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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 2005

OR

For the transition period from                     to                     

Commission File No. 001-08772

HUGHES SUPPLY, INC.

(Exact name of registrant as specified in its charter)

One Hughes Way Orlando, Florida 32805

(Address of principal executive offices)

(407) 841-4755

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act)  x  Yes    ¨  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter ($30.46 per share as of July 30, 2004): $1,795,567,289

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 66,421,867 shares of common stock ($1.00 par value) outstanding as of April 6, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of the Definitive Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on May 19, 2005 are incorporated by reference in Part III of this Report.

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FORWARD-LOOKING STATEMENTS

Some of the statements set forth or incorporated by reference in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions created by those sections. When used in this report and the information incorporated by reference herein and therein, the words “believe,” “anticipate,” “estimate,” “expect,” “may,” “will,” “should,” “plan,” “intend,” “project” or phrases such as “will be well-positioned to,” “will benefit,” “will gain” and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, our expectations may not prove to be correct. Actual results or events may differ significantly from those indicated in our forward-looking statements as a result of various important factors, as discussed in the section entitled “Risk Factors” in Item 1. We assume no obligation to publicly update or revise our forward-looking statements, except to the extent required by law. The following should be read in conjunction with our consolidated financial statements and the notes thereto filed as part of this report.

PART I

ITEM 1.  BUSINESS

FISCAL YEAR

Beginning with fiscal year 2005 and thereafter, our fiscal year is a 52-week period ending on January 31. Previously, our fiscal year was a 52- or 53-week period ending on the last Friday in January. The change in our fiscal year ending date was made to simplify reporting and to allow for better comparability between reporting periods. Fiscal year 2005 and fiscal year 2004 each contained 52 weeks while fiscal year 2003 contained 53 weeks. The additional week in fiscal year 2003 was included in the first quarter.

OUR BUSINESS

Founded in 1928, we are one of the largest diversified wholesale distributors of construction, repair and maintenance- related products in the United States. We distribute over 350,000 products to more than 100,000 customers through 503 branches located in 40 states and two Canadian provinces. Our principal customers include water and sewer, plumbing, electrical, and mechanical contractors; public utilities; municipalities; property management companies; and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States, from which we derived 48% and 25%, respectively, of our net sales for the fiscal year ended January 31, 2005. We operate in 14 of the 15 fastest growing states in the United States, which collectively contributed 76% of our consolidated net sales during the fiscal year ended January 31, 2005.

We manage our business on a product line basis and report the results of our operations in seven operating segments and an Other category. During the fourth quarter of fiscal year 2005, we revised our segment reporting to include the Building Materials product line as its own separate operating segment due to the growth of and allocation of management resources to this product line. The seven operating segments are Water & Sewer; Plumbing/Heating, Ventilating and Air Conditioning (“HVAC”); Utilities; Maintenance, Repair and Operations (“MRO”); Electrical; Industrial Pipe, Valves and Fittings (“PVF”); and Building Materials. We include our Fire Protection and Mechanical product lines in the “Other” category. Our segments are complementary, enabling us to be a single-source provider and providing us with opportunities to secure a larger share of our customers’ business. Our customers use our products for commercial, residential, industrial and public infrastructure construction projects, and related maintenance, repair and operations. We believe the diversity of the end-markets we serve and our broad offering of replacement, repair and maintenance products help lessen the impact on us of the seasonality and cyclicality that affect the construction industry as a whole.

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We believe that our more than 76 years of experience delivering superior customer service, the depth and breadth of our product offerings, and our sales force’s extensive technical expertise, make us a market leader in our businesses. The following table illustrates our estimated domestic market position (based on net sales) in each of our product lines, the primary end-markets served and the principal products sold:

OUR INDUSTRY

Based on industry data and management estimates, we believe that the U.S. wholesale construction, repair and maintenance distribution market collectively generated approximately $200 billion of revenues in 2004 and is highly fragmented. We are one of the largest diversified wholesale distributors in the United States (based on net sales), and we have approximately a 2% overall market share. Spending in the U.S. construction, repair and maintenance industries generally follows trends in the domestic economy, although different factors affect the level of spending in various market segments, which can result in significantly different growth rates across those segments.

We believe that the following industry trends will benefit our business:

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OUR COMPETITIVE STRENGTHS

We believe the following competitive strengths are the keys to our success:

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OUR BUSINESS STRATEGY

We intend to become the leading diversified distributor of construction, repair and maintenance-related products in the United States. In pursuing that goal, we expect to significantly increase our earnings and return on invested capital, which we believe will lead to increased shareholder value. Management uses internal return on invested capital to measure how effectively capital is allocated to core operations and uses external return on invested capital in assessing potential acquisition candidates. Our multi-year strategy focuses on organic growth; strategic acquisitions; and best-in-class operations.

The key elements of our strategy are to:

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OUR BUSINESSES

We distribute products and offer services in the following major product categories, which correspond to our reportable operating segments. A summary of net sales, operating income, assets and accounts payable for our operating segments is incorporated herein by reference to Note 2 to the consolidated financial statements in Item 8 of this Form 10-K.

Water & Sewer

We provide a complete line of water, sewer and storm-drain products to serve the needs of both contractors and municipalities in all aspects of the water and wastewater industries. Our waterline products transmit potable and non-potable water from the source to treatment plants, storage towers and pumping stations and ultimately to homes and businesses. Also included in this product category is our concrete business, which complements our Water & Sewer business by manufacturing prefabricated concrete vaults used for sewer and storm drain applications. Because all commercial and residential structures require water and sewer systems, we consider our Water & Sewer business to be a leading indicator of future construction activity. Our Water & Sewer business operates primarily in the southeast, southwest and western United States through 109 branches located in 23 states.

Products and Services.  The products in our Water & Sewer segment include waterworks products such as piping, fire hydrants, water meters, storm drains, irrigation products, backflow prevention devices, concrete sewer products and concrete electrical and telephone vaults. In addition, we offer specialized industry services including leak detection, water system audits, hot tapping, manhole rehabilitation, line stopping, control valve testing and repair and engineered plant products and services.

Customers.  The Water & Sewer segment primarily serves the residential, commercial and public infrastructure markets with customers including underground utility contractors, utility companies, site developers, municipalities and government agencies.

Competition.  We are the second largest distributor of water and sewer products in the United States. Our primary competitors in the water and sewer market include National Waterworks, Inc. and Ferguson Enterprises, Inc. (a subsidiary of Wolseley plc) on a national level and other regional and local distributors.

Plumbing/HVAC

We are one of the nation’s largest distributors of plumbing supplies, offering complete inventories for one-stop service. Our plumbing products are sold primarily to commercial and residential contractors and homebuilders for bathroom and kitchen installation. Also included in this segment is our HVAC business, which distributes air conditioning and heating equipment. Our HVAC products are sold to contractors for the installation and repair of central air conditioners, furnaces and refrigeration systems. Our Plumbing/HVAC business operates primarily in the southeast, southwest and western United States through 158 branches located in 19 states.

Products and Services.  The products in our Plumbing/HVAC segment include residential and commercial water heaters, furnaces, heat pumps, pipe and fittings, air conditioning units, plumbing fixtures, faucets and accessories, pumps and sprinkler heads, mechanical valves and repair parts. In addition, our dedicated technical personnel provide complete plastics fabrication, pipe cutting and threading, project management, procurement and field services.

Customers.  The Plumbing/HVAC segment serves the residential, commercial and industrial markets with customers

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including plumbing, mechanical, HVAC and remodeling contractors; homebuilders; commercial and industrial purchasing agents; and municipalities.

Competition.  We are the second largest wholesale distributor of plumbing products in the United States. Our primary national competitors in the Plumbing/HVAC market include Ferguson Enterprises, Inc., Noland Company, Hajoca Corporation, Winholesale, Inc. and Watsco Inc.

Utilities

Following our acquisition of Southwest Power, Inc./Western States Electric, Inc. (collectively referred to as “SWP/WSE”) on November 1, 2004, we are the nation’s largest distributor of transmission and distribution products to electric utility companies. We believe that there are opportunities for us to develop enhanced relationships with municipal, cooperative and investor-owned electric utility companies, which we believe the wholesale distribution industry historically has underserved. As utility companies seek ways to gain efficiencies in costs and working capital, they are increasingly turning to wholesale distributors for purchasing and inventory management services. In addition to broad and deep inventories, we offer supply chain management services that lower costs and improve service levels. Our Utilities business operates throughout the United States through 62 branches, serving utility customers in 26 states and one Canadian province.

Products and Services.  The products in our Utilities segment include electrical distribution equipment, wire and cable, energy products, electrical meters and pole line hardware. In addition, we offer value-added services that include warehouse integration and outsourcing; substation, transmission and distribution packaging; meter testing and repair; field-testing; tool repair; and storm and emergency response.

Customers.  The Utilities segment primarily serves the public infrastructure markets with customers including various municipal, cooperative and investor-owned electric utilities.

Competition.  We are the largest distributor of electric utilities products in the United States. Our primary competitors in the electric utilities market are Wesco International, Inc. on a national level and various regional independent distributors.

MRO

Following our acquisition of Century Maintenance Supply, Inc. (“Century”) on December 19, 2003, we are the nation’s largest MRO products supplier in the apartment MRO industry. Currently, there are approximately 20 million apartment units in the United States that continually require routine maintenance and repair in order to retain existing tenants and attract new ones. Though low apartment occupancy levels created a challenging sales environment during fiscal year 2005, the apartment MRO market has historically been less cyclical than new construction markets as maintenance work is required regardless of economic and/or weather conditions. With our full range of MRO supplies that are available to be shipped for same or next-day delivery, we are able to provide our customers with the items they need quickly and efficiently. Our MRO business operates throughout the United States currently through 48 branches located in 28 states.

Products and Services.  The products in our MRO segment include the items needed to maintain an apartment unit or complex in good working condition, such as plumbing and electrical supplies, appliances and parts, hardware, door and window parts, HVAC equipment and parts, pool maintenance supplies, lawn and garden and janitorial supplies. Our services include custom cutting and building of products such as mini-blinds, drawers and screens; lock re-keying for bulk lock orders and customer-specific activities, such as seminars and customized ordering.

Customers.  The MRO segment primarily serves the multi-family housing market with commercial customers that include local, regional and national property management companies that either own or manage apartment complexes.

Competition.  Our primary competitors in the apartment MRO market include Home Depot Supply and Wilmar Industries, Inc. (a subsidiary of Interline Brands, Inc.) on a national level, and other local wholesale and retail hardware and home improvement stores.

Electrical

We were founded over 76 years ago as a distributor of electrical supplies. Our Electrical segment provides electrical construction and maintenance products and related services to the commercial, residential and industrial markets. While we have expanded into other product lines and markets, the Electrical segment remains an important part of our business and an essential complement to our other product lines. Our Electrical business operates primarily in the southeastern and southwestern United States through 38 branches located in 5 states.

Products and Services.  The products and services in our Electrical segment include wire management products, electrical distribution equipment, wire and cable, automation equipment, tools and fasteners, lamps, light fixtures, motor controls, energy products, wiring devices, data/communications products and storeroom/job trailer management.

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Customers.  The Electrical segment serves the commercial, residential and industrial markets with customers including commercial businesses, electrical contractors, industrial companies and original equipment manufacturers (“OEMs”).

Competition.  We are a market-leading distributor of electrical products in the southeastern United States. Our primary national competitors in the electrical market include Graybar Electric Company, Inc., Consolidated Electrical Distributors, Inc., Rexel, Inc., Wesco International, Inc., GE Supply (a division of General Electric Company), Sonepar USA and numerous smaller electrical distributors.

Industrial PVF

We offer one of the nation’s largest inventories of high quality, specialty stainless and high nickel alloy industrial PVF products for industrial, mechanical and specialty uses. Our extensive depth and breadth of products and key relationships with the world’s leading manufacturers enable us to deliver solutions to a wide range of industrial and commercial customers. Our Industrial PVF business operates primarily in the southwestern United States through 36 branches located in 15 states and one Canadian province.

Products and Services.  The products in our Industrial PVF segment include pipe, valves, flanges, fittings, plate, sheet and tubing, all offered in commodity and specialty materials and in various temperature and pressure ratings. Services include valve automation and repair, piping fabrication and pipe cutting and grooving.

Customers.  The Industrial PVF segment primarily serves the industrial markets with customers that include power, petrochemical, food and beverage, pulp and paper, mining, marine and pharmaceutical companies; industrial and mechanical contractors; fabricators; wholesale distributors; exporters; and OEMs.

Competition.  We are a market-leading distributor of industrial PVF products in the southwestern United States. Our primary national competitors in the Industrial PVF market include Wilson Pipe & Supply Inc., McJunkin Corporation, Ferguson Enterprises, Inc. and Red Man Pipe and Supply Company.

Building Materials

As one of the nation’s largest distributors of specialty construction supplies, we are able to provide our customers with field-tested and proven brand names for a wide range of building materials. Our Building Materials’ business operates in the southeastern United States through 28 branches located in five states.

Products and Services.  Our Building Materials’ segment includes rebar fabrication, lumber, wire mesh, concrete and masonry supplies and accessories, bridge rail, overhang brackets, tilt-up bracing rental and lifting/bracing inserts, bearing pads, sealants, waterproofing and fireproofing materials, commercial washroom specialties, tools and accessories.

Customers.  The Building Materials segment primarily serves the commercial, industrial and public infrastructure markets, with customers such as general contractors and subcontractors, including concrete, masonry and road and bridge contractors.

Competition.  Our primary competitors in the building materials market include White Cap Construction Supply (a division of Home Depot), Construction Materials, Inc., Ram Tool and Supply and numerous smaller distributors.

Other

Our “Other” product category includes our Fire Protection and Mechanical businesses.

Fire Protection.  We are one of the nation’s largest distributors of fire protection products offering complete fire protection pre-fabrication capabilities, which allows us to construct, deliver and install entire fire protection systems for our customers. Our Fire Protection branches and fabrication facilities are located strategically within our large network of Water & Sewer branches, giving our customers access to materials for both aboveground and underground applications. Our Fire Protection business operates throughout the United States through 20 branches located in 13 states.

Products and Services.  Our Fire Protection product line includes sprinkler heads and devices, steel pipe and fittings, backflow prevention devices, valves, hydrants, air compressors and fabrication.

Customers.  The Fire Protection product line serves fire protection contractors, subcontractors and builders in the commercial, residential and industrial markets.

Competition.  Our primary national competitors in the fire protection market include Pacific Fire Safety (a division of Ferguson Enterprises, Inc.), Viking Fire Group, Tyco Fire Products and Reliable Automatic Sprinkler Company, Inc.

Mechanical.  Our Mechanical business offers a complete inventory of valves, actuators and accessories, and a variety of consulting services. Our Mechanical business operates in the southeastern United States through four branches located in three states.

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Products and Services.  Our Mechanical product line includes carbon, stainless and thermoplastic pipe, valves, fittings and accessories; steam traps; actuators; valve positioners; gauges; sanitary piping systems; valve automation and repair; high density polyethylene (hdpe) pipe fabrication and field installation and pipe cutting and grooving.

Customers.  The Mechanical product line serves the commercial and industrial markets, with customers including fabricators, OEM’s, industrial subcontractors, mechanical contractors, exporters, purchasing agents, maintenance departments, engineering departments and planners.

Competition.  Our primary competitors in the mechanical market include Ferguson Enterprises, Inc., McJunkin Corporation, Winholesale, Inc. and Home Depot Supply.

OUR CUSTOMERS

We currently serve over 100,000 active customers who are typically professionals who choose their vendors primarily on the basis of product availability, relationships with and expertise of sales personnel, price and the quality and scope of services offered. For the year ended January 31, 2005, no single customer accounted for more than 1% of total sales and, as a group, the top ten customers comprised less than 5% of total sales. Additionally, professional customers generally buy in large volumes, are repeat buyers because of their involvement in longer-term projects and require specialized services. We do not market our products to retail consumers. We differentiate ourselves with the depth and breadth of products offered and services provided, including fabrication, integrated supply, kitting, design assistance, material specifications, scheduled job site delivery, follow-up job site visits to ensure satisfaction and technical product services (including blueprint take-off and computerized order quotes).

VENDORS

To be the best customer service company in each of the industries we serve, we must offer, and provide on a timely basis, a broad range of products our customers need, often on a special order basis. To accomplish this, we purchase from over 12,000 vendors; however, approximately 800 vendors comprised over 90% of our consolidated purchases for fiscal year 2005 compared to approximately 900 vendors in fiscal years 2004 and 2003. No single vendor accounted for more than 5% of our total purchases during the fiscal years 2005, 2004 and 2003. We have a centralized merchant relations department, which is dedicated to fostering key vendor relationships, consolidating purchasing volume and refining agreements with our vendors. Key initiatives in this area include:

We expect the continued development of these vendor initiatives, together with the implementation of our integrated distribution platform and a state-of-the-art purchasing system upgrade, will significantly improve profitability, supply chain efficiencies and customer service, while helping us achieve our goal of efficiently buying, operating and selling as one integrated company.

DISTRIBUTION AND LOGISTICS

Our distribution network consists of over 500 branches and four central Plumbing/HVAC distribution centers in the United States. The efficient operation of our distribution network is critical in providing quality service to our customer base. Our central distribution centers and branches use warehouse management technology to optimize receiving, inventory control and picking, packing and shipping functions. Our purchasing agents in our branches use a computerized inventory system to monitor stock levels, while central distribution centers in our Plumbing/HVAC segment in Arizona, Florida, North Carolina and Ohio provide purchasing assistance as well as a broad stock of inventory that supplements the inventory of our Plumbing/HVAC branches. In addition, we use several of our larger branches in other parts of the United States as distribution points for certain product lines.

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The majority of customer orders are shipped from inventory at our branches. In order to maintain complete control of the delivery process, we use approximately 3,400 vehicles from our total vehicle fleet to deliver products to our customers. We also accommodate special orders from our customers and facilitate the shipment of certain large volume orders directly from the manufacturer to the customer. Orders for larger construction projects normally require long-term delivery schedules throughout the period of construction, which in some cases may continue for several years.

We are continuously searching for ways to leverage our people, facilities and fleet. In November 2003, we opened a megacenter branch facility in Miami, Florida in which six product lines operate in a two-building campus on 22 acres. The megacenter branch configuration will increase our efficiency and make it easier for the product lines to work together and for customers to purchase from Hughes. Although the product lines share a common facility, their operations will not be fully integrated until the completion of our Hughes Unified implementation, which will allow us to more fully integrate certain functions, including warehousing, administration and fleet operations of our product lines and provide future opportunities for purchasing and inventory management efficiencies. We are currently moving into a similar megacenter facility in the Atlanta area and expect to complete another similar facility in the Orlando area within the next two years. We will continue to evaluate future implementations of this branch configuration in other geographic areas.

SALES

We employ a specialized and experienced sales force for each of our product lines, including approximately 1,000 outside sales representatives who work with contractors, subcontractors, professional buyers, property management companies and municipalities. Our sales representatives provide product specifications and usage data, design solutions and develop job quotes in an effort to help customers fulfill their needs. Additionally, approximately 1,000 inside sales account representatives and 400 counter associates expedite orders, deliveries, quotations, requests for pricing and the release of products for delivery.

MARKETING

Our marketing department’s focus is to develop innovative opportunities that drive incremental sales, increase customer retention and build long-term business relationships across the supply chain. Our marketing programs build Hughes brand awareness and bring value to the supply chain by helping our vendors market their products to a broad customer base. These programs also give our customers best value in quality and cost with special offers/services through our vendor partners. We are continuing to execute our best-in-class marketing programs, and believe the following marketing materials and programs are unparalleled in our industry and differentiate us from our competitors:

INFORMATION TECHNOLOGY

Our information technology (“IT”) systems are capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management, sales analysis and accounting. In addition, our customers and sales representatives rely on these systems for real-time information on product pricing, inventory availability and order status. The systems also provide management with information relating to sales, inventory levels, customer payments and other data that is essential for us to operate efficiently and provide a high level of service to our customers.

We believe that our continued investment in upgrading, consolidating and integrating our IT systems is necessary to provide a state-of-the art platform to continue our strategic growth, efficiency and customer service programs. Our IT initiatives will help us increase operational efficiencies, particularly in the area of working capital management; improve information flow,

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which will aid in decision-making; provide a means for decreasing transaction costs; and provide us with the infrastructure necessary to realize further administrative cost savings associated with past and future business acquisitions.

We continue to implement the Hughes Unified framework, which includes the Eclipse and Sx.Enterprise operating systems. These are e-commerce enabled, customer fulfillment, inventory management, logistics and distribution management systems designed specifically for construction and contractor-oriented distributors. We began implementing the Hughes Unified platform in December 2001 and have made significant progress through fiscal year 2005 with over 80% of our branches on the Hughes Unified platform, representing 74% of our total revenues. We expect implementation to be completed within the next year, providing us with better inventory management capabilities, improved matrix pricing disciplines, and a comprehensive view across all our businesses that will facilitate our ability to buy, operate and sell as one company.

In addition, we are implementing best-in-class applications for financial and data warehousing functions. In fiscal year 2005, we began the implementation of Oracle financial systems, which will provide us with the efficiency of one integrated system for financial transaction processing, consolidation, analysis and reporting. We expect the system to be fully implemented within the next year. Once fully implemented, we expect to achieve selling, general and administrative cost savings from the elimination of manual and redundant back-office systems and functions, as well as improved asset management from the higher functionality in credit and collections, and better financial analytics and reporting. Also in fiscal year 2005, we entered into an agreement with Teradata for a data warehousing and business analytics solution, which will enable us to gather the information from our various systems and perform customer, product and vendor profitability analyses, providing us with key information to strategically grow our businesses. The first data warehousing application was delivered in January 2005, with the implementation continuing over the next several years as we explore new reporting and analysis areas. Lastly, in December 2004, we began a search for a best-in-class purchasing system that, along with integration with our inventory and sales management systems, will allow us to better manage our inventory levels.

SEASONALITY

Our operating results are impacted by seasonality. Historically, sales of our products have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these periods. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects.

COMPETITION

We are one of the largest wholesale distributors of our range of products in the United States, and we believe that no other company competes against us across all of our product lines. However, there is significant competition in each of our individual product lines. Our competition includes other wholesalers, manufacturers that sell products directly to their respective customer base and some of our customers that resell our products. To a limited extent, retailers in the markets for plumbing, electrical fixtures and supplies, building materials, MRO supplies and contractors’ tools also compete with us. Competition varies depending on product line, customer classification and geographic market. The principal competitive factors in our business include, but are not limited to, availability of materials and supplies; technical product knowledge and expertise as to application and usage; advisory or other service capabilities; ability to build and maintain customer relationships; same-day delivery capabilities in certain product lines; pricing of products and provision of credit.

INVENTORIES

We are a wholesale distributor of construction, repair and maintenance-related products and therefore maintain extensive inventories to meet the rapid delivery requirements of our customers. Our inventories are based on the needs, delivery schedules and lead times of our customers. We focus on distributing products that leverage our strengths in inventory management, purchasing, specialized sales force, distribution and logistics, credit management and information technology. As of January 31, 2005, our inventories totaled approximately $633.9 million and represented approximately 25% of our total assets.

EMPLOYEES

As of January 31, 2005, we had approximately 9,300 employees. The acquisitions of SWP/WSE, Todd Pipe & Supply, and Standard Wholesale Supply Company added approximately 750 employees to our headcount in fiscal year 2005. We currently have 29 employees who are represented by two labor unions. We consider our relationships with our employees to be good.

ENVIRONMENTAL LAWS

Compliance with federal, state and local environmental protection laws has not, in the past, had a material effect upon our consolidated results of operations and financial condition. As a supplier of construction, repair and maintenance prod - -

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ucts, we distribute a limited number of chemical materials. These materials are packaged for transportation and storage in a manner that prevents our employees from having direct contact with the materials under normal conditions. Our limited exposure to such materials still requires compliance with applicable OSHA, EPA and DOT regulations for the safe handling, storage, and transportation of chemical materials, and we intend to devote increased resources to the maintenance and improvement of our regulatory compliance programs to further mitigate any such exposure. Compliance with such laws will likely require greater effort and expenditures in the future due to increasingly stringent requirements; however, we do not anticipate compliance having a material affect on our consolidated results of operations or financial condition.

RISK FACTORS

Our business is subject to significant risks. You should carefully consider the risks and uncertainties described below and in the other information included or incorporated by reference in this report, including our consolidated financial statements and the notes to those statements filed as part of this report. If any of the events described below actually occur, our business, financial condition or results of operations could be materially and adversely affected.

Risks Related to Our Business

We operate in a highly competitive marketplace, which may result in decreased demand or prices for our products.

The wholesale construction, repair and maintenance distribution industry is highly competitive and fragmented. The principal competitive factors in our business include, but are not limited to:

Our competition includes other wholesalers and manufacturers that sell products directly to their respective customer base and some of our customers that resell our products. To a limited extent, retailers in the markets for plumbing, electrical fixtures and supplies, building materials, MRO supplies and contractors’ tools also compete with us. Competition varies depending on product line, customer classification and geographic market. We may not be successful in responding effectively to competitive pressures, particularly from competitors with substantially greater financial and other resources than us. Furthermore, because of the fragmented nature of the markets in which we operate, we are also susceptible to being underbid by local competition.

Delays in the implementation of our new Hughes Unified operating system, or interruptions in the proper functioning of our information systems, could disrupt our operations and cause unanticipated increases in our costs.

We continue to implement our Hughes Unified operating system and expect implementation to be completed for our existing Hughes businesses within the next year. Subsequent acquisitions could extend the time frame an additional year for those businesses exclusively. We believe that this time frame will enable us to reduce implementation-related risk, minimize customer disruption, reduce system outages and disruptions and spread implementation costs. Delays in the successful implementation of the new systems or their failure to meet our expectations could result in adverse consequences, including disruption of operations or unanticipated increases in costs. In addition, the proper functioning of our information systems is critical to the successful operation of our business. Although we protect our information systems through physical and software safeguards and we have back-up remote processing capabilities, these information systems are still vulnerable to natural disasters, power losses, telecommunications failures, physical or internet access intrusions and similar events. If our critical information systems fail or are otherwise unavailable, we would have to accomplish these functions manually, which could temporarily affect our ability to process orders, identify business opportunities, maintain proper levels of inventories, bill accounts receivable and pay expenses.

We rely heavily on our key personnel and the loss of one or more of these individuals could harm our ability to carry out our business strategy.

We believe that our ability to implement our business strategy and our continued success will largely depend upon the efforts, skills, abilities and judgment of our executive management team. Our success also depends to a significant degree upon our ability to recruit and retain our highly knowledgeable and skilled sales personnel and our sales and marketing, operations and other senior managers. We may not be successful in attracting and retaining these employees or in managing our growth successfully, which may in turn have an adverse effect on our results of operations and financial condition.

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We may not be able to efficiently or effectively integrate newly-acquired businesses into our business or achieve expected profitability from our acquisitions.

Integrating newly-acquired businesses involves a number of risks, including:

If we are unable to effectively integrate strategic acquisitions, our business, results of operations and financial condition could be materially and adversely affected.

We may be unable to achieve our enhanced profitability goals.

We have set goals to progressively improve our profitability ratio over time by enhancing our gross margin ratio and reducing our expense ratio. There can be no assurance that we will achieve our enhanced profitability goals. Factors that could significantly adversely affect our efforts to achieve these goals include, but are not limited to, the following:

Our results of operations are affected by changes in commodity prices and product demand.

Rising commodity prices can have a positive effect on our gross margins in periods of strong product demand or a negative effect when product demand is weak. During periods of rapid price decline, particularly during periods of weak demand, our net sales and gross margins could be negatively affected. As the value of our inventories and related cost of sales are determined by the moving average cost method, the impact of any commodity price changes on our cost of sales will generally occur later than the impact resulting from such changes on our net sales. Our financial results in fiscal year 2005 benefited from the effect of rising prices in the major commodities used in products we distribute, together with strong product demand. If we are negatively impacted by the factors described above, we may not be able to maintain the level of gross margins experienced in fiscal year 2005.

We have substantial fixed costs and, as a result, our operating income is sensitive to changes in our net sales.

A significant portion of our expenses are fixed costs, which do not fluctuate with net sales. Consequently, a percentage decline in our net sales has a greater percentage effect on our operating income. Any decline in our net sales could cause our profitability to be adversely affected. Moreover, a key element of our strategy is managing our assets, including our substantial fixed assets, more effectively, including through sales or other disposals of excess assets. Though we have been able to successfully leverage and manage our fixed assets in fiscal year 2005 through several sale-leaseback transactions and other asset disposals, our failure to rationalize our fixed assets in the time and within the costs we expect could have an adverse effect on our results of operations and financial condition.

Because our business is working capital intensive, we rely on our ability to manage our product purchasing and customer credit policies.

Our operations are working capital intensive, and our investments in inventories, accounts receivable and accounts payable are significant components of our net asset base. We manage our inventories and accounts payable through our purchasing policies and our accounts receivable through our customer credit policies. Approximately 94% of our net sales are credit sales, and although we take measures to secure lien and bond rights, where available, our customers’ ability to pay may depend on the economic strength of the construction industry and regional economies. If we fail to adequately manage our product purchasing or customer credit policies, our working capital and financial condition may be adversely affected.

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We depend on our vendors for materials and supplies. Unexpected product shortages could interrupt our operations and adversely affect our results of operations and financial condition.

In total, we purchase materials and supplies from over 12,000 manufacturers and other vendors, no one of which accounted for more than 5% of our total material and supply purchases during fiscal 2005. Despite this widely diversified base of manufacturers and vendors, we may still experience shortages as a result of unexpected industry demand or production difficulties. If this were to occur and we were unable to obtain a sufficient allocation of products from other manufacturers and vendors, there could be a short-term adverse effect on our results of operations and a long-term adverse effect on our customer relationships and reputation. In addition, we have strategic relationships with key vendors. In the event we are unable to maintain those relationships, we may lose some of the competitive pricing advantages that those relationships offer us, which could, in turn, adversely affect our results of operations and financial condition.

We may not be successful in identifying and consummating future acquisitions, which is an important element of our business strategy.

We intend to continue to grow, in part, through strategic acquisitions. We compete with a number of other companies in pursuing acquisitions, and some of those competitors may be more successful than us in completing future strategic acquisitions. Moreover, acquisitions we propose to make may be subject to antitrust reviews and may face other regulatory challenges. In addition, we may require additional debt or equity financing to fund future acquisitions, and financing may not be available or may only be available on terms we consider unfavorable. As a result of these and other factors, our ability to identify and consummate future acquisitions is uncertain.

If we become subject to material liabilities under our self-insured programs, our financial results may be adversely affected.

We provide workers’ compensation, automobile and product/general liability coverage through a program that is partially self-insured. In addition, we provide medical coverage to our employees through a partially self-insured preferred provider organization. Though we believe that we have adequate insurance coverage in excess of self-insured retention levels, our results of operations and financial condition may be adversely affected if the number and severity of insurance claims increase.

Our indebtedness could limit our ability to operate our business, obtain additional financing and pursue other business opportunities.

As of January 31, 2005, our outstanding indebtedness was $545.7 million compared to shareholders’ equity of $1.25 billion. Our debt level may restrict our pursuit of new acquisition opportunities, require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and prevent us from obtaining additional financing. Our failure to make required debt payments could result in an acceleration of our indebtedness, causing our outstanding indebtedness to become immediately due and payable. In addition, our revolving credit agreement requires us to meet specific financial and financial ratio tests on an ongoing basis. Our failure to meet those tests could limit our ability to borrow additional funds under that agreement and could result in an event of default, which, if left uncured, could lead to an acceleration of our indebtedness. We use those borrowings for working capital and general corporate purposes. A limitation on our ability to obtain additional revolving loans could materially and adversely affect our business.

Risks Related to Our Industry

Our operating results depend on the strength of the general economy, which is beyond our control.

Demand for our products and services depend to a significant degree on construction, repair and maintenance spending in the commercial, residential, industrial and public infrastructure markets. The level of activity in these end-markets depends on a variety of factors that we cannot control, including:

Weather conditions can also affect the timing of construction and the demand for our products and services. Although we have diversified our business to reduce our exposure to the seasonality and cyclicality of the construction markets

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through our focus on expanding our MRO and other replacement-related businesses, we continue to be sensitive to changes in the economy, which may adversely affect our results of operations and financial condition. We are especially susceptible to economic fluctuations in Florida, Texas, Georgia, North Carolina, California and Arizona, which collectively accounted for approximately 64% of our consolidated net sales in fiscal year 2005.

Fluctuating commodity prices may adversely impact our operating results.

The cost of steel, aluminum, copper, nickel alloys, polyvinyl chloride (pvc) and other commodities used in products distributed by us can be volatile. Market demand for these products drives cost volatility, and market demand is beyond our control. Although we attempt to pass increased costs to our customers, we are not always able to do so quickly or at all. Significant fluctuations in the cost of such commodities have adversely affected and in the future may adversely affect our results of operations and financial condition.

The movement of manufacturing facilities overseas may adversely affect our operating results.

The U.S. manufacturing industry has experienced, and is expected to continue to experience, a shift in production to overseas facilities. This shift has resulted in the closings of existing facilities in the United States, which from time to time has reduced, and may in the future reduce, the amount of our business in our Industrial PVF segment. If additional U.S. operations of our customers are moved overseas or if new plant construction in the United States continues to decline, our results of operations and financial condition may be adversely affected.

Risks Related to our Common Stock

Our quarterly results are seasonal and may have an adverse effect on the market price of our common stock.

Our operating results are seasonal. Historically, we have experienced lower operating results in the first and fourth quarters than in the second and third quarters of our fiscal year. Seasonal weather conditions, such as cold or wet weather, can also delay construction projects, further contributing to quarterly fluctuations in our operating results. If our financial results for a quarter fall below investors’ expectations, the market price of our common stock may decline, perhaps significantly.

Dividend payments are restricted and within the discretion of our Board of Directors.

The payment of future dividends, if any, will be at the discretion of our Board of Directors, after taking into account various factors, including earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations. We are also party to debt instruments and agreements that contain provisions limiting the amount of dividends that we may pay. In the future, we may become a party to debt instruments or agreements that further restrict our ability to pay dividends. Moreover, our Board may decide not to pay, or to reduce the amount of, dividends even when the aforementioned factors are positive.

Our stock price may fluctuate substantially.

Our common stock is traded on the New York Stock Exchange under the symbol “HUG.” The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, availability of capital, changes in general conditions in the economy, the financial markets, the wholesale construction, repair and maintenance industry or other developments affecting us, our customers or our competitors, some of which may be unrelated to our performance. Those fluctuations and demand for our products may adversely affect the price of our stock. In addition, if our results of operations fail to meet the expectations of investors, our stock price could decline.

Furthermore, the stock market in general has experienced volatility that has often been unrelated to the operating performance of companies in our industry. These fluctuations and general economic, political and market conditions may adversely affect the market price of our common stock, regardless of our operating results. The volatility also could impair our ability in the future to offer common stock as a source of additional capital or as consideration in the acquisition of other businesses.

Certain anti-takeover provisions may make our stock less attractive to investors.

Certain provisions of our restated articles of incorporation, as amended, Florida law and our shareholders’ rights plan may make it more difficult for a third party to acquire a controlling interest in us, even if a change in control would benefit shareholders. These provisions may delay or prevent transactions in which shareholders would receive a substantial premium for their shares over then-prevailing market prices. These provisions may also limit shareholders’ ability to approve transactions they may otherwise believe are in their best interests. In particular, these provisions include a provision dividing the Board of Directors into three classes of directors elected for staggered three-year terms; a provision authorizing the issuance of preferred stock without shareholder approval; and a

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provision requiring that certain business combinations receive approval by two-thirds of our shares of voting stock.

AVAILABLE INFORMATION

We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available on our website, www.hughessupply.com, under “Investor Relations,” free of charge, as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. During the period covered by this report, we posted our periodic reports on Form 10-K, Form 10-Q, and our current reports on Form 8-K and any amendments to those documents to our website as soon as reasonably practicable after those reports were filed or furnished electronically with the SEC. The filings are also available through the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549, by calling 1-800-SEC-0330, or on the internet at www.sec.gov.

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ITEM 2.  PROPERTIES

Our corporate headquarters, a leased facility consisting of approximately 195,000 square feet, is located in Orlando, Florida. In addition, we own or lease approximately 560 properties representing over 500 branches in 40 states and two Canadian provinces. The typical sales branch consists of a combined office and warehouse facility with an average size of 19,000 square feet. We also operate four central distribution centers for our Plumbing/HVAC segment, with an average size of approximately 142,000 square feet. The following table presents the number of properties we leased and owned as of January 31, 2005:

We believe that our properties are in good condition and are suitable and adequate to carry out our business. The extent of utilization of such facilities varies based upon the seasonal demand for our products. It is not possible to measure with any degree of certainty or uniformity the extent of utilization of these facilities. We continuously review our anticipated requirements for facilities and, on the basis of that review, may from time to time lease or acquire additional facilities and/or dispose of existing facilities. None of the owned principal properties are subject to any encumbrance that is material to our consolidated results of operations or financial position.

ITEM 3.  LEGAL PROCEEDINGS

We are involved in various legal proceedings arising in the normal course of our business. In the opinion of our management, none of the proceedings are material in relation to our consolidated financial statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter ended January 31, 2005.

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PART II

Our common stock is listed on the New York Stock Exchange under the symbol “HUG.” As of April 6, 2005, there were approximately 904 shareholders of record of our common stock, which includes broker dealers holding stock on behalf of approximately 11,600 beneficial owners. The following table presents the high and low intra-day sale prices for shares of our common stock for each quarterly period along with cash dividends per share in fiscal years 2005 and 2004:

Dividends have been paid quarterly since 1980 with an increase in the dividend rate per share each of the last three years. Payment of future dividends, if any, will be at the discretion of our Board of Directors, after taking into account various factors, including earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations. Accordingly, there can be no assurance that dividends will be declared or paid any time in the future. Dividend covenants in our debt agreements at January 31, 2005 limit the amount of available funds for the payment of dividends to $141.5 million.

On March 15, 1999, our Board of Directors authorized us to repurchase up to 5.0 million shares of our outstanding common stock to be used for general corporate purposes. Since March 15, 1999, we have repurchased approximately 3.7 million shares at an average price of $11.45 per share, of which 0.5 million shares at an average price of $11.70 were purchased in fiscal year 2004 and 0.5 million shares at an average price of $13.89 per share were repurchased in fiscal year 2003. We did not repurchase any shares during fiscal year 2005 under the aforementioned share repurchase plan.

The following table sets forth our repurchases of equity securities registered under Section 12 of the Exchange Act that have occurred during the three months ended January 31, 2005.

⁽¹⁾    These shares relate to an option exercise whereby the individual delivered 2,356 shares already owned for over one year in exchange for the shares received in the stock option exercise; thus, the transaction relates to a stock-for-stock exchange but is not considered to be purchased under the aforementioned share repurchase plan.

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The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our financial statements, notes to those statements and other financial information appearing elsewhere in this report.

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This management’s discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of our results of operations during fiscal years 2005, 2004 and 2003, our financial condition as of January 31, 2005, and our prospects for the future. This information should be read in conjunction with our consolidated financial statements and notes thereto contained in Item 8 of this Form 10-K. The following sections will be discussed and analyzed herein:

OUR BUSINESS

Company Overview

Founded in 1928, we are one of the largest diversified wholesale distributors of construction, repair and maintenance-related products in the United States. We distribute over 350,000 products to more than 100,000 customers through over 500 branches located in 40 states and two Canadian provinces. We generate revenues, income and cash flows by distributing supplies and providing value-added services to our principal customers. Our principal customers include water and sewer, plumbing, electrical, and mechanical contractors; public utilities; municipalities; property management companies; and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States.

We manage our business on a product line basis and report the results of our operations in seven operating segments and an Other category. During the fourth quarter of fiscal year 2005, we revised our segment reporting to include the Building Materials product line as its own separate operating segment due to the growth and allocation of management resources to this product line. All prior period segment results have been reclassified to reflect these changes. The seven operating segments are Water & Sewer; Plumbing/HVAC; Utilities; MRO; Electrical; Industrial PVF; and Building Materials. We include our Fire Protection and Mechanical product lines in the Other category. This reporting structure 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. A discussion of each respective operating segment is provided in greater detail in Item 1 of this Form 10-K and in Note 2 to the Consolidated Financial Statements.

Beginning with fiscal year 2005 and thereafter, our fiscal year is a 52-week period ending on January 31. Previously, our fiscal year was a 52- or 53-week period ending on the last Friday in January. The change in our fiscal year ending date was made to simplify reporting and to allow for better comparability between reporting periods. Fiscal year 2005 and fiscal year 2004 each contained 52 weeks while fiscal year 2003 contained 53 weeks. The additional week in fiscal year 2003 was included in the first quarter.

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On August 24, 2004, our Board of Directors approved a two-for-one stock split in the form of a stock dividend that was paid on September 22, 2004 to shareholders of record as of the close of business on September 15, 2004. All shares and per share amounts set forth in this report have been adjusted for the two-for-one stock split.

Recent Business Acquisitions

On November 1, 2004, we completed the acquisition of Southwest Power, Inc. and Western States Electric, Inc. and their subsidiary entities (collectively referred to as “SWP/WSE”) from a common private ownership group. SWP/WSE was a large privately-owned distributor of electrical transmission and distribution (T&D) supplies and equipment, focused exclusively on the western and southwestern United States and, recently, western Canada. The acquisition of SWP/WSE enables us to become a leader nationally in the electrical utility T&D supplies and equipment distribution market and is aligned with our growth strategy of investing in businesses that expand our national footprint and reduce business cyclicality. The purchase price consisted of $123.1 million of net cash paid for SWP/WSE’s net assets along with the assumption of accounts payable, accrued and other liabilities, which collectively totaled $31.7 million, subject to finalization of working capital adjustments in accordance with the purchase agreement. The results of SWP/WSE’s operations have been included in our consolidated statements of income since November 1, 2004.

On May 28, 2004, we acquired Todd Pipe & Supply (“Todd Pipe”), one of the largest independent wholesale plumbing suppliers in Southern California and Las Vegas, Nevada. Todd Pipe’s historical returns have been higher than those of our other plumbing operations, and its acquisition expands our geographic footprint into higher growth markets. The purchase price consisted of $85.3 million of net cash paid for Todd Pipe’s net assets along with the assumption of accounts payable, accrued and other liabilities, which collectively totaled $43.8 million. Approximately $81.8 million of the total purchase price has been paid through January 31, 2005. The results of Todd Pipe’s operations have been included in our consolidated statements of income since May 28, 2004.

On May 3, 2004, we acquired Standard Wholesale Supply Company (“Standard”), a distributor of waterworks, electrical and plumbing products primarily serving residential and infrastructure water and sewer contractors and customers in Las Vegas, Nevada. The acquisition of Standard allows us to accelerate our expansion into the high-growth market of Las Vegas, Nevada, and also allows us to invest in a business that is well-aligned with our culture of providing the highest level of service possible to the customer, along with quality products. The purchase price consisted of $25.7 million of net cash paid for Standard’s net assets along with the assumption of accounts payable, accrued and other liabilities, which collectively totaled $11.7 million. The results of Standard’s operations have been included in our consolidated statements of income since May 3, 2004.

On December 19, 2003, we acquired Century Maintenance Supply, Inc. (“Century”), a leading supplier of MRO products serving the multi-family apartment market throughout the United States. The acquisition has enabled us to become a leader in the apartment MRO market and has facilitated entry into adjacent customer markets such as hospitality and lodging, assisted living and healthcare, education and government. The purchase price consisted of $260.0 million of net cash paid for Century’s net assets along with the assumption of $31.5 million of accounts payable and accrued liabilities and $101.5 million of debt. The results of Century’s operations have been included in our consolidated statements of income since December 19, 2003.

On August 4, 2003, we acquired substantially all of the net assets of Marden Susco, LLC (“Marden Susco”), a southern California supplier of underground piping products for use in municipal water, sewer and storm drain systems. The acquisition allowed us to expand our Water & Sewer business into California. The purchase price consisted of $19.6 million cash paid for Marden Susco’s net assets along with the assumption of $13.7 million of accounts payable and accrued liabilities and $6.7 million of debt. The results of Marden Susco’s operations have been included in our consolidated statements of income since August 4, 2003.

On August 9, 2002, we acquired all 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, we became a leading provider of electrical transmission and distribution products and services in the United States. We also expanded our development of customer contracts as a result of Utiliserve’s value-added services, including vendor-managed inventory, collaborative emergency response and job-site delivery. The purchase price consisted of $33.4 million of net cash paid for Utiliserve’s net equity along with the assumption of $54.5 million and $33.2 million of debt and other liabilities, respectively. The results of Utiliserve’s operations have been included in our consolidated statements of income since August 9, 2002.

CONSOLIDATED RESULTS OF OPERATIONS

Overview of Fiscal Year 2005 Results of Operations

Our results of operations for fiscal year 2005 reflected net sales, net income and diluted earnings per share growth

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driven primarily by strength in commercial and residential construction demand, higher commodity prices across most of our segments, and the impact of recent acquisitions, including Century, Standard, Todd Pipe and SWP/WSE. Net sales increased by 35.9% or $1,169.2 million during fiscal year 2005 to $4,422.6 million from $3,253.4 million reported during fiscal year 2004. Organic sales increased by $640.1 million or 15.6%, with positive organic sales growth reported in all of our product lines and double-digit organic growth reported in seven of our nine product lines during fiscal year 2005. Net income totaled $123.7 million during fiscal year 2005, a $66.0 million or 114.4% increase compared to net income during fiscal year 2004 of $57.7 million. The increase in net income was primarily attributable to the 15.6% increase in organic sales; the impact of our recent acquisitions; a 90 basis point increase in our gross margin ratio to net sales; and a 30 basis point improvement in our ratio of operating expenses to net sales, despite higher expenses for variable compensation and benefits, professional services (particularly for fees related to systems development and Sarbanes-Oxley compliance), insurance and the integration of our acquisitions. Diluted earnings per share in fiscal year 2005 was $1.95 on 63.4 million weighted-average shares outstanding, compared to $1.23 per diluted share reported in the prior year on 47.0 million weighted-average shares outstanding. The 16.4 million increase in weighted-average shares outstanding was primarily the result of our equity offerings in January and October of 2004, at which times an additional 13.8 million and 4.0 million shares were issued, respectively.

Net Sales

Net sales are affected by numerous factors, including, but not limited to, changes in demand, commodity pricing, seasonality, weather, competition and construction cycles. The following table presents the major components of our consolidated net sales in fiscal years 2005, 2004 and 2003:

⁽¹⁾ Organic sales is a measure used by management to assess the sales performance associated with branches we have had during each of the last two years (i.e., existing sales base), branches we have opened or closed within the last two years, and branches we have acquired during the last two years. During the first quarter of fiscal year 2005, we changed our organic sales methodology to include all branches, including those that were newly opened, closed and those acquired during the comparative fiscal periods; branches of any divested business are excluded from our calculation. For comparative purposes, prior period sales are reported on a pro forma basis to include pre-acquisition sales activity. We believe the new methodology more accurately reflects the current sales performance of all our branches, including those newly acquired. All organic sales amounts and percentages presented in this report exclude the impact of the additional week of net sales in the first quarter of fiscal year 2003.

⁽²⁾ During the third quarter of fiscal year 2005, we sold a business within the MRO segment for $2.6 million, which resulted in a gain of approximately $0.1 million. This business was sold because it was not a core operation within the MRO segment.

Fiscal Year 2005 Compared to Fiscal Year 2004

Net sales in fiscal year 2005 totaled $4,422.6 million, an increase of $1,169.2 million or 35.9%, compared to fiscal year 2004’s net sales of $3,253.4 million. Organic sales increased by $640.1 million or 15.6%, with positive growth reported by each of our seven business segments and the Other category, with five of our seven business segments and the product lines in our Other category reporting double-digit growth. The increase in net sales included approximately $305.7 million of net sales in fiscal year 2005 from the acquisitions of Standard, Todd Pipe and SWP/WSE in addition to $353.5 million associated with the impact of a full year of sales relating to the acquisitions of Century and Marden Susco in December and August 2003, respectively. The remaining increase in net sales was primarily due to growth in our exist - -

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ing base of branches as a result of a higher level of commercial construction and industrial activity, continued strength in residential construction, and higher commodity prices across most businesses as compared to fiscal year 2004.

Fiscal Year 2004 Compared to Fiscal Year 2003

Net sales in fiscal year 2004 totaled $3,253.4 million, an increase of $187.1 million or 6.1%, compared to fiscal year 2003’s net sales of $3,066.3 million due partially to the acquisitions of Century, Marden Susco and Utiliserve as well as strong residential construction activity and an improvement in the commercial construction market during the second half of the fiscal year. The Century and Marden Susco acquisitions added net sales of $29.2 million and $31.2 million, respectively, during fiscal year 2004. A full year of Utiliserve activity in fiscal year 2004 increased net sales by $131.3 million. These increases were partially offset by a benefit of $53.4 million included in fiscal year 2003’s consolidated net sales due to the additional week included in its first quarter.

During fiscal year 2004, organic sales increased $78.7 million or 2.3% as compared to fiscal year 2003 due to the procurement of several large subdivision and municipal projects in the midwestern water and sewer markets, an overall improvement in the commercial construction markets served by the Plumbing/HVAC segment and the Building Materials segment in the eastern United States, and market share growth in the MRO segment. These increases were partially offset by lower sales in the Industrial PVF segment due to weak end-market demand and the loss of a large Utilities segment customer during the second quarter of fiscal year 2004.

Gross Margin

Gross margin is affected by numerous factors, including, but not limited to, business and product mix changes, demand, commodity pricing, competition, purchasing rebates and direct shipments compared to stock sales. Gross margin and gross margin ratio to net sales in fiscal years 2005, 2004 and 2003 were as follows:

Fiscal Year 2005 Compared to Fiscal Year 2004

Gross margin ratio to net sales was 23.5% and 22.6% during fiscal years 2005 and 2004, respectively. The 90 basis point improvement during fiscal year 2005 was mainly attributable to a change in our net sales mix resulting from the acquisition of Century in December 2003, which is a higher margin business; the improved performance of our Industrial PVF and Building Materials segments, traditionally higher margin businesses, resulting from improved market conditions and stronger demand for materials that experienced commodity price inflation; improved purchasing leverage from our continued vendor consolidation efforts and improved programs with our suppliers; and the favorable impact of lower average cost inventory in the first half of fiscal year 2005.

Fiscal Year 2004 Compared to Fiscal Year 2003

The decrease in gross margin ratio to net sales to 22.6% in fiscal year 2004 from 23.1% in fiscal year 2003 was driven primarily by competitive pricing pressures and the mix of our net sales activity. During fiscal year 2004, the Utilities segment, which has historically generated lower gross margins than our other segments, comprised a higher percentage of consolidated net sales, and the Industrial PVF segment, a higher gross margin business, comprised a lower percentage of consolidated net sales. Additionally, an unfavorable margin impact resulting from higher inventory losses and write-downs was partially offset by an increase in vendor rebates resulting from our continued vendor consolidation efforts and improved programs with our suppliers.

Operating Expenses

We are primarily a fixed cost business; consequently, a percentage change in our net sales can have a greater percentage effect on our operating expense ratio. Operating expenses and percentage of net sales for fiscal years 2005, 2004 and 2003 were as follows:

Fiscal Year 2005 Compared to Fiscal Year 2004

As a percentage of net sales, personnel expenses remained relatively consistent at 11.8% and 11.9% in fiscal year 2005 and 2004, respectively, with approximately one-half of the $137.3 million increase in personnel expenses year over year primarily relating to the Standard, Todd Pipe and SWP/WSE acquisitions completed during fiscal year 2005 and the incremental impact of a full year of operations for Century and Marden Susco. Our workforce increased 10.7% from approx - -

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imately 8,400 employees at January 31, 2004 to approximately 9,300 employees at January 31, 2005 primarily as a result of acquisitions. Excluding the impact of the acquisitions, personnel expenses increased $68.4 million or 17.7% during fiscal year 2005 primarily as a result of the following factors:

As a percentage of net sales, other selling, general and administrative expenses decreased 20 basis points to 6.1% in fiscal year 2005 compared to 6.3% in fiscal year 2004, primarily as a result of the operating leverage obtained from the increase in net sales. Over one-half of the $64.2 million increase in expenses related to the current year acquisitions of Standard, Todd Pipe and SWP/WSE and the incremental impact of a full year of operations for the acquisitions of Marden Susco and Century that occurred in August and December of 2003. Excluding the acquisitions, other selling, general and administrative expenses increased $27.6 million or 13.5% during fiscal year 2005 primarily as a result of the following factors:

As a percentage of net sales, depreciation and amortization expenses remained relatively flat at 0.6% of net sales in fiscal year 2005 compared to 0.7% of net sales in fiscal year 2004. The increase of $5.9 million during fiscal year 2005 compared to fiscal year 2004 was primarily a result of the incremental amortization expense associated with the intangible assets related to the Century, Standard, Todd Pipe and SWP/WSE acquisitions. Depreciation expense was relatively consistent with the prior year with the increase in depreciation from capital expenditures primarily offset by the decrease in depreciation associated with sale-leaseback transactions that occurred in April and December of fiscal year 2005.

Fiscal Year 2004 Compared to Fiscal Year 2003

As a percentage of net sales, personnel expenses were 11.9% and 12.4% in fiscal years 2004 and 2003, respectively. Our workforce increased 16.7% from approximately 7,200 employees at January 31, 2003 to approximately 8,400 employees at January 30, 2004 primarily as a result of the acquisitions of Century and Marden Susco. Century and Marden Susco added $7.7 million of personnel expenses to fiscal year 2004, and a full year of Utiliserve activity during the year additionally increased personnel expenses by $6.1 million. Excluding the acquisitions, personnel expenses decreased during fiscal year 2004 primarily as a result of the following factors:

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As a percentage of net sales, other selling, general and administrative expenses were 6.3% and 6.1% in fiscal years 2004 and 2003, respectively. The increase was primarily attributable to the following factors:

Operating Income

Operating income is affected by numerous factors, including, but not limited to, fluctuations in net sales as well as changes in business and product mix. Operating income for fiscal years 2005, 2004, and 2003 were as follows:

Fiscal Year 2005 Compared to Fiscal Year 2004

Operating income in fiscal year 2005 totaled $220.9 million, increasing $98.2 million or 80.0%, compared to fiscal year 2004’s operating income total of $122.7 million, due in part to the acquisitions of Century, Standard, Todd Pipe and SWP/WSE. As a percentage of sales, operating income increased 120 basis points primarily due to the leverage obtained from the increased net sales, higher gross margins, our continued efforts to manage our expenses and the overall higher return contributions from our recent acquisitions.

Fiscal Year 2004 Compared to Fiscal Year 2003

Operating income in fiscal year 2004 totaled $122.7 million, increasing $1.5 million or 1.2%, compared to fiscal year 2003’s operating income of $121.2 million. Operating income as a percentage of net sales decreased 20 basis points to 3.8% in fiscal year 2004 compared to 4.0% in fiscal year 2003 due primarily to a decline in Industrial PVF net sales and profitability as a result of the significant downturn in the petrochemical and power industries, and the additional week included in the first quarter of fiscal year 2003, which improved the prior year’s operating income leverage by $4.6 million. Partially offsetting these decreases was operating income from the acquisitions of Century and Marden Susco, which collectively added $3.2 million of operating income to fiscal year 2004. A full year of Utiliserve activity in fiscal year 2004 also increased operating income $5.7 million.

Interest Expense

Fiscal Year 2005 Compared to Fiscal Year 2004

Interest expense totaled $30.6 million and $34.6 million during fiscal years 2005 and 2004, respectively. Interest expense for fiscal year 2005 included an $0.8 million write-off of unamortized loan origination costs related to our $290.0 million revolving credit agreement, which was replaced by a new $500.0 million revolving credit agreement on June 14, 2004. Excluding the $0.8 million charge, interest expense decreased by $4.8 million in fiscal year 2005 compared to the prior year due primarily to a 30 basis point decrease in the weighted-average interest rate partially offset by a slight increase in our weighted-average outstanding debt balance, which was primarily the result of our $300.0 million debt issuance in October of 2004. The decrease in the weighted-average interest rate was primarily attributable to an increase in the mix of lower-cost variable-rate borrowings under our revolving credit agreement during fiscal year 2005, in addition to a lower weighted-average interest rate associated with our fixed rate notes resulting from principal payments on higher cost notes and the impact of a lower fixed rate borrowing related to the aforementioned $300.0 million debt issuance.

Fiscal Year 2004 Compared to Fiscal Year 2003

In fiscal year 2004 and fiscal year 2003, interest expense totaled $34.6 million and $30.3 million, respectively. The increase was primarily due to approximately $2.6 million of debt issuance costs associated with an interim $250.0 million

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senior unsecured term loan (the “term loan”) and additional borrowings under our $290.0 million revolving credit agreement used to initially fund the acquisition of Century. We used the proceeds from the issuance of our common stock in January 2004 to repay the term loan in full. We also expensed $1.1 million of loan origination fees in connection with the amendment of our revolving credit agreement to permit the new term loan borrowings and to make its financial and other covenants essentially the same as the term loan agreement. These increases were partially offset by lower average interest rates and lower outstanding debt balances in fiscal year 2004. Total debt decreased $28.6 million or 6.5% from $441.9 million as of January 31, 2003 to $413.3 million of January 30, 2004 and our weighted-average interest rate for fiscal year 2004 decreased 110 basis points compared to the prior year.

Interest and Other Income

Interest and other income totaled $8.0 million, $6.4 million, and $7.3 million in fiscal years 2005, 2004 and 2003, respectively. The $1.6 million increase during fiscal year 2005 was primarily due to additional interest income resulting from increased levels of cash during the second half of fiscal year 2005; interest received during the first quarter of fiscal year 2005 related to the settlement of amended prior year federal income tax filings; and slightly increased service charge income; the total of which was partially offset by a favorable legal settlement in the prior year. The increased levels of cash during the second half of fiscal year 2005 were primarily the result of the net proceeds received on October 12, 2004 from our debt and equity offerings. The decrease in fiscal year 2004 versus fiscal year 2003 was primarily due to reduced collections of service charge income on past due or delinquent accounts.

Income Taxes

Our effective tax rate was 37.6%, 38.9% and 40.9% in fiscal years 2005, 2004 and 2003, respectively. The decrease during fiscal year 2005 was primarily attributable to a $1.7 million tax benefit recognized in the first quarter of fiscal year 2005 related to federal income tax filing amendments associated with prior fiscal years and the release of tax reserves related to expiring statutes of limitations and to state income tax benefits received, the total of which was partially offset by a $1.0 million tax benefit recognized in the prior year related to a discontinued operation in Mexico. The decrease in the effective tax rate during fiscal year 2004 was primarily attributable to a lower effective state income tax rate and the aforementioned tax benefit related to the discontinued operation in Mexico.

SEGMENT RESULTS OF OPERATIONS

The organic sales amounts by segment denoted below are non-GAAP financial measures. Please refer to page 22 for the reconciliation of organic sales to consolidated net sales for fiscal years 2005, 2004, and 2003. Net sales and organic sales by segment in fiscal years 2005, 2004 and 2003 were as follows:

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⁽¹⁾ The difference in organic sales amounts for fiscal year 2004 is due to our organic sales methodology. See footnote 1 to the consolidated organic sales table on page 22 for a description of our organic sales methodology.

Operating income by segment and as a percentage of net sales in fiscal years 2005, 2004 and 2003 was as follows: