Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended May 2, 2003

OR

For the transition period from                      to                     

Commission File Number 001-08772

HUGHES SUPPLY, INC.

(Exact name of registrant as specified in its charter)

20 North Orange Avenue

Suite 200

Orlando, Florida 32801

(Address of principal executive offices)

(407) 841-4755

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                 No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x                 No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

HUGHES SUPPLY, INC.

FORM 10-Q

INDEX

2

Table of Contents

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

HUGHES SUPPLY, INC.

Consolidated Statements of Income (unaudited)

(in millions, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

HUGHES SUPPLY, INC.

Consolidated Balance Sheets

(in millions, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

HUGHES SUPPLY, INC.

Consolidated Statements of Cash Flows (unaudited)

(in millions)

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

HUGHES SUPPLY, INC.

Notes to Consolidated Financial Statements (unaudited)

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 May 2, 2003, the results of operations for the three months ended May 2, 2003 and May 3, 2002, and cash flows for the three months then ended. The results of operations for the three months ended May 2, 2003 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 the Company’s Annual Report on Form 10-K (the “Annual Report”) for the year ended January 31, 2003, as filed with the Securities and Exchange Commission.

Business

Founded in 1928, the Company is a diversified wholesaler of construction and industrial materials, equipment, and supplies. The Company distributes its products to three primary end markets, including commercial, residential, and industrial public infrastructure markets throughout North America. The Company distributes over 300,000 products, representing three broad product groups, through approximately 450 wholesale branches and six central distribution centers located in 34 states. The Company’s principal customers are electrical, plumbing and mechanical contractors, electric utility customers, property management companies, municipalities, and industrial companies. Industrial companies include businesses in the petrochemical, food and beverage, pulp and paper, mining, pharmaceutical, and marine industries.

Fiscal Year

The fiscal year of the Company is a 52 or 53-week period ending on the last Friday in January. Fiscal year 2004 will be a 52-week period while fiscal year 2003 was a 53-week period. The three months ended May 2, 2003 and May 3, 2002 contained 13 and 14 weeks, respectively.

Reclassifications

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentation. These reclassifications had no net impact on previously reported results of operations.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“FAS”) 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. In general, FAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As the Company does not currently have any derivative financial instruments, the adoption of FAS 149 is not expected to have any impact on the Company’s consolidated financial statements.

6

Table of Contents

FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003 and clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As the Company does not have any of these financial instruments, the adoption of FAS 150 is not expected to have any impact on the Company’s consolidated financial statements.

The Company accounts for its stock option plans using the intrinsic value based method of accounting, under which no compensation expense has been recognized for stock option awards granted at fair market value. For purposes of pro forma disclosures under FAS 123, Accounting for Stock-Based Compensation, as amended by FAS 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 period. 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):

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 during the first quarter of fiscal 2004 and 2003:

The weighted-average estimated fair value of employee stock options granted during the three months ended May 2, 2003 and May 3, 2002 was $10.38 and $18.65 per share, respectively. The pro forma calculations above do not include the effects of options granted prior to fiscal 1996.

7

Table of Contents

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions could materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

As more fully disclosed in Note 5 of the Company’s notes to the consolidated financial statements in the fiscal 2003 Annual Report, the Company’s management approved a plan to close and consolidate certain branches because they did not strategically fit into the Company’s core businesses and/or they did not perform to management’s expectations. The liability balance included in other current liabilities related to the Company’s closure activities totaled $1.0 million and $1.2 million as of May 2, 2003 and January 31, 2003, respectively. The reduction of $0.2 million was attributable to lease payments made in the first quarter of fiscal 2004.

There have been no material changes to the Company’s plans or estimates at May 2, 2003, and no additional charges were recorded in the three month period ended May 2, 2003 related to management’s plan.

Effective January 1, 2003, the Company adopted FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities. FAS 146 was effective for exit or disposal activities initiated after December 31, 2002. There have been no such activities initiated in fiscal 2004 and accordingly, the adoption of this statement has had no impact on the Company’s consolidated financial statements.

Long-term debt at May 2, 2003 and January 31, 2003 consisted of the following (in millions):

8

Table of Contents

On March 26, 2003, the Company replaced its existing $275.0 million revolving credit agreement, which was scheduled to mature on January 25, 2004, with a new $252.5 million revolving credit agreement (the “new credit agreement”), subject to borrowing limitations, which matures on March 26, 2007. The new credit agreement is unsecured and contains financial and other covenants, including limitations on dividends and maintenance of certain financial ratios. Interest is payable at market rates plus applicable margins and commitment fees of 0.25% are paid on the new credit agreement.

On May 22, 2003, the Company amended the new credit agreement to increase maximum borrowing capacity from $252.5 million to $290.0 million effective June 9, 2003.

At May 2, 2003, the Company was in compliance with all financial covenants.

Basic earnings per share are calculated by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share include the additional dilutive effect of the Company’s potential common shares, which includes 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:

Excluded from the above computation of weighted-average shares outstanding for diluted earnings per share for the three months ended May 2, 2003 were options and unvested shares of restricted stock to purchase 883,159 shares of common stock at an average price of $33.45 because their effect would have been anti-dilutive. All stock options and restricted stock as of May 3, 2002 were dilutive and, therefore, included in the computation of diluted earnings per share for the three months ended May 3, 2002.

On March 15, 1999, the Company’s board of directors authorized the Company to repurchase up to 2,500,000 shares of its outstanding common stock to be used for general corporate purposes. Since March 15, 1999, the Company has repurchased a total of 1,831,400 shares at an average price of $22.91 per share, of which 258,600 shares at an average price of $23.39 were repurchased during the first quarter of fiscal 2004. Shares repurchased totaled $6.0 million in the first quarter of fiscal 2004. There were no shares repurchased during the first quarter of fiscal 2003.

Treasury stock of 5,700 and 24,251 shares in the first quarter of fiscal 2004 and 2003, respectively, were issued under stock option plans.

9

Table of Contents

Additional supplemental information related to the accompanying consolidated statements of cash flows is as follows:

During the first quarter of fiscal 2003, the Company awarded certain key employees 10,000 restricted shares of the Company’s common stock, in accordance with the 1997 Executive Stock Plan. There were no restricted stock grants made to employees during the first quarter of fiscal 2004.

Dividends declared but not paid totaled $2.3 million and $2.0 million at May 2, 2003 and May 3, 2002.

The Company’s operations are under the management of three group (“Group”) presidents, and are organized on a product basis into three stand-alone Groups: Electrical/Plumbing; Industrial; and Water & Sewer/Building Materials. The Electrical/Plumbing Group includes the Company’s electrical and electric utility products, plumbing products, and heating, ventilation and air conditioning (“HVAC”) products. The Industrial Group includes the Company’s industrial pipe, valves, and fittings products. The Water & Sewer/Building Materials Group includes the Company’s water and sewer products, building materials products and maintenance supplies, fire protection products, and concrete products. The “Corporate & Other” category includes corporate level expenses not allocated to the Company’s operating Groups. These three Groups represent the Company’s reportable segments. This is the basis management uses for making operating decisions and assessing performance, and is on a basis consistent with how business activities are reported internally to management and the board of directors.

Intersegment sales are excluded from net sales presented for each Group. Operating income includes certain corporate expense allocations for employee benefits, corporate capital charges, data processing expenses, and property/casualty insurance. These allocations are based on consumption or at a standard rate determined by management.

The following table presents net sales and other financial information by Group for the first quarter of fiscal 2004 and 2003 (in millions):

10

Table of Contents

The following table presents the Company’s accounts receivable net of the allowance for doubtful accounts, inventories, and goodwill for each Group at May 2, 2003 and January 31, 2003 (in millions):

11

Table of Contents

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 a discussion and analysis of certain significant factors that have affected the financial condition of the Company as of May 2, 2003, and the results of operations for the first quarter of fiscal 2004 and 2003. This information should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained herein and in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended January 31, 2003.

Forward-Looking Statements

Certain statements set forth in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities 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”, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be different from any future results, performance, and achievements expressed or implied by these statements. These risks and uncertainties include, but are not limited to, the strength of the construction market, fluctuating commodity prices and unexpected product shortages, competition, the Company’s reliance on key personnel, general economic conditions, success in integrating acquired business units, the Company’s dependence on credit sales, and other factors set forth from time to time in filings with the Securities and Exchange Commission. The Company does not have any obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

Material Changes in Results of Operations

Business

Founded in 1928, the Company is a diversified wholesaler of construction and industrial materials, equipment, and supplies. The Company distributes its products to three primary end markets, including commercial, residential, and industrial public infrastructure markets throughout North America. The Company distributes over 300,000 products, representing three major product groups, through approximately 450 wholesale branches and six central distribution centers located in 34 states. The Company’s principal customers are electrical, plumbing and mechanical contractors, electric utility customers, property management companies, municipalities, and industrial companies. Industrial companies include businesses in the petrochemical, food and beverage, pulp and paper, mining, pharmaceutical, and marine industries.

Fiscal Year

The fiscal year of the Company is a 52 or 53-week period ending on the last Friday in January. Fiscal year 2004 will be a 52-week period while fiscal year 2003 was a 53-week period. The three months ended May 2, 2003 and May 3, 2002 contained 13 and 14 weeks, respectively.

Segment Information

The Company’s operations are under the management of three group (“Group”) presidents, and are organized on a product basis into three stand-alone Groups: Electrical/Plumbing; Industrial; and Water & Sewer/Building Materials. The Electrical/Plumbing Group includes the Company’s electrical and electric utility products, plumbing products, and heating, ventilation and air conditioning (“HVAC”) products. The Industrial Group includes the Company’s industrial pipe, valves, and fittings products. The Water & Sewer/Building Materials Group includes the Company’s water and sewer products, building materials products and maintenance supplies, fire protection products, and concrete products. The “Corporate & Other” category includes corporate level expenses not allocated to the Company’s operating Groups. These three Groups represent the Company’s

12

Table of Contents

reportable segments. This is the basis management uses for making operating decisions and assessing performance, and is on a basis consistent with how business activities are reported internally to management and the board of directors.

Comparable Branch Sales Methodology

The Company computes and discloses comparable branch sales, which exclude net sales related to (a) acquired and newly-opened branches until operating results are included in the consolidated financial statements for all periods in the current and prior fiscal years, (b) branch combinations and splits unless within the same Group and physical location, and (c) closed and divested branches. All comparable branch sales amounts and percentages presented in this report exclude the impact of the additional week of net sales included in the first quarter of fiscal 2003.

Net Sales

Net sales in the first quarter of fiscal 2004 totaled $782.8 million, a decrease of $7.2 million or 0.9%, compared to the prior year’s first quarter net sales of $790.0 million. Comparable branch sales remained relatively flat despite a continuing challenging economy, particularly in the industrial, non-residential building, and commercial construction sectors. Net sales in the first quarter of fiscal 2004 included sales from the acquisition of Utiliserve Holdings, Inc. and its subsidiaries (“Utiliserve”), which was completed in August 2002, while net sales in the prior year’s first quarter included the benefit of an additional fiscal week as presented below (dollars in millions):

Consolidated and comparable branch sales by Group in the first quarter of fiscal 2004 and 2003 were as follows (dollars in millions):

The following sets forth factors impacting net sales for the Company’s operating Groups:

Electrical/Plumbing

Net sales in the first quarter of fiscal 2004 increased $17.9 million or 4.8% compared to the prior year’s first quarter. The acquisition of Utiliserve accounted for $52.2 million of this increase, partially offset by a decrease

13

Table of Contents

of $26.6 million of net sales from the additional week in the first quarter of fiscal 2003 and $1.3 million from the closing and/or combining of branches. Comparable branch sales decreased $6.4 million or 1.9%. The comparable branch sales decrease primarily stems from the electrical product line as a result of the continued weakness in the commercial market, particularly in office building and hotel & motel construction. The plumbing business also continues to operate in a competitive environment, which has created pricing pressure on newer projects.

Industrial

Net sales in the first quarter of fiscal 2004 decreased $11.2 million or 13.3% compared to the prior year’s first quarter. Of the total $11.2 million decrease in net sales, $7.2 million resulted from the additional week in the first quarter of fiscal 2003 and $5.4 million or 6.9% related to a decline in comparable branch sales. Partially offsetting these decreases were acquired and newly-opened branch sales of $1.4 million. Comparable branch sales decreased primarily due to the downward trend in power industry spending and uncertainties surrounding the war in Iraq. These two factors resulted in the postponement and cancellation of certain power generation and petrochemical plant construction and rehabilitation projects combined with a moratorium on capital spending and a decrease in the fabrication business. Net sales for the Industrial Group may continue to be negatively impacted in the near term as a result of the postponement and cancellation of these projects.

Water & Sewer/Building Materials

Net sales in the first quarter of fiscal 2004 decreased $13.9 million or 4.2% compared to the prior year’s first quarter. This decrease resulted from the additional week in the first quarter of fiscal 2003, which added $21.3 million to net sales in fiscal 2003, and a decline of $3.2 million from the closing and combining of branches. Partially offsetting this decrease was growth of $8.9 million or 2.9% in comparable branch sales combined with $1.7 million in net sales from acquired and newly-opened branches. This increase was a result of growth in the maintenance supplies product line due largely to increased demand for multi-family dwellings. Comparable branch sales in the water & sewer product line were favorably impacted by increased subdivision jobs, new department of transportation projects, and increased sewer and waterline projects. Non-building construction starts were also up, with an increase primarily in new highway starts.

Gross Profit and Gross Margin

Gross profit in the first quarter of fiscal 2004 totaled $175.6 million, a decrease of $5.6 million or 3.1%, compared to the prior year’s first quarter gross profit of $181.2 million. Comparable branch gross profit remained relatively flat despite the continued slowdown in the commercial and non-residential sectors combined with competitive pricing pressures in the Electrical/Plumbing Group. Gross profit in the first quarter of fiscal 2004 included gross profit from the acquisition of Utiliserve while gross profit in the prior year’s first quarter included the benefit of an additional fiscal week as presented below (dollars in millions):

Gross margin totaled 22.4% and 22.9% in the first quarter of fiscal 2004 and 2003, respectively. The net reduction of 50 basis points in gross margin was largely attributable to the acquisition of Utiliserve, which

14

Table of Contents

generates lower gross margins than the Company’s average, and changes in sales mix partially offset by favorable vendor rebates.

Operating Expenses

Operating expenses in the first quarter of fiscal 2004 and 2003 were as follows (dollars in millions):

As a percentage of net sales, personnel expenses decreased to 12.2% in the first quarter of fiscal 2004 from 12.5% in the prior year’s first quarter. The Company’s workforce increased to approximately 7,200 employees at May 2, 2003 from approximately 7,100 employees at May 3, 2002. The first quarter of fiscal 2004 includes approximately 200 employees related to the acquisition of Utiliserve, which added $2.9 million of personnel expenses in the first quarter of fiscal 2004. Excluding the acquisition of Utiliserve, the Company’s overall workforce decreased 1.4% from fiscal 2003. Personnel expenses were also impacted by the additional week included in the first quarter of fiscal 2003, which added $7.2 million to the prior year’s first quarter.

As a percentage of net sales, other selling, general and administrative expenses remained relatively flat at 6.3% and 6.4% in the first quarter of fiscal 2004 and 2003, respectively. The acquisition of Utiliserve in the third quarter of fiscal 2003 added $2.8 million of other selling, general and administrative expenses in the first quarter of fiscal 2004, and the additional week added approximately $1.2 million of such expenses in the first quarter of fiscal 2003.

Operating Income

Operating income in the first quarter of fiscal 2004 totaled $25.7 million, a decrease of $1.2 million or 4.5%, compared to the prior year’s first quarter operating income of $26.9 million. This decrease was primarily attributable to the additional week included in the first quarter of fiscal 2003, which added approximately $4.6 million of operating income to the prior year’s first quarter. Partially offsetting this decrease was operating income from the acquisition of Utiliserve. As a percentage of net sales, operating income totaled 3.3% and 3.4% in the first quarter of fiscal 2004 and 2003, respectively. The slight decrease was attributable to the leverage gained in the first quarter of fiscal 2003 as a result of the additional week of net sales.

Operating income by Group in the first quarter of fiscal 2004 and 2003 was as follows (dollars in millions):

15

Table of Contents

Electrical/Plumbing

As a percentage of net sales, operating income remained relatively flat at 2.0% and 2.1% in the first quarter of fiscal 2004 and 2003, respectively. The slight decline was attributable to the leverage gained in the first quarter of fiscal 2003 from the additional week of net sales partially offset by the acquisition of Utiliserve, which generates higher operating income returns on net sales than the Electrical/Plumbing Group as a whole. Additionally, operating income in the first quarter of fiscal 2003 was unfavorably impacted by non-recurring provisions for doubtful accounts totaling $0.9 million associated with the Company’s international business.

Industrial

As a percentage of net sales, operating income decreased to 6.4% in the first quarter of fiscal 2004 from 8.7% in the prior year’s first quarter. The decrease in operating income as a percentage of net sales was primarily driven by reduced sales volumes in the first quarter of fiscal 2004 combined with the leverage gained in the first quarter of fiscal 2003 from the additional week of net sales.

Water & Sewer/Building Materials

As a percentage of net sales, operating income declined to 4.0% in the first quarter of fiscal 2004 from 4.2% in the prior year’s first quarter. This decrease resulted from the leverage gained from the additional week of net sales included in the first quarter of fiscal 2004.

Interest and Other Income

Interest and other income totaled $1.7 million and $2.1 million in the first quarter of fiscal 2004 and 2003, respectively. The decrease of $0.4 million was largely due to reduced service charge income combined with the elimination of equity income in an unconsolidated affiliate, which was sold in December 2002.

Interest Expense

Interest expense totaled $7.7 million and $8.0 million in the first quarter of fiscal 2004 and 2003, respectively. The decrease in fiscal 2004 was primarily due to lower average interest rates partially offset by higher outstanding debt balances in fiscal 2004. Total debt increased $95.2 million or 25.7% from $370.6 million as of May 3, 2002 to $465.8 million of May 2, 2003. Borrowing levels were increased from the first quarter of fiscal 2003 to fund the acquisition of Utiliserve along with the working capital needs of the Company, including strategic inventory purchases in the Electrical/Plumbing and Water & Sewer/Building Materials Groups.

Income Taxes

The Company’s effective tax rate was 40.0% and 41.0% in the first quarter of fiscal 2004 and 2003, respectively. The decrease was attributable primarily to a lower effective state income tax rate.

Net Income

Net income totaled $11.8 million and $12.4 million in the first quarter of fiscal 2004 and 2003, respectively. Diluted earnings per share were $0.51 and $0.52 on 23.1 million and 23.6 million shares outstanding, in the first quarter of fiscal 2004 and 2003, respectively. The factors impacting net income and diluted earnings per share have been enumerated above.

16

Table of Contents

Liquidity and Capital Resources

The following sets forth certain measures of the Company’s liquidity (dollars in millions):

Working Capital

Higher levels of accounts receivable ($36.7 million) and inventories ($28.0 million) combined with lower accrued compensation and benefits ($19.7 million) balances partially offset by higher accounts payable ($44.8 million) and other current liabilities ($4.0 million) balances and lower other current assets ($7.4 million) balances drove the working capital increase of $27.8 million in the first quarter of fiscal 2004. The higher accounts receivable balances reflect the timing of payments and represent a normal seasonal trend for the first quarter. Inventories and accounts payable increased largely as a result of the seasonal build-up in inventories to support the higher sales volumes expected in the spring and summer months combined with strategic inventory purchases in the Electrical/Plumbing and Water & Sewer/Building Material Groups. Accrued compensation and benefit balances decreased as a result of the timing of bi-weekly payroll payments combined with annual bonus payments, which are made in the first quarter of each year. Other current assets decreased primarily due to collections of vendor rebate receivables in the first quarter of fiscal 2004.

Operating Activities

In the first quarter of fiscal 2004 and 2003, cash flows (used in) provided by operating activities totaled ($3.6) million and $53.8 million, respectively. The decrease of $57.4 million in operating cash flows was driven primarily by fluctuations in inventories, other current assets, accounts payable, accrued compensation and benefits, and other current liability balances. Partially offsetting these operating cash flow decreases were fluctuations in accounts receivable and net deferred tax assets balances. Compared to the prior-year period, inventories increased $28.0 million in the first quarter of fiscal 2004 versus a $6.9 million decrease in the first quarter of fiscal 2003. The increase in inventories was the result of strategic purchases made in the Electrical/Plumbing and Water & Sewer/Building Material Groups during the first quarter of fiscal 2004. In the first quarter of fiscal 2003, the Company also collected approximately $20.0 million of non-recurring income tax receivables, which drove down the other current asset balances, and favorably impacted operating cash flows in fiscal 2003. Fluctuations in accounts payable, accrued compensation and benefits, and other current liability balances reflect the timing of payments, including bi-weekly payroll payments. Compared to the prior-year period, accounts receivable balances increased $38.7 million in the first quarter of fiscal 2004 versus a $47.9 million increase in the first quarter of fiscal 2003. The increase in accounts receivable balances was higher in the first quarter of fiscal 2003 largely due to increasing sales volumes in the first quarter of fiscal 2003. Overall, days sales outstanding remained essentially flat in both periods. Net deferred tax liabilities increased largely due to temporary differences related to goodwill amortization and prepaid expenses. Going forward, the Company expects to maintain a sufficient level of liquidity for operational purposes.

17

Table of Contents

Investing Activities

The Company’s expenditures for property and equipment totaled $5.3 million and $2.4 million in the first quarter of fiscal 2004 and 2003, respectively. The increase in capital expenditures was largely due to the new Hughes Unified operating system and primarily consisted of personal computers and related hardware along with capitalized software upgrades. Fiscal 2004 capital expenditures are expected to be approximately $21.0 million, of which $5.0 million relates to the Hughes Unified operating system.

Proceeds from the sale of property and equipment totaled $0.1 million and $1.3 million in the first quarter of fiscal 2004 and 2003, respectively. The decrease was due to fiscal 2003 sales of certain land and building assets resulting from branch closure and consolidation activities.

Financing Activities

Total debt was $465.8 million and $441.9 million as of May 2, 2003 and January 31, 2003, respectively, an increase of $23.9 million or 5.4%. Net borrowings (payments) made under the Company’s revolving credit agreement totaled $20.8 million and ($52.8 million) in the first quarter of fiscal 2004 and 2003, respectively. Scheduled payments on the Company’s senior notes totaled $2.4 million in the first quarter of fiscal 2004. There were no senior notes repayments made in the first quarter of fiscal 2003. Other principal repayments totaled $0.2 million in the first quarter of fiscal 2004 with no such repayments in the first quarter of fiscal 2003.

On March 15, 1999, the Company’s board of directors authorized the Company to repurchase up to 2,500,000 shares of its outstanding common stock to be used for general corporate purposes. Since March 15, 1999, the Company has repurchased a total of 1,831,400 shares at an average price of $22.91 per share, of which 258,600 shares at an average price of $23.39 were repurchased during the first quarter of fiscal 2004. Shares repurchased totaled $6.0 million in the first quarter of fiscal 2004. There were no shares repurchased during the first quarter of fiscal 2003.

On March 26, 2003, the Company replaced its existing $275.0 million revolving credit agreement, which was scheduled to mature on January 25, 2004, with a new $252.5 million revolving credit agreement (the “new credit agreement”), subject to borrowing limitations, which matures on March 26, 2007. The new credit agreement is unsecured and contains financial and other covenants, including limitations on dividends and maintenance of certain financial ratios. Interest is payable at market rates plus applicable margins and commitment fees of 0.25% are paid on the new credit agreement.

On May 22, 2003, the Company amended the new credit agreement to increase maximum borrowing capacity from $252.5 million to $290.0 million effective June 9, 2003.

At May 2, 2003, the Company was in compliance with all financial covenants.

Dividend payments totaled $2.4 and $2.0 million during the first quarter of fiscal 2004 and 2003, respectively.

As of May 2, 2003, the Company had approximately $2.0 million of cash and $159.3 million of unused borrowing capacity (subject to borrowing limitations under long-term debt covenants) to fund ongoing operating requirements and anticipated capital expenditures. With the additional borrowing capacity under the recently amended new credit agreement, total unused borrowing capacity is $196.8 million. The Company believes it has sufficient borrowing capacity and cash on hand to take advantage of growth and business opportunities. The Company expects to continue to finance future expansion on a project-by-project basis through additional borrowing or through the issuance of stock.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“FAS”) 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies financial accounting and

18

Table of Contents

reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. In general, FAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As the Company does not currently have any derivative financial instruments, the adoption of FAS 149 is not expected to have any impact on the Company’s consolidated financial statements.

FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003 and clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As the Company does not have any of these financial instruments, the adoption of FAS 150 is not expected to have any impact on the Company’s consolidated financial statements.

Critical Accounting Policies

The Company’s significant accounting policies are more fully described in the notes to the consolidated financial statements included in the Annual Report. Certain of the Company’s accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. As with all judgments, they are subject to an inherent degree of uncertainty. These judgments are based on historical experience, current economic trends in the industry, information provided by customers and vendors, information available from other outside sources and management’s estimates, as appropriate. The Company’s 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 Annual Report. As of May 2, 2003, there have been no material changes to any of the critical accounting policies.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in interest rates on outstanding variable-rate debt and from changes in the prices of certain of its products that result from commodity price fluctuations.

Interest Rate Risk

At May 2, 2003, the Company had $123.9 million of outstanding variable-rate debt. Based upon a hypothetical 10% increase or decrease in interest rates from their May 2, 2003 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 balance between fixed and variable rate debt and by entering into interest rate swap transactions. As of May 2, 2003, the Company does not have any interest rate swap agreements.

Commodity Price Risk

The Company is affected by price fluctuations in stainless steel, nickel alloy, copper, aluminum, plastic, lumber, and other commodities. Such commodity price fluctuations have from time to time created cyclicality in the financial performance of the Company and could continue to do so in the future. The Company seeks to minimize the effects of commodity price fluctuations through economies of purchasing and inventory management resulting in cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins.

19

Table of Contents

Item 4.     Controls and Procedures

Within 90 days before the filing date of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect such internal controls subsequent to the date that the Company’s management conducted its evaluation.

20

Table of Contents

PART II.    OTHER INFORMATION

HUGHES SUPPLY, INC.

Item 6.     Exhibits and Reports on Form 8-K