Item 1. Business - ------- --------
Graybar Electric Company, Inc. (the "Company") is engaged internationally in the distribution of electrical and communications products and integrated supply services primarily to contractors, industrial plants, telephone companies, power utilities, and commercial users. All products sold by the Company are purchased by the Company from others.
The Company was incorporated under the laws of the State of New York on December 11, 1925 to take over the wholesale supply department of Western Electric Company, Incorporated. The location and telephone number of the principal executive offices of the Company are 34 North Meramec Avenue, St. Louis, Missouri (314) 512-9200, and the mailing address of the principal executive offices is P.O. Box 7231, St. Louis, Missouri 63177.
Suppliers - ---------
The Company acts as a distributor of the products of more than 1,000 manufacturers. The relationship of the Company with a number of its principal suppliers goes back many years. It is customarily a nonexclusive national or regional distributorship terminable upon 30 to 90 days notice by either party.
During 1998, the Company purchased a significant portion of its products from several major suppliers. The termination by any of these companies, within a short period of time, of a significant number of their agreements with the Company might have an immediate material adverse effect on the business of the Company, but the Company believes that within a reasonable period of time it could find alternate sources of supply adequate to alleviate such adverse effect.
Products Distributed - --------------------
The Company distributes more than 100,000 different products and, therefore, is able to supply its customers with a wide variety of electrical and communications products. The products distributed by the Company consist primarily of wire, cable, conduit, wiring devices, tools, motor controls, transformers, lamps, lighting fixtures and hardware, power transmission equipment, telephone station apparatus, key systems, PBXs, data products for local area networks or wide area networks, fiber optic products, and CATV products. These products are sold to customers such as contractors (both industrial and residential), industrial plants, telephone companies, private and public utilities, and commercial users.
On December 31, 1998 and 1997, the Company had orders on hand which totaled approximately $252,052,000 and $ 232,157,000, respectively. The Company believes that the increase from 1997 to 1998 reflects the improvements in the market sectors of the economy in which the Company operates. The Company expects that approximately 85% of the orders on hand at December 31, 1998 will be filled within the twelve-month period ending December 31, 1999. Historically, orders on hand for the Company's products have been firm, but customers from time to time request cancellation and the Company has historically allowed such cancellations.
Marketing - ---------
The Company sells its products through a network of distributing houses located in 14 geographical districts throughout the United States. In each district the Company maintains a main distributing house and a number of branch distributing houses, each of which carries an inventory of supply materials and operates as a wholesale distributor for the territory in which it is located. The main distributing house in each district carries a substantially larger inventory than the branch houses so that the branch houses can call upon the main distributing house for additional items of inventory. In addition, the Company maintains four (4) zone warehouses with special inventories so all locations can call upon them for additional items. The Company also has subsidiary operations with distribution facilities located in Puerto Rico, Mexico, Singapore, Canada and Chile.
The distribution facilities operated by the Company are shown in the following table:
Where the specialized nature or size of a particular shipment warrants, the Company has products shipped directly from its suppliers to the place of use, while in other cases orders are filled from the Company's inventory. On a dollar volume basis, over sixty percent of the orders are filled from the Company's inventory and the remainder are shipped directly from the supplier to the place of use. The Company generally finances its inventory from internally generated funds and from long and short-term borrowings.
The Company distributes its products to more than 200,000 customers, which fall into six general classes. The following list shows the estimated percentage of the Company's total sales for each of the three years ended December 31, attributable to each of these classes:
At December 31, 1998, the Company employed approximately 2,900 persons in sales capacities. Approximately 1,300 of these sales personnel were sales representatives who work in the field making sales to customers at the work site. The remainder of the sales personnel were sales and marketing managers, and telemarketing, advertising, quotation, counter and clerical personnel.
Competition - -----------
The Company believes that it is one of the three largest distributors of electrical and comm/data products in the United States. The field is highly competitive, and the Company estimates that the three largest distributors account for only a small portion of the total market, with the balance of the market being accounted for by independent distributors and manufacturers operating on a local, state-wide or regional basis.
The Company believes that its competitive position is primarily a result of its ability to supply its customers through a network of conveniently located distribution facilities with a broad range of electrical and telecommunications materials within a short period of time. Price is also important, particularly where the Company is asked to submit bids to contractors in connection with large construction jobs.
Employees - ---------
At December 31, 1998, the Company employed approximately 7,900 persons on a full-time basis. Approximately 160 of these persons were covered by union contracts. The Company has not had a material work stoppage and considers its relations with its employees to be good.
Item 2.
Item 2. Properties - ------- ----------
As of December 31, 1998, the Company operated offices and distribution facilities in 275 locations. Of these, 142 were owned by the Company, and the balance were leased. The leases are for varying terms, the majority having a duration of less than five years.
The Company's distribution facilities consist primarily of warehouse space. A small portion of the space in each facility is used for offices. Distribution facilities vary in size from approximately 5,000 square feet to 213,000 square feet, the average being approximately 29,000 square feet.
As of December 31, 1998, approximately $30.5 million in debt of the Company was secured by mortgages on 35 buildings. Eighteen of these facilities are subject to a first mortgage securing a 12.25% note, of which $1.8 million in principal amount remains outstanding. Seven of these facilities are subject to a first mortgage securing a 9.23% note, of which $19.1 million in principal amount remains outstanding. Eight of these facilities are subject to first mortgages securing variable rate notes, of which $1.7 million in principal remains outstanding. A facility in Houston, Texas is subject to a first mortgage securing a 7.75% note, of which $2.5 million in principal remains outstanding, and a facility in St. Louis, Missouri is subject to a first mortgage securing a 7.74% note, of which $5.4 million in principal remains outstanding.
Item 3.
Item 3. Legal Proceedings - ------- -----------------
There are presently no material pending legal proceedings which are expected to have a material impact on the Company or any one of its subsidiaries.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- ---------------------------------------------------
No matter was submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II -------
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder - ------- ---------------------------------------------------------------- Matters -------
The Company is wholly owned by its active and retired employees, and there is no public trading market for its Common Stock, par value $1 per share with a stated value of $20 per share. No shareholder may sell, transfer or otherwise dispose of shares of Common Stock without first offering the Company the option to purchase such shares at the price at which they were issued. The Company also has the option to purchase the Common Stock of any shareholder who dies or ceases to be an employee of the Company for any cause other than retirement on a Company pension. In the past all shares issued by the Company have been issued at $20 per share, and the Company has always exercised its repurchase option, and expects to continue to do so.
The information as to number of holders of Common Stock and frequency and amount of dividends, required to be included pursuant to this Item 5, is included under the captions "Capital Stock Data" and "Dividend Data" on page 1 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, (the "1998 Annual Report") furnished to the Securities and Exchange Commission (the "Commission") pursuant to Rule 14c-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such information is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data - ------- -----------------------
The selected financial data for the Company as of December 31, 1998 and for the five years then ended, which is required to be included pursuant to this Item 6, is included under the caption "Selected Consolidated Financial Data" on page 18 of the 1998 Annual Report and is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations ---------------------
Management's discussion and analysis required to be included pursuant to this Item 7 is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 and 20 of the 1998 Annual Report and is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------- ----------------------------------------------------------
The Company's interest expense is sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest paid on its debt. To mitigate the cash flow impact of interest rate fluctuations, the Company generally maintains a significant portion of its debt as fixed rate in nature by borrowing on a long-term basis.
The following table provides information about financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates.
The fair value of long-term debt is estimated by discounting cash flows using current borrowing rates available for debt of similar maturities. Based on the discounted cash flow analysis, the fair value of long-term debt approximates the carrying value at December 31, 1998. Fair value of the notes payable to banks approximates the carrying value due to the short-term maturity of the instruments.
Foreign Exchange Rate Risk --------------------------
The Company conducts business in several foreign countries including Canada, Mexico, Puerto Rico, Singapore and Chile. Exposure from foreign currency exchange rate fluctuations is not material.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
The financial statements and Report of Independent Auditors required by this Item 8 are listed in Item 14(a)(1) of this Annual Report on Form 10-K under the caption "Index to Financial Statements."
Such financial statements specifically referenced from the 1998 Annual Report in such list are incorporated herein by reference. There is no supplementary financial information required by this item which is applicable to the Company.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure --------------------
None.
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
The information with respect to the directors and executive officers of the Company required to be included pursuant to this Item 10 will be included under the caption "Directors and Executive Officers -- Nominees for Election as Directors" in the Company's Information Statement relating to the 1999 Annual Meeting (the "Information Statement"), to be filed with the Commission pursuant to Rule 14c-5 under the Exchange Act, and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation - -------- ----------------------
The information with respect to executive compensation required to be included pursuant to this Item 11 will be included under the captions "Executive Compensation" and "Pension Plan" in the Information Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
The information with respect to the security ownership of beneficial owners of more than 5% of the Common Stock, the directors of the Company and all directors and officers of the Company, which is required to be included pursuant to this Item 12, will be included in the introductory language and under the caption "Directors and Executive Officers -- Nominees for Election as Directors" in the Information Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
The information with respect to any reportable transactions, business relationships and indebtedness between the Company and the beneficial owners of more than 5% of the Common Stock, the directors or nominees for director of the Company, the executive officers of the Company or the members of the immediate families of such individuals, required to be included pursuant to this
Item 13, will be included under the caption "Directors and Executive Officers" in the Information Statement and is incorporated herein by reference.
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------- ----------------------------------------------------------------
(a) Documents filed as part of this report: --------------------------------------
The following financial statements and Report of Independent Auditors are included on the indicated pages in the 1998 Annual Report and are incorporated by reference in this Annual Report on Form 10-K:
1. Index to Financial Statements -----------------------------
(i) Consolidated Statements of Income and Retained Earnings for each of the three years ended December 31, 1998 (page 21).
(ii) Consolidated Balance Sheets, as of December 31, 1998 and December 31, 1997 (page 22).
(iii) Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998 (page 23).
(iv) Consolidated Statements of Changes in Shareholders' Equity for each of the three years ended December 31, 1998 (page 24)
(v) Notes to Consolidated Financial Statements (pages 25 to 28).
(vi) Report of Independent Auditors (page 29).
2. Index to Financial Schedule ---------------------------
The following schedule for each of the three years ended December 31, 1998, to the financial statements is included on the indicated page in this Annual Report on Form 10-K:
(i) Schedule II. Valuation and Qualifying Accounts (page 14).
All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the required information is set forth in the financial statements and the accompanying notes thereto.
3. Exhibits --------
The following exhibits required to be filed as part of this Annual Report on Form 10-K have been included:
(3) Articles of incorporation and by-laws
(i) Restated Certificate of Incorporation, as amended, filed as exhibit 4(i) to the Company's Registration Statement on Form S-1 (Registration No. 333-15761) and incorporated herein by reference.
(ii) By-laws as amended through August 1, 1994 filed as exhibit 3(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-255) and incorporated herein by reference.
(4)and(9) Voting Trust Agreements
Voting Trust Agreement dated as of April 1, 1997, attached as Annex A to the Prospectus, dated January 21, 1997, constituting a part of the Company's Registration Statement on Form S-1 (Registration No. 333-15761) and incorporated herein by reference.
The Company hereby agrees to furnish to the Commission upon request a copy of each instrument omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
(10) Material contracts.
(i) Management Incentive Plan, filed as Exhibit 4(a)(1) to the Annual Report on Form 10-K for the year ended December 31, 1972 (Commission File No. 0-255), as amended by the Amendment effective January 1, 1974, filed as Exhibit 13-c to the Registration Statement on Form S-1 (Registration No. 2-51832), the Amendment effective January 1, 1977, filed as Exhibit 13(d) to the Registration Statement on Form S-1 (Registration No. 2-59744), and the Amendment effective January 1, 1980, filed as Exhibit 5(f) to the Registration Statement on Form S-7 (Registration No. 2-68938) and incorporated herein by reference.
(13) Annual Report to Shareholders for 1998 (except for those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, this exhibit is furnished for the information of the Commission and is not deemed to be filed as part of this Annual Report on Form 10-K).
(21) List of subsidiaries of the Company.
(23) Independent Auditors' Consent of Ernst and Young LLP.
(27) Financial Data Schedule (submitted in EDGAR format only).
(b) Reports on Form 8-K: -------------------
No reports on Form 8-K were filed during the last quarter of the Company's fiscal year ended December 31, 1998.
SIGNATURES ----------
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 26th day of March, 1999.
GRAYBAR ELECTRIC COMPANY, INC.
By /s/ C. L. HALL --------------------------------- (C. L. Hall, President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Company, in the capacities indicated, on March 26, 1999.