10-Q 1 0001.txt HUGHES SUPPLY, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 001-08772 HUGHES SUPPLY, INC. (Exact name of registrant as specified in its charter) Florida 59-0559446 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 20 North Orange Avenue, Suite 200 Orlando, Florida 32801 (Address of principal executive offices, including zip code) (407) 841-4755 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X|Yes |_| No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding as of December 11, 2000 ------------ ----------------------------------- $1 Par Value 24,323,686 HUGHES SUPPLY, INC. FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 2000 and January 28, 2000...................................................... 1 Consolidated Statements of Income for the Three Months Ended October 31, 2000 and 1999............................................... 2 Consolidated Statements of Income for the Nine Months Ended October 31, 2000 and 1999................................................ 3 Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2000 and 1999................................................ 4 Notes to Consolidated Financial Statements................................................. 5 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 8 - 12 Item 3. Quantitative and Qualitative Disclosures about Market Risks................................ 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................................................... 13 SIGNATURES ........................................................................................... 13
PART I. FINANCIAL INFORMATION HUGHES SUPPLY, INC. ITEM 1. Financial Statements Consolidated Balance Sheets (In thousands, except share and per share data)
October 31, 2000 January 28, (unaudited) 2000 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents........................................................... $19,490 $10,000 Accounts receivable, less allowance for losses of $9,484 and $2,777................. 489,789 398,244 Inventories......................................................................... 485,112 495,491 Deferred income taxes............................................................... 7,061 15,993 Other current assets................................................................ 34,860 38,050 ---------- ---------- Total current assets.............................................................. 1,036,312 957,778 Property and Equipment, Net......................................................... 155,701 144,945 Excess of Cost Over Net Assets Acquired............................................. 271,652 243,367 Other Assets........................................................................ 23,471 22,924 ---------- ---------- $1,487,136 $1,369,014 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt................................................... $471 $803 Accounts payable.................................................................... 223,888 239,810 Accrued compensation and benefits................................................... 35,375 29,590 Other current liabilities........................................................... 50,033 30,075 ---------- ---------- Total current liabilities......................................................... 309,767 300,278 Long-Term Debt........................................................................ 577,074 535,000 Deferred Income Taxes................................................................. 7,216 6,027 Other Noncurrent Liabilities.......................................................... 5,439 5,265 ---------- ---------- Total liabilities................................................................. 899,496 846,570 ---------- ---------- Commitments and Contingencies -- -- Shareholders' Equity: Preferred stock, no par value; 10,000,000 shares authorized; none issued............ -- -- Common stock, par value $1 per share; 100,000,000 shares authorized; 24,965,841 and 24,249,281 shares issued..................................................... 24,966 24,249 Capital in excess of par value...................................................... 234,862 221,284 Retained earnings................................................................... 349,390 300,144 Treasury stock, 644,453 and 668,950 at cost......................................... (14,869) (15,434) Unearned compensation related to outstanding restricted stock....................... (6,709) (7,799) ---------- ---------- Total shareholders' equity........................................................ 587,640 522,444 ---------- ---------- $1,487,136 $1,369,014 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
1 HUGHES SUPPLY, INC. Consolidated Statements of Income (Unaudited) (In thousands, except per share data)
Three Months Ended October 31, -------------------------------- 2000 1999 --------- --------- Net Sales.............................................................. $ 863,283 $ 786,379 Cost of Sales.......................................................... 666,993 607,731 ------- ------- Gross Profit........................................................... 196,290 178,648 ------- ------- Operating Expenses: Selling, general and administrative.................................. 144,591 130,056 Depreciation and amortization........................................ 7,937 7,549 Provision for doubtful accounts...................................... 2,045 785 ----- --- Total operating expenses.......................................... 154,573 138,390 ------- ------- Operating Income....................................................... 41,717 40,258 ------ ------ Non-Operating Income and (Expenses): Interest and other income............................................ 1,508 2,000 Interest expense..................................................... (11,290) (8,235) -------- ------- (9,782) (6,235) ------- ------- Income Before Income Taxes............................................. 31,935 34,023 Income Taxes........................................................... 13,093 13,780 ------ ------ Net Income............................................................. $18,842 $20,243 ======= ======= Earnings Per Share: Basic................................................................ $.80 $.87 ==== ==== Diluted.............................................................. $.80 $.87 ==== ==== Average Shares Outstanding: Basic................................................................ 23,511 23,214 ====== ====== Diluted.............................................................. 23,617 23,349 ====== ====== Dividends Per Share.................................................... $.085 $.085 ===== ===== The accompanying notes are an integral part of these consolidated financial statements.
2 HUGHES SUPPLY, INC. Consolidated Statements of Income (Unaudited) (In thousands, except per share data)
Nine Months Ended October 31, ----------------------------- 2000 1999 ---------- ----------- Net Sales.............................................................. $2,568,510 $2,272,563 Cost of Sales.......................................................... 1,989,103 1,761,384 --------- --------- Gross Profit........................................................... 579,407 511,179 ------- ------- Operating Expenses: Selling, general and administrative.................................. 429,098 379,213 Depreciation and amortization........................................ 23,442 21,500 Provision for doubtful accounts...................................... 5,157 3,055 ----- ----- Total operating expenses.......................................... 457,697 403,768 ------- ------- Operating Income....................................................... 121,710 107,411 ------- ------- Non-Operating Income and (Expenses): Interest and other income............................................ 4,702 6,728 Interest expense..................................................... (32,146) (22,537) ------- ------- (27,444) (15,809) ------- ------- Income Before Income Taxes............................................. 94,266 91,602 Income Taxes........................................................... 38,649 37,099 ------- ------- Net Income............................................................. $55,617 $54,503 ======= ======= Earnings Per Share: Basic................................................................ $2.38 $2.32 ===== ===== Diluted.............................................................. $2.38 $2.31 ===== ===== Average Shares Outstanding: Basic................................................................ 23,323 23,458 ====== ====== Diluted.............................................................. 23,413 23,606 ====== ====== Dividends Per Share.................................................... $.255 $.255 ===== ===== The accompanying notes are an integral part of these consolidated financial statements.
3 HUGHES SUPPLY, INC. Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine Months Ended October 31, ----------------------------- 2000 1999 -------- ------- Cash Flows from Operating Activities: Net income............................................................................ $55,617 $54,503 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................................ 23,442 21,500 Provision for doubtful accounts...................................................... 5,157 3,055 Equity in losses (income) of unconsolidated affiliates............................... 3,615 (1,002) Other, net........................................................................... 1,091 274 Changes in assets and liabilities, net of effects of business acquisitions: (Increase) in accounts receivable.................................................... (87,566) (73,708) Decrease (increase) in inventories................................................... 20,885 (48,407) Decrease (increase) in other current assets.......................................... 3,586 (407) (Increase) in other assets........................................................... (1,504) (6,236) (Decrease) increase in accounts payable and accrued liabilities...................... (12,820) 65,296 Increase in accrued interest and income taxes........................................ 13,019 11,585 Increase in other noncurrent liabilities............................................. 174 43 Decrease (increase) in net deferred income taxes..................................... 10,121 (4,155) ------- ------ Net cash provided by operating activities.......................................... 34,817 22,341 ------- ------ Cash Flows from Investing Activities: Capital expenditures.................................................................. (18,957) (23,704) Proceeds from sale of property and equipment.......................................... 894 4,049 Investments in unconsolidated affiliates.............................................. (6,250) -- Business acquisitions, net of cash.................................................... (34,111) (86,501) ------- ------ Net cash used in investing activities.............................................. (58,424) (106,156) ------- ------ Cash Flows from Financing Activities: Net borrowings under short-term debt arrangements..................................... 41,894 127,072 Principal payments on long-term debt and debt of acquired entities ................... (2,924) (14,646) Dividends paid........................................................................ (6,078) (6,043) Purchase of treasury stock............................................................ -- (21,229) Other................................................................................. 205 677 ------- ------ Net cash provided by financing activities.......................................... 33,097 85,831 ------- ------ Net Increase in Cash and Cash Equivalents............................................... 9,490 2,016 Cash and Cash Equivalents: Beginning of period................................................................... 10,000 6,010 ------- ------ End of period......................................................................... $19,490 $8,026 ======= ====== The accompanying notes are an integral part of these consolidated financial statements.
4 HUGHES SUPPLY, INC. Notes to Consolidated Financial Statements (Unaudited) (In thousands, except share and per share data) 1. Basis of Presentation In the opinion of Hughes Supply, Inc. (the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of October 31, 2000, the results of operations for the three and nine months ended October 31, 2000 and 1999, and cash flows for the nine months ended October 31, 2000 and 1999. The results of operations for the three and nine months ended October 31, 2000 are not necessarily indicative of the trends or results that may be expected for the full year. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 28, 2000, as filed with the Securities and Exchange Commission. The fiscal year of the Company is a 52-week period ending on the last Friday in January. The three and nine months ended October 31, 2000 and 1999 each contained 13 and 39 weeks, respectively. Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentation. These reclassifications had no impact on previously reported results of operations. 2. Earnings Per Share Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding, adjusted for dilutive potential common shares. The weighted-average number of shares used in calculating basic earnings per share were 23,511,000 and 23,214,000 for the three months ended October 31, 2000 and 1999, respectively, and 23,323,000 and 23,458,000 for the nine months ended October 31, 2000 and 1999, respectively. In calculating diluted earnings per share, these amounts were adjusted to include dilutive potential common shares of 106,000 and 135,000 for the three months ended October 31, 2000 and 1999, respectively, and 90,000 and 148,000 for the nine months ended October 31, 2000 and 1999, respectively. 3. Business Combinations During the nine months ended October 31, 2000, the Company acquired three wholesale distributors for $34.1 million in cash. As part of its e-commerce growth strategy, the Company also acquired the remaining 51% interest of bestroute.com for 723,183 shares of the Company's common stock. Previously, the Company owned 49% of bestroute.com, with the initial investment having been paid in cash. Additionally, in exchange for its 33 1/3% equity investment in Accord Industries ("Accord"), the Company acquired the net assets of Accord's rebar fabrication division. These acquisitions were accounted for as purchases, and accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the dates of acquisition. The excess of cost over net assets acquired in the amount of $34.1 million has been recorded and is being amortized using the straight-line method over 5 to 40 years. These acquisitions, individually and in the aggregate, did not have a material effect on the consolidated financial statements of the Company. Results of operations of these companies from their respective dates of acquisition have been included in the consolidated financial statements. 4. Long-Term Debt On May 29, 2000 the Company executed an amendment to its $75 million syndicated line of credit agreement which extended the maturity date to January 19, 2001. On September 13, 2000, the Company entered into a short-term credit agreement with a bank which provided for borrowings up to $50 million. On September 14, 2000, the maturity date of the Company's $15 million line of credit agreement was extended to June 30, 2001. There were no amounts outstanding under any of the above agreements as of October 31, 2000. 5 5. Segment Information Effective February 1, 2000, the Company was reorganized into five strategic business units ("SBUs") on a product group basis. The five SBUs are: Electrical & Electric Utility; Plumbing/HVAC; Industrial Pipe, Valves & Fittings ("PVF"); Building Materials/Pool & Spa/Maintenance Supplies; and Water & Sewer. The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating income amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The "Corporate/Eliminations & Other" category includes corporate level operating expenses not allocated to the Company's operating segments along with intercompany eliminations and revenues and expenses for an immaterial segment. Income before income tax amounts evaluated include certain expense allocations for employee benefits, interest expense, corporate capital charges and property and casualty insurance. These allocations are based on consumption or at a standard rate determined by management. As part of the Company's reorganization at the beginning of fiscal 2001, certain administrative groups and assets were re-aligned on an SBU basis. As a result of the reorganization, the Company restructured various administrative groups whereby activities previously performed on a centralized basis are now performed at the SBU level. Additionally, commencing in fiscal 2001, the Company changed its method of allocating certain costs (interest expense, rent expense, corporate capital charges and depreciation and amortization expense) to the SBUs which has also impacted the comparability of prior year information. Accordingly, comparative information has only been presented for net sales and gross profit, which were not impacted by any of the allocation method changes. The tables set forth below represent segment results for the three and nine months ended October 31, 2000 for each of the Company's SBUs. When comparable, information for the three and nine months ended October 31, 1999 has also been presented.
Building Materials/ Pool & Spa/ Corporate/ Electrical & Plumbing/ Industrial Maintenance Water & Eliminations Electric Utility HVAC PVF Supplies Sewer & Other Total Three Months ---------------- ---- --- -------- ----- ------- ----- Ended October 31 Net Sales 2000 $160,198 $265,403 $79,080 $113,357 $254,945 $(9,700) $863,283 1999 149,668 251,277 75,738 108,901 206,733 (5,938) 786,379 Gross Profit 2000 30,278 59,999 21,059 32,310 52,643 1 196,290 1999 27,869 60,457 17,533 28,969 43,820 -- 178,648 Depreciation and Amortization 2000 629 1,877 710 989 1,853 1,879 7,937 Interest and Other Income 2000 345 359 55 466 857 (574) 1,508 Interest Expense 2000 740 2,564 2,709 1,544 3,733 -- 11,290 Income Before Income Taxes 2000 6,795 4,166 5,077 3,421 14,957 (2,481) 31,935
6
Building Materials/ Pool & Spa/ Corporate/ Electrical & Plumbing/ Industrial Maintenance Water & Eliminations Electric Utility HVAC PVF Supplies Sewer & Other Total Nine Months ---------------- ---- --- -------- ----- ------- ----- Ended October 31 Net Sales 2000 $456,951 $795,810 $235,681 $365,434 $736,520 $(21,886) $2,568,510 1999 441,507 739,362 223,926 337,459 546,488 (16,179) 2,272,563 Gross Profit 2000 88,283 177,488 64,678 100,488 148,469 1 579,407 1999 79,902 176,963 51,373 87,823 115,118 -- 511,179 Depreciation and Amortization 2000 1,776 5,584 2,175 2,879 5,624 5,404 23,442 Interest and Other Income 2000 905 2,331 183 1,772 2,350 (2,839) 4,702 Interest Expense 2000 2,217 7,489 7,742 4,354 10,344 -- 32,146 Income Before Income Taxes 2000 20,025 11,112 16,800 16,362 38,347 (8,380) 94,266
The table set forth below represents the investment in accounts receivable, less allowance for losses, and inventories, for each SBU at October 31, 2000 and January 28, 2000.
October 31, 2000 January 28, 2000 --------------------------------------- --------------------------------------- Accounts Total Accounts Total Receivable Inventories Investment Receivable Inventories Investment ---------- ----------- ---------- ---------- ----------- ---------- Electrical & Electric Utility $83,620 $60,882 $144,502 $67,544 $53,617 $121,161 Plumbing/HVAC 139,561 157,467 297,028 115,357 171,448 286,805 Industrial PVF 42,452 119,491 161,943 42,303 118,455 160,758 Building Materials/Pool & Spa/ Maintenance Supplies 52,127 59,186 111,313 43,506 62,245 105,751 Water & Sewer 174,665 84,071 258,736 132,282 89,726 222,008 ------- ------ ------- ------- ------ ------- 492,425 481,097 973,522 400,992 495,491 896,483 Corporate/Eliminations & Other (2,636) 4,015 1,379 (2,748) -- (2,748) ------ ----- ----- ------ ------- ------ Total $489,789 $485,112 974,901 $398,244 $495,491 893,735 ======== ======== ======== ======== Cash and Cash Equivalents 19,490 10,000 Deferred Income Taxes 7,061 15,993 Other Current Assets 34,860 38,050 Property and Equipment, Net 155,701 144,945 Excess of Cost Over Net Assets Acquired 271,652 243,367 Other Assets 23,471 22,924 ------ ------ Total Assets $1,487,136 $1,369,014 ========== ==========
6. Subsequent Events The Company's short-term credit agreement, which provided for borrowings up to $50 million, terminated on November 30, 2000, but was subsequently amended to extend the termination date to December 15, 2000 and reduce the maximum borrowings to $10 million. On December 14, 2000, the Company executed an amendment to its $75 million syndicated line of credit agreement which extended the maturity date from January 19, 2001 to July 19, 2001. 7 PART I. FINANCIAL INFORMATION -- Continued HUGHES SUPPLY, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the financial condition of the Company as of October 31, 2000, and the results of operations for the three and nine months then ended. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto contained herein and in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2000. Forward-Looking Statements Certain statements set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by such sections. When used in this report, the words "believe," "anticipate," "estimate," "expect," "may," "will," "should," "plan," "intend," "potential," "predict," "forecast," and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. When appropriate, certain factors that could cause results to differ materially from those projected in the forward-looking statements are enumerated. Material Changes in Results of Operations Net Sales Net sales were $863.3 million for the quarter ended October 31, 2000, a 10% increase over the prior year's third quarter. Approximately 49% of the increase in net sales was attributable to same-store sales growth over the prior year's third quarter. The remainder of the increase was attributable to branches acquired or opened after January 31, 1999. Net sales for the nine months ended October 31, 2000 were $2.6 billion, a 13% increase over 1999. Approximately 54% of the increase in net sales was attributable to same-store sales growth over the prior fiscal year's first nine months, with the remainder of the increase attributable to branches acquired or opened after January 31, 1999. Electrical & Electric Utility Net sales were $160.2 million and $457.0 million for the three and nine months ended October 31, 2000, respectively, compared to $149.7 million and $441.5 million for the same periods in fiscal 2000. Of the total $10.5 million third quarter increase, $8.2 million was attributable to same-store sales growth with the remainder coming from newly opened or acquired branches. Of the $15.5 million year-to-date increase, $9.2 million was attributable to same-store sales growth. For the year-to-date period, the markets that the electrical and electric utility group serve did not have significant growth, which resulted in relatively flat sales growth. The 6% increase in same-store sales in the third quarter of fiscal 2001 was primarily due to increased sales associated with several large commercial jobs. Plumbing/HVAC Plumbing/HVAC net sales were $265.4 million and $795.8 million for the three and nine months ended October 31, 2000, respectively, compared to $251.3 million and $739.4 million for the same periods in fiscal 2000. The sales increase for both periods was primarily attributable to newly acquired or opened branches and a same-store sales increase of $9.6 million (4%) for the third quarter and $44.8 million (6%) for the first nine months of fiscal 2001. The growth in same-store sales for the three and nine month periods was driven by improved market penetration and the continued strength of the construction market. Industrial PVF For the quarter ended October 31, 2000, net sales were $79.1 million compared to $75.7 million in the third quarter of fiscal 2000. The sales increase was due to a 4% increase in same-store sales primarily driven by an increase in stainless steel and nickel alloy prices in fiscal 2001. For the nine months ended October 31, 2000 and October 31, 1999, net sales were $235.7 million and $223.9 million, respectively. The increase was primarily due to a 5% same-store sales increase as a result of commodity price increases in stainless steel and nickel alloy products in fiscal 2001. 8 Building Materials/Pool & Spa/Maintenance Supplies Net sales increased from $108.9 million for the three months ended October 31, 1999 to $113.4 million for the three months October 31, 2000. For the nine months ended October 31, 1999 and October 31, 2000, sales increased 8% from $337.5 million to $365.4 million. Of the $4.5 million third quarter increase, $2.7 million was attributable to same-store sales growth, with the remainder coming from newly opened or acquired branches. Of the $27.9 million year-to-date increase, $18.7 million was attributable to same-store sales growth. The 3% third quarter and 6% year-to-date same-store sales increase was primarily due to (i) improved market penetration in pool and spa products, (ii) strong demand for construction rental materials, and (iii) expansion of appliance product lines in the maintenance supply branches. Water & Sewer Water & sewer sales increased $48.2 million from $206.7 million in the third quarter of fiscal 2000 to $254.9 million in the third quarter of fiscal 2001, a 23% increase. For the nine months ended October 31, 2000, sales increased from $546.5 million to $736.5 million. Of the increases, $17.4 million of the third quarter increase and $79.5 million of the year-to-date increase were from increased sales in same-store branches. The remainder was due to branches opened or acquired after January 31, 1999. The 9% third quarter and 16% year-to-date same-store sales increase was due to (i) several large contracts and a general increase in overall activity through all water & sewer markets in fiscal 2001, and (ii) increased spending on infrastructure by municipalities. Gross Profit and Gross Margin Gross profit and gross margin for the three and nine months ended October 31, 2000 and October 31, 1999 were as follows (dollars in thousands):
Gross Profit Gross Margin ------------ ------------ Three Three Three Three Months Months Months Months Ended Oct. Ended Oct. Ended Oct. Ended Oct. 31, 2000 31, 1999 31, 2000 31, 1999 -------- -------- -------- -------- Electrical & Electric Utility $30,278 $27,869 18.9% 18.6% Plumbing/HVAC 59,999 60,457 22.6% 24.1% Industrial PVF 21,059 17,533 26.6% 23.1% Building Materials/Pool & Spa/Maintenance Supplies 32,310 28,969 28.5% 26.6% Water & Sewer 52,643 43,820 20.6% 21.2% Corporate/Eliminations & Other 1 -- 12.5% -- -- --- ----- --- $196,290 $178,648 22.7% 22.7% ======== ======== ===== ===== Gross Profit Gross Margin ------------ ------------ Nine Nine Nine Nine Months Months Months Months Ended Oct. Ended Oct. Ended Oct. Ended Oct. 31, 2000 31, 1999 31, 2000 31, 1999 -------- -------- -------- -------- Electrical & Electric Utility $88,283 $79,902 19.3% 18.1% Plumbing/HVAC 177,488 176,963 22.3% 23.9% Industrial PVF 64,678 51,373 27.4% 22.9% Building Materials/Pool & Spa/Maintenance Supplies 100,488 87,823 27.5% 26.0% Water & Sewer 148,469 115,118 20.2% 21.1% Corporate/Eliminations & Other 1 -- 12.5% -- -- --- ----- --- $579,407 $511,179 22.6% 22.5% ======== ======== ===== =====
Electrical & Electric Utility Gross margin increased approximately 30 basis points from the third quarter of fiscal 2000 to the third quarter of fiscal 2001. For the nine months ended October 31, 2000, gross margin increased approximately 120 basis points compared to the prior period. The primary cause of the increased margins was a shift in sales mix to higher margin products, with the remainder being attributable to enhanced purchasing power. 9 Plumbing/HVAC Gross margin decreased approximately 150 basis points from the third quarter of fiscal 2000 to the third quarter of fiscal 2001. When compared to the first nine months of fiscal 2000, gross margin for the nine months ended October 31, 2000 decreased by approximately 160 basis points. The decreases were primarily attributable to an erosion of margins as the Company sought to protect market share in certain geographic areas. Industrial PVF Gross margin and gross profit within this segment are closely tied to the pricing of certain commodity based products, primarily stainless steel and nickel alloys. In the first two quarters of fiscal 2001, the price of these commodity items increased which improved the Company's gross margin for these products. There was a slight decrease in margins during the third quarter, and the Company anticipates margins within this segment to continue decreasing in the fourth quarter of fiscal 2001 and during fiscal year 2002 as the inventories purchased prior to recent price increases are depleted. Building Materials/Pool & Spa/Maintenance Supplies Gross margin increased approximately 190 basis points from the third quarter of fiscal 2000 to the third quarter of fiscal 2001. For the nine months ended October 31, 2000, gross margin increased approximately 150 basis points compared to the prior period. The increases were primarily due to a shift in sales mix resulting from increased equipment rentals and increased emphasis on specialty product sales. The remainder of the increase was largely due to improved purchasing power in fiscal 2001. Water & Sewer For the three and nine months ended October 31, 2000, gross margin in the water & sewer segment declined approximately 60 and 90 basis points, respectively, when compared to the same periods in the prior year. The decreases were primarily due to an increase in large direct shipment orders which generate lower gross margins. Operating Expenses Operating expenses for the three and nine months ended October 31, 2000 and 1999 were as follows (dollars in thousands):
2000 1999 Variance ---- ---- -------- Three Months Ended October 31, Operating expenses $154,573 $138,390 $16,183 Percentage of net sales 17.9% 17.6% 11.7% 2000 1999 Variance ---- ---- -------- Nine Months Ended October 31, Operating expenses $457,697 $403,768 $53,929 Percentage of net sales 17.8% 17.8% 13.4%
Approximately $8.8 million (54%) of the $16.2 million increase in operating expenses for the three months ended October 31, 2000 and $25.6 million (48%) of the $53.9 million nine month increase was attributable to branches acquired and opened after January 31, 1999. The remainder of the increase for these periods was primarily due to (i) higher personnel costs associated with same-store sales growth, (ii) increased transportation costs brought about by same-store growth and increased fuel costs, and (iii) increased information technology costs as the Company continues to upgrade its information technology systems. Interest and Other Income Interest and other income decreased from $2.0 million for the three months ended October 31, 1999 to $1.5 million for the three months ended October 31, 2000. For the nine months ended October 31, 1999 and 2000, interest and other income decreased from $6.7 million to $4.7 million, respectively. For the three and nine months ended October 31, 2000, the decrease was primarily due to losses from the Company's equity investment in bestroute.com. These losses were partially offset by increased income from the Company's other equity investments and increased service charge income. 10 Interest Expense Interest expense was $11.3 million and $8.2 million for the three months ended October 31, 2000 and 1999, respectively. Interest expense increased from $22.5 million for the nine months ended October 31, 1999 to $32.1 million for the nine months ended October 31, 2000. The increase in interest expense for both the three and nine month periods was primarily the result of higher borrowing levels, coupled with increased interest rates. The higher borrowing levels were primarily due to the Company's (i) higher working capital investments resulting from accelerated sales growth, (ii) expansion through business acquisitions, which has been partially funded by debt financing, and (iii) share repurchases. Income Taxes The effective income tax rates for the three months and nine months ended October 31, 2000 and 1999 were 41.0% and 40.5%, respectively. The increase in the effective rate was due to increases in non-deductible goodwill and other non-deductible costs. Net Income Net income was $18.8 million for the third quarter compared to $20.2 million for the prior year's third quarter, a 7% decrease. Net income for the nine months ended October 31, 2000 increased from $54.5 million in fiscal 2000 to $55.6 million in fiscal 2001, a 2% increase. Diluted earnings per share for the three and nine months ended October 31, 2000 was $.80 and $2.38, respectively, compared to $.87 and $2.31 for the three and nine month periods ended October 31, 1999. The factors impacting net income and diluted earnings per share have been enumerated above in the material changes in results of operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources Working capital at October 31, 2000 totaled $726.5 million compared to $657.5 million at January 28, 2000. The working capital ratio was 3.3 to 1 and 3.2 to 1 as of October 31, 2000 and January 28, 2000, respectively. The increase was principally driven by increased receivables which were partially offset by increases in accrued income taxes. The higher accounts receivable include a seasonal component and reflect sales increases over prior year end. The increased accrued income taxes resulted from timing differences of estimated tax payments. Net cash provided by operations was $34.8 million for the nine months ended October 31, 2000 compared to net cash provided by operations of $22.3 million for the nine months ended October 31, 1999. This change was primarily the result of reduced inventory levels and an increase in net deferred taxes partially offset by increased accounts receivable and lower accounts payable. The Company's expenditures for property and equipment were $19.0 million for the nine months ended October 31, 2000 compared to $23.7 million for the nine months ended October 31, 1999. Capital expenditures for property and equipment, excluding amounts for business acquisitions, are expected to be approximately $26 million for fiscal 2001. Cash payments for business acquisitions accounted for as purchases totaled $34.1 million for the nine months ended October 31, 2000 compared to $86.5 million for the nine months ended October 31, 1999. These outlays represent three wholesale distributors acquired and accounted for as purchases in the current nine month period and six wholesale distributors acquired in the prior year period. As part of its e-commerce growth strategy, the Company also acquired the remaining 51% interest of bestroute.com for 723,183 shares of the Company's common stock. Previously, the Company owned 49% of bestroute.com, with the initial investment having been paid in cash. Additionally, in exchange for its 33 1/3% equity investment in Accord, the Company also acquired the net assets of Accord's rebar fabrication division. Principal reductions on long-term debt were $2.9 million for the nine months ended October 31, 2000 and $14.6 million for the nine months ended October 31, 1999. These amounts were primarily attributable to the repayment of debt assumed as a result of certain business acquisitions. Dividend payments were $6.1 million and $6.0 million during the nine months ended October 31, 2000 and 1999, respectively. On September 13, 2000, the Company entered into a short-term credit agreement with a bank which provided for borrowings up to $50 million. The short-term credit agreement terminated on November 30, 2000, but was subsequently amended to extend the termination date to December 15, 2000 and reduce the maximum borrowings to $10 million. On September 14, 2000, the maturity date of the Company's $15 million line of credit agreement was extended to June 30, 2001. On December 14, 2000, the Company executed an amendment to its $75 million syndicated line of credit agreement which extended the maturity date from January 19, 2001 to July 19, 2001. There were no amounts outstanding under any of these agreements as of October 31, 2000. 11 As of October 31, 2000, the Company had approximately $19.5 million of cash and $61.3 million of unused borrowing capacity (subject to borrowing limitations under long-term debt covenants) to fund ongoing operating requirements and anticipated capital expenditures. The Company also believes it has sufficient borrowing capacity and cash on hand to take advantage of growth and business acquisition opportunities in the near term. The Company expects to continue to finance future expansion on a project-by-project basis through additional borrowing or through the issuance of common stock. The Company is in the process of marketing a $150 million private debt placement and anticipates the closing of this transaction to occur by December 31, 2000. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), was issued in June 1998. FAS 133 is effective for the Company in the year beginning January 27, 2001. FAS 133 was amended in June 2000 by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (FAS 138). Both FAS 133 and FAS 138 require that an entity recognize and measure all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The adoption of these standards is not expected to have a material impact on the Company's financial reporting. In September 2000, the Emerging Issues Task Force issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs (EITF 00-10), which requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of sales or disclosed in the notes to the consolidated financial statements. The Company includes shipping and handling fees billed to customers in net sales. The Company will elect to disclose in the notes to the consolidated financial statements the shipping and handling costs, which are now included in selling, general and administrative expenses. The Company is currently assessing the amount required to be disclosed, and will adopt EITF 00-10 in the fourth quarter of fiscal year 2001. Item 3. Quantitative and Qualitative Disclosures about Market Risks The Company is exposed to market risk from changes in (i) interest rates on outstanding variable-rate debt and (ii) the prices of certain of the Company's products whose manufacture is reliant on certain commodity price fluctuations. Interest Rate Risk At October 31, 2000, the Company had approximately $348.8 million of outstanding variable-rate debt. Based upon an assumed 10% increase or decrease in interest rates from their October 31, 2000 levels, the market risk with respect to the Company's variable-rate debt would not be material. The Company manages its interest rate risk by maintaining a combination of fixed-rate and variable-rate debt. Commodity Price Risk The Company is affected by price fluctuations in stainless steel, nickel alloys, copper, aluminum, resin and other commodities. Such commodity price fluctuations have from time to time created cyclicality in the financial performance of the Company and could continue to do so in the future. The Company seeks to minimize the effects of commodity price fluctuations through (i) economies of purchasing and inventory management resulting in cost reductions, maintenance of minimum economic reorder points, and productivity improvements and (ii) price increases to maintain reasonable profit margins. Additional information with respect to the Company's commodity price risk is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this report. 12 PART II. OTHER INFORMATION HUGHES SUPPLY, INC. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Filed. 10.11(a) Second Amendment dated May 29, 2000 to Line of Credit Agreement, dated as of January 26, 1999 and amended on September 29, 1999, by and among the Company and a group of banks. 10.13 Short Term Credit Agreement, dated as of September 13, 2000, by and between the Company and Bank of America, N.A. 27.1 Financial Data Schedule. (filed electronically only). (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed during the quarter ended October 31, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HUGHES SUPPLY, INC. Date: December 15, 2000 By: /s/ DAVID H. HUGHES ------------------- David H. Hughes, Chairman of the Board and Chief Executive Officer Date: December 15, 2000 By: /s/ J. STEPHEN ZEPF --------------------- J. Stephen Zepf, Treasurer, Chief Financial Officer and Chief Accounting Officer 13 Exhibit Index Exhibit Page Description ----- ----------- 10.11(a) Second Amendment dated May 29, 2000 to Line of Credit Agreement, dated as of January 26, 1999 and amended on September 29, 1999, by and among the Company and a group of banks. 10.13 Short Term Credit Agreement, dated as of September 13, 2000, by and between the Company and Bank of America, N.A. 27.1 Financial Data Schedule (filed electronically only). 17