UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2001
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 001-08772
HUGHES SUPPLY, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0559446
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 North Orange Avenue
Suite 200
Orlando, Florida 32801
(Address of principal executive offices)
(407) 841-4755
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of December 10, 2001
------------ -----------------------------------
$1 Par Value 23,560,131
HUGHES SUPPLY, INC.
FORM 10-Q
INDEX
Page(s)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 2001 (unaudited)
and January 26, 2001........................................................................ 3
Consolidated Statements of Income for the Three Months Ended
October 31, 2001 and 2000 (unaudited)....................................................... 4
Consolidated Statements of Income for the Nine Months Ended
October 31, 2001 and 2000 (unaudited)....................................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
October 31, 2001 and 2000 (unaudited)....................................................... 6
Notes to Consolidated Financial Statements (unaudited)...................................... 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 10 - 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 17
SIGNATURES............................................................................................... 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HUGHES SUPPLY, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
October 31,
2001 January 26,
(unaudited) 2001
----------- -----------
Assets
Current Assets:
Cash and cash equivalents......................................................... $ 13,619 $ 22,449
Accounts receivable, less allowance for doubtful accounts of $9,555 and $6,106.... 443,126 431,998
Inventories....................................................................... 396,626 441,789
Deferred income taxes............................................................. 17,083 18,524
Other current assets.............................................................. 40,758 66,131
---------- ----------
Total current assets............................................................ 911,212 980,891
Property and Equipment, Net........................................................ 140,944 152,079
Excess of Cost Over Net Assets Acquired............................................ 267,598 249,826
Other Assets....................................................................... 19,390 17,481
---------- ----------
$1,339,144 $1,400,277
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt................................................. $ 21,692 $ 15,274
Accounts payable.................................................................. 207,644 215,353
Accrued compensation and benefits................................................. 39,364 32,762
Other current liabilities......................................................... 53,203 38,372
---------- ----------
Total current liabilities....................................................... 321,903 301,761
Long-Term Debt..................................................................... 415,216 516,168
Deferred Income Taxes.............................................................. 6,068 6,704
Other Noncurrent Liabilities....................................................... 5,985 5,609
---------- ----------
Total liabilities............................................................... 749,172 830,242
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued.......... -- --
Common stock, par value $1 per share; 100,000,000 shares authorized; 23,723,350
and 24,211,485 shares issued.................................................... 23,723 24,211
Capital in excess of par value.................................................... 215,288 228,103
Retained earnings................................................................. 364,101 337,149
Treasury stock, 167,000 and 576,783 shares, at cost............................... (3,637) (13,307)
Unearned compensation related to outstanding restricted stock..................... (9,503) (6,121)
---------- ----------
Total shareholders' equity...................................................... 589,972 570,035
---------- ----------
$1,339,144 $1,400,277
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HUGHES SUPPLY, INC.
Consolidated Statements of Income (unaudited)
(in thousands, except per share data)
Three Months Ended October 31,
------------------------------
2001 2000
-------- --------
Net Sales.................................. $790,042 $863,283
Cost of Sales.............................. 608,254 666,993
-------- --------
Gross Profit............................... 181,788 196,290
-------- --------
Operating Expenses:
Selling, general and administrative...... 134,953 144,530
Depreciation and amortization............ 7,680 7,998
Provision for doubtful accounts.......... 2,617 2,045
-------- --------
Total operating expenses................. 145,250 154,573
-------- --------
Operating Income........................... 36,538 41,717
-------- --------
Non-Operating Income (Expenses):
Interest and other income................ 2,192 1,508
Interest expense......................... (8,658) (11,290)
-------- --------
(6,466) (9,782)
-------- --------
Income Before Income Taxes................. 30,072 31,935
Income Taxes............................... 12,330 13,093
-------- --------
Net Income................................. $ 17,742 $ 18,842
======== ========
Earnings Per Share:
Basic.................................... $ 0.77 $ 0.80
======== ========
Diluted.................................. $ 0.76 $ 0.80
======== ========
Average Shares Outstanding:
Basic.................................... 23,145 23,511
======== ========
Diluted.................................. 23,356 23,617
======== ========
Dividends Per Share........................ $ 0.085 $ 0.085
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
HUGHES SUPPLY, INC.
Consolidated Statements of Income (unaudited)
(in thousands, except per share data)
Nine Months Ended October 31,
--------------------------------
2001 2000
----------- ----------
Net Sales................................. $2,371,508 $2,568,510
Cost of Sales............................. 1,835,035 1,989,103
---------- ----------
Gross Profit.............................. 536,473 579,407
---------- ----------
Operating Expenses:
Selling, general and administrative...... 420,870 428,919
Depreciation and amortization............ 23,589 23,621
Provision for doubtful accounts.......... 6,966 5,157
---------- ----------
Total operating expenses................ 451,425 457,697
---------- ----------
Operating Income.......................... 85,048 121,710
---------- ----------
Non-Operating Income (Expenses):
Interest and other income................ 8,687 4,702
Interest expense......................... (27,928) (32,146)
---------- ----------
(19,241) (27,444)
---------- ----------
Income Before Income Taxes................ 65,807 94,266
Income Taxes.............................. 26,981 38,649
---------- ----------
Net Income................................ $ 38,826 $ 55,617
========== ==========
Earnings Per Share:
Basic................................... $ 1.67 $ 2.38
========== ==========
Diluted................................. $ 1.66 $ 2.38
========== ==========
Average Shares Outstanding:
Basic................................... 23,204 23,323
========== ==========
Diluted................................. 23,397 23,413
========== ==========
Dividends Per Share....................... $ 0.255 $ 0.255
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
HUGHES SUPPLY, INC.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended October 31,
-----------------------------
2001 2000
-------- --------
Cash Flows from Operating Activities:
Net income........................................... $ 38,826 $ 55,617
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....................... 23,589 23,621
Provision for doubtful accounts..................... 6,966 5,157
Deferred income taxes............................... 975 4,209
Other............................................... (269) 3,981
Changes in assets and liabilities, net
of businesses acquired:
Accounts receivable................................. (4,579) (87,566)
Inventories......................................... 54,744 20,885
Other current assets................................ 3,865 9,498
Other assets........................................ (2,978) (1,272)
Accounts payable.................................... (13,902) (24,816)
Accrued compensation and benefits................... 5,653 5,629
Other current liabilities........................... 14,141 19,386
Other noncurrent liabilities........................ 376 174
-------- --------
Net cash provided by operating
activities....................................... 127,407 34,503
--------- --------
Cash Flows from Investing Activities:
Capital expenditures................................ (11,770) (19,136)
Proceeds from sale of property and
equipment.......................................... 8,150 894
Business acquisitions, net of cash.................. (31,809) (34,111)
Investments in affiliated entities.................. -- (5,757)
Purchase of bestroute.com stock rights.............. (7,273) --
Collections on note receivable from
sale of pool and spa business...................... 22,000 --
--------- --------
Net cash used in investing activities............. (20,702) (58,110)
--------- --------
Cash Flows from Financing Activities:
Net (payments) borrowings under
short-term debt arrangements........................ (89,717) 41,894
Principal payments on acquired debt and other debt.. (8,684) (2,924)
Principal payments on senior notes.................. (4,667) --
Purchase of treasury shares......................... (7,537) --
Dividends paid...................................... (6,076) (6,078)
Other............................................... 1,146 205
--------- --------
Net cash (used in) provided by
financing activities............................ (115,535) 33,097
--------- --------
Net (Decrease) Increase in Cash and
Cash Equivalents................................... (8,830) 9,490
Cash and Cash Equivalents:
Beginning of period................................. 22,449 10,000
--------- --------
End of period....................................... $ 13,619 $ 19,490
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
HUGHES SUPPLY, INC.
Notes to Consolidated Financial Statements
(unaudited) (in thousands, except share and per share data)
1. Basis of Presentation
In the opinion of Hughes Supply, Inc. (the "Company"), the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position as of October 31, 2001, the results of operations for
the three and nine months ended October 31, 2001 and 2000, and cash flows for
the nine months ended October 31, 2001 and 2000. The results of operations
for the periods presented are not necessarily indicative of the trends or
results that may be expected for the full year. These interim financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended January 26, 2001, as filed with the Securities and
Exchange Commission.
The fiscal year of the Company is a 52-week period ending on the last Friday
in January. The three and nine months ended October 31, 2001 and 2000 each
contained 13 and 26 weeks, respectively.
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to current year presentation. These reclassifications
had no impact on previously reported results of operations.
2. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of shares
outstanding, adjusted for dilutive potential common shares. The weighted-
average number of shares used in calculating basic earnings per share were
23,144,812 and 23,511,308 for the three months ended October 31, 2001 and
2000, respectively, and 23,203,706 and 23,322,932 for the nine months ended
October 31, 2001 and 2000, respectively. In calculating diluted earnings per
share, these amounts were adjusted to include dilutive potential common
shares of 211,686 and 105,221 for the three months ended October 31, 2001 and
2000, respectively, and 193,252 and 90,515 for the nine months ended October
31, 2001 and 2000, respectively. The Company's dilutive potential common
shares consist of employee and director stock options, restricted stock and
stock rights issued in connection with the acquisition of bestroute.com
("bestroute") in fiscal 2001. Stock options and restricted stock totaling
266,114 and 552,214 shares in the three months ended October 31, 2001 and
2000, respectively, and 394,373 and 1,197,990 shares in the nine months ended
October 31, 2001 and 2000, respectively, were not included in the computation
of diluted earnings per share because their effect would have been anti-
dilutive.
3. Bestroute
On March 2, 2001, in connection with the closure of bestroute, one of the
Company's e-commerce ventures, the Company entered into an agreement with the
holders of 723,183 of the Company's stock rights originally issued as
consideration for the bestroute acquisition. This agreement canceled 347,541
of the stock rights and enabled the remaining stock rights to be redeemed for
$7,273 in cash.
For the nine months ended October 31, 2001, the Company recorded a loss
before income taxes of $2,776 for bestroute, including $1,542 of closure
costs primarily related to employee severance pay and termination fees on
certain agreements. The remaining $1,234 of the loss related to bestroute's
loss from operations through the date of its closure.
4. Long-Term Debt
On May 31, 2001, the Company executed an amendment to its $75,000 line of
credit agreement, which extended the maturity date from July 17, 2001 to
January 14, 2002. There were no amounts outstanding under this agreement at
October 31, 2001.
5. Employee Benefit Plans
During fiscal 2002, the Company granted certain key employees 410,000
restricted shares in accordance with a stock performance award under the 1997
Executive Stock Plan (collectively, the "Performance Plan"). Pursuant to the
7
Performance Plan, the shares will be awarded in five separate tranches as the
Company achieves certain stock price levels. During the nine months ended
October 31, 2001, three of the award levels were reached and 246,000 shares
were issued pursuant to the Performance Plan. The shares vest five years from
the award date, and are subject to certain other vesting and forfeiture
provisions contained in the Performance Plan. On the date of these awards,
the market value of the restricted shares was $5,670. This amount was
recorded as unearned compensation, a component of shareholders' equity, and
is being charged to expense over the respective vesting periods.
6. Commitments and Contingencies
On June 22, 2001, the Company entered into a synthetic lease agreement and
related documents with Atlantic Financial Group, Ltd (the "Lessor), certain
financial parties as lenders, and SunTrust Bank as agent ("SunTrust") in
which the Lessor and SunTrust agreed to fund up to $40,000 for the
acquisition and development of real property projects chosen by the Company,
including the Company's new corporate headquarters building in Orlando,
Florida (the cost of which is estimated at $25,000). The term of this
agreement is five years, which includes the construction period and a lease
period. Lease payments will begin at the earlier of the completion of
construction (which is expected in April 2003) or eighteen months following
the acquisition of a property financed through the synthetic lease. Under the
terms of the lease agreement, rent payments are interest only at a one month
LIBOR rate plus applicable credit spreads (currently estimated to be 150
basis points). At the end of the lease term, the Company has the option to
renew the lease for up to two additional five year periods, or to purchase
the building for a price including the outstanding lease balance. If the
Company elects not to renew the lease or purchase the building, the Company
may elect to remarket the property and arrange the sale of the building to a
third party. Under the remarketing option, the Company has guaranteed a
percentage of the total original cost as the residual fair value of the
building.
On June 22, 2001, the Company entered into an operating lease agreement with
the Lessor for the construction of a new warehouse in Miami, Florida. The
Company anticipates total project costs not to exceed $15,000 with rent
payments beginning at the earlier of the completion of construction (which is
expected in January 2003) or eighteen months following the acquisition of the
property. Under the terms of the lease agreement, rent payments for the first
four years are interest only at a rate based on LIBOR plus applicable credit
spreads (currently estimated to be 150 basis points). Beginning in the fifth
year, rents are re-amortized and rates for the remainder of the term increase
to 12.5% plus applicable consumer price index adjustments. During the first
four years of the lease agreement, the Company may elect to purchase the
property for the existing lease balance or convert it into the Company's
synthetic lease facility referenced above.
7. Capital Stock
On March 15, 1999, the Company's Board of Directors authorized the Company to
repurchase up to 2,500,000 shares of its outstanding common stock to be used
for general corporate purposes. Since March 15, 1999, the Company has
repurchased 1,315,800 shares at an average price of $21.86 per share, of
which 394,700 shares at an average price of $19.10 per share were repurchased
during the nine months ended October 31, 2001. No shares were repurchased
during the nine months ended October 31, 2000. On September 21, 2001, the
Company retired 326,854 shares of its common stock previously held in
treasury.
8. Segment Information
The Company's operations are organized on a product basis into five stand-
alone Groups: Electrical; Plumbing/HVAC; Industrial; Building Materials; and
Water & Sewer. This is the basis management uses for making operating
decisions and assessing performance.
Segment information has been presented on a basis consistent with how
business activities are reported internally to management. The Electrical
Group includes the Company's electrical and electric utility products; the
Plumbing/HVAC Group includes the Company's plumbing/HVAC products and its
international business; the Industrial Group includes the Company's
industrial pipe, valves and fittings products; the Building Materials Group
includes the Company's building materials products and maintenance supplies;
and the Water & Sewer Group includes the Company's water and sewer, fire
protection and concrete products. The "Corporate & Other" category includes
corporate level operating expenses not allocated to the Company's operating
segments along with revenues and expenses for bestroute.
Income before income taxes includes certain corporate expense allocations for
employee benefits, interest expense, corporate capital charges, and
property/casualty insurance. These allocations are based on consumption or at
a standard rate determined by management.
8
The following table presents net sales and other financial information by
Group for the three and nine months ended October 31, 2001 and 2000:
Plumbing/ Building Water & Corporate
Electrical HVAC/(1)/ Industrial Materials/(1)/ Sewer & Other Consolidated
---------- ---------- ---------- -------------- --------- --------- ------------
Three Months Ended October 31:
Net Sales
2001........................ $146,016 $227,018 $ 82,996 $ 76,431 $257,581 $ -- $ 790,042
2000........................ 159,268 267,250 79,080 103,399 254,279 7 863,283
Gross Profit
2001........................ 28,312 53,382 20,730 24,680 54,684 -- 181,788
2000........................ 30,278 62,128 21,059 30,181 52,643 1 196,290
Income Before Income Taxes
2001........................ 7,064 3,659 5,294 6,134 13,950 (6,029) 30,072
2000........................ 7,248 5,513 5,259 3,624 15,644 (5,353) 31,935
Nine Months Ended October 31:
Net Sales
2001........................ 448,677 698,801 254,386 231,125 738,436 83 2,371,508
2000........................ 455,048 811,523 235,681 331,886 734,365 7 2,568,510
Gross Profit
2001........................ 85,820 164,506 63,353 69,730 153,055 9 536,473
2000........................ 88,283 184,792 64,678 93,184 148,469 1 579,407
Income Before Income Taxes
2001........................ 20,014 12,263 15,474 11,387 34,589 (27,920) 65,807
2000........................ 21,381 15,871 17,289 16,168 40,408 (16,851) 94,266
/(1)/ Results of operations for the pool and spa business, which was sold in
January 2001, were included in the Plumbing/HVAC and Building Materials
Groups for the three and nine months ended October 31, 2000.
9
PART I. FINANCIAL INFORMATION -- Continued
HUGHES SUPPLY, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition of the Company as of October
31, 2001, and the results of operations for the three and nine months then
ended. This information should be read in conjunction with the Company's
consolidated financial statements and the notes thereto contained herein and in
the Company's Annual Report on Form 10-K for the year ended January 26, 2001.
Forward-Looking Statements
Certain statements set forth in this report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbor created by such sections. When used in this
report, the words "believe," "anticipate," "estimate," "expect," "may," "will,"
"should," "plan," "intend," "potential," "predict," "forecast," and similar
expressions are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. When appropriate,
certain factors which may cause results to differ materially from those
projected in the forward-looking statements are enumerated.
Material Changes in Results of Operations
Net Sales
Net sales for the quarter ended October 31, 2001 decreased $73.2 million or 8%
compared to the prior year's third quarter. Approximately $33.4 million or 46%
of the decrease was attributable to the divestiture of the Company's pool and
spa business. Of the $33.4 million, approximately $5.7 million and $27.7
million related to the Plumbing/HVAC Group and Building Materials Group,
respectively. Same-store sales for the current quarter decreased $65.3 million
or 8% compared to the prior year's third quarter and lost sales from closed
branches totaled $2.4 million. These net sales decreases were partially offset
by an increase in net sales of $27.9 million attributable to branches acquired
or opened after January 31, 2000.
Net sales for the nine months ended October 31, 2001 decreased $197.0 million or
8% compared to the prior fiscal year's first nine months. Approximately $127.2
million or 65% of the decrease was attributable to the divestiture of the
Company's pool and spa business. Of the $127.2 million, approximately $23.9
million and $103.3 million related to the Plumbing/HVAC Group and Building
Materials Group, respectively. Same-store sales for the nine months ended
decreased $122.6 million or 5% compared to the prior fiscal year's first nine
months and lost sales from closed branches totaled $11.2 million. These net
sales decreases are partially offset by an increase in net sales of $64.0
million attributable to branches acquired or opened after January 31, 2000.
Consolidated and same-store sales by Group for the three and nine months ended
October 31, 2001 and 2000 were as follows (dollars in thousands):
Consolidated Sales Same-Store Sales
--------------------------------------- ----------------------------------
Three Months Ended October 31, Three Months Ended October 31,
--------------------------------------- ----------------------------------
Percent Percent
2001 2000 Variance 2001 2000 Variance
-------- -------- ---------- --------- -------- ----------
Electrical.................... $146,016 $159,268 (8%) $144,749 $157,109 (8%)
Plumbing/HVAC................. 227,018 267,250 (15%) 225,876 259,200 (13%)
Industrial.................... 82,996 79,080 5% 82,996 79,080 5%
Building Materials............ 76,431 103,399 (26%) 73,476 75,093 (2%)
Water & Sewer................. 257,581 254,279 1% 228,610 250,491 (9%)
Corporate & Other............. -- 7 (100%) -- -- --
-------- -------- -------- --------
Consolidated.................. $790,042 $863,283 (8%) $755,707 $820,973 (8%)
======== ======== ===== ======== ======== ====
10
Consolidated Sales Same-Store Sales
--------------------------------------- ----------------------------------
Nine Months Ended October 31, Nine Months Ended October 31,
--------------------------------------- ----------------------------------
Percent Percent
2001 2000 Variance 2001 2000 Variance
---------- ---------- ---------- ----------- ----------- ----------
Electrical....................... $ 448,677 $ 455,048 (1%) $ 444,917 $ 449,943 (1%)
Plumbing/HVAC.................... 698,801 811,523 (14%) 695,876 777,655 (11%)
Industrial....................... 254,386 235,681 8% 254,386 235,680 8%
Building Materials............... 231,125 331,886 (30%) 221,870 228,034 (3%)
Water & Sewer.................... 738,436 734,365 1% 682,227 730,577 (7%)
Corporate & Other................ 83 7 1,086% -- -- --
---------- ---------- ---------- ----------
Consolidated..................... $2,371,508 $2,568,510 (8%) $2,299,276 $2,421,889 (5%)
========== ========== ====== ========== ========== ====
The following sets forth factors impacting same-store sales for the Company's
operating Groups:
Electrical
Same-store sales decreased $12.4 million or 8% and $5.0 million or 1% for the
three and nine months ended October 31, 2001, respectively, compared to the same
periods in the prior year. The same-store sales decreases were primarily
attributable to a general slowdown in the U.S. economy combined with the
completion of several infrastructure projects in fiscal 2001 with no
corresponding activity in the current year. These decreases were partially
offset from strong commercial activity in the Houston, Texas market and from
increased sales of utility products in the Illinois market.
Plumbing/HVAC
Same-store sales decreased $33.3 million or 13% and $81.8 million or 11% for the
three and nine months ended October 31, 2001, respectively, compared to the same
periods in the prior year. These decreases were due to slower construction
activity in the Arizona, Colorado, North Carolina and Texas markets. Sales
performance in fiscal 2002 was further impacted by a slowdown in international
business resulting from the completion of a large oil and gas pipeline project
in fiscal 2001 with no corresponding activity in fiscal 2002. Net sales for the
Company's international business decreased $6.8 million and $13.1 million,
respectively, for the three and nine months ended October 31, 2001 as compared
to same periods in the prior year.
Industrial
Same-store sales increased $3.9 million or 5% and $18.7 million or 8% for the
three and nine months ended October 31, 2001, respectively, compared to the same
periods in the prior year. These increases were primarily attributable to
strong sales to customers in the chemical, petrochemical, power generation and
gas utility industries. Same-store sales were also favorably impacted by
several large petrochemical plant rehabilitation and energy and power plant
installation projects in the Texas market. Additional sales related to these
projects are expected through the end of fiscal 2002. The same-store sales
increases for both the three and nine-month periods were partially offset by
declining prices for certain commodity-based products, including stainless steel
and nickel alloys.
Building Materials
Same-store sales decreased $1.6 million or 2% and $6.2 million or 3% for the
three and nine months ended October 31, 2001, respectively, compared to the same
periods in the prior year. These decreases were primarily attributable to sales
of complementary building materials products that were lost as a result of the
divestiture of the pool and spa business.
Water & Sewer
Same-store sales decreased $21.9 million or 9% and $48.4 million or 7% for the
three and nine months ended October 31, 2001, respectively, compared to the same
periods in the prior year. These decreases were primarily attributable to the
completion of several large infrastructure projects for municipalities with less
activity in the current year, declining commodity prices for certain PVC and
domestic steel products, wet weather conditions in the Texas market, and slower
construction activity in the Florida market.
11
Gross Profit and Gross Margin
Gross profit and gross margin by Group for the three and nine months ended
October 31, 2001 and 2000 were as follows (dollars in thousands):
Gross Profit Gross Margin
-------------------------------- --------------------------------
Three Months Ended October 31, Three Months Ended October 31,
-------------------------------- --------------------------------
Percent Basis Point
2001 2000 Variance 2001 2000 Variance
-------- -------- -------- ---- ---- --------
Electrical..................... $ 28,312 $ 30,278 (6%) 19.4% 19.0% 40
Plumbing/HVAC.................. 53,382 62,128 (14%) 23.5% 23.2% 30
Industrial..................... 20,730 21,059 (2%) 25.0% 26.6% (160)
Building Materials............. 24,680 30,181 (18%) 32.3% 29.2% 310
Water & Sewer.................. 54,684 52,643 4% 21.2% 20.7% 50
Corporate & Other.............. -- 1 (100%) -- 14.3% (1,430)
-------- --------
Consolidated................... $181,788 $196,290 (7%) 23.0% 22.7% 30
======== ======== ==== ==== ==== ======
Gross Profit Gross Margin
-------------------------------- --------------------------------
Nine Months Ended October 31, Nine Months Ended October 31,
-------------------------------- --------------------------------
Percent Basis Point
2001 2000 Variance 2001 2000 Variance
-------- -------- -------- ---- ---- --------
Electrical..................... $ 85,820 $ 88,283 (3%) 19.1% 19.4% (30)
Plumbing/HVAC.................. 164,506 184,792 (11%) 23.5% 22.8% 70
Industrial..................... 63,353 64,678 (2%) 24.9% 27.4% (250)
Building Materials............. 69,730 93,184 (25%) 30.2% 28.1% 210
Water & Sewer.................. 153,055 148,469 3% 20.7% 20.2% 50
Corporate & Other.............. 9 1 800% 10.8% 14.3% (350)
-------- --------
Consolidated................... $536,473 $579,407 (7%) 22.6% 22.6% --
======== ======== ==== ==== ==== ======
The following sets forth factors impacting gross margins for the Company's
operating Groups:
Electrical
Gross margin increased 40 basis points for the three months ended October 31,
2001, and decreased 30 basis points for the nine months ended October 31, 2001.
The increase of 40 basis points for the quarter was primarily attributable to a
sales mix that was more heavily weighted towards out of stock sales. The
decrease of 30 basis points for the nine-month period was primarily attributable
to (i) a sales mix that was more heavily weighted towards utility products,
which generally are shipped direct from the manufacturer to the customer and
have lower gross margins compared to gross margins as a whole for the Electrical
Group, (ii) increased competition in the Florida and Carolina markets, and (iii)
declining commodity prices for certain PVC and copper products.
Plumbing/HVAC
Gross margin increased 30 and 70 basis points for the three and nine months
ended October 31, 2001, respectively, compared to the same periods in the prior
year. These increases were primarily due to the Company's efforts to improve
its margin on certain products and to a decline in lower-margin international
business.
Industrial
Gross margin decreased 160 and 250 basis points for the three and nine months
ended October 31, 2001, respectively, compared to the same periods in the prior
year. These decreases were primarily attributable to declining prices for
certain commodity-based products, including stainless steel and nickel alloys.
The Company anticipates prices related to commodity based products to increase
in fiscal 2003. Accordingly, gross margins are expected to increase slowly in
fiscal 2003 as the inventories purchased during recent price decreases are
depleted.
Building Materials
Gross margin increased 310 and 210 basis points for the three and nine months
ended October 31, 2001, respectively, compared to the same periods in the prior
year. These increases were primarily attributable to a sales mix that included
more higher-margin fabricated products and to the divestiture of the pool and
spa business, which generated lower gross margins compared to gross margins as a
whole for the Building Materials Group.
12
Water & Sewer
Gross margin increased 50 basis points for the three and nine months ended
October 31, 2001, compared to the same periods in the prior year. These
increases were primarily due to a change in sales mix that resulted from fewer
large direct shipment orders, which typically generate lower gross margins, in
the Florida and Carolina markets and to the Company's efforts to improve its
margin on certain products.
Operating Expenses
Operating expenses for the three and nine months ended October 31, 2001 and 2000
were as follows (dollars in thousands):
Three Months Ended October 31, Nine Months Ended October 31,
--------------------------------- -------------------------------
2001 2000 Variance 2001 2000 Variance
-------- -------- -------- -------- -------- --------
Operating expenses............ $145,250 $154,573 ($9,323) $451,425 $457,697 ($6,272)
Percentage of net sales....... 18.4% 17.9% 2.8% 19.0% 17.8% 6.7%
Operating expenses as a percentage of net sales increased to 18.4% and 19.0% for
the three and nine months ended October 31, 2001, respectively, compared to
17.9% and 17.8% for the three and nine months ended October 31, 2000. The
increases for both periods were a direct result of the lower sales volumes
experienced by the Company.
Operating expenses decreased $9.3 million and $6.3 million for the three and
nine months ended October 31, 2001, respectively, compared to the same periods
in the prior year. These decreases were attributable to the Company's efforts
to reduce certain variable costs through its cost reduction program and to lower
personnel and other costs resulting from the divestiture of the pool and spa
business. Operating expenses related to the pool & spa business totaled $6.4
million and $20.0 million, respectively, for the three and nine months ended
October 31, 2000. Partially offsetting these decreases is approximately $5.0
million and $12.1 million of operating expenses for the three and nine months
ended October 31, 2001, respectively, for new branches acquired and opened after
January 31, 2000. In addition, operating expenses for the nine months ended
were negatively impacted by (i) employee severance expense resulting from the
elimination of certain management and staff positions totaling $2.6 million, of
which $1.5 million related to the Company's separation agreement with its former
president, which took place in the first quarter of fiscal 2002; (ii) increased
employee health insurance costs, and (iii) expenses related to bestroute
totaling $2.8 million, including $1.5 million in closure costs primarily related
to employee severance pay and termination fees on certain agreements.
In recent months, the Company has heightened its focus on controlling costs.
These cost control procedures have included a hiring freeze, tightened
management of all variable expenses and a reduction of capital spending. The
Company will continue to review its operations and identify areas where
additional efficiencies may be obtained.
Non-Operating Income (Expenses)
Interest and other income increased from $1.5 million for the three months ended
October 31, 2000 to $2.2 million for the three months ended October 31, 2001.
For the nine months ended October 31, 2000 and 2001, interest and other income
increased from $4.7 million to $8.7 million, respectively. The increases for
both periods were primarily due to (i) prior year non-recurring losses of $0.5
million and $3.7 million for the three and nine months ended October 31, 2000,
respectively, related to the Company's equity investment in certain
unconsolidated affiliates, and (ii) interest income of $0.1 million and $0.9
million for the three and nine months ended October 31, 2001, respectively,
related to a $25.0 million short-term note receivable received in connection
with the Company's sale of its pool and spa business.
Interest expense decreased from $11.3 million for the three months ended October
31, 2000 to $8.7 million for the three months ended October 31, 2001. For the
nine months ended October 31, 2000 and 2001, interest expense decreased from
$32.1 million to $27.9 million, respectively. The decreases for both periods
were primarily due to lower borrowing levels coupled with reduced interest
rates.
Net Income
Net income was $17.7 million for this year's quarter compared to $18.8 million
for the prior year's third quarter, a 6% decrease. For the nine months ended
October 31, 2001 and 2000, net income was $38.8 million and $55.6 million,
respectively, a decrease of 30%. Diluted earnings per share for the three and
nine months ended October 31, 2001 were $0.76 and $1.66, respectively, compared
to $0.80 and $2.38 for the three and nine months ended October 31, 2000,
respectively. The
13
factors impacting net income and diluted earnings per share have been enumerated
above.
Liquidity and Capital Resources
Working capital decreased $89.8 million to $589.3 million as of October 31,
2001, compared with $679.1 million as of January 26, 2001. The current ratio
was 2.8 to 1 and 3.3 to 1 as of October 31, 2001 and January 26, 2001,
respectively. The decrease was primarily driven by lower levels of inventories,
a decrease in other current assets and increases in accrued interest and accrued
taxes. These changes were partially offset by an increase in accounts
receivable. The decrease in inventories reflects the Company's efforts to reduce
inventory levels to be more in line with current market demand. The decrease in
other current assets was primarily attributable to $22.0 million of collections
on the note receivable from the Company's sale of its pool and spa business.
Accrued interest and accrued taxes increased as a result of the timing of the
related payments. The higher level of accounts receivable was primarily
attributable to seasonal increases in sales volumes.
Net cash provided by operations was $127.4 million and $34.5 million for the
nine months ended October 31, 2001 and 2000, respectively. As previously
discussed, the Company experienced lower sales volumes during the nine months
ended October 31, 2001 compared to the same period in the prior year. As a
result of the lower sales volumes, accounts receivable and accounts payable did
not increase as much compared to the prior year's first nine months and
inventory levels, excluding business acquisitions, were reduced by $54.7 million
during the nine months ended October 31, 2001.
The Company's expenditures for property and equipment were $11.8 million and
$19.1 million for the nine months ended October 31, 2001 and 2000, respectively.
The Company continues to closely monitor and control capital expenditures, and
instituted a freeze on new building projects during the first nine months of
fiscal 2002. Capital expenditures, excluding amounts for business acquisitions,
are expected to be between $15 and $16 million in fiscal 2002.
Proceeds from the sale of property and equipment were $8.2 million and $0.9
million for the nine months ended October 31, 2001 and 2000, respectively. This
increase was primarily due to the sale and subsequent lease-back of
substantially all of the Company's forklift fleet and certain of the Company's
trailers in August 2001, which generated proceeds of $5.7 million and sales of
certain of the Company's land and buildings related to its closed branches.
Cash payments for business acquisitions totaled $31.8 million for the nine
months ended October 31, 2001 compared to $34.1 million for the nine months
ended October 31, 2000.
Net payments on the Company's revolving credit agreement were $89.7 million for
the nine months ended October 31, 2001, compared to net borrowings of $41.9
million for the nine months ended October 31, 2000. Principal reductions on
long-term debt were $13.4 million for the nine months ended October 31, 2001, of
which $8.7 million related to the repayment of debt assumed as a result of
certain business acquisitions and $4.7 million related to payments on the
Company's $98.0 million senior notes due 2011. The Company expects principal
payments on senior notes to be $4.7 million in the fourth quarter of fiscal
2002.
Long-term debt was $415.2 million and $516.2 million at October 31, 2001 and
January 26, 2001, respectively, a decrease of $101.0 million. As a percentage of
total capitalization, long-term debt was 41% at October 31, 2001 compared to 48%
at January 26, 2001. Cash provided by operations and collections on the note
receivable from the sale of the pool and spa business were used to reduce the
Company's long-term debt during the nine months ended October 31, 2001.
On May 31, 2001, the Company executed an amendment to its $75.0 million line of
credit agreement, which extended the maturity date from July 17, 2001 to January
14, 2002. There were no amounts outstanding under this agreement at October 31,
2001. The Company anticipates amending its line of credit agreement in order to
extend the maturity date in the near term.
On June 22, 2001, the Company entered into a synthetic lease agreement and
related documents with Atlantic Financial Group, Ltd (the "Lessor), certain
financial parties as lenders, and SunTrust Bank as agent ("SunTrust") in which
the Lessor and SunTrust agreed to fund up to $40.0 million for the acquisition
and development of real property projects chosen by the Company, including the
Company's new corporate headquarters building in Orlando, Florida (the cost of
which is estimated at $25.0 million). The term of this agreement is five years,
which includes the construction period and a lease period. Lease payments will
begin at the earlier of the completion of construction (which is expected in
April 2003) or eighteen months following the acquisition of a property financed
through the synthetic lease. Under the terms of the lease agreement, rent
payments are interest only at a one month LIBOR rate plus applicable credit
spreads (currently estimated to be 150 basis points). At the end of the lease
term, the Company has the option to renew the lease for up to two additional
five year periods, or to purchase the building for a price including the
outstanding lease balance. If the Company elects not to renew the lease or
purchase the building, the Company may elect to remarket the property and
arrange the sale of the building to a third party. Under the remarketing option,
the Company has guaranteed a percentage of the total original cost as the
residual fair value of the building.
14
On June 22, 2001, the Company entered into an operating lease agreement with the
Lessor for the construction of a new warehouse in Miami, Florida. The Company
anticipates total project costs not to exceed $15.0 million with rent payments
beginning at the earlier of the completion of construction (which is expected in
January 2003) or eighteen months following the acquisition of the property.
Under the terms of the lease agreement, rent payments for the first four years
are interest only at a rate based on LIBOR plus applicable credit spreads
(currently estimated to be 150 basis points). Beginning in the fifth year, rents
are re-amortized and rates for the remainder of the term increase to 12.5% plus
applicable consumer price index adjustments. During the first four years of the
lease agreement, the Company may elect to purchase the property for the existing
lease balance or convert it into the Company's synthetic lease facility
referenced above.
As of October 31, 2001, the Company had approximately $13.6 million of cash and
$311.6 million of unused borrowing capacity (subject to borrowing limitations
under long-term debt covenants) to fund ongoing operating requirements and
anticipated capital expenditures. The Company believes it has sufficient
borrowing capacity and cash on hand to take advantage of growth and business
opportunities in the near term. The Company expects to continue to finance
future expansion on a project-by-project basis through additional borrowing or
through the issuance of common stock.
On March 15, 1999, the Company's Board of Directors authorized the Company to
repurchase up to 2,500,000 shares of its outstanding common stock to be used for
general corporate purposes. Since March 15, 1999, the Company has repurchased
1,315,800 shares at an average price of $21.86 per share, of which 394,700
shares at an average price of $19.10 per share were repurchased during the nine
months ended October 31, 2001. No shares were repurchased during the nine
months ended October 31, 2000. On September 21, 2001, the Company retired
326,854 shares of its common stock previously held in treasury.
Dividend payments totaled $6.1 million during the nine months ended October 31,
2001 and 2000.
On March 2, 2001, in connection with the closure of bestroute, one of the
Company's e-commerce ventures, the Company entered into an agreement with the
holders of 723,183 of the Company's stock rights originally issued as
consideration for the bestroute acquisition. This agreement canceled 347,541 of
the stock rights and the remaining stock rights were redeemed for $7.3 million
in cash.
Recent Accounting Pronouncements
Effective in February 2001, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities ("FAS 133"). FAS 133 was amended by FAS No. 138, Accounting
for Certain Derivative Instruments and Hedging Activities ("FAS 138"). Both FAS
133 and FAS 138 require that an entity record all derivatives as either assets
or liabilities in the balance sheet at fair value. The adoption of these
standards did not have a material impact on the Company's consolidated financial
statements.
FAS No. 141, Business Combinations ("FAS 141") and FAS No. 142, Goodwill and
Other Intangible Assets ("FAS 142"), were issued in July 2001. FAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. FAS 141 also specifies the criteria
which must be met in order for certain acquired intangible assets to be recorded
separately from goodwill. FAS 142 is effective for the Company beginning with
the Company's first quarter of fiscal 2003. Under FAS 142, goodwill and
intangible assets with indefinite useful lives will no longer be amortized but
rather will be tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. Goodwill
and intangible assets acquired after June 30, 2001 will be subject immediately
to the provisions of FAS 142. Goodwill is currently being amortized at
approximately $9.5 million annually. The Company is currently evaluating the
provisions of FAS 142 and has not yet determined the effect that adoption of
this standard will have on its consolidated financial statements.
FAS No. 143, Accounting for Asset Retirement Obligations ("FAS 143") was issued
in June 2001. FAS 143, which is effective for the Company beginning in fiscal
2004, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company does not expect the adoption of FAS 143 to have a
material impact on its consolidated financial statements.
FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("FAS 144") was issued in August 2001. FAS 144, which is effective beginning
with the Company's first quarter of fiscal 2003, establishes a single accounting
model for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.
The Company does not expect the adoption of FAS 144 to have a material impact on
its consolidated financial statements.
15
PART I. FINANCIAL INFORMATION -- Continued
HUGHES SUPPLY, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates on
outstanding variable-rate debt and from changes in the prices of certain of its
products that result from commodity price fluctuations.
Interest Rate Risk
At October 31, 2001, the Company had approximately $63.4 million of outstanding
variable-rate debt. Based upon a hypothetical 10% increase or decrease in
interest rates from their October 31, 2001 levels, the market risk with respect
to the Company's variable-rate debt would not be material. The Company manages
its interest rate risk by maintaining a combination of fixed-rate and variable-
rate debt.
Commodity Price Risk
The Company is affected by price fluctuations in stainless steel, nickel alloy,
copper, aluminum, plastic, lumber and other commodities. Such commodity price
fluctuations have from time to time created cyclicality in the financial
performance of the Company and could continue to do so in the future. The
Company seeks to minimize the effects of commodity price fluctuations through
economies of purchasing and inventory management resulting in cost reductions
and productivity improvements as well as price increases to maintain reasonable
profit margins. The Company also believes its diversified product offering
reduces the impact of commodity price fluctuations.
16
PART II. OTHER INFORMATION
HUGHES SUPPLY, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.14 - Master Lease Agreement, dated as of June 22, 2001
between Atlantic Financial Group, Ltd, as Lessor and Hughes Supply, Inc.
and Certain Subsidiaries of Hughes Supply, Inc., as Lessees - Synthetic
Lease
Exhibit 10.14 (a) - Loan Agreement, dated as of June 22, 2001 among
Atlantic Financial Group, Ltd, as Lessor and Borrower, the financial
institutions party hereto as Lenders and SunTrust Bank, as Agent -
Synthetic Lease
Exhibit 10.14 (b) - Construction Agency Agreement, dated as of June 22,
2001 among Atlantic Financial Group, Ltd, and Hughes Supply, Inc. as
Construction Agent - Synthetic Lease
Exhibit 10.14 (c) - Guaranty Agreement from Hughes Supply, Inc., dated
as of June 22, 2001 - Synthetic Lease
Exhibit 10.14 (d) - Appendix A to the Operative Documents, Definitions
and Interpretation - Synthetic Lease
Exhibit 10.15 - Master Lease Agreement, dated as of June 22, 2001
between Atlantic Financial Group, Ltd, as Lessor and Hughes Supply, Inc.
and Certain Subsidiaries of Hughes Supply, Inc., as Lessees - Operating
Lease
Exhibit 10.15 (a) - Loan Agreement, dated as of June 22, 2001 among
Atlantic Financial Group, Ltd, as Lessor and Borrower, the financial
institutions party hereto as Lenders and SunTrust Bank, as Agent -
Operating Lease
Exhibit 10.15 (b) - Construction Agency Agreement, dated as of June 22,
2001 among Atlantic Financial Group, Ltd, and Hughes Supply, Inc. as
Construction Agent - Operating Lease
Exhibit 10.15 (c) - Guaranty Agreement from Hughes Supply, Inc., dated
as of June 22, 2001 - Operating Lease
Exhibit 10.15 (d) - Appendix A to the Operative Documents, Definitions
and Interpretation - Operating Lease
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended October
31, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUGHES SUPPLY, INC.
Date: December 10, 2001 By:/s/ DAVID H. HUGHES
--------------------------------------
David H. Hughes,
Chairman of the Board
and Chief Executive Officer
Date: December 10, 2001 By:/s/ J. STEPHEN ZEPF
---------------------------------------
J. Stephen Zepf,
Treasurer, Chief Financial Officer
and Chief Accounting Officer
18