Consolidated Statements of Income
(in thousands, except per share data)
Fiscal Years Ended
-----------------------------------------
January 25, January 26, January 28,
2002 2001 2000
- -----------------------------------------------------------------------------------
Net Sales $ 3,037,708 $ 3,310,163 $ 2,994,877
Cost of Sales 2,343,788 2,566,706 2,320,604
- -----------------------------------------------------------------------------------
Gross Profit 693,920 743,457 674,273
- -----------------------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative 550,943 579,234 508,009
Depreciation and amortization 31,093 32,551 29,808
Provision for doubtful accounts 11,065 10,626 4,064
Impairment of long-lived assets 734 15,557 --
- -----------------------------------------------------------------------------------
Total operating expenses 593,835 637,968 541,881
- -----------------------------------------------------------------------------------
Operating Income 100,085 105,489 132,392
- -----------------------------------------------------------------------------------
Non-Operating Income (Expenses):
Interest and other income 10,546 7,476 9,015
Interest expense (35,945) (43,288) (31,805)
Gain on sale of pool and spa business -- 11,000 --
- -----------------------------------------------------------------------------------
(25,399) (24,812) (22,790)
- -----------------------------------------------------------------------------------
Income Before Income Taxes 74,686 80,677 109,602
Income Taxes 30,621 34,162 43,731
- -----------------------------------------------------------------------------------
Net Income $ 44,065 $ 46,515 $ 65,871
===================================================================================
Earnings Per Share:
Basic $ 1.90 $ 2.00 $ 2.82
===================================================================================
Diluted $ 1.88 $ 1.97 $ 2.80
===================================================================================
Average Shares Outstanding:
Basic 23,175 23,238 23,398
===================================================================================
Diluted 23,424 23,584 23,547
===================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
10
Consolidated Balance Sheets
(in thousands, except share and per share data)
January 25, January 26,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 6,817 $ 22,449
Accounts receivable, less allowance for doubtful accounts of $8,388 and $6,106 387,953 435,607
Inventories 396,441 441,789
Deferred income taxes 15,420 18,524
Other current assets 56,809 68,940
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 863,440 987,309
Property and Equipment 145,702 152,079
Goodwill 263,808 249,826
Other Assets 20,312 17,481
- -------------------------------------------------------------------------------------------------------------------------
$ 1,293,262 $ 1,406,695
=========================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 19,175 $ 15,274
Accounts payable 188,447 221,771
Accrued compensation and benefits 32,790 32,762
Other current liabilities 34,753 38,372
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 275,165 308,179
Long-Term Debt 403,671 516,168
Deferred Income Taxes 13,872 6,704
Other Noncurrent Liabilities 6,081 5,609
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 698,789 836,660
- -------------------------------------------------------------------------------------------------------------------------
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;
23,774,600 and 24,211,485 shares issued 23,775 24,211
Capital in excess of par value 217,609 228,103
Retained earnings 367,726 337,149
Treasury stock, 24,251 and 576,783 shares, at cost (531) (13,307)
Unearned compensation related to outstanding restricted stock (14,106) (6,121)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 594,473 570,035
- -------------------------------------------------------------------------------------------------------------------------
$ 1,293,262 $ 1,406,695
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
11
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
Common Stock Treasury Stock Capital in
------------------ ------------------ Excess of Retained Unearned
Shares Dollars Shares Dollars Par Value Earnings Compensation Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 1999 24,184 $ 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) (21,229) -- -- -- (21,229)
Shares issued under stock
option and bonus plans 29 29 36 811 472 (378) -- 934
Purchase and retirement
of common shares (7) (7) -- -- (57) (89) -- (153)
Issuance of restricted stock,
net of cancellations 43 43 216 4,984 1,311 -- (6,338) --
Amortization of unearned
restricted stock -- -- -- -- -- -- 1,055 1,055
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 28, 2000 24,249 $ 24,249 (669) $(15,434) $ 221,284 $ 300,144 $ (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 2,127 -- (425) -- 1,702
Purchase and retirement of
common shares (32) (32) -- -- (319) (1,002) -- (1,353)
Issuance of restricted stock,
net of cancellations (6) (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 24,211 $ 24,211 (577) $(13,307) $ 228,103 $ 337,149 $ (6,121) $ 570,035
Net income -- -- -- -- -- 44,065 -- 44,065
Cash dividends--$.34 per share -- -- -- -- -- (7,964) -- (7,964)
Purchase of treasury stock -- -- (395) (7,537) -- -- -- (7,537)
Shares issued under stock
option and bonus plans -- -- 266 5,634 300 (1,726) -- 4,208
Purchase and retirement of
common shares (90) (90) -- -- (854) (1,111) -- (2,055)
Retirement of treasury stock (343) (343) 343 7,488 (3,160) (3,985) -- --
Issuance of restricted stock,
net of cancellations (3) (3) 339 7,191 493 1,298 (9,498) (519)
Amortization of unearned
restricted stock -- -- -- -- -- -- 1,513 1,513
Cancellation of stock rights
issued to bestroute.com -- -- -- -- (7,273) -- -- (7,273)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 25, 2002 23,775 $ 23,775 (24) $ (531) $ 217,609 $ 367,726 $(14,106) $ 594,473
=============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
12
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Years Ended
-------------------------------------
January 25, January 26, January 28,
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 44,065 $ 46,515 $ 65,871
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 31,093 32,551 29,808
Provision for doubtful accounts 11,065 10,626 4,064
Impairment of long-lived assets 734 15,557 --
Gain on sale of pool and spa business -- (11,000) --
Deferred income taxes 10,442 (7,766) 564
Other 372 3,968 (441)
Changes in assets and liabilities, net of businesses acquired or sold:
Accounts receivable 50,087 (43,224) (35,768)
Inventories 55,019 34,567 (67,594)
Other current assets (11,953) 1,795 (11,588)
Other assets (1,831) (7,776) (4,006)
Accounts payable (39,555) (23,926) 48,375
Accrued compensation and benefits (921) 4,433 4,046
Other current liabilities (4,326) 9,484 (50)
Other noncurrent liabilities 472 344 168
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 144,763 66,148 33,449
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (16,850) (23,871) (30,740)
Proceeds from sale of property and equipment 8,673 1,772 4,892
Business acquisitions, net of cash (32,007) (34,086) (88,905)
Purchase of bestroute.com stock rights (7,273) -- --
Proceeds from sale of pool and spa business 25,000 22,972 --
Investments in affiliated entities -- (5,757) (3,750)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,457) (38,970) (118,503)
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net (payments) borrowings under short-term debt arrangements (100,328) (153,900) 132,797
Proceeds from issuance of long-term debt -- 150,000 --
Principal payments on other debt (23,809) (2,476) (14,724)
Purchase of treasury shares (7,537) -- (21,229)
Dividends paid (7,946) (8,083) (8,042)
Other 1,682 (270) 242
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (137,938) (14,729) 89,044
- -------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (15,632) 12,449 3,990
Cash and Cash Equivalents, Beginning of Year 22,449 10,000 6,010
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 6,817 $ 22,449 $ 10,000
=========================================================================================================================
Supplemental Disclosure of Cash Flows Information:
Income taxes paid $ 36,642 $ 36,601 $ 49,079
Interest paid 35,814 44,429 29,636
Property and equipment acquired with debt 6,946 -- --
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
13
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 439
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 businesses in the petrochemical, food
and beverage, pulp and paper, 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 years 2002,
2001 and 2000 each consisted of 52 weeks.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
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.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable based on
numerous factors, including past transaction history with customers and their
credit worthiness. Initially, the Company estimates an allowance for doubtful
accounts as a percentage of net sales based on historical bad debt experience.
This estimate is periodically adjusted when the Company becomes aware of a
specific customer's inability to meet its financial obligations (e.g.
bankruptcy, etc.), or as a result of changes in the overall aging of accounts
receivable. While the Company has a large customer base that is geographically
dispersed, a slowdown in the markets in which the Company operates may result in
higher than expected uncollectible accounts, and therefore, the need to revise
estimates for bad debts. Provision for doubtful accounts totaled $11,065,
$10,626 and $4,064 in fiscal 2002, 2001 and 2000, respectively. To the extent
historical credit experience is not indicative of future performance or other
assumptions used by management do not prevail, the allowance for doubtful
accounts could differ significantly, resulting in either higher or lower future
provisions for doubtful accounts.
Inventories
Inventories are carried at the lower of cost or market. The cost of
substantially all inventories is determined by the average cost method. The
Company evaluates its inventory value at the end of each quarter to ensure that
it is carried at the lower of cost or market. This evaluation includes an
analysis of a branch's physical inventory results over the last two years, a
review of potential dead stock and an overall consolidated analysis of potential
excess inventory items. An inventory provision is recorded monthly to provide
for any potential write-downs of the Company's inventory to market value or for
projected historical shortages. Periodically, the branch's perpetual inventory
records are adjusted to reflect permanent declines in market value. At January
25, 2002 and January 26, 2001, inventory reserves totaled $9,849 and $10,379,
respectively. To the extent historical physical inventory results are not
indicative of future results and if unexpected future events impact, either
favorably or unfavorably, the saleability of the Company's products, the
Company's inventory reserves could differ significantly, resulting in either
higher or lower future inventory provisions.
Property and Equipment
Property and equipment are recorded at cost and depreciated using both
straight-line and declining-balance methods based on the following estimated
useful lives of the assets:
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
14
assets are capitalized. Gains or losses are reflected in income upon
disposition. Interest costs related to assets under construction are capitalized
during the construction period. Depreciation of property and equipment totaled
$18,073, $19,565 and $18,486 in fiscal 2002, 2001 and 2000, respectively.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of
the net assets acquired in connection with business acquisitions and is being
amortized on a straight-line basis over periods ranging from 15 to 40 years. At
January 25, 2002 and January 26, 2001, goodwill totaled $263,808 and $249,826,
respectively, net of accumulated amortization of $40,296 and $31,821,
respectively. Amortization of goodwill totaled $9,229, $9,295 and $7,797 in
fiscal 2002, 2001 and 2000, respectively.
Other Assets
The Company capitalizes certain software development costs, which are being
amortized on a straight-line basis over the estimated useful lives of the
software, ranging from 3 to 7 years. At January 25, 2002 and January 26, 2001,
capitalized software development costs totaled $9,775 and $8,680, respectively,
net of accumulated amortization of $10,404 and $7,709, respectively.
Amortization of capitalized software development costs totaled $3,595, $3,550
and $3,385 in fiscal 2002, 2001 and 2000, 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. Impairment is assessed
by evaluating the estimated undiscounted cash flows over the asset's remaining
life. If estimated cash flows are insufficient to recover the investment, an
impairment loss is recognized.
Self-Insurance
The Company is self-insured for certain losses relating to workers'
compensation, automobile, general and product liability claims. The Company also
maintains stop loss coverages to limit the exposure arising from such claims.
Self-insurance losses for claims filed and claims incurred but not reported are
accrued based upon the Company's estimates of the aggregate liability for
uninsured claims using loss development factors and actuarial assumptions
followed in the insurance industry and the Company's historical loss development
experience. To the extent the projected future development of the losses
resulting from workers' compensation, automobile, general and product liability
claims incurred as of January 25, 2002 differs from the actual development of
such losses in future periods, the Company's insurance reserves could differ
significantly, resulting in either higher or lower future insurance expense.
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.
Effective in February 2001, the Company adopted Statement of Financial
Accounting Standards ("FAS") 133, Accounting for Derivative Instruments and
Hedging Activities. FAS 133 was amended by FAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. Both FAS 133 and FAS 138
require that an entity record all derivatives as either assets or liabilities in
the consolidated balance sheets at fair value and measure those instruments at
fair value and to reflect changes in fair value of those instruments as either
components of comprehensive income or in net income depending on the types of
instruments. The adoption of these standards did not have an impact on the
Company's consolidated financial statements.
Revenue Recognition
The Company recognizes revenues from product sales when shipment occurs and
title to the goods is passed to the customer.
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 by 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 $5,333, $6,482 and $6,471 in fiscal 2002, 2001 and 2000, respectively.
15
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share data)
Shipping and Handling Fees and Costs
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
$19,690, $24,445 and $18,857 in fiscal 2002, 2001 and 2000, respectively.
Income Taxes
Income taxes are recorded 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 9 to the consolidated financial statements.
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 net impact on previously reported results of operations.
Recent Accounting Pronouncements
FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible
Assets, were issued in July 2001. FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting. FAS 141 also specifies the criteria which must be met in order for
certain acquired intangible assets to be recorded separately from goodwill. FAS
142 is effective for the Company beginning with the Company's first quarter of
fiscal 2003. Under FAS 142, all of the Company's goodwill will no longer be
amortized but rather will be tested for impairment annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
In fiscal 2002, amortization of goodwill totaled $9,229. This new approach
requires the use of valuation techniques and methodologies significantly
different than the present undiscounted cash flow policy being followed by the
Company. In connection with the adoption of FAS 142, the Company's conclusions
about the valuation and recoverability of goodwill may change. The new approach
may result in impairment charges and reductions in the carrying amount of
goodwill on the consolidated balance sheets upon adoption. Subsequent to the
initial adoption of FAS 142, the Company may be subject to earnings volatility
if additional goodwill impairment occurs at a future date. The Company is in the
process of performing the goodwill evaluation required under FAS 142 and has not
yet determined the impact that will result from adoption.
FAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001.
FAS 143, which is effective for the Company beginning in fiscal 2004, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company does not expect the adoption of FAS 143 to have a material
impact on its consolidated financial statements.
FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was
issued in August 2001. FAS 144, which is effective beginning with the Company's
first quarter of fiscal 2003, establishes a single accounting model for
long-lived assets to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions. The Company does
not expect the adoption of FAS 144 to have a material impact on its consolidated
financial statements.
Note 2--Business Combinations and Divestiture
In fiscal 2000, the Company invested $1,750 in bestroute.com ("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 51.0% 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
16
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 into an agreement to cancel 347,541 of the
stock rights and redeem the remaining rights for $7,273 in cash.
During fiscal 2002, 2001 and 2000, the Company acquired several other wholesale
distributors of materials to the construction and industrial markets that were
accounted for as purchases. 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
-----------------------------
2002 2001 2000
- -------------------------------------------------------------
Fair value of:
Assets acquired $ 47,976 $ 58,182 $125,536
Liabilities assumed (16,635) (12,466) (37,510)
- -------------------------------------------------------------
Purchase price $ 31,341 $ 45,716 $ 88,026
=============================================================
Consideration in fiscal 2001 for bestroute included 723,183 stock rights with a
fair value of $7,273. There was no stock consideration issued during fiscal 2002
and 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
bore interest at a fixed rate of 7.0% and was fully collected in fiscal 2002. In
fiscal 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 the fourth quarter of fiscal 2002, the Company recorded an impairment loss of
$734 related to goodwill on one entity in its Plumbing/HVAC operations.
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:
2002 2001
- -------------------------------------------------------------
Land $ 34,735 $ 34,784
Buildings and improvements 116,595 115,568
Transportation equipment 20,611 31,446
Furniture, fixtures and equipment 71,743 69,991
Construction in progress 10,306 3,476
- -------------------------------------------------------------
253,990 255,265
Less accumulated depreciation (108,288) (103,186)
- -------------------------------------------------------------
$ 145,702 $ 152,079
=============================================================
17
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share data)
Note 5--Long-Term Debt
Long-term debt consists of the following:
2002 2001
- -----------------------------------------------------------------------
8.27% senior notes, due 2003 $ 19,000 $ 19,000
8.27% senior notes, due 2005 22,400 28,000
8.42% senior notes, due 2007 103,000 103,000
7.96% senior notes, due 2011 88,666 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, (interest rate of 2.3%
at January 25, 2002) 16,142 79,000
Commercial paper 36,409 74,101
Other notes payable (varying interest rates of
2.8% to 9.8% at January 25, 2002 with
due dates from 2002 to 2016) 7,229 341
- -----------------------------------------------------------------------
422,846 531,442
Less current portion (19,175) (15,274)
- -----------------------------------------------------------------------
$ 403,671 $ 516,168
=======================================================================
On January 15, 2002, the Company's line of credit agreement was amended to
decrease borrowing capacity from $75,000 to $36,250. The Company's current
borrowing capacity under its revolving credit agreement and its line of credit
agreement (the "credit agreement") totaled $311,250 (subject to borrowing
limitations under the credit agreement)--$275,000 under its revolving credit
agreement as long-term debt due January 25, 2004 and $36,250 under its line of
credit agreement, as amended, which matures on July 31, 2002. Under the credit
agreement, interest is payable at market rates plus applicable margins. Facility
fees of .25% and .225% are paid on the total of the revolving credit agreement
and line of credit agreement, respectively.
The Company has two short-term lines of credit with an aggregate borrowing
capacity of $25,000. On June 30, 2001, these lines of credit were amended to
extend the maturity dates to June 30, 2002. At January 25, 2002, approximately
$222 was outstanding under these lines of credit. There were no amounts
outstanding at January 26, 2001.
On June 22, 2001, the Company entered into an agreement ("lease facility
agreement") with Atlantic Financial Group, Ltd. ("AFG"), certain financial
parties as lenders and SunTrust Bank as agent ("SunTrust") in which AFG and
SunTrust agreed to fund up to $40,000 for the acquisition and development of
real property projects chosen by the Company, including up to $25,000 for the
Company's new corporate headquarters building in Orlando, Florida ("Orlando
property") which is expected to cost approximately $23,000. Also on June 22,
2001, the Company entered into an agreement with AFG, certain financial parties
as lenders and SunTrust as agent for the construction of a new warehouse in
Miami, Florida ("Miami property"). Pursuant to this agreement, AFG and SunTrust
agreed to fund up to $15,000 for the construction of this facility, which is
expected to cost approximately $13,000.
Orlando Property
Under the terms of the loan agreement ("Orlando loan agreement") between AFG and
SunTrust for the Orlando property, AFG was required to fund the lease facility
through a nominal equity investment, with the remainder funded through
non-recourse borrowings from SunTrust. Concurrent with the execution of the
Orlando loan agreement, the Company executed a master lease agreement ("Orlando
lease agreement") with AFG under which the Company will lease the Orlando
property for a five-year term, including the construction period and a lease
period. The Orlando lease agreement requires interest only payments that begin
at the earlier of the completion of construction, which is expected in September
2003, or eighteen months following the acquisition of the Orlando property,
which is expected to occur in April 2002. Payments are interest only at LIBOR
rates plus applicable credit spreads (currently estimated to be 150 basis
points). Although AFG has partially funded the lease facility through equity
contributions, AFG does not have sufficient residual equity at risk.
Accordingly, the Company has included the assets and liabilities related to
AFG's Orlando loan agreement in the consolidated balance sheet at January 25,
2002. The outstanding borrowings and related assets of approximately $1,130 are
reflected in long-term debt and construction in progress. At the end of the
lease term, the Company has the option to renew the lease for up to two
additional five-year periods, or to purchase the building for a price including
the outstanding lease balance. If the Company elects not to renew the lease or
purchase the building, the Company may elect to remarket the property and
arrange the sale of the building to a third party. Under the remarketing option,
the Company has guaranteed approximately 85% of the total original cost as the
residual fair value of the building.
Miami Property
Under the terms of the loan agreement ("Miami loan agreement") between AFG and
SunTrust for the Miami property, AFG was required to fund the Miami property
through an equity investment of approximately 20% with the remainder funded
through non-recourse borrowings from SunTrust. Concurrent with the
18
execution of the Miami loan agreement, the Company executed a master lease
agreement (the "Miami lease agreement") with AFG. Under the terms of the Miami
lease agreement, the Company will lease the Miami property with rent payments
scheduled to begin in January 2003. Rent payments for the first four years are
interest only at a rate based on LIBOR plus applicable credit spreads (currently
estimated to be 150 basis points). Beginning in the fifth year, rents are
re-amortized and rates for the remainder of the term increase to 12.5% plus
applicable consumer price index adjustments. During the first four years of the
Miami lease agreement, the Company may elect to purchase the property for the
existing lease balance or convert it into the Company's lease facility agreement
referenced above. Although AFG has sufficient equity at risk with respect to the
Miami property, the assets and liabilities related to AFG's Miami loan agreement
have been included in the consolidated balance sheet at January 25, 2002 based
on the required consolidation of the assets and liabilities related to AFG's
lease facility referenced above. The outstanding borrowings and related assets
of approximately $5,459 are reflected in long-term debt and construction in
progress.
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. During
fiscal 2002, the Company paid $5,600 on these senior notes. 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 $36,409 and $74,101 as of January 25, 2002 and January 26, 2001
was 2.9% and 6.7%, 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 25, 2002 and January 26, 2001 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 $160,547 was available at January 25, 2002
for payment of dividends.
Maturities of long-term debt for each of the five years subsequent to January
25, 2002 and in the aggregate are as follows:
Fiscal Years Ending
- --------------------------------------------------------------
2003 $ 19,175
2004 115,777
2005 44,191
2006 44,105
2007 38,505
Thereafter 161,093
- --------------------------------------------------------------
$422,846
==============================================================
The fair values of long-term debt approximated $431,870 and $539,287 and the
related carrying values were $422,846 and $531,442 at January 25, 2002 and
January 26, 2001, respectively.
Note 6--Income Taxes
The consolidated provision for income taxes consists of the following:
Fiscal Years Ended
- --------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------
Currently payable:
Federal $17,811 $37,515 $36,763
State 2,321 4,315 5,553
- --------------------------------------------------------------
20,132 41,830 42,316
Deferred:
Federal 10,998 (7,007) 1,241
State (509) (661) 174
- --------------------------------------------------------------
10,489 (7,668) 1,415
- --------------------------------------------------------------
$30,621 $34,162 $43,731
==============================================================
19
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share data)
The following is a reconciliation of tax computed at the statutory federal rate
to the income tax expense in the consolidated statements of income:
Fiscal Years Ended
-------------------------------------------------------
2002 2001 2000
-------------------------------------------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------
Tax computed at statutory federal rate $26,140 35.0% $28,237 35.0% $ 38,361 35.0%
Effect of:
State and local income tax, net of federal income tax benefit 1,509 2.0 2,377 2.9 3,722 3.4
Nondeductible expenses 2,336 3.1 3,548 4.4 2,740 2.5
Other, net 636 0.9 -- -- (1,092) (1.0)
- -------------------------------------------------------------------------------------------------------------------------
$30,621 41.0% $34,162 42.3% $ 43,731 39.9%
=========================================================================================================================
The components of deferred tax assets and liabilities at January 25, 2002 and
January 26, 2001 are as follows:
2002 2001
- -------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 2,016 $ 2,339
Inventories 5,621 5,144
Property and equipment 700 --
Accrued vacation 2,481 2,230
Other accrued liabilities 2,843 7,549
State net operating losses 2,086 1,166
Deferred compensation 3,498 4,011
Other -- 3,692
- -------------------------------------------------------------
Gross deferred tax assets 19,245 26,131
Valuation allowance (72) (698)
- -------------------------------------------------------------
Total deferred tax assets 19,173 25,433
- -------------------------------------------------------------
Deferred tax liabilities:
Capitalized software development costs 2,793 3,717
Goodwill and intangible assets 7,165 5,559
Deferred gain and prepaid expenses 7,554 3,466
Property and equipment -- 871
Other 113 --
- -------------------------------------------------------------
Total deferred tax liabilities 17,625 13,613
- -------------------------------------------------------------
Net deferred tax assets $ 1,548 $11,820
=============================================================
At January 25, 2002, the Company had state net operating loss carryforwards of
$2,086, which expire between 2006 and 2022. A valuation allowance has been
provided on certain of the state net operating losses at January 25, 2002 as
full realization of these assets is not considered more likely than not.
Note 7--Employee Benefit Plans
Profit Sharing Plan
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. Prior to August 1, 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, from 4% to 5% on February 1, 2000, and from 5% to 6%
on February 1, 2001. Additional annual contributions may be made at the
discretion of the Board of Directors. Amounts charged to expense for this plan
totaled $5,004, $4,294 and $2,883 in fiscal 2002, 2001 and 2000, 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 $1,285, $1,410 and $1,914 in
fiscal 2002, 2001 and 2000, respectively.
Supplemental Executive Retirement Plan
The Company has a defined benefit retirement plan, which provides supplemental
benefits for certain key executive officers, generally for periods up to 15
years, upon retirement, disability or death. The obligations are not funded
separately from the Company's general assets. At January 25, 2002, the liability
under the plan, as determined in accordance with FAS 87, Employers' Accounting
for Pensions, was $4,649. At January 26, 2001, the liability was $4,110. The
liability in each year is recorded in other noncurrent liabilities. Amounts
charged to expense under the plan totaled $539, $663 and $543 in fiscal 2002,
2001 and 2000, 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 totaled
20
$51,649, $51,073 and $42,792 in fiscal 2002, 2001 and 2000, respectively.
The Company leases several buildings and properties from certain related
parties, including the Company's chairman and chief executive officer, two
members of the Board of Directors, and an executive officer. The leases
generally provide that all expenses related to the properties are to be paid by
the Company. Rents paid under these leases totaled $2,063, $1,945 and $1,841 in
fiscal 2002, 2001 and 2000, respectively.
Aggregate minimum annual rental payments, under non-cancelable operating leases,
including those discussed above, as of January 25, 2002 are as follows:
Fiscal Years Ending
- --------------------------------------------------------------
2003 $ 42,632
2004 32,467
2005 25,554
2006 17,322
2007 9,239
Thereafter 12,710
- --------------------------------------------------------------
$139,924
==============================================================
Guarantee of Affiliate
The Company has provided a financial guarantee totaling $1,470 at January 25,
2002 related to a construction loan for its equity investment.
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.
Note 9--Stock Option Plans
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 until December 31, 2006 with respect to the 1997 Stock Plan or May 24, 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 of the Board of Directors (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.
During fiscal 2002, the Company granted certain key executives 410,000
restricted shares in accordance with a stock performance award under the 1997
Stock Plan. The shares were awarded in five separate tranches as the Company's
stock price achieved certain levels as determined by the compensation committee.
At January 25, 2002, all such stock price achievement levels had been met. The
shares vest five years from the award date, and are subject to certain other
vesting and forfeiture provisions contained in the 1997 Stock Plan. The market
value of the restricted shares was $10,735 at the date of the grant and was
recorded as unearned compensation, a component of shareholders' equity. This
amount is being charged to expense over the respective vesting period and
totaled $749 in fiscal 2002.
During fiscal 2002 and 2000, the Company granted certain employees 11,000 and
261,921 shares of restricted stock, with market values at the date of grant of
$319 and $6,415, respectively. There were no restricted stock grants made to
employees during fiscal 2001. In fiscal 2002, 2001 and 2000, the Company also
cancelled 84,709, 6,000 and 2,400, respectively, of the restricted shares
granted, with market values at the date of grant of $1,545, $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 2002, 2001 and 2000, this expense totaled
$764, $1,542 and $1,055, respectively.
The 1997 Stock Plan also permits the granting of stock appreciation rights
("SARs") to holders of options. Such rights permit the option holder 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
21
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share data)
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 25, 2002.
Stock Options
Stock option activity and information about the Company's stock options for the
1997 Stock Plan and the Directors' Stock Plan are as follows:
Weighted-
Shares Average
Subject Option
To Option Price
- --------------------------------------------------------------
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
Granted 167,500 20.71
Exercised (255,425) 14.63
Cancelled (80,600) 26.91
- --------------------------------------------------------------
Under option, January 25, 2002
(695,664 shares exercisable) 955,364 $22.40
==============================================================
There were 319,398 shares available for the granting of stock options and
restricted shares at January 25, 2002. Outstanding options at January 25, 2002
have expiration dates ranging from August 17, 2004 to November 15, 2011.
The following table summarizes information about stock options outstanding at
January 25, 2002:
Weighted-
Weighted- Average
Average Remaining
Range of Options Exercise Contractual
Exercise Prices Outstanding Price Life (Years)
- ---------------------------------------------------------------
$12.83-$15.35 84,500 $13.99 5
16.00- 18.75 466,250 17.41 8
21.00- 25.67 152,639 22.81 9
26.30- 35.63 251,975 33.28 6
- ---------------------------------------------------------------
$12.83-$35.63 955,364 $22.16 7
===============================================================
Stock-Based Compensation
The Company accounts for its stock option plans using the intrinsic value based
method of accounting, under which no compensation expense has been recognized
for stock option awards granted at fair market value. Had compensation expense
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
Fiscal Years Ended
-------------------------------
2002 2001 2000
- ---------------------------------------------------------------
Net income:
As reported $44,065 $46,515 $65,871
Pro forma 43,485 43,163 64,770
- ---------------------------------------------------------------
Earnings per share:
As reported--basic $ 1.90 $ 2.00 $ 2.82
Pro forma--basic 1.88 1.86 2.77
As reported--diluted $ 1.88 $ 1.97 $ 2.80
Pro forma--diluted 1.86 1.83 2.75
===============================================================
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 1.5%, 1.3% and 1.3% for fiscal 2002, 2001 and
2000, respectively; expected volatility of 38.3%, 36.0% and 35.0% for fiscal
2002, 2001 and 2000, respectively; risk-free interest rates of 4.7%, 6.7% and
6.7% for fiscal 2002, 2001 and 2000, respectively; and expected lives of 8 years
for fiscal 2002, 2001 and 2000. The weighted-average fair value of options
granted during the year was $9.16, $8.77 and $11.48 in fiscal 2002, 2001 and
2000, 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.
Note 10--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. Since March 15, 1999, the Company has repurchased
1,315,800 shares at an average price of $21.86 per share, of which 394,700
shares at an average price of $19.10 per share were repurchased in fiscal 2002,
and 921,100 shares at an average price of $23.05 per share were repurchased in
fiscal 2000. No shares were repurchased in fiscal 2001.
22
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 (a) ten days after 20% or more of the Company's stock is acquired by a person
or group and (b) 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 shareholder rights plan.
Note 11--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
includes the additional dilutive effect of the Company's potential common
shares, which includes certain employee and director stock options, unvested
shares of restricted stock and stock rights issued in connection with the
bestroute acquisition in fiscal 2001.
The following summarizes the incremental shares from these potentially dilutive
common shares, calculated using the treasury method, as included in the
calculation of diluted weighted-average shares:
` Fiscal Years Ended
- -------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------
Basic weighted-average
number of shares 23,175,025 23,238,025 23,398,204
Incremental shares resulting from:
Stock options 96,062 56,244 108,142
Restricted stock 84,986 47,363 40,272
Stock rights issued in
connection with the
bestroute acquisition 67,550 242,386 --
=========================================================================
Diluted weighted-average
number of shares 23,423,623 23,584,018 23,546,618
=========================================================================
Options to purchase 362,114, 1,166,490 and 544,802 shares of common stock at
average exercise prices of approximately $32.10, $23.77 and $29.83 were not
included in the computation of diluted earnings per share for fiscal 2002, 2001
and 2000, respectively, because their effect would have been anti-dilutive.
Note 12--Segment Information
The Company's operations are organized on a product basis into five stand-alone
Groups: Electrical; Plumbing/HVAC; Industrial; Building Materials; and Water &
Sewer. The Electrical Group includes the Company's electrical and electric
utility products; the Plumbing/HVAC Group includes the Company's plumbing/ HVAC
products and its international business; the Industrial Group includes the
Company's industrial pipe, valves and fittings products; the Building Materials
Group includes the Company's building materials products and maintenance
supplies; and the Water & Sewer Group includes the Company's water and sewer,
fire protection and concrete products. The "Corporate & Other" category includes
corporate level expenses not allocated to the Company's operating Groups along
with revenues and expenses for bestroute. This is the basis management uses for
making operating decisions and assessing performance and is on a basis
consistent with how business activities are reported internally to management.
Intersegment sales are excluded from net sales presented for each Group. Income
before income taxes includes certain corporate expense allocations for employee
benefits, interest expense, corporate capital charges, and property/casualty
insurance. These allocations are based on consumption or at a standard rate
determined by management.
23
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share data)
In connection with the Company's reorganization at the beginning of fiscal 2001,
certain administrative groups and assets were realigned on a Group basis.
Additionally, in 2001, the Company changed its method of allocating certain
costs (e.g., interest expense, rent expense, corporate capital charges, and
depreciation and amortization, etc.) to the Groups, which has also impacted the
comparability of prior year information. Accordingly, comparative financial
information for fiscal 2000 has only been presented for net sales and gross
profit, which were not impacted by the allocation method changes. In fiscal
2002, various functions previously performed on a decentralized basis, including
accounting and credit, are now performed at the Corporate level. As a result of
this change, in fiscal 2001, operating expenses totaling $17,180 have been
reclassified from the operating Groups to Corporate.
The following table presents net sales and other financial information by Group
for fiscal 2002 and 2001. When comparable, information for fiscal 2000 has also
been presented.
Plumbing/ Building Water & Corporate
Electrical HVAC(1) Industrial Materials(1) Sewer & Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Net sales
2002 $575,460 $ 900,996 $330,375 $293,348 $937,446 $ 83 $3,037,708
2001 606,268 1,045,997 315,315 409,684 932,870 29 3,310,163
2000 576,739 992,522 299,590 388,169 737,857 -- 2,994,877
===========================================================================================================================
Gross profit
2002 $111,222 $ 213,003 $ 82,823 $ 89,663 $197,700 $ (491) $ 693,920
2001 117,263 236,229 82,463 118,045 190,384 (927) 743,457
2000 105,492 242,055 69,668 102,938 154,120 -- 674,273
===========================================================================================================================
Depreciation and amortization
2002 $ 2,510 $ 6,940 $ 2,752 $ 3,320 $ 8,492 $ 7,079 $ 31,093
2001 2,416 7,592 2,876 4,033 7,650 7,984 32,551
===========================================================================================================================
Provision for doubtful accounts
2002 $ 659 $ 6,281 $ 255 $ 87 $ 3,384 $ 399 $ 11,065
2001 1,185 5,145 356 733 2,839 368 10,626
===========================================================================================================================
Impairment of long-lived assets
2002 $ -- $ 734 $ -- $ -- $ -- $ -- $ 734
2001 -- 2,217 -- -- 416 12,924 15,557
===========================================================================================================================
Interest and other income
2002 $ 1,154 $ 3,095 $ 142 $ 1,127 $ 3,647 $ 1,381 $ 10,546
2001 1,357 3,596 355 1,982 3,727 (3,541) 7,476
===========================================================================================================================
Interest expense
2002 $ 872 $ 6,941 $ 9,181 $ 3,194 $ 15,757 $ -- $ 35,945
2001 2,926 9,891 10,170 5,678 14,623 -- 43,288
===========================================================================================================================
Gain on sale of pool and spa business
2001 $ -- $ -- $ -- $ 11,000 $ -- $ -- $ 11,000
===========================================================================================================================
Income (loss) before income taxes
2002 $ 27,523 $ 11,210 $ 20,023 $ 15,397 $ 41,662 $(41,129) $ 74,686
2001 28,940 8,240 20,393 27,084 44,294 (48,274) 80,677
===========================================================================================================================
(1) Results of operations for the pool and spa business, which was sold in
January 2001, were included in the Plumbing/HVAC and Building Materials
Groups in fiscal 2001 and 2000. In addition, prior year amounts have been
restated to reflect the transfer of branches between the Plumbing/HVAC and
Building Materials Groups, which resulted from the sale of the pool and spa
business.
24
The following table includes the Company's investment in accounts receivable,
less allowance for doubtful accounts, and inventories, for each Group at January
25, 2002 and January 26, 2001:
2002 2001
-------------------------------------------------------------------------
Accounts Group Accounts Group
Receivable Inventories Assets Receivable Inventories Assets
- -----------------------------------------------------------------------------------------------------
Electrical $ 71,436 $ 48,527 $ 119,963 $ 82,883 $ 59,170 $ 142,053
Plumbing/HVAC 98,178 129,163 227,341 127,265 149,170 276,435
Industrial 42,971 103,663 146,634 42,734 111,355 154,089
Building Materials 31,556 27,881 59,437 35,253 36,144 71,397
Water & Sewer 143,812 87,207 231,019 147,465 82,729 230,194
Corporate & Other -- -- -- 7 3,221 3,228
- -----------------------------------------------------------------------------------------------------
$ 387,953 $ 396,441 784,394 $435,607 $441,789 877,396
=================================================== =====================
Cash and cash equivalents 6,817 22,449
Deferred income taxes 15,420 18,524
Other current assets 56,809 68,940
Property and equipment 145,702 152,079
Goodwill 263,808 249,826
Other assets 20,312 17,481
- -----------------------------------------------------------------------------------------------------
Total assets $1,293,262 $1,406,695
=====================================================================================================
25
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share data)
Note 13--Quarterly Financial Information (Unaudited)
The following is a summary of the unaudited results of operations for each
quarter in fiscal 2002 and 2001:
First Second Third Fourth Full Year
- ---------------------------------------------------------------------------------------------------------
Fiscal 2002
Net sales $ 775,149 $ 806,317 $ 790,042 $ 666,200 $ 3,037,708
Gross profit 174,882 179,803 181,788 157,447 693,920
Net income 6,417 14,667 17,742 5,239 44,065
- ---------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ .28 $ .63 $ .77 $ .23 $ 1.90
Diluted .27 .63 .76 .22 1.88
- ---------------------------------------------------------------------------------------------------------
Average shares outstanding (in thousands):
Basic 23,297 23,170 23,145 23,089 23,175
Diluted 23,603 23,270 23,356 23,395 23,424
- ---------------------------------------------------------------------------------------------------------
Market price per share:
High $ 18.78 $ 26.30 $ 27.35 $ 31.62 $ 31.62
Low 13.44 15.12 19.55 23.24 13.44
- ---------------------------------------------------------------------------------------------------------
Dividends per share $ .085 $ .085 $ .085 $ .085 $ .34
=========================================================================================================
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
=========================================================================================================
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.
26
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 25, 2002 and January 26, 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended January 25, 2002 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 14, 2002
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 judgments, 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.
27
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 25, 2002, and the results of
operations for fiscal 2002 and 2001. This information should be read in
conjunction with the Company's consolidated financial information provided on
pages 10 to 26 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. Actual results or events may differ significantly from
those indicated in such forward-looking statements as a result of various
important factors. These factors include, but are not limited to, changes in
general economic conditions, the growth rate of the market for the Company's
products and services, the ability to maintain favorable vendor arrangements and
relationships, competitive product and pricing pressures, commodity price
fluctuations as well as other risks and uncertainties that may be described in
the Company's Annual Report on Form 10-K and/or other filings with the
Securities and Exchange Commission. The Company assumes no obligation to
publicly update or revise its forward-looking statements.
Organization
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 439 wholesale branches.
The Company's operations are managed in five strategic business units
("Groups"), which are built around five broad product categories. These Groups
represent the Company's reportable segments and are: Electrical; Plumbing/HVAC;
Industrial; Building Materials; and Water & Sewer. The Corporate & Other
category includes corporate level expenses not allocated to the Company's
operating Groups along with revenues and expenses for the Company's e-commerce
venture.
Results of Operations
Net Sales
Comparable Branch Sales Methodology
In the fourth quarter of fiscal 2002, the Company adopted a new comparable
branch sales methodology, which differs from its previous same-store
methodology. Historically, the Company calculated and disclosed same-store
sales, which included (a) branches open for all fiscal years presented, (b)
branches newly-opened and operating in an existing market of the Company in the
current or prior fiscal years and (c) branches closed where other branches were
going to maintain the existing market. Same-store sales also included activity
associated with splitting a branch between two Groups and from combining two
branches in the same market place. Under the new methodology, comparable branch
sales will exclude sales related to (a) acquired and newly-opened branches until
operating results are included in the consolidated financial statements for all
periods in the current and prior fiscal years, (b) branch combinations and
splits unless within the same Group and physical location and (c) closed and
divested branches until operating results have been excluded for all fiscal
years presented. All prior year amounts have been restated to reflect the change
in methodology.
Consolidated Net Sales and
Comparable Branch Sales Discussion
In fiscal 2002, net sales for the Company were $3.0 billion, an 8% decrease from
fiscal 2001 net sales of $3.3 billion. Approximately $156.3 million of the
decrease was attributable to a 5% comparable branch sales decline from fiscal
2001. The comparable branch sales decrease was primarily driven by a general
slowdown in the economy in fiscal 2002, combined with deflationary pricing
pressure in stainless steel, nickel alloy, PVC and certain other commodity-based
products. An additional $144.0 million of the overall net sales decrease was due
to the divestiture of the Company's pool and spa business in January 2001. Of
the total $144.0 million net sales decrease, approximately $27.9 million and
$116.1 million related to the Plumbing/HVAC and Building Materials Groups,
respectively. The remaining net sales decrease of approximately $55.5 million
resulted from combining and closing of certain non-performing branches and
elimination or consolidation of customers and services. During fiscal 2002, the
Company closed or decided to close 43 under-performing branches. The above net
sales decreases were partially offset by acquired and newly-opened branches,
which had net sales of $83.3 million in fiscal 2002.
28
In fiscal 2001, consolidated net sales were $3.3 billion, an 11% increase over
fiscal 2000 net sales of $3.0 billion. Approximately $309.5 million of the
increase was attributable to a 12% comparable branch sales increase with the
remainder of the increase attributable to acquired and newly-opened branches.
The 2001 comparable branch sales increase was primarily attributable to
increased infrastructure spending by municipalities in the Water & Sewer Group,
favorable commodity pricing in stainless steel and nickel alloy products, and
increased market penetration in the Building Materials Group.
Consolidated and comparable branch net sales by Group were as follows (in
thousands):
Consolidated Net Sales Comparable Branch Sales(1)
------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Electrical $ 575,460 $ 606,268 $ 576,739 $ 557,898 $ 595,924 $ 564,932
Plumbing/HVAC(2) 900,996 1,045,997 992,522 809,863 876,766 816,634
Industrial 330,375 315,315 299,590 327,092 306,517 288,860
Building Materials(2) 293,348 409,684 388,169 265,591 272,861 257,195
Water & Sewer 937,446 932,870 737,857 848,296 912,949 727,848
Corporate & Other 83 29 -- -- -- --
- ------------------------------------------------------------------------------------------------------
$3,037,708 $3,310,163 $2,994,877 $2,808,740 $2,965,017 $2,655,469
======================================================================================================
(1) Prior year amounts have been restated to conform with the new comparable
branch sales methodology as discussed above.
(2) Results of operations for the pool and spa business, which was sold in
January 2001, were included in the Plumbing/HVAC and Building Materials
Groups in fiscal 2001 and 2000. In addition, prior year amounts have been
restated to reflect the transfer of branches between the Plumbing/HVAC and
Building Materials Groups, which resulted from the sale of the pool and spa
business.
The following sets forth factors impacting comparable branch sales for the
Company's operating Groups:
Electrical
In fiscal 2002, comparable branch sales for the Electrical Group decreased $38.0
million or 6%. The decrease was primarily due to softening prices of certain
commodity driven items coupled with an overall weakness in the electrical
construction market as a result of a general slowdown in the U.S. economy. This
Group supplied materials for several large infrastructure projects in fiscal
2001 with no corresponding activity in fiscal 2002. These decreases were
partially offset by strong commercial activity in the Southwestern U.S. market
and increased sales of utility products in the Midwestern U.S. market.
In fiscal 2001, comparable branch sales were $595.9 million,
a $31.0 million or 5% increase from fiscal 2000. The increase was primarily due
to commercial construction activity related to several large infrastructure
projects.
Plumbing/HVAC
In fiscal 2002, comparable branch sales for the Plumbing/HVAC Group declined
$66.9 million or 8%. The overall comparable branch sales decline was primarily
due to a slowdown in the commercial construction markets in the Western U.S.
Sales performance was further impacted by a slowdown in international business
resulting from the completion of a large oil and gas pipeline project in fiscal
2001 with no corresponding activity in fiscal 2002. Net sales for the Company's
international business decreased $20.0 million compared to fiscal 2001.
In fiscal 2001, comparable branch sales were $876.8 million, a $60.1 million or
7% increase from fiscal 2000. The growth in comparable branch sales resulted
from improved strength of the construction market.
Industrial
In fiscal 2002, comparable branch sales for the Industrial Group increased $20.6
million or 7% as a result of strong sales to customers in the chemical,
petrochemical, power generation and gas utility industries. Comparable branch
sales were also favorably impacted by several large petrochemical plant
rehabilitation and energy and power plant installation projects. The increase
was partially offset by declining prices for certain commodity-based products,
including stainless steel and nickel alloy products. In recent months, the
Company has been informed of several large power generation projects which have
been postponed. These postponements are expected to reduce sales levels in the
near term.
In fiscal 2001, comparable branch sales were $306.5 million, a $17.7 million or
6% increase from fiscal 2000. The increase was the result of commodity price
increases in stainless steel and
29
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
nickel alloy products. Fiscal 2000 was negatively impacted by declines in such
commodity-based products.
Building Materials
In fiscal 2002, comparable branch sales for the Building Materials Group
decreased $7.3 million or 3%. This decrease was primarily attributable to sales
of complementary building materials products that were lost as a result of the
divestiture of the pool and spa business.
In fiscal 2001, comparable branch sales were $272.9 million,
a $15.7 million or 6% increase from fiscal 2000. The increase 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.
Water & Sewer
Overall sales for the Water & Sewer Group were flat in fiscal 2002 when compared
to fiscal 2001, while comparable branch sales declined $64.7 million or 7%. The
comparable branch sales decrease was primarily attributable to (a) the
completion of several large infrastructure projects for municipalities in fiscal
2001 which did not recur in fiscal 2002 and (b) declining commodity prices for
certain PVC and domestic steel products. The comparable branch sales decline was
offset by sales from an acquisition completed in the spring of fiscal 2002.
In fiscal 2001, comparable branch sales for the Water & Sewer Group were $912.9
million, a $185.1 million or 25% increase from fiscal 2000. This increase was
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.
Gross Profit and Gross Margin
Gross margins were 22.8% in fiscal 2002 and 22.5% in both
fiscal 2001 and 2000. The 30 basis point improvement in gross margin was largely
due to a shift in sales mix, with a higher proportion of out-of-stock sales in
fiscal 2002 as compared to direct shipments, which typically generate lower
margins. Gross margins were also favorably impacted by company-wide inventory
improvement initiatives implemented in fiscal 2002, which resulted in enhanced
purchasing power. In fiscal 2001, the favorable impact of stainless steel and
nickel alloy commodity price increases 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 Group were as follows (in thousands):
Gross Profit Gross Margin
----------------------------------------------------------
2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------
Electrical $111,222 $117,263 $105,492 19.3% 19.3% 18.3%
Plumbing/HVAC 213,003 236,229 242,055 23.6 22.6 24.4
Industrial 82,823 82,463 69,668 25.1 26.2 23.3
Building Materials 89,663 118,045 102,938 30.6 28.8 26.5
Water & Sewer 197,700 190,384 154,120 21.1 20.4 20.9
Corporate & Other (491) (927) -- -- -- --
- -------------------------------------------------------------------------------
$693,920 $743,457 $674,273 22.8% 22.5% 22.5%
===============================================================================
Electrical
Overall, gross margin remained flat in fiscal 2002 as declines in commodity
prices offset margin improvements achieved through enhanced purchasing power. In
fiscal 2001, gross margin increased approximately 100 basis points primarily as
a result of 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 increased approximately 100 basis points in fiscal 2002 primarily
due to the Company's efforts to improve margin on certain products and to a
decline in lower-margin international business. In fiscal 2001, gross margin
decreased approximately 180 basis points as a result of the impact of lower
commodity prices on plumbing products and increased sales in its lower-margin
international branches. There was also an erosion of margins as the Company
sought to protect market share in certain geographic areas from aggressive price
competition.
30
Industrial
In fiscal 2002, gross margin decreased approximately 110 basis points as a
result of declining prices for certain commodity-based products, including
stainless steel and nickel alloy products. The Company anticipates prices
related to commodity-based products to increase only modestly in fiscal 2003,
which could yield slightly higher margins as inventories purchased during
declining price environments are depleted.
In fiscal 2001, gross margin increased approximately 290 basis points. As noted
above, gross profit and gross margin within this Group are closely tied to the
pricing of certain commodity-based products, primarily stainless steel and
nickel alloy products. The 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.
Building Materials
Gross margin increased approximately 180 and 230 basis points in fiscal 2002 and
2001, respectively. The increase in fiscal 2002 was driven primarily by a sales
mix that included more high-margin fabricated products and to the divestiture of
the pool and spa business, which generated lower gross margins compared to gross
margins as a whole for the Building Materials Group. The 230 basis point
increase in fiscal 2001 was 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 increased approximately 70 basis points in fiscal 2002. This
increase was primarily due to a change in sales mix that resulted from fewer
large direct shipment orders, which typically generate lower gross margins. In
fiscal 2001, gross margin decreased approximately 50 basis points. This decrease
was principally attributable to a general increase in large direct shipment
orders.
Operating Expenses
Operating expenses were as follows (in thousands):
Fiscal Years Ended % of Net Sales
------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Personnel expenses $373,857 $382,050 $340,377 12.3% 11.5% 11.4%
Other selling, general and administrative expenses 177,086 197,184 167,632 5.8 6.0 5.6
Depreciation and amortization 31,093 32,551 29,808 1.0 1.0 1.0
Provision for doubtful accounts 11,065 10,626 4,064 0.4 0.3 0.1
Impairment of long-lived assets 734 15,557 -- -- 0.5 --
- -----------------------------------------------------------------------------------------------------------------------
$593,835 $637,968 $541,881 19.5% 19.3% 18.1%
=======================================================================================================================
Operating expenses decreased $44.1 million or 7% in fiscal 2002. As a percentage
of net sales, operating expenses increased approximately 20 basis points in
fiscal 2002, which was directly due to lower sales volumes experienced by the
Company. Approximately $25.5 million of the overall expense decrease was due to
the divestiture of the Company's pool and spa business. Impairment of long-lived
assets decreased $14.8 million in fiscal 2002 when compared to fiscal 2001. In
fiscal 2001, the Company recorded a $15.6 million charge, including the
write-off of goodwill and other assets totaling $12.9 million related to the
Company's e-commerce initiatives, and a charge totaling approximately $2.7
million primarily related to the write-off of goodwill in the Company's
international operations. In fiscal 2002, a goodwill write-off of $0.7 million
for the Company's Plumbing/HVAC operations was recorded in the fourth quarter.
The remaining operating expense decrease was primarily attributable to the
overall net sales decrease and the Company's cost containment initiatives, which
were implemented in fiscal 2002. These initiatives included hiring freezes,
salary rate limits on merit and promotional increases, the elimination of
certain management and staff positions and reductions in both capital spending
and discretionary spending items, including overtime, contract labor, travel,
entertainment and other variable expenses. The Company will continue to review
its operations and identify areas where additional efficiencies may be obtained.
In fiscal 2002, the cost saving initiatives noted above were partially offset by
costs associated with the closing of 43 under-performing branches, severance
costs associated with layoffs and an increase in the provision for doubtful
accounts. These branch closures
31
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
resulted in approximately $6.5 million of charges related to severance, lease
and other contractual obligations, and additional provisions for doubtful
accounts. Excluding severance costs associated with branch closures, the Company
recorded $2.7 million of severance expense in fiscal 2002. Approximately $1.5
million of this amount was related to the Company's separation agreement with
its former president, with the remainder attributable to the elimination of
various other management and staff positions.
In fiscal 2001, operating expenses were $638.0 million, an 18% increase from
fiscal 2000. Included in fiscal 2001 operating expenses is a $15.6 million
charge for the impairment of long-lived assets. Provision for doubtful accounts
increased from $4.1 million in fiscal 2000 to $10.6 million in fiscal 2001. The
increase was related to an economic slowdown which affected the Company's
primary markets, particularly its international business, during late fiscal
2001. The remaining increase in operating expenses was primarily due to higher
personnel costs associated with comparable branch sales growth, increased
transportation costs brought about by comparable branch sales growth, increased
fuel costs, and increased information technology ("IT") spending as the Company
initiated its program of upgrading IT systems.
Non-Operating Income (Expenses)
Interest and other income totaled $10.5 million, $7.5 million and $9.0 million
in fiscal 2002, 2001 and 2000, respectively. The increase in fiscal 2002 was due
to the elimination of $3.2 million of prior year net losses related to the
Company's equity investments combined with interest income of $0.9 million
related to a $25.0 million short-term note receivable which was received in
connection with the sale of the Company's pool and spa business. These increases
were partially offset by $0.7 million of non-operating expenses primarily
related to asset write-downs and other expenses from branch closures. The $1.5
million decrease in fiscal 2001 was primarily due to net losses totaling $3.7
million from the Company's equity investments, partially offset by increased
income from the collection of service charges on delinquent accounts receivable
and other interest income.
Interest expense totaled $35.9 million, $43.3 million and $31.8 million in
fiscal 2002, 2001 and 2000, respectively. The decrease in fiscal 2002 was due to
lower borrowing levels coupled with reduced interest rates. Borrowing levels in
fiscal 2002 were reduced as the Company utilized proceeds from the sale of its
pool and spa business and working capital improvements program to reduce debt
balances. In fiscal 2001, interest expense increased $11.5 million or 36% from
fiscal 2000 primarily as a result of higher borrowing levels and interest rates.
The higher borrowing levels were primarily due to the Company's (a) higher
working capital investments resulting from accelerated sales growth, (b)
expansion through business acquisitions, which has been partially funded by debt
financing and (c) share repurchases.
Non-operating income (expenses) in fiscal 2001 included an $11.0 million pre-tax
($6.7 million after-tax) gain relating to the sale of the Company's pool and spa
business, which was sold for $48.0 million in January 2001. The Company received
cash proceeds of $23.0 million with the remaining $25.0 million of consideration
being received in the form of a short-term note receivable, which was fully
collected in fiscal 2002.
Income Taxes
The Company's effective tax rate was 41.0%, 42.3% and 39.9% in fiscal 2002, 2001
and 2000, respectively. The increase in the fiscal 2001 effective tax rate was
due to the elimination of nondeductible goodwill related to the Company's
international operations and the sale of its pool and spa business.
Net Income
Net income totaled $44.1 million, $46.5 million and $65.9 million in fiscal
2002, 2001 and 2000, respectively. Diluted earnings per share totaled $1.88,
$1.97 and $2.80 in fiscal 2002, 2001 and 2000, respectively. The factors
impacting net income and diluted earnings per share have been enumerated above.
Financial Condition
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity (in
thousands):
Fiscal Years Ended
- --------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------
Cash provided by
operating activities $ 144,763 $ 66,148 $ 33,449
Working capital $ 588,275 $ 679,130 $ 657,500
Current ratio 3.1 to 1 3.3 to 1 3.2 to 1
Long-term debt-to-capital 40% 48% 51%
==============================================================
In fiscal 2002, net cash provided by operations of $144.8 million was primarily
the result of reductions in inventory as part of the Company's inventory
management program and lower accounts receivable levels caused by the year over
year sales decline in fiscal 2002. 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. The
increase in accrued liabilities was related to the timing of income tax
payments.
32
In fiscal 2002, the $90.9 million decrease in working capital was principally
driven by lower receivable and inventory balances and a decrease in other
current assets. These changes were partially offset by lower accounts payable,
which correspond with the reduction in inventory levels. The decrease in
inventories reflects company-wide initiatives to reduce inventory levels to be
more in line with current market demand. The decrease in other current assets
was due to the collection of $25.0 million on the note receivable related to the
sale of the Company's pool and spa business, which was partially offset by
higher income tax receivables in fiscal 2002. The fiscal 2001 increase of $21.6
million in working capital was primarily attributable to 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 $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 in connection with its cash management programs.
Investing Activities
Capital expenditures totaled $16.9 million, $23.9 million and $30.7 million in
fiscal 2002, 2001 and 2000, respectively. Of these expenditures, approximately
$3.9 million, $8.3 million and $14.0 million, respectively, were for new
warehouse facilities and approximately $7.6 million, $3.2 million and $5.0
million, respectively, related to IT outlays. The Company continues to closely
monitor and control capital expenditures, and instituted a freeze on most new
building projects during fiscal 2002. Fiscal 2003 capital expenditures are
expected to be approximately $15 million. This excludes approximately $18
million related to the Company's new corporate headquarters facility in Orlando,
Florida and a new warehouse in Miami, Florida, as discussed further below.
Proceeds from the sale of property and equipment totaled $8.7 million, $1.8
million and $4.9 million in fiscal 2002, 2001 and 2000, respectively. The $6.9
million increase in proceeds during fiscal 2002 was primarily due to the sale
and subsequent lease-back of substantially all of the Company's forklift fleet
and certain trailers, which generated proceeds of $5.7 million in August 2001.
The remaining increase was due to sales of certain land and building assets as a
result of closed branches. In fiscal 2000, the Company received proceeds of
approximately $2.5 million from the sale and subsequent lease-back of certain
computer hardware.
Cash payments for business acquisitions totaled $32.0 million, $34.1 million and
$88.9 million in fiscal years 2002, 2001 and 2000, respectively. These outlays
represent one, three and seven wholesale distributors acquired and accounted for
using the purchase method of accounting in fiscal 2002, 2001 and 2000,
respectively.
On March 2, 2001, in connection with the closure of one of the Company's
e-commerce ventures, the Company entered into an agreement with the holders of
723,183 of the Company's stock rights originally issued as consideration for the
acquisition. This agreement cancelled 347,541 of the stock rights and enabled
the remaining stock rights to be redeemed for $7.3 million in cash.
Financing Activities
Net payments on the Company's revolving credit agreement totaled $100.3 million
and $153.9 million in fiscal 2002 and 2001, respectively, compared to net
borrowings of $132.8 million in fiscal 2000. Principal reductions on long-term
debt were $23.8 million, $2.5 million and $14.7 million in fiscal 2002, 2001 and
2000, respectively. In fiscal 2002, these amounts were attributable to payments
of $15.0 million on the Company's senior notes, $8.6 million on debt assumed as
a result of certain business acquisitions and $0.2 million on other notes
payable. Dividend payments totaled $8.0 million, $8.1 million and $8.0 million
during fiscal 2002, 2001 and 2000, respectively.
On January 15, 2002, the Company's line of credit agreement was amended to
decrease borrowing capacity from $75.0 million to $36.3 million. The Company's
current borrowing capacity under its revolving credit agreement and its line of
credit agreement (the "credit agreement") totaled $311.3 million (subject to
borrowing limitations under the credit agreement)--$275.0 million under its
revolving credit agreement as long-term debt due January 25, 2004 and $36.3
million under its line of credit agreement, as amended, which matures on July
31, 2002.
On October 31, 2001, the Company entered into an equipment lease agreement (the
"lease agreement") with a financial institution. Under the terms of the lease
agreement, the Company leases certain equipment, including vehicles, forklifts
and trailers from various companies with fundings provided by the lease
agreement. The maximum capacity is $15.0 million and the monthly payments are
made to the bank in accordance with the terms of each specific equipment lease.
Availability at January 25, 2002 under the lease agreement totaled approximately
$14.4 million.
33
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
The Company has two short-term lines of credit with an aggregate borrowing
capacity of $25.0 million. On June 30, 2001, these lines of credit were amended
to extend the maturity dates to June 30, 2002.
On June 22, 2001, the Company entered into an agreement ("lease facility
agreement") with Atlantic Financial Group, Ltd. ("AFG"), certain financial
parties as lenders and SunTrust Bank as agent ("SunTrust") in which AFG and
SunTrust agreed to fund up to $40.0 million for the acquisition and development
of real property projects chosen by the Company, including up to $25.0 million
for the Company's new corporate headquarters building in Orlando, Florida
("Orlando property") which is expected to cost approximately $23.0 million. Also
on June 22, 2001, the Company entered into an agreement with AFG, certain
financial parties as lenders and SunTrust as agent for the construction of a new
warehouse in Miami, Florida ("Miami property"). Pursuant to this agreement, AFG
and SunTrust agreed to fund up to $15.0 million for the construction of this
facility, which is expected to cost approximately $13.0 million.
Orlando Property
Under the terms of the loan agreement ("Orlando loan agreement") between AFG and
SunTrust for the Orlando property, AFG was required to fund the lease facility
through a nominal equity investment, with the remainder funded through
non-recourse borrowings from SunTrust. Concurrent with the execution of the
Orlando loan agreement, the Company executed a master lease agreement ("Orlando
lease agreement") with AFG under which the Company will lease the Orlando
property for a five-year term, including the construction period and a lease
period. The Orlando lease agreement requires interest only payments that begin
at the earlier of the completion of construction, which is expected in September
2003, or eighteen months following the acquisition of the Orlando property,
which is expected to occur in April 2002. Payments are interest only at LIBOR
rates plus applicable credit spreads (currently estimated to be 150 basis
points). Although AFG has partially funded the lease facility through equity
contributions, AFG does not have sufficient residual equity at risk.
Accordingly, the Company has included the assets and liabilities related to
AFG's Orlando loan agreement in the consolidated balance sheet at January 25,
2002. The outstanding borrowings and related assets of approximately $1.1
million are reflected in long-term debt and construction in progress. At the end
of the lease term, the Company has the option to renew the lease for up to two
additional five-year periods, or to purchase the building for a price including
the outstanding lease balance. If the Company elects not to renew the lease or
purchase the building, the Company may elect to remarket the property and
arrange the sale of the building to a third party. Under the remarketing option,
the Company has guaranteed approximately 85% of the total original cost as the
residual fair value of the building.
Miami Property
Under the terms of the loan agreement ("Miami loan agreement") between AFG and
SunTrust for the Miami property, AFG was required to fund the Miami property
through an equity investment of 20% with the remainder funded through
non-recourse borrowings from SunTrust. Concurrent with the execution of the
Miami loan agreement, the Company executed a master lease agreement (the "Miami
lease agreement") with AFG. Under the terms of the Miami lease agreement, the
Company will lease the Miami property with rent payments scheduled to begin in
January 2003. Rent payments for the first four years are interest only at a rate
based on LIBOR plus applicable credit spreads (currently estimated to be 150
basis points). Beginning in the fifth year, rents are re-amortized and rates for
the remainder of the term increase to 12.5% plus applicable consumer price index
adjustments. During the first four years of the Miami lease agreement, the
Company may elect to purchase the property for the existing lease balance or
convert it into the Company's lease facility agreement referenced above.
Although AFG has sufficient equity at risk with respect to the Miami property,
the assets and liabilities related to AFG's Miami loan agreement have been
included in the consolidated balance sheet at January 25, 2002 based on the
required consolidation of the assets and liabilities related to AFG's lease
facility referenced above. The outstanding borrowings and related assets of
approximately $5.5 million are reflected in long-term debt and construction in
progress.
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
bears 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 credit agreement.
As of January 25, 2002, the Company had approximately $6.8 million of cash and
$283.5 million of unused borrowing capacity (subject to borrowing limitations,
under long-term debt covenants) to fund ongoing operating requirements and
anticipated capital
34
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 Company's Board of Directors authorized the Company to
repurchase up to 2,500,000 shares of its outstanding common stock to be used for
general corporate purposes. Since March 15, 1999, the Company has repurchased
1,315,800 shares at an average price of $21.86 per share, of which 394,700
shares at an average price of $19.10 per share were repurchased in fiscal 2002,
and 921,100 shares at an average price of $23.05 per share were repurchased in
fiscal 2000. No shares were repurchased in fiscal 2001.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in the
notes to the consolidated financial statements. Certain of the Company's
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. As with all judgments, they are subject to an inherent degree of
uncertainty. These judgments are based on our historical experience, current
economic trends in the industry, information provided by customers and vendors,
information available from other outside sources and management's estimates, as
appropriate. The Company's significant accounting policies include:
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable based on
numerous factors, including past transaction history with customers and their
credit worthiness. Initially, the Company estimates an allowance for doubtful
accounts as a percentage of net sales based on historical bad debt experience.
This estimate is periodically adjusted when the Company becomes aware of a
specific customer's inability to meet its financial obligations (e.g.
bankruptcy, etc.), or as a result of changes in the overall aging of accounts
receivable. While the Company has a large customer base that is geographically
dispersed, a slowdown in the markets in which the Company operates may result in
higher than expected uncollectible accounts, and therefore, the need to revise
estimates for bad debts. Provision for doubtful accounts totaled $11.1 million,
$10.6 million and $4.1 million in fiscal 2002, 2001 and 2000, respectively. To
the extent historical credit experience is not indicative of future performance
or other assumptions used by management do not prevail, the allowance for
doubtful accounts could differ significantly, resulting in either higher or
lower future provisions for doubtful accounts.
Inventories
The Company evaluates its inventory value at the end of each quarter to ensure
that it is carried at the lower of cost or market. This evaluation includes an
analysis of a branch's physical inventory results over the last two years, a
review of potential dead stock, and an overall consolidated analysis of
potential excess inventory items. An inventory provision is recorded monthly to
provide for any potential write-downs of the Company's inventory to market value
or for projected historical shortages. Periodically, the branch's perpetual
inventory records are adjusted to reflect permanent declines in market value. To
the extent historical physical inventory results are not indicative of future
results and if unexpected future events impact, either favorably or unfavorably,
the saleability of the Company's products, the inventory reserves could differ
significantly, resulting in either higher or lower future inventory provisions.
At January 25, 2002 and January 26, 2001, inventory reserves totaled $9.9
million and $10.4 million, 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. Impairment is assessed
by evaluating the estimated undiscounted cash flows over the asset's remaining
life. If estimated cash flows are insufficient to recover the investment, an
impairment loss is recognized. In the fourth quarter of fiscal 2002, the Company
recorded an impairment loss of $0.7 million related to goodwill on its
Plumbing/HVAC operations. 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 $15.6 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,
and a charge totaling approximately $2.7 million primarily related to the
write-off of goodwill in the Company's international operations.
35
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
Self-Insurance
The Company is self-insured for certain losses relating to workers'
compensation, automobile, general and product liability claims. The Company also
maintains stop loss coverages to limit the exposure arising from such claims.
Self-insurance losses for claims filed and claims incurred but not reported are
accrued based upon the Company's estimates of the aggregate liability for
uninsured claims using loss development factors and actuarial assumptions
followed in the insurance industry and the Company's historical loss development
experience. To the extent future projected development of the losses resulting
from workers' compensation, automobile, general and product liability claims
incurred as of January 25, 2002 differs from the actual development of such
losses in future periods, the Company's insurance reserves could differ
significantly resulting in either higher or lower future insurance expense.
Recent Accounting Pronouncements
Effective February 2001, the Company adopted Statement of Financial Accounting
Standards ("FAS") 133, Accounting for Derivative Instruments and Hedging
Activities. FAS 133 was amended by FAS 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Both FAS 133 and FAS 138 require
that an entity record all derivatives as either assets or liabilities in the
consolidated balance sheets at fair value and measure those instruments at fair
value and to reflect changes in fair value of those instruments as either
components of comprehensive income or in net income depending on the types of
instruments. The adoption of these standards did not have an impact on the
Company's consolidated financial statements.
FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible
Assets, were issued in July 2001. FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting. FAS 141 also specifies the criteria which must be met in order for
certain acquired intangible assets to be recorded separately from goodwill. FAS
142 is effective for the Company beginning with the Company's first quarter of
fiscal 2003. Under FAS 142, all the Company's goodwill will no longer be
amortized but rather will be tested for impairment annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
In fiscal 2002, amortization of goodwill totaled $9,229. This new approach
requires the use of valuation techniques and methodologies significantly
different than the present undiscounted cash flow policy being followed by the
Company. In connection with the adoption of FAS 142, the Company's conclusions
about the valuation and recoverability of goodwill may change. The new approach
may result in impairment charges and reductions in the carrying amount of
goodwill on the consolidated balance sheets upon adoption. Subsequent to the
initial adoption of FAS 142, the Company may be subject to earnings volatility
if additional goodwill impairment occurs at a future date. The Company is in the
process of performing the goodwill evaluation required under FAS 142 and has not
yet determined the impact that will result from adoption.
FAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001.
FAS 143, which is effective for the Company beginning in fiscal 2004, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company does not expect the adoption of FAS 143 to have a material
impact on its consolidated financial statements.
FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was
issued in August 2001. FAS 144, which is effective beginning with the Company's
first quarter of fiscal 2003, establishes a single accounting model for
long-lived assets to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions. The Company does
not expect the adoption of FAS 144 to have a material impact on its consolidated
financial statements.
36
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 25, 2002, the Company had approximately $59.4 million of outstanding
variable-rate debt. Based upon an assumed 10% increase or decrease in interest
rates from their January 25, 2002 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 2002, 2001 or 2000. As discussed above, however, the Company's results
of operations in fiscal 2002 and 2001 were both favorably and unfavorably
impacted by increases and decreases in the pricing of certain commodity-based
products. Fiscal 2000 was unfavorably 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.
37
Selected Financial Data
(in thousands, except per share data)
Fiscal Years Ended(1)(2)
----------------------------------------------------
2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME:
Net sales $3,037,708 $3,310,163 $2,994,877 $2,536,265
Cost of sales 2,343,788 2,566,706 2,320,604 1,977,266
Gross margin 22.8% 22.5% 22.5% 22.0%
- ---------------------------------------------------------------------------------------------------
Selling, general and administrative expenses $ 550,943 $ 579,234 $ 508,009 $ 416,642
Percentage of net sales 18.1% 17.5% 17.0% 16.4%
Depreciation and amortization 31,093 32,551 29,808 23,269
Provision for doubtful accounts 11,065 10,626 4,064 1,882
Operating income 100,085 105,489 132,392 117,206
Operating margin 3.3% 3.2% 4.4% 4.6%
- ---------------------------------------------------------------------------------------------------
Interest and other income $ 10,546 $ 18,476 $ 9,015 $ 6,886
Interest expense 35,945 43,288 31,805 25,415
- ---------------------------------------------------------------------------------------------------
Income before income taxes $ 74,686 $ 80,677 $ 109,602 $ 98,677
Percentage of net sales 2.5% 2.4% 3.7% 3.9%
Income taxes (benefits) 30,621 34,162 43,731 37,234
Net income 44,065 46,515 65,871 61,443
Percentage of net sales 1.5% 1.4% 2.2% 2.4%
- ---------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.90 $ 2.00 $ 2.82 $ 2.57
Diluted 1.88 1.97 2.80 2.55
- ---------------------------------------------------------------------------------------------------
Average shares outstanding:
Basic 23,175 23,238 23,398 23,889
Diluted 23,424 23,584 23,547 24,138
- ---------------------------------------------------------------------------------------------------
BALANCE SHEETS:
Working capital $ 588,275 $ 679,130 $ 657,500 $ 567,435
Total assets 1,293,262 1,406,695 1,377,036 1,128,973
Long-term debt 403,671 516,168 535,000 402,203
Shareholders' equity 594,473 570,035 522,444 483,956
- ---------------------------------------------------------------------------------------------------
Current ratio 3.1 to 1 3.3 to 1 3.2 to 1 3.5 to 1
Long-term debt-to-capital 40% 48% 51% 45%
Leverage (total assets/shareholders' equity) 2.18 2.47 2.64 2.33
- ---------------------------------------------------------------------------------------------------
OTHER:
Cash dividends per share $ .34 $ .34 $ .34 $ .33
Shareholders' equity per share 25.03 24.12 22.16 20.01
Return on average assets 3.3% 3.3% 5.3% 5.9%
Return on average shareholders' equity 7.6% 8.5% 13.1% 13.6%
Capital expenditures 16,850 23,871 30,740 26,921
- ---------------------------------------------------------------------------------------------------
(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.
38
Fiscal Years Ended(1)(2)
- ----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------
$1,945,446 $1,619,362 $1,326,978 $1,065,549 $ 880,977 $ 724,466 $ 690,311
1,519,323 1,276,481 1,052,120 848,698 704,907 583,513 557,380
21.9% 21.2% 20.7% 20.4% 20.0% 19.5% 19.3%
- ----------------------------------------------------------------------------------------------
$ 318,923 $ 261,355 $ 218,093 $ 172,828 $ 145,913 $ 119,732 $ 116,317
16.4% 16.1% 16.4% 16.2% 16.6% 16.5% 16.8%
18,727 15,566 11,859 10,131 8,657 7,382 7,987
1,229 1,023 2,203 1,501 2,448 2,028 3,247
87,244 64,937 42,703 32,391 19,052 11,811 5,380
4.5% 4.0% 3.2% 3.0% 2.2% 1.6% .8%
- ----------------------------------------------------------------------------------------------
$ 5,837 $ 6,241 $ 5,111 $ 3,206 $ 3,677 $ 4,072 $ 2,696
19,257 14,842 10,440 6,813 6,456 6,087 7,702
- ----------------------------------------------------------------------------------------------
$ 73,824 $ 56,336 $ 37,374 $ 28,784 $ 16,273 $ 9,796 $ 374
3.8% 3.5% 2.8% 2.7% 1.8% 1.4% .1%
26,254 19,282 11,728 7,984 4,710 1,734 (1,359)
47,570 37,054 25,646 20,800 11,563 8,062 1,733
2.4% 2.3% 1.9% 2.0% 1.3% 1.1% .3%
- ----------------------------------------------------------------------------------------------
$ 2.37 $ 2.13 $ 1.78 $ 1.54 $ .97 $ .68 $ .15
2.33 2.09 1.75 1.50 .92 .68 .15
- ----------------------------------------------------------------------------------------------
20,108 17,384 14,418 13,504 11,900 11,899 11,899
20,432 17,719 14,647 13,992 13,675 11,917 11,899
- ----------------------------------------------------------------------------------------------
$ 486,106 $ 350,975 $ 235,113 $ 212,573 $ 171,702 $ 148,919 $ 134,961
965,742 684,056 474,574 418,717 330,526 294,510 276,439
343,197 228,351 139,165 127,166 121,292 103,870 89,921
421,769 299,233 188,926 165,427 116,918 106,597 99,649
- ----------------------------------------------------------------------------------------------
3.5 to 1 3.3 to 1 2.6 to 1 2.7 to 1 2.9 to 1 2.8 to 1 2.6 to 1
45% 43% 42% 43% 51% 49% 47%
2.29 2.29 2.51 2.53 2.83 2.76 2.77
- ----------------------------------------------------------------------------------------------
$ .31 $ .25 $ .20 $ .15 $ .11 $ .08 $ .16
18.00 15.29 12.64 11.40 9.43 8.71 8.14
5.8% 6.4% 5.7% 5.6% 3.7% 2.8% .6%
13.2% 15.2% 14.5% 14.7% 10.3% 7.8% 1.7%
28,185 16,898 14,713 15,824 9,997 10,335 6,073
- ----------------------------------------------------------------------------------------------
39
Corporate and Shareholder Information
Directors
David H. Hughes
Chairman of the Board
and Chief Executive Officer
John D. Baker II
President and Chief Executive Officer
Florida Rock Industries, Inc.
Robert N. Blackford
Retired Attorney, Holland & Knight LLP
H. Corbin Day
Chairman
Jemison Investment Co., Inc.
Vincent S. Hughes
Former Vice President
Hughes Supply, Inc.
Toni Jennings
President
Jack Jennings and Sons, Inc.
William P. Kennedy
Chief Executive Officer
Nephron Pharmaceuticals Corporation
Amos R. McMullian
Chairman and Chief Executive Officer
Flowers Foods, Inc.
Thomas I. Morgan
President and Chief Operating Officer
Executive Officers and Management
David H. Hughes
Chairman of the Board
and Chief Executive Officer
Thomas I. Morgan
President and Chief Operating Officer
Benjamin P. Butterfield
Secretary and General Counsel
Jasper L. Holland, Jr.
Senior Vice President of Customer Development
Clyde E. Hughes III
Group President
Robert A. Machaby
Senior Vice President of Vendor Development
Michael L. Stanwood
Group President
Thomas J. Starnes
Senior Vice President of Sales and Marketing
John A. Steele
Senior Vice President of Operations
Thomas M. Ward II
Senior Vice President--Chief Information Officer
Gradie E. Winstead, Jr.
Group President
Laura L. Wright
Vice President of Human Resources
J. Stephen Zepf
Chief Financial Officer
Transfer Agent and Registrar
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Annual Meeting
Tuesday, May 21, 2002
at 10:00 a.m., local time
Hughes Supply, Inc.
20 North Orange Avenue
Suite 200
Orlando, Florida 32801
Independent Accountants
PricewaterhouseCoopers LLP
390 North Orange Avenue
Suite 2400
Orlando, Florida 32801
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 27, 2002 was 915. 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
Chief Financial Officer
Hughes Supply, Inc.
Post Office Box 2273
Orlando, Florida 32802
40