Financial Review
Selected Financial Data ................................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................. 20
Consolidated Statements of Income ......................................... 26
Consolidated Balance Sheets ............................................... 27
Consolidated Statements of Shareholders' Equity ........................... 28
Consolidated Statements of Cash Flows ..................................... 29
Notes to Consolidated Financial Statements ................................ 30
Report of Independent
Certified Public Accountants .............................................. 40
Management's Responsibility for
Financial Statements ...................................................... 40
17
Hughes Supply, Inc.
SELECTED FINANCIAL DATA
(in thousands, except per share data and ratios)
Fiscal Years Ended(1)(2)
-------------------------------------------------------------
2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME:
Net sales ............................ $3,310,163 $2,994,877 $2,536,265 $1,945,446
Cost of sales ........................ $2,566,706 $2,320,604 $1,977,266 $1,519,323
Gross margin ......................... 22.5% 22.5% 22.0% 21.9%
- ---------------------------------------------------------------------------------------------------------
Selling, general and administrative
expenses .......................... $ 579,826 $ 508,644 $ 416,642 $ 318,923
Percentage of net sales ............ 17.5% 17.0% 16.4% 16.4%
Depreciation and amortization ........ $ 32,312 $ 29,629 $ 23,269 $ 18,727
Provision for doubtful accounts ...... $ 10,273 $ 3,608 $ 1,882 $ 1,229
Operating income(3) .................. $ 105,489 $ 132,392 $ 117,206 $ 87,244
Operating margin ..................... 3.2% 4.4% 4.6% 4.5%
- ---------------------------------------------------------------------------------------------------------
Interest and other income(4) ......... $ 18,476 $ 9,015 $ 6,886 $ 5,837
Interest expense ..................... $ 43,288 $ 31,805 $ 25,415 $ 19,257
- ---------------------------------------------------------------------------------------------------------
Income before income taxes ........... $ 80,677 $ 109,602 $ 98,677 $ 73,824
Percentage of net sales ............ 2.4% 3.7% 3.9% 3.8%
Income taxes (benefits) .............. $ 34,162 $ 43,731 $ 37,234 $ 26,254
Net income ........................... $ 46,515 $ 65,871 $ 61,443 $ 47,570
Percentage of net sales ............ 1.4% 2.2% 2.4% 2.4%
- ---------------------------------------------------------------------------------------------------------
Earnings per share:
Basic .............................. $ 2.00 $ 2.82 $ 2.57 $ 2.37
Diluted ............................ $ 1.97 $ 2.80 $ 2.55 $ 2.33
- ---------------------------------------------------------------------------------------------------------
Average shares outstanding:
Basic .............................. 23,238 23,398 23,889 20,108
Diluted ............................ 23,584 23,547 24,138 20,432
- ---------------------------------------------------------------------------------------------------------
BALANCE SHEETS:
Working capital ...................... $ 679,130 $ 657,500 $ 567,435 $ 486,106
Total assets ......................... $1,400,277 $1,369,014 $1,123,513 $ 965,742
Long-term debt ....................... $ 516,168 $ 535,000 $ 402,203 $ 343,197
Shareholders' equity ................. $ 570,035 $ 522,444 $ 483,956 $ 421,769
- ---------------------------------------------------------------------------------------------------------
Current ratio ........................ 3.3 to 1 3.2 to 1 3.5 to 1 3.5 to 1
Long-term debt-to-capital ............ .48 to 1 .51 to 1 .45 to 1 .45 to 1
Leverage (total assets/shareholders'
equity) ............................ 2.46 2.62 2.32 2.29
- ---------------------------------------------------------------------------------------------------------
OTHER:
Cash dividends per share ............. $ .34 $ .34 $ .33 $ .31
Shareholders' equity per share ....... $ 24.12 $ 22.16 $ 20.01 $ 18.00
Return on average assets ............. 3.4% 5.3% 5.9% 5.8%
Return on average shareholders' equity 8.5% 13.1% 13.6% 13.2%
Capital expenditures ................. $ 23,871 $ 30,740 $ 26,921 $ 28,185
=========================================================================================================
(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) Fiscal 2001 includes the charge of $15,557 for the impairment of long-lived
assets.
(4) Fiscal 2001 includes the gain of $11,000 for the sale of the Company's pool
and spa business.
18
Fiscal Years Ended(1)(2)
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME:
Net sales .............................. $1,619,362 $1,326,978 $1,065,549 $880,977 $724,466 $ 690,311 $752,951
Cost of sales .......................... $1,276,481 $1,052,120 $ 848,698 $704,907 $583,513 $ 557,380 $608,322
Gross margin ........................... 21.2% 20.7% 20.4% 20.0% 19.5% 19.3% 19.2%
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative
expenses .......................... $ 261,355 $ 218,093 $ 172,828 $145,913 $119,732 $ 116,317 $117,649
Percentage of net sales .............. 16.1% 16.4% 16.2% 16.6% 16.5% 16.8% 15.6%
Depreciation and amortization .......... $ 15,566 $ 11,859 $ 10,131 $ 8,657 $ 7,382 $ 7,987 $ 9,929
Provision for doubtful accounts ........ $ 1,023 $ 2,203 $ 1,501 $ 2,448 $ 2,028 $ 3,247 $ 3,119
Operating income(3) .................... $ 64,937 $ 42,703 $ 32,391 $ 19,052 $ 11,811 $ 5,380 $ 13,932
Operating margin ....................... 4.0% 3.2% 3.0% 2.2% 1.6% .8% 1.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Interest and other income(4) ........... $ 6,241 $ 5,111 $ 3,206 $ 3,677 $ 4,072 $ 2,696 $ 4,732
Interest expense ....................... $ 14,842 $ 10,440 $ 6,813 $ 6,456 $ 6,087 $ 7,702 $ 9,850
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ............. $ 56,336 $ 37,374 $ 28,784 $ 16,273 $ 9,796 $ 374 $ 8,814
Percentage of net sales .............. 3.5% 2.8% 2.7% 1.8% 1.4% .1% 1.2%
Income taxes (benefits) ................ $ 19,282 $ 11,728 $ 7,984 $ 4,710 $ 1,734 $ (1,359) $ 2,058
Net income ............................. $ 37,054 $ 25,646 $ 20,800 $ 11,563 $ 8,062 $ 1,733 $ 6,756
Percentage of net sales .............. 2.3% 1.9% 2.0% 1.3% 1.1% .3% .9%
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic ................................ $ 2.13 $ 1.78 $ 1.54 $ .97 $ .68 $ .15 $ .58
Diluted .............................. $ 2.09 $ 1.75 $ 1.50 $ .92 $ .68 $ .15 $ .58
- -----------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding:
Basic ................................ 17,384 14,418 13,504 11,900 11,899 11,899 11,746
Diluted .............................. 17,719 14,647 13,992 13,675 11,917 11,899 11,746
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS:
Working capital ........................ $ 350,975 $ 235,113 $ 212,573 $171,702 $148,919 $ 134,961 $143,011
Total assets ........................... $ 684,056 $ 474,574 $ 418,717 $330,526 $294,510 $ 276,439 $273,216
Long-term debt ......................... $ 228,351 $ 139,165 $ 127,166 $121,292 $103,870 $ 89,921 $ 99,261
Shareholders' equity ................... $ 299,233 $ 188,926 $ 165,427 $116,918 $106,597 $ 99,649 $102,094
- -----------------------------------------------------------------------------------------------------------------------------------
Current ratio .......................... 3.3 to 1 2.6 to 1 2.7 to 1 2.9 to 1 2.8 to 1 2.6 to 1 3.0 to 1
Long-term debt-to-capital .............. .43 to 1 .42 to 1 .43 to 1 .51 to 1 .49 to 1 .47 to 1 .49 to 1
Leverage (total assets/shareholders'
equity) .............................. 2.29 2.51 2.53 2.83 2.76 2.77 2.68
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER:
Cash dividends per share ............... $ .25 $ .20 $ .15 $ .11 $ .08 $ .16 $ .24
Shareholders' equity per share ......... $ 15.29 $ 12.64 $ 11.40 $ 9.43 $ 8.71 $ 8.14 $ 8.64
Return on average assets ............... 6.4% 5.7% 5.6% 3.7% 2.8% .6% 2.4%
Return on average shareholders'
equity ............................... 15.2% 14.5% 14.7% 10.3% 7.8% 1.7% 6.5%
Capital expenditures ................... $ 16,898 $ 14,713 $ 15,824 $ 9,997 $ 10,335 $ 6,073 $ 8,877
===================================================================================================================================
19
Hughes Supply, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of certain significant factors which
have affected the financial condition of Hughes Supply, Inc. and its
subsidiaries (the "Company") as of January 26, 2001, and the results of
operations for fiscal 2001 compared with fiscal 2000, and of fiscal 2000
compared with fiscal 1999. This information should be read in conjunction with
the Company's consolidated financial information provided on pages 26 to 39 of
this Annual Report.
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 that could cause results to differ materially from those
projected in the forward-looking statements are enumerated.
Overview
The Company is a diversified wholesale distributor of construction and
industrial materials, equipment, and supplies to commercial construction,
residential construction, industrial, and public infrastructure markets in North
America. Operating in 34 states and Mexico, the Company distributes over 240,000
products through its 442 wholesale branches.
Effective February 1, 2000, the Company's operations were reorganized into
strategic business units ("SBUs"), which are built around five broad product
categories. These SBUs represent the Company's reportable segments and include
Electrical & Electric Utility; Plumbing & HVAC; Industrial Pipe, Valves &
Fittings ("Industrial PVF"); Building Materials/Pool & Spa/Maintenance Supplies;
and Water & Sewer. This is the basis management uses for making operating
decisions and assessing performance.
In fiscal 2001, the Company experienced continued operating losses in its
e-commerce ventures and international operations. As a result of these losses
and based on an analysis of future profitability and anticipated customer demand
for these operations, the Company recorded an impairment charge totaling $15.6
million relating to the write-down of long-lived assets. This charge included
the write-off of goodwill and other assets totaling $12.9 million related to the
Company's e-commerce investments, including bestroute.com ("bestroute") and
supplyFORCE.com, and a charge totaling $2.7 million primarily related to the
write-off of goodwill in the Company's international operations.
In January 2001, the Company completed the sale of the assets of its pool and
spa business for $48.0 million. The Company received cash proceeds of $23.0
million with the remaining $25.0 million of the consideration in the form of a
short-term note receivable. The Company recorded a pre-tax gain of $11.0 million
and an after-tax gain of $6.7 million or $.28 per share on a diluted basis.
Material Changes in Results of Operations
Net Sales
In fiscal 2001, the Company generated consolidated net sales of $3.3 billion, an
11% increase over fiscal 2000 net sales of $3.0 billion. Approximately $156.6
million of the increase was attributable to same-store sales growth with the
remainder of the increase attributable to acquired and newly-opened wholesale
branches. Same-store sales increased 5% in fiscal 2001 and 7% in fiscal 2000.
The 5% same-store sales increase was primarily attributable to increased
infrastructure spending by municipalities in the Water & Sewer SBU; favorable
commodity pricing in stainless steel and nickel alloy products; and increased
market penetration in the Building Materials/ Pool & Spa/Maintenance Supplies
SBU. The drop in same-store sales growth from 7% in fiscal 2000 to 5% in fiscal
2001 was primarily due to the impact of lower commodity prices on plumbing
products, aggressive price competition in some of the Company's major markets
and inclement weather, particularly in the fourth quarter of fiscal 2001.
Fiscal 2000 net sales increased $458.6 million or 18% over fiscal 1999 net sales
of $2.5 billion. Approximately $162.8 million of the increase was attributable
to same-store sales growth with the remainder of the increase attributable to
acquired and newly-opened wholesale branches. On a basis comparable to the prior
year, same-store sales increased 6% in fiscal 1999 and 7% in fiscal 2000. The 7%
same-store sales increase in fiscal 2000 was attributable to continued overall
strength of the construction market, increases in pool and spa product sales due
to increased market penetration, and growth in electric utility product sales
due to the anticipated deregulation within their industry.
20
Net sales by SBU for fiscal 2001, 2000 and 1999 are presented below (dollars in
thousands):
Building
Materials/
Electrical & Pool & Spa/ Corporate/
Electric Plumbing Industrial Maintenance Water & Eliminations
Utility & HVAC PVF Supplies Sewer & Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
2001 ................ $606,268 $1,007,318 $315,315 $448,363 $932,870 $29 $3,310,163
2000 ................ 576,739 956,553 299,590 424,138 737,857 -- 2,994,877
1999 ................ 519,408 857,385 291,870 325,136 542,466 -- 2,536,265
====================================================================================================================================
Electrical & Electric Utility
In fiscal 2001, net sales were $606.3 million, a $29.6 million or 5% increase
from fiscal 2000 net sales of $576.7 million. Fiscal 2000 net sales increased
$57.3 million or 11% over fiscal 1999 net sales. The net sales increases for
both years were primarily attributable to newly acquired or opened branches and
a same-store sales increase of $22.1 million or 4% in fiscal 2001 and $35.5
million or 8% in fiscal 2000. The 4% same-store sales increase in fiscal 2001
was primarily due to an increase in commercial construction activity. The 8%
same-store sales increase in fiscal 2000 was due to growth in electric utility
product sales resulting from increased spending by utility companies due to the
anticipated deregulation within their industry.
Plumbing & HVAC
In fiscal 2001, net sales were $1.0 billion, a $50.8 million or 5% increase from
fiscal 2000 net sales of $956.6 million. Fiscal 2000 net sales increased $99.2
million or 12% over fiscal 1999 net sales. The net sales increases for both
years were primarily attributable to newly acquired or opened branches and a
same-store sales increase of $36.7 million or 4% in fiscal 2001 and $19.2
million or 2% in fiscal 2000. The growth in same-store sales in both years was
below Company averages as a result of aggressive price competition in certain
geographic areas as well as lower commodity prices on certain products.
Industrial PVF
In fiscal 2001, net sales were $315.3 million, a $15.7 million or 5% increase
from fiscal 2000 net sales of $299.6 million. Fiscal 2000 net sales increased
$7.7 million or 3% over fiscal 1999 net sales. The same-store sales increase of
5% in fiscal 2001 was the result of commodity price increases in stainless steel
and nickel alloy products.
Building Materials/Pool & Spa/Maintenance Supplies
In fiscal 2001, net sales were $448.4 million, a $24.3 million or 6% increase
from fiscal 2000 net sales of $424.1 million. Fiscal 2000 net sales increased
$99.0 million or 30% over fiscal 1999 net sales. The net sales increase for both
years was primarily attributable to newly acquired or opened branches and a
same-store sales increase of $12.7 million or 3% in fiscal 2001 and $47.2
million or 15% in fiscal 2000. The 3% same-store sales increase in fiscal 2001
was primarily due to improved market penetration in pool and spa products,
demand for construction rental materials, and expansion of appliance product
lines in the maintenance supply branches. The 15% same-store sales increase in
fiscal 2000 was due to growth in pool and spa product sales due to increased
market penetration.
Water & Sewer
In fiscal 2001, net sales were $932.9 million, a $195.0 million or 26% increase
from fiscal 2000 net sales of $737.9 million. Fiscal 2000 net sales increased
$195.4 million or 36% over fiscal 1999 net sales. The net sales increases for
both years were primarily attributable to newly acquired or opened branches and
a same-store sales increase of $69.5 million or 10% in fiscal 2001 and $54.6
million or 10% in fiscal 2000. These same-store sales increases were primarily
due to improved market penetration, increased spending on infrastructure
projects by municipalities, and a general increase in overall activity through
all water and sewer markets.
21
Hughes Supply, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Gross Profit and Gross Margin
Gross margins were 22.5% in both fiscal 2001 and 2000 compared to 22.0% in
fiscal 1999. The improvement in gross margin from fiscal 1999 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.The favorable impact of
stainless steel and nickel alloy commodity price increases in fiscal 2001 were
offset by competitive market pressures in certain other product groups. This
resulted in fiscal 2001 gross margin being at the same level as fiscal 2000.
Gross profit and gross margin by SBU in fiscal 2001, 2000 and 1999 were as
follows (dollars in thousands):
Gross Profit Gross Margin
-------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Electrical & Electric Utility ............................... $ 117,263 $105,492 $ 93,658 19.3% 18.3% 18.0%
Plumbing & HVAC ............................................. 226,736 233,449 204,056 22.5% 24.4% 23.8%
Industrial PVF .............................................. 82,463 69,668 68,258 26.2% 23.3% 23.4%
Building Materials/Pool & Spa/Maintenance Supplies .......... 127,538 111,544 83,316 28.4% 26.3% 25.6%
Water & Sewer ............................................... 190,384 154,120 109,711 20.4% 20.9% 20.2%
Corporate/Eliminations & Other .............................. (927) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total ....................................................... $ 743,457 $674,273 $558,999 22.5% 22.5% 22.0%
===================================================================================================================================
Electrical & Electric Utility
Gross margin increased approximately 100 and 30 basis points in fiscal 2001 and
2000, respectively. The primary cause of the increased margins was a shift in
sales mix to higher margin products, with the remainder being attributable to
enhanced purchasing power. This enhanced purchasing power was due to increased
volume and concentration of supply sources as part of the Company's preferred
vendor program.
Plumbing & HVAC
Gross margin decreased approximately 190 basis points in fiscal 2001 as a result
of the impact of lower commodity prices on plumbing products. There was also an
erosion of margins as the Company sought to protect market share in certain
geographic areas from aggressive price competition. Fiscal 2000 margins
increased from 23.8% to 24.4% or approximately 60 basis points as a result of an
overall expansion of higher gross margin products, efficiencies created with
central distribution centers and enhanced purchasing power.
Industrial PVF
In fiscal 2001, gross profit increased $12.8 million and gross margin increased
approximately 290 basis points. Gross profit and gross margin within this SBU
are closely tied to the pricing of certain commodity based products, primarily
stainless steel and nickel alloys. The continued increases in the price of these
commodity items improved the Company's gross margin for these products in the
first half of fiscal 2001. Prices for these products started to decline in the
second half of the year, thereby causing a reduction in gross margins in the
third and fourth quarter of fiscal 2001. The Company anticipates commodity
prices, and therefore gross margins within this segment, to continue decreasing
during fiscal year 2002.
Building Materials/Pool & Spa/Maintenance Supplies
Gross margin increased approximately 210 and 70 basis points in fiscal 2001 and
2000, respectively. The increases were primarily due to a shift in sales mix
resulting from equipment rentals and increased emphasis on the replacement
market which tends to yield higher gross margins. The remainder of the increase
was largely due to improved purchasing power.
Water & Sewer
Gross margin decreased approximately 50 basis points in fiscal 2001. This
decrease was principally attributable to a general increase in large direct
shipment orders which generate lower gross margins. The increase of 70 basis
points in fiscal 2000 was primarily due to the Company's acquisition program and
enhanced purchasing power.
Operating Expenses
Operating expenses in fiscal 2001 were $638.0 million (19% of net sales), an 18%
increase over fiscal 2000 operating expenses of $541.9 million (18% of net
sales). Included in operating expenses in fiscal 2001 is the $15.6 million
charge related to the impairment of certain
22
long-lived assets as set forth in the overview. Additionally, operating expenses
were impacted by a higher than anticipated provision for doubtful accounts which
traditionally increases during economic slowdowns. The remaining increase was
primarily due to higher personnel costs associated with same-store sales growth,
increased transportation costs brought about by same-store sales growth,
increased fuel costs, and increased information technology ("IT") spending as
the Company continues 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 $100.1 million increase in fiscal 2000 compared to fiscal 1999,
which had operating expenses of $441.8 million (17% of net sales), was primarily
attributable to newly opened or acquired branches. The remainder of the increase
was primarily due to higher personnel and transportation costs associated with
same-store sales growth, and expenses related to the Company's IT initiatives.
Non-Operating Income (Expenses)
Interest and other income was $7.5 million, $9.0 million, and $6.9 million in
fiscal 2001, 2000 and 1999, respectively. The $1.5 million decrease in fiscal
2001 was primarily due to losses totaling $4.4 million from the Company's equity
investment in bestroute, partially offset by increased income from the Company's
other equity investments and the collection of service charge income on
delinquent accounts receivable. The $2.1 million increase in fiscal 2000 was
primarily attributable to increased service charge income.
Interest expense in fiscal 2001, 2000 and 1999 was $43.3 million, $31.8 million
and $25.4 million, respectively. The increases were primarily the result of
higher borrowing levels, coupled with increased interest rates. The higher
borrowing levels were primarily due to the Company's (i) higher working capital
investments resulting from accelerated sales growth, (ii) expansion through
business acquisitions, which has been partially funded by debt financing, and
(iii) share repurchases.
Non-operating income (expenses) in fiscal 2001 includes an $11.0 million pre-tax
gain relating to the sale of the Company's pool and spa business as set forth in
the overview.
Income Taxes
The effective tax rates in fiscal 2001, 2000 and 1999 were 42.3%, 39.9% and
37.7%, respectively. The increases in the effective tax rates were due to
increases in non-deductible goodwill and other non-deductible costs. Prior to
the merger with Winn-Lange Electric, Inc. ("Winn-Lange") on June 30, 1998, this
entity was a Subchapter S corporation and, therefore, not subject to corporate
income tax. Winn-Lange's Subchapter S corporation status terminated upon the
merger with the Company. The Company's effective tax rate for fiscal 1999 would
have been approximately 38.3%, assuming Winn-Lange was a tax paying entity.
Net Income
Net income in fiscal 2001 decreased to $46.5 million from $65.9 million in
fiscal 2000. Diluted earnings per share decreased to $1.97 in fiscal 2001
compared to $2.80 in fiscal 2000. Net income and diluted earnings per share in
fiscal 1999 were $61.4 million and $2.55, respectively. The factors impacting
net income and diluted earnings per share have been enumerated above.
Financial Condition
Liquidity and Capital Resources
Working capital increased to $679.1 million as of January 26, 2001, compared
with $657.5 million as of January 28, 2000 and $567.4 million as of January 29,
1999. The current ratio was 3.3 to 1 as of January 26, 2001, 3.2 to 1 as of
January 28, 2000 and 3.5 to 1 as of January 29, 1999. The fiscal 2001 increase
in working capital was principally driven by higher cash levels and higher
accounts and other receivables, which were partially offset by reduced
inventories. Cash on hand increased primarily as a result of the sale of the
Company's pool and spa business in January 2001, which generated cash proceeds
of approximately $23.0 million. Additionally, in connection with this sale, the
Company received a short-term note receivable totaling $25.0 million. The higher
level of accounts receivable reflects sales increases over prior year end and
slower collection activity resulting from the economic slowdown which started in
the second half of fiscal 2001. During fiscal 2001, the Company reduced
inventory levels to be more in line with current market demand.
23
Hughes Supply, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The fiscal 2000 increase in working capital was also attributable to increased
accounts receivable as a result of increased sales volume and higher inventory
levels, partially offset by increases in accounts payable and accrued
liabilities.
Net cash provided by operations was $66.1 million, $33.4 million and $31.6
million in fiscal 2001, 2000 and 1999, respectively. In fiscal 2001, net cash
provided by operations of $66.1 million was primarily the result of the
Company's reduced inventory levels and increases in accrued liabilities,
partially offset by increases in accounts receivable, resulting from higher
sales volumes. Net cash provided by operations of $33.4 million in fiscal 2000
was primarily the result of an increase in accounts payable and accrued
liabilities resulting from the Company's working capital management efforts.
Investing Activities
Capital expenditures were $23.9 million, $30.7 million and $26.9 million in
fiscal 2001, 2000 and 1999, respectively. Of these expenditures, approximately
$8.3 million, $14.0 million and $10.0 million, respectively, were for new
warehouse facilities to support the Company's growth and approximately $3.2
million, $5.0 million and $7.0 million, respectively, were related to IT
outlays. Capital expenditures, excluding amounts for business acquisitions, are
expected to be approximately $20.0 million in fiscal 2002.
Proceeds from the sale of property and equipment were $1.8 million, $4.9 million
and $6.6 million in fiscal 2001, 2000 and 1999, respectively. The decreases in
both years were attributable to the sale and subsequent lease-back of certain
computer hardware, which generated proceeds of approximately $2.5 million in
fiscal 2000 and $5.4 million in fiscal 1999.
Cash payments for business acquisitions totaled $34.1 million, $88.9 million and
$40.4 million in fiscal years 2001, 2000 and 1999, respectively. These outlays
represent three, seven and eight wholesale distributors acquired and accounted
for using the purchase method of accounting in fiscal 2001, 2000 and 1999,
respectively. The increase in cash paid for acquisitions in fiscal 2000 as
compared to fiscal 1999 was the result of all of the Company's fiscal 2000
acquisitions being financed completely with cash consideration. In fiscal 1999,
the Company used $18.0 million of its common stock as additional consideration
for acquisitions.
In fiscal 2001 and 2000, the Company invested $6.3 million and $3.8 million,
respectively, into two e-commerce ventures, including bestroute.
Financing Activities
Principal reductions on long-term debt were $2.5 million, $14.7 million and
$24.1 million in fiscal 2001, 2000 and 1999, respectively. These amounts were
primarily attributable to the repayment of debt assumed as a result of certain
business acquisitions. Dividend payments totaled $8.1 million, $8.0 million and
$8.8 million during fiscal 2001, 2000 and 1999, respectively. In fiscal 1999,
these payments included cash dividends of pooled companies totaling $1.2
million.
On December 13, 2000, the Company executed an amendment to its $75.0 million
line of credit agreement, which extended the maturity date from January 19, 2001
to July 17, 2001.There were no amounts outstanding under this agreement at
January 26, 2001 and January 28, 2000.
On December 21, 2000, the Company issued $150.0 million of senior notes in a
private placement. Of the total $150.0 million of senior notes, $103.0 million
bear interest at 8.42% and are payable in five annual principal payments
beginning November 30, 2003. The remaining $19.0 million and $28.0 million of
senior notes bear interest at 8.27% and are payable in one annual principal
payment on November 30, 2003 and five annual principal payments beginning
November 30, 2001, respectively. Proceeds from the sale of the senior notes were
used to reduce indebtedness under the Company's revolving line of credit
agreement.
As of January 26, 2001, the Company had approximately $22.4 million of cash and
$221.9 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
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 the issuance of common stock.
On March 15, 1999, the Board of Directors authorized the Company to repurchase
up to 2.5 million of its outstanding shares. During fiscal 2000 the Company
repurchased 921,100 shares for a total cost of $21.2 million at an average
purchase price of $23.05. No shares were repurchased in fiscal 2001.
24
Quantitative and Qualitative Disclosure About Market Risk
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 alloy, copper, aluminum, plastic, lumber 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 26, 2001, the Company had approximately $153.1 million of outstanding
variable-rate debt. Based upon an assumed 10% increase or decrease in interest
rates from their January 26, 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.
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 2001, 2000 or 1999. As discussed above, however, the Company's results
of operations in fiscal 2001 were both favorably and negatively impacted by
increases and decreases in the pricing of certain commodity-based products.
Fiscal 2000 and 1999 were negatively impacted by declines in prices of such
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 ("FAS 133"), was issued in June 1998 and is
effective for the Company beginning January 27, 2001. FAS 133 was amended in
June 2000 by Statement of Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Hedging Activities ("FAS 138"). Both FAS 133
and FAS 138 require that an entity measure all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The adoption of these standards did not have a material impact on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), which provided guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 was effective for the
Company beginning in the fourth quarter of fiscal 2001. The Company is in
compliance with the provisions of SAB 101, and adoption of its provisions did
not have an impact on the consolidated financial statements.
In September 2000, the Emerging Issues Task Force issued EITF 00-10, Accounting
for Shipping and Handling Fees and Costs ("EITF 00-10"). EITF 00-10 requires
shipping and handling fees billed to customers to be classified as revenue and
shipping and handling costs to be either classified as cost of sales or
disclosed in the notes to the consolidated financial statements. The Company
includes shipping and handling fees billed to customers in net sales. The
Company adopted EITF 00-10 in the fourth quarter of fiscal 2001 and has properly
disclosed in the notes to the consolidated financial statements the shipping and
handling costs which are included in selling, general and administrative
expenses.
25
Hughes Supply, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Fiscal Years Ended
-----------------------------------------------
January 26, January 28, January 29,
2001 2000 1999
- --------------------------------------------------------------------------------------------
Net Sales ............................. $ 3,310,163 $ 2,994,877 $ 2,536,265
Cost of Sales ......................... 2,566,706 2,320,604 1,977,266
- --------------------------------------------------------------------------------------------
Gross Profit .......................... 743,457 674,273 558,999
Operating Expenses:
Selling, general and administrative . 579,826 508,644 416,642
Depreciation and amortization ....... 32,312 29,629 23,269
Provision for doubtful accounts ..... 10,273 3,608 1,882
Impairment of long-lived assets ..... 15,557 -- --
- --------------------------------------------------------------------------------------------
Total operating expenses .......... 637,968 541,881 441,793
Operating Income ...................... 105,489 132,392 117,206
Non-Operating Income (Expenses):
Gain on sale of pool and spa business 11,000 -- --
Interest and other income ........... 7,476 9,015 6,886
Interest expense .................... (43,288) (31,805) (25,415)
- --------------------------------------------------------------------------------------------
(24,812) (22,790) (18,529)
- --------------------------------------------------------------------------------------------
Income Before Income Taxes ............ 80,677 109,602 98,677
Income Taxes .......................... 34,162 43,731 37,234
- --------------------------------------------------------------------------------------------
Net Income ............................ $ 46,515 $ 65,871 $ 61,443
============================================================================================
Earnings Per Share:
Basic ............................... $ 2.00 $ 2.82 $ 2.57
============================================================================================
Diluted ............................. $ 1.97 $ 2.80 $ 2.55
============================================================================================
Average Shares Outstanding:
Basic ............................... 23,238 23,398 23,889
============================================================================================
Diluted ............................. 23,584 23,547 24,138
============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
26
Hughes Supply, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
January 26, January 28,
2001 2000
- ------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents ....................................... $ 22,449 $ 10,000
Accounts receivable, less allowance for doubtful accounts
of $6,106 and $2,777 .......................................... 431,998 398,244
Inventories ..................................................... 441,789 495,491
Deferred income taxes ........................................... 18,524 10,081
Other current assets ............................................ 66,131 43,962
- ------------------------------------------------------------------------------------------------------
Total current assets .......................................... 980,891 957,778
Property and Equipment, Net ....................................... 152,079 144,945
Excess of Cost Over Net Assets Acquired ........................... 249,826 243,367
Other Assets ...................................................... 17,481 22,924
- ------------------------------------------------------------------------------------------------------
$ 1,400,277 $ 1,369,014
======================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt ............................... $ 15,274 $ 803
Accounts payable ................................................ 215,353 239,810
Accrued compensation and benefits ............................... 32,762 29,590
Other current liabilities ....................................... 38,372 30,075
- ------------------------------------------------------------------------------------------------------
Total current liabilities ..................................... 301,761 300,278
Long-Term Debt .................................................... 516,168 535,000
Deferred Income Taxes ............................................. 6,704 6,027
Other Noncurrent Liabilities ...................................... 5,609 5,265
- ------------------------------------------------------------------------------------------------------
Total liabilities ............................................. 830,242 846,570
- ------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
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; 24,211,485 and 24,249,281 shares issued ........... 24,211 24,249
Capital in excess of par value .................................. 228,103 221,284
Retained earnings ............................................... 337,149 300,144
Treasury stock, 576,783 and 668,950 shares, at cost ............. (13,307) (15,434)
Unearned compensation related to outstanding restricted stock ... (6,121) (7,799)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity .................................... 570,035 522,444
$ 1,400,277 $ 1,369,014
======================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
27
Hughes Supply, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share data)
Common Capital in Unearned
Shares Common Excess of Retained Treasury Compen-
Outstanding Stock Par Value Earnings Stock sation Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1998 ............... 23,437,039 $ 23,437 $ 202,210 $ 197,364 $ -- $(1,242) $ 421,769
Net income .............................. -- -- -- 61,443 -- -- 61,443
Cash dividends--$.33 per share .......... -- -- -- (7,866) -- -- (7,866)
Pooled companies ...................... -- -- -- (1,222) -- -- (1,222)
Shares issued under stock option
and bonus plans ....................... 107,980 108 1,282 -- -- -- 1,390
Purchase and retirement of
common shares ......................... (19,439) (19) (193) (389) -- -- (601)
Issuance of restricted stock ............ 52,500 52 1,615 -- -- (1,667) --
Amortization of unearned
restricted stock ...................... -- -- -- -- -- 393 393
Capitalization of undistributed earnings
of Subchapter S corporation ........... -- -- 7,697 (7,697) -- -- --
Other acquisitions ...................... 605,754 606 6,947 1,097 -- -- 8,650
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 1999 ............... 24,183,834 $ 24,184 $ 219,558 $ 242,730 $ -- $(2,516) $ 483,956
Net income .............................. -- -- -- 65,871 -- -- 65,871
Cash dividends--$.34 per share .......... -- -- -- (7,990) -- -- (7,990)
Purchase of treasury stock .............. (921,100) -- -- -- (21,229) -- (21,229)
Shares issued under stock option
and bonus plans ....................... 64,700 29 472 (378) 811 -- 934
Purchase and retirement
of common shares ...................... (6,624) (7) (57) (89) -- -- (153)
Issuance of restricted stock,
net of cancellations .................. 259,521 43 1,311 -- 4,984 (6,338) --
Amortization of unearned
restricted stock ...................... -- -- -- -- -- 1,055 1,055
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 28, 2000 ............... 23,580,331 $ 24,249 $ 221,284 $ 300,144 $(15,434) $(7,799) $ 522,444
Net income .............................. -- -- -- 46,515 -- -- 46,515
Cash dividends--$.34 per share .......... -- -- -- (8,088) -- -- (8,088)
Shares issued under stock option
and bonus plans ....................... 92,167 -- -- (425) 2,127 -- 1,702
Purchase and retirement of
common shares ......................... (31,796) (32) (319) (1,002) -- -- (1,353)
Issuance of restricted stock, net
of cancellations ..................... (6,000) (6) (135) 5 -- 136 --
Amortization of unearned
restricted stock ...................... -- -- -- -- -- 1,542 1,542
Consideration for
bestroute.com acquisition ............. -- -- 7,273 -- -- -- 7,273
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 26, 2001 ............... 23,634,702 $ 24,211 $ 228,103 $ 337,149 $(13,307) $(6,121) $ 570,035
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
28
Hughes Supply, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Years Ended
-----------------------------------------
January 26, January 28, January 29,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ........................................................................ $ 46,515 $ 65,871 $ 61,443
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................................. 32,312 29,629 23,269
Provision for doubtful accounts ............................................... 10,273 3,608 1,882
Impairment of long-lived assets ............................................... 15,557 -- --
Gain on sale of pool and spa business ......................................... (11,000) -- --
Deferred income taxes ......................................................... (7,766) 564 7,763
Other ......................................................................... 4,207 (262) (671)
Changes in assets and liabilities, net of businesses acquired or sold:
Accounts receivable ........................................................... (44,672) (33,961) (25,497)
Inventories ................................................................... 34,567 (67,594) (29,493)
Other current assets .......................................................... 1,992 (10,376) (7,718)
Other assets .................................................................. (7,776) (4,006) (5,692)
Accounts payable .............................................................. (22,322) 45,812 11,472
Accrued compensation and benefits ............................................. 4,433 4,046 2,278
Other current liabilities ..................................................... 9,484 (50) (8,166)
Other noncurrent liabilities .................................................. 344 168 697
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................................... 66,148 33,449 31,567
Cash Flows from Investing Activities:
Capital expenditures .............................................................. (23,871) (30,740) (26,921)
Business acquisitions, net of cash ................................................ (34,086) (88,905) (40,378)
Investments in affiliated entities ................................................ (5,757) (3,750) --
Proceeds from sale of property and equipment ...................................... 1,772 4,892 6,630
Proceeds from sale of pool and spa business ....................................... 22,972 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ....................................... (38,970) (118,503) (60,669)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt .......................................... 150,000 -- 50,000
Net (payments) borrowings under short-term debt arrangements ...................... (153,900) 132,797 10,232
Principal payments on debt of acquired entities ................................... (2,476) (14,724) (24,084)
Purchase of treasury shares ....................................................... -- (21,229) --
Dividends paid .................................................................... (8,083) (8,042) (8,832)
Other ............................................................................. (270) 242 (408)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities ......................... (14,729) 89,044 26,908
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ................................ 12,449 3,990 (2,194)
Cash and Cash Equivalents, Beginning of Year ........................................ 10,000 6,010 8,204
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year .............................................. $ 22,449 $ 10,000 $ 6,010
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
29
Hughes Supply, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Note 1--Description of Business and Summary of Significant Accounting Policies
Organization
Hughes Supply, Inc. and its subsidiaries (the "Company") is a diversified
wholesale distributor of construction and industrial materials, equipment, and
supplies to commercial construction, residential construction, industrial, and
public infrastructure markets in North America. The Company distributes over
240,000 products, representing five major product categories, through 442
wholesale branches located in 34 states and Mexico. The Company's principal
customers are electrical, plumbing and mechanical contractors, electric utility
customers, property management companies, municipalities and industrial
companies. Industrial companies include companies in the petrochemical, food and
beverage, pulp and mining, pharmaceutical and marine industries.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Investments in 50% or less owned affiliates over
which the Company has the ability to exercise significant influence are
accounted for using the equity method. All significant intercompany balances and
transactions have been eliminated. Results of operations of companies acquired
and accounted for using the purchase method of accounting are included from
their respective dates of acquisition.
Fiscal Year
The Company's fiscal year ends on the last Friday in January. Fiscal 2001, 2000
and 1999 each consisted of 52 weeks.
Cash and 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
Property and equipment are recorded at cost and depreciated by the straight-line
method 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
Maintenance and repair costs are charged to expense as incurred and renewals and
improvements that extend the useful lives of assets are capitalized. Gains or
losses are reflected in income upon disposition. Depreciation of property and
equipment totaled $19,326, $18,309 and $15,750 in fiscal 2001, 2000 and 1999,
respectively.
Excess of Cost Over Net Assets Acquired
The excess of cost over the fair value of net assets acquired ("goodwill") is
amortized on a straight-line basis over 15 to 40 years. At January 26, 2001 and
January 28, 2000, goodwill totaled $249,826 and $243,367, respectively, net of
accumulated amortization of $31,821 and $24,477, respectively. Amortization of
goodwill totaled $9,295, $7,797 and $5,614 in fiscal 2001, 2000 and 1999,
respectively.
Other Assets
The Company capitalizes certain internal software development costs, which are
being amortized on a straight-line basis over the estimated useful lives of the
software, not to exceed five years. At January 26, 2001 and January 28, 2000,
capitalized internal software development costs totaled $8,680 and $11,465,
respectively, net of accumulated amortization of $7,709 and $5,186,
respectively. Amortization totaled $3,550, $3,385 and $1,680 in fiscal 2001,
2000 and 1999, respectively.
Impairment of Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including goodwill, other intangible assets and property and equipment,
relying on a number of factors, including operating results, business plans,
economic projections and anticipated future cash flows. An impairment in the
carrying value of an asset is recorded when the undiscounted, expected future
operating cash flows derived from the asset are less than its carrying value.
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 revenues from product sales when title to the goods is
passed to the customer.
30
Concentration of Credit Risk
The majority 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 they operate. 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 net 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.
Advertising
Advertising costs are charged to expense as incurred. Advertising expenses
totaled $6,482, $6,471 and $5,533 in fiscal 2001, 2000 and 1999, respectively.
Shipping and Handling Fees and Costs
In September 2000, the Emerging Issues Task Force issued EITF 00-10, Accounting
for Shipping and Handling Fees and Costs ("EITF 00-10"). EITF 00-10 requires
shipping and handling fees billed to customers to be classified as revenue and
shipping and handling costs to be either classified as cost of sales or
disclosed in the notes to the consolidated financial statements. The Company
includes shipping and handling fees billed to customers in net sales. Shipping
and handling costs associated with inbound freight are included in cost of
sales. Shipping and handling costs associated with outbound freight are included
in selling, general and administrative expenses and totaled $24,445, $18,857 and
$15,359 in fiscal 2001, 2000 and 1999, respectively.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
consolidated 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 7 to the consolidated financial statements.
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 23,238,000,
23,398,000 and 23,889,000 in fiscal 2001, 2000 and 1999, respectively. In
calculating diluted earnings per share, these amounts were adjusted to include
346,000, 149,000 and 249,000 of dilutive potential common shares in fiscal 2001,
2000 and 1999, 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 bestroute.com ("bestroute") acquisition in
fiscal 2001. Options to purchase 1,166,490 shares of common stock at an average
exercise price of approximately $23.77 were not included in the computation of
diluted earnings per share for fiscal 2001 because their effect would be
anti-dilutive.
Comprehensive Income
The Company does not have any significant components of comprehensive income.
Reclassifications
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.
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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
31
Hughes Supply, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
Note 2--Business Combinations and Divestiture
In fiscal 2000, the Company invested $1,750 in bestroute, an e-commerce company
founded in 1999 to provide hard to find inventory items to wholesale
distributors and end users via the internet. During fiscal 2001, the Company was
required to fund an additional $6,250 to bestroute as certain operating
thresholds were met. In September 2000, the Company acquired the remaining 51%
interest of bestroute in a transaction where the other members of bestroute
received 723,183 stock rights of the Company. Under the terms of the agreement,
the stock rights were exercisable by the holders on or after February 1, 2001
and granted the holders the right to convert their bestroute holdings into the
Company's common stock. The agreement also provided a call provision under which
the Company had the ability to call the stock rights in exchange for shares of
the Company's common stock. The exercise of a portion of the stock rights issued
was contingent upon bestroute meeting its operating plan and demonstrating
continued viability as a business. In the fourth quarter of fiscal 2001,
bestroute was not able to meet its operating plan and incurred operating losses
of $2,136. These losses were attributed to bestroute's inability to gain market
acceptance and generate revenues sufficient to cover its operating costs. As a
result of these continued losses and viability concerns, the Company
discontinued bestroute's operations and on March 2, 2001, the Company and the
holders of the stock rights entered an agreement to cancel 347,541 of the stock
rights and redeem the remaining rights for $7,273 in cash.
During fiscal 2001, 2000 and 1999, 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 and 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.
The assets acquired and liabilities assumed for acquisitions recorded using the
purchase method of accounting are summarized below:
Fiscal Years Ended
----------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Fair value of:
Assets acquired ................ $ 58,182 $ 125,536 $ 77,707
Liabilities assumed ............ (12,466) (37,510) (32,048)
- -------------------------------------------------------------------------------
Purchase price ................... $ 45,716 $ 88,026 $ 45,659
===============================================================================
Consideration in fiscal 2001 and 1999 included 723,183 stock rights and 207,829
shares of common stock, with fair values of $7,273 and $5,438, respectively.
There was no stock consideration issued during fiscal 2000.
In January 2001, the Company completed the sale of the assets of its pool and
spa business for $47,972 subject to working capital adjustments. The Company
received cash proceeds of $22,972 with the remaining $25,000 of the
consideration in the form of a short-term note receivable. The note receivable
bears interest at a fixed rate of 7.0% and matures on November 1, 2001. The
Company recorded a pre-tax gain of $11,000 in connection with the sale. The pool
and spa business was engaged in the wholesale distribution of swimming pool and
spa equipment and supplies. Net sales and income before income taxes for the
pool and spa business were approximately $144,000 and $8,800, respectively, in
fiscal 2001.
Note 3--Impairment of Long-Lived Assets
In fiscal 2001, the Company experienced continued operating losses in its
e-commerce ventures and international operations. As a result of these losses
and based on an analysis of future profitability and anticipated customer demand
for these businesses, the Company recorded an impairment charge totaling $15,557
relating to the write-down of long-lived assets. This charge included the
write-off of goodwill and other assets totaling $12,924 related to the Company's
e-commerce investments, and a charge totaling $2,633 primarily related to the
write-off of goodwill in the Company's international operations.
Note 4--Property and Equipment
Property and equipment consist of the following:
2001 2000
- --------------------------------------------------------------------------------
Land ......................................... $ 34,784 $ 28,771
Buildings and improvements ................... 119,044 110,308
Transportation equipment ..................... 31,446 33,205
Furniture, fixtures and equipment ............ 69,991 64,613
- -------------------------------------------------------------------------------
255,265 236,897
Less accumulated depreciation ................ (103,186) (91,952)
- -------------------------------------------------------------------------------
$ 152,079 $ 144,945
===============================================================================
32
Note 5--Long-Term Debt
Long-term debt consists of the following:
2001 2000
- --------------------------------------------------------------------------------
8.27% senior notes, due 2003 ..................... $ 19,000 $ --
8.27% senior notes, due 2005 ..................... 28,000 --
8.42% senior notes, due 2007 ..................... 103,000 --
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
(6.4% to 7.2% at January 26, 2001) ............. 79,000 232,959
Short-term instruments
classified as long-term debt ................... 74,101 74,041
Other notes payable .............................. 341 803
- -------------------------------------------------------------------------------
531,442 535,803
Less current portion ............................ (15,274) (803)
- -------------------------------------------------------------------------------
$ 516,168 $ 535,000
===============================================================================
On March 1, 1999, the Company entered into two short-term lines of credit with
an aggregate borrowing capacity of $25,000. These lines of credit were amended
during fiscal 2001 to extend the maturity dates to June 30, 2001. There were no
amounts outstanding under these lines of credit at January 26, 2001 and January
28, 2000.
On September 29, 1999, the Company's revolving credit agreement and line of
credit agreement (the "credit agreement") were amended to increase borrowing
capacity 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, as amended,
which matures on July 17, 2001. 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.
On December 21, 2000, the Company issued $150,000 of senior notes in a private
placement. Of the total $150,000 of senior notes, $103,000 bears interest at
8.42% and are payable in five annual principal payments beginning November 30,
2003. The remaining $19,000 and $28,000 of senior notes bear interest at 8.27%
and are payable in one annual principal payment on November 30, 2003 and five
annual principal payments beginning November 30, 2001, respectively. Proceeds
from the sale of the senior notes were used to reduce indebtedness under the
Company's credit agreement.
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 $74,101 and $74,041 as of January 26, 2001 and January 28, 2000
was 6.7% and 6.6%, 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 26, 2001 and January 28, 2000 have been
classified as long-term debt.
The Company's debt agreements contain covenants that require the Company, among
other things, 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 $138,515 was available at January 26, 2001
for payment of dividends.
Cash paid for interest during fiscal 2001, 2000 and 1999 was $44,429, $29,636
and $23,972, respectively.
Maturities of long-term debt for each of the five years subsequent to January
26, 2001 and in the aggregate are as follows:
Fiscal Years Ending
- --------------------------------------------------------------------------------
2002 .................................................. $ 15,274
2003 .................................................. 37,743
2004 .................................................. 197,205
2005 .................................................. 44,105
2006 .................................................. 44,105
Thereafter ............................................ 193,010
- --------------------------------------------------------------------------------
$531,442
================================================================================
The fair values of long-term debt approximated $539,287 and $524,002 and the
related carrying values were $531,442 and $535,803 at January 26, 2001 and
January 28, 2000, respectively.
33
Hughes Supply, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
Note 6--Income Taxes
The consolidated provision for income taxes consists of the following:
Fiscal Years Ended
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Currently payable:
Federal ....................... $ 37,515 $36,763 $25,119
State ......................... 4,315 5,553 2,778
- --------------------------------------------------------------------------------
41,830 42,316 27,897
Deferred:
Federal ....................... (7,007) 1,241 7,864
State ......................... (661) 174 1,473
- --------------------------------------------------------------------------------
(7,668) 1,415 9,337
- --------------------------------------------------------------------------------
$ 34,162 $43,731 $37,234
================================================================================
The following is a reconciliation of tax computed at the statutory federal rate
to income tax expense in the consolidated statements of income:
Fiscal Years Ended
-----------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Amount % Amount % Amount %
- --------------------------------------------------------------------------------
Tax computed
at statutory
federal rate ... $28,237 35.0% $ 38,361 35.0% $ 34,537 35.0%
Effect of:
State and local
income tax,
net of federal
income tax
benefit ...... 2,377 2.9 3,722 3.4 2,763 2.8
Nondeductible
expenses ..... 3,548 4.4 2,740 2.5 1,085 1.1
Other, net ..... -- -- (1,092) (1.0) (1,151) (1.2)
- -------------------------------------------------------------------------------
$34,162 42.3% $ 43,731 39.9% $ 37,234 37.7%
===============================================================================
The Company merged with Winn-Lange Electric, Inc. ("Winn-Lange") on June 30,
1998. Prior to its merger with the Company, Winn-Lange was a Subchapter S
corporation and, therefore, not subject to corporate income taxes.
The components of deferred tax assets and liabilities at January 26, 2001 and
January 28, 2000 are as follows:
2001 2000
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts .............. $ 2,339 $ 1,064
Inventories .................................. 5,144 2,537
Accrued vacation ............................. 2,230 2,646
State net operating losses ................... 1,166 --
Deferred compensation ........................ 2,939 2,054
Other accrued liabilities .................... 7,549 3,325
Other ........................................ 4,764 662
- --------------------------------------------------------------------------------
Gross deferred tax assets ...................... 26,131 12,288
Valuation allowance .......................... (698) --
- --------------------------------------------------------------------------------
Total deferred tax assets .................. 25,433 12,288
Deferred tax liabilities:
Capitalized internal software
development costs .......................... 3,717 3,401
Installment sale ............................. 3,466 --
Goodwill and intangible assets ............... 5,559 3,590
Property and equipment ....................... 871 1,243
- --------------------------------------------------------------------------------
Total deferred tax liabilities ............. 13,613 8,234
Net deferred tax assets ........................ $ 11,820 $ 4,054
================================================================================
At January 26, 2001, the Company had state net operating loss carryforwards of
$1,166. Of the total net operating loss carryforwards, $698 expire in 2016, with
the remainder expiring between 2006 and 2021. A valuation allowance has been
provided on certain of the state net operating losses at January 26, 2001 as
full realization of these assets is not considered more likely than not.
Cash paid for income taxes during fiscal 2001, 2000 and 1999 was $36,601,
$49,079 and $33,862, respectively.
Note 7--Employee Benefit Plans
Profit Sharing and Employee Stock Ownership Plans
34
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, 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. 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% on 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, which covered substantially
all employees of the Company who met minimum age and length of service
requirements. The plan was terminated by the Company effective December 31,
1998. At January 28, 2000, the plan owned approximately 236,000 shares of the
Company's common stock, all of which were allocated to participants. As of
January 26, 2001, the Company had distributed each participant's final account
balance in cash or stock.
Amounts charged to expense for these and other similar plans totaled $4,294,
$2,883 and $1,946 in fiscal 2001, 2000 and 1999, respectively.
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 totaled $1,410, $1,914 and $1,576 in
fiscal 2001, 2000 and 1999, 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 2,052,500 shares of common stock, including 1,750,000 shares to key
employees and 302,500 shares to directors. Under these 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 875,000 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. There
were no restricted stock grants made to employees during fiscal 2001. During
fiscal 2000 and 1999, the Company granted certain employees 261,921 and 52,500
shares of restricted stock, with market values at the date of grant of $6,415
and $1,667, respectively. In fiscal 2001 and 2000, the Company also cancelled
6,000 and 2,400, respectively, of the restricted shares granted, with market
values at the date of grant of $141 and $77, respectively, 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 2001, 2000 and 1999, this expense amounted to $1,542, $1,055 and $393,
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 26, 2001.
A summary of activity under the Company's stock options plans since January 30,
1998 is as follows:
Shares Weighted-
Subject Average
To Option Option Price
- --------------------------------------------------------------------------------
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
Granted ................................... 502,000 18.75
Exercised ................................. (83,420) 8.62
Cancelled ................................. (27,838) 24.72
- --------------------------------------------------------------------------------
Under option, January 26, 2001
(1,098,789 shares exercisable) .............. 1,123,889 $21.21
================================================================================
35
Hughes Supply, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
There were 742,589 shares available for the granting of options at January 26,
2001.
The following table summarizes information about stock options outstanding at
January 26, 2001:
Weighted-
Average
Options Remaining Weighted-
Range of Outstanding at Contractual Average
Exercise Prices January 26, 2001 Life Exercise Price
- --------------------------------------------------------------------------------
$8.42............ 74,399 < 1 Year $ 8.42
12.83-18.75..... 719,776 8 Years 18.12
21.63-28.75..... 66,639 8 Years 25.60
33.00-35.63..... 263,075 7 Years 34.19
If the fair value of options granted had been used to record compensation
expense, pro forma net income would have been $43,163, $64,770 and $60,307 in
fiscal 2001, 2000 and 1999, respectively. Diluted earnings per share would have
been $1.83, $2.75 and $2.50 in fiscal 2001, 2000 and 1999, 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 2001, 2000 and 1999; expected
volatility of 36%, 35% and 33% for fiscal 2001, 2000 and 1999, respectively;
risk-free interest rates of 6.69%, 6.65% and 4.77% for fiscal 2001, 2000 and
1999, respectively; and expected lives of 8 years for fiscal 2001, 2000 and
1999. The weighted-average fair value of options granted during the year was
$8.77, $11.48 and $13.81 in fiscal 2001, 2000 and 1999, respectively. The pro
forma calculations do not include the effects of options granted prior to fiscal
1996. Accordingly, 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 separately from
the Company's general assets. Amounts charged to expense under the agreements
totaled $663, $543 and $537 in fiscal 2001, 2000 and 1999, respectively.
At January 26, 2001 and January 28, 2000, the liability under the plan, which is
reflected in other noncurrent liabilities totaled $4,110 and $3,478,
respectively.
Note 8--Commitments and Contingencies
Lease Commitments
The Company occupies certain properties and operates certain equipment and
vehicles under leases that expire at various dates through the year 2011. Rent
expense under these leases amounted to $51,073, $42,792 and $33,062 in fiscal
2001, 2000 and 1999, respectively.
Aggregate minimum annual rental payments, under non-cancelable operating leases,
as of January 26, 2001 are as follows:
Fiscal Years Ending
- --------------------------------------------------------------------------------
2002 .................................................. $ 39,607
2003 .................................................. 32,785
2004 .................................................. 22,864
2005 .................................................. 18,320
2006 .................................................. 10,535
Thereafter ............................................ 11,489
- --------------------------------------------------------------------------------
$135,600
================================================================================
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, cash flows or
financial position.
36
Note 9--Capital Stock
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 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. No
shares were repurchased in fiscal 2001. During fiscal 2001 and 2000, the Company
issued 92,167 and 36,150 shares, respectively, of treasury stock for bonus plans
and stock options exercised. In fiscal 2000, the Company issued 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
1,000 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 $1,000 per share plus any accrued and
unpaid dividends or 1,000 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 $.01 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 10--Segment Information
Effective February 1, 2000, the Company's operations were reorganized on a
product group basis into five stand-alone strategic business units ("SBUs"):
Electrical & Electric Utility; Plumbing & HVAC; Industrial Pipe, Valves &
Fittings ("Industrial PVF"); Building Materials/Pool & Spa/Maintenance Supplies;
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 accounting policies of the
segments are the same as those described in Note 1. Income before income tax
amounts include certain corporate expense allocations for employee benefits,
interest expense, corporate capital charges, and property and casualty
insurance. These allocations are based on consumption or at a standard rate
determined by management.
In connection with the Company's reorganization at the beginning of fiscal 2001,
certain administrative groups and assets were realigned on a SBU basis. Various
functions previously performed on a centralized basis are now performed at the
SBU level. Additionally, the Company changed its method of allocating certain
costs (interest expense, rent expense, corporate capital charges, and
depreciation and amortization) to the SBUs, which has also impacted the
comparability of prior year information. Accordingly, comparative financial
information has only been presented for net sales and gross profit, which were
not impacted by the allocation method changes.
The Corporate/Eliminations & Other category includes corporate level operating
expenses not allocated to the Company's operating segments along with
intercompany eliminations and revenues and expenses for bestroute.
37
Hughes Supply, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
The following table presents net sales and other financial information by SBU
for fiscal 2001. When comparable, information for fiscal 2000 and 1999 has also
been presented.
Building
Materials/
Electrical & Pool & Spa/ Corporate/
Electric Plumbing Industrial Maintenance Water & Eliminations
Utility & HVAC PVF Supplies Sewer & Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales
2001 ........................................... $606,268 $1,007,318 $315,315 $448,363 $932,870 $ 29 $3,310,163
2000 ........................................... 576,739 956,553 299,590 424,138 737,857 -- 2,994,877
1999 ........................................... 519,408 857,385 291,870 325,136 542,466 -- 2,536,265
====================================================================================================================================
Gross profit
2001 ........................................... 117,263 226,736 82,463 127,538 190,384 (927) 743,457
2000 ........................................... 105,492 233,449 69,668 111,544 154,120 -- 674,273
1999 ........................................... 93,658 204,056 68,258 83,316 109,711 -- 558,999
====================================================================================================================================
Depreciation and amortization
2001 ........................................... 2,445 7,556 2,906 3,914 7,691 7,800 32,312
====================================================================================================================================
Impairment of long-lived assets
2001 ........................................... -- 2,217 -- -- 416 12,924 15,557
====================================================================================================================================
Gain on sale of pool and spa business
2001 ........................................... -- -- -- 11,000 -- -- 11,000
====================================================================================================================================
Interest and other income
2001 ........................................... 1,357 3,489 355 2,093 3,727 (3,545) 7,476
====================================================================================================================================
Interest expense
2001 ........................................... 2,926 9,891 10,170 5,678 14,623 -- 43,288
====================================================================================================================================
Income (loss) before income taxes
2001 ........................................... $ 26,268 $ 189 $ 19,139 $ 26,442 $ 39,731 $(31,092) $ 80,677
====================================================================================================================================
The following table includes the Company's investment in accounts receivable,
less allowance for doubtful accounts, and inventories, for each SBU at January
26, 2001 and January 28, 2000:
2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Accounts Segment Accounts Segment
Receivable Inventories Assets Receivable Inventories Assets
- -------------------------------------------------------------------------------------------------------------------------------
Electrical & Electric Utility................ $ 83,163 $ 59,170 $ 142,333 $ 67,544 $ 53,617 $ 121,161
Plumbing & HVAC.............................. 125,359 146,007 271,366 115,357 171,448 286,805
Industrial PVF............................... 42,734 111,355 154,089 42,303 118,455 160,758
Building Materials/Pool & Spa
/Maintenance Supplies(1) ................. 37,159 39,307 76,466 43,506 62,245 105,751
Water & Sewer................................ 147,465 82,729 230,194 132,282 89,726 222,008
Corporate/Eliminations & Other............... (3,882) 3,221 (661) (2,748) -- (2,748)
- -------------------------------------------------------------------------------------------------------------------------------
Total $431,998 $441,789 873,787 $398,244 $495,491 893,735
====================================================================== ===================
Cash and Cash Equivalents.................... 22,449 10,000
Deferred Income Taxes........................ 18,524 10,081
Other Current Assets......................... 66,131 43,962
Property and Equipment, Net.................. 152,079 144,945
Excess of Cost Over Net Assets Acquired...... 249,826 243,367
Other Assets................................. 17,481 22,924
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets................................. $1,400,277 $1,369,014
===============================================================================================================================
(1) Assets of the pool and spa business, which was sold in January 2001, were
principally included in the Building Materials/Pool & Spa/Maintenance
Supplies SBU at January 28, 2000.
38
Note 11--Quarterly Financial Information (Unaudited)
The following is a summary of the unaudited results of operations for each
quarter in the years ended January 26, 2001 and January 28, 2000:
First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001
Net sales ........................................ $831,171 $874,056 $863,283 $741,653 $3,310,163
Gross profit ..................................... $184,885 $198,232 $196,290 $164,050 $ 743,457
Net income (loss) ................................ $ 14,428 $ 22,347 $ 18,842 $ (9,102) $ 46,515
Earnings (loss) per share:
Basic .......................................... $ .62 $ .96 $ .80 $ (.39) $ 2.00
Diluted ........................................ $ .62 $ .96 $ .80 $ (.39) $ 1.97
Average shares outstanding (in thousands):
Basic .......................................... 23,223 23,236 23,511 23,258 23,238
Diluted ........................................ 23,229 23,333 23,617 23,258 23,584
Market price per share:
High ........................................... $ 18.75 $ 20.56 $ 21.30 $ 18.75 $ 21.30
Low ............................................ $ 15.13 $ 15.00 $ 16.18 $ 14.41 $ 14.41
Dividends per share .............................. $ .085 $ .085 $ .085 $ .085 $ .34
====================================================================================================================================
Fiscal 2000
Net sales ........................................ $711,296 $774,888 $786,379 $722,314 $2,994,877
Gross profit ..................................... $156,358 $176,173 $178,648 $163,094 $ 674,273
Net income ....................................... $ 13,355 $ 20,905 $ 20,243 $ 11,368 $ 65,871
Earnings per share:
Basic .......................................... $ .56 $ .90 $ .87 $ .49 $ 2.82
Diluted ........................................ $ .55 $ .88 $ .87 $ .49 $ 2.80
Average shares outstanding (in thousands):
Basic .......................................... 23,863 23,300 23,214 23,215 23,398
Diluted ........................................ 24,240 23,686 23,349 23,338 23,547
Market price per share:
High ........................................... $ 26.25 $ 29.94 $ 28.50 $ 24.13 $ 29.94
Low ............................................ $ 17.94 $ 22.94 $ 20.75 $ 18.06 $ 17.94
Dividends per share .............................. $ .085 $ .085 $ .085 $ .085 $ .34
====================================================================================================================================
During the fourth quarter of fiscal 2001, the Company recorded a charge totaling
$15,557 for the impairment of long-lived assets, principally related to the
discontinued operations of bestroute and another e-commerce venture and the
write-off of goodwill for its international operations. Due to an economic
slowdown which affected the Company's primary markets during late fiscal 2001,
the Company determined that an increase in the provision for doubtful accounts
was necessary. During the fourth quarter of fiscal 2001, the Company recorded a
charge of $5,116 to reflect the estimated bad debts at January 26, 2001.
Partially offsetting these charges is a gain of $11,000 recorded on the sale of
the Company's pool and spa business in January 2001.
39
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 26, 2001 and January 28, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended January 26, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orlando, Florida
March 23, 2001
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 consolidated 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 consolidated 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.
40
CORPORATE AND SHAREHOLDER INFORMATION
DIRECTORS
David H. Hughes
Chairman of the Board
John D. Baker II
President and Chief Executive Officer,
Florida Rock Industries, Inc.
Robert N. Blackford
Attorney, Holland & Knight LLP
H. Corbin Day
Chairman,
Jemison Investment Co., Inc.
Vincent S. Hughes
William P. Kennedy
Chief Executive Officer,
Nephron Pharmaceuticals Corporation
EXECUTIVE OFFICERS
AND MANAGEMENT
David H. Hughes
Chairman of the Board and
Chief Executive Officer
Thomas Morgan
President and Chief Operating Officer
Benjamin P. Butterfield
Secretary and General Counsel
John R. Clark
Vice President of Credit
Jacquel K. Clark
Assistant Secretary and
Assistant Treasurer
Jasper L. Holland, Jr.
Group President
Clyde E. Hughes III
Group President
Vincent S. Hughes
Vice President
Robert A. Machaby
Group President
James C. Plyler, Jr.
Regional Manager
Michael L. Stanwood
Group President
Kenneth H. Stephens
Regional Manager
Sidney J. Strickland, Jr.
Vice President of Administration
Thomas M. Ward II
Vice President of Information Technology
Gradie E. Winstead, Jr.
Group President
J. Stephen Zepf
Treasurer and Chief Financial Officer
TRANSFER AGENT
AND REGISTRAR
American Stock Transfer
& Trust Company
40 Wall Street
New York, New York 10005
ANNUAL MEETING
Tuesday, May 15, 2001,
at 10:00 a.m., local time
Hughes Supply, Inc.
20 North Orange Avenue
Suite 200
Orlando, Florida 32801
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
Orlando, Florida
CORPORATE
HEADQUARTERS
Hughes Supply, Inc.
20 North Orange Avenue
Orlando, Florida 32801
Telephone: 407-841-4755
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 23, 2001 was 1,084. 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