UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  i 10-K

For the fiscal year ended  i  i December 31 / , 2019

or

For the transition period from __________ to __________

Commission File Number  i 000-00255

Graybar Electric Company, Inc. and Subsidiaries

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2019

Table of Contents

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, 2019, 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; a sustained interruption in the operation of our information systems; volatility in the prices of industrial commodities; 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, commercial, institutional and government ("CIG"), and industrial & utility 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 288 locations across the United States and Canada, we serve approximately 146,000 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.

We were incorporated in 1925 under the laws of the State of New York. Our active and retired employees own 100% of our common 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, CIG, and industrial & utility 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 of our sales in 2019. 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.

The other verticals we serve are CIG and industrial & utility. 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 industrial & utility vertical includes customers and products for MRO, OEM, broadband utility and electrical transmission and distribution infrastructure.

The following table provides the approximate percentages of our net sales attributable to each of the verticals we serve:

Certain reclassifications have been made to the vertical market assigned to customers in the prior years’ information to conform to the December 31, 2019 presentation.

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 60% and 55% of customer orders from this on-hand inventory in 2019 and 2018, respectively.

Approximately 50% of the products we sold during 2019 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:

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, 2019 are shown below:

At December 31, 2019, we employed approximately 4,700 people in sales capacities.  Approximately 3,000 of these sales personnel were inside and outside sales representatives working to generate sales with current and prospective customers.  The remaining 1,700 employees were customer service representatives who provided support services to our customers and our salesforce.

We had orders on hand totaling $1,212.0 million and $1,221.7 million at December 31, 2019 and 2018, respectively.  We expect that approximately 90% of the orders we had on hand at December 31, 2019 will be filled within the twelve-month period ending December 31, 2020.  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 2019, 2018, and 2017.  Long-lived assets located outside the U.S. represented approximately 1% of our consolidated total assets at the end of 2019, 2018, and 2017.  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, 2019, we employed approximately 9,000 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 146,000 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 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-attacks, 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 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 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 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 products 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 revolving 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, 2019, 3,398 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 governmental regulation globally. Existing and future laws and 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 exercise 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 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 ten to twenty-two and totals 218 for all districts.  The facilities range in size from 800 to 136,000 square feet, with the average being approximately 30,000 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 300,000 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 two and nine years.

We also have two U.S. subsidiaries with seven owned facilities and twelve 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.

Supplemental Item.  Executive Officers of the Registrant

The following table lists the name, age as of March 1, 2020, 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.

 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.  Under applicable New York law, a voting trust may not have a term greater than ten years. A new Voting Trust Agreement was established effective March 3, 2017, which expires by its terms on March 1, 2027. At December 31, 2019, approximately 83% of our outstanding 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 for the three months ended December 31, 2019, all of which were made pursuant to the foregoing provisions:

On December 12, 2019, our Board of Directors declared a 5% stock dividend to shareholders of record on December 16, 2019.  Shares representing this dividend were issued on February 7, 2020.

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.

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)

^(A)All periods adjusted for the declaration of a 5% stock dividend declared December 2019, 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, 2018, 2017, 2016, and 2015 were 21.4 million shares, 19.4 million shares, 17.4 million shares, and 16.4 million shares, respectively.

^(B)All periods adjusted for certain balance sheet reclassifications to conform to the December 31, 2019 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 years ended December 31, 2019 and 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. For comparison of the results of operations relating to the years ended December 31, 2018 and 2017, refer to our Annual Report on Form 10-K, Part II., Item 7. filed with the SEC on March 13, 2019.

Business Overview

We set records for net sales, gross margin, and net income of the Company for the year ended December 31, 2019. Our 2019 net sales totaled $7,523.9 million, an increase of $321.4 million, or 4.5%, compared to net sales of $7,202.5 million for the year ended December 31, 2018. In 2019, net sales in our construction, CIG, and industrial & utility verticals increased 5.2%, 3.4%, and 3.4%, respectively. We believe our continued investments in people, technology and service innovation contributed significantly to our strong sales performance for 2019.

Gross margin increased $48.1 million, or 3.5%, to $1,429.0 million for the year ended December 31, 2019, when compared to gross margin of $1,380.9 million for the same twelve-month period last year.  Gross margin rate was 19.0% for the year ended December 31, 2019, compared to 19.2% at December 31, 2018. The decrease in gross margin rate was primarily due to a decrease in our vendor allowances as a result of better inventory management.

Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2019 was $144.5 million, which was $1.2 million, or 0.8%, higher than net income attributable to Graybar Electric Company, Inc. of $143.3 million for the year ended December 31, 2018.

We achieved positive results in 2019 by investing in the people, services and technology to grow our business and improve our productivity. We believe these investments contributed to our strong performance last year and will also serve as foundational building blocks for success in the years to come. As we work to transform our company for the future, we remain focused on providing an exceptional customer experience, boosting efficiency in the supply chain and inspiring a culture of innovation, agility and growth throughout the company.

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, 2019, 2018, and 2017:

2019 Compared to 2018

Net sales totaled $7,523.9 million for the year ended December 31, 2019, compared to $7,202.5 million for the year ended December 31, 2018, an increase of $321.4 million, or 4.5%.  For the year ended December 31, 2019, net sales in our construction, CIG, and industrial & utility verticals increased by 5.2%, 3.4%, and 3.4%, respectively, compared to the year ended December 31, 2018.

Gross margin increased $48.1 million, or 3.5%, to $1,429.0 million for the year ended December 31, 2019, from $1,380.9 million for the year ended December 31, 2018. The increase resulted from higher net sales for the year ended December 31, 2019, compared to the year ended December 31, 2018. Our gross margin rate was 19.0% for the year ended December 31, 2019, compared to 19.2% for the year ended December 31, 2018. The decrease in gross margin rate was primarily due to a decrease in vendor allowances as a result of better inventory management.

Selling, general and administrative ("SG&A") expenses increased $34.9 million, or 3.1%, to $1,159.9 million for the year ended December 31, 2019, compared to $1,125.0 million for the year ended December 31, 2018, mainly due to higher salary expenses, higher information technology expenses, and higher bad debt expenses for the year ended December 31, 2019. SG&A expenses as a percentage of net sales were 15.4% for the year ended December 31, 2019, compared to 15.6% for the year ended December 31, 2018.

Depreciation and amortization for the year ended December 31, 2019, increased $0.9 million, or 1.8%, to $50.5 million from $49.6 million for the year ended December 31, 2018.  This increase was primarily due to an increase in property, at cost. Total property, at cost, at December 31, 2019 was $1,022.4 million, an increase of $33.1 million, or 3.3%, when compared to total property,

at cost, at December 31, 2018 of $989.3 million. Depreciation as a percentage of net sales remained consistent at 0.7% for the years ended December 31, 2019 and 2018.

Other income, net totaled $5.0 million for the year ended December 31, 2019, compared to $3.4 million for the year ended December 31, 2018.  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 primarily due to net gains on disposal of assets in 2019.

Non-operating expenses decreased $6.9 million, or 22.5%, to $23.7 million for the year ended December 31, 2019, from $30.6 million for the year ended December 31, 2018. The decrease was due to decreases in non-service cost components of net periodic benefit costs of $7.2 million and interest expense, net of $1.4 million offset by an increase in other post employment benefits expenses of $1.7 million for the year ended December 31, 2019, compared to the year ended December 31, 2018. The decrease in interest expense, net was primarily due to lower levels of average outstanding short-term borrowings for the year ended December 31, 2019, compared to the year ended December 31, 2018.

Income before provision for income taxes increased $20.8 million, or 11.6%, to $199.9 million for the year ended December 31, 2019, compared to $179.1 million for the year ended December 31, 2018. The increase was primarily due to our growth in gross margin outpacing our increases in SG&A expenses and depreciation and amortization.

Our provision for income taxes increased $19.6 million, or 55.4%, to $55.0 million for the year ended December 31, 2019 from $35.4 million for the year ended December 31, 2018.  Our effective tax rate was 27.5% for the year ended December 31, 2019, up from 19.8% for the year ended December 31, 2018. The increase in the effective tax rate reflects a normalization after certain one-time effects of the Tax Cuts and Jobs Act (“TCJA”), finalized under Staff Accounting Bulletin No. 118, were included in the 2018 and 2017 results.

Net income attributable to Graybar Electric Company, Inc. for the year ended December 31, 2019 increased $1.2 million, or 0.8%, to $144.5 million from $143.3 million for the year ended December 31, 2018.

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:

Our cash was $60.8 million at December 31, 2019, an increase of $1.9 million, or 3.2%, from $58.9 million at December 31, 2018. As a result of the improvement in our cash collection efforts related to trade receivables and improvements in our merchandise inventory management, we were able to pay down our short-term borrowings by $97.0 million, or 41.3% to $138.0 million at December 31, 2019 from $235.0 million at December 31, 2018. Current assets exceeded current liabilities by $583.7 million at December 31, 2019, an increase of $41.7 million, or 7.7%, from $542.0 million at December 31, 2018 due to the decrease in short-term borrowings.

Operating Activities

Cash flows provided by operating activities for the year ended December 31, 2019 was $249.4 million, compared to cash provided by operating activities of $42.1 million for the year ended December 31, 2018. Cash provided by operations for the year ended December 31, 2019, was attributable to net income of $144.9 million adjusted for non-cash depreciation and amortization expenses of $50.5 million and non-cash lease operating expense of $30.1 million, and an increase in collections of trade receivables of $92.2 million, partially offset by a decrease in trade accounts payable of $62.8 million.

The average number of days of sales in trade receivables for the year ended December 31, 2019 improved significantly compared to the same twelve-month period in 2018 due to better collection results. The days in inventory improved significantly for the year ended December 31, 2019 compared to the year ended December 31, 2018 due to improved inventory management.

Investing Activities

Net cash used by investing activities was $39.4 million for the year ended December 31, 2019, compared to $42.3 million for the year ended December 31, 2018, an improvement of $2.9 million, or 6.9%. The decrease was due to higher proceeds from disposal of assets of $3.7 million for the year ended December 31, 2019, compared to $0.7 million for the year ended December 31, 2018. Capital expenditures remained relatively consistent year over year.

Financing Activities

Net cash used by financing activities totaled $208.1 million for the year ended December 31, 2019, compared to net cash provided by financing activities of $16.3 million for the year ended December 31, 2018, an increase in cash used of $224.4 million. This was primarily due to payments made on the short-term borrowings of $97.0 million and cash paid for dividends during the year ended December 31, 2019, compared to the same period in 2018. Cash dividends paid totaled $107.2 million, or $5.00 per share, for the year ended December 31, 2019, compared to $46.9 million, or $2.40 per share, for the year ended December 31, 2018.

Liquidity

We had a $750.0 million amended revolving credit facility with $611.5 million in available capacity at December 31, 2019, compared to available capacity of $515.0 million at December 31, 2018. At December 31, 2019 and 2018, we also had two uncommitted $100.0 million private placement shelf agreements ("Shelf Agreements"). One 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. Our other Shelf Agreement 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, 2019 and 2018. For further discussion related to our revolving credit facility and our Shelf Agreements, refer to Note 12, "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 short-term borrowings of $138.0 million and $235.0 million outstanding at December 31, 2019 and 2018, respectively. We had total letters of credit of $5.6 million outstanding at December 31, 2019, of which $0.5 million were issued under our amended revolving credit facility. We had total letters of credit of $5.6 million outstanding at December 31, 2018, of which none were issued under our amended revolving credit facility. 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, 2019:

Finance and operating lease obligations consist of both principal and interest payments. There were no long-term debt obligations, other than finance lease obligations, at December 31, 2019.

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 $166.7 million of accrued, unfunded pension obligations, $84.8 million of accrued, unfunded employment-related benefit obligations, of which $76.2 million is related to our postretirement benefit plan, and $1.9 million in contingent payments for uncertain tax positions because it is not certain when these obligations will be settled or paid.

We expect to make contributions totaling approximately $40.0 million to our defined benefit pension plan and fund $1.8 million for nonqualified pension benefits during 2020 that are not included in the table. We contributed $10.0 million to our defined benefit pension plan and funded $1.7 million for nonqualified benefits in 2019.

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, 2019, 2018 and 2017, 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.

The following table presents key assumptions used to measure the pension and postretirement benefits obligations at December 31:

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, 2019, was approximately 73% fixed income investments, 15% equity securities and 12% 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 one percentage point decrease in the expected return on plan assets would have increased our 2019 pension expense by approximately $6.1 million. Our expected long-term rate of return on plan assets assumption will decrease to 5.50% for fiscal year 2020.

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 one percentage point decrease in the discount rate used to calculate both pension expense for 2019 and the pension liability as of December 31, 2019 would have increased pension expense by $8.1 million and the pension liability by $96.9 million.  Similarly, a one percentage point decrease in the discount rate would have increased postretirement benefits expense by $0.1 million and the December 31, 2019 postretirement benefits liability by $5.8 million.

New Accounting Standards

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 $138.0 million in variable-rate debt outstanding at December 31, 2019, a one percentage point increase in interest rates would increase our interest expense by $1.4 million per year.

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:

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, 2019.

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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

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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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, Missouri

March 12, 2020

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Graybar Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income