9 million for the year ended December 31, 2017.  This increase was primarily due to an increase in property, at cost. Total property, at cost, at December 31, 2018 was $989.3 million, an increase of $25.1 million, or 2.6%, when compared to total property, at cost, at December 31, 2017 of $964.2 million. Depreciation as a percentage of net sales remained consistent at 0.7% for the years ended December 31, 2018 and 2017.

Other income, net totaled $3.4 million for the year ended December 31, 2018, compared to $6.5 million for the year ended December 31, 2017.  Other income, net consists primarily of gains or losses on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities. The decrease in other income, net was primarily due to a favorable settlement of a prior claim substantially paid in 2017.


12



Non-operating expenses increased $5.8 million, or 23.4%, to $30.6 million for the year ended December 31, 2018, from $24.8 million for the year ended December 31, 2017. The increase was due to increases in non-service cost components of net periodic benefit costs of $3.1 million and interest expense, net of $2.7 million for the year ended December 31, 2018, compared to the year ended December 31, 2017. The increase in interest expense, net was due to higher interest rates and higher levels of average outstanding short-term borrowings for the year ended December 31, 2018, compared to the year ended December 31, 2017.

Income before provision for income taxes increased $11.6 million, or 6.9%, to $179.1 million for the year ended December 31, 2018, compared to $167.5 million for the year ended December 31, 2017. The increase in income before provision for income taxes was primarily due to the increase in gross margin, while SG&A expenses as a percentage of net sales remained relatively flat.

Our provision for income taxes decreased $60.2 million, or 63.0%, to $35.4 million for the year ended December 31, 2018 from $95.6 million for the year ended December 31, 2017.  Our effective tax rate was 19.8% for the year ended December 31, 2018, down from 57.1% for the year ended December 31, 2017. The decrease in the effective tax rate is due to the reduction in the statutory tax rate, tax planning, and remeasurement of deferred tax assets and liabilities in response to the TCJA.

Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2018 increased $71.7 million, or 100.1%, to $143.3 million from $71.6 million for the year ended December 31, 2017.

2017 Compared to 2016

Net sales totaled $6,631.2 million for the year ended December 31, 2017, compared to $6,385.0 million for the year ended December 31, 2016, an increase of $246.2 million, or 3.9%.  For the year ended December 31, 2017, net sales in our construction vertical increased by 5.1%, while net sales in our industrial & utility vertical increased 9.2%. Our CIG vertical net sales decreased by 5.0% from 2016.

Gross margin increased $52.9 million, or 4.4%, to $1,261.3 million for the year ended December 31, 2017, from $1,208.4 million for the year ended December 31, 2016. The increase resulted from an increase in net sales for the year ended December 31, 2017, compared to the year ended December 31, 2016, as well as our pricing and product diversification initiatives and our acquisition of Cape Electrical Supply LLC in 2016.  Our gross margin rate was 19.0% for the year ended December 31, 2017, compared to 18.9% for the year ended December 31, 2016.

SG&A expenses increased $40.3 million, or 4.1%, to $1,026.6 million for the year ended December 31, 2017, mainly due to higher employment-related costs.  SG&A expenses as a percentage of net sales remained consistent at 15.5% for the years ended December 31, 2017 and 2016.

Depreciation and amortization for the year ended December 31, 2017 increased $1.0 million, or 2.1%, to $48.9 million from $47.9 million for the year ended December 31, 2016.  This increase was primarily due to an increase in property, at cost. Total property, at cost, at December 31, 2017 was $964.2 million, an increase of $23.6 million, or 2.5%, when compared to total property, at cost, at December 31, 2016 of $940.6 million.  Depreciation and amortization as a percentage of net sales remained consistent at 0.7% for the years ended December 31, 2017 and 2016.

Other income, net totaled $6.5 million for the year ended December 31, 2017, compared to $5.3 million for the year ended December 31, 2016.  Other income, net consists primarily of gains or losses on the disposal of property, trade receivable interest charges to customers, and other miscellaneous income items related to our business activities. The increase in other income, net was due to a favorable settlement of a prior claim partially offset by reduced net gains on the disposal of real and personal property in 2017 as compared to 2016. Net gains on the disposal of real and personal property was $0.1 million for the year ended December 31, 2017, compared to net gains on the disposal of real and personal property of $1.8 million for the year ended December 31, 2016.  

Non-operating expenses decreased $1.2 million, or 4.6%, to $24.8 million for the year ended December 31, 2017, from $26.0 million for the year ended December 31, 2016.  The decrease was due to a decrease in non-service cost components of net periodic benefit costs of $1.2 million, partially offset by an increase in interest expense, net of $0.6 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase in interest expense, net was due to higher interest rates on our short-term borrowings for the year ended December 31, 2017, compared to the year ended December 31, 2016.
 

13



Income before provision for income taxes increased $14.0 million, or 9.2% to $167.5 million for the year ended December 31, 2017, compared to $153.5 million for the year ended December 31, 2016. The increase in income before provision for income taxes was primarily due to our growth in gross margin and increased other income, net which outpaced our increases in SG&A expenses and depreciation and amortization.

Our provision for income taxes increased $35.4 million, or 58.8%, to $95.6 million for the year ended December 31, 2017, from $60.2 million for the year ended December 31, 2016.  Our effective tax rate was 57.1% for the year ended December 31, 2017, up from 39.2% for the year ended December 31, 2016. The increase in effective tax rate was primarily due to the remeasurement of deferred tax assets and liabilities in response to the TCJA.

Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2017 decreased $21.5 million, or 23.1%, to $71.6 million from $93.1 million for the year ended December 31, 2016.

Financial Condition and Liquidity

Summary
 
We manage our liquidity and capital levels so that we have the capability to invest in the growth of our business, meet debt service obligations, finance anticipated capital expenditures, pay dividends, make benefit payments, finance information technology needs, fund acquisitions and finance other miscellaneous cash outlays. We believe that maintaining a strong company financial condition enables us to competitively access multiple financing channels, maintain an optimal cost of capital and enable our company to invest in strategic long-term growth plans.

We have historically funded our working capital requirements using cash flows generated by the collection of trade receivables and trade accounts payable terms with our suppliers, supplemented by short-term bank lines of credit.  Capital expenditures have been financed primarily by cash from working capital management and short-term bank lines of credit. 

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years:
Total cash provided by (used in):
2018
 
2017
 
2016
Operating Activities
$
42.1

 
$
45.1

 
$
112.2

Investing Activities
(42.3
)
 
(39.1
)
 
(91.0
)
Financing Activities
16.3

 
(6.5
)
 
(15.8
)
Net Increase (Decrease) in Cash
$
16.1

 
$
(0.5
)
 
$
5.4

 
Our cash was $58.9 million at December 31, 2018, a increase of $16.1 million, or 37.6%, from $42.8 million at December 31, 2017. Our short-term borrowings increased during the year to $235.0 million at December 31, 2018 from $169.6 million at December 31, 2017, primarily as a result of higher working capital investment required to support operating activities due to the growth in sales and due to funding of employee benefits, all funded with short-term lines of credit. Current assets exceeded current liabilities by $542.0 million at December 31, 2018, an increase of $55.3 million, or 11.4%, from $486.7 million at December 31, 2017.

Operating Activities
       
Cash flows provided by operating activities for the year ended December 31, 2018 was $42.1 million, compared to cash provided by operating activities of $45.1 million for the year ended December 31, 2017. Cash provided by operations for the year ended December 31, 2018, was attributable to net income of $143.7 million and increases in accounts payable of $59.7 million and accrued payroll and benefit costs of $38.8, partially offset by increases in trade receivables of $125.4 million and merchandise inventory of $101.9 million both to support the increase in net sales, as well as a decrease in other non-current liabilities of $24.4 million.

The average number of days of sales in trade receivables for the year ended December 31, 2018 increased moderately compared to the same twelve-month period in 2017 due to increased sales in the fourth quarter of 2018, as compared to the fourth quarter of 2017. The days in inventory increased significantly for the year ended December 31, 2018 as a result of higher merchandise inventory levels at December 31, 2018, compared to December 31, 2017.


14



Investing Activities

Net cash used by investing activities was $42.3 million for the year ended December 31, 2018, compared to $39.1 million for the year ended December 31, 2017, an increase of $3.2 million, or 8.2%. The increase was due to higher capital expenditures for the year ended December 31, 2018, compared to the year ended December 31, 2017, partially offset by lower proceeds received on the disposal of property for the year ended December 31, 2018, compared to the same period in 2017.

Financing Activities
 
Net cash provided by financing activities totaled $16.3 million for the year ended December 31, 2018, compared to net cash used by financing activities of $6.5 million for the year ended December 31, 2017, an increase of $22.8 million, or 350.8%. The increase was primarily due to higher short-term borrowings during the year ended December 31, 2018, compared to the same period in 2017, partially offset by higher cash dividends paid in 2018 as compared to 2017. Cash dividends paid totaled $46.9 million, or $2.40 per share, for the year ended December 31, 2018, compared to $35.4 million, or $2.00 per share, for the year ended December 31, 2017.

Liquidity

We had a $750.0 million amended revolving credit facility with $515.0 million in available capacity at December 31, 2018, compared to a $550.0 million revolving credit facility with available capacity of $380.4 million at December 31, 2017. At December 31, 2018 and 2017, we also had two uncommitted $100.0 million private placement shelf agreements ("shelf agreements"). The first of the shelf agreements is expected to allow us to issue senior promissory notes to PGIM, Inc., at fixed rate terms to be agreed upon at the time of any issuance during a three-year issuance period ending in August 2020. The second of the shelf agreements is expected to allow us to issue senior promissory notes to Metropolitan Life Insurance Company and MetLife Investment Advisors, LLC and each other affiliate of MetLife Investment Advisors, LLC that becomes a party to the agreement, at fixed or floating rate terms to be agreed upon at the time of any issuance during a three-year issuance period ending in August 2021.

We have not issued any notes under the shelf agreements as of December 31, 2018 and 2017. For further discussion related to our revolving credit facility and our private placement shelf agreements, refer to Note 11, "Debt", of the notes to the consolidated financial statements located in Item 8., "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.

We had total letters of credit of $5.6 million and $5.4 million outstanding, of which none were issued under the applicable credit agreements at December 31, 2018 and 2017, respectively.  The letters of credit are issued primarily to support certain workers' compensation insurance policies.

Contractual Obligations and Commitments
 
We had the following contractual obligations as of December 31, 2018:
 
 

 
Payments due by period
Contractual obligations
Total
 
2019
 
2020
and
2021
 
2022
and
2023
 
 After
2023
Capital lease obligations
$
13.8

 
$
2.7

 
$
5.1

 
$
3.0

 
$
3.0

Operating lease obligations
109.1

 
30.3

 
39.1

 
21.5

 
18.2

Purchase obligations
942.0

 
942.0

 

 

 

Other obligations
3.6

 
1.8

 
1.8

 

 

Total
$
1,068.5

 
$
976.8

 
$
46.0

 
$
24.5

 
$
21.2

 
Capital lease obligations consist of both principal and interest payments. There were no long-term debt obligations, other than capital lease obligations, at December 31, 2018.

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 $120.5 million of accrued, unfunded pension obligations, $81.2 million of accrued, unfunded employment-related benefit obligations, of which $72.5 million is related to our postretirement benefit plan, and $2.6

15



million in contingent payments for uncertain tax positions because it is not certain when these obligations will be settled or paid.

We also expect to fund $1.7 million for nonqualified pension benefits during 2019 that are not included in the table. Required pension contributions under Employee Retirement Income Security Act of 1974 regulations are expected to be zero in 2019; however, additional contributions may be made at our discretion.  We contributed $80.0 million to our defined benefit pension plan and funded $1.6 million for nonqualified benefits in 2018.
 
Critical Accounting Estimates
 
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"). In connection with the preparation of our financial statements we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our estimates, assumptions and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, estimates, assumptions, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material.

Our significant accounting policies are discussed in Note 2, "Summary of Significant Accounting Policies", of the notes to the consolidated financial statements located in Item 8., “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.  We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.
 
Income Taxes
 
We recognize deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns.  A deferred tax asset or liability results from the temporary difference between an item’s carrying value as reflected in the financial statements and its tax basis, and is calculated using enacted applicable tax rates.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, a valuation allowance is established.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.  We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages. We assess uncertainty regarding tax positions taken in previously filed returns and record reserves in accordance with the guidance under Accounting Standards Codification 740-10, "Accounting for Uncertainty in Income Taxes".
 
Merchandise Inventory
 
We value our inventories at the lower of cost (generally determined using the last-in, first-out (“LIFO”) cost method) or market.  LIFO accounting is a method of accounting that, compared with other inventory accounting methods, generally provides better matching of current costs with current sales.  In assessing the ultimate realization of inventories, we make judgments as to our return rights to suppliers and future demand requirements and record an inventory reserve for obsolete inventory.  If actual future demand, market conditions, or supplier return provisions are less favorable than those projected by management, additional inventory write-downs may be required. For the years ended December 31, 2018, 2017 and 2016, there were no material differences between our estimated reserve levels and actual write-offs.
 
Pension and Postretirement Benefits Plans
 
We account for our pension and postretirement benefit obligations in accordance with the accounting standards for defined benefit pension and other postretirement plans. These standards require the use of several important assumptions, including the discount rate and expected long-term rate of return on plan assets, among others, in determining our obligations and the annual cost of our pension and postretirement benefits. These assumptions are assessed annually in consultation with independent actuaries and investment advisors as of December 31 and adjustments are made as needed.


16



The following table presents key assumptions used to measure the pension and postretirement benefits obligations at December 31: 
 
Pension Benefits
    Postretirement Benefits
 
2018
2017
2018
2017
Discount rate
4.31%
3.67%
4.16%
3.44%
Expected return on plan assets
5.75%
5.75%
       
To determine the long-term expected rate of return, we consider macroeconomic conditions, the historical experience and expected future long-term performance of the plan assets, as well as the current and expected allocation of the plan assets. The pension plan’s asset allocation as of December 31, 2018, was approximately 74% fixed income investments, 16% equity securities and 10% other investments, in line with our policy ranges. We periodically evaluate the allocation of plan assets among the different investment classes to ensure that they are within policy guidelines and ranges. Holding all other assumptions constant, we estimate that a 1% decrease in the expected return on plan assets would have increased our 2018 pension expense by approximately $6.0 million. Our expected long-term rate of return on plan assets assumption will remain consistent for fiscal year 2019 at 5.75%.

In determining the discount rate, we use yields on high-quality fixed-income investments (including among other things, Moody’s Aa corporate bond yields) that match the duration and expected cash flows of the future pension obligations. To the extent the discount rate increases or decreases, our pension and postretirement obligations are decreased or increased accordingly. Holding all other assumptions constant, we estimate that a 1% decrease in the discount rate used to calculate both pension expense for 2018 and the pension liability as of December 31, 2018 would have increased pension expense by $7.1 million and the pension liability by $79.4 million.  Similarly, a 1% decrease in the discount rate would have increased postretirement benefits expense by $0.2 million and the December 31, 2018 postretirement benefits liability by $5.6 million.  
 
New Accounting Standards
 
Our adoption of new accounting standards are discussed in Note 2, "Summary of Significant Accounting Policies", of the notes to the consolidated financial statements located in Item 8., "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the risk of loss arising from adverse changes in market rates and prices, including commodity prices, foreign currency exchange rates, interest rates, and equity prices.  Our primary exposures to market risk are commodity price risk, foreign currency exchange rate risk, and interest rate risk associated with debt obligations.
 
Commodity Price Risk
 
We have exposure to commodity price risk on products we purchase for resale. Examples of such products include wire and cable, conduit, enclosures, and fittings. 

 Foreign Currency Exchange Rate Risk
 
The functional currency for our Canadian subsidiary is the Canadian dollar.  Accordingly, its balance sheet amounts are translated at the exchange rates in effect at year-end and its income and expenses are translated using average exchange rates prevailing during the year.  Currency translation adjustments are included in accumulated other comprehensive loss.  Exposure to foreign currency exchange rate fluctuations is not material.

Interest Rate Risk
 
Our interest expense is sensitive to changes in the general level of market interest rates.  Changes in interest rates have different impacts on the fixed-rate and variable-rate portions of our debt portfolio.  A change in market interest rates on the fixed-rate portion of our debt portfolio impacts the fair value of the financial instrument, but has no impact on interest incurred or cash flows.  A change in market interest rates on the variable-rate portion of our debt portfolio impacts the interest incurred and cash flows, but does not impact the fair value of the financial instrument. 
 
Based on $235.0 million in variable-rate debt outstanding at December 31, 2018, a 1% increase in interest rates would increase our interest expense by $2.4 million per year.

17



 
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, 2018
 
Debt Instruments
2019
2020
2021
2022
2023
After 2023
Total

Fair
Value

 
 

 

 
 
 
 
 
 
Long-term, fixed-rate debt
$
3.4

$
3.4

$
1.8

$
1.3

$
1.0

$
2.5

$
13.4

$
11.9

Weighted-average interest rate
4.87
%
4.84
%
5.65
%
6.40
%
7.58
%
9.32
%
 
 
 
 

 

 

 

 

 

 

 

Short-term, variable-rate borrowings
$
235.0

$

$

$

$

$

$
235.0

$
235.0

Weighted-average interest rate
3.57
%










 
 
 
The fair value of long-term debt is estimated by calculating future cash flows at interpolated Treasury yields with similar maturities, plus an estimate of our credit risk spread as of December 31, 2018.  





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18



CAUTION REGARDING FORWARD-LOOKING STATEMENTS:
 
For additional information related to risks associated with our future performance, see Part I, "Caution Regarding Forward-looking Statements" above and Item 1A. Risk Factors of this Form 10-K.

Item 8.  Financial Statements and Supplementary Data






[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] 


19



Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Graybar Electric Company, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Graybar Electric Company, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1996.

St. Louis, MO
March 13, 2019


20



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
For the Years Ended December 31,
(Stated in millions, except per share data)
2018
2017
2016
Net Sales
$
7,202.5

$
6,631.2

$
6,385.0

Cost of merchandise sold
(5,821.6
)
(5,369.9
)
(5,176.6
)
Gross Margin
1,380.9

1,261.3

1,208.4

Selling, general and administrative expenses
(1,125.0
)
(1,026.6
)
(986.3
)
Depreciation and amortization
(49.6
)
(48.9
)
(47.9
)
Other income, net
3.4

6.5

5.3

Income from Operations
209.7

192.3

179.5

Non-operating expenses
(30.6
)
(24.8
)
(26.0
)
Income before Provision for Income Taxes
179.1

167.5

153.5

Provision for income taxes
(35.4
)
(95.6
)
(60.2
)
Net Income
143.7

71.9

93.3

Net income attributable to noncontrolling interests
(0.4
)
(0.3
)
(0.2
)
Net Income attributable to Graybar Electric Company, Inc.
$
143.3

$
71.6

$
93.1

Net Income attributable to Graybar Electric Company, Inc.
per share of Common Stock(A)
$
6.69

$
3.36

$
4.43

(A)Adjusted for the declaration of a 10% stock dividend in December 2018, shares related to which were issued in February 2019. Prior to the adjustment, the average common shares outstanding were 19.4 million shares and 19.1 million shares for the years ended December 31, 2017 and 2016, respectively.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements.
 

21



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

 
For the Years Ended December 31,
(Stated in millions)
2018
 
2017
 
2016
Net Income
$
143.7

 
$
71.9

 
$
93.3

Other Comprehensive Income
 
 
 
 
 
Foreign currency translation
(8.1
)
 
5.9

 
2.2

Pension and postretirement benefits liability adjustment
 
 
 
 
 
(net of tax of $(6.1), $10.0, and $5.2, respectively)
17.6

 
(15.7
)
 
(8.2
)
Total Other Comprehensive Income (Loss)
9.5

 
(9.8
)
 
(6.0
)
Comprehensive Income
$
153.2

 
$
62.1

 
$
87.3

Less: comprehensive income attributable to noncontrolling
          interests, net of tax
0.1

 
0.5

 
0.4

Comprehensive Income attributable to
       Graybar Electric Company, Inc.
$
153.1

 
$
61.6

 
$
86.9


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


22



Graybar Electric Company, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
 
 
December 31,
(Stated in millions, except share and per share data)
 
 
2018

2017

ASSETS
 
 
 

 

       Current Assets
 
 
 
 

Cash and cash equivalents
 
 
$
58.9

$
42.8

Trade receivables (less allowances of $5.9 and $6.0, respectively)
1,187.0

1,061.6

Merchandise inventory
 
 
658.7

566.2

Other current assets
 
 
54.1

56.2

Total Current Assets
 
 
1,958.7

1,726.8

       Property, at cost
 
 
 
 
Land
 
 
79.4

79.8

Buildings
 
 
489.2

470.8

Furniture and fixtures
 
 
233.0

225.5

Software
 
 
166.4

162.5

Capital leases
 
 
21.3

25.6

Total Property, at cost
 
 
989.3

964.2

Less – accumulated depreciation and amortization
(565.4
)
(539.3
)
Net Property
 
 
423.9

424.9

       Other Non-current Assets
 
 
108.6

109.7

Total Assets
 
 
$
2,491.2

$
2,261.4

LIABILITIES
 
 
 
 
       Current Liabilities
 
 
 
 
Short-term borrowings
 
 
$
235.0

$
169.6

Current portion of long-term debt
 
 
3.4

2.1

Trade accounts payable
 
 
895.2

835.5

Accrued payroll and benefit costs
 
 
158.2

119.4

Other accrued taxes
 
 
23.9

17.2

Other current liabilities
 
 
101.0

96.3

Total Current Liabilities
 
 
1,416.7

1,240.1

Postretirement Benefits Liability
 
 
66.7

70.7

Pension Liability
 
 
118.6

169.2

Long-term Debt
 
 
10.0

7.0

Other Non-current Liabilities
 
 
8.7

12.8

Total Liabilities
1,620.7

1,499.8

SHAREHOLDERS’ EQUITY
 
 
 

 

 
Shares at December 31,
 
 
 
Capital Stock
2018

2017

 
 
Common, stated value $20.00 per share
 
 
 

 
Authorized
50,000,000

50,000,000

 

 
Issued to voting trustees
17,754,923

15,912,467

 

 
Issued to shareholders
3,744,318

3,496,114

 

 
In treasury, at cost
(58,172
)
(24,243
)
 

 
Outstanding Common Stock
21,441,069

19,384,338

428.8

387.7

Common shares subscribed
958,439

923,156

19.2

18.5

Less subscriptions receivable
(958,439
)
(923,156
)
(19.2
)
(18.5
)
Retained Earnings
 
 
678.1

619.9

Accumulated Other Comprehensive Loss
 
 
(240.3
)
(250.1
)
Total Graybar Electric Company, Inc. Shareholders’ Equity
866.6

757.5

Noncontrolling Interests
 
 
3.9

4.1

Total Shareholders’ Equity
 
 
870.5

761.6

Total Liabilities and Shareholders’ Equity
$
2,491.2

$
2,261.4

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

23



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

 
For the Years Ended December 31,
(Stated in millions)
2018
 
2017
 
2016
Cash Flows from Operating Activities
 
 
 
 
 

Net Income
$
143.7

 
$
71.9

 
$
93.3

Adjustments to reconcile net income to cash provided
by operating activities:
 

 
 

 
 
Depreciation and amortization
49.6

 
48.9

 
47.9

Deferred income taxes
3.4

 
14.2

 
19.5

Net gains on disposal of property

 
(0.1
)
 
(1.8
)
Losses on impairment of property
0.3

 

 

Net income attributable to noncontrolling interests
(0.4
)
 
(0.3
)
 
(0.2
)
Changes in assets and liabilities, net of acquisitions:
 
 
 
 
 
Trade receivables
(125.4
)
 
(97.5
)
 
(18.6
)
Merchandise inventory
(101.9
)
 
(63.8
)
 
19.7

Other current assets
2.1

 
(10.9
)
 
6.7

Other non-current assets
(9.0
)
 
(0.5
)
 
(1.5
)
Trade accounts payable
59.7

 
83.3

 
(25.5
)
Accrued payroll and benefit costs
38.8

 
(2.1
)
 
9.8

Other current liabilities
5.6

 
13.3

 
0.7

Other non-current liabilities
(24.4
)
 
(11.3
)
 
(37.8
)
Total adjustments to net income
(101.6
)
 
(26.8
)
 
18.9

Net cash provided by operating activities
42.1

 
45.1

 
112.2

Cash Flows from Investing Activities
 
 
 
 
 
Proceeds from disposal of property
0.7

 
2.2

 
4.1

Capital expenditures for property
(43.0
)
 
(41.3
)
 
(35.2
)
Acquisition of business, net of cash acquired

 

 
(59.9
)
Net cash used by investing activities
(42.3
)
 
(39.1
)
 
(91.0
)
Cash Flows from Financing Activities
 
 
 
 
 
Net increase in short-term borrowings
65.4

 
29.1

 
35.5

Repayment of long-term debt

 

 
(1.9
)
Principal payments under capital leases
(4.0
)
 
(4.2
)
 
(4.8
)
Sales of common stock
17.8

 
17.4

 
17.0

Purchases of treasury stock
(15.7
)
 
(13.7
)
 
(11.3
)
Sales of noncontrolling interests’ common stock

 
0.6

 

Purchases of noncontrolling interests’ common stock
(0.3
)
 
(0.3
)
 
(0.4
)
Dividends paid
(46.9
)
 
(35.4
)
 
(49.9
)
Net cash provided (used) by financing activities
16.3

 
(6.5
)
 
(15.8
)
Net Increase (Decrease) in Cash
16.1

 
(0.5
)
 
5.4

Cash, Beginning of Year
42.8

 
43.3

 
37.9

Cash, End of Year
$
58.9

 
$
42.8

 
$
43.3

Supplemental Cash Flow Information:
 

 
 

 
 

Non-cash Investing and Financing Activities:
 

 
 

 
 

Acquisitions of equipment under capital leases
$
3.1

 
$
1.9

 
$
0.4

Acquisition of software and maintenance under financing arrangement
$
5.0

 
$

 
$

Cash Paid During the Year for:
 

 
 

 
 

Interest, net of amounts capitalized
$
6.3

 
$
4.2

 
$
3.7

Income taxes, net of refunds
$
38.3

 
$
78.4

 
$
36.8

 
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 Changes in Shareholders’ Equity
  
 
Graybar Electric Company, Inc.
Shareholders’ Equity
 
 
 
 
(Stated in millions)
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
 
Total
Shareholders’
Equity
Balance, December 31, 2015
$
326.5

 
$
548.8

 
$
(190.4
)
 
$
3.3

 
$
688.2

Net income
 

 
93.1

 
 

 
0.2

 
93.3

Other comprehensive (loss) income
 

 
 

 
(6.2
)
 
0.2

 
(6.0
)
Stock issued
17.0

 
 

 
 

 


 
17.0

Stock purchased
(11.3
)
 
 

 
 

 
(0.4
)
 
(11.7
)
Dividends declared
16.6

 
(66.5
)
 
 

 
 

 
(49.9
)
Balance, December 31, 2016
$
348.8

 
$
575.4

 
$
(196.6
)
 
$
3.3

 
$
730.9

Net income
 

 
71.6

 
 

 
0.3

 
71.9

Other comprehensive (loss) income
 

 
 

 
(10.0
)
 
0.2

 
(9.8
)
Adoption of ASU 2018-02
 
 
43.5

 
(43.5
)
 
 
 

Stock issued
17.4

 
 

 
 

 
0.6

 
18.0

Stock purchased
(13.7
)
 
 

 
 

 
(0.3
)
 
(14.0
)
Dividends declared
35.2

 
(70.6
)
 
 

 
 

 
(35.4
)
Balance, December 31, 2017
$
387.7

 
$
619.9

 
$
(250.1
)
 
$
4.1

 
$
761.6

Net income
 

 
143.3

 
 

 
0.4

 
143.7

Other comprehensive income (loss)
 

 
 

 
9.8

 
(0.3
)
 
9.5

Adoption of ASC 606, net of tax
 
 
0.8

 
 
 
 
 
0.8

Stock issued
17.8

 
 

 
 

 


 
17.8

Stock purchased
(15.7
)
 
 

 
 

 
(0.3
)
 
(16.0
)
Dividends declared
39.0

 
(85.9
)
 
 

 
 

 
(46.9
)
Balance, December 31, 2018
$
428.8

 
$
678.1

 
$
(240.3
)
 
$
3.9

 
$
870.5

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

25



Graybar Electric Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
as of December 31, 2018 and 2017 and
for the Years Ended December 31, 2018, 2017, and 2016
(Stated in millions, except share and per share data)
 

1. DESCRIPTION OF THE BUSINESS
 
Graybar Electric Company, Inc. (“Graybar”, “Company”, "we", "our", or "us") is a New York corporation, incorporated in 1925.  We are engaged in the distribution of electrical and communications and data networking products and are a provider of related supply chain management and logistics services.  We primarily serve customers in the construction, industrial & utility, and commercial, institutional and government ("CIG") vertical markets, with products and services that support new construction, infrastructure updates, building renovation, facility maintenance, repair and operations ("MRO"), and original equipment manufacturers ("OEM"). We purchase all of the products we sell from others, and we neither manufacture nor contract to manufacture any products we sell.  Our business activity is primarily based in the United States (“U.S.”).  We also have subsidiary operations with distribution facilities in Canada and Puerto Rico.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Our accounting policies conform to generally accepted accounting principles in the U.S. ("GAAP”) and are applied on a consistent basis among all years presented. Significant accounting policies are described below.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Graybar and its subsidiary companies.  All material intercompany balances and transactions have been eliminated.  The ownership interests that are held by owners other than the Company in subsidiaries consolidated by the Company are accounted for and reported as noncontrolling interests.

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

Reclassifications
 
Certain reclassifications have been made to prior years' financial information to conform to the December 31, 2018 presentation. These changes consisted of reclassifying certain asset and liability items between current and non-current within the December 31, 2017 balance sheet. The reclassifications had no effect on total assets or liabilities as of December 31, 2017.

Subsequent Events
 
        We have evaluated subsequent events through the time of the filing of this Annual Report on Form 10-K with the Commission.  No material subsequent events have occurred since December 31, 2018 that require recognition or disclosure in our financial statements.
 
Revenue Recognition
 
Sales revenue is recognized when performance obligations are satisfied, which is typically upon delivery of the product to the customer.  Sometimes product is purchased from the manufacturer and drop-shipped to the customer. We generally take control of the goods when shipped by the manufacturer and then recognize revenue when control of the product transfers to the customer. Revenues recognized are primarily for product sales, but may also include freight and handling charges. Our standard warehouse shipping terms are FOB shipping point, under which control passes to the customer at the time of shipment. We also earn revenue for professional services, general contracting services, and storage services. Service revenue represented less than 1% of gross sales for the year ended December 31, 2018.  Revenue is reported net of all taxes assessed by governmental authorities as a result of revenue-producing transactions, primarily sales tax.
 

26



Outgoing Freight Expenses                                                                                        
 
We record certain outgoing freight expenses as a component of selling, general and administrative expenses.  These costs totaled $62.0 million, $54.5 million, and $50.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
  
Cash and Cash Equivalents
 
We account for cash on hand, deposits in banks, and other short-term, highly liquid investments with an original maturity of three months or less as cash and cash equivalents.
 
Allowance for Doubtful Accounts
 
We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables is secured by mechanic’s lien or payment bond rights.  We maintain allowances to reflect the expected uncollectability of trade receivables based on past collection history and specific risks identified in the receivables portfolio.  Although actual credit losses have historically been within management’s expectations, additional allowances may be required if the financial condition of our customers were to deteriorate.
 
Merchandise Inventory
 
Our inventory is stated at the lower of cost (generally determined using the last-in, first-out (“LIFO”) cost method) or market.  LIFO accounting is a method of accounting that, compared with other inventory accounting methods, generally provides better matching of current costs with current sales. 
 
We make provisions for obsolete or excess inventories as necessary to reflect reductions in inventory value. 
 
Vendor Allowances
 
Our agreements with many of our suppliers provide for us to earn volume incentives based on purchases during the agreement period.  Based on the provisions of our vendor agreements, we develop vendor accrual rates by estimating the point at which we will have completed our performance under the agreement and the deferred amounts will be earned. We perform analyses and review historical trends to ensure the deferred amounts earned are appropriately recorded. Certain vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year are based on estimates of future activity levels, and could be materially impacted if actual purchase volumes differ. Changes in the estimated amount of incentives are treated as changes in estimate and are recognized in earnings in the period in which the change in estimate occurs.  In the event that the operating performance of our suppliers were to decline, however, there can be no assurance that amounts earned would be paid or that the volume incentives would continue to be included in future agreements.

Property and Depreciation
 
Property, plant and equipment are recorded at cost. Depreciation is expensed on a straight-line basis over the estimated useful lives of the related assets. Interest costs incurred to finance expenditures for major long-term construction projects are capitalized as part of the asset's historical cost and included in property, plant and equipment, then depreciated over the useful life of the asset. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Expenditures for maintenance and repairs are charged to expense when incurred, while the costs of significant improvements, which extend the useful life of the underlying asset, are capitalized.
 
Credit Risk
 
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of trade receivables.  We perform ongoing credit evaluations of our customers, and a significant portion of our trade receivables are secured by mechanic’s lien or payment bond rights.  We maintain allowances for potential credit losses, and such losses historically have been within management’s expectations.
 
Fair Value
 
We endeavor to utilize the best available information in measuring fair value.  GAAP has established a fair value hierarchy, which prioritizes the inputs used in measuring fair value.  The tiers in the hierarchy include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are

27



either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own data inputs and assumptions.  We have used fair value measurements to value our pension plan assets.
 
Foreign Currency Exchange Rate
 
The functional currency for our Canadian subsidiary is the Canadian dollar.  Accordingly, its balance sheet amounts are translated at the exchange rates in effect at the end of each reporting period and its statements of income amounts are translated at the average rates of exchange prevailing during the current period.  Currency translation adjustments are included in accumulated other comprehensive loss.
 
Goodwill
 
Our goodwill is not amortized, but rather tested annually for impairment.  Goodwill is reviewed annually in the fourth quarter and when circumstances or other events might indicate that impairment may have occurred.  We first perform a qualitative assessment of goodwill impairment. The qualitative assessment considers several factors including the excess fair value over carrying value as of the last quantitative impairment test, the length of time since the last fair value measurement, the current carrying value, market conditions, actual performance compared to forecasted performance, and the current business outlook. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the reporting unit is then quantitatively tested for impairment. If a quantitative assessment is required, the fair value is determined using a variety of assumptions including estimated future cash flows of the reporting unit using applicable discount rates. 

Definite Lived Intangible Assets

The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Customer relationships, trade names and other non-contractual intangible assets with determinable lives are amortized over periods generally ranging from 3 to 20 years. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.
 
Income Taxes
 
We recognize deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns.  A deferred tax asset or liability results from the temporary difference between an item’s carrying value as reflected in the financial statements and its tax basis, and is calculated using enacted applicable tax rates.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, a valuation allowance is established.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.  We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages. We assess uncertainty regarding tax positions taken in previously filed returns and record reserves in accordance with the guidance under Accounting Standards Codification ("ASC") 740-10, "Accounting for Uncertainty in Income Taxes".
 
Other Postretirement Benefits
 
We account for postretirement benefits other than pension by accruing the costs of benefits to be provided over the eligible employees’ periods of active service.  These costs are determined on an actuarial basis.  Our consolidated balance sheets reflect the funded status of postretirement benefits.
 
Pension Plan
 
We sponsor a noncontributory defined benefit pension plan accounted for by accruing the cost to provide the benefits over the eligible employees’ periods of active service.  These costs are determined on an actuarial basis.  Our consolidated balance sheets reflect the funded status of the defined benefit pension plan.

Non-Operating Expenses
 
Non-operating expenses are comprised of interest expense, net and non-service cost components of the net periodic benefit cost for the pension and other postretirement benefit plans. The non-service cost components include interest cost, expected return on plan assets, amortization of net actuarial gains/losses, and amortization of prior service costs/gains.


28



New Accounting Standards
 
No new accounting standards that were issued or became effective during 2018 have had or are expected to have a material impact on our consolidated financial statements except those noted below.

We adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU" or "Update") 2017-07, "Compensation - Retirement Benefits (Topic 715)" ("ASU 2017-07") on January 1, 2018 using the retrospective transition method. The updates to the standard require us to report the service cost component in the same line as other compensation costs arising from services rendered by employees during the reporting period. The other components of net benefit costs are presented in the income statement separately from the service cost and outside of a subtotal of income from operations. As a result of the adoption, the financial statement line previously entitled "interest expense, net" was changed to "non-operating expenses". The impact to the operating results for the years ended December 31, 2017 and 2016 within the consolidated statements of income as a result of adopting ASU 2017-07 is presented in the tables below:

Consolidated Statements of Income
 
Year Ended December 31, 2017
 
As Reported

 
Reclassification

 
As Adjusted

Selling, general and administrative expenses
$
1,047.2

 
$
(20.6
)
 
$
1,026.6

Non-operating expenses
4.2

 
20.6

 
24.8


 
Year Ended December 31, 2016
 
As Reported

 
Reclassification

 
As Adjusted

Selling, general and administrative expenses
$
1,008.7

 
$
(22.4
)
 
$
986.3

Non-operating expenses
3.6

 
22.4

 
26.0


On January 1, 2018, we adopted ASC Topic 606, "Revenue from Contracts with Customers." See Note 3, "Revenue", for further information.
 
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” ("ASU 2016-02"). The core principle of Topic 842 requires a lessee to recognize a right of use asset ("ROU") and lease liability on the balance sheet for both operating and finance leases while disclosing key information about the leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, using a modified retrospective approach.

We will adopt the new guidance on January 1, 2019. We will elect the package of transitional practical expedients which allows an entity not to reassess whether expired or existing contracts contain leases, lease classification of expired or existing leases, and whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. As guidance allows, this package can be elected separate of any other practical expedient. As a practical expedient, the Company has elected as an accounting policy not to separate non-lease components from lease components for real estate properties and information technology.

In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information. The standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated statements of income. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remains substantially unchanged.

Adoption of the ASU 2016-02 will result in the recognition of additional ROU assets and lease liabilities for operating leases of approximately $100 million at January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which introduces new guidance for the accounting for credit losses on certain financial instruments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this Update to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13") that makes minor changes to the disclosure

29



requirements on fair value measurements in Topic 820. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of the adoption of the Update on our financial statements, but do not expect it to have a material impact.

In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14") that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and adds new disclosure requirements that the FASB considers pertinent. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 for public entities. Early adoption is permitted. We are currently evaluating the impact of the adoption of the Update on our financial statements, but do not expect it to have a material impact.

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15") requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years for public entities. Early adoption is permitted. The adoption of this Update will not have a material impact on our financial statements.

3. REVENUE

On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers” ("ASC Topic 606") using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, "Revenue Recognition" ("ASC Topic 605").

We recorded an increase to opening retained earnings of $0.8 million (net of tax of $0.3 million) as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact primarily related to the recognition of bill and hold transactions that were deferred under ASC Topic 605. The impact to net sales as a result of applying ASC Topic 606 for the year ended December 31, 2018 was an increase of $0.2 million.

In accordance with the new revenue standard requirement, the disclosure impact of adoption on our consolidated statement of income for the year ended December 31, 2018 and the consolidated balance sheet as of December 31, 2018 was as follows:

Consolidated Statements of Income
 
For the Year Ended December 31, 2018
 
As Reported
 
Balance without Adoption
 
Effect of Change
Net sales
$
7,202.5

 
$
7,202.3

 
$
0.2

Cost of merchandise sold
5,821.6

 
5,821.6

 


Consolidated Balance Sheet
 
As of December 31, 2018
 
As Reported
 
Balance without Adoption
 
Effect of Change
Merchandise inventory
$
658.7

 
$
668.2

 
$
(9.5
)
Other current assets
54.1

 
54.4

 
(0.3
)
Other non-current liabilities
8.7

 
19.4

 
(10.7
)
Retained earnings
678.1

 
677.2

 
0.9



30



The following table summarizes the percentages of our net sales attributable to each of our vertical markets for the years ended December 31, 2018 and 2017:
 
For the Years Ended
 December 31,
 
2018

 
2017

Construction
59.6
%
 
59.6
%
Industrial & Utility
21.3

 
21.7

CIG
19.1

 
18.7

Total net sales
100.0
%
 
100.0
%

We had no material contract assets, contract liabilities, or deferred contract costs recorded on the consolidated balance sheet as of December 31, 2018. In addition, for the year ended December 31, 2018, revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period is not material.

Revenue expected to be recognized in any future year related to remaining performance obligations is not material. As permitted in ASC Topic 606, we have elected to omit disclosure related to performance obligations for revenue pertaining to contracts that have an original expected duration of one year or less, to contracts where revenue is recognized as invoiced and to contracts with variable consideration related to wholly unsatisfied performance obligations.

4. CASH DISCOUNTS AND DOUBTFUL ACCOUNTS

The following table summarizes the activity in the allowances for cash discounts and doubtful accounts:
 
Beginning Balance
 
Provision (Charged to Expense)
 
Deductions
 
Ending Balance
For the Year Ended December 31, 2018
 
 
 
 
 
 
 
Allowance for cash discounts
$
2.0

 
$
33.2

 
$
(33.0
)
 
$
2.2

Allowance for doubtful accounts
4.0

 
2.9

 
(3.2
)
 
3.7

        Total
$
6.0

 
$
36.1

 
$
(36.2
)
 
$
5.9

 
 
 
 
 
 
 
 
For the Year Ended December 31, 2017
 
 
 
 
 
 
 
Allowance for cash discounts
$
1.7

 
$
31.2

 
$
(30.9
)
 
$
2.0

Allowance for doubtful accounts
3.3

 
3.6

 
(2.9
)
 
4.0

Total
$
5.0

 
$
34.8

 
$
(33.8
)
 
$
6.0

 
 
 
 
 
 
 
 
For the Year Ended December 31, 2016
 
 
 
 
 
 
 
Allowance for cash discounts
$
1.7

 
$
28.2

 
$
(28.2
)
 
$
1.7

Allowance for doubtful accounts
4.1

 
2.3

 
(3.1
)
 
3.3

Total
$
5.8

 
$
30.5

 
$
(31.3
)
 
$
5.0


5. INVENTORY

Our inventory is stated at the lower of cost (generally determined using the LIFO cost method) or market.  Inventories valued using the LIFO method comprised 91% and 90% of the total inventories at December 31, 2018 and 2017, respectively. Had the first-in, first-out (“FIFO”) method been used, merchandise inventory would have been $188.8 million and $170.9 million greater than reported under the LIFO method at December 31, 2018 and 2017, respectively.  In 2018 and 2017, we did not liquidate any portion of previously-created LIFO layers. In 2016, we liquidated portions of previously-created LIFO layers, resulting in decreases in cost of merchandise sold of $0.1 million.
 
Reserves for excess and obsolete inventories were $7.8 million and $9.2 million at December 31, 2018 and 2017, respectively.  The change in the reserve for excess and obsolete inventories, included in cost of merchandise sold, was $(1.4) million, $2.7 million, and $1.6 million for the years ended December 31, 2018, 2017, and 2016, respectively.


31



6. PROPERTY AND DEPRECIATION

We provide for depreciation and amortization using the straight-line method over the following estimated useful asset lives:
Classification
Estimated Useful Asset Life
Buildings
42 years
Leasehold improvements
Over the shorter of the asset’s life or the lease term
Furniture, fixtures, equipment and software
3 to 14 years
Assets held under capital leases
Over the shorter of the asset’s life or the lease term
 
Depreciation expense was $37.3 million, $38.8 million, and $39.3 million in 2018, 2017, and 2016, 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, 2018 and 2017 were $3.1 million and $1.9 million, respectively. 
 
We capitalize interest expense on major construction and development projects while in progress.  Interest capitalized in 2018 and 2017 was $0.3 million and $0.1 million, respectively. There was no interest capitalized in 2016.
 
Where applicable, we capitalize 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.  We capitalized software and software development costs of $3.7 million and $4.2 million in 2018 and 2017, respectively, and the amounts are recorded in software.
 
We consider properties to be assets held for sale when all of the following criteria are met: (i) a formal commitment to a plan to sell a property has been made and exercised; (ii) the property is available for sale in its present condition; (iii) actions required to complete the sale of the property have been initiated; (iv) sale of the property is probable and we expect the sale will occur within one year; and (v) the property is being actively marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and depreciation of the property ceases. There were no assets held for sale at December 31, 2018 or 2017. During 2017, we sold assets classified as held for sale with net book values of $0.5 million and recorded net gains on the assets held for sale of $0.2 million in other income, net.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  For assets classified as held and used, impairment may occur if projected undiscounted cash flows are not adequate to cover the carrying value of the assets.  In such cases, additional analysis is conducted to determine the amount of the loss to be recognized.  The impairment loss is calculated as the difference between the carrying amount of the asset and its estimated fair value.  The analysis requires estimates of the amount and timing of projected cash flows and, where applicable, selection of an appropriate discount rate.  Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed necessary. 

We recorded an impairment loss of $0.3 million to account for the expected loss on an abandoned property that does not qualify as an asset held for sale, where the net book value of the property exceeded the estimated selling price less estimated selling expenses, during 2018. There were no impairment losses recorded during 2017 or 2016. The impairment losses are included in other income, net in the consolidated statements of income.


32



7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill, included in other non-current assets in our consolidated balance sheets, for the years ended December 31 were as follows:
 
2018
2017
Beginning balance
$
30.1

$
30.1

Goodwill acquired


Ending balance
$
30.1

$
30.1


As of December 31, 2018, we have completed our annual impairment test and concluded that there is no impairment of our goodwill.

Other Intangible Assets

Other intangible assets, included in other non-current assets in our consolidated balance sheets, consist of the following:
 
As of December 31, 2018
 
Weighted Average Life
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Customer relationships
8.5 to 10.8 years
$
17.1

$
(5.0
)
$
12.1

Trade name
15 to 20 years
14.3

(2.1
)
12.2

Non-compete agreements
3 to 5 years
0.3

(0.2
)
0.1

Other intangible assets
10 years
0.2

(0.1
)
0.1

Total
$
31.9

$
(7.4
)
$
24.5


 
As of December 31, 2017
 
Weighted Average Life
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Customer relationships
8.5 to 10.8 years
$
17.1

$
(3.2
)
$
13.9

Trade name
15 to 20 years
14.3

(1.3
)
13.0

Non-compete agreements
3 to 5 years
0.3

(0.2
)
0.1

Other intangible assets
10 years
0.2

(0.1
)
0.1

Total
$
31.9

$
(4.8
)
$
27.1


Amortization expense for other intangible assets was $2.6 million in both 2018 and 2017.

Estimated future amortization expense related to our intangible assets for the years ending December 31 are as follows:
2019
$
2.5

2020
2.5

2021
2.5

2022
2.5

2023
2.5

After 2023
12.0

 
$
24.5


We did not incur impairment losses related to our other intangible assets during the year ended December 31, 2018.


33



8. INCOME TAXES
 
The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017. Among the provisions, the TCJA reduces the U.S. federal corporate income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018, requires companies to pay a one-time transition tax on deemed repatriated earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. At December 31, 2018 we have completed our accounting for the tax effects of the enactment of the TCJA. We have finalized the tax effects on our existing deferred tax balances and the one-time transition tax under Staff Accounting Bulletin No. 118 ("SAB 118"). We have also included current year impacts of the TCJA in our tax provision.

At December 31, 2017 we remeasured domestic deferred tax assets and liabilities based on the expected future applicable tax rate and recorded a provisional tax expense of $22.6 million, consisting of $43.5 million of tax expense related to items previously recorded through accumulated other comprehensive income under FASB Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("FAS 158"), and $20.9 million of tax benefit related to items previously recorded through our provision for income taxes. We adopted ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220)" in 2017; refer to Note 15, "Accumulated Other Comprehensive Loss". During 2018, we finalized calculations of cumulative timing differences, resulting in a decrease in tax expense of $9.2 million due to the return vs. provision difference remeasurement of these balances related to tax planning initiatives as of December 31, 2018.

The one-time transition tax is based on our total post-1986 earnings and profits ("E&P") that we previously deferred from U.S. income taxation, and the amount of those earnings held in cash and other specified assets. At December 31, 2017, we recorded a provisional amount for our one-time transition tax liability of $6.2 million. We finalized our calculation as of December 31, 2018, resulting in a decrease in income tax expense of $2.4 million. The entire transition tax liability was settled with the filing of the 2017 U.S. federal income tax return; no additional payments are expected with regards to this liability. No additional income taxes have been provided for any outside basis difference inherent in these foreign entities, as these amounts continue to be indefinitely reinvested in foreign operations. We have made an accounting policy election to treat global intangible low-taxed income ("GILTI") as a period cost as it will not have a material impact on our tax provision.

We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assets and liabilities calculated using enacted applicable tax rates.  We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance.  Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.
 
Our unrecognized tax benefits of $2.6 million, $2.3 million, and $1.8 million as of December 31, 2018, 2017, and 2016, respectively, are uncertain tax positions that would impact our effective tax rate if recognized.  We are periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes.  We do not anticipate a material change in unrecognized tax benefits during the next twelve months.
 
Our uncertain tax benefits, and changes thereto, during 2018, 2017, and 2016 were as follows: 
 
2018
 
2017
 
2016
Balance at January 1,
$
2.3

 
$
1.8

 
$
2.3

Additions based on tax positions related to current year
1.1

 
0.4

 
0.4

Additions based on tax positions of prior years

 
0.3

 

Reductions for tax positions of prior years
(0.8
)
 
(0.2
)
 
(0.9
)
Settlements

 

 

Balance at December 31,
$
2.6

 
$
2.3

 
$
1.8

 
We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages.  We have accrued $0.4 million and $1.0 million in interest and penalties at December 31, 2018 and 2017, respectively.  Interest was computed on the difference between the provision for income taxes recognized in accordance with GAAP and the amount of benefit previously taken or expected to be taken in our federal, state, and local income tax returns. 
 
Our federal income tax returns for the tax years 2015 and forward are available for examination by the United States Internal Revenue Service (“IRS”).  The statute of limitation for the 2015 federal return will expire on September 15, 2019, unless extended by consent. Our state income tax returns for 2014 through 2018 remain subject to examination by various state

34



authorities with the latest period closing on December 31, 2023.  We have not extended the statutes of limitations in any state jurisdictions with respect to years prior to 2014.
 
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,
 
2018
 
2017
 
2016
“Statutory” federal tax rate
21.0
 %
 
35.0
 %
 
35.0
 %
State and local income taxes, net of federal benefit
3.1

 
4.0

 
3.3

Deemed repatriation of foreign earnings
(1.0
)
 
3.3

 

Effect of tax rate changes
(5.1
)
 
13.5

 

Meals and entertainment
1.4

 
1.4

 
1.6

Other, net                 
0.4

 
(0.1
)
 
(0.7
)
Effective tax rate
19.8
 %
 
57.1
 %
 
39.2
 %

The effective tax rate decreased significantly in 2018 as a result of the reduction in the statutory federal tax rate, the final calculation and remeasurement of deferred tax assets and liabilities under SAB 118, and additional tax planning undertaken as a result of the TCJA.

The components of income before taxes and the provision for income taxes recorded in the consolidated statements of income are as follows: 
 
For the Years Ended December 31,
Components of Income before Taxes
2018
 
2017
 
2016
Domestic
$
163.3

 
$
155.2

 
$
143.6

Foreign
15.8

 
12.3

 
9.9

Income before taxes
$
179.1

 
$
167.5

 
$
153.5


 
For the Years Ended December 31,
Components of Income Tax Provision
2018
 
2017
 
2016
Current expense
 
 
 
 
 
U.S. Federal
$
20.5

 
$
66.5

 
$
33.1

State
6.9

 
11.4

 
4.8

Foreign
4.6

 
3.5

 
2.8

Total current expense
$
32.0

 
$
81.4

 
$
40.7

Deferred expense (benefit)
 
 
 
 
 
U.S. Federal
2.5

 
15.3

 
16.7

State
0.8

 
(1.1
)
 
3.0

Foreign
0.1

 

 
(0.2
)
Total deferred expense
$
3.4

 
$
14.2

 
$
19.5

Total income tax provision
$
35.4

 
$
95.6

 
$
60.2

 

35



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)
2018
 
2017
Pension
$
31.0

 
$
38.0

Postretirement benefits
18.6

 
19.8

Inventory
12.1

 
12.1

Other deferred tax assets
5.0

 
4.8

Payroll accruals
2.9

 
1.8

Bad debt reserves
1.0

 
1.0

       Subtotal
70.6

 
77.5

Less: valuation allowances

 

       Deferred tax assets
70.6

 
77.5

Fixed assets
(28.3
)
 
(27.2
)
Other deferred tax liabilities
(4.0
)
 
(2.6
)
Computer software
(3.2
)
 
(3.2
)
Deferred tax liabilities
(35.5
)
 
(33.0
)
Net deferred tax assets
$
35.1

 
$
44.5


Deferred income taxes included in non-current assets (liabilities) at December 31 were: 
 
2018
 
2017
Deferred tax assets included in other non-current assets
$
35.5

 
$
44.9

Deferred tax liabilities included in other non-current liabilities
(0.4
)
 
(0.4