HUGHES SUPPLY INC - 10-Q Quarterly Report

	November 1, 2002 (unaudited)			January 25, 2002
Assets
Current Assets:
Cash and cash equivalents	$	2,319		$	6,817
Accounts receivable, less allowance for doubtful accounts of $12,008 and $8,388		461,452			387,953
Inventories		442,937			396,441
Deferred income taxes		17,615			15,420
Other current assets		40,429			56,809

Total current assets		964,752			863,440

Property and Equipment		148,377			145,702
Goodwill		317,115			263,808
Other Assets		28,716			20,312

	$	1,458,960		$	1,293,262

Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of long-term debt	$	24,186		$	19,175
Accounts payable		248,794			188,447
Accrued compensation and benefits		34,534			32,790
Other current liabilities		44,382			34,753

Total current liabilities		351,896			275,165

Long-Term Debt		431,728			403,671
Deferred Income Taxes		25,564			13,872
Other Noncurrent Liabilities		6,314			6,081

Total liabilities		815,502			698,789


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; 23,935,264 and 23,774,600 shares issued		23,935			23,775
Capital in excess of par value		222,377			217,609
Retained earnings		411,707			367,726
Treasury stock, 98,000 and 24,251 shares, at cost		(2,791	)		(531	)
Unearned compensation related to outstanding restricted stock		(11,770	)		(14,106	)

Total shareholders’ equity		643,458			594,473

	$	1,458,960		$	1,293,262

	Three Months Ended						Nine Months Ended
	November 1, 2002			October 26, 2001			November 1, 2002			October 26, 2001
Net Sales	$	804,061		$	790,042		$	2,368,716		$	2,371,508
Cost of Sales		615,539			607,048			1,818,293			1,832,430

Gross Profit		188,522			182,994			550,423			539,078

Operating Expenses:
Selling, general and administrative		142,299			135,909			426,335			422,826
Depreciation and amortization		5,142			7,680			14,928			23,589
Provision for doubtful accounts		2,402			2,867			8,148			7,615

Total operating expenses		149,843			146,456			449,411			454,030

Operating Income		38,679			36,538			101,012			85,048

Non-Operating Income (Expenses):
Interest and other income		2,497			2,192			8,006			8,687
Interest expense		(7,658	)		(8,658	)		(23,060	)		(27,928	)

		(5,161	)		(6,466	)		(15,054	)		(19,241	)

Income Before Income Taxes		33,518			30,072			85,958			65,807
Income Taxes		13,743			12,330			35,243			26,981

Net Income	$	19,775		$	17,742		$	50,715		$	38,826


Earnings Per Share:
Basic	$	0.85		$	0.77		$	2.18		$	1.67

Diluted	$	0.84		$	0.76		$	2.14		$	1.66


Average Shares Outstanding:
Basic		23,252			23,145			23,229			23,204

Diluted		23,609			23,356			23,695			23,397


Dividends Per Share	$	0.085		$	0.085		$	0.255		$	0.255

	Nine Months Ended
	November 1, 2002			October 26, 2001
Cash Flows from Operating Activities:
Net income	$	50,715		$	38,826
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,928			23,589
Provision for doubtful accounts		8,148			7,615
Deferred income taxes		9,614			975
Amortization of restricted stock		2,115			550
Other		484			(819	)
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable		(61,713	)		(5,228	)
Inventories		(16,049	)		54,744
Other current assets		17,339			3,865
Other assets		43			(2,978	)
Accounts payable		33,556			(13,902	)
Accrued compensation and benefits		1,003			5,653
Other current liabilities		9,472			14,141
Other noncurrent liabilities		233			376

Net cash provided by operating activities		69,888			127,407

Cash Flows from Investing Activities:
Capital expenditures		(13,321	)		(11,770	)
Proceeds from sale of property and equipment		3,671			8,150
Business acquisitions, net of cash		(33,422	)		(31,809	)
Purchase of bestroute.com stock rights		—			(7,273	)
Proceeds from sale of pool and spa business		—			22,000

Net cash used in investing activities		(43,072	)		(20,702	)

Cash Flows from Financing Activities:
Net borrowings (payments) under short-term debt arrangements		34,605			(89,717	)
Principal payments on debt of acquired entities and other debt		(60,726	)		(13,351	)
Purchase of treasury shares		(2,791	)		(7,537	)
Proceeds from stock option exercises		3,990			1,426
Dividends paid		(6,075	)		(6,076	)
Other		(317	)		(280	)

Net cash used in financing activities		(31,314	)		(115,535	)

Net Decrease in Cash and Cash Equivalents		(4,498	)		(8,830	)
Cash and Cash Equivalents:
Beginning of period		6,817			22,449

End of period	$	2,319		$	13,619

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 November 1, 2002, the results of operations for the three and nine months ended November 1, 2002 and October 26, 2001, and cash flows for the nine months then ended. The results of operations for the three and nine months ended November 1, 2002 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 for the fiscal year ended January 25, 2002, as filed with the Securities and Exchange Commission.

Inventories are carried at the lower of cost or market. The cost of substantially all inventories is determined by the average cost method. The Company evaluates its inventory value at the end of each quarter to ensure that it is carried at the lower of cost or market. This evaluation includes an analysis of a branch’s physical inventory results over the last two years and a review of potential dead stock based on historical product sales and forecasted sales. Periodically, the branch’s perpetual inventory records are adjusted to reflect permanent declines in market value. During the third quarter of fiscal 2003, the Company changed its estimate of potential dead stock as discussed below. This change resulted in inventory reserves of $7,773 at November 1, 2002 compared to $9,849 at January 25, 2002.

During the third quarter of fiscal 2002, the Company initiated an inventory management group to better manage potential dead stock and excess inventories. Their efforts have been strengthened over the course of fiscal 2003 through the use of improved inventory reporting tools, including the analysis of inventory on a product by product basis. The combination of renewed emphasis on inventory management and the greater visibility from the new reporting tools led to the development of programs to dispose of dead stock on a product specific basis. These programs include returning products to manufacturers, transferring products to other branches where the products are selling, reducing the sales prices of the products, and disposing of any remaining products that could not be returned, transferred, or sold. As a result of this analysis and these programs, the Company reduced its estimate

of inventory reserves required for potential dead stock, which resulted in an adjusted reserve of $7,773 at November 1, 2002 compared to $9,849 at January 25, 2002. This adjustment favorably impacted gross margin in the third quarter and first nine months of fiscal 2003 by 42 and 30 basis points, respectively (See Gross Profit and Gross Margin section of management’s discussion and analysis of financial condition and results of operations for additional discussion on the Company’s gross profit and gross margin).

The Company ships products to its customers predominantly by its internal fleet and to a lesser extent by third party carriers. The Company recognizes revenues from product sales when title to the products is passed to the customer, which occurs at the point of destination for products shipped by the Company’s internal fleet and at the point of shipping for products shipped by third party carriers. Revenues related to services are recognized in the period the services are performed.

Statement of Financial Accounting Standards (“FAS”) 143, Accounting for Asset Retirement Obligations, was issued in June 2001. FAS 143, which is effective for the Company beginning in fiscal 2004, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company does not expect the adoption of FAS 143 in fiscal 2004 to have a material impact on its consolidated financial statements.

FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001. This standard establishes a single accounting model for long-lived assets to be disposed of, including segments, and supercedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and Accounting Principles Board (“APB”) Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under FAS 144, goodwill is no longer allocated to long-lived assets, and, therefore, no longer subjected to testing for impairment as part of those assets, but tested separately as prescribed by FAS 142. In addition, FAS 144 broadens the presentation of discontinued operations to include components of an entity rather than being limited to a segment of a business. The Company adopted FAS 144 as of January 26, 2002. The adoption had no impact on the Company’s consolidated financial statements.

FAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued in April 2002. This newly issued standard rescinds FAS 4, Reporting Gains and Losses from Extinguishment of Debt—an amendment of APB Opinion No. 30, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria set forth by APB Opinion No. 30 will now be used to classify those gains and losses. FAS 145 also amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, FAS 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. For the provisions related to the rescission of FAS 4, FAS 145 is effective for the Company beginning in fiscal 2004. The remaining provisions of FAS 145 are effective for the Company in fiscal 2003. The Company does not expect the adoption of FAS 145 to have a material impact on its consolidated financial statements.

(“EITF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), certain exit costs were recorded upon management’s commitment to an exit plan. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged. The Company will adopt FAS 146 effective January 1, 2003 and does not expect the adoption to have a material impact on its consolidated financial statements.

In November 2002, the EITF reached a consensus with respect to EITF Issue 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. This consensus includes a presumption that cash consideration received by a customer from a vendor be treated as a reduction of cost of sales when recognized in the customer’s income statement. In addition, if the vendor offers the customer a rebate or refund of a specified amount of cash consideration that is payable only if the customer completes a specified level of purchases or remains a customer for a specified time period, the customer should recognize the rebate or refund as a reduction of cost of sales based on a systematic and rational allocation of the cash consideration to each of the underlying transactions that results in progress by the customer toward earning the rebate or refund. As the Company already accounts for such consideration as a reduction of cost of sales based on a systematic and rational allocation of the cash consideration to be received, this EITF has no impact on the Company’s consolidated financial statements.

FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets, were issued in June 2001. FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. FAS 141 also specifies the criteria which must be met in order for certain acquired intangible assets to be recorded separately from goodwill. Under FAS 142, goodwill is no longer amortized but rather tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This new approach requires the use of valuation techniques and methodologies significantly different from the undiscounted cash flow policy previously followed by the Company. The Company adopted FAS 142 effective January 26, 2002.

Within the operating segments, the Company identified five reporting units as defined in FAS 142. The reporting units’ goodwill was tested for impairment during the first quarter of fiscal 2003 based upon the expected present value of future cash flows approach. As a result of this valuation process as well as the application of the remaining provisions of FAS 142, the Company concluded that there was no impairment of goodwill related to any of the Company’s five reporting units.

Prior to the adoption of FAS 142, the Company amortized goodwill over estimated useful lives ranging from 15 to 40 years. Amortization of goodwill totaled $2,454 and $6,816 in the three and nine months ended October 26, 2001, respectively. Had the Company accounted for goodwill consistent with the provisions of FAS 142 in prior periods, the Company’s net income, basic earnings per share, and diluted earnings per share would have been affected as follows:

	Three Months Ended				Nine Months Ended
	November 1, 2002		October 26, 2001		November 1, 2002		October 26, 2001
Net income, as reported	$	19,775	$	17,742	$	50,715	$	38,826
Add: goodwill amortization, net of tax		—		1,448		—		4,021

Adjusted net income	$	19,775	$	19,190	$	50,715	$	42,847


Basic earnings per share, as reported	$	0.85	$	0.77	$	2.18	$	1.67
Add: goodwill amortization, net of tax		—		0.06		—		0.17

Adjusted basic earnings per share	$	0.85	$	0.83	$	2.18	$	1.84


Diluted earnings per share, as reported	$	0.84	$	0.76	$	2.14	$	1.66
Add: goodwill amortization, net of tax		—		0.06		—		0.17

Adjusted diluted earnings per share	$	0.84	$	0.82	$	2.14	$	1.83

On August 9, 2002, the Company acquired one hundred percent of the capital stock of Utiliserve Holdings, Inc. and its subsidiaries (“Utiliserve”), a wholesale distributor of electrical transmission and distribution products and services to the U.S. electric utility industry. As a result of the acquisition, the Company expects to be a leading provider of electrical transmission and distribution products and services in the U.S. It also expects to expand the development of customer contracts as a result of Utiliserve’s value-added services, including vendor-managed inventory, collaborative emergency response and job-site delivery. Through its supply chain management solutions, Utiliserve is able to assume full responsibility for its customers’ warehouse, work-flow, and inventory management needs.

The purchase price consisted of $33,422 cash paid for Utiliserve’s net equity along with the assumption of $54,536 and $27,849 of long-term debt and other liabilities, respectively. The results of Utiliserve’s operations have been included in the Company’s consolidated statements of income since August 9, 2002. The total cost of the acquisition was allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values in accordance with FAS 141 (See Note 8). Goodwill, all of which is non-deductible for income tax purposes, and other intangible assets recorded in connection with the transaction totaled $53,308 and $8,560, respectively. The goodwill was assigned entirely to the Electrical & Plumbing Group. The fair value assigned to intangible assets and the related weighted-average useful life was based on valuations prepared by an independent third party appraisal firm using estimates and assumptions provided by management. The intangible assets are subject to amortization and consist mainly of customer contracts that are being amortized on a straight-line basis over a weighted-average useful life of 14.6 years. The estimated annual amortization expense related to these contracts for the next five fiscal years is expected to be $619. Pro forma results of operations reflecting this acquisition have not been presented because the results of operations of Utiliserve are not material to the Company’s consolidated operating results or assets in fiscal 2003 or 2002.

	November 1, 2002			January 25, 2002
8.27% senior notes, due 2003	$	19,000		$	19,000
8.27% senior notes, due 2005		22,400			22,400
8.42% senior notes, due 2007		103,000			103,000
7.96% senior notes, due 2011		84,000			88,666
7.14% senior notes, due 2012		38,095			40,000
7.19% senior notes, due 2012		40,000			40,000
6.74% senior notes, due 2013		50,000			50,000
Unsecured bank notes under $275,000 revolving credit agreement, payable January 25, 2004 (interest rate of 2.0% at November 1, 2002)		80,000			16,142
Commercial paper		7,378			36,409
Other notes payable (varying interest rates of 2.4% to 9.8% at November 1, 2002 with due dates between 2002 to 2016)		12,041			7,229

		455,914			422,846
Less current portion		(24,186	)		(19,175	)

	$	431,728		$	403,671

The Company has two short-term lines of credit with borrowing capacities of $10,000 and $15,000, respectively. On July 25, 2002, both line of credit agreements were amended to extend the maturity dates to June 30, 2003. Concurrently with this amendment, the funds under the $15,000 line of credit agreement were allocated to an operating lease agreement. On August 30, 2002, the operating lease agreement was amended to increase borrowing capacity from $15,000 to $18,666. Under the terms of the operating lease agreement, the Company leases certain equipment, including vehicles, forklifts, and trailers from various companies with funds provided by the $18,666 line of credit. Monthly payments are made to the bank in accordance with the terms of each specific equipment lease. There was no remaining availability under the operating lease agreement at November 1, 2002. There were no amounts outstanding at November 1, 2002 under the $10,000 line of credit agreement.

On June 7, 2002, the Company terminated its loan and master lease agreement (the “lease agreement”) with Atlantic Financial Group, Ltd. as lessor, and SunTrust Bank (“SunTrust”). Concurrently, the Company executed a new real estate term credit agreement (the “credit agreement”) with SunTrust, and the outstanding principal balance of $1,694 under the lease agreement was paid off and rolled into the credit agreement. Under the terms of the credit agreement, SunTrust agreed to fund up to a maximum of $25,000 for the acquisition and development of the Company’s new corporate headquarters building in Orlando, Florida. The credit agreement bears interest based on LIBOR plus applicable credit spreads (currently estimated to be 102.5 basis points) and matures July 31, 2005. At November 1, 2002, the total outstanding borrowings and related assets of $11,242 under the credit agreement are recorded in long-term debt and construction in progress.

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share includes the additional dilutive effect of the Company’s potential common shares, which includes certain employee and director stock options, unvested shares of restricted stock, and stock rights issued in connection with the bestroute.com acquisition in fiscal 2001. The following summarizes the incremental shares from these potentially dilutive common shares, calculated using the treasury method, as included in the computation of diluted average shares outstanding:

	Three Months Ended		Nine Months Ended
	November 1, 2002	October 26, 2001	November 1, 2002	October 26, 2001
Basic average shares outstanding	23,251,637	23,144,812	23,229,365	23,203,706
Incremental shares resulting from:
Stock options	121,527	117,788	167,201	72,786
Restricted stock	236,176	93,898	298,208	30,399
Stock rights issued in connection with the bestroute.com acquisition	—	—	—	90,067

Diluted average shares outstanding	23,609,340	23,356,498	23,694,774	23,396,958

Stock options and restricted stock totaling 677,020 and 266,114 shares at an average exercise price of $34.30 and $32.89 per share, respectively, were not included in the computation of diluted earnings per share in the three months ended November 1, 2002 and October 26, 2001, respectively, because their effect would have been anti-dilutive. In the nine months ended November 1, 2002 and October 26, 2001, stock options and restricted stock totaling 540,020 and 394,373 shares, respectively, at an average exercise price of $34.37 and $29.17 per share, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

On March 2, 2001, in connection with the closure of bestroute.com, one of the Company’s e-commerce ventures, the Company entered into an agreement with the holders of 723,183 of the Company’s stock rights originally issued as consideration for the bestroute.com acquisition. This agreement canceled 347,541 of the stock rights and enabled the remaining stock rights to be redeemed for $7,273 in cash, all of which was paid by the end of the second quarter of fiscal 2002.

In the normal course of business, the Company’s management continually evaluates the operations and performance of its individual branches and identifies branches for closure or consolidation. Prior to January 25, 2002, the Company’s management approved a plan to close and consolidate 43 branches, including bestroute.com as discussed in Note 6 above, because these branches did not strategically fit into the Company’s core businesses and/or they did not perform to management’s expectations. During the first nine months of fiscal 2003, the Company announced the closure of an additional six branches

	Three Months Ended					Nine Months Ended
	November 1, 2002			October 26, 2001		November 1, 2002			October 26, 2001
Cost of sales	$	254		$	132	$	385		$	279


Severance expense	$	21		$	—	$	49		$	417
Lease expense		(214	)		—		1			204
Professional expense (contractual obligation)		—			—		—			650
Other (vehicle rent, property taxes, telephone, etc.)		(288	)		—		(256	)		301

Selling, general and administrative expenses	$	(481	)	$	—	$	(206	)	$	1,572


Non-operating expenses	$	13		$	6	$	51		$	258

The cost of sales amounts represented an inventory write-down of products that will no longer be saleable following the closure of the branches. Severance expense included charges associated with payments owed to employees who have been or will be involuntarily terminated in connection with the Company’s branch closures. All terminations from branch closures in fiscal 2003 are expected to occur prior to January 31, 2003. The Company has accrued the estimated lease obligation from the planned closure date through the end of the contractual lease term, net of any estimated sublease income. Other costs accrued for branches identified for closure were based on amounts due under agreements and/or based on estimates to terminate such agreements. Non-operating expenses primarily related to write-downs of assets for which the Company projects the undiscounted cash flows to be less than the carrying amount of the related investment.

	November 1, 2002			October 26, 2001
Accounts receivable	$	19,934		$	13,515
Inventories		30,447			9,581
Property and equipment		2,382			961
Goodwill		53,308			24,357
Other assets		9,736			63

Assets acquired		115,807			48,477

Accounts payable and accrued liabilities		(27,849	)		(8,134	)
Long-term debt		(54,536	)		(8,534	)

Liabilities assumed		(82,385	)		(16,668	)

Cash purchase price	$	33,422		$	31,809

During the second quarter of fiscal 2003, the Company’s board of directors approved a donation in the amount of $800 to Hughes Supply, Inc. Foundation (“HSF”), a not-for-profit charitable organization. The board of directors of HSF is comprised of certain executives of the Company, including the chairman and chief executive officer, the president and chief operating officer, and the chief financial officer. The Company paid the donation to HSF during the third 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 1,413,800 shares at an average price of $22.32 per share, of which 98,000 and 394,700 shares at an average price of $28.48 and $19.10 per share, respectively, were repurchased during the first nine months of fiscal 2003 and 2002, respectively.

During the first quarter of fiscal 2003, the Company completed the reorganization of its management structure, which started in fiscal 2002 after the new president/chief operating officer had been with the Company for several months and a new strategic direction set. In connection with this reorganization, the Company initiated centralization programs in vendor relations, customer service, and support service areas, which are designed to leverage these functions across the entire Company. The branch operations were then reorganized under the management of three group (“Group”) presidents, as compared to being managed by five Group presidents in the prior fiscal year.

Based on the requirements of FAS 131, Disclosures about Segments of an Enterprise and Related Information, which aligns financial reporting with management structure and responsibility, the Company combined the operating results of its previous Electrical and Plumbing/HVAC Groups, to create a single Electrical & Plumbing segment, which reports to one Group president. The Company also combined the Water & Sewer and Building Material Groups, to create a single Water & Sewer/Building Materials segment, which reports to one Group president. The Industrial Group president was not affected by the changes in management responsibility. 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.

The Electrical & Plumbing Group includes the Company’s electrical and electric utility products, plumbing/HVAC products, and its international business. 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, along with revenues and expenses for bestroute.com in fiscal 2002.

In fiscal 2003, in connection with the reorganization of the Company’s operations and re-centralization of certain administrative functions, the Company changed its method of allocating certain costs (e.g. corporate capital charges, certain centralized support service expenses, data processing expenses, interest expense, etc.) to the Groups. As a result of these changes, prior year operating expenses totaling $1,911 and $2,658 for the three and nine months ended October 26, 2001, respectively, have been reclassified from Corporate to the operating Groups.

	Electrical & Plumbing ⁽¹⁾		Industrial		Water & Sewer/Building Materials ⁽¹⁾		Corporate & Other			Total
Three Months Ended

Net sales
2003	$	398,011	$	78,768	$	327,282	$	—		$	804,061
2002		370,877		82,996		336,169		—			790,042

Gross profit
2003	$	87,036	$	22,868	$	78,618	$	—		$	188,522
2002		81,059		21,009		80,926		—			182,994

Depreciation and amortization
2003	$	1,679	$	197	$	1,381	$	1,885		$	5,142
2002		2,218		678		3,081		1,703			7,680

Provision for doubtful accounts
2003	$	1,292	$	116	$	994	$	—		$	2,402
2002		1,762		137		977		(9	)		2,867

Interest and other income
2003	$	841	$	3	$	1,446	$	207		$	2,497
2002		826		11		1,086		269			2,192

Income (loss) before income taxes
2003	$	13,449	$	7,976	$	19,467	$	(7,374	)	$	33,518
2002		7,405		5,889		20,896		(4,118	)		30,072

	Electrical & Plumbing ⁽¹⁾		Industrial		Water & Sewer/Building Materials⁽¹⁾		Corporate & Other			Total
Nine Months Ended

Net sales
2003	$	1,127,608	$	240,105	$	1,001,003	$	—		$	2,368,716
2002		1,140,615		254,386		976,424		83			2,371,508

Gross profit
2003	$	249,242	$	66,644	$	234,537	$	—		$	550,423
2002		248,245		64,438		227,368		(973	)		539,078

Depreciation and amortization
2003	$	4,524	$	603	$	4,349	$	5,452		$	14,928
2002		7,138		2,076		9,035		5,340			23,589

Provision for doubtful accounts
2003	$	3,870	$	437	$	3,841	$	—		$	8,148
2002		4,283		517		2,567		248			7,615

Interest and other income
2003	$	3,172	$	5	$	4,485	$	344		$	8,006
2002		3,224		43		3,681		1,739			8,687

Income (loss) before income taxes
2003	$	34,451	$	21,100	$	56,444	$	(26,037	)	$	85,958
2002		24,144		17,891		49,034		(25,262	)		65,807

	As of November 1, 2002
	Accounts Receivable		Inventories		Goodwill		Group Assets
Electrical & Plumbing	$	207,452	$	205,082	$	115,446	$	527,980
Industrial		42,031		119,169		56,398		217,598
Water & Sewer/Building Materials		211,969		118,686		145,271		475,926

Total	$	461,452	$	442,937	$	317,115		1,221,504

Cash and cash equivalents								2,319
Deferred income taxes								17,615
Other current assets								40,429
Property and equipment								148,377
Other assets								28,716

Total Assets							$	1,458,960

	As of January 25, 2002
	Accounts Receivable		Inventories		Goodwill		Group Assets
Electrical & Plumbing	$	168,702	$	176,599	$	62,139	$	407,440
Industrial		42,971		103,663		56,398		203,032
Water & Sewer/Building Materials		176,280		116,179		145,271		437,730

Total	$	387,953	$	396,441	$	263,808		1,048,202

Cash and cash equivalents								6,817
Deferred income taxes								15,420
Other current assets								56,809
Property and equipment								145,702
Other assets								20,312

Total Assets							$	1,293,262

The following is management’s discussion and analysis of certain significant factors which have affected the financial condition of the Company as of November 1, 2002 and the results of operations for the three and nine months then ended. This information should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained herein and in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended January 25, 2002.

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 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. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results or events may differ significantly from those indicated in such forward-looking statements as a result of various important factors. These factors include, but are not limited to, the strength of the construction market, general economic conditions, the Company’s dependence on credit sales, fluctuating commodity prices, competition, unexpected product shortages, the Company’s reliance on key personnel, success in integrating acquired business units, and other factors that may be described in the Annual Report and/or other filings with the Securities and Exchange Commission. The Company assumes no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

Based on the requirements of Statement of Financial Accounting Standards (“FAS”) 131, Disclosures about Segments of an Enterprise and Related Information, which aligns financial reporting with management structure and responsibility, the Company combined the operating results of its previous Electrical and Plumbing/HVAC Groups, to create a single Electrical & Plumbing segment, which reports to one Group president. The Company also combined the Water & Sewer and Building Materials Groups, to create a single Water & Sewer/Building Materials segment, which reports to one Group president. The Industrial Group president was not affected by the

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 in the quarter ended November 1, 2002 increased $14,019 or 1.8% compared to the prior year’s third quarter. Acquired and newly-opened branches accounted for $51,487 of the increase in net sales. The majority of net sales for acquired and newly-opened branches related to the acquisition of Utiliserve Holdings, Inc. and its subsidiaries (“Utiliserve”) in the Electrical & Plumbing Group with $47,919 of net sales. Comparable branch sales declined $17,338 or 2.4% largely as a result of a slow-down in the non-residential building and commercial construction sectors, including office buildings, hotels and motels, and other commercial buildings. This slow-down created pricing pressure on newer projects. Comparable branch sales were also unfavorably impacted by a decline in industrial sales as certain projects have been postponed and/or cancelled until economic conditions become more stable. The remaining difference of $20,130 is attributable to the closure and/or consolidation of under-performing branches, primarily in the Electrical & Plumbing and Water & Sewer/Building Materials Groups.

Net sales in the nine months ended November 1, 2002 decreased $2,792 or 0.1% compared to the prior year’s first nine months. Comparable branch sales declined $78,473 or 3.5% primarily due to a slow-down in the non-residential building and commercial construction sectors, which created pricing pressure on newer projects along with a decline in industrial sales as certain projects have been postponed and/or cancelled. An additional $72,222 of the decrease is attributable to the closure and/or consolidation of under-performing branches. Partially offsetting these declines was an increase of $92,771 in net sales for acquired and newly-opened branches combined with the addition of $55,132 in net sales from the additional week included in the first quarter of fiscal 2003. The majority of net sales for acquired and newly-opened branches related to the Electrical & Plumbing and Water & Sewer/Building Materials Groups, which accounted for $55,476 and $35,530 of the increase in net sales.

	Consolidated Net Sales						Comparable Branch Sales
	Three Months Ended						Three Months Ended
	November 1, 2002		October 26, 2001		Percent Variance		November 1, 2002		October 26, 2001		Percent Variance
Electrical & Plumbing	$	398,011	$	370,877	7.3	%	$	334,013	$	346,538	(3.6	)%
Industrial		78,768		82,996	(5.1	)%		78,071		82,594	(5.5	)%
Water & Sewer/Building Materials		327,282		336,169	(2.6	)%		303,450		303,740	(0.1	)%
Corporate & Other		—		—	—			—		—	—

	$	804,061	$	790,042	1.8	%	$	715,534	$	732,872	(2.4	)%


	Consolidated Net Sales						Comparable Branch Sales
	Nine Months Ended						Nine Months Ended
	November 1, 2002		October 26, 2001		Percent Variance		November 1, 2002		October 26, 2001		Percent Variance
Electrical & Plumbing	$	1,127,608		1,140,615	(1.1	)%	$	1,029,895	$	1,081,490	(4.8	)%
Industrial		240,105		254,386	(5.6	)%		238,352		258,302	(7.7	)%
Water & Sewer/Building Materials		1,001,003		976,424	2.5	%		920,619		927,547	(0.7	)%
Corporate & Other		—		83	—			—		—	—

	$	2,368,716	$	2,371,508	(0.1	)%	$	2,188,866	$	2,267,339	(3.5	)%

Comparable branch sales decreased $12,525 or 3.6% and $51,595 or 4.8% in the third quarter and first nine months of fiscal 2003, respectively, compared to the same periods in fiscal 2002. These decreases were primarily attributable to an overall weakness in the electrical construction market, particularly in Florida, Georgia, and Texas. This Group supplied materials for several large infrastructure projects in fiscal 2002 with no corresponding replacement projects in fiscal 2003. Comparable branch sales in the Texas market were unfavorably impacted due to inclement weather conditions. Net sales in the plumbing product line held relatively solid despite current market conditions.

Comparable branch sales decreased $4,523 or 5.5% and $19,950 or 7.7% in the third quarter and first nine months of fiscal 2003, respectively, compared to the same periods in fiscal 2002. These decreases were primarily due to the postponement and cancellation of certain power generation, gas utility, and petro-chemical plant construction and/or rehabilitation projects in late fiscal 2002 and early fiscal 2003. These projects were postponed and cancelled by the Company’s customers due to weakened economic conditions, which resulted in reduced plant utilization. The comparable branch sales decline was partially offset by increased sales prices for certain commodity-based products, including stainless steel and nickel alloys. Nickel pricing increased approximately 10% compared to the prior year’s first nine months.

Gross profit in the third quarter ended November 1, 2002 increased $5,528 or 3.0% compared to the prior year’s third quarter. This increase was primarily driven by acquired and newly-opened branches, which accounted for $6,307 of the increase in gross profit. Comparable branch gross profit increased $3,195 or 1.9% primarily as a result of increases in vendor rebate programs, focused purchasing, and a change to a more proactive management and disposition of dead stock and slower-moving inventories (the “Company’s dead stock program”). Partially offsetting these increases was a decline of $3,974 related to the closure and/or consolidation of branches. Gross margin totaled 23.4% and 23.2% in the third quarter of fiscal 2003 and 2002, respectively. The net improvement in gross margin was the result of various factors, both positive and negative. Gross margins increased due to increased vendor rebates (38 basis points), favorable results of the Company’s dead stock program (42 basis points), improved margins from the Industrial Group, primarily driven by nickel pricing (29 basis points), and improved margins from the 53 branches which are now on the “Hughes Unified” operating system, primarily resulting from the implementation of centralized price matrices (37 basis points). Pricing pressures brought about by the intensified competition resulting from the slow-down in the non-residential and commercial construction sectors as well as the impact of deflationary pressures on PVC and ductile pipe products combined to offset the increases which resulted in a net 20 basis point improvement in gross margin.

Gross profit in the nine months ended November 1, 2002 increased $11,345 or 2.1% compared to the prior year’s first nine months. This increase was primarily driven by acquired and newly-opened branches, which accounted for $14,396 of the increase in gross profit, combined with the addition of $12,995 in net sales from the additional week included in the first quarter of fiscal 2003. Comparable branch gross profit decreased $3,047 or 0.6% primarily as a result of the slow-down in the commercial construction sector combined with deflationary pricing pressure on PVC and ductile pipe products. The remaining decrease of $12,999 related to the closure and/or consolidation of branches. Gross margin totaled 23.2% and 22.7% in the first nine months of fiscal 2003 and 2002, respectively. The net improvement in gross margin was the result of various factors, both positive and negative. Gross margins increased due to increased vendor rebates (18 basis points), favorable results of the Company’s dead stock program (30 basis points), improved margins from the Industrial Group, primarily driven by nickel pricing (23 basis points), and improved margins from the 53 branches which are now on the “Hughes Unified” operating system, primarily resulting from the implementation of centralized price matrices (7 basis points). Pricing pressures brought about by the intensified competition resulting from the slow-down in the non-residential and commercial construction sectors as well as the impact of deflationary pressures on PVC and ductile pipe products combined to offset the increases which resulted in a net 50 basis point improvement in gross margin.

	Gross Profit						Gross Margin
	Three Months Ended						Three Months Ended
	November 1, 2002		October 26, 2001		Percent Variance		November 1, 2002		October 26, 2001		Basis Point Variance
Electrical & Plumbing	$	87,036	$	81,059	7.4	%	21.9	%	21.9	%	—
Industrial		22,868		21,009	8.8	%	29.0	%	25.3	%	370
Water & Sewer/Building Materials		78,618		80,926	(2.9	)%	24.0	%	24.1	%	(10	)
Corporate & Other		—		—	—		—		—		—

	$	188,522	$	182,994	3.0	%	23.4	%	23.2	%	20

	Gross Profit							Gross Margin
	Nine Months Ended							Nine Months Ended
	November 1, 2002		October 26, 2001			Percent Variance		November 1, 2002		October 26, 2001		Basis Point Variance
Electrical & Plumbing	$	249,242	$	248,245		0.4	%	22.1	%	21.8	%	30
Industrial		66,644		64,438		3.4	%	27.8	%	25.3	%	250
Water & Sewer/Building Materials		234,537		227,368		3.1	%	23.4	%	23.3	%	10
Corporate & Other		—		(973	)	—		—		—		—

	$	550,423	$	539,078		2.1	%	23.2	%	22.7	%	50

The 30 basis point improvement in gross margin in the first nine months of fiscal 2003 was largely the result of the closure of certain under-performing branches in fiscal 2002 coupled with the implementation of centralized price matrices on the new “Hughes Unified” operating system. During the third and fourth quarters of fiscal 2002, the Company closed approximately 30 branches in the Electrical & Plumbing Group because they did not strategically fit into the Company’s core businesses and/or they did not perform to expectations. In fiscal 2003, three additional branches were closed. These branches generally yielded lower gross margins in relation to the other branches. Gross margin was also favorably impacted by margin improvement programs initiated during fiscal 2002, including increases in vendor rebate programs, focused purchasing, and favorable results from the Company’s dead stock program, which was initiated in fiscal 2003. The newly acquired Utiliserve branches negatively impacted gross margins because of the lower margins generated on a higher proportion of direct shipments. Competitive pricing pressures in the commercial construction sector also unfavorably impacted gross margins.

The 370 and 250 basis point improvements in gross margin in the third quarter and first nine months of fiscal 2003, respectively, were due to increased sales prices for certain commodity-based products, including stainless steel and nickel alloys. The Industrial Group’s gross margins have benefited from favorable nickel pricing. Nickel pricing increased approximately 10% compared to the prior year’s first nine months. Gross margin was also favorably impacted by increases in vendor rebate programs.

Gross margins in the Water & Sewer/Building Materials Group remained relatively flat on a comparable basis. The 10 basis point reduction in gross margin in the third quarter of fiscal 2003 was primarily attributable to competition and deflationary pricing pressure on PVC and ductile pipe products. On a year-to-date basis, gross margin improved 10 basis points as a result of the favorable impact of margin improvement programs initiated during fiscal 2002, including increases in vendor rebate programs, focused purchasing, and favorable results from the Company’s dead stock program, which was initiated in fiscal 2003.

	Operating Expenses									% of Net Sales
	Three Months Ended									Three Months Ended
	November 1, 2002		October 26, 2001		Dollar Variance			Percent Variance		November 1, 2002		October 26, 2001
Personnel expenses	$	96,627	$	93,294	$	3,333		3.6	%	12.0	%	11.8	%
Other selling, general and administrative expenses		45,672		42,615		3,057		7.2	%	5.7	%	5.4	%
Depreciation and amortization		5,142		7,680		(2,538	)	(33.0	)%	0.6	%	1.0	%
Provision for doubtful accounts		2,402		2,867		(465	)	(16.2	)%	0.3	%	0.4	%

	$	149,843	$	146,456	$	3,387		2.3	%	18.6	%	18.5	%


	Operating Expenses									% of Net Sales
	Nine Months Ended									Nine Months Ended
	November 1, 2002		October 26, 2001		Dollar Variance			Percent Variance		November 1, 2002		October 26, 2001
Personnel expenses	$	287,955	$	288,060	$	(105	)	—		12.2	%	12.1	%
Other selling, general and administrative expenses		138,380		134,766		3,614		2.7	%	5.8	%	5.7	%
Depreciation and amortization		14,928		23,589		(8,661	)	(36.7	)%	0.6	%	1.0	%
Provision for doubtful accounts		8,148		7,615		533		7.0	%	0.3	%	0.3	%

	$	449,411	$	454,030	$	(4,619	)	1.0	%	19.0	%	19.1	%

As a percentage of net sales, personnel expenses totaled 12.0% and 11.8% in the third quarter of fiscal 2003 and 2002, respectively. The 20 basis point increase was largely due to lower comparable branch sales levels and normal pay rate increases combined with higher employee health insurance expense and incentive compensation expense. The Company’s workforce remained essentially flat with 7,239 and 7,278 employees as of October 26, 2001 and November 1, 2002, respectively. At November 1, 2002, this included 154 additional employees as a result of the acquisition of Utiliserve. Employee health insurance expense increased $1,356 as a result of higher inpatient claims and continued increases in overall health care costs, including prescription drug costs. Personnel expenses were also impacted by an increase of $745 in incentive compensation expense due to increased profitability along with compensation expense related to the 400,000 shares of restricted stock issued during fiscal 2002. These increases were partially offset by a decrease of $688 in discretionary type expenses, including overtime and contract labor, as a result of the cost reduction programs initiated in fiscal 2002.

Other selling, general and administrative expenses as a percentage of net sales totaled 5.7% and 5.4% in the third quarter of fiscal 2003 and 2002, respectively. This increase was primarily due to lower comparable branch sales levels and higher losses associated with the Company’s casualty insurance program of $1,508 and certain professional fees associated with consulting for various projects of $618. Other selling, general and administrative expenses totaling $426 related to the new “Hughes Unified” operating system currently being implemented by the Company.

As a percentage of net sales, personnel expenses remained relatively flat at 12.2% and 12.1% in the first nine months of fiscal 2003 and 2002, respectively. The additional week added $7,200 of personnel expenses in the first quarter of fiscal 2003. Had the additional week been excluded from operating results, personnel expenses in the first nine months of fiscal 2003 would have been $280,755, a $7,305 or 2.5% decrease from the prior year’s first nine months. Personnel expenses were also favorably impacted by reductions of $3,021 in discretionary type expenses, including overtime and contract labor, as a result of the cost reduction programs initiated in fiscal 2002. Severance expense also declined in fiscal 2003 and totaled $475 and $2,634 in the first nine months of fiscal 2003 and 2002, respectively. Approximately $1,500 of severance expense in fiscal 2002 related to the Company’s separation agreement with its former president, which occurred during the first quarter of fiscal 2002. Incentive compensation expense under stock plans of $1,878 and $540 in the first nine months of fiscal 2003 and 2002, respectively, primarily related to the 400,000 shares of restricted stock issued to key executives during fiscal 2002 as previously discussed above.

Other selling, general and administrative expenses as a percentage of net sales totaled 5.8% and 5.7% in the first nine months of fiscal 2003 and 2002, respectively. The additional week added $1,216 of other selling, general and administrative expenses in the first quarter of fiscal 2003. Had the additional week been excluded from operating results, other selling, general and administrative expenses in the first nine months of fiscal 2003 would have been $137,164, a $2,398 or 1.8% increase from the prior year’s first nine months. This increase was primarily due to a non-recurring donation totaling $800 made by the Company in the second quarter of fiscal 2003 to the Hughes Supply, Inc. Foundation, a not-for-profit charitable organization, combined with higher losses on the Company’s casualty insurance program of $1,752.

Depreciation and amortization decreased $8,661 or 36.7% in the first nine months of fiscal 2003 compared to the prior year’s first nine months. Of the total decrease, $6,816 related to the amortization of goodwill, which was eliminated under FAS 142. The remaining decrease of $1,845 was primarily due to reduced capital spending in fiscal 2003 along with the elimination of depreciation expense related to the Company’s forklift fleet and trailers. Certain of these assets were sold and subsequently leased back by the Company in August 2001.

Interest and other income totaled $2,497 and $2,192 in the third quarter of fiscal 2003 and 2002, respectively. For the first nine months of fiscal 2003 and 2002, interest and other income totaled $8,006 and $8,687, respectively. Included in interest and other income were gains (losses) on sales of property and equipment which totaled $75 and ($86) in the third quarter of fiscal 2003 and 2002, respectively, and $1,395 and $569 in the first nine months of fiscal 2003 and 2002, respectively. The overall increases in gains on sales of property and equipment were due to the sale of certain land and building assets resulting from the closure and consolidation of branches. Excluding gains on sales of property and equipment, interest and other income totaled $2,422 and $2,278 in the third quarter of fiscal 2003 and 2002, respectively, and $6,611 and $8,118 in the first nine months of fiscal 2003 and 2002, respectively. The decrease in the nine months ended November 1, 2002 was primarily attributable to non-recurring interest income of $2,055 in fiscal 2002 due to the collection in full of the $25,000 short-term note agreement.

Interest expense totaled $7,658 and $8,658 in the third quarter of fiscal 2003 and 2002, respectively. In the first nine months of fiscal 2003 and 2002, interest expense totaled $23,060 and $27,928, respectively. The decreases in fiscal 2003 were primarily due to a reduction of average outstanding debt balances combined with lower interest rates in fiscal 2003. Borrowing levels were reduced in the first and second quarters of fiscal 2003 largely as a result of working capital improvements. In the third quarter of fiscal 2003, the Company made additional borrowings under its revolving credit agreement in order to fund the acquisition of Utiliserve. As a result, total debt increased from $422,846 as of January 25, 2002 to $455,914 as of November 1, 2002.

Net income totaled $19,775 and $17,742 in the third quarter of fiscal 2003 and 2002, respectively. Diluted earnings per share was $0.84 and $0.76 in the third quarter of fiscal 2003 and 2002, respectively. For the first nine months of fiscal 2003, net income totaled $50,715 and $38,826, respectively. Diluted earnings per share was $2.14 and $1.66 in the first nine months of fiscal 2003 and 2002, respectively. The factors impacting net income and diluted earnings per share have been enumerated above.

The working capital increase of $24,581 was driven by higher levels of accounts receivable and inventories partially offset by lower levels of cash and other current assets and higher accounts payable and other current liabilities levels. The higher accounts receivable, inventories, accounts payable, and other current liabilities balances reflect the acquisition of Utiliserve, which added $23,035 of working capital at November 1, 2002, and the timing of payments, which represent a normal trend for the third quarter.

In the first nine months of fiscal 2003 and 2002, cash flows provided by operating activities totaled $69,888 and $127,407, respectively. This decrease was primarily due to the addition of $61,713 of gross accounts receivable and $16,049 of inventories in the first nine months of fiscal 2003 compared with an increase of $5,228 of gross accounts receivable and a decrease of $54,744 of inventories in the comparable period in fiscal 2002. Partially offsetting these changes were increases in net income and accounts payable. Accounts receivable increased as a result of higher sales volumes. Overall, days sales outstanding for accounts receivable remained relatively flat in both periods. Inventories and accounts payable increased as a result of strategic purchases, primarily in the Industrial Group.

The Company’s expenditures for property and equipment totaled $13,321 and $11,770 in the first nine months of fiscal 2003 and 2002, respectively. Of the total $13,321 of capital expenditures, $5,766 related to the new “Hughes Unified” operating system currently being implemented by the Company. Capital expenditures are expected to be approximately $17,000 in fiscal 2003, of which approximately $7,000 to $8,000 relates to the new “Hughes Unified” operating system. This excludes amounts for any business acquisitions, the Company’s new corporate headquarters facility in Orlando, Florida, and a new warehouse in Miami, Florida.

Proceeds from the sale of property and equipment totaled $3,671 and $8,150 in the first nine months of fiscal 2003 and 2002, respectively. The decrease was due to the sale and subsequent lease-back of substantially all of the Company’s forklift fleet and certain of the Company’s trailers in August 2001, which generated cash proceeds of approximately $5,700. Partially offsetting this decrease were proceeds from sales of certain land and building assets in fiscal 2003 resulting from the closure and consolidation of branches.

During the first nine months of fiscal 2003 and 2002, cash payments for business acquisitions totaled $33,422 and $31,809, respectively. In August 2002, the Company acquired one hundred percent of the capital stock of Utiliserve, a wholesale distributor of electrical transmission and distribution products and services to the U.S. electric utility industry. The Company paid $33,422 for the equity value of Utiliserve and assumed $54,536 and $27,849 of long-term and other liabilities, respectively.

Total debt was $455,914 and $422,846 as of November 1, 2002 and January 25, 2002, respectively, reflecting an increase of $33,068 or 7.8%. The increase in total debt was due to borrowings made under the Company’s revolving credit agreement to fund the acquisition of Utiliserve. Net borrowings (payments) on the Company’s revolving credit agreement totaled $34,605 and $(89,717) in the first nine months of fiscal 2003 and 2002, respectively. Scheduled principal payments on the Company’s senior notes totaled $6,572 and $4,667 in the first nine months of fiscal 2003 and 2002, respectively. Other principal payments, including debt of acquired entities, totaled $54,154 and $8,684 in the first nine months of fiscal 2003 and 2002, respectively.

As of November 1, 2002, the Company had $2,319 of cash and cash equivalents and $197,622 of unused borrowing capacity (subject to borrowing limitations under long-term debt covenants) to fund ongoing operating requirements and anticipated capital expenditures. The Company believes it has sufficient borrowing capacity and cash on hand to take advantage of growth and business opportunities and to fund share repurchases. The Company expects to continue to finance future expansion on a project-by-project basis through additional borrowing or through the issuance of stock.

	Three Months Ended				Nine Months Ended
	November 1, 2002		October 26, 2001		November 1, 2002		October 26, 2001
Net income, as reported	$	19,775	$	17,742	$	50,715	$	38,826
Add: goodwill amortization, net of tax		—		1,448		—–		4,021

Adjusted net income	$	19,775	$	19,190	$	50,715	$	42,847


Basic earnings per share, as reported	$	0.85	$	0.77	$	2.18	$	1.67
Add: goodwill amortization, net of tax		—		0.06		—		0.17

Adjusted basic earnings per share	$	0.85	$	0.83	$	2.18	$	1.84


Diluted earnings per share, as reported	$	0.84	$	0.76	$	2.14	$	1.66
Add: goodwill amortization, net of tax		—		0.06		—		0.17

Adjusted diluted earnings per share	$	0.84	$	0.82	$	2.14	$	1.83

FAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001. FAS 143, which is effective for the Company beginning in fiscal 2004, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company does not expect the adoption of FAS 143 in fiscal 2004 to have a material impact on its consolidated financial statements.

FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued in August 2001. This standard establishes a single accounting model for long-lived assets to be disposed of, including segments, and supercedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and Accounting Principles Board (“APB”) Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under FAS 144, goodwill is no longer allocated to long-lived assets, and, therefore, no longer subjected to testing for impairment as part of those assets, but tested separately as prescribed by FAS 142. In addition, FAS 144 broadens the presentation of discontinued operations to include components of an entity rather than being limited to a segment of a business. The Company adopted FAS 144 as of January 26, 2002. The adoption had no impact on the Company’s consolidated financial statements.

FAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued in April 2002. This newly issued standard rescinds FAS 4, Reporting Gains and Losses from Extinguishment of Debt – an amendment of APB Opinion No. 30, which required all gains and losses from the extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria set forth by APB Opinion No. 30 will now be used to classify those gains and losses. FAS 145 also amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, FAS 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. For the provisions related to the rescission of FAS 4, FAS 145 is effective for the Company beginning in fiscal 2004. The remaining provisions of FAS 145 are effective for the Company in fiscal 2003. The Company does not expect the adoption of FAS 145 to have a material impact on its consolidated financial statements.

FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in June 2002 and addresses financial accounting and reporting for costs associated with exit or disposal activities. This standard requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under the previous guidance of Emerging Issues Task Force (“EITF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), certain exit costs were recorded upon management’s commitment to an exit plan. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged. The Company will adopt FAS 146 effective January 1, 2003 and does not expect the adoption to have a material impact on its consolidated financial statements.

The Company’s significant accounting policies are more fully described in the notes to 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, impairment of long-lived assets, and self-insurance reserves are described in the Annual Report. As of November 1, 2002, there have been no material changes to any of the critical accounting policies with the exception of inventories as discussed below.

not be returned, transferred, or sold. As a result of this analysis and these programs, the Company reduced its estimate of inventory reserves required for potential dead stock, which resulted in an adjusted reserve of $7,773 at November 1, 2002 compared to $9,849 at January 25, 2002. This adjustment favorably impacted gross margin in the third quarter and first nine months of fiscal 2003 by 42 and 30 basis points, respectively (See Gross Profit and Gross Margin section of management’s discussion and analysis of financial condition and results of operations for additional discussion on the Company’s gross profit and gross margin).

At November 1, 2002, the Company had $99,419 of outstanding variable-rate debt. Based upon a hypothetical 10% increase or decrease in interest rates from their November 1, 2002 levels, the market risk with respect to the Company’s variable-rate debt would not be material. The Company manages its interest rate risk by maintaining a balance between fixed and variable rate debt and by entering into interest rate swaps.

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.

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.

Florida		59-0559446
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Common Stock		Outstanding as of December 12, 2002
$1 Par Value		23,781,764

		Page(s)
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of November 1, 2002 (unaudited) and January 25, 2002	3

	Consolidated Statements of Income for the Three and Nine Months Ended November 1, 2002 and October 26, 2001 (unaudited)	4

	Consolidated Statements of Cash Flows for the Nine Months Ended November 1, 2002 and October 26, 2001 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6–16

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17–29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K	30

SIGNATURES		30

CERTIFICATIONS		31–32

Balance at January 25, 2002	$	3,102
Expense (income)		(155	)
Less payments:
Severance		(108	)
Lease		(939	)
Other branch closure costs		(339	)
Less non-cash asset write-downs		(176	)

Balance at November 1, 2002	$	1,385

	Nine Months Ended
	November 1, 2002		October 26, 2001
Income taxes paid	$	19,269	$	20,747
Interest paid		15,045		20,348
Property acquired with debt		4,653		—

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	November 1, 2002			January 25, 2002
Working capital	$	612,856		$	588,275
Current ratio		2.7 to 1			3.1 to 1
Long-term debt-to-capital		40.2	%		40.4	%

	HUGHES SUPPLY, INC.

Date: December 12, 2002	By:	/s/	DAVID H. HUGHES

			David H. Hughes
			Chairman of the Board
			and Chief Executive Officer

Date: December 12, 2002	By:	/s/	J. STEPHEN ZEPF

			J. Stephen Zepf
			Chief Financial Officer
			and Chief Accounting Officer