UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-08772
HUGHES SUPPLY, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0559446
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 North Orange Avenue
Suite 200
Orlando, Florida 32801
(Address of principal executive offices)
(407) 841-4755
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of September 10, 2001
------------ ------------------------------------
$1 Par Value 23,676,450
HUGHES SUPPLY, INC.
FORM 10-Q
INDEX
Page(s)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 2001 (unaudited) and January 26, 2001........... 3
Consolidated Statements of Income for the Three Months Ended
July 31, 2001 and 2000 (unaudited)......................................................... 4
Consolidated Statements of Income for the Six Months Ended
July 31, 2001 and 2000 (unaudited)......................................................... 5
Consolidated Statements of Cash Flows for the Six Months Ended
July 31, 2001 and 2000 (unaudited)......................................................... 6
Notes to Consolidated Financial Statements (unaudited)..................................... 7 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... 9 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
SIGNATURES ........................................................................................... 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HUGHES SUPPLY, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
July 31,
2001 January 26,
(unaudited) 2001
----------- ------------
Assets
Current Assets:
Cash and cash equivalents ........................................................ $ 17,305 $ 22,449
Accounts receivable, less allowance for doubtful accounts of $8,389 and $6,106.... 463,139 431,998
Inventories ...................................................................... 432,431 441,789
Deferred income taxes ............................................................ 13,164 18,524
Other current assets ............................................................. 49,891 66,131
----------- -----------
Total current assets ........................................................... 975,930 980,891
Property and Equipment, Net ........................................................ 148,416 152,079
Excess of Cost Over Net Assets Acquired ............................................ 270,784 249,826
Other Assets ....................................................................... 19,587 17,481
----------- -----------
$ 1,414,717 $ 1,400,277
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt ................................................ $ 21,710 $ 15,274
Accounts payable ................................................................. 226,681 215,353
Accrued compensation and benefits ................................................ 30,105 32,762
Other current liabilities ........................................................ 49,013 38,372
----------- -----------
Total current liabilities ...................................................... 327,509 301,761
Long-Term Debt ..................................................................... 496,689 516,168
Deferred Income Taxes .............................................................. 7,831 6,704
Other Noncurrent Liabilities ....................................................... 6,034 5,609
----------- -----------
Total liabilities .............................................................. 838,063 830,242
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued ......... -- --
Common stock, par value $1 per share; 100,000,000 shares authorized; 24,059,663
and 24,211,485 shares issued ................................................. 24,060 24,211
Capital in excess of par value ................................................... 218,389 228,103
Retained earnings ................................................................ 352,367 337,149
Treasury stock, 486,631 and 576,783 shares, at cost .............................. (10,219) (13,307)
Unearned compensation related to outstanding restricted stock .................... (7,943) (6,121)
----------- -----------
Total shareholders' equity ..................................................... 576,654 570,035
----------- -----------
$ 1,414,717 $ 1,400,277
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
HUGHES SUPPLY, INC.
Consolidated Statements of Income (unaudited)
(in thousands, except per share data)
Three Months Ended July 31,
--------------------------
2001 2000
-------- --------
Net Sales............................................................................. $ 806,317 $ 874,056
Cost of Sales......................................................................... 626,514 675,824
------------ ------------
Gross Profit.......................................................................... 179,803 198,232
------------ ------------
Operating Expenses:
Selling, general and administrative................................................. 138,268 141,933
Depreciation and amortization....................................................... 7,989 7,876
Provision for doubtful accounts..................................................... 2,422 1,579
------------ ------------
Total operating expenses......................................................... 148,679 151,388
------------ ------------
Operating Income...................................................................... 31,124 46,844
------------ ------------
Non-Operating Income (Expenses):
Interest and other income........................................................... 3,277 1,978
Interest expense.................................................................... (9,543) (10,946)
------------ ------------
(6,266) (8,968)
------------ ------------
Income Before Income Taxes............................................................ 24,858 37,876
Income Taxes.......................................................................... 10,191 15,529
------------ ------------
Net Income............................................................................ $ 14,667 $ 22,347
============ ============
Earnings Per Share:
Basic............................................................................... $ .63 $ .96
============ ============
Diluted............................................................................. $ .63 $ .96
============ ============
Average Shares Outstanding:
Basic............................................................................... 23,170 23,236
============ ============
Diluted............................................................................. 23,270 23,333
============ ============
Dividends Per Share................................................................... $ .085 .085
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
HUGHES SUPPLY, INC.
Consolidated Statements of Income (unaudited)
(in thousands, except per share data)
Six Months Ended July 31,
--------------------------
2001 2000
-------- --------
Net Sales............................................................................. $ 1,581,466 $ 1,705,227
Cost of Sales......................................................................... 1,226,781 1,322,110
------------ ------------
Gross Profit.......................................................................... 354,685 383,117
------------ ------------
Operating Expenses:
Selling, general and administrative................................................. 285,917 284,389
Depreciation and amortization....................................................... 15,909 15,623
Provision for doubtful accounts..................................................... 4,349 3,112
------------ ------------
Total operating expenses......................................................... 306,175 303,124
------------ ------------
Operating Income...................................................................... 48,510 79,993
------------ ------------
Non-Operating Income (Expenses):
Interest and other income........................................................... 6,495 3,194
Interest expense.................................................................... (19,270) (20,856)
------------ ------------
(12,775) (17,662)
------------ ------------
Income Before Income Taxes............................................................ 35,735 62,331
Income Taxes.......................................................................... 14,651 25,556
------------ ------------
Net Income............................................................................ $ 21,084 $ 36,775
============ ============
Earnings Per Share:
Basic............................................................................... $ .91 $ 1.58
============ ============
Diluted............................................................................. $ .90 $ 1.58
============ ============
Average Shares Outstanding:
Basic............................................................................... 23,233 23,229
============ ============
Diluted............................................................................. 23,431 23,318
============ ============
Dividends Per Share................................................................... $ .17 $ .17
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
5
HUGHES SUPPLY, INC.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Six Months Ended July 31,
--------------------------------
2001 2000
------------ ------------
Cash Flows from Operating Activities:
Net income.......................................................................... $ 21,084 $ 36,775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 15,909 15,623
Provision for doubtful accounts.................................................... 4,349 3,112
Deferred income taxes.............................................................. 6,487 8,645
Other.............................................................................. (695) 2,846
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable................................................................ (21,854) (96,223)
Inventories........................................................................ 18,816 (6,423)
Other current assets............................................................... 1,186 4,348
Other assets....................................................................... (3,550) (1,984)
Accounts payable .................................................................. 4,832 9,242
Accrued compensation and benefits.................................................. (3,773) (3,396)
Other current liabilities.......................................................... 10,033 16,541
Other noncurrent liabilities....................................................... 425 88
------------ ------------
Net cash provided by (used in) operating activities.............................. 53,249 (10,806)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures................................................................ (8,286) (14,204)
Proceeds from sale of property and equipment........................................ 2,368 549
Business acquisitions, net of cash.................................................. (32,715) (23,787)
Investments in affiliated entities.................................................. -- (4,570)
Purchase of bestroute.com stock rights.............................................. (7,273) --
Cash collections on note receivable from sale of pool and spa business.............. 16,000 --
------------ ------------
Net cash used in investing activities............................................ (29,906) (42,012)
------------ ------------
Cash Flows from Financing Activities:
Net (payments) borrowings under short-term debt arrangements........................ (8,369) 92,066
Principal payments on debt of acquired entities .................................... (7,782) (152)
Principal payments on senior notes.................................................. (4,667) --
Purchase of treasury shares......................................................... (3,728) --
Dividends paid ..................................................................... (4,002) (4,010)
Other............................................................................... 61 205
------------ ------------
Net cash (used in) provided by financing activities.............................. (28,487) 88,109
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents.................................. (5,144) 35,291
Cash and Cash Equivalents:
Beginning of period................................................................. 22,449 10,000
------------ ------------
End of period....................................................................... $ 17,305 $ 45,291
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
6
HUGHES SUPPLY, INC.
Notes to Consolidated Financial Statements
(unaudited) (in thousands, except share and per share data)
1. Basis of Presentation
In the opinion of Hughes Supply, Inc. (the "Company"), the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial position as of July 31, 2001, the results of
operations for the three and six months ended July 31, 2001 and 2000, and
cash flows for the six months ended July 31, 2001 and 2000. The results of
operations for the three and six months ended July 31, 2001 are not
necessarily indicative of the trends or results that may be expected for
the full year. These interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
January 26, 2001, as filed with the Securities and Exchange Commission.
The fiscal year of the Company is a 52-week period ending on the last
Friday in January. The three and six months ended July 31, 2001 and 2000
each contained 13 and 26 weeks, respectively.
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to current year presentation. These
reclassifications had no impact on previously reported results of
operations.
2. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding. Diluted earnings per share
is calculated by dividing net income by the weighted-average number of
shares outstanding, adjusted for dilutive potential common shares. The
weighted-average number of shares used in calculating basic earnings per
share were 23,169,583 and 23,235,532 for the three months ended July 31,
2001 and 2000, respectively, and 23,233,153 and 23,229,253 for the six
months ended July 31, 2001 and 2000, respectively. In calculating diluted
earnings per share, these amounts were adjusted to include dilutive
potential common shares of 100,049 and 97,951 for the three months ended
July 31, 2001 and 2000, respectively, and 198,079 and 88,816 for the six
months ended July 31, 2001 and 2000, respectively. The Company's dilutive
potential common shares consist of employee and director stock options,
restricted stock and stock rights issued in connection with the
bestroute.com ("bestroute") acquisition in fiscal 2001. Stock options and
restricted stock totaling 462,573 and 552,214 shares in the three months
ended July 31, 2001 and 2000, respectively, and 670,849 and 1,247,590
shares in the six months ended July 31, 2001 and 2000, respectively, were
not included in the computation of diluted earnings per share because their
effect would have been anti-dilutive.
3. Bestroute
On March 2, 2001, in connection with the closure of bestroute, one of the
Company's e-commerce ventures, the Company entered into an agreement with
the holders of 723,183 of the Company's stock rights originally issued as
consideration for the bestroute acquisition. This agreement canceled
347,541 of the stock rights and enabled the remaining stock rights to be
redeemed for $7,273 in cash.
For the six months ended July 31, 2001, the Company recorded a loss before
income taxes of $2,776 for bestroute, including $1,542 in closure costs
primarily related to employee severance pay and termination fees on certain
agreements. The remaining $1,234 of the loss related to bestroute's loss
from operations through the date of its closure.
4. Long-Term Debt
On May 31, 2001, the Company executed an amendment to its $75,000 line of
credit agreement, which extended the maturity date from July 17, 2001 to
January 14, 2002. There were no amounts outstanding under this agreement at
July 31, 2001.
5. Employee Benefit Plans
During fiscal 2002, the Company granted certain key employees 410,000
restricted shares in accordance with a stock performance award under the
1997 Executive Stock Plan (collectively, the "Performance Plan"). Pursuant
to the Performance Plan, the shares will be awarded in several tranches as
the Company achieves certain stock price levels. During the six months
ended July 31, 2001, two of the award levels were reached and 164,000
shares were issued pursuant to the Performance Plan. The shares vest five
years from the award date, and are subject to certain other vesting and
forfeiture provisions contained in the Performance Plan. On the date of
these awards, the market value of the restricted shares was $3,674. This
amount was recorded as unearned compensation, a component of shareholders'
equity, and is being charged to expense over the respective vesting
periods.
7
6. Capital Stock
On March 15, 1999, the Company's Board of Directors authorized the Company
to repurchase up to 2,500,000 shares of its outstanding common stock to be
used for general corporate purposes. Since March 15, 1999, the Company has
repurchased 1,154,300 shares at an average price of $21.62 per share, of
which 233,200 shares at an average price of $15.99 per share were
repurchased during the six months ended July 31, 2001. No shares were
repurchased during the six months ended July 31, 2000.
7. Segment Information
The Company's operations are organized on a product basis into five stand-
alone Groups: Electrical; Plumbing/HVAC; Industrial; Building Materials;
and Water & Sewer. This is the basis management uses for making operating
decisions and assessing performance.
Segment information has been presented on a basis consistent with how
business activities are reported internally to management. The Electrical
Group includes the Company's electrical and electric utility products; the
Plumbing/HVAC Group includes the Company's plumbing/HVAC products and its
international business; the Industrial Group includes the Company's
industrial pipe, valves and fittings products; the Building Materials Group
includes the Company's building materials products and maintenance
supplies; and the Water & Sewer Group includes the Company's water and
sewer, fire protection and concrete products. The "Corporate & Other"
category includes corporate level operating expenses not allocated to the
Company's operating segments along with revenues and expenses for
bestroute.
Income before income taxes includes certain corporate expense allocations
for employee benefits, interest expense, corporate capital charges, and
property/casualty insurance. These allocations are based on consumption or
at a standard rate determined by management.
The following table presents net sales and other financial information by
Group for the three and six months ended July 31, 2001 and 2000:
Plumbing/ Building Water & Corporate
Electrical HVAC(1) Industrial Materials(1) Sewer & Other Consolidated
---------- --------- ---------- -------------- ------- --------- ------------
Three Months Ended July 31:
Net Sales
2001................. $ 151,947 $ 237,323 $ 81,305 $ 80,030 $ 255,712 $ -- $ 806,317
2000................. 149,595 278,774 76,038 122,884 246,765 -- 874,056
Gross Profit
2001................. 29,265 56,600 20,095 22,123 51,720 -- 179,803
2000................. 29,638 63,023 21,015 34,345 50,211 -- 198,232
Income Before Income Taxes
2001................. 7,497 6,170 3,988 2,399 11,783 (6,979) 24,858
2000................. 8,207 5,816 5,200 8,734 14,115 (4,196) 37,876
Six Months Ended July 31:
Net Sales
2001................. 302,661 471,783 171,390 154,694 480,855 83 1,581,466
2000................. 295,780 544,273 156,601 228,487 480,086 -- 1,705,227
Gross Profit
2001................. 57,508 111,124 42,623 45,050 98,371 9 354,685
2000................. 58,005 122,664 43,619 63,003 95,826 -- 383,117
Income Before Income Taxes
2001................. 12,535 7,831 10,180 4,762 19,945 (19,518) 35,735
2000................. 13,910 9,790 12,031 12,061 24,317 (9,778) 62,331
(1) Results of operations for the pool and spa business, which was sold in
January 2001, were included in the Plumbing/HVAC and Building Materials
Groups for the three and six months ended July 31, 2000.
8
PART I. FINANCIAL INFORMATION -- Continued
HUGHES SUPPLY, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition of the Company as of July
31, 2001, and the results of operations for the three and six months then ended.
This information should be read in conjunction with the Company's consolidated
financial statements and the notes thereto contained herein and in the Company's
Annual Report on Form 10-K for the fiscal year ended January 26, 2001.
Forward-Looking Statements
Certain statements set forth in this report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbor created by such sections. When used in this
report, the words "believe," "anticipate," "estimate," "expect," "may," "will,"
"should," "plan," "intend," "potential," "predict," "forecast," and similar
expressions are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. When appropriate,
certain factors that could cause results to differ materially from those
projected in the forward-looking statements are enumerated.
Material Changes in Results of Operations
Net Sales
Net sales for the quarter ended July 31, 2001 decreased $67.7 million or 8%
compared to the prior year's second quarter. Approximately $54.9 million or 81%
of the decrease was attributable to the divestiture of the Company's pool and
spa business. Of the $54.9 million, approximately $10.6 million and $44.3
million related to the Plumbing/HVAC Group and Building Materials Group,
respectively. The remainder of the net sales decrease was attributable to a
decline of $4.0 million resulting from closed branches and to a decline in same-
store sales of $33.9 million or 4% compared to the prior year's second quarter,
partially offset by an increase in net sales of $25.1 million attributable to
branches acquired or opened after January 31, 2000.
Net sales for the six months ended July 31, 2001 decreased $123.8 million or 7%
compared to the prior fiscal year's first six months. Approximately $93.8
million or 76% of the decrease was attributable to the divestiture of the
Company's pool and spa business. Of the $93.8 million, approximately $18.3
million and $75.5 million related to the Plumbing/HVAC Group and Building
Materials Group, respectively. The remainder of the net sales decrease was
attributable to a decline of $9.3 million resulting from closed branches and to
a decline in same-store sales of $57.3 million or 4% compared to the prior
fiscal year's first six months, partially offset by an increase in net sales of
$36.6 million attributable to branches acquired or opened after January 31,
2000.
Consolidated and same-store net sales by Group for the three and six months
ended July 31, 2001 and 2000 were as follows (dollars in thousands):
Consolidated Net Sales Same-Store Net Sales
---------------------- ---------------------
Three Months Ended July 31, Three Months Ended July 31,
---------------------------- Percent --------------------------- Percent
2001 2000 Variance 2001 2000 Variance
------------ ----------- ----------- ----------- ----------- -----------
Electrical............. $ 151,947 $ 149,595 2% $ 150,771 $ 148,253 2%
Plumbing/HVAC.......... 237,323 278,774 (15%) 236,453 264,705 (11%)
Industrial............. 81,305 76,038 7% 81,305 76,038 7%
Building Materials..... 80,030 122,884 (35%) 76,855 78,535 (2%)
Water & Sewer.......... 255,712 246,765 4% 235,010 246,765 (5%)
Corporate & Other ..... -- -- -- -- -- --
----------- ----------- ----------- -----------
Consolidated........... $ 806,317 $ 874,056 (8%) $ 780,394 $ 814,296 (4%)
=========== =========== === =========== =========== ===
9
Consolidated Net Sales Same-Store Net Sales
---------------------- --------------------
Six Months Ended July 31, Six Months Ended July 31,
--------------------------- Percent --------------------------- Percent
2001 2000 Variance 2001 2000 Variance
----------- --------- -------- ----------- ----------- --------
Electrical............. $ 302,661 $ 295,780 2% $ 300,168 $ 292,834 3%
Plumbing/HVAC.......... 471,783 544,273 (13%) 470,000 518,455 (9%)
Industrial............. 171,390 156,601 9% 171,390 156,601 9%
Building Materials..... 154,694 228,487 (32%) 148,394 152,940 (3%)
Water & Sewer.......... 480,855 480,086 -- 453,617 480,086 (6%)
Corporate & Other...... 83 -- -- -- -- --
----------- ----------- ----------- -----------
Consolidated........... $ 1,581,466 $ 1,705,227 (7%) $ 1,543,569 $ 1,600,916 (4%)
=========== =========== === =========== =========== ===
The following sets forth factors impacting same-store sales for the Company's
operating Groups:
Electrical
Same-store sales increased $2.5 million or 2% and $7.3 million or 3% for the
three and six months ended July 31, 2001, respectively, compared to the same
periods in the prior year. These increases were primarily attributable to strong
commercial activity in the Houston, Texas market and to increased sales of
utility products in the Illinois market.
Plumbing/HVAC
Same-store sales decreased $28.3 million or 11% and $48.5 million or 9% for the
three and six months ended July 31, 2001, respectively, compared to the same
periods in the prior year. These decreases were primarily attributable to slower
construction markets and to a slowdown in international business resulting from
the completion of a large oil and gas pipeline project with no corresponding
replacement in the current year.
Industrial
Same-store sales increased $5.3 million or 7% and $14.8 million or 9% for the
three and six months ended July 31, 2001, respectively, compared to the same
periods in the prior year. These increases were primarily attributable to strong
sales to customers in the chemical, petrochemical, power generation and gas
utility industries, and to several large plant rehabilitation projects in the
Texas market. Additional sales related to these projects are expected through
the second half of fiscal 2002.
Building Materials
Same-store sales decreased $1.7 million or 2% and $4.5 million or 3% for the
three and six months ended July 31, 2001, respectively, compared to the same
periods in the prior year. These decreases were primarily attributable to sales
of complementary building materials products that were lost as a result of the
divestiture of the pool and spa business.
Water & Sewer
Same-store sales decreased $11.8 million or 5% and $26.5 million or 6% for the
three and six months ended July 31, 2001, respectively, compared to the same
periods in the prior year. These decreases were primarily attributable to the
completion of several large projects with no corresponding replacements in the
current year, declining commodity prices for certain PVC and domestic steel
products, and unfavorable weather conditions. Wet weather conditions in the
Texas market during the first half of fiscal 2002 resulted in a significant
number of unshipped orders. The Company expects sales volumes for this Group to
improve in the third quarter of fiscal 2002 if conditions become more favorable
and projects that were previously postponed are completed and new projects are
started.
Gross Profit and Gross Margin
Gross profit and gross margin by Group for the three and six months ended July
31, 2001 and 2000 were as follows (dollars in thousands):
10
Gross Profit Gross Margin
------------------------------------------- ------------------------------------------
Three Months Ended July 31, Three Months Ended July 31, Basis
----------------------------- Percent --------------------------- Point
2001 2000 Variance 2001 2000 Variance
---------- ---------- -------- ------- -------- --------
Electrical............. $ 29,265 $ 29,638 (1%) 19.3% 19.8% (50)
Plumbing/HVAC.......... 56,600 63,023 (10%) 23.8% 22.6% 120
Industrial............. 20,095 21,015 (4%) 24.7% 27.6% (290)
Building Materials..... 22,123 34,345 (36%) 27.6% 27.9% (30)
Water & Sewer.......... 51,720 50,211 3% 20.2% 20.3% (10)
Corporate & Other...... -- -- -- -- -- --
---------- ----------
Consolidated........... $ 179,803 $ 198,232 (9%) 22.3% 22.7% (40)
========== ========== ======== ======= ======== ========
Gross Profit Gross Margin
------------------------------------------- -----------------------------------------
Six Months Ended July 31, Six Months Ended July 31, Basis
----------------------------- Percent --------------------------- Point
2001 2000 Variance 2001 2000 Variance
---------- ---------- -------- ------- -------- --------
Electrical............. $ 57,508 $ 58,005 (1%) 19.0% 19.6% (60)
Plumbing/HVAC.......... 111,124 122,664 (9%) 23.6% 22.5% 110
Industrial............. 42,623 43,619 (2%) 24.9% 27.9% (300)
Building Materials..... 45,050 63,003 (28%) 29.1% 27.6% 150
Water & Sewer.......... 98,371 95,826 3% 20.5% 20.0% 50
Corporate & Other...... 9 -- -- 10.8% -- --
---------- ----------
Consolidated........... $ 354,685 $ 383,117 (7%) 22.4% 22.5% (10)
========== ========== ======== ======= ======== ========
The following sets forth factors impacting gross margins for the Company's
operating Groups:
Electrical
Gross margin decreased 50 and 60 basis points for the three and six months ended
July 31, 2001, respectively, compared to the same periods in the prior year.
These decreases were primarily attributable to (i) a sales mix that was more
heavily weighted towards utility products, which generally are shipped direct
from the manufacturer to the customer and have lower gross margins compared to
gross margins as a whole for the Electrical Group, (ii) increased competition in
the Florida, North Carolina and South Carolina markets, and (iii) declining
commodity prices for certain PVC and copper products.
Plumbing/HVAC
Gross margin increased 120 and 110 basis points for the three and six months
ended July 31, 2001, respectively, compared to the same periods in the prior
year. These increases were primarily attributable to the Company's efforts to
improve its margin on certain products and to a decline in lower-margin
international business.
Industrial
Gross margin decreased 290 and 300 basis points for the three and six months
ended July 31, 2001, respectively, compared to the same periods in the prior
year. These decreases were primarily attributable to declining prices for
certain commodity-based products, including stainless steel and nickel alloys.
Building Materials
Gross margin decreased 30 basis points for the three months ended July 31, 2001,
and increased 150 basis points for the six months ended July 31, 2001. The
decrease of 30 basis points for the current quarter was primarily attributable
to declining lumber prices. The increase of 150 basis points for the six-month
period was primarily attributable 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.
Water & Sewer
Gross margin decreased 10 basis points for the three months ended July 31, 2001,
and increased 50 basis points for the six months ended July 31, 2001. The
decrease of 10 basis points for the quarter was primarily attributable to
changes in the sales mix. The increase of 50 basis points for the six-month
period was primarily attributable to a change in sales mix that resulted from
fewer large direct shipment orders, which typically generate lower gross
margins, and to the Company's efforts to improve its margin on certain products.
11
Operating Expenses
Operating expenses for the three and six months ended July 31, 2001 and 2000
were as follows (dollars in thousands):
Three Months Ended July 31, Six Months Ended July 31,
---------------------------- ----------------------------
2001 2000 Variance 2001 2000 Variance
--------- --------- --------- --------- --------- --------
Operating expenses......... $ 148,679 $ 151,388 ($2,709) $ 306,175 $ 303,124 $ 3,051
Percentage of net sales.... 18.4% 17.3% 1.1% 19.4% 17.8% 1.6%
Operating expenses as a percentage of net sales increased to 18.4% and 19.4% for
the three and six months ended July 31, 2001, respectively, compared to 17.3%
and 17.8% for the three and six months ended July 31, 2000. The increases for
both periods were primarily attributable to lower sales volumes experienced by
the Company.
For the three and six months ended July 31, 2001, operating expenses for the
Plumbing/HVAC and Building Materials Groups decreased compared to the same
periods in the prior year, primarily due to lower personnel and other costs
resulting from the divestiture of the pool and spa business. These decreases
were $6.3 million and $8.8 million for the Plumbing/HVAC Group, and $6.0 million
and $10.3 million for the Building Materials Group, for the three and six months
ended July 31, 2001, respectively. Several factors offset these decreases,
including increases in operating expenses of $4.5 million and $7.4 million for
the three and six months ended July 31, 2001, respectively, attributable to
branches acquired and opened after January 31, 2000. Other factors offsetting
the decreases were (i) higher personnel costs resulting from $1.5 million in
expense incurred in the first quarter of fiscal 2002 related to the Company's
separation agreement with its former president, employee severance expense
related to the elimination of certain management and staff positions, and
increased employee health insurance costs, (ii) higher property/casualty
insurance costs, and (iii) expenses related to bestroute totaling $2.8 million
for the six months ended July 31, 2001, including $1.5 million in closure costs
primarily related to employee severance pay and termination fees on certain
agreements.
The Company continues to evaluate operations and balance its cost structure with
current economic conditions. As part of these efforts, in the first six months
of fiscal 2002, the Company instituted a hiring freeze, eliminated certain
management and staff positions, and reduced capital spending. The Company will
continue to review its operational effectiveness over the remainder of fiscal
2002.
Non-Operating Income (Expenses)
Interest and other income increased from $2.0 million for the three months ended
July 31, 2000 to $3.3 million for the three months ended July 31, 2001. For the
six months ended July 31, 2000 and 2001, interest and other income increased
from $3.2 million to $6.5 million, respectively. The increases for both periods
were primarily due to (i) prior year non-recurring losses of $1.0 million and
$2.4 million for the three and six months ended July 31, 2000, respectively,
related to the Company's equity investment in certain unconsolidated affiliates,
and (ii) interest income of $.4 million and $.8 million for the three and six
months ended July 31, 2001, respectively, related to a $25.0 million short-term
note receivable received in connection with the Company's sale of its pool and
spa business.
Interest expense decreased from $10.9 million for the three months ended July
31, 2000 to $9.5 million for the three months ended July 31, 2001. For the six
months ended July 31, 2000 and 2001, interest expense decreased from $20.9
million to $19.3 million, respectively. The decreases for both periods were
primarily due to lower borrowing levels.
Net Income
Net income was $14.7 million for the second quarter compared to $22.3 million
for the prior year's second quarter, a 34% decrease. For the six months ended
July 31, 2001 and 2000, net income was $21.1 million and $36.8 million,
respectively, a decrease of 43%. Diluted earnings per share for the three and
six months ended July 31, 2001 were $.63 and $.90, respectively, compared to
$.96 and $1.58 for the three and six months ended July 31, 2000, respectively.
The factors impacting net income and diluted earnings per share have been
enumerated above.
Liquidity and Capital Resources
Working capital decreased $30.7 million to $648.4 million at July 31, 2001,
compared with $679.1 million as of January 26,
12
2001. The current ratio was 3.0 to 1 and 3.3 to 1 as of July 31, 2001 and
January 26, 2001, respectively. The decrease was primarily driven by lower
levels of inventories, a decrease in other current assets and increases in
accounts payable and accrued taxes. These changes were partially offset by an
increase in accounts receivable. The decrease in inventories reflects the
Company's efforts to reduce inventory levels to be more in line with current
market demand. The decrease in other current assets was primarily attributable
to $16.0 million in collections on the note receivable from the Company's sale
of its pool and spa business. Accrued income taxes and accrued sales taxes
increased as a result of the timing of the related payments. The higher levels
of accounts payable and accounts receivable are primarily attributable to
seasonal increases in sales volumes.
Net cash provided by operations was $53.2 million for the six months ended July
31, 2001 compared to net cash used in operations of $10.8 million for the six
months ended July 31, 2000. As previously discussed, the Company experienced
lower sales volumes during the six months ended July 31, 2001 compared to the
same period in the prior year. As a result of the lower sales volumes, accounts
receivable did not increase as much compared to the prior year's first six
months and inventory levels, excluding business acquisitions, were reduced by
$18.8 million during the six months ended July 31, 2001.
The Company's expenditures for property and equipment were $8.3 million and
$14.2 million for the six months ended July 31, 2001 and 2000, respectively. The
Company continues to closely monitor and control capital expenditures, and
instituted a freeze on new building projects during the first six months of
fiscal 2002. Capital expenditures, excluding amounts for business acquisitions,
are expected to be approximately $17.0 million in fiscal 2002.
Cash payments for business acquisitions totaled $32.7 million for the six months
ended July 31, 2001 compared to $23.8 million for the for the six months ended
July 31, 2000. These outlays represent one and two wholesale distributors
acquired and accounted for using the purchase method of accounting during the
six months ended July 31, 2001 and 2000, respectively.
Net payments on the Company's revolving credit agreement were $8.4 million for
the six months ended July 31, 2001, compared to net borrowings of $92.1 million
for the six months ended July 31, 2000. Principal reductions on long-term debt
were $12.5 million for the six months ended July 31, 2001, of which $7.8 million
related to the repayment of debt assumed as a result of certain business
acquisitions and $4.7 million related to payments on the Company's $98.0 million
senior notes due 2011. The Company expects principal payments on senior notes to
be $4.7 million in the second half of fiscal 2002.
Long-term debt was $496.7 million and $516.2 million at July 31, 2001 and
January 26, 2001, respectively, a decrease of $19.5 million. As a percentage of
total capitalization, long-term debt was 46% at July 31, 2001 compared to 48% at
January 26, 2001. Cash provided by operations and collections on the note
receivable from the sale of the pool and spa business were used to reduce the
Company's long-term debt during the six months ended July 31, 2001.
On May 31, 2001, the Company executed an amendment to its $75.0 million line of
credit agreement, which extended the maturity date from July 17, 2001 to January
14, 2002. There were no amounts outstanding under this agreement at July 31,
2001.
As of July 31, 2001, the Company had approximately $17.3 million of cash and
$230.4 million of unused borrowing capacity (subject to borrowing limitations
under long-term debt covenants) to fund ongoing operating requirements and
anticipated capital expenditures. The Company believes it has sufficient
borrowing capacity and cash on hand to take advantage of growth and business
acquisition opportunities and to fund share repurchases in the near term. The
Company expects to continue to finance future expansion on a project-by-project
basis through additional borrowing.
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
1,154,300 shares at an average price of $21.62 per share, of which 233,200
shares at an average price of $15.99 per share were repurchased during the six
months ended July 31, 2001. No shares were repurchased during the six months
ended July 31, 2000.
Dividend payments totaled $4.0 million during the six months ended July 31, 2001
and 2000.
On March 2, 2001, in connection with the closure of bestroute, one of the
Company's e-commerce ventures, the Company entered into an agreement with the
holders of 723,183 of the Company's stock rights originally issued as
consideration for the bestroute acquisition. This agreement canceled 347,541 of
the stock rights and the remaining stock rights were redeemed for $7.3 million
in cash.
Recent Accounting Pronouncements
Effective in February 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133"). FAS 133 was amended by Statement of Financial Accounting
13
Standards No. 138, Accounting for Certain Derivative Instruments and Hedging
Activities ("FAS 138"). Both FAS 133 and FAS 138 require that an entity record
all derivatives as either assets or liabilities in the balance sheet and record
those instruments at fair value. The adoption of these standards did not have a
material impact on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 141, Business Combinations ("FAS
141") and Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets ("FAS 142"), were issued in July 2001. FAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. FAS 141 also specifies the criteria
which must be met in order for certain acquired intangible assets to be recorded
separately from goodwill.
FAS 142 is effective for the Company beginning in fiscal 2003. Under FAS 142,
goodwill and intangible assets with indefinite useful lives will no longer be
amortized but rather will be tested for impairment annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
Goodwill and intangible assets acquired after June 30, 2001 will be subject
immediately to the provisions of FAS 142. The Company does not expect the
adoption of FAS 142 to have a material impact on its consolidated financial
statements, except for goodwill amortization, which is currently at an annual
run rate of $10.3 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates on
outstanding variable-rate debt and from changes in the prices of certain of its
products that result from commodity price fluctuations.
Interest Rate Risk
At July 31, 2001, the Company had approximately $144.6 million of outstanding
variable-rate debt. Based upon a hypothetical 10% increase or decrease in
interest rates from their July 31, 2001 levels, the market risk with respect to
the Company's variable-rate debt would not be material. The Company manages its
interest rate risk by maintaining a combination of fixed-rate and variable-rate
debt.
Commodity Price Risk
The Company is affected by price fluctuations in stainless steel, nickel alloy,
copper, aluminum, plastic, lumber and other commodities. Such commodity price
fluctuations have from time to time created cyclicality in the financial
performance of the Company and could continue to do so in the future. The
Company seeks to minimize the effects of commodity price fluctuations through
economies of purchasing and inventory management resulting in cost reductions
and productivity improvements as well as price increases to maintain reasonable
profit margins. The Company also believes its diversified product offering
reduces the impact of commodity price fluctuations.
14
PART II. OTHER INFORMATION
HUGHES SUPPLY, INC.
Item 4. Submission of Matters to a Vote of Security Holders
The 2001 Annual Meeting of Shareholders (the "Annual Meeting") was held on May
15, 2001. At the Annual Meeting, holders of 19,920,379 shares of the Company's
common stock were present in person or by proxy. At the Annual Meeting, Messrs.
John D. Baker II and William P. Kennedy were elected directors of the Company to
hold office until the 2004 Annual Meeting and until the election and
qualification of their respective successors or until the earlier of their
death, resignation or removal. The tabulation of the votes present in person or
by proxy at the Annual Meeting with respect to each nominee for office was as
follows:
Authority
Name For Withheld
---- ---------- ----------
John D. Baker II 18,990,089 930,290
William P. Kennedy 17,376,580 2,543,799
Messrs. Robert N. Blackford, H. Corbin Day, David H. Hughes and Vincent S.
Hughes each continued their respective terms of office as a director of the
Company after the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.11 Line of Credit Agreement, dated as of January 26, 1999 and
amended on various dates through May 31, 2001, by and among
the Company and a group of banks. The Line of Credit
Agreement contains a table of contents identifying the
contents of Schedules and Exhibits, all of which have been
omitted. The Company agrees to furnish a supplemental copy
of any omitted Schedule or Exhibit to the Commission upon
request.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended July
31, 2001.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUGHES SUPPLY, INC.
Date: September 10, 2001 By: /s/ DAVID H. HUGHES
---------------------------------------
David H. Hughes,
Chairman of the Board
and Chief Executive Officer
Date: September 10, 2001 By: /s/ J. STEPHEN ZEPF
---------------------------------------
J. Stephen Zepf,
Treasurer, Chief Financial Officer
and Chief Accounting Officer
16