CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Fiscal Years Ended
--------------------------------------------------------------
January 28, January 29, January 30,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales ............................................... $ 2,994,877 $ 2,536,265 $ 1,945,446
Cost of Sales ........................................... 2,320,604 1,977,266 1,519,323
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit ............................................ 674,273 558,999 426,123
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative ................... 508,644 416,642 318,923
Depreciation and amortization ......................... 29,629 23,269 18,727
Provision for doubtful accounts ....................... 3,608 1,882 1,229
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses ............................ 541,881 441,793 338,879
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income ........................................ 132,392 117,206 87,244
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Operating Income and (Expenses):
Interest and other income ............................. 9,015 6,886 5,837
Interest expense ...................................... (31,805) (25,415) (19,257)
- ------------------------------------------------------------------------------------------------------------------------------------
(22,790) (18,529) (13,420)
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes .............................. 109,602 98,677 73,824
Income Taxes ............................................ 43,731 37,234 26,254
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income .............................................. $ 65,871 $ 61,443 $ 47,570
====================================================================================================================================
Earnings Per Share:
Basic ................................................. $ 2.82 $ 2.57 $ 2.37
====================================================================================================================================
Diluted ............................................... $ 2.80 $ 2.55 $ 2.33
====================================================================================================================================
Average Shares Outstanding:
Basic ................................................. 23,398 23,889 20,108
====================================================================================================================================
Diluted ............................................... 23,547 24,138 20,432
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
HUGHES SUPPLY, INC. 17
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
January 28, January 29,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents .............................................................. $ 10,000 $ 6,010
Accounts receivable, less allowance for losses of $2,777 and $2,809 .................... 398,244 341,109
Inventories ............................................................................ 495,491 409,734
Deferred income taxes .................................................................. 15,993 8,520
Other current assets ................................................................... 38,050 31,346
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets ................................................................. 957,778 796,719
Property and Equipment, Net .............................................................. 144,945 127,632
Excess of Cost over Net Assets Acquired .................................................. 243,367 181,622
Other Assets ............................................................................. 22,924 17,540
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,369,014 $ 1,123,513
====================================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt ...................................................... $ 803 $ 39
Accounts payable ....................................................................... 239,810 176,234
Accrued compensation and benefits ...................................................... 29,590 25,029
Other current liabilities .............................................................. 30,075 27,982
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities ............................................................ 300,278 229,284
Long-Term Debt ........................................................................... 535,000 402,203
Deferred Income Taxes .................................................................... 6,027 4,711
Other Noncurrent Liabilities ............................................................. 5,265 3,359
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities .................................................................... 846,570 639,557
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued;
preferences, limitations and relative rights to be established
by the Board of Directors ............................................................ -- --
Common stock, par value $1 per share; 100,000,000 shares
authorized; 24,249,281 and 24,183,834 shares issued .................................. 24,249 24,184
Capital in excess of par value ......................................................... 221,284 219,558
Retained earnings ...................................................................... 300,144 242,730
Treasury stock, 668,950 and no shares, at cost ......................................... (15,434) --
Unearned compensation related to outstanding restricted stock .......................... (7,799) (2,516)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity ........................................................... 522,444 483,956
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,369,014 $ 1,123,513
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
Capital in
Number of Common Excess of Retained Treasury Unearned
Shares Stock Par Value Earnings Stock Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 ............................ 19,576 $ 19,576 $ 110,328 $ 169,329 $ -- $ --
Net income ......................................... -- -- -- 47,570 -- --
Cash dividends-$.31 per share ...................... -- -- -- (5,966) -- --
Pooled companies ................................. -- -- -- (2,794) -- --
Shares issued under stock option
and bonus plans .................................. 172 172 1,494 -- -- --
Purchase and retirement of common shares ........... (19) (19) (234) (325) -- --
Issuance of restricted stock ....................... 50 50 1,250 -- -- (1,300)
Amortization of unearned restricted stock .......... -- -- -- -- -- 58
Capitalization of undistributed earnings of
Subchapter S corporation ......................... -- -- 12,999 (12,999) -- --
Other acquisitions ................................. 3,658 3,658 76,373 2,549 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 30, 1998 ............................ 23,437 23,437 202,210 197,364 -- (1,242)
Net income ......................................... -- -- -- 61,443 -- --
Cash dividends-$.33 per share ...................... -- -- -- (7,866) -- --
Pooled companies ................................. -- -- -- (1,222) -- --
Shares issued under stock option
and bonus plans .................................. 108 108 1,282 -- -- --
Purchase and retirement of common shares ........... (19) (19) (193) (389) -- --
Issuance of restricted stock ....................... 52 52 1,615 -- -- (1,667)
Amortization of unearned restricted stock .......... -- -- -- -- -- 393
Capitalization of undistributed earnings of
Subchapter S corporation ......................... -- -- 7,697 (7,697) -- --
Other acquisitions ................................. 606 606 6,947 1,097 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 1999 ............................ 24,184 24,184 219,558 242,730 -- (2,516)
Net income ......................................... -- -- -- 65,871 -- --
Cash dividends-$.34 per share ...................... -- -- -- (7,990) -- --
Purchase of treasury stock ......................... (921) -- -- -- (21,229) --
Shares issued under stock option
and bonus plans .................................. 65 29 472 (378) 811 --
Purchase and retirement of common shares ........... (7) (7) (57) (89) -- --
Issuance of restricted stock,
net of cancellations ............................. 259 43 1,311 -- 4,984 (6,338)
Amortization of unearned restricted stock .......... -- -- -- -- -- 1,055
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 28, 2000 ............................ 23,580 $ 24,249 $ 221,284 $ 300,144 $ (15,434) $ (7,799)
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
HUGHES SUPPLY, INC. 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Years Ended
--------------------------------------------
January 28, January 29, January 30,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ....................................................................... $ 65,871 $ 61,443 $ 47,570
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................................ 29,629 23,269 18,727
Provision for doubtful accounts .............................................. 3,608 1,882 1,229
Other, net ................................................................... (262) (671) (626)
Changes in assets and liabilities, net of effects of business acquisitions:
(Increase) in accounts receivable ............................................ (33,961) (25,497) (30,443)
(Increase) in inventories .................................................... (67,594) (29,493) (39,136)
(Increase) in other current assets ........................................... (4,464) (7,718) (3,865)
(Increase) in other assets ................................................... (4,006) (5,692) (9,061)
Increase in accounts payable and accrued liabilities ......................... 47,639 8,532 6,102
Increase (decrease) in accrued interest and income taxes ..................... 2,169 (2,948) 1,880
Increase in other noncurrent liabilities ..................................... 168 697 408
(Increase) decrease in net deferred income taxes ............................. (5,348) 7,763 2,425
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ........................ 33,449 31,567 (4,790)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures ............................................................. (30,740) (26,921) (28,185)
Proceeds from sale of property and equipment ..................................... 4,892 6,630 1,184
Investments in affiliated entities ............................................... (3,750) -- --
Business acquisitions, net of cash ............................................... (88,905) (40,378) (47,725)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities .................................... (118,503) (60,669) (74,726)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net borrowings under short-term debt arrangements ................................ 132,797 10,232 36,921
Principal payments on debt of acquired entities .................................. (14,724) (24,084) (25,212)
Proceeds from issuance of long-term debt ......................................... -- 50,000 80,000
Purchase of treasury shares ...................................................... (21,229) -- --
Dividends paid ................................................................... (8,042) (8,832) (8,112)
Other ............................................................................ 242 (408) (2,496)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .................................. 89,044 26,908 81,101
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ............................... 3,990 (2,194) 1,585
Cash and Cash Equivalents, Beginning of Year ....................................... 6,010 8,204 6,619
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year ............................................. $ 10,000 $ 6,010 $ 8,204
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Industry
Hughes Supply, Inc. and its subsidiaries (the "Company") are engaged in the
wholesale distribution of a broad range of materials, equipment and supplies
primarily to the construction and industrial markets. The Company distributes
nine different product groups which it has classified into three major product
categories: (i) Fluid Control Products, consisting of the Company's industrial
pipe, plate, valves and fittings, plumbing, water and sewer, and water systems
product groups; (ii) Electrical Products, consisting of the Company's electrical
and electric utilities product groups; and (iii) Specialty Products, consisting
of the Company's air conditioning and heating, building materials, and pool and
spa equipment and supplies product groups. The Company's principal customers are
electrical, plumbing and mechanical contractors, electric utility companies,
property management companies, municipalities and industrial companies.
Industrial companies include companies in the petrochemical, food and beverage,
pulp and paper, mining, pharmaceutical and marine industries.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and accounts have been
eliminated. Results of operations of companies acquired and accounted for as
purchases are included from their respective dates of acquisition.
Fiscal Year
The Company's fiscal year ends on the last Friday in January. Fiscal years 2000,
1999 and 1998 each contained 52 weeks.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are carried at the lower of cost or market. The cost of
substantially all inventories is determined by the average cost method.
Property and Equipment
Buildings and equipment are recorded at cost and depreciated using both
straight-line and declining-balance methods based on the following estimated
useful lives:
Buildings and improvements ............................... 5-40 years
Transportation equipment ................................. 2- 7 years
Furniture, fixtures and equipment ........................ 2-12 years
Property under capital leases ............................ 20-40 years
Maintenance and repairs are charged to expense as incurred and major renewals
and betterments are capitalized. Gains or losses are credited or charged to
earnings upon disposition. Depreciation of property and equipment totaled
$18,309, $15,750 and $12,759 in fiscal 2000, 1999 and 1998, respectively.
Excess of Cost over Net Assets Acquired
The excess of cost over the fair value of net assets of purchased companies
(goodwill) is being amortized by the straight-line method over 15 to 40 years.
At January 28, 2000 and January 29, 1999, goodwill totaled $243,367 and
$181,622, respectively, net of accumulated amortization of $24,477 and $16,688,
respectively. Amortization of goodwill totaled $7,797, $5,614 and $5,053 in
fiscal 2000, 1999 and 1998, respectively.
Other Assets
The Company capitalizes certain internal software development costs which are
amortized by the straight-line method over the estimated useful lives of the
software, not to exceed five years. At January 28, 2000 and January 29, 1999,
unamortized software development costs totaled $11,465 and $9,474, respectively,
net of accumulated amortization of $5,186 and $1,873, respectively. Amortization
of capitalized internal software development costs totaled $3,385, $1,680 and
$316 in fiscal 2000, 1999 and 1998, respectively.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying value of a
long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required.
HUGHES SUPPLY, INC. 21
Deferred Employee Benefits
The present value of amounts estimated to be payable under unfunded supplemental
retirement agreements with certain officers is being accrued over the remaining
years of active employment of the officers and is included in other noncurrent
liabilities.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their fair values because of the
short maturity of these instruments. The fair value of the Company's long-term
debt is estimated based on quoted market prices for the same or similar issues
or on current rates offered to the Company for debt of the same remaining
maturities.
Revenue Recognition
The Company recognizes revenue from product sales when goods are received by
customers.
Advertising
Advertising costs are charged to expense as incurred. Advertising expenses
totaled $6,471, $5,533 and $4,369 in fiscal 2000, 1999 and 1998, respectively.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
resulting from temporary differences. Such temporary differences result from
differences in the carrying value of assets and liabilities for tax and
financial reporting purposes. The deferred tax assets and liabilities represent
the future tax consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income. An assessment is made as to whether or not a valuation
allowance is required to offset deferred tax assets.
Stock-Based Compensation
The Company measures compensation expense for employee and director stock
options as the aggregate difference between the market and exercise prices of
the options on the date that both the number of shares the grantee is entitled
to receive and the purchase price are known. Compensation expense associated
with restricted stock grants is equal to the market value of the shares on the
date of grant and is recorded pro rata over the required holding period. Pro
forma information relating to the fair value of stock-based compensation is
presented in Note 6 to the consolidated financial statements.
Earnings Per Common 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 23,398,000,
23,889,000 and 20,108,000 for fiscal 2000, 1999 and 1998, respectively. In
calculating diluted earnings per share, these amounts were adjusted to include
149,000, 249,000 and 324,000 of dilutive potential common shares for fiscal
2000, 1999 and 1998, respectively. The Company's dilutive potential common
shares consist of stock options and restricted stock.
Reclassifications
The fiscal 1999 and 1998 statements of cash flows contain certain
reclassifications which were made to conform to the Company's current financial
statement format.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2--BUSINESS COMBINATIONS
On January 8, 1998, the Company acquired all of the common stock of Mountain
Country Supply, Inc. ("Mountain Country"). Mountain Country is a wholesale
distributor of plumbing supplies, water and sewer equipment and supplies, and
air conditioning and heating equipment and supplies, with 10 locations in
Arizona. On January 13, 1998, the Company acquired all of the common stock of
International Supply Company, Inc. and all of its affiliated operations
("International"). International is a wholesale distributor of water and sewer
equipment and supplies, plumbing supplies and industrial pipe, valves and
fittings with 38 locations in Texas. The aggregate consideration paid for the
Mountain Country and International acquisitions was
22
$98,772, consisting of cash in the amount of $39,642 and the issuance of
2,153,396 shares of common stock. These transactions were accounted for as
purchases and the results of operations of Mountain Country and International
from their respective dates of acquisition are included in the consolidated
financial statements. The excess of cost over net assets acquired for Mountain
Country and International is being amortized over 40 years by the straight-line
method.
The following table reflects the unaudited pro forma combined results of
operations, assuming the Mountain Country and International acquisitions had
occurred at the beginning of the year presented:
Fiscal Year Ended
-----------------
1998
- --------------------------------------------------------------------------------
Net sales ........................................... $ 2,180,227
Net income .......................................... 53,214
Earnings per share:
Basic ............................................. 2.41
Diluted ........................................... 2.37
During fiscal 2000, 1999 and 1998, the Company acquired several other wholesale
distributors of materials to the construction and industrial markets that were
accounted for as purchases or immaterial poolings. These acquisitions,
individually or in the aggregate, did not have a material effect on the
consolidated financial statements. Results of operations of these companies from
their respective dates of acquisition have been included in the consolidated
financial statements.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2000 1999
- --------------------------------------------------------------------------------
Land ......................................... $ 28,771 $ 25,590
Buildings and improvements ................... 110,308 93,341
Transportation equipment ..................... 33,205 31,158
Furniture, fixtures and equipment ............ 64,613 57,840
- --------------------------------------------------------------------------------
236,897 207,929
Less accumulated depreciation
and amortization ........................... (91,952) (80,297)
- --------------------------------------------------------------------------------
$ 144,945 $ 127,632
================================================================================
NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following:
2000 1999
- --------------------------------------------------------------------------------
7.96% Senior notes, due 2011 ................. $ 98,000 $ 98,000
7.14% Senior notes, due 2012 ................. 40,000 40,000
7.19% Senior notes, due 2012 ................. 40,000 40,000
6.74% Senior notes, due 2013 ................. 50,000 50,000
Unsecured bank notes under
$275,000 revolving credit
agreement, payable January 25,
2004, fluctuating interest (6.0%
to 6.9% at January 28, 2000) ............... 232,959 108,450
Short-term instruments classified
as long-term debt .......................... 74,041 65,753
Other notes payable .......................... 803 39
- --------------------------------------------------------------------------------
535,803 402,242
Less current portion ......................... (803) (39)
- --------------------------------------------------------------------------------
$ 535,000 $ 402,203
================================================================================
On August 28, 1997, the Company issued $80,000 of senior notes due 2012 in a
private placement. The senior notes, of which $40,000 bear interest at 7.14% and
$40,000 bear interest at 7.19%, will be payable in 21 and 13 equal semi-annual
principal payments beginning in 2002 and 2006, respectively. Proceeds received
by the Company from the sale of the senior notes were used to reduce
indebtedness outstanding under the Company's revolving credit agreement and line
of credit agreement (the "credit agreement").
On August 27, 1997, in connection with the issuance of the $80,000 of senior
notes, the Company entered into an interest rate swap agreement (the "swap
agreement"). The swap agreement effectively converts the Company's $40,000 of
7.19% senior notes due 2012 from fixed-rate debt to floating-rate debt based on
six month London Interbank Offered Rates (LIBOR) less a predetermined spread of
.05% (5.99% as of January 28, 2000). The differential is accrued as interest
rates change and is recorded as an adjustment to interest expense. As a result
of the swap agreement, interest expense decreased by $705, $171 and $219 in
fiscal 2000, 1999 and 1998, respectively. The swap agreement matures in 2012.
However, the counterparty has the option to terminate the agreement at any time
from May 30, 2000 through November 30, 2011. The estimated fair value of the
swap agreement, based on a valuation from an investment bank, approximated
$1,504 and $1,251 at January 28, 2000 and January 29, 1999, respectively.
HUGHES SUPPLY, INC. 23
On May 5, 1998, the Company issued $50,000 of senior notes due 2013 in a private
placement. The senior notes bear interest at 6.74% and will be payable in 21
equal semi-annual principal payments beginning in 2003. Proceeds received by the
Company from the sale of the senior notes were used to reduce indebtedness
outstanding under the Company's credit agreement.
On September 29, 1999, the credit agreement was amended. The credit agreement,
as amended, now permits the Company to borrow up to $350,000 (subject to
borrowing limitations under the credit agreement)--$275,000 under its revolving
credit agreement as long-term debt due January 25, 2004 and $75,000 under its
line of credit agreement. Under the credit agreement, interest is payable at
market rates plus applicable margins. Facility fees of .25% and .225% are paid
on the total of the revolving credit agreement and line of credit agreement,
respectively.
The credit agreement contains financial covenants requiring the Company to
maintain certain financial ratios and minimum net worth levels. The covenants
also restrict the Company's activities regarding investments, liens, borrowing
and leasing, and payment of dividends other than stock. Under the dividend
covenant, approximately $115,257 was available at January 28, 2000 for payment
of dividends.
The Company has a commercial paper program backed by its line of credit
agreement. The weighted-average interest rate on outstanding commercial paper
borrowings of $74,041 and $65,753 as of January 28, 2000 and January 29, 1999
was 6.6% and 5.8%, respectively. The Company has the ability and intent to
refinance short-term borrowings on a long-term basis. Accordingly, all of the
commercial paper borrowings at January 28, 2000 and January 29, 1999 have been
classified as long-term debt.
On March 1, 1999, the Company entered into two new lines of credit for
short-term borrowing totaling $25,000. There were no amounts outstanding under
these lines of credit at January 28, 2000.
On November 30, 1999, the Company entered into a new $50,000 bridge revolving
credit agreement for short-term borrowing. There were no amounts outstanding
under this line of credit at January 28, 2000.
Maturities of long-term debt for each of the five years subsequent to January
28, 2000 and in the aggregate are as follows:
Fiscal Years Ending
- --------------------------------------------------------------------------------
2001 .................................................. $ 803
2002 .................................................. 9,333
2003 .................................................. 13,143
2004 .................................................. 324,905
2005 .................................................. 17,905
Later years ........................................... 169,714
- --------------------------------------------------------------------------------
$535,803
================================================================================
The fair values of long-term debt approximated $524,002 and $407,836 and the
related carrying values were $535,803 and $402,242 at January 28, 2000 and
January 29, 1999, respectively.
NOTE 5--INCOME TAXES
The components of deferred tax assets and liabilities at January 28, 2000 and
January 29, 1999 are as follows:
2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts ................ $ 1,064 $ 1,211
Inventories .................................... 2,537 506
Accrued vacation ............................... 2,646 3,001
Deferred compensation .......................... 2,054 1,446
Other accrued liabilities ...................... 3,325 2,326
Other .......................................... 662 270
- --------------------------------------------------------------------------------
Total deferred tax assets .................... 12,288 8,760
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software
development costs ............................ 3,401 2,664
Intangible assets .............................. 3,590 2,287
Property and equipment ......................... 1,243 --
- --------------------------------------------------------------------------------
Total deferred tax liabilities ............... 8,234 4,951
Net deferred tax assets .......................... $ 4,054 $ 3,809
================================================================================
No valuation allowance has been provided for these deferred tax assets at
January 28, 2000 and January 29, 1999 as full realization of these assets is
more likely than not.
24
The consolidated provision for income taxes consists of the following:
Fiscal Years Ended
---------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Currently payable:
Federal ...................... $36,763 $25,119 $21,058
State ........................ 5,553 2,778 3,377
- --------------------------------------------------------------------------------
42,316 27,897 24,435
Deferred:
Federal ...................... 1,241 7,864 1,500
State ........................ 174 1,473 319
- --------------------------------------------------------------------------------
1,415 9,337 1,819
- --------------------------------------------------------------------------------
$43,731 $37,234 $26,254
================================================================================
The following is a reconciliation of tax computed at the statutory Federal rate
to the income tax expense in the consolidated statements of income:
Fiscal Years Ended
--------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------
Tax computed
at statutory
Federal rate ...... $ 38,361 35.0 $ 34,537 35.0 $ 25,838 35.0
Effect of:
State and
local income
tax, net of
Federal income
tax benefit ..... 3,722 3.4 2,763 2.8 2,459 3.3
Subchapter
S corporation
earnings ........ -- -- (606) (.6) (2,315) (3.1)
Nondeductible
purchase
adjustments ..... -- -- 880 .9 288 .4
Nondeductible
expenses ........ 2,740 2.5 1,085 1.1 886 1.2
Other, net ........ (1,092) (1.0) (1,425) (1.5) (902) (1.2)
- ---------------------------------------------------------------------------------------------------
Income tax
expense ........... $ 43,731 39.9 $ 37,234 37.7 $ 26,254 35.6
===================================================================================================
The Company merged with Chad Supply, Inc. ("Chad") on January 30, 1998 and with
Winn-Lange Electric, Inc. ("Winn-Lange") on June 30, 1998. Prior to their merger
with the Company, Chad and Winn-Lange were Subchapter S corporations and were
not subject to corporate income tax.
NOTE 6--EMPLOYEE BENEFIT PLANS
Profit Sharing and Employee Stock Ownership Plans
The Company has a 401(k) profit sharing plan which provides benefits for
substantially all employees of the Company who meet minimum age and length of
service requirements. In fiscal 1999 and 1998, employee contributions of not
less than 2% to not more than 3% of each eligible employee's compensation were
matched (in cash or stock) 50% by the Company. In fiscal 2000, the Company
adopted a plan to increase the maximum amount of employee contributions eligible
to be matched 50% by the Company. The maximum percentage of each eligible
employee's contribution to be matched by the Company was increased from 3% to 4%
on August 1, 1999 and from 4% to 5% as of February 1, 2000. The plan also calls
for an additional increase in the maximum matching percentage from 5% to 6% on
February 1, 2001. Additional annual contributions may be made at the discretion
of the Board of Directors.
The Company had an employee stock ownership plan (ESOP) covering substantially
all employees of the Company who met minimum age and length of service
requirements. The plan was terminated by the Company on December 31, 1998. At
January 28, 2000 and January 29, 1999, the plan owned approximately 236,000 and
248,000 shares, respectively, of the Company's common stock, all of which were
allocated to participants. The Company is in the process of distributing each
participant's final account balance in cash or stock.
Amounts charged to expense for these and other similar plans during fiscal 2000,
1999 and 1998 were $2,883, $1,946 and $1,581, respectively.
25
Bonus Plans
The Company has bonus plans, based on profitability formulas, which provide
incentive compensation for key officers and employees. Amounts charged to
expense for bonuses to executive officers were $1,914, $1,576 and $1,539 for
fiscal 2000, 1999 and 1998, respectively.
Stock Plans
The Company's two active stock plans include the 1997 Executive Stock Plan (the
"1997 Stock Plan") and the Directors' Stock Option Plan. These stock plans
authorize the granting of both incentive and non-incentive stock options for an
aggregate of 1,052,500 shares of common stock, including 750,000 shares to key
employees and 302,500 shares to directors. Under the stock plans, options are
granted at prices not less than the market value on the date of grant, and the
maximum term of an option may not exceed ten years. Prices for incentive stock
options granted to employees who own 10% or more of the Company's stock are at
least 110% of market value at date of grant. Options may be granted from time to
time to December 2006 with respect to the 1997 Stock Plan, or May 2003 with
respect to the Directors' Stock Option Plan. An option becomes exercisable at
such times and in such installments as set forth by the Compensation Committee
or by the Directors' Stock Option Plan.
Under the 1997 Stock Plan, the Company can grant up to 375,000 shares of the
authorized options as restricted stock to certain key employees. These shares
are subject to certain transfer restrictions, and vesting may be dependent upon
continued employment, the satisfaction of performance objectives, or both.
During fiscal 2000, 1999 and 1998, the Company granted certain employees
261,921, 52,500 and 50,000 shares of restricted stock, with market values of
$6,415, $1,667 and $1,300 at the date of grant, respectively. In fiscal 2000,
the Company also cancelled 2,400 of the restricted shares granted, with a market
value of $77 at the date of grant, according to the provisions of the grant. The
market value of the restricted stock at the date of grant was recorded as
unearned compensation, a component of shareholders' equity, and is being charged
to expense over the respective vesting periods. In fiscal 2000, 1999 and 1998,
this expense amounted to $1,055, $393 and $58, respectively.
The 1997 Stock Plan also permits the granting of stock appreciation rights
("SARs") to holders of options. Such rights permit the optionee to surrender an
exercisable option, in whole or in part, on any date that the fair market value
of the Company's common stock exceeds the option price for the stock and receive
payment in common stock or, if the Board of Directors approves, in cash or any
combination of cash and common stock. Such payment would be equal to the excess
of the fair market value of the shares under the surrendered option over the
option price for such shares. The change in value of SARs would be reflected in
income based upon the market value of the stock. No SARs have been granted or
issued through January 28, 2000.
A summary of option transactions, including a terminated plan under which
options remain outstanding, during each of the three fiscal years in the period
ended January 28, 2000 is shown below:
Weighted-
Number of Average
Shares Option Price
- --------------------------------------------------------------------------------
Under option, January 31, 1997
(492,312 shares exercisable) .............. 666,314 12.78
Granted .................................. 271,991 33.23
Exercised ................................ (112,908) 11.53
Cancelled ................................ (6,000) 13.50
- -----------------------------------------------------------------
Under option, January 30,1998
(455,897 shares exercisable) .............. 819,397 19.74
Granted .................................. 48,000 34.19
Exercised ................................ (98,587) 10.99
Cancelled ................................ (12,800) 34.06
- -----------------------------------------------------------------
Under option, January 29, 1999
(435,810 shares exercisable) .............. 756,010 21.55
Granted .................................. 40,500 24.93
Exercised ................................ (51,900) 11.89
Cancelled ................................ (11,463) 28.24
- -----------------------------------------------------------------
Under option, January 28, 2000
(426,947 shares exercisable) .............. 733,147 22.32
=================================================================
There were 211,751 shares available for the granting of options at January 28,
2000.
26
The following table summarizes the stock options outstanding at January 28,
2000:
Weighted-
Average
Options Remaining Weighted-
Range of Outstanding at Contractual Average
Exercise Prices Jan. 28, 2000 Life Exercise Price
- --------------------------------------------------------------------------------
$ 8.42 154,069 1 Year $ 8.42
12.83-18.67 234,276 6 Years 16.69
21.63-28.75 74,102 8 Years 25.55
33.00-35.63 270,700 8 Years 34.22
If the fair value of options granted had been used to record compensation
expense, pro forma net income would have been $64,770, $60,307 and $47,140 in
fiscal 2000, 1999 and 1998, respectively. Diluted earnings per share would have
been $2.75, $2.50 and $2.31 in fiscal 2000, 1999 and 1998, respectively. The
fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yields of 1.3% for fiscal 2000, 1999 and 1998; expected
volatility of 35%, 33% and 32% for fiscal 2000, 1999 and 1998, respectively;
risk-free interest rates of 6.65%, 4.77% and 5.72% for fiscal 2000, 1999 and
1998, respectively; and expected lives of 8 years for fiscal 2000, 1999 and
1998. The weighted-average fair value of options granted during the year was
$11.48, $13.81 and $13.92 for fiscal 2000, 1999 and 1998, respectively. The pro
forma calculations do not include the effects of options granted prior to fiscal
1996. As such, the impact is not necessarily indicative of the effects on
reported net income in future years.
Supplemental Executive Retirement Plan
The Company has entered into agreements with certain key executive officers
providing for supplemental payments, generally for periods up to 15 years, upon
retirement, disability or death. The obligations are not funded apart from the
Company's general assets. Amounts charged to expense under the agreements were
$543, $537 and $445 in fiscal 2000, 1999 and 1998, respectively.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain properties from a corporation owned by two directors
and one executive officer of Hughes Supply, Inc. The leases generally provide
that all expenses related to the properties are to be paid by the lessee. On
April 1, 1998, certain amendments to these leases were executed, which included
the extension of their lease terms through March 31, 2003. Rents paid to the
related corporation under these leases and other operating leases amounted to
$1,341, $1,241 and $1,140 in fiscal 2000, 1999 and 1998, respectively.
Future minimum payments, by year and in the aggregate, under the aforementioned
leases and other noncancelable operating leases with initial or remaining terms
in excess of one year as of January 28, 2000, are as follows:
Fiscal Years Ending
- --------------------------------------------------------------------------------
2001 ..................................................... $ 35,698
2002 ..................................................... 31,282
2003 ..................................................... 24,704
2004 ..................................................... 15,741
2005 ..................................................... 10,392
Later years .............................................. 17,342
- --------------------------------------------------------------------------------
Total minimum lease payments ............................. $135,159
================================================================================
Lease-related expenses were as follows:
Fiscal Years Ended
-------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Capital lease
amortization .................... $ -- $ 89 $ 518
Capital lease
interest expense ................ -- 30 199
Operating lease
rentals (excluding
month-to-month rents) ........... 42,792 33,062 22,335
Legal Matters
The Company is involved in various legal proceedings arising in the normal
course of its business. In the opinion of management, none of the proceedings
are material in relation to the Company's consolidated operations or financial
position.
HUGHES SUPPLY, INC. 27
NOTE 8--CAPITAL STOCK
Common Stock
On May 20, 1997, the Company's Board of Directors declared a three-for-two stock
split to shareholders of record as of July 10, 1997. The date of issuance for
the additional shares was July 17, 1997. Accordingly, all share and per share
data have been restated for periods prior to the stock split.
On May 20, 1997, the shareholders approved an amendment to the Restated Articles
of Incorporation of the Company increasing the number of authorized shares of
common stock from 20,000,000 to 100,000,000 shares.
Treasury 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 shares of common stock to
be used for general corporate purposes. In fiscal 2000, the Company repurchased
921,100 shares for a total cost of $21,229 at an average price of $23.05 per
share. During fiscal 2000, the Company issued 36,150 shares of treasury stock
for stock options exercised and 216,000 shares of treasury stock for restricted
stock grants.
Preferred Stock
The Company's Board of Directors established Series A Junior Participating
Preferred Stock ("Series A Stock") consisting of 75,000 shares. Each share of
Series A Stock will be entitled to 1,000 votes on all matters submitted to a
vote of shareholders. Series A Stock is not redeemable or convertible into any
other security. Each share of Series A Stock shall have a minimum cumulative
preferential quarterly dividend rate equal to the greater of $1.00 per share or
1000 times the aggregate per share amount of the dividend declared on common
stock in the related quarter. In the event of liquidation, shares of Series A
Stock will be entitled to the greater of $1000 per share plus any accrued and
unpaid dividend or 1000 times the payment to be made per share of common stock.
No shares of Series A Stock are presently outstanding, and no shares are
expected to be issued except in connection with the shareholder rights plan
referred to below.
The Company has a shareholder rights plan. Under the plan, the Company
distributed to shareholders a dividend of one right per share of the Company's
common stock. When exercisable, each right will permit the holder to purchase
from the Company one one-thousandth of a share (a "unit") of Series A Stock at a
purchase price of $200 per unit. The rights generally become exercisable if a
person or group acquires 15% or more of the Company's common stock or commences
a tender offer that could result in such person or group owning 15% or more of
the Company's common stock. If certain subsequent events occur after the rights
first become exercisable, the rights may become exercisable for the purchase of
shares of common stock of the Company, or of an acquiring company, having a
value equal to two times the exercise price of the right. In general, the rights
may be redeemed by the Company at $.0l per right at any time prior to the later
of (i) ten days after 20% or more of the Company's stock is acquired by a person
or group and (ii) the first date of a public announcement that a person or group
has acquired 15% or more of the Company's stock. The rights expire on June 2,
2008 unless terminated earlier in accordance with the rights plan.
NOTE 9--SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest during fiscal 2000, 1999 and 1998 was $29,636, $23,972
and $18,107, respectively. Cash paid for income taxes during fiscal 2000, 1999
and 1998 was $49,079, $33,862 and $23,099, respectively.
Noncash Investing and Financing Activities
The net assets acquired and consideration for acquisitions accounted for as
purchases are summarized below:
Fiscal Years Ended
--------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Fair value of:
Assets acquired ........... $ 125,536 $ 77,707 $ 172,546
Liabilities assumed ....... (37,510) (32,048) (45,816)
- --------------------------------------------------------------------------------
Purchase price .............. $ 88,026 $ 45,659 $ 126,730
================================================================================
Consideration in fiscal 1999 and 1998 included 207,829 and 2,850,526 shares of
common stock, with fair values of $5,438 and $78,768, respectively.
28
NOTE 10--PRODUCT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company's products are classified into three major product categories,
including Fluid Control Products, Electrical Products and Specialty Products.
Net sales for each of these product categories were as follows:
Fiscal Years Ended
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Fluid Control
Products .................. $1,803,742 $1,512,828 $1,048,688
Electrical Products ......... 625,068 572,048 536,490
Specialty Products .......... 566,067 451,389 360,268
- --------------------------------------------------------------------------------
$2,994,877 $2,536,265 $1,945,446
================================================================================
The Company sells its products in the major areas of construction and industrial
markets in certain states primarily in the Southeast, Southwest and Midwest
United States. Revenues and assets of operations located outside the United
States are not material.
Approximately 90% of the Company's sales are credit sales which are made
primarily to customers whose ability to pay is dependent upon the economic
strength of the construction industry in the areas where it operates.
Concentration of credit risk with respect to trade accounts receivable is
limited, however, due to the large number of customers comprising the Company's
customer base and the fact that no one customer comprises more than 1% of annual
sales. The Company performs ongoing credit evaluations of its customers and in
certain situations obtains collateral sufficient to protect its credit position.
The Company maintains reserves for potential credit losses, and such losses have
been within management's expectations.
NOTE 11--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarter
--------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------------------------------------------
Fiscal 2000
Net sales .......................................... $711,296 $774,888 $786,379 $722,314
Gross profit ....................................... $156,358 $176,173 $178,648 $163,094
Net income ......................................... $ 13,355 $ 20,905 $ 20,243 $ 11,368
Earnings per share:
Basic ............................................ $ .56 $ .90 $ .87 $ .49
Diluted .......................................... $ .55 $ .88 $ .87 $ .49
Average shares outstanding (in thousands):
Basic ............................................ 23,863 23,300 23,214 23,215
Diluted .......................................... 24,240 23,686 23,349 23,338
Market price per share:
High ............................................. $ 26.25 $ 29.94 $ 28.50 $ 24.13
Low .............................................. $ 17.94 $ 22.94 $ 20.75 $ 18.06
Dividends per share ................................ $ .085 $ .085 $ .085 $ .085
- --------------------------------------------------------------------------------------------------------------------
Fiscal 1999
Net sales .......................................... $602,031 $674,550 $659,045 $600,639
Gross profit ....................................... $129,277 $148,841 $146,639 $134,242
Net income ......................................... $ 11,603 $ 19,773 $ 19,150 $ 10,917
Earning per share:
Basic ............................................ $ .49 $ .83 $ .80 $ .45
Diluted .......................................... $ .49 $ .82 $ .79 $ .45
Average shares outstanding (in thousands):
Basic ............................................ 23,601 23,925 23,989 24,038
Diluted .......................................... 23,874 24,180 24,204 24,294
Market price per share:
High ............................................. $ 39.81 $ 39.19 $ 32.50 $ 29.50
Low .............................................. $ 32.56 $ 29.13 $ 25.13 $ 25.13
Dividends per share ................................ $ .080 $ .080 $ .085 $ .085
HUGHES SUPPLY, INC. 29
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Hughes Supply, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Hughes
Supply, Inc. and its subsidiaries at January 28, 2000 and January 29, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended January 28, 2000 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orlando, Florida
March 17, 2000
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
Management's Responsibility
for Financial Statements
The consolidated financial statements and related information included in this
annual report were prepared in conformity with generally accepted accounting
principles. Management is responsible for the integrity of the financial
statements and for the related information. Management has included in the
Company's financial statements amounts that are based on estimates and
judgements which it believes are reasonable under the circumstances.
The responsibility of the Company's independent accountants is to express an
opinion on the fairness of the financial statements. Their opinion is based on
an audit conducted in accordance with generally accepted auditing standards as
further described in their report.
The Audit Committee of the Board of Directors is composed of three
non-management directors. The Committee meets periodically with financial
management, internal auditors, and the independent accountants to review
internal accounting control, auditing, and financial reporting matters.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations 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," "estimate," "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 that could cause results to differ materially
from those projected in the forward-looking statements are enumerated. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's consolidated
financial statements and the notes thereto.
RESULTS OF OPERATIONS
Net Sales
In fiscal 2000, the Company generated net sales of $2.99 billion, an 18%
increase over fiscal 1999 net sales of $2.54 billion. Fiscal 1999 net sales of
$2.54 billion increased 30% over fiscal 1998 net sales of $1.95 billion. The
increases in net sales were primarily due to acquired and newly-opened wholesale
branches resulting from the Company's acquisition and internal growth programs.
Same-store sales growth also contributed to the increases. On a basis comparable
to the prior year, same-store sales increased 7% in fiscal 2000 and 6% in fiscal
1999.
The increase of 7% in same-store sales for fiscal 2000 was attributable to (i)
continued overall strength of the construction market, (ii) increases in pool
and spa product sales due to increased market penetration and (iii) growth in
electric utility product sales resulting from increased spending by utility
companies due to the anticipated deregulation within their industry. The
same-store sales increase of 6% in fiscal 1999 was primarily attributable to (i)
continued growth in construction markets and (ii) the favorable impact of warm
and dry weather conditions experienced in certain regions served by the
Company's air conditioning and pool supply products. These increases were
partially offset by declines in industrial product demand and deflationary
pricing within certain of the Company's commodity-based products as further
discussed below.
Gross Margin
Over the past three years, gross margins have been improving. Gross margins were
22.5%, 22.0% and 21.9% for fiscal 2000, 1999 and 1998, respectively. The
improvement in gross margins resulted from several factors, including the
Company's overall expansion of higher-margin products due primarily to its
acquisition program, efficiencies created with central distribution centers and
enhanced purchasing power. Enhanced purchasing power was attributable to
increased volume and concentration of supply sources as part of the Company's
preferred vendor program. In the early part of fiscal 2000, all of fiscal 1999
and the last part of fiscal 1998, total gross profit dollars were negatively
impacted by deflationary pressures on the pricing of certain of the Company's
products whose manufacture is reliant on certain commodities, including
stainless steel, nickel alloys, copper, aluminum and plastic. Despite the
commodity pricing pressures, the Company was able to maintain the gross margins
on much of the business associated with these products and increase overall
gross margin for each of these years. In the latter part of fiscal 2000, the
deflationary pressures on certain commodity items eased, which further improved
gross margins.
Operating Expenses
Operating expenses in fiscal 2000 were $542 million (or 18.1% of net sales), a
23% increase over fiscal 1999 operating expenses of $442 million (or 17.4% of
net sales). The increase in operating expenses as a percent of net sales for
fiscal 2000 was primarily due to (i) higher personnel costs resulting from
increased headcount due to higher volume levels of activity, wage increases and
the Company's employee retention activities and (ii) increased information
technology ("IT") spending and conversion costs as the Company continued its
program of upgrading IT systems. The Company believes its investment in these
initiatives will provide a platform for future growth and enable it to realize
more administrative synergies from past and future acquisitions.
Similarly, the increase of $103 million in fiscal 1999 compared to fiscal 1998,
which had operating expenses of $339 million (or 17.4% of net sales), was
primarily attributable to branches acquired and opened after February 1,
HUGHES SUPPLY, INC. 31
1997. The remainder of the increase was primarily due to (i) higher personnel
and transportation costs associated with same-store sales growth, (ii) expenses
related to the Company's IT initiatives and (iii) the impact of deflation on
sales volumes.
Non-Operating Income and Expenses
Interest and other income was $9.0 million in fiscal 2000 compared to $6.9
million in fiscal 1999 and $5.8 million in fiscal 1998. The increases of $2.1
million and $1.1 million in fiscal 2000 and 1999, respectively, were primarily
the result of higher levels of accounts receivable and the related collection of
service charge income on delinquent accounts receivable.
Interest expense for fiscal 2000, 1999 and 1998 was $31.8 million, $25.4 million
and $19.3 million, respectively. The $6.4 million increase in fiscal 2000 and
the $6.1 million increase in fiscal 1999 were primarily the result of higher
borrowing levels. The higher borrowing levels were primarily due to the
Company's expansion through business acquisitions, which was partially funded by
debt financing. The increase in fiscal 2000's debt level was also due to the
Company's share repurchase program.
Income Taxes
The effective tax rates for fiscal 2000, 1999 and 1998 were 39.9%, 37.7% and
35.6%, respectively. Prior to the mergers with Chad Supply, Inc. ("Chad") on
January 30, 1998 and with Winn-Lange Electric, Inc. ("Winn-Lange") on June 30,
1998, both of these entities were Subchapter S corporations and, therefore, not
subject to corporate income tax. Each entity's Subchapter S corporation status
terminated upon the merger with the Company. As a result, the Company's
effective tax rate is higher for fiscal 2000 compared to fiscal 1999 and is
higher for fiscal 1999 compared to fiscal 1998. The Company's effective tax rate
for fiscal 1999 and 1998 would have been approximately 38.3% and 38.7%,
respectively, assuming Chad and Winn-Lange were tax paying entities.
Net Income
Net income in fiscal 2000 increased 7% to $65.9 million from $61.4 million in
fiscal 1999. Diluted earnings per share increased 10% to $2.80 in fiscal 2000
compared to $2.55 in fiscal 1999. These results followed fiscal 1999 increases
of 29% and 9% in net income and diluted earnings per share, respectively. Net
income and diluted earnings per share in fiscal 1998 were $47.6 million and
$2.33, respectively.
Liquidity and Capital Resources
Net cash provided by operations was $33.4 million in fiscal 2000 compared to
$31.6 million in fiscal 1999 and net cash used in operations of $4.8 million in
fiscal 1998. In fiscal 2000, net cash provided by operations of $33.4 million
was primarily the result of an increase in accounts payable and accrued
liabilities resulting from the Company's working capital management efforts. Net
cash provided by operations of $31.6 million in fiscal 1999 was primarily the
result of the Company's improved profit levels, partially offset by increases in
accounts receivable and inventories, resulting from higher sales volumes.
The Company's expenditures for property and equipment were $30.7 million in
fiscal 2000 compared to $26.9 million in fiscal 1999. Of these expenditures,
approximately $14 million and $10 million, respectively, were for new warehouse
facilities to support the Company's growth and approximately $5 million and $7
million, respectively, were related to information technology outlays. Capital
expenditures for property and equipment, not including amounts for business
acquisitions, are expected to be approximately $30 million in fiscal 2001.
Proceeds from the sale of property and equipment were $4.9 million for fiscal
2000 compared to $6.6 million and $1.2 million for fiscal 1999 and 1998,
respectively. The increases in fiscal 2000 and fiscal 1999, as compared to
fiscal 1998, were primarily due to the sale and subsequent lease-back of certain
computer hardware which generated proceeds of $2.5 million and $5.4 million,
respectively.
Principal reductions on debt of acquired entities were $14.7 million for fiscal
2000 compared to $24.1 million and $25.2 million for fiscal 1999 and 1998,
respectively. Dividend payments totaled $8.0 million, $8.8 million and $8.1
million during fiscal 2000, 1999 and 1998. This included cash dividends of
pooled companies totaling $1.2 million and $2.8 million in fiscal 1999 and 1998,
respectively.
As discussed in Note 4 of the Notes to Consolidated Financial Statements, in
September 1999 the Company amended its credit agreement. The credit agreement
permits the Company to borrow up to $350 million ($300 million previously). With
the increase in this facility and the additional $50,000 bridge facility
discussed in Note 4, the Company believes it has the resources necessary,
32
with approximately $103 million available under its existing credit facilities
(subject to borrowing limitations under long-term debt covenants) as of January
28, 2000, to fund ongoing operating requirements and anticipated capital
expenditures. The Company also believes it has sufficient borrowing capacity to
take advantage of growth and business acquisition opportunities and to fund
share repurchases 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.
Business Acquisitions
Cash payments for business acquisitions accounted for as purchases totaled $88.9
million for fiscal 2000 compared to $40.4 million and $47.7 million in fiscal
years 1999 and 1998, respectively. These outlays represent seven, eight and ten
wholesale distributors acquired and accounted for as purchases in fiscal 2000,
1999 and 1998, respectively. The increase in cash paid for acquisitions in
fiscal 2000 was the result of all of the Company's fiscal 2000 acquisitions
being financed completely with cash consideration. In fiscal 1999 and 1998, the
Company used $18 million and $96 million of its stock, respectively, as
additional consideration for acquisitions (excluding poolings of interests).
Investment in Affiliated Entities
In fiscal 2000, the Company invested $3.8 million into two e-commerce
initiatives. Under the terms of these agreements, the Company may be required to
fund an additional $6.3 million in fiscal 2001 if certain operating thresholds
are met.
Share Repurchases
On March 15, 1999, the Board of Directors authorized the Company to repurchase
up to 2.5 million of its outstanding shares. Through March 31, 2000, the Company
repurchased 921,100 shares for a total cost of $21.2 million at an average
purchase price of $23.05 per share.
Inflation and Changing Prices
The Company is aware of the potentially unfavorable effects inflationary
pressures may create through higher asset replacement costs and related
depreciation, higher interest rates and higher material costs. In addition, the
Company's operating performance is affected by price fluctuations in stainless
steel, nickel alloys, copper, aluminum, plastic and other commodities. The
Company seeks to minimize the effects of inflation and changing prices through
economies of purchasing and inventory management resulting in cost reductions
and productivity improvements as well as price increases to maintain reasonable
profit margins.
At January 28, 2000, the Company had approximately $307.0 million of outstanding
variable-rate debt. Based upon an assumed 10% increase or decrease in interest
rates from their January 28, 2000 levels, the Company's interest expense would
increase or decrease by approximately $2.0 million. The Company manages its
interest rate risk by maintaining a combination of fixed-rate and variable-rate
debt.
Management believes that inflation (which has been moderate over the past few
years) did not significantly affect the Company's operating results or markets
in fiscal 2000, 1999 or 1998. As discussed above, however, the Company's results
of operations for fiscal 1999 and parts of fiscal 2000 and 1998 were negatively
impacted by declines in the pricing of certain commodity-based products. 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.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), is effective for fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The adoption of this
standard is not expected to have a material impact on the Company's financial
reporting.
Year 2000 Issues
The Company studied the "Year 2000" issues affecting its information technology
systems, its non-information technology systems, and its issues with third-party
companies and other significant suppliers, and implemented a plan to address
them. Year 2000 issues have not had a material adverse effect on the Company's
operations. The cost of addressings its Year 2000 issues was approximately $1.2
million. These costs have not had a material effect on the Company's financial
position or results of operations in any one period in part because they
represent the re-deployment of existing information technology resources, and
because they would have been incurred as part of normal software upgrades and
replacements.
HUGHES SUPPLY, INC. 33
SELECTED FINANCIAL DATA
(in thousands, except per share data and ratios)
Fiscal Years Ended(1)(2)
-----------------------------------------------------
2000 1999 1998 1997
- --------------------------------------------------------------------------------------------
STATEMENTS OF INCOME:
Net sales .......................... $2,994,877 $2,536,265 $1,945,446 $1,619,362
Cost of sales ...................... $2,320,604 $1,977,266 $1,519,323 $1,276,481
Gross margin ....................... 22.5% 22.0% 21.9% 21.2%
- --------------------------------------------------------------------------------------------
Selling, general and
administrative expenses .......... $508,644 $416,642 $318,923 $261,355
As a percentage of net sales .... 17.0% 16.4% 16.4% 16.1%
Depreciation and amortization ...... $29,629 $23,269 $18,727 $15,566
Provision for doubtful accounts .... $3,608 $1,882 $1,229 $1,023
Operating income ................... $132,392 $117,206 $87,244 $64,937
Operating margin ................... 4.4% 4.6% 4.5% 4.0%
- --------------------------------------------------------------------------------------------
Interest and other income .......... $9,015 $6,886 $5,837 $6,241
Interest expense ................... $31,805 $25,415 $19,257 $14,842
- --------------------------------------------------------------------------------------------
Income before income taxes ......... $109,602 $98,677 $73,824 $56,336
As a percentage of net sales .... 3.7% 3.9% 3.8% 3.5%
Income taxes (benefits) ............ $43,731 $37,234 $26,254 $19,282
Net income ......................... $65,871 $61,443 $47,570 $37,054
As a percentage of net sales .... 2.2% 2.4% 2.4% 2.3%
- --------------------------------------------------------------------------------------------
Earnings per share:
Basic ........................... $2.82 $2.57 $2.37 $2.13
Diluted ......................... $2.80 $2.55 $2.33 $2.09
- --------------------------------------------------------------------------------------------
Average shares outstanding:
Basic ........................... 23,398 23,889 20,108 17,384
Diluted ......................... 23,547 24,138 20,432 17,719
BALANCE SHEET:
Working capital .................... $657,500 $567,435 $486,106 $350,975
Total assets ....................... $1,369,014 $1,123,513 $965,742 $684,056
Long-term debt, less current portion $535,000 $402,203 $343,197 $228,351
Shareholders' equity ............... $522,444 $483,956 $421,769 $299,233
- --------------------------------------------------------------------------------------------
Current ratio ...................... 3.2 to 1 3.5 to 1 3.5 to 1 3.3 to 1
Ratio of long-term debt to
total capital employed ........... .51 to 1 .45 to 1 .45 to 1 .43 to 1
Leverage (total assets/
shareholders' equity) ............ 2.62 2.32 2.29 2.29
OTHER:
Cash dividends per share ........... $.34 $.33 $.31 $.25
Shareholders' equity per share ..... $22.16 $20.01 $18.00 $15.29
Return on average assets ........... 5.3% 5.9% 5.8% 6.4%
Return on average
shareholders' equity ............. 13.1% 13.6% 13.2% 15.2%
Capital expenditures(3) ............ $30,740 $26,921 $28,185 $16,898
- --------------------------------------------------------------------------------------------
- --------
(1) The Company's fiscal year ends on the last Friday in January.
(2) All data adjusted for poolings of interests and the three-for-two stock
split declared in fiscal 1998.
(3) Excludes capital leases.
34
Fiscal Years Ended(1)(2)
------------------------------------------------------------------
1996 1995 1994 1993
------------------------------------------------------------------
STATEMENTS OF INCOME:
Net sales .......................... $1,326,978 $1,065,549 $ 880,977 $ 724,466
Cost of sales ...................... $1,052,120 $ 848,698 $ 704,907 $ 583,513
Gross margin ....................... 20.7% 20.4% 20.0% 19.5%
- ---------------------------------------------------------------------------------------------------------
administrative expenses .......... $ 218,093 $ 172,828 $ 145,913 $ 119,732
As a percentage of net sales .... 16.4% 16.2% 16.6% 16.5%
Depreciation and amortization ...... $ 11,859 $ 10,131 $ 8,657 $ 7,382
Provision for doubtful accounts .... $ 2,203 $ 1,501 $ 2,448 $ 2,028
Operating income ................... $ 42,703 $ 32,391 $ 19,052 $ 11,811
Operating margin ................... 3.2% 3.0% 2.2% 1.6%
- ---------------------------------------------------------------------------------------------------------
Interest and other income .......... $ 5,111 $ 3,206 $ 3,677 $ 4,072
Interest expense ................... $ 10,440 $ 6,813 $ 6,456 $ 6,087
- ---------------------------------------------------------------------------------------------------------
Income before income taxes ......... $ 37,374 $ 28,784 $ 16,273 $ 9,796
As a percentage of net sales .... 2.8% 2.7% 1.8% 1.4%
Income taxes (benefits) ............ $ 11,728 $ 7,984 $ 4,710 $ 1,734
Net income ......................... $ 25,646 $ 20,800 $ 11,563 $ 8,062
As a percentage of net sales .... 1.9% 2.0% 1.3% 1.1%
- ---------------------------------------------------------------------------------------------------------
Earnings per share:
Basic ........................... $ 1.78 $ 1.54 $ .97 $ .68
Diluted ......................... $ 1.75 $ 1.50 $ .92 $ .68
- ---------------------------------------------------------------------------------------------------------
Average shares outstanding:
Basic ........................... 14,418 13,504 11,900 11,899
Diluted ......................... 14,647 13,992 13,675 11,917
BALANCE SHEET:
Working capital .................... $ 235,113 $ 212,573 $ 171,702 $ 148,919
Total assets ....................... $ 474,574 $ 418,717 $ 330,526 $ 294,510
Long-term debt, less current portion $ 139,165 $ 127,166 $ 121,292 $ 103,870
Shareholders' equity ............... $ 188,926 $ 165,427 $ 116,918 $ 106,597
- ---------------------------------------------------------------------------------------------------------
Current ratio ...................... 2.6 to 1 2.7 to 1 2.9 to 1 2.8 to 1
Ratio of long-term debt to
total capital employed ........... .42 to 1 .43 to 1 .51 to 1 .49 to 1
Leverage (total assets/
shareholders' equity) ............ 2.51 2.53 2.83 2.76
OTHER:
Cash dividends per share ........... $ .20 $ .15 $ .11 $ .08
Shareholders' equity per share ..... $ 12.64 $ 11.40 $ 9.43 $ 8.71
Return on average assets ........... 5.7% 5.6% 3.7% 2.8%
Return on average
shareholders' equity ............. 14.5% 14.7% 10.3% 7.8%
Capital expenditures(3) ............ $ 14,713 $ 15,824 $ 9,997 $ 10,335
- ---------------------------------------------------------------------------------------------------------
Fiscal Years Ended(1)(2)
------------------------------------------------
1992 1991 1990
------------------------------------------------
STATEMENTS OF INCOME:
Net sales .......................... $ 690,311 $ 752,951 $ 706,860
Cost of sales ...................... $ 557,380 $ 608,322 $ 565,386
Gross margin ....................... 19.3% 19.2% 20.0%
- --------------------------------------------------------------------------------------
administrative expenses .......... $ 116,317 $ 117,649 $ 107,882
As a percentage of net sales .... 16.8% 15.6% 15.3%
Depreciation and amortization ...... $ 7,987 $ 9,929 $ 9,743
Provision for doubtful accounts .... $ 3,247 $ 3,119 $ 2,962
Operating income ................... $ 5,380 $ 13,932 $ 20,887
Operating margin ................... .8% 1.9% 3.0%
- --------------------------------------------------------------------------------------
Interest and other income .......... $ 2,696 $ 4,732 $ 3,348
Interest expense ................... $ 7,702 $ 9,850 $ 8,911
- --------------------------------------------------------------------------------------
Income before income taxes ......... $ 374 $ 8,814 $ 15,324
As a percentage of net sales .... .1% 1.2% 2.2%
Income taxes (benefits) ............ $ (1,359) $ 2,058 $ 4,937
Net income ......................... $ 1,733 $ 6,756 $ 10,387
As a percentage of net sales .... .3% .9% 1.5%
- --------------------------------------------------------------------------------------
Earnings per share:
Basic ........................... $ .15 $ .58 $ .84
Diluted ......................... $ .15 $ .58 $ .81
- --------------------------------------------------------------------------------------
Average shares outstanding:
Basic ........................... 11,899 11,746 12,374
Diluted ......................... 11,899 11,746 14,062
BALANCE SHEET:
Working capital .................... $ 134,961 $ 143,011 $ 140,226
Total assets ....................... $ 276,439 $ 273,216 $ 285,434
Long-term debt, less current portion $ 89,921 $ 99,261 $ 94,409
Shareholders' equity ............... $ 99,649 $ 102,094 $ 107,113
- --------------------------------------------------------------------------------------
Current ratio ...................... 2.6 to 1 3.0 to 1 2.7 to 1
Ratio of long-term debt to
total capital employed ........... .47 to 1 .49 to 1 .47 to 1
Leverage (total assets/
shareholders' equity) ............ 2.77 2.68 2.66
OTHER:
Cash dividends per share ........... $ .16 $ .24 $ .23
Shareholders' equity per share ..... $ 8.14 $ 8.64 $ 8.54
Return on average assets ........... .6% 2.4% 3.8%
Return on average
shareholders' equity ............. 1.7% 6.5% 9.9%
Capital expenditures(3) ............ $ 6,073 $ 8,877 $ 11,844
- --------------------------------------------------------------------------------------
HUGHES SUPPLY, INC. 35
CORPORATE AND SHAREHOLDER INFORMATION
DIRECTORS EXECUTIVE OFFICERS Thomas M. Ward II
David H. Hughes AND MANAGEMENT Vice President and Chief Technology Officer
Chairman of the Board
David H. Hughes Gradie E. Winstead, Jr.
John D. Baker II Chairman of the Board and Group President
President and Chief Executive Officer Chief Executive Officer
Florida Rock Industries, Inc.
A. Stewart Hall, Jr. J. Stephen Zepf
Robert N. Blackford President and Chief Operating Officer Treasurer and Chief Financial Officer
Attorney, Holland & Knight LLP
Benjamin P. Butterfield
H. Corbin Day Secretary and General Counsel TRANSFER AGENT
Chairman, Jemison Investment Co., Inc. AND REGISTRAR
Jack R. Clark
A. Stewart Hall, Jr. Vice President of Credit American Stock Transfer
& Trust Company
Vincent S. Hughes Jacquel K. Clark 40 Wall Street
Assistant Secretary and New York, New York 10005
William P. Kennedy Assistant Treasurer
Chief Executive Officer ANNUAL MEETING
Nephron Pharmaceuticals Corporation Jasper L. Holland, Jr.
Group President Tuesday, May 16, 2000,
at 10:00 a.m., local time
Clyde E. Hughes III Hughes Supply, Inc.
Group President 20 North Orange Avenue
Suite 200
Vincent S. Hughes Orlando, Florida 32801
Vice President
INDEPENDENT ACCOUNTANTS
Robert A. Machaby
Group President PricewaterhouseCoopers LLP
Orlando, Florida
James C. Plyler, Jr.
Vice President and Regional Manager CORPORATE HEADQUARTERS
Kenneth H. Stephens Hughes Supply, Inc.
Vice President and Regional Manager 20 North Orange Avenue
Orlando, Florida 32801
Michael L. Stanwood Telephone: 407-841-4755
Group President
Sidney J. Strickland, Jr.
Vice President of Administration
The shares of Hughes Supply, Inc. common stock are traded on the New York Stock
Exchange under the symbol "HUG." The approximate number of shareholders of
record as of March 24, 2000 was 1,188. A COPY OF THE HUGHES SUPPLY, INC. ANNUAL
REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE
MADE AVAILABLE WITHOUT CHARGE, UPON WRITTEN REQUEST. REQUESTS SHOULD BE DIRECTED
TO:
J. Stephen Zepf
Treasurer and Chief Financial Officer
Hughes Supply, Inc.
Post Office Box 2273
Orlando, Florida 32802