Hughes Supply Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One) |
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended October 31, 2005 |
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OR |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File Number 001-08772
HUGHES SUPPLY, INC.
(Exact name of registrant as specified in its charter)
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Florida |
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59-0559446 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
Corporate Office
One Hughes Way
Orlando, Florida 32805
(Address of principal executive offices)
(407) 841-4755
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Common Stock |
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Outstanding as of December 9, 2005 |
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$1 Par Value
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66,877,666 |
HUGHES SUPPLY, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
HUGHES SUPPLY, INC.
Consolidated Statements of Income (unaudited)
(in millions, except per share data)
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Three Months Ended | |
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Nine Months Ended | |
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October 31, | |
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October 29, | |
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October 31, | |
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October 29, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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Net Sales
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$ |
1,493.5 |
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$ |
1,167.5 |
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$ |
4,066.2 |
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$ |
3,303.4 |
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Cost of Sales
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1,165.9 |
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893.6 |
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3,171.5 |
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2,517.3 |
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Gross Margin
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327.6 |
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273.9 |
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894.7 |
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786.1 |
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Operating Expenses:
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Selling, general and administrative
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237.9 |
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206.0 |
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655.4 |
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584.4 |
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Depreciation and amortization
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8.8 |
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6.6 |
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24.9 |
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19.3 |
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Total operating expenses
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246.7 |
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212.6 |
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680.3 |
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603.7 |
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Operating Income
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80.9 |
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61.3 |
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214.4 |
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182.4 |
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Non-Operating (Expense) Income:
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Interest expense
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(8.9 |
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(7.8 |
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(26.7 |
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(21.6 |
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Interest and other income
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2.2 |
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1.9 |
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6.5 |
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5.2 |
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(6.7 |
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(5.9 |
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(20.2 |
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(16.4 |
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Income Before Income Taxes
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74.2 |
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55.4 |
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194.2 |
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166.0 |
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Income Taxes
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28.5 |
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21.6 |
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75.3 |
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63.0 |
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Net Income
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$ |
45.7 |
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$ |
33.8 |
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$ |
118.9 |
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$ |
103.0 |
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Earnings Per Share:
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Basic
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$ |
0.71 |
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$ |
0.55 |
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$ |
1.84 |
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$ |
1.71 |
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Diluted
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$ |
0.68 |
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$ |
0.54 |
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$ |
1.78 |
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$ |
1.65 |
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Weighted-Average Shares Outstanding:
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Basic
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64.7 |
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61.1 |
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64.6 |
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60.3 |
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Diluted
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66.8 |
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63.0 |
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66.7 |
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62.2 |
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Dividends Declared Per Share
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$ |
0.090 |
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$ |
0.065 |
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$ |
0.270 |
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$ |
0.195 |
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The accompanying notes are an integral part of these
consolidated financial statements.
3
HUGHES SUPPLY, INC.
Consolidated Balance Sheets
(in millions, except share and per share data)
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October 31, | |
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2005 | |
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January 31, | |
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(unaudited) | |
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2005 | |
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Assets
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Current Assets:
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Cash and cash equivalents
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$ |
251.8 |
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$ |
213.2 |
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Accounts receivable, less allowance for doubtful accounts of
$11.3 and $10.3
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797.2 |
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625.3 |
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Inventories
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707.8 |
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633.9 |
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Deferred income taxes
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34.2 |
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25.1 |
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Other current assets
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81.5 |
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89.0 |
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Total current assets
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1,872.5 |
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1,586.5 |
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Property and equipment, net
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110.4 |
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92.8 |
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Goodwill
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763.9 |
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718.6 |
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Other assets
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160.7 |
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132.4 |
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Total assets
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$ |
2,907.5 |
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$ |
2,530.3 |
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Liabilities and Shareholders Equity |
Current Liabilities:
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Current portion of long-term debt
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$ |
48.2 |
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$ |
45.2 |
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Accounts payable
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699.5 |
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503.9 |
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Accrued compensation and benefits
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53.4 |
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58.7 |
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Taxes payable
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62.0 |
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15.9 |
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Other current liabilities
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54.1 |
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47.5 |
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Total current liabilities
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917.2 |
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671.2 |
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Long-term debt
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488.9 |
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500.5 |
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Deferred income taxes
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100.0 |
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72.3 |
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Other noncurrent liabilities
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37.0 |
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32.4 |
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Total liabilities
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1,543.1 |
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1,276.4 |
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Shareholders Equity:
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Preferred stock, no par value; 10,000,000 shares
authorized; none issued
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Common stock, par value $1 per share;
200,000,000 shares authorized; 66,782,354 and
66,214,127 shares issued
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66.8 |
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66.2 |
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Capital in excess of par value
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641.8 |
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629.4 |
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Retained earnings
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674.3 |
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573.3 |
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Accumulated other comprehensive income, net of tax
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1.8 |
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2.0 |
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Unearned compensation related to outstanding restricted stock
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(20.3 |
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(17.0 |
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Total shareholders equity
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1,364.4 |
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1,253.9 |
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Total liabilities and shareholders equity
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$ |
2,907.5 |
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$ |
2,530.3 |
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The accompanying notes are an integral part of these
consolidated financial statements.
4
HUGHES SUPPLY, INC.
Consolidated Statements of Cash Flows (unaudited)
(in millions)
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Nine Months Ended | |
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October 31, | |
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October 29, | |
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2005 | |
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2004 | |
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Cash Flows from Operating Activities:
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Net income
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$ |
118.9 |
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$ |
103.0 |
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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24.9 |
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19.3 |
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Provision for doubtful accounts
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6.8 |
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8.1 |
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Restricted stock expense
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5.7 |
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3.6 |
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Deferred income taxes
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18.6 |
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0.8 |
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Other
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(5.6 |
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1.5 |
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Changes in assets and liabilities, net of businesses acquired:
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Accounts receivable
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(157.4 |
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(135.2 |
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Inventories
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(61.9 |
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(74.9 |
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Other current assets
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10.6 |
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(15.7 |
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Other assets
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(13.0 |
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(3.1 |
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Accounts payable
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191.9 |
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120.8 |
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Accrued compensation and benefits
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(6.8 |
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(0.3 |
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Other current liabilities
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48.3 |
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48.1 |
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Other noncurrent liabilities
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6.1 |
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(2.1 |
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Net cash provided by operating activities
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187.1 |
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73.9 |
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Cash Flows from Investing Activities:
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Capital expenditures
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(43.4 |
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(17.5 |
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Proceeds from sale of property and equipment
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8.8 |
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38.8 |
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Business acquisitions, net of cash acquired
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(82.5 |
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(101.4 |
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Net investment in corporate owned life insurance
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(11.4 |
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Net cash used in investing activities
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(117.1 |
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(91.5 |
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Cash Flows from Financing Activities:
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Net payments under short-term debt arrangements
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(100.0 |
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Principal payments on other debt
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(9.8 |
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(10.7 |
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Proceeds from issuance of long-term debt, net
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295.7 |
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Proceeds from issuance of common stock, net
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114.8 |
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Change in book overdrafts
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(9.6 |
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(19.3 |
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Dividends paid
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(16.3 |
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(11.1 |
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Other
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4.3 |
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9.5 |
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Net cash (used in) provided by financing activities
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(31.4 |
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278.9 |
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Net Increase in Cash and Cash Equivalents
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38.6 |
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261.3 |
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Cash and Cash Equivalents, Beginning of Period
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213.2 |
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8.3 |
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Cash and Cash Equivalents, End of Period
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$ |
251.8 |
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$ |
269.6 |
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The accompanying notes are an integral part of these
consolidated financial statements.
5
HUGHES SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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Note 1. |
Basis of Presentation |
In our opinion, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly our
results of operations for the three and nine months ended
October 31, 2005 and October 29, 2004, our financial
position as of October 31, 2005, and cash flows for the
nine months ended October 31, 2005 and October 29,
2004. The results of operations for the three and nine months
ended October 31, 2005 are not necessarily indicative of
the trends or results that may be expected for the full year.
Certain information and disclosures normally included in the
notes to the annual consolidated financial statements have been
omitted from these interim consolidated financial statements.
Accordingly, these interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on
Form 10-K (the Annual Report) for the fiscal
year ended January 31, 2005, as filed with the Securities
and Exchange Commission (SEC).
Business
Founded in 1928, we are one of the nations largest
diversified wholesale distributors of construction, repair and
maintenance-related products with over 500 branches located in
40 states, as well as one branch located in Canada. Our
customers include water and sewer, plumbing, electrical, and
mechanical contractors; public utilities; municipalities;
property management companies; and industrial companies.
Although we have a national presence, we operate principally in
the southeastern and southwestern United States. Our fiscal year
ends on January 31, with our quarterly periods ending on
the last calendar day of each quarter. Prior to fiscal year
2005, our fiscal years were 52- or 53-week periods ending on the
last Friday in January. During fiscal year 2005 and prior, our
quarterly periods were 13- or 14-week periods ending on the last
Friday of the quarter.
Reclassifications
Certain prior year amounts in the consolidated financial
statements and the notes thereto have been reclassified to
conform to current year presentation. These reclassifications
had no net income impact on previously reported consolidated
results of operations.
Stock-Based Compensation
We account for our 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. For purposes of pro forma disclosures under
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, the
estimated fair value of the stock options is amortized to
compensation expense over the options vesting periods with
the impact of forfeitures recognized as they occur.
6
The following table illustrates the effect on net income and
earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period
(in millions, except per share data):
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Three Months Ended | |
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Nine Months Ended | |
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| |
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| |
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|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
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|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
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| |
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| |
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|
| |
Net income as reported
|
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$ |
45.7 |
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$ |
33.8 |
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$ |
118.9 |
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$ |
103.0 |
|
Add: Stock-based compensation expense included in reported net
income, net of related tax effects
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1.2 |
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0.9 |
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3.5 |
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2.2 |
|
Deduct: Total stock-based compensation expense determined under
the fair value based method for all awards, net of related tax
effects
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|
(1.8 |
) |
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(1.4 |
) |
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|
(5.7 |
) |
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|
(4.6 |
) |
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Pro forma net income
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$ |
45.1 |
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|
$ |
33.3 |
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$ |
116.7 |
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|
$ |
100.6 |
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Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.71 |
|
|
$ |
0.55 |
|
|
$ |
1.84 |
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
0.70 |
|
|
$ |
0.54 |
|
|
$ |
1.81 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
0.68 |
|
|
$ |
0.54 |
|
|
$ |
1.78 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
0.68 |
|
|
$ |
0.53 |
|
|
$ |
1.75 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants issued in the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Granted During the | |
|
|
| |
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
Assumptions |
|
2005 | |
|
2004(1) | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.9 |
% |
|
|
|
|
|
|
4.0 |
% |
|
|
3.0 |
% |
Average expected life of stock options (in years)
|
|
|
4.8 |
|
|
|
|
|
|
|
4.8 |
|
|
|
5.0 |
|
Expected volatility of common stock
|
|
|
34.0 |
% |
|
|
|
|
|
|
34.0 |
% |
|
|
43.2 |
% |
Expected annual dividend yield on common stock
|
|
|
1.2 |
% |
|
|
|
|
|
|
1.2 |
% |
|
|
1.0 |
% |
Weighted-average fair value of stock options granted
|
|
$ |
9.95 |
|
|
|
|
|
|
$ |
9.81 |
|
|
$ |
9.65 |
|
|
|
(1) |
There were no stock options granted during the three months
ended October 29, 2004. |
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R,
Share-Based Payment (SFAS 123R), which
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. This statement
requires that the compensation cost related to share-based
payment transactions be recognized in the financial statements
based on the estimated fair value of the equity-based
compensation awards issued as of the grant date. The related
compensation expense will be based on the estimated number of
awards expected to vest and will be recognized over the period
during which an employee is required to provide services in
exchange for the award. The statement requires the use of
assumptions and judgments about future events, and some of the
inputs to the valuation models will require considerable
judgment by management. We will be required to adopt the
provisions of SFAS 123R on February 1, 2006. We are
currently evaluating the impact that the ultimate adoption of
SFAS 123R will have on our financial position and results
of operations. The Stock-Based Compensation section provided
above contains the pro forma impact on net income and earnings
per share if the fair value based method under SFAS 123 had
been applied to all outstanding and unvested awards during the
first nine months of fiscal years 2006 and 2005.
7
In June 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), a replacement of APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 will require companies
to account for and apply changes in accounting principles
retrospectively to prior periods financial statements
instead of recording a cumulative effect adjustment within the
period of the change, unless it is impracticable to determine
the effects of the change to each period being presented.
SFAS 154 is effective for accounting changes made in annual
periods beginning after December 15, 2005. We will adopt
the new accounting provisions effective February 1, 2006.
We do not expect the adoption of SFAS 154 to have a
material effect on our financial position, results of operations
or cash flows.
|
|
Note 2. |
Segment Information |
We manage our business on a product line basis and report the
results of our operations in seven operating segments and an
Other category. The operating segments are Water &
Sewer; Plumbing/ Heating, Ventilating and Air Conditioning
(HVAC); Utilities; Maintenance, Repair and
Operations (MRO); Electrical; Industrial Pipe,
Valves and Fittings (PVF); and Building Materials.
We include our Fire Protection and Mechanical product lines in
the Other category.
The Corporate category includes corporate level expenses not
allocated to our operating segments or the Other category.
Inter-segment sales are excluded from net sales presented for
each segment and the Other category. Operating income for each
segment and the Other category includes certain corporate
expense allocations for corporate overhead expenses, employee
benefits, data processing expenses and insurance. These
allocations are based on a standard rate determined by
management.
The following tables present net sales and other financial
information by segment for the three and nine months ended
October 31, 2005 and October 29, 2004, respectively
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and | |
|
|
Net Sales | |
|
Operating Income | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
|
Three Months Ended | |
|
Three Months Ended | |
|
Three Months Ended | |
|
|
| |
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
416.8 |
|
|
$ |
327.9 |
|
|
$ |
26.0 |
|
|
$ |
16.3 |
|
|
$ |
0.9 |
|
|
$ |
1.0 |
|
Plumbing/HVAC
|
|
|
294.4 |
|
|
|
276.1 |
|
|
|
4.3 |
|
|
|
4.5 |
|
|
|
1.3 |
|
|
|
1.3 |
|
Utilities
|
|
|
259.8 |
|
|
|
118.0 |
|
|
|
12.2 |
|
|
|
6.0 |
|
|
|
1.5 |
|
|
|
0.3 |
|
MRO
|
|
|
139.0 |
|
|
|
116.2 |
|
|
|
11.6 |
|
|
|
9.7 |
|
|
|
1.1 |
|
|
|
1.1 |
|
Electrical
|
|
|
129.3 |
|
|
|
119.6 |
|
|
|
5.0 |
|
|
|
2.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Industrial PVF
|
|
|
116.9 |
|
|
|
96.7 |
|
|
|
14.8 |
|
|
|
15.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Building Materials
|
|
|
81.7 |
|
|
|
65.2 |
|
|
|
5.2 |
|
|
|
5.5 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Other
|
|
|
55.6 |
|
|
|
47.8 |
|
|
|
3.1 |
|
|
|
2.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Corporate(1)
|
|
|
|
|
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
3.4 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,493.5 |
|
|
$ |
1,167.5 |
|
|
$ |
80.9 |
|
|
$ |
61.3 |
|
|
$ |
8.8 |
|
|
$ |
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and | |
|
|
Net Sales | |
|
Operating Income | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
1,086.7 |
|
|
$ |
922.7 |
|
|
$ |
57.2 |
|
|
$ |
45.3 |
|
|
$ |
2.6 |
|
|
$ |
2.7 |
|
Plumbing/HVAC
|
|
|
858.0 |
|
|
|
758.7 |
|
|
|
14.9 |
|
|
|
17.6 |
|
|
|
3.9 |
|
|
|
3.4 |
|
Utilities
|
|
|
665.0 |
|
|
|
326.8 |
|
|
|
27.6 |
|
|
|
13.3 |
|
|
|
4.0 |
|
|
|
0.9 |
|
MRO
|
|
|
368.2 |
|
|
|
349.5 |
|
|
|
30.2 |
|
|
|
30.5 |
|
|
|
3.1 |
|
|
|
3.4 |
|
Electrical
|
|
|
361.6 |
|
|
|
348.3 |
|
|
|
11.5 |
|
|
|
8.3 |
|
|
|
0.4 |
|
|
|
0.5 |
|
Industrial PVF
|
|
|
347.1 |
|
|
|
265.0 |
|
|
|
48.9 |
|
|
|
38.9 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Building Materials
|
|
|
224.5 |
|
|
|
190.1 |
|
|
|
15.6 |
|
|
|
16.9 |
|
|
|
0.6 |
|
|
|
0.6 |
|
Other
|
|
|
155.1 |
|
|
|
142.3 |
|
|
|
6.8 |
|
|
|
11.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
Corporate(1)
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
|
0.3 |
|
|
|
9.5 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,066.2 |
|
|
$ |
3,303.4 |
|
|
$ |
214.4 |
|
|
$ |
182.4 |
|
|
$ |
24.9 |
|
|
$ |
19.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The $1.7 million of operating income in the Corporate
category during the first nine months of fiscal year 2006
primarily related to gains from the sale of surplus properties
(Note 9) partially offset by additional tax and tax-related
items; an environmental liability associated with the
anticipated remediation of chlorinated hydrocarbons discovered
at one of our branches (Note 8); and a charitable donation
for which we will receive a matching tax credit. The
$1.3 million of operating losses in the Corporate category
in the third quarter of fiscal year 2006 related to the
additional tax and tax-related items and the charitable donation
partly offset by gains from the sale of surplus properties. We
recognized net gains from the sale of surplus properties
totaling $2.3 million during the first nine months of
fiscal year 2005, which were partly offset by a
$1.3 million loss associated with a sale-leaseback
transaction completed on April 30, 2004 for a portfolio of
properties associated with 18 different branches. Prior to the
second quarter of fiscal year 2005, all surplus property
activity was allocated to our operating segments. |
The following tables include our investment in assets (accounts
receivable less allowance for doubtful accounts, inventories and
goodwill) and accounts payable for each segment as of
October 31, 2005 and January 31, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2005 | |
|
|
| |
|
|
Accounts | |
|
|
|
Accounts | |
|
|
Receivable | |
|
Inventories | |
|
Goodwill | |
|
Segment Assets | |
|
Payable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
266.3 |
|
|
$ |
135.4 |
|
|
$ |
112.2 |
|
|
$ |
513.9 |
|
|
$ |
211.5 |
|
Plumbing/HVAC
|
|
|
151.5 |
|
|
|
144.1 |
|
|
|
91.0 |
|
|
|
386.6 |
|
|
|
153.0 |
|
Utilities
|
|
|
104.7 |
|
|
|
116.4 |
|
|
|
161.9 |
|
|
|
383.0 |
|
|
|
105.3 |
|
MRO
|
|
|
65.4 |
|
|
|
66.1 |
|
|
|
273.0 |
|
|
|
404.5 |
|
|
|
54.0 |
|
Electrical
|
|
|
76.6 |
|
|
|
41.7 |
|
|
|
9.0 |
|
|
|
127.3 |
|
|
|
61.1 |
|
Industrial PVF
|
|
|
57.3 |
|
|
|
154.8 |
|
|
|
56.4 |
|
|
|
268.5 |
|
|
|
46.3 |
|
Building Materials
|
|
|
40.1 |
|
|
|
27.1 |
|
|
|
30.0 |
|
|
|
97.2 |
|
|
|
25.3 |
|
Other
|
|
|
35.3 |
|
|
|
22.2 |
|
|
|
30.4 |
|
|
|
87.9 |
|
|
|
25.9 |
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
797.2 |
|
|
$ |
707.8 |
|
|
$ |
763.9 |
|
|
|
2,268.9 |
|
|
$ |
699.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251.8 |
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.2 |
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.5 |
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110.4 |
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,907.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2005 | |
|
|
| |
|
|
Accounts | |
|
|
|
Accounts | |
|
|
Receivable | |
|
Inventories | |
|
Goodwill | |
|
Segment Assets | |
|
Payable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
193.8 |
|
|
$ |
137.6 |
|
|
$ |
112.2 |
|
|
$ |
443.6 |
|
|
$ |
137.4 |
|
Plumbing/HVAC
|
|
|
140.5 |
|
|
|
156.6 |
|
|
|
87.1 |
|
|
|
384.2 |
|
|
|
126.2 |
|
Utilities
|
|
|
62.0 |
|
|
|
84.8 |
|
|
|
123.4 |
|
|
|
270.2 |
|
|
|
53.9 |
|
MRO
|
|
|
50.8 |
|
|
|
49.0 |
|
|
|
273.0 |
|
|
|
372.8 |
|
|
|
40.8 |
|
Electrical
|
|
|
64.7 |
|
|
|
28.6 |
|
|
|
9.0 |
|
|
|
102.3 |
|
|
|
43.2 |
|
Industrial PVF
|
|
|
50.5 |
|
|
|
136.3 |
|
|
|
56.4 |
|
|
|
243.2 |
|
|
|
43.6 |
|
Building Materials
|
|
|
31.1 |
|
|
|
22.8 |
|
|
|
27.1 |
|
|
|
81.0 |
|
|
|
22.5 |
|
Other
|
|
|
31.9 |
|
|
|
18.2 |
|
|
|
30.4 |
|
|
|
80.5 |
|
|
|
15.6 |
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
625.3 |
|
|
$ |
633.9 |
|
|
$ |
718.6 |
|
|
|
1,977.8 |
|
|
$ |
503.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213.2 |
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.1 |
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.0 |
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92.8 |
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,530.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. |
Goodwill and Intangible Assets |
On May 1, 2005, we completed the acquisition of National
Construction Products, Inc. (National), a small
privately owned distributor of construction materials serving
the Atlanta, Georgia area. The acquisition of National enables
us to become a leader in the tilt wall construction market
throughout the metro Atlanta area. The results of
Nationals operations have been included in our
consolidated statements of income since May 1, 2005.
On June 30, 2005, we acquired Ram Pipe and Supply, Inc.
(Ram Pipe), a distributor of plumbing and water and
sewer products serving the Yuma, Arizona area. The acquisition
of Ram Pipe allows us to expand our leadership position in the
plumbing and waterworks market in an attractive geographic
market. The results of Ram Pipes operations have been
included in our consolidated statements of income since
June 30, 2005.
The combined purchase price associated with the acquisitions of
National and Ram Pipe consisted of $12.2 million of net
cash paid for National and Ram Pipes net assets along with
the assumption of accounts payable, accrued and other
liabilities, which collectively totaled $2.0 million,
subject to finalization of working capital adjustments in
accordance with the respective purchase agreements. The total
cost of the acquisitions was allocated to the assets acquired
and liabilities assumed based on their respective preliminary
fair values in accordance with SFAS No. 141,
Business Combinations (SFAS 141).
Goodwill, and other intangible assets recorded in connection
with the transactions totaled $6.7 million and
$2.2 million, respectively. Goodwill associated with the
National acquisition is deductible for tax purposes. The
goodwill and intangible assets associated with the National and
Ram Pipe acquisitions were assigned entirely to our Building
Materials and Plumbing/HVAC segments, respectively. The
intangible assets are subject to amortization and consist
primarily of shareholder relationships, corporate customer
relationships, non-compete agreements, and employment agreements
that are amortized on a straight-line basis over a
weighted-average useful life of approximately 9.7 years.
The purchase price allocations for these acquisitions have not
been finalized because the post closing settlements have not
been completed and our initial determinations of fair values
assigned to intangible assets other than goodwill is ongoing.
The purchase price allocations are, therefore, subject to change
based upon continuing review. Pro forma results of operations
reflecting these acquisitions have not been
10
presented because the results of operations of National and Ram
Pipe are not material to our consolidated results of operations
on either an individual or aggregate basis.
On August 29, 2005, we completed the acquisition of TVESCO,
Inc. (TVESCO), which distributes transmission and
distribution (T&D) and electrical commercial and
industrial (C&I) products to municipal utility,
electric cooperative utility and contractor customers through 14
branches in five southeastern states. The acquisition of TVESCO
further strengthens the geographic footprint of our Utilities
business by expanding it into the Tennessee Valley region and is
aligned with our growth strategy of investing in businesses that
expand our national footprint and reduce business cyclicality.
The purchase price associated with the acquisition of TVESCO
consisted of $65.0 million of net cash paid for
TVESCOs net assets along with the assumption of accounts
payable, accrued and other liabilities, which collectively
totaled $16.9 million, subject to finalization of working
capital adjustments in accordance with the purchase agreement.
Additionally, approximately $6.5 million has been accrued
as of October 31, 2005 relating to a tax election under
section 338(h)(10) of the Internal Revenue Code associated
with our acquisition of TVESCO. The total cost of the
acquisition was allocated to the assets acquired and liabilities
assumed based on their respective preliminary fair values in
accordance with SFAS 141. Goodwill, all of which is
deductible for tax purposes, and other intangible assets
recorded in connection with the transaction totaled
$37.4 million and $18.1 million, respectively. The
goodwill and intangible assets associated with the TVESCO
acquisition were assigned entirely to our Utilities segment. The
intangible assets are subject to amortization and consist
primarily of corporate customer relationships, employment
agreements, and non-compete agreements that are amortized on a
straight-line basis over a weighted-average useful life of
approximately 8.3 years. The purchase price allocation for
this acquisition has not been finalized because the post closing
settlements have not been completed and our initial
determinations of fair values assigned to intangible assets
other than goodwill is ongoing. The purchase price allocation
is, therefore, subject to change based upon continuing review.
Pro forma results of operations reflecting this acquisition have
not been presented because the results of operations of TVESCO
are not material to our consolidated results of operations.
During the first nine months of fiscal year 2006, we finalized
working capital adjustments associated with our acquisitions of
Todd Pipe and Supply (Todd Pipe) and Southwest
Power, Inc. and Western States Electric, Inc. and their
subsidiary entities (collectively referred to as SWP/
WSE). Todd Pipe was acquired on May 28, 2004 and is
included in our Plumbing/ HVAC segment. SWP/ WSE was acquired on
November 1, 2004 and is included in our Utilities segment.
A summary of the changes in the carrying amount of goodwill by
reportable segment during the nine months ended October 31,
2005 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water & | |
|
Plumbing/ | |
|
|
|
|
|
|
|
Industrial | |
|
Building | |
|
|
|
|
|
|
Sewer | |
|
HVAC | |
|
Utilities | |
|
MRO | |
|
Electrical | |
|
PVF | |
|
Materials | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at January 31, 2005
|
|
$ |
112.2 |
|
|
$ |
87.1 |
|
|
$ |
123.4 |
|
|
$ |
273.0 |
|
|
$ |
9.0 |
|
|
$ |
56.4 |
|
|
$ |
27.1 |
|
|
$ |
30.4 |
|
|
$ |
718.6 |
|
Goodwill acquired
|
|
|
|
|
|
|
3.8 |
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
44.1 |
|
Finalization of purchase accounting
|
|
|
|
|
|
|
0.4 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
Other
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2005
|
|
$ |
112.2 |
|
|
$ |
91.0 |
|
|
$ |
161.9 |
|
|
$ |
273.0 |
|
|
$ |
9.0 |
|
|
$ |
56.4 |
|
|
$ |
30.0 |
|
|
$ |
30.4 |
|
|
$ |
763.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
As of October 31, 2005 and January 31, 2005, our
intangible assets, included in other assets, were classified as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2005 | |
|
As of January 31, 2005 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
|
|
Carrying | |
|
Accumulated | |
|
|
|
|
Value | |
|
Amortization | |
|
Net | |
|
Value | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired customer contracts
|
|
$ |
56.8 |
|
|
$ |
(7.8 |
) |
|
$ |
49.0 |
|
|
$ |
56.8 |
|
|
$ |
(4.7 |
) |
|
$ |
52.1 |
|
|
Corporate customer relationships
|
|
|
32.0 |
|
|
|
(1.9 |
) |
|
|
30.1 |
|
|
|
15.2 |
|
|
|
(0.8 |
) |
|
|
14.4 |
|
|
Non-compete/employment agreements
|
|
|
10.1 |
|
|
|
(4.5 |
) |
|
|
5.6 |
|
|
|
8.3 |
|
|
|
(2.0 |
) |
|
|
6.3 |
|
|
Shareholder relationships
|
|
|
5.9 |
|
|
|
(0.8 |
) |
|
|
5.1 |
|
|
|
4.2 |
|
|
|
(0.3 |
) |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized
|
|
|
104.8 |
|
|
|
(15.0 |
) |
|
|
89.8 |
|
|
|
84.5 |
|
|
|
(7.8 |
) |
|
|
76.7 |
|
Unamortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label tradenames
|
|
|
5.9 |
|
|
|
|
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
|
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
110.7 |
|
|
$ |
(15.0 |
) |
|
$ |
95.7 |
|
|
$ |
90.4 |
|
|
$ |
(7.8 |
) |
|
$ |
82.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for amortized intangible assets totaled
$2.6 million and $7.2 million for the three months and
nine months ended October 31, 2005, respectively. Estimated
aggregate future amortization expense for acquisition-related
intangible assets for the three months ending January 31,
2006 and future fiscal years is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ending | |
|
Fiscal Years Ending January 31, | |
|
|
January 31, | |
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Amortization expense
|
|
$ |
2.7 |
|
|
$ |
10.2 |
|
|
$ |
8.9 |
|
|
$ |
8.3 |
|
|
$ |
8.2 |
|
|
$ |
57.4 |
|
|
|
Note 4. |
Branch Closures and Consolidation Activities |
As more fully disclosed in Note 6 to the consolidated
financial statements in our fiscal year 2005 Annual Report, we
approved plans to close and consolidate certain branches that
did not strategically fit into our core businesses and/or did
not perform to our expectations. The liability balance, included
in other current liabilities, incurred related to these
activities as of October 31, 2005 and January 31, 2005
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
January 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
Beginning balance
|
|
$ |
2.9 |
|
|
$ |
4.1 |
|
|
Provision
|
|
|
0.7 |
|
|
|
1.7 |
|
|
Lease payments
|
|
|
(1.5 |
) |
|
|
(2.9 |
) |
|
Other
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
1.4 |
|
|
$ |
2.9 |
|
|
|
|
|
|
|
|
12
Long-term debt as of October 31, 2005 and January 31,
2005 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
January 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
8.27% senior notes, due 2005
|
|
$ |
5.6 |
|
|
$ |
5.6 |
|
8.42% senior notes, due 2007
|
|
|
61.8 |
|
|
|
61.8 |
|
7.96% senior notes, due 2011
|
|
|
56.0 |
|
|
|
60.7 |
|
7.14% senior notes, due 2012
|
|
|
26.7 |
|
|
|
28.6 |
|
7.19% senior notes, due 2012
|
|
|
40.0 |
|
|
|
40.0 |
|
6.74% senior notes, due 2013
|
|
|
38.1 |
|
|
|
40.5 |
|
5.50% senior notes, due 2014
|
|
|
300.0 |
|
|
|
300.0 |
|
Fair value hedge carrying value adjustment
|
|
|
1.7 |
|
|
|
1.4 |
|
Other notes payable with varying interest rates of 2.1% to 6.9%
at October 31, 2005, with due dates from 2005 to 2014
|
|
|
8.6 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
Total debt
|
|
|
538.5 |
|
|
|
547.3 |
|
Less discount on debt issuance
|
|
|
(1.4 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
Total debt less discount
|
|
|
537.1 |
|
|
|
545.7 |
|
Less current portion
|
|
|
(48.2 |
) |
|
|
(45.2 |
) |
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
488.9 |
|
|
$ |
500.5 |
|
|
|
|
|
|
|
|
As of October 31, 2005, we were in compliance with all
financial covenants.
On October 12, 2004, we issued $300.0 million in
original principal amount of 5.50% senior notes (the
notes) due on October 15, 2014 in a private
placement pursuant to Rule 144A under the Securities Act.
The notes were issued at 99.468% of their par value and are
reflected in our consolidated balance sheet, net of a
$1.4 million and $1.6 million discount as of
October 31, 2005 and January 31, 2005, respectively.
On May 10, 2005, we filed an exchange offer registration
statement with the SEC on Form S-4 to exchange the notes
for a new issue of substantially identical notes registered
under the Securities Act. On July 21, 2005 the SEC declared
our registration effective, and on July 22, 2005, we
announced the commencement of the exchange offer. Subsequently,
on August 22, 2005, all of the original notes were tendered
for the registered new notes, which are guaranteed by
substantially all of our subsidiaries. Separate financial
statements of the subsidiary guarantors are not provided because
our parent company (issuer of the notes) has no independent
assets or operations and the subsidiary guarantees are full and
unconditional and joint and several. There are no significant
restrictions on our parent company or subsidiaries ability
to obtain funds from our subsidiaries by dividend or loan.
Additionally, any of our subsidiaries not guaranteeing the note
issuance are minor (i.e., represent less than 3% of total
consolidated assets, shareholders equity, net sales,
income before income taxes and cash flows from operating
activities).
On November 10, 2004 and November 30, 2004, we entered
into separate interest rate swap contracts with two distinct
financial institutions that each effectively converted
$50.0 million (i.e., an aggregate of $100.0 million)
of our $300.0 million in original principal amount of
5.50% notes, due October 15, 2014, to floating rate
debt based on the six-month LIBOR rate plus 0.6985% and 0.79%,
respectively, with semi-annual settlements through
October 15, 2014. The interest rate swap contracts were
designated as fair value hedges of the changes in fair value of
the respective $50.0 million of 5.50% notes due to
changes in the benchmark interest rate (i.e., six-month LIBOR
rate). We settled the interest rate swap contracts during the
second quarter of fiscal year 2006, receiving approximately
$1.8 million in cash. The corresponding fair value hedge
carrying value adjustment of $1.8 million was recognized
during the second quarter of fiscal year 2006 as a component of
debt and is being amortized on a straight-line basis as a
favorable adjustment to interest expense over the same period in
which the related interest costs on the
13
$300.0 million notes are recognized in earnings.
Approximately $0.2 million of the fair value hedge carrying
value adjustment will be recognized as an adjustment to interest
expense during the next twelve months.
|
|
Note 6. |
Comprehensive Income |
Total comprehensive income, net of tax, was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
45.7 |
|
|
$ |
33.8 |
|
|
$ |
118.9 |
|
|
$ |
103.0 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash flow hedge treasury lock
|
|
|
(0.1 |
) |
|
|
2.0 |
|
|
|
(0.2 |
) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of tax
|
|
$ |
45.6 |
|
|
$ |
35.8 |
|
|
$ |
118.7 |
|
|
$ |
105.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of tax, totaled
$1.8 million as of October 31, 2005, and consisted of
the net unrealized gain associated with the settlement of our
ten-year treasury rate lock contract on October 5, 2004.
Approximately $0.3 million of the gain will be recognized
in earnings as an adjustment to interest expense during the next
twelve months.
|
|
Note 7. |
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
our potential common shares, which include certain employee and
director stock options and unvested shares of restricted stock.
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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Basic weighted-average shares outstanding
|
|
|
64.7 |
|
|
|
61.1 |
|
|
|
64.6 |
|
|
|
60.3 |
|
Incremental shares resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
0.7 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
Restricted stock
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
1.3 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
66.8 |
|
|
|
63.0 |
|
|
|
66.7 |
|
|
|
62.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the above computations of diluted weighted-average
shares outstanding during the nine months ended October 31,
2005 were options to purchase 382,240 shares of common
stock at an average exercise price of $30.63 because their
effect would have been anti-dilutive. Excluded from the above
computations of diluted weighted-average shares outstanding for
the three and nine months ended October 29, 2004 were
52,000 unvested shares of restricted stock at an average grant
price of $30.88 because their effect would have been
anti-dilutive. All outstanding restricted stock as of
October 31, 2005 and stock options as of October 29,
2004 were dilutive and, therefore, included in the computation
of diluted weighted-average shares outstanding for the three and
nine months ended.
|
|
Note 8. |
Commitments and Contingencies |
We are involved in various legal proceedings arising in the
normal course of our business. In our opinion, none of the
proceedings that have not been disclosed or recognized in our
consolidated financial statements are material in relation to
our consolidated operations, cash flows, or financial position.
14
In 1979, we acquired property to support a branch in our
Electrical business. Small traces of chlorinated hydrocarbons
(hydrocarbons) were discovered in limited soil
samples. Subsequent testing of the soil revealed larger amounts
of hydrocarbons that now require remediation. We currently
estimate the amount of remediation to range from
$1.0 million to $2.3 million, with no amount in that
range being a better estimate than any other amount in that
range. We are currently evaluating all available recourse
related to the cost of the cleanup, and believe the previous
owners caused the contamination. As it is not currently probable
that we will be successful in recovering amounts from other
third parties, including the previous owners and any insurance
carriers, we have accrued a $1.0 million liability as of
October 31, 2005 for environmental remediation, of which
approximately $0.2 million relates to capitalizable
equipment to be used to improve the safety of the property over
its original condition.
Based on currently available information and analysis, we
believe it is still possible that costs associated with such
liabilities or as yet unknown liabilities may exceed current
reserves in amounts or a range of amounts that could be material
but cannot be estimated as of October 31, 2005. There can
be no assurance that activities identified in the future will
not result in additional investigations or remedial actions
being required.
|
|
Note 9. |
Supplemental Cash Flows Information |
Additional supplemental information related to the accompanying
consolidated statements of cash flows was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Income taxes paid, net
|
|
$ |
13.6 |
|
|
$ |
33.5 |
|
Interest paid
|
|
|
25.7 |
|
|
|
14.3 |
|
Income tax benefit of stock options exercised
|
|
|
1.0 |
|
|
|
2.5 |
|
Debt paid with sale-leaseback proceeds (non-cash activity)
|
|
|
|
|
|
|
23.0 |
|
Assets acquired with debt (non-cash activity)
|
|
|
|
|
|
|
1.5 |
|
On October 28, 2005 our Board of Directors declared a
quarterly cash dividend of $0.09 per share that was paid on
November 17, 2005 to shareholders of record on
November 7, 2005. Dividends declared but not paid totaled
$6.0 million and $4.3 million at October 31, 2005
and October 29, 2004, respectively.
During the first nine months of fiscal year 2006, net gains
totaling approximately $5.1 million were recognized on the
sale of surplus properties, for which we received approximately
$7.7 million of net cash proceeds. During the first nine
months of fiscal year 2005, proceeds from the sale of property
and equipment consisted primarily of $32.7 million of net
cash received from the sale-leaseback of a portfolio of
properties associated with 18 different branches that were
leased back pursuant to 15-year minimum term operating leases.
All of the resulting leases qualified for operating lease
treatment.
15
The assets acquired and liabilities assumed associated with our
acquisitions during the nine months ended October 31, 2005
(Note 3) and October 29, 2004 (Standard Wholesale
Supply Company and Todd Pipe) are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accounts receivable
|
|
$ |
21.3 |
|
|
$ |
49.8 |
|
Inventories
|
|
|
12.1 |
|
|
|
33.3 |
|
Property and equipment
|
|
|
1.1 |
|
|
|
5.1 |
|
Goodwill
|
|
|
44.1 |
|
|
|
43.4 |
|
Intangible assets
|
|
|
20.3 |
|
|
|
17.0 |
|
Other assets
|
|
|
3.7 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
102.6 |
|
|
|
153.7 |
|
Accounts payable and accrued liabilities
|
|
|
(14.8 |
) |
|
|
(38.7 |
) |
Other liabilities
|
|
|
(10.6 |
) |
|
|
(13.6 |
) |
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
(25.4 |
) |
|
|
(52.3 |
) |
|
|
|
|
|
|
|
Cash purchase price, net of cash acquired
|
|
$ |
77.2 |
|
|
$ |
101.4 |
|
|
|
|
|
|
|
|
During the nine months ended October 31, 2005, additional
payments totaling approximately $5.3 million were made
relating to a tax election under section 338(h)(10) of the
Internal Revenue Code associated with our acquisition of SWP/WSE.
|
|
Note 10. |
Stock-Based Compensation |
Stock Plans
The Amended 2005 Executive Stock Plan (the 2005 Stock
Plan) is our only active stock plan at October 31,
2005. The Amended and Restated 1997 Executive Stock Plan (the
1997 Stock Plan), established to grant both
incentive and non-incentive stock options to key employees, was
replaced by the 2005 Stock Plan effective May 19, 2005, and
no further shares are expected to be issued under the 1997 Stock
Plan. The 2005 Stock Plan authorizes the Compensation Committee
of the Board of Directors (the Compensation
Committee) to grant key employees and non-employee
directors options to purchase stock, grants of stock
appreciation rights (SAR) and grants of restricted
stock, including performance-based restricted stock, for an
aggregate of 2.2 million shares of common stock. Under
certain conditions the President and Chief Executive Officer is
also authorized to make stock grants to key employees. Incentive
stock options (ISO) are granted at prices not less
than the market value on the date of grant, and non-incentive
stock options are issued by the Compensation Committee, which is
authorized to establish any option price at its sole discretion.
The maximum term of an ISO may not exceed ten years; however, if
the ISO is issued to a key employee who owns 10% or more of our
stock, the maximum term of an option may not exceed five years.
An option becomes exercisable at such times and in such
installments as set forth by the Compensation Committee. Under
the 2005 Stock Plan, a key employee or non-employee director may
be granted one or more options, or one or more SAR, or one or
more options and SAR in any combination which, individually or
in the aggregate, relate to no more than 250,000 shares of
stock in any calendar year. Additionally, no more than
250,000 shares of performance-based restricted stock may be
granted to a key employee or non-employee director in any
calendar year. These shares are subject to certain transfer
restrictions, and vesting may be dependent upon continued
employment, the satisfaction of performance objectives, or both.
16
Restricted Stock
Performance-based shares: Performance-based shares are
used as an incentive to increase shareholder returns with actual
awards based on various criteria, including increases in the
price of our common shares, earnings per share, shareholder
value, and net income. Compensation expense for the number of
shares issued is recognized over the vesting period.
During the first quarter of fiscal year 2006, the Compensation
Committee authorized the grant of 145,288 performance-based
restricted stock grants under the 1997 Stock Plan. Subsequently,
during the second and third quarters of fiscal year 2006, the
Compensation Committee authorized the grant of an additional
60,622 and 5,025 performance-based restricted stock grants,
respectively, under the 2005 Stock Plan. The aggregate amount of
performance-based restricted stock issued during the first nine
months of fiscal year 2006 totaled 210,935. These
performance-based restricted stock grants provide for graded
vesting only if a comparison of our total shareholder return
equals or exceeds the cumulative total shareholder return of the
Standard & Poors 500 Composite Stock Index (the
S&P index) over a three-year period ending
March 1, 2008. The market value of the performance-based
restricted shares awarded during the first nine months of fiscal
year 2006, which is based on the number of shares expected to
ultimately vest in light of our performance against the S&P
index and our stock price, totaled $4.2 million and was
recorded as unearned compensation, a component of
shareholders equity. A portion of the unearned
compensation is expensed each reporting period based on the
vesting period. The expense associated with these
performance-based shares could be adjusted should it either
become unlikely that the expected number of shares will vest or
if future estimates indicate that a greater number of shares
will vest, respectively.
Non-performance based shares: During the first quarter of
fiscal year 2006, the Compensation Committee authorized the
grant of 19,000 non-performance based restricted stock grants
under the 1997 Stock Plan. Subsequently, during the second
quarter of fiscal year 2006, the Compensation Committee
authorized the grant of an additional 157,500 shares of
non-performance based restricted stock under the 2005 Stock
Plan. The market value of the non-performance based restricted
shares awarded during the first nine months of fiscal year 2006
totaled $4.9 million, was recorded as unearned
compensation, and is being charged to expense over five year
vesting periods from the date of the grants.
During the second quarter of fiscal year 2006, we also awarded
14,400 restricted shares to non-employee directors that
immediately vested under the 2005 Stock Plan. The market value
of these shares totaled $0.4 million and was recognized in
our consolidated results of operations during the second quarter
of fiscal year 2006.
During the first nine months of fiscal year 2006, we cancelled
25,710 restricted shares previously granted, with market values
at the date of grant of $0.5 million according to the
provisions of the grant.
17
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is intended to
provide information to assist the reader in better understanding
and evaluating our business and results of operations. This
information is a discussion and analysis of certain significant
factors that have affected our results of operations for the
three and nine months ended October 31, 2005 and
October 29, 2004, and our financial condition as of
October 31, 2005. MD&A should be read in conjunction
with our consolidated financial statements and the notes thereto
contained herein and in our Annual Report on Form 10-K (the
Annual Report) for the fiscal year ended
January 31, 2005.
Forward-Looking Statements
Certain statements made by us or incorporated by reference 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 provisions created by such sections. When used in this
report, the words believe, anticipate,
estimate, expect, may,
will, should, plan,
intend, project, and similar expressions
are intended to identify forward-looking statements. Although we
believe that the expectations reflected in such forward-looking
statements are reasonable, our expectations may not prove to be
correct. Actual results or events may differ significantly from
those indicated in our forward-looking statements as a result of
various important factors. These factors are discussed under the
caption Item 1. Business Risk
Factors in our Annual Report for the fiscal year ended
January 31, 2005. In addition, actual results or events may
be impacted by the results of the review of strategic
alternatives by the Special Committee of the Board of Directors
as announced on October 31, 2005, the disruption of normal
management and business operations as a result of Special
Committee activities, and reliance on key personnel who may
separate from the Company due to general attrition or due to
additional uncertainties created by Special Committee
activities. All forward-looking statements are qualified by and
should be read in conjunction with those risk factors. Except as
may be required by applicable law, we undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events, or
otherwise.
Business
Founded in 1928, we are one of the largest diversified wholesale
distributors of construction, repair and maintenance-related
products in the United States. We distribute over
350,000 products to more than 100,000 customers
through over 500 branches located in 40 states, as well as
one branch located in Canada. Our principal customers include
water and sewer, plumbing, electrical, and mechanical
contractors; public utilities; municipalities; property
management companies; and industrial companies. Although we have
a national presence, we operate principally in the southeastern
and southwestern United States. Our fiscal year ends on
January 31, with our quarterly periods ending on the last
calendar day of each quarter. Prior to fiscal year 2005, our
fiscal years were 52- or 53- week periods ending on the last
Friday in January. During fiscal year 2005 and prior, our
quarterly periods were 13- or 14- week periods ending on the
last Friday of the quarter.
Segment Information
We manage our business on a product line basis and report the
results of our operations in seven operating segments and an
Other category. The operating segments are Water &
Sewer; Plumbing/Heating, Ventilating and Air Conditioning
(HVAC); Utilities; Maintenance, Repair and
Operations (MRO); Electrical; Industrial Pipe,
Valves and Fittings (PVF); and Building Materials.
We include our Fire Protection and Mechanical product lines in
the Other category.
The Corporate category includes corporate level expenses not
allocated to our operating segments or the Other category.
Inter-segment sales are excluded from net sales presented for
each segment and the Other category. Operating income for each
segment and the Other category includes certain corporate
18
expense allocations for corporate overhead expenses, employee
benefits, data processing expenses and insurance. These
allocations are based on a standard rate determined by
management.
Results of Operations
Overview
Net sales increased 27.9% to $1,493.5 million in the third
quarter of fiscal year 2006, compared to $1,167.5 million
reported in the same period last year, with $127.0 million
of the increase relating to the impact from the acquisitions of
Southwest Power, Inc./Western States Electric, Inc.
(SWP/WSE), TVESCO, Inc. (TVESCO),
National Construction Products, Inc. (National), and
Ram Pipe and Supply, Inc. (Ram Pipe). Organic sales
increased 16.7%, with positive growth reported by all of our
segments. A higher average cost of inventories sold and a change
in business mix contributed to a 160 basis point reduction
in our overall gross margin ratio to net sales to 21.9%,
compared to the same period in the prior year. The decrease in
the gross margin ratio to net sales was partly offset by a
170 basis point reduction in operating expenses as a
percentage of net sales due primarily to leverage obtained from
higher net sales, productivity improvements (including lower
corporate costs), a moderation in expense investment spending,
and business mix. Net income increased $11.9 million or
35.2% in the third quarter of fiscal year 2006 to
$45.7 million, as compared to the prior years third
quarter net income of $33.8 million. Diluted earnings per
share in the third quarter of fiscal year 2006 totaled $0.68 on
66.8 million weighted-average shares outstanding, compared
to $0.54 per diluted share reported in the prior year on
63.0 million weighted-average shares outstanding. The
increase of 3.8 million weighted-average shares outstanding
was primarily the result of our equity offering in October 2004,
at which time an additional 4.0 million shares were issued.
Net sales increased 23.1% to $4,066.2 million in the first
nine months of fiscal year 2006, compared to
$3,303.4 million reported in the same period last year,
with $403.4 million of the increase relating to the impact
from the acquisitions of SWP/WSE, Todd Pipe & Supply
(Todd Pipe), Standard Wholesale Supply Company
(Standard), TVESCO, National, and Ram Pipe. Organic
sales increased 11.4%, with positive growth reported by all of
our segments. A higher average cost of inventories sold and a
change in business mix contributed to a 180 basis point
reduction in our overall gross margin ratio to net sales to
22.0%, compared to the same period in the prior year. The
decrease in the gross margin ratio to net sales was partly
offset by a 160 basis point reduction in operating expenses
as a percentage of net sales due primarily to the leverage
obtained from higher net sales, productivity improvements
(including lower corporate costs), a moderation in expense
investment spending, business mix, and net gains from the sale
of surplus property. Net income in the first nine months of
fiscal year 2006 totaled $118.9 million, a
$15.9 million or 15.4% increase compared to the prior
years first nine months net income of $103.0 million.
Diluted earnings per share in the first nine months of fiscal
year 2006 totaled $1.78 on 66.7 million weighted-average
shares outstanding, compared to $1.65 per diluted share
reported in the prior year on 62.2 million weighted-average
shares outstanding. The increase of 4.5 million
weighted-average shares outstanding was primarily the result of
our equity offering in October 2004.
On October 31, 2005, the Company announced the formation of
a special committee of the Board of Directors (the
Committee) to explore strategic alternatives. The
Committee has retained Lehman Brothers as its financial
advisors, and Weil, Gotshal & Manges, LLP as its legal
advisors. There can be no assurance that the Company will enter
into or consummate any transaction, or as to the terms or timing
thereof. The Company does not expect to make any announcement
until the Committee completes its process, either upon the
Boards approval of a definitive transaction, or a
determination not to approve a transaction at this time.
19
Net Sales
Net sales are affected by numerous factors, including, but not
limited to, changes in demand, seasonality, weather, commodity
pricing, competition, and construction cycles. The following
table presents the major components of our consolidated net
sales in the third quarter and first nine months of fiscal years
2006 and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Existing sales base
|
|
$ |
1,355.2 |
|
|
$ |
1,153.8 |
|
|
|
17.5 |
% |
|
$ |
3,639.3 |
|
|
$ |
3,245.5 |
|
|
|
12.1 |
% |
Branch openings
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
17.5 |
|
|
|
|
|
|
|
|
|
Branch closures
|
|
|
0.8 |
|
|
|
11.4 |
|
|
|
|
|
|
|
3.7 |
|
|
|
49.0 |
|
|
|
|
|
Acquisitions
|
|
|
140.8 |
|
|
|
126.8 |
|
|
|
|
|
|
|
501.0 |
|
|
|
442.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic
sales(1)
|
|
|
1,507.3 |
|
|
|
1,292.0 |
|
|
|
16.7 |
% |
|
|
4,161.5 |
|
|
|
3,737.3 |
|
|
|
11.4 |
% |
Excluded (divested) branches
(2)
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
|
|
8.9 |
|
|
|
|
|
Less: Pre-acquisition pro forma sales
|
|
|
(13.8 |
) |
|
|
(126.8 |
) |
|
|
|
|
|
|
(97.6 |
) |
|
|
(442.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net sales
|
|
$ |
1,493.5 |
|
|
$ |
1,167.5 |
|
|
|
27.9 |
% |
|
$ |
4,066.2 |
|
|
$ |
3,303.4 |
|
|
|
23.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Organic sales is a non-gaap financial measure used by management
to assess the sales performance associated with branches we have
had during each of the last two years (i.e., existing sales
base), branches we have opened or closed within the last two
years, and branches we have acquired during the last two years.
Branches of any divested business are excluded from our
calculation. For comparative purposes, prior period sales are
reported on a pro forma basis to include pre-acquisition sales
activity. We believe this methodology reflects the current sales
performance of all of our branches, including those newly
acquired. |
|
(2) |
During the second quarter of fiscal year 2006, we sold the
assets associated with both a branch in our Other category
(Mechanical product line) and a branch in our Utilities segment
for a combined total of approximately $1.6 million,
respectively. Additionally, during the third quarter of fiscal
year 2005, we sold a business within our MRO segment for
$2.6 million, which resulted in a gain of approximately
$0.1 million. These businesses were sold because they were
not core operations. As a result, the related third quarter
sales of $2.3 million for fiscal year 2005, and
$2.3 million and $8.9 million for the first nine
months of fiscal years 2006 and 2005, respectively, have been
excluded from our organic sales. |
Net sales in the third quarter of fiscal year 2006 totaled
$1,493.5 million, an increase of $326.0 million or
27.9%, compared to the prior years third quarter net sales
of $1,167.5 million. Organic sales increased by
$215.3 million or 16.7%, with positive growth reported by
all of our segments. The increase in net sales included
approximately $127.0 million from our acquisitions
completed during the past year including SWP/WSE (completed in
the fourth quarter of fiscal year 2005), TVESCO (completed in
the third quarter of fiscal year 2006), National (completed in
the second quarter of fiscal year 2006) and Ram Pipe (completed
in the second quarter of fiscal year 2006). The remaining
increase in net sales was primarily due to continued strength in
commercial, residential, industrial and infrastructure end
markets; project-related activity from large industrial and
engineering customers in the petrochemical, power, and oil
markets; hurricane recovery projects; and higher commodity
prices primarily in PVC and copper based products.
Net sales in the first nine months of fiscal year 2006 totaled
$4,066.2 million, an increase of $762.8 million or
23.1%, compared to the prior years first nine months net
sales of $3,303.4 million. Organic sales increased by
$424.2 million or 11.4%, with positive growth reported by
all of our segments. The increase in net sales included
approximately $403.4 million from our acquisitions of
SWP/WSE, Todd Pipe, TVESCO, Standard, National, and Ram Pipe.
The remaining increase in net sales was primarily due to
continued strength across the commercial, residential,
industrial and infrastructure end markets. Price changes for
commodity-based products were mixed, resulting in a modest price
impact to our total reported net sales during the first nine
months of fiscal year 2006.
20
Gross Margin
Gross margin is affected by numerous factors, including, but not
limited to product mix changes, commodity pricing, competition,
vendor rebates and direct shipments compared to stock sales.
Gross margin and gross margin ratio to net sales in the third
quarter and first nine months of fiscal years 2006 and 2005 were
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Percentage and | |
|
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
Gross margin
|
|
$ |
327.6 |
|
|
$ |
273.9 |
|
|
|
19.6 |
% |
Gross margin ratio to net sales
|
|
|
21.9 |
% |
|
|
23.5 |
% |
|
|
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
| |
|
Percentage and | |
|
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
Gross margin
|
|
$ |
894.7 |
|
|
$ |
786.1 |
|
|
|
13.8 |
% |
Gross margin ratio to net sales
|
|
|
22.0 |
% |
|
|
23.8 |
% |
|
|
(180 |
) |
Gross margin ratio to net sales totaled 21.9% and 23.5% in the
third quarter of fiscal years 2006 and 2005, respectively, and
22.0% and 23.8% in the first nine months of fiscal years 2006
and 2005, respectively. The decreases were mainly attributable
to higher product costs and business mix. The higher product
costs were primarily the result of the favorable impact in the
prior year periods of higher selling prices resulting from a
steep increase in commodity prices while the commensurate
increase in product costs was not incurred until the inventory
was replaced in subsequent months. Approximately 70 basis
points of the gross margin decrease during the third quarter of
fiscal year 2006 was due to a greater mix of our Utilities
business, which carries a lower gross margin, but also lower
expenses, as a result of the SWP/WSE and TVESCO acquisitions.
The Utilities business comprised 17.4% and 10.1% of our net
sales during the third quarter of fiscal years 2006 and 2005,
respectively, and 16.4% and 9.9% of our net sales during the
first nine months of fiscal years 2006 and 2005, respectively.
Partially offsetting these negative impacts were improved
purchasing leverage as well as favorable PVC and copper pricing
in fiscal year 2006.
Operating Expenses
Operating expenses and percentage of net sales for the third
quarter and first nine months of fiscal years 2006 and 2005 were
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses | |
|
Percentage of Net Sales | |
|
|
| |
|
| |
|
|
Three Months Ended | |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Personnel expenses
|
|
$ |
157.0 |
|
|
$ |
137.6 |
|
|
|
14.1 |
% |
|
|
10.5 |
% |
|
|
11.8 |
% |
|
|
(130 |
) |
Other selling, general and administrative expenses
|
|
|
80.9 |
|
|
|
68.4 |
|
|
|
18.3 |
% |
|
|
5.4 |
% |
|
|
5.8 |
% |
|
|
(40 |
) |
Depreciation and amortization
|
|
|
8.8 |
|
|
|
6.6 |
|
|
|
33.3 |
% |
|
|
0.6 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
246.7 |
|
|
$ |
212.6 |
|
|
|
16.0 |
% |
|
|
16.5 |
% |
|
|
18.2 |
% |
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses | |
|
Percentage of Net Sales | |
|
|
| |
|
| |
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Personnel expenses
|
|
$ |
438.1 |
|
|
$ |
388.9 |
|
|
|
12.7 |
% |
|
|
10.8 |
% |
|
|
11.8 |
% |
|
|
(100 |
) |
Other selling, general and administrative expenses
|
|
|
217.3 |
|
|
|
195.5 |
|
|
|
11.2 |
% |
|
|
5.3 |
% |
|
|
5.9 |
% |
|
|
(60 |
) |
Depreciation and amortization
|
|
|
24.9 |
|
|
|
19.3 |
|
|
|
29.0 |
% |
|
|
0.6 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
680.3 |
|
|
$ |
603.7 |
|
|
|
12.7 |
% |
|
|
16.7 |
% |
|
|
18.3 |
% |
|
|
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Personnel expenses during the third quarter of fiscal year 2006
increased by $19.4 million or 14.1% compared to the third
quarter of fiscal year 2005. Of the $19.4 million increase,
approximately $5.4 million was the result of the SWP/WSE
and TVESCO acquisitions. Our workforce increased by
approximately 5%, from approximately 9,100 employees at
October 29, 2004 to approximately 9,600 employees at
October 31, 2005, primarily as a result of acquisitions.
Excluding the impact of these acquisitions, our workforce
increased by approximately 1% compared to the prior years
third quarter. The $14.0 million or 10.2% increase in
personnel expenses during the third quarter of fiscal year 2006,
excluding the impact of the acquisitions, was primarily the
result of a $6.7 million or 8.6% increase in salaries and
wages as a result of the increase in headcount (which included a
number of key management additions) as well as normal annual
increases; a $3.2 million increase in commissions driven by
the increase in net sales over the prior year quarter; a
$1.9 million increase in temporary labor and overtime
primarily related to increased sales, systems conversions to the
Hughes Unified platform and various branch relocations; a
$1.3 million increase in training expenses related to
system conversions; and a $0.6 million increase in
additional restricted stock amortization associated with fiscal
year 2005 and fiscal year 2006 restricted stock grants. These
increases were partially offset by a reduction in employee
benefit expenses of $1.1 million primarily due to lower
healthcare claims activity and a change in our healthcare
provider effective January 1, 2005.
As a percentage of net sales, personnel expenses were 10.8% and
11.8% during the first nine months of fiscal years 2006 and
2005, respectively, with $21.5 million of the
$49.2 million increase in costs primarily relating to the
SWP/WSE, Todd Pipe, Standard and TVESCO acquisitions. Personnel
expenses during the first nine months of fiscal year 2006,
excluding the impact of acquisitions, increased by
$27.7 million primarily due to the factors identified in
the analysis of the third quarters results.
Other selling, general and administrative expenses increased
$12.5 million or 18.3% compared to the third quarter of
fiscal year 2005. The acquisitions of SWP/WSE and TVESCO
accounted for $2.1 million of the increase. Excluding the
impact of these acquisitions, other selling, general and
administrative expenses increased $10.4 million or 15.2%,
primarily as a result of a $3.9 million increase in fuel
and freight costs due to increased prices and sales volume;
$2.3 million of additional tax and tax-related items; a
$1.4 million increase in equipment and vehicle rent
primarily attributable to an increase in our leased fleet; a
$1.3 million increase in professional fees related to
various facilities management, credit reporting improvements and
strategic initiatives; $0.8 million of additional
charitable donations for which we will receive a matching tax
credit; and other increases that were consistent with the 27.9%
increase in net sales. These increases in other selling, general
and administrative costs were partially offset by
$1.8 million of additional net gains from the sale of
surplus property as compared to the prior year.
Other selling, general and administrative expenses increased
$21.8 million or 11.2% compared to the first nine months of
fiscal year 2005, primarily related to the SWP/WSE, Todd Pipe,
Standard and TVESCO acquisitions, which collectively added
$8.5 million of other selling, general and administrative
expenses. Excluding the impact of these acquisitions, other
selling, general and administrative expenses increased
$13.3 million or 6.8% during the first nine months of
fiscal year 2006 primarily due to a $6.8 million increase
in fuel and freight costs driven by increased prices and sales
volume; a $3.2 million increase in equipment and vehicle
rent attributable to an increase in our leased fleet; a
$2.8 million increase in building rents due in part to the
sale-leaseback transactions completed in April and December of
fiscal year 2005; a $2.7 million increase in professional
fees related to various facilities management, credit reporting
improvements and strategic initiatives; an $0.8 million
environmental charge associated with the anticipated remediation
of chlorinated hydrocarbons discovered at one of our branches;
and other increases that were consistent with the 23.1% increase
in net sales. These increases in other selling, general and
administrative costs were partially offset by $4.3 million
associated with additional net gains from the sale of surplus
property compared to the prior year and losses from the
sale-leaseback transactions completed during the first quarter
of fiscal year 2005; and a $2.7 million decrease in
marketing expenses primarily as a result of expanded vendor
involvement in our marketing promotions and events.
The increase in depreciation and amortization of
$2.2 million and $5.6 million during the third quarter
and first nine months of fiscal year 2006 compared to the third
quarter and first nine months of fiscal year
22
2005, respectively, was primarily a result of incremental
amortization expense associated with the intangible assets
related to the SWP/WSE, Todd Pipe, National, Ram Pipe and TVESCO
acquisitions as well as increases associated with capitalized
software amortization. As a percentage of net sales,
depreciation and amortization expenses remained flat at 0.6% for
the third quarter and first nine months of fiscal year 2006 and
the comparable periods of fiscal year 2005.
We are primarily a fixed cost business; consequently a
percentage change in our net sales can have a greater percentage
effect on our operating expense ratio. Operating expenses as a
percentage of net sales decreased 170 basis points from
18.2% in the third quarter fiscal year 2005 to 16.5% in the
third quarter of fiscal year 2006. For the first nine months of
fiscal year 2006, operating expenses as a percentage of net
sales decreased 160 basis points to 16.7% from 18.3% in the
prior years period. These improvements were due primarily
to the leverage obtained from higher net sales; productivity
improvements (including lower corporate costs); a moderation in
expense investment spending; business mix; and net gains from
the sale of surplus property.
Operating Income
Operating income is affected significantly by fluctuations in
net sales as well as changes in business and product mix.
Operating income for the third quarter and first nine months of
fiscal years 2006 and 2005 was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income | |
|
Percentage of Net Sales | |
|
|
| |
|
| |
|
|
Three Months Ended | |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating Income
|
|
$ |
80.9 |
|
|
$ |
61.3 |
|
|
|
32.0 |
% |
|
|
5.4 |
% |
|
|
5.3 |
% |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income | |
|
Percentage of Net Sales | |
|
|
| |
|
| |
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating Income
|
|
$ |
214.4 |
|
|
$ |
182.4 |
|
|
|
17.5 |
% |
|
|
5.3 |
% |
|
|
5.5 |
% |
|
|
(20 |
) |
Operating income during the third quarter of fiscal year 2006
totaled $80.9 million, increasing $19.6 million or
32.0% over last years strong third quarter. Operating
income as a percentage of net sales increased 10 basis
points during the third quarter of fiscal year 2006 due
primarily to a 170 basis point reduction in operating
expenses as a percentage of net sales resulting from the
leverage obtained from higher net sales, productivity
improvements (including lower corporate costs), a moderation in
expense investment spending and business mix, offset by a
160 basis point reduction in our gross margin ratio to net
sales resulting from a higher average cost of inventory sold, a
change in business mix, and some selling price weakness.
Operating income during the first nine months of fiscal year
2006 totaled $214.4 million, increasing $32.0 million
or 17.5%, compared to the prior years first nine months
operating income total of $182.4 million. Operating income
as a percentage of net sales decreased 20 basis points
during the first nine months of fiscal year 2006 due primarily
to a 180 basis point reduction in our gross margin ratio to
net sales, partially offset by a 160 basis point reduction
in our operating expenses as a percentage of net sales, for
reasons consistent with those identified in the analysis of the
third quarter of fiscal year 2006.
Interest Expense
Interest expense totaled $8.9 million and $7.8 million
in the third quarter of fiscal years 2006 and 2005,
respectively, and totaled $26.7 million and
$21.6 million in the first nine months of fiscal years 2006
and 2005, respectively. Interest expense increased during the
third quarter and first nine months of fiscal year 2006
primarily as a result of an 86 and 94 basis point increase
in our weighted-average interest rates, respectively, partly
offset by a decrease in our weighted-average outstanding debt
balances of $44.4 million and $44.5 million during the
third quarter and the first nine months of fiscal year 2006,
respectively. The
23
increases in our weighted-average interest rates were mainly
attributable to our private placement of $300.0 million in
original principal amount of 5.50% senior notes in October
2004, a portion of the proceeds from which were used to pay off
amounts outstanding from lower cost variable borrowings under
our revolving credit agreement.
Interest and Other Income
Interest and other income totaled $2.2 million and
$1.9 million in the third quarter of fiscal years 2006 and
2005, respectively, and $6.5 million and $5.2 million
in the first nine months of fiscal years 2006 and 2005,
respectively. The increase in the third quarter and the first
nine months of fiscal year 2006 was mainly due to additional
interest income resulting from an increased level of cash,
primarily resulting from strong operating cash flow and our
equity and debt offerings in October 2004.
Income Taxes
Our effective tax rate was 38.4% and 39.0% in the third quarter
of fiscal years 2006 and 2005, respectively, and 38.8% and 38.0%
in the first nine months of fiscal years 2006 and 2005,
respectively. The decrease in our effective tax rate during the
quarter was attributable to an $0.8 million tax benefit
related to a charitable donation. The increase in our effective
tax rate during the first nine months of fiscal year 2006 was
primarily attributable to a $1.7 million tax benefit
realized in the first quarter of fiscal year 2005 related to
federal income tax filing amendments associated with prior
fiscal years. Our effective tax rate is expected to be
approximately 39% for fiscal year 2006.
Segment Results
Consolidated net sales and organic sales by segment in the third
quarter and first nine months of fiscal years 2006 and 2005 were
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales | |
|
Organic Sales | |
|
|
| |
|
| |
|
|
Three Months Ended | |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005(1) | |
|
2004(2) | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
416.8 |
|
|
$ |
327.9 |
|
|
|
27.1 |
% |
|
$ |
416.8 |
|
|
$ |
327.9 |
|
|
|
27 |
% |
Plumbing/HVAC
|
|
|
294.4 |
|
|
|
276.1 |
|
|
|
6.6 |
% |
|
|
294.4 |
|
|
|
280.1 |
|
|
|
5 |
% |
Utilities
|
|
|
259.8 |
|
|
|
118.0 |
|
|
|
120.2 |
% |
|
|
273.6 |
|
|
|
238.6 |
|
|
|
15 |
% |
MRO
|
|
|
139.0 |
|
|
|
116.2 |
|
|
|
19.6 |
% |
|
|
139.0 |
|
|
|
116.2 |
|
|
|
20 |
% |
Electrical
|
|
|
129.3 |
|
|
|
119.6 |
|
|
|
8.1 |
% |
|
|
129.3 |
|
|
|
119.6 |
|
|
|
8 |
% |
Industrial
|
|
|
116.9 |
|
|
|
96.7 |
|
|
|
20.9 |
% |
|
|
116.9 |
|
|
|
96.7 |
|
|
|
21 |
% |
Building Materials
|
|
|
81.7 |
|
|
|
65.2 |
|
|
|
25.3 |
% |
|
|
81.7 |
|
|
|
67.4 |
|
|
|
21 |
% |
Other
|
|
|
55.6 |
|
|
|
47.8 |
|
|
|
16.3 |
% |
|
|
55.6 |
|
|
|
45.5 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,493.5 |
|
|
$ |
1,167.5 |
|
|
|
27.9 |
% |
|
$ |
1,507.3 |
|
|
$ |
1,292.0 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales | |
|
Organic Sales | |
|
|
| |
|
| |
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005(1) | |
|
2004(2) | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
1,086.7 |
|
|
$ |
922.7 |
|
|
|
17.8 |
% |
|
$ |
1,086.7 |
|
|
$ |
942.8 |
|
|
|
15 |
% |
Plumbing/HVAC
|
|
|
858.0 |
|
|
|
758.7 |
|
|
|
13.1 |
% |
|
|
865.9 |
|
|
|
850.6 |
|
|
|
2 |
% |
Utilities
|
|
|
665.0 |
|
|
|
326.8 |
|
|
|
103.5 |
% |
|
|
751.3 |
|
|
|
651.1 |
|
|
|
15 |
% |
MRO
|
|
|
368.2 |
|
|
|
349.5 |
|
|
|
5.4 |
% |
|
|
368.2 |
|
|
|
346.7 |
|
|
|
6 |
% |
Electrical
|
|
|
361.6 |
|
|
|
348.3 |
|
|
|
3.8 |
% |
|
|
361.6 |
|
|
|
348.3 |
|
|
|
4 |
% |
Industrial
|
|
|
347.1 |
|
|
|
265.0 |
|
|
|
31.0 |
% |
|
|
347.1 |
|
|
|
265.0 |
|
|
|
31 |
% |
Building Materials
|
|
|
224.5 |
|
|
|
190.1 |
|
|
|
18.1 |
% |
|
|
226.8 |
|
|
|
196.6 |
|
|
|
15 |
% |
Other
|
|
|
155.1 |
|
|
|
142.3 |
|
|
|
9.0 |
% |
|
|
153.9 |
|
|
|
136.2 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,066.2 |
|
|
$ |
3,303.4 |
|
|
|
23.1 |
% |
|
$ |
4,161.5 |
|
|
$ |
3,737.3 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
(1) |
Organic sales during the third quarter of fiscal year 2006
include $13.8 million of pre-acquisition pro forma sales in
the Utilities segment (TVESCO). |
|
(2) |
Organic sales during the third quarter of fiscal year 2005
includes $120.6 million, $4.0 million, and
$2.2 million of pre-acquisition pro forma sales in the
Utilities segment (SWP/WSE and TVESCO), the Plumbing/HVAC
segment (Ram Pipe), and the Building Materials segment
(National), respectively, and excludes $2.3 million of net
sales associated with a divested business in the Mechanical
product line within our Other category. |
|
(3) |
Organic sales for the first nine months of fiscal year 2006
includes $87.4 million, $7.9 million and
$2.3 million of pre-acquisition pro forma sales in the
Utilities segment (TVESCO), Plumbing/HVAC segment (Ram Pipe) and
the Building Materials segment (National), respectively, and
excludes $1.1 million and $1.2 million of net sales
associated with a divested branch in our Utilities segment and a
branch in the Mechanical product line within our Other category,
respectively. |
|
(4) |
Organic sales during the first nine months of fiscal year 2005
includes $324.3 million, $91.9 million,
$20.1 million and $6.5 million of pre-acquisition pro
forma sales in the Utilities segment (SWP/WSE and TVESCO),
Plumbing/HVAC segment (Todd Pipe and Ram Pipe), Water &
Sewer segment (Standard), and the Building Materials segment
(National), respectively, and excludes $2.8 million and
$6.1 million of net sales associated with a divested
business in our MRO segment and a branch in the Mechanical
product line within our Other category, respectively. |
Operating income by segment and as a percentage of net sales for
the third quarter and first nine months of fiscal years 2006 and
2005 were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income | |
|
Percentage of Net Sales | |
|
|
| |
|
| |
|
|
Three Months Ended | |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
26.0 |
|
|
$ |
16.3 |
|
|
|
59.5 |
% |
|
|
6.2 |
% |
|
|
5.0 |
% |
|
|
120 |
|
Plumbing/ HVAC
|
|
|
4.3 |
|
|
|
4.5 |
|
|
|
(4.4 |
)% |
|
|
1.5 |
% |
|
|
1.6 |
% |
|
|
(10 |
) |
Utilities
|
|
|
12.2 |
|
|
|
6.0 |
|
|
|
103.3 |
% |
|
|
4.7 |
% |
|
|
5.1 |
% |
|
|
(40 |
) |
MRO
|
|
|
11.6 |
|
|
|
9.7 |
|
|
|
19.6 |
% |
|
|
8.3 |
% |
|
|
8.3 |
% |
|
|
|
|
Electrical
|
|
|
5.0 |
|
|
|
2.1 |
|
|
|
138.1 |
% |
|
|
3.9 |
% |
|
|
1.8 |
% |
|
|
210 |
|
Industrial PVF
|
|
|
14.8 |
|
|
|
15.1 |
|
|
|
(2.0 |
)% |
|
|
12.7 |
% |
|
|
15.6 |
% |
|
|
(290 |
) |
Building Materials
|
|
|
5.2 |
|
|
|
5.5 |
|
|
|
(5.5 |
)% |
|
|
6.4 |
% |
|
|
8.4 |
% |
|
|
(200 |
) |
Other
|
|
|
3.1 |
|
|
|
2.1 |
|
|
|
47.6 |
% |
|
|
5.6 |
% |
|
|
4.4 |
% |
|
|
120 |
|
Corporate
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
80.9 |
|
|
$ |
61.3 |
|
|
|
32.0 |
% |
|
|
5.4 |
% |
|
|
5.3 |
% |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income | |
|
Percentage of Net Sales | |
|
|
| |
|
| |
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
October 31, | |
|
October 29, | |
|
Percentage | |
|
October 31, | |
|
October 29, | |
|
Basis Point | |
|
|
2005 | |
|
2004 | |
|
Variance | |
|
2005 | |
|
2004 | |
|
Variance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Water & Sewer
|
|
$ |
57.2 |
|
|
$ |
45.3 |
|
|
|
26.3 |
% |
|
|
5.3 |
% |
|
|
4.9 |
% |
|
|
40 |
|
Plumbing/ HVAC
|
|
|
14.9 |
|
|
|
17.6 |
|
|
|
(15.3 |
)% |
|
|
1.7 |
% |
|
|
2.3 |
% |
|
|
(60 |
) |
Utilities
|
|
|
27.6 |
|
|
|
13.3 |
|
|
|
107.5 |
% |
|
|
4.2 |
% |
|
|
4.1 |
% |
|
|
10 |
|
MRO
|
|
|
30.2 |
|
|
|
30.5 |
|
|
|
(1.0 |
)% |
|
|
8.2 |
% |
|
|
8.7 |
% |
|
|
(50 |
) |
Electrical
|
|
|
11.5 |
|
|
|
8.3 |
|
|
|
38.6 |
% |
|
|
3.2 |
% |
|
|
2.4 |
% |
|
|
80 |
|
Industrial
|
|
|
48.9 |
|
|
|
38.9 |
|
|
|
25.7 |
% |
|
|
14.1 |
% |
|
|
14.7 |
% |
|
|
(60 |
) |
Building Materials
|
|
|
15.6 |
|
|
|
16.9 |
|
|
|
(7.7 |
)% |
|
|
6.9 |
% |
|
|
8.9 |
% |
|
|
(200 |
) |
Other
|
|
|
6.8 |
|
|
|
11.3 |
|
|
|
(39.8 |
)% |
|
|
4.4 |
% |
|
|
7.9 |
% |
|
|
(350 |
) |
Corporate
|
|
|
1.7 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
214.4 |
|
|
$ |
182.4 |
|
|
|
17.5 |
% |
|
|
5.3 |
% |
|
|
5.5 |
% |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The $1.7 million of operating income in the Corporate
category during the first nine months of fiscal year 2006
primarily related to gains from the sale of surplus properties
partially offset by additional tax and tax-related items; an
environmental liability associated with the anticipated
remediation of chlorinated hydrocarbons discovered at one of our
branches; and a charitable donation for which we will receive a
matching tax credit. The $1.3 million of operating losses
in the Corporate category in the |
25
|
|
|
third quarter of fiscal year 2006
related to the additional tax and tax-related items and the
charitable donation partly offset by gains from the sale of
surplus properties. We recognized net gains from the sale of
surplus properties totaling $2.3 million during the first
nine months of fiscal year 2005, which were partly offset by a
$1.3 million loss associated with a sale-leaseback
transaction completed on April 30, 2004 for a portfolio of
properties associated with 18 different branches. Prior to the
second quarter of fiscal year 2005, all surplus property
activity was allocated to our operating segments.
|
The following is a discussion of the factors impacting net sales
and operating income for our operating segments:
Water & Sewer
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $416.8 million, an increase of
$88.9 million or 27.1%, compared to the prior years
third quarter net sales of $327.9 million. A higher volume
of private and public infrastructure projects, particularly in
Florida, Arizona, Texas and Georgia, and higher prices for PVC
products drove the 27% organic growth rate during the third
quarter of fiscal year 2006.
Net sales for the first nine months of fiscal year 2006 totaled
$1,086.7 million, an increase of $164.0 million or
17.8%. The increase included net sales of $25.2 million
from the Standard acquisition completed in May 2004. Organic
sales increased $143.9 million or 15% compared to the first
nine months of fiscal year 2005 due primarily to strengthened
demand for residential, commercial and municipal projects
particularly in Florida, Arizona, Texas and Georgia and higher
prices for PVC products.
Operating Income: As a percentage of net sales, operating
income increased to 6.2% and 5.3% in the third quarter and first
nine months of fiscal year 2006 from 5.0% and 4.9% in the
comparable prior year periods, respectively. The increases in
operating income as a percentage of net sales were primarily the
result of the leverage obtained from the net sales increase.
Plumbing/HVAC
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $294.4 million, an increase of
$18.3 million or 6.6%, compared to the prior years
third quarter net sales of $276.1 million. The acquisition
of Ram Pipe contributed $4.2 million to net sales in the
third quarter of fiscal year 2006. Organic sales increased by 5%
due mainly to increased market penetration, particularly in the
Carolinas, Florida and Colorado, as well as higher PVC and
copper prices.
Net sales in the first nine months of fiscal year 2006 totaled
$858.0 million, an increase of $99.3 million or 13.1%
compared to the prior years first nine months net sales
total of $758.7 million. The acquisitions of Todd Pipe and
Ram Pipe contributed $84.4 million and $5.2 million,
respectively, to the net sales increase in the first nine months
of fiscal year 2006. Organic sales increased 2% during the first
nine months of fiscal year 2006 due to the increased market
penetration in the third quarter of fiscal year 2006, partly
offset by non-recurring large project work and competitive
pricing pressures.
Operating income: As a percentage of net sales, operating
income decreased to 1.5% and 1.7% in the third quarter and first
nine months of fiscal year 2006 from 1.6% and 2.3% in the
comparable prior year periods, respectively. These decreases
were directly attributable to declines in gross margin resulting
from higher product costs and competitive pricing pressures in
certain markets along with higher building rents, freight and
fuel charges.
Utilities
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $259.8 million, an increase of
$141.8 million or 120.2%, compared to the prior year third
quarter net sales of $118.0 million. This increase included
net sales of $89.4 million from the SWP/WSE acquisition
completed in November 2004 and net sales of $30.1 million
from the TVESCO acquisition completed in August 2005. The
organic sales growth rate of 15% during the third quarter of
fiscal year 2006 was driven primarily by expanded alliance
26
contracts, hurricane recovery projects, higher meter sales, and
increased project work across all regions, with particular
strength in the Southeast, Texas, and Oklahoma markets.
Net sales for the first nine months of fiscal year 2006 totaled
$665.0 million, an increase of $338.2 million or
103.5%, compared to the net sales for the first nine months of
fiscal year 2005 of $326.8 million. The increase included
$256.6 million of net sales from the SWP/WSE acquisition
and $30.1 million of net sales from the TVESCO acquisition.
The organic sales growth rate of 15% during the first nine
months of fiscal year 2006 was driven primarily by new and
expanded alliance contracts with large electric utility
companies, higher meter sales, and increased project work across
all regions.
Operating income: As a percentage of net sales, operating
income decreased to 4.7% in the third quarter of fiscal year
2006 from 5.1% in the prior years third quarter. During
the first nine months of fiscal year 2006, operating income as a
percentage of net sales totaled 4.2% as compared to a ratio of
4.1% during the first nine months of fiscal year 2005. The
40 basis point decrease for the third quarter of fiscal
year 2006 was primarily due to a higher level of lower margin
direct sales.
MRO
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $139.0 million, an increase of
$22.8 million or 19.6%, compared to the prior years
third quarter total of $116.2 million. The organic sales
growth of 20% was primarily attributable to an increase in HVAC
equipment sales, and a higher level of renovation business,
along with higher fabrication and window covering sales.
Increased sales of appliances and water heaters also contributed
to the organic sales growth, but resulted in lower margins
during the quarter. The MRO segment also benefited from an
improvement in occupancy rates in its largest apartment markets
of Houston, Dallas and Atlanta, due to an influx of new tenants
from the hurricane affected areas.
Net sales in the first nine months of fiscal year 2006 totaled
$368.2 million, an increase of $18.7 million or 5.4%
compared to the prior years first nine months net sales
total of $349.5 million. Organic sales increased
$21.5 million or 6% compared to the first nine months of
fiscal year 2005 amount, which excluded sales of
$2.8 million from divested operations. The increase in
organic sales was primarily driven by higher sales of
appliances, water heaters and HVAC equipment, and improved
occupancy rates partially offset by the impact of branch
consolidations in overlapping markets.
Operating income: As a percentage of net sales, operating
income in the third quarter of fiscal year 2006 remained
consistent with the 8.3% in the prior years third quarter.
During the first nine months of fiscal year 2006, operating
income as a percentage of net sales decreased to 8.2% compared
to 8.7% during the prior year period. The 50 basis point
decline during the first nine months of fiscal year 2006 was
primarily driven by a change in sales mix with a greater
proportion of lower margin product lines of appliances, water
heaters, and HVAC equipment. These items contributed to the
overall net sales growth, but a higher mix of these items as
well as a very competitive pricing environment diluted the
overall margin.
Electrical
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $129.3 million, an increase of
$9.7 million or 8.1%, compared to the prior years
third quarter total of $119.6 million. During the first
nine months of fiscal year 2006, net sales totaled
$361.6 million, an increase of $13.3 million or 3.8%
compared to the prior year. Sales growth in the third quarter
compared to the prior year period was favorably impacted by
higher PVC and copper prices and hurricane recovery projects.
Additionally impacting the first nine months of fiscal year 2006
compared to the prior year period was continued strength in
commercial and residential construction partially offset by
decreased project business in Atlanta and low sales growth in
Texas, due to a weak commercial market.
Operating income: As a percentage of net sales, operating
income increased to 3.9% in the third quarter of fiscal year
2006 from 1.8% in the prior years third quarter. During
the first nine months of fiscal
27
year 2006, operating income as a percentage of net sales
increased to 3.2%, as compared to a ratio of 2.4% during the
prior year period. The improvements in both periods were
primarily the result of PVC and copper price increases, improved
pricing discipline, and efficiencies gained from the closure of
the distribution center serving this business in the third
quarter of fiscal year 2005.
Industrial PVF
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $116.9 million, an increase of
$20.2 million or 20.9%, compared to the prior years
third quarter net sales total of $96.7 million. The
increase was primarily attributable to continued increases in
project related activity from large industrial and engineering
customers in the petrochemical, power and oil markets coupled
with increased demand and relatively stable nickel prices.
Net sales in the first nine months of fiscal year 2006 totaled
$347.1 million, an increase of $82.1 million or 31.0%
compared to the prior years first nine months net sales
total of $265.0 million. The increase was primarily
attributable to continued increases in project-related activity,
increased demand from fabricators and end users, and a favorable
pricing environment.
Operating income: As a percentage of net sales, operating
income decreased 290 basis points to 12.7% in the third
quarter of fiscal year 2006, from 15.6% in the prior years
third quarter. The decrease was a result of the continued
increases in average inventory costs for commodity-based
products. Operating income for the first nine months of fiscal
year 2006 as a percentage of net sales decreased 60 basis
points to 14.1%, as compared to a ratio of 14.7% during the
prior year period. The decrease of 60 basis points was
primarily the result of a decrease in gross margin attributable
to continued increases in average inventory costs for
commodity-based products, which was offset partially by the
increase in demand over fiscal year 2005.
Building Materials
Net sales: Net sales in the third quarter of fiscal year
2006 totaled $81.7 million, an increase of
$16.5 million or 25.3%, compared to the prior years
third quarter total of $65.2 million. The acquisition of
National in May 2005 contributed $3.3 million to net sales
in the third quarter of fiscal year 2006. Organic sales
increased $14.3 million or 21% during the third quarter of
fiscal year 2006 due primarily to strong commercial and
residential construction activity.
Net sales in the first nine months of fiscal year 2006 totaled
$224.5 million, an increase of $34.4 million or 18.1%
compared to the prior years first nine months net sales
total of $190.1 million. The organic sales growth rate of
15% during the first nine months of fiscal year 2006 was
primarily a result of strong commercial and residential
construction activity, mainly in Florida.
Operating income: As a percentage of net sales, operating
income decreased to 6.4% in the third quarter of fiscal year
2006 from 8.4% in the prior years third quarter. During
the first nine months of fiscal year 2006, operating income as a
percentage of net sales decreased by 200 basis points to
6.9%, compared to 8.9% during the prior year period. The
decreases for the three and nine month periods were primarily
attributable to higher average inventory costs compared to the
prior years quarter resulting from a significant increase
in prices for steel-based products in fiscal year 2005 and
higher fuel, building rents and personnel costs in fiscal year
2006.
Other
Net sales: In the Other category, net sales in the third
quarter of fiscal year 2006 totaled $55.6 million, an
increase of $7.8 million or 16.3%, compared to the prior
years third quarter net sales of $47.8 million.
Organic sales growth totaled 22% in the third quarter of fiscal
year 2006 compared to the third quarter of fiscal year 2005. Net
sales in the first nine months of fiscal year 2006 totaled
$155.1 million, an increase of $12.8 million or 9.0%
compared to the prior years net sales of
28
$142.3 million. Organic sales growth totaled 13% during the
first nine months of fiscal year 2006 compared to the first nine
months of fiscal year 2005.
The Fire Protection product line had net sales growth of
$9.9 million or 27.1% during the third quarter of fiscal
year 2006 and net sales growth of $15.7 million or 14.1%
during the first nine months of fiscal year 2006. The increase
in net sales was primarily driven by the opening of a
fabrication facility in the fourth quarter of fiscal year 2005
that expanded business in the Carolinas. The Mechanical product
line sales declined 24.4% and 12.0% during the third quarter and
first nine months of fiscal year 2006, respectively, due
primarily to the divestiture of a mechanical branch in Louisiana.
Operating income: As a percentage of net sales, operating
income increased to 5.6% in the third quarter of fiscal year
2006 from 4.4% in the prior years third quarter due
primarily due to the leverage obtained from the increase in net
sales. During the first nine months of fiscal year 2006,
operating income as a percentage of net sales decreased
350 basis points to 4.4%, compared to 7.9% during the prior
year period. The decline during the first nine months of fiscal
year 2006 was primarily the result of higher average inventory
costs over the prior fiscal year.
Liquidity and Capital Resources
The following sets forth certain measures of our liquidity
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
October 31, | |
|
October 29, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash provided by operating activities
|
|
$ |
187.1 |
|
|
$ |
73.9 |
|
Net cash used in investing activities
|
|
|
(117.1 |
) |
|
|
(91.5 |
) |
Net cash (used in) provided by financing activities
|
|
|
(31.4 |
) |
|
|
278.9 |
|
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
January 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
Working capital
|
|
$ |
955.3 |
|
|
$ |
915.3 |
|
Current ratio
|
|
|
2.0 to 1 |
|
|
|
2.4 to 1 |
|
Debt to total capital
|
|
|
28.2 |
% |
|
|
30.3 |
% |
Working Capital
Compared to January 31, 2005, working capital increased
$40.0 million or 4.4% during the first nine months of
fiscal year 2006. The increase in working capital was primarily
attributable to higher accounts receivable balances driven by
net sales growth, as well as a higher cash position due
primarily to $187.1 million of cash provided by operating
activities which was used to fund $117.1 million and
$31.4 million of investing and financing activities,
respectively. These working capital increases were offset by
lower levels of owned inventories (inventories less accounts
payable) resulting from improved inventory and payables
management and an increase in taxes payable due primarily to the
timing of disbursements.
Net Cash Provided by Operating Activities
During the first nine months of fiscal years 2006 and 2005, net
cash provided by operating activities totaled
$187.1 million and $73.9 million, respectively. The
$113.2 million increase was primarily due to improved
earnings compared to the same period last year, lower levels of
owned inventories, and the timing of disbursements. These
increases were partly offset by higher accounts receivable
balances driven by net sales growth.
Going forward, we expect operating cash flows to be positive as
we continue to improve our working capital efficiency.
29
Net Cash Used in Investing Activities
Our expenditures for property and equipment totaled
$43.4 million and $17.5 million during the first nine
months of fiscal years 2006 and 2005, respectively. Of the total
$43.4 million of capital expenditures, $18.2 million
were outlays for information technology. Also included in our
capital expenditures during the first nine months of fiscal year
2006 were investments in land for future megacenter development
and for expansion of our corporate facilities. We anticipate
entering into subsequent sale-leasebacks for these transactions
and therefore expect that our annual capital expenditures, net
of sale-leaseback activity, normally will range from
approximately $35 million to $40 million.
Proceeds from the sale of property and equipment totaled
$8.8 million and $38.8 million during the first nine
months of fiscal years 2006 and 2005, respectively. During the
first nine months of fiscal year 2006, net gains of
$5.1 million were recognized on the sale of surplus
properties, for which we received $7.7 million of net cash
proceeds. During the first nine months of fiscal year 2005,
proceeds from the sale of property and equipment consisted
primarily of $32.7 million of net cash received from the
sale-leaseback of a portfolio of properties associated with 18
different branches that were leased back pursuant to 15-year
minimum term operating leases. All of the resulting leases
qualified for operating lease treatment.
Cash payments for business acquisitions totaled
$82.5 million and $101.4 million during the first nine
months of fiscal years 2006 and 2005, respectively. The cash
payments for business acquisitions during fiscal year 2006
primarily related to the acquisitions of National on May 1,
2005, Ram Pipe on June 30, 2005, and TVESCO on
August 29, 2005, with consideration including the
assumption of accounts payable, accrued and other current
liabilities, which collectively totaled $18.9 million,
subject to finalization of working capital adjustments in
accordance with the respective purchase agreements.
Consideration totaling approximately $6.5 million has been
accrued as of October 31, 2005 relating to a tax election
under section 338(h)(10) of the Internal Revenue Code
associated with our acquisition of TVESCO. National is a
distributor of construction materials serving the Atlanta,
Georgia area; Ram Pipe is a distributor of plumbing and water
and sewer products serving the Yuma, Arizona area; and TVESCO is
a distributor of transmission and distribution
(T&D) and electrical commercial and industrial
(C&I) products serving the Tennessee Valley
area. During the nine months ended October 31, 2005,
additional payments totaling approximately $5.3 million
were made relating to a tax election under
section 338(h)(10) of the Internal Revenue Code associated
with our acquisition of SWP/WSE. The cash payments for business
acquisitions during the prior year period related to the
Standard and Todd Pipe acquisitions, both of which were
completed in May 2004.
On June 30, 2004, we made an $11.4 million investment
in our corporate owned life insurance (COLI)
policies to partially fund enhancements made in the first
quarter of fiscal year 2005 to our supplemental executive
retirement plan (SERP), which provides supplemental
benefits for certain key executive officers. While the SERP
obligation is not funded by our general assets and thus the
value of our COLI policies is not restricted to funding the SERP
obligation, the interest income generated by our COLI policies
partially offsets the additional net periodic benefit costs
associated with our SERP.
Net Cash (Used in) Provided by Financing Activities
During the first nine months of fiscal years 2006 and 2005, net
cash (used in) provided by financing activities totaled
($31.4) million and $278.9 million, respectively. The
net decrease of $310.3 million in financing cash flows,
compared to the prior year period, was primarily the result of
$410.5 million of net proceeds generated from our equity
and debt offerings in October 2004, a portion of which was used
to pay amounts outstanding on our revolving credit facility.
There were no borrowings under short-term debt arrangements
during the first nine months of fiscal year 2006 given our cash
position of over $200 million as of October 31, 2005.
Dividend payments totaled $16.3 million and
$11.1 million during the first nine months of fiscal years
2006 and 2005, respectively. The higher dividend payments in
fiscal year 2006 were primarily attributable
30
to an increase in our common stock outstanding due to the sale
of 4.0 million shares in a public offering during the third
quarter of fiscal year 2005 in addition to a 38% higher dividend
rate per share. On October 28, 2005, our Board of Directors
declared a quarterly dividend of $0.09 per share that was
paid on November 17, 2005 to shareholders of record on
November 7, 2005. Dividends declared but not paid totaled
$6.0 million and $4.3 million at October 31, 2005
and October 29, 2004, respectively.
On October 12, 2004, we issued $300.0 million in
original principal amount of 5.50% senior notes (the
notes) due on October 15, 2014 in a private
placement pursuant to Rule 144A under the Securities Act.
The notes were issued at 99.468% of their par value and are
reflected in our consolidated balance sheet, net of a
$1.4 million and $1.6 million discount as of
October 31, 2005 and January 31, 2005, respectively.
On May 10, 2005, we filed an exchange offer registration
statement with the SEC on Form S-4 to exchange the notes
for a new issue of substantially identical notes registered
under the Securities Act. On July 21, 2005 the SEC declared
our registration effective, and on July 22, 2005, we
announced the commencement of the exchange offer. Subsequently,
on August 22, 2005, all of the original notes were tendered
for the new registered notes.
On March 15, 1999, our Board of Directors authorized us to
repurchase up to 5.0 million shares of our outstanding
common stock to be used for general corporate purposes. Since
March 15, 1999, we have repurchased a total of
3.7 million shares at an average price of $11.45 per
share. There were no shares repurchased during the first nine
months of fiscal years 2006 or 2005.
As of October 31, 2005, we had $251.8 million of cash
and $499.6 million of unused borrowing capacity on our
revolving credit agreement (subject to borrowing limitations
under long-term debt covenants) to fund ongoing operating
requirements, scheduled principal amortization and interest on
our senior notes due 2005 through 2014, anticipated capital
expenditures, future acquisitions of businesses and other
general corporate purposes. We also have an effective shelf
registration statement on Form S-3 on file with the SEC for
the offer and sale, from time-to-time, of up to an aggregate of
$700.0 million of equity and/or debt securities, less the
approximately $120.0 million of gross proceeds associated
with our common stock offering on October 12, 2004.
Our financing initiatives allow us to further develop our
capital structure as we expand, and together with continued
strong financial performance, will provide us with the ability
to fund and achieve our strategic growth goals. We believe we
have sufficient borrowing capacity and cash on hand to take
advantage of growth and business opportunities.
Off-balance Sheet Arrangements
As more fully disclosed in our fiscal year 2005 Annual Report,
we have entered into operating leases for certain facilities,
vehicles and equipment. Many of our vehicle and equipment leases
typically contain set residual values and residual value
guarantees. We believe that the likelihood of any material
amounts being funded in connection with these commitments is
remote. There have been no material changes outside of the
ordinary course of business in our off-balance sheet
arrangements set forth in the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section of our fiscal year 2005 Annual Report.
Contractual Obligations
There have been no material changes outside of the ordinary
course of business in our contractual obligations set forth in
the Managements Discussion and Analysis of Financial
Condition and Results of Operations section of our fiscal year
2005 Annual Report.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123R, Share-Based
Payment (SFAS 123R), which supersedes
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. This statement
requires that the compensation cost
31
related to share-based payment transactions be recognized in the
financial statements based on the estimated fair value of the
equity-based compensation awards issued as of the grant date.
The related compensation expense will be based on the estimated
number of awards expected to vest and will be recognized over
the period during which an employee is required to provide
services in exchange for the award. The statement requires the
use of assumptions and judgments about future events, and some
of the inputs to the valuation models will require considerable
judgment by management. We will be required to adopt the
provisions of SFAS 123R on February 1, 2006. We are
currently evaluating the impact that the ultimate adoption of
SFAS 123R will have on our financial position and results
of operations. The Stock-Based Compensation section in
Note 1 contains the pro forma impact on net income and
earnings per share if the fair value based method under
SFAS 123 had been applied to all outstanding and unvested
awards during the first nine months of fiscal years 2006 and
2005.
In June 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), a replacement of APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 will require companies
to account for and apply changes in accounting principles
retrospectively to prior periods financial statements
instead of recording a cumulative effect adjustment within the
period of the change, unless it is impracticable to determine
the effects of the change to each period being presented.
SFAS 154 is effective for accounting changes made in annual
periods beginning after December 15, 2005. We will adopt
the new accounting provisions effective February 1, 2006.
We do not expect the adoption of SFAS 154 to have a
material effect on our financial position, results of operations
or cash flows.
Critical Accounting Policies
Our significant accounting policies are more fully described in
the notes to our consolidated financial statements included in
our fiscal year 2005 Annual Report. Certain of our 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 historical experience, current economic trends in
the industry, information provided by customers and vendors,
information available from other outside sources and
managements estimates, as appropriate. Our critical
accounting policies relating to the allowance for doubtful
accounts, inventories, consideration received from vendors,
impairment of long-lived assets, and self-insurance reserves are
described in the fiscal year 2005 Annual Report. During the nine
months ended October 31, 2005, there were no material
changes to any of our critical accounting policies.
32
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Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to market risk from changes in the prices of
certain of our products that result from commodity price
fluctuations and from changes in interest rates on our
outstanding debt balances.
Commodity Price Risk
We are 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, our operating performance is affected by
price fluctuations in steel, PVC, nickel alloy, copper,
aluminum, lumber, and other commodities. We seek 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.
As discussed above, our results of operations during the first
nine months of fiscal year 2005 were favorably impacted by our
ability to pass increases in the prices of certain
commodity-based products to our customers. Price changes for
commodity-based products were mixed during the first nine months
of fiscal year 2006 compared to the prior year, resulting in a
modest price impact to our total reported net sales during the
current year, the impact from which was offset by a higher
average cost of inventories sold. Such commodity price
fluctuations have from time-to-time created cyclicality in our
financial performance and could continue to do so in the future.
Interest Rate Risk
As a result of the repayment of amounts outstanding under our
$500.0 million revolving credit agreement during October
2004 with $203.5 million of the proceeds from our issuance
on October 12, 2004 of $300.0 million in original
principal amount of 5.50% notes due on October 15,
2014, all of our outstanding debt as of October 31, 2005
was fixed-rate debt. On November 10, 2004 and
November 30, 2004, we entered into separate interest rate
swap contracts with two distinct financial institutions that
each effectively converted $50.0 million (i.e., an
aggregate of $100.0 million) of our $300.0 million in
original principal amount of 5.50% notes, due
October 15, 2014, to floating rate debt based on the
six-month LIBOR rate plus 0.6985% and 0.79%, respectively, with
semi-annual settlements through October 15, 2014. The
interest rate swap contracts were designated as fair value
hedges of the changes in fair value of the respective
$50.0 million of 5.50% notes due to changes in the
benchmark interest rate (i.e., six-month LIBOR rate). We settled
the interest rate swap contracts during the second quarter of
fiscal year 2006, receiving approximately $1.8 million of
cash. The corresponding fair value hedge carrying value
adjustment of $1.8 million was recognized during the second
quarter of fiscal year 2006 as a component of debt and is being
amortized on a straight-line basis as a favorable adjustment to
interest expense over the same period in which the related
interest costs on the $300.0 million notes are recognized
in earnings. Approximately $0.2 million of the fair value
hedge carrying value adjustment will be recognized as an
adjustment to interest expense during the next twelve months.
We manage our interest rate risk by maintaining a balance
between fixed-and variable-rate debt in accordance with our
formally documented interest rate risk management policy, with a
targeted ratio of 60% fixed and 40% variable rate debt. We are
currently evaluating alternatives in order to achieve our
targeted ratio, including the use of additional derivative
instruments. Based upon our current capital structure, a
hypothetical 10% increase or decrease in interest rates from
their October 31, 2005 levels would not have a material
impact on our results of operations but would have an impact on
the fair value of our outstanding debt, which has an average
interest rate of approximately 6.4%.
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Item 4. |
Controls and Procedures |
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and forms, and that such information is accumulated and
communicated to management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
During the first nine months of fiscal year 2006, there were no
changes in internal control over financial reporting that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting other than
the information systems changes currently ongoing. These
information systems changes involve the design of our computer
system architecture and the implementation of the Oracle
Financial System (Oracle Financials). We have
completed the first phase of our Oracle Financials
implementation, which included the general ledger, credit
management, and fixed assets modules. The second phase of our
Oracle Financials implementation, expected to be completed in
May 2006, involves the implementation of the incentive
compensation, collections, customer payment processing,
treasury, and accounts payable disbursement modules. These
changes in our systems and their design will provide us better
visibility across all our businesses, facilitating our ability
to operate more efficiently and effectively by streamlining
various financial processes and eliminating many of the manual
and redundant tasks previously performed using the old systems.
We believe the conversion and implementation of these
initiatives further strengthens our internal control over
financial reporting, as well as automates a number of our
processes and activities.
As of the end of the period covered by this report, management,
under the supervision of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as
amended. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the end of
such period, the disclosure controls and procedures were
effective at a level of reasonable assurance to ensure that
information required to be disclosed in the reports we file and
submit under the Exchange Act is recorded, processed, summarized
and reported as and when required.
34
PART II. OTHER INFORMATION
HUGHES SUPPLY, INC.
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
On March 15, 1999, our Board of Directors authorized us to
repurchase up to 5.0 million shares of our outstanding
common stock to be used for general corporate purposes. Since
March 15, 1999, we have repurchased approximately
3.7 million shares at an average price of $11.45 per
share. We have not repurchased any shares since fiscal year 2004
under the aforementioned share repurchase plan.
The following table sets forth our repurchases of equity
securities registered under Section 12 of the Exchange Act
that have occurred during the three months ended
October 31, 2005.
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Maximum Number | |
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Total Number of | |
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(or Approximate | |
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Shares (or units) | |
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Dollar Value) of | |
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Total Number | |
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Purchased as part | |
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Shares (or units) that | |
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of Shares (or | |
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Average | |
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of Publicly | |
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may yet be Purchased | |
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Units) | |
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Price Paid | |
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Announced Plans or | |
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under the Plans or | |
Period |
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Purchased | |
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per Share | |
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Programs | |
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Programs | |
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August 2005
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(August 1 August 27)
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1,337,200 |
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September 2005
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(August 28 September 24)
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1,337,200 |
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October 2005
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(September 25 October 31)
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1,337,200 |
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Dividends have been paid quarterly since 1980 with an increase
in the dividend rate per share each fiscal year beginning in
fiscal year 2003. Payment of future dividends, if any, will be
at the discretion of our Board of Directors, after taking into
account various factors, including earnings, capital
requirements and surplus, financial position, contractual
restrictions and other relevant business considerations.
Accordingly, there can be no assurance that dividends will be
declared or paid any time in the future. Dividend covenants in
our debt agreements as of October 31, 2005 limit the amount
of retained earnings available for the payment of dividends to
$185.1 million.
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31 |
.1 |
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Rule 13a-14(a)/15d-14(a) Certification of President and
Chief Executive Officer |
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31 |
.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Executive Vice
President and Chief Financial Officer |
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32 |
.1 |
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Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code by the President and
Chief Executive Officer |
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32 |
.2 |
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Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code by the Executive Vice
President and Chief Financial Officer |
35
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.
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Hughes Supply, Inc.
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Date: December 12, 2005
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By: /s/ THOMAS I.
MORGAN
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Thomas I.
Morgan President and Chief Executive Officer |
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Date: December 12, 2005
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By: /s/ DAVID BEARMAN
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David Bearman Executive
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) |
36