UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission File Number 001-08772

HUGHES SUPPLY, INC.

(Exact name of registrant as specified in its charter)

Corporate Office

One Hughes Way

Orlando, Florida 32805

(Address of principal executive offices)

(407) 841-4755

(Registrant’s telephone number, including area code)

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

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

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

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

HUGHES SUPPLY, INC.

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

HUGHES SUPPLY, INC.

Consolidated Statements of Income (unaudited)

(in millions, except per share data)

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

HUGHES SUPPLY, INC.

Consolidated Balance Sheets

(in millions, except share and per share data)

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

HUGHES SUPPLY, INC.

Consolidated Statements of Cash Flows (unaudited)

(in millions)

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

HUGHES SUPPLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

      In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our results of operations for the three and six months ended July 31, 2005 and July 30, 2004, our financial position as of July 31, 2005, and cash flows for the six months ended July 31, 2005 and July 30, 2004. The results of operations for the three and six months ended July 31, 2005 are not necessarily indicative of the trends or results that may be expected for the full year. Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been omitted from these interim consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended January 31, 2005, as filed with the Securities and Exchange Commission (“SEC”).

      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 share and per share amounts set forth in this report have been adjusted for the two-for-one stock split.

Business

      Founded in 1928, we are one of the nation’s largest diversified wholesale distributors of construction, repair and maintenance-related products with over 500 branches located in 40 states, as well as one branch located in Canada. Our customers include water and sewer, plumbing, electrical, and mechanical contractors; public utilities; municipalities; property management companies; and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States. Our fiscal year is a 52-week period ending on January 31, with our quarters ending on the last calendar day of each quarter. Prior to fiscal year 2005, our fiscal years were 52- or 53-week periods ending on the last Friday in January. During fiscal year 2005 and prior, our quarters were 13- or 14-week periods ending on the last Friday of the quarter.

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

      We account for our stock option plans using the intrinsic value based method of accounting, under which no compensation expense has been recognized for stock option awards granted at fair market value. For purposes of pro forma disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, the estimated fair value of the stock options is amortized to compensation expense over the options’ vesting periods with the impact of forfeitures recognized as they occur.

      The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (in millions, except per share data):

      The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants issued in the periods presented:

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement requires that the compensation cost related to share-based payment transactions be recognized in the financial statements based on the estimated fair value of the equity-based compensation awards issued as of the grant date. The related compensation expense will be based on the estimated number of awards expected to vest and will be recognized over the period during which an employee is required to provide services in exchange for the award. The statement requires the use of assumptions and judgments about future events, and some of the inputs to the valuation models will require considerable judgment by management. We will be required to adopt the provisions of SFAS 123R on February 1, 2006. We are currently evaluating the impact that the ultimate adoption of SFAS 123R will have on our financial position and results of operations. The Stock-Based Compensation section provided above contains the pro forma impact on net income and earnings per share if the fair value based method under SFAS 123 had been applied to all outstanding and unvested awards during the first half of fiscal years 2006 and 2005.

      In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”) a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 will require companies to account for and apply changes in accounting principles retrospectively to prior periods’ financial statements, instead of recording a cumulative effect adjustment within the period of the change, unless it is impracticable to determine the effects of the change to each period being presented. SFAS 154 is effective for accounting changes made in annual periods beginning after December 15, 2005. We will adopt the new accounting provisions effective February 1, 2006. We do not expect the adoption of SFAS 154 to have a material effect on our financial position, results of operations or cash flows.

      We manage our business on a product line basis and report the results of our operations in seven operating segments and an Other category. The operating segments are Water & Sewer; Plumbing/ Heating, Ventilating and Air Conditioning (“HVAC”); Utilities; Maintenance, Repair and Operations (“MRO”); Electrical; Industrial Pipe, Valves and Fittings (“PVF”); and Building Materials. We include our Fire Protection and Mechanical product lines in the Other category.

      The Corporate category includes corporate level expenses not allocated to our operating segments or the Other category. Inter-segment sales are excluded from net sales presented for each segment and the Other category. Operating income for each segment and the Other category includes certain corporate expense allocations for corporate overhead expenses, employee benefits, data processing expenses and insurance. These allocations are based on consumption or at a standard rate determined by management.

      The following tables present net sales and other financial information by segment for the three and six months ended July 31, 2005 and July 30, 2004, respectively (in millions):

      The following tables include our investment in assets (accounts receivable less allowance for doubtful accounts, inventories and goodwill) and accounts payable for each segment as of July 31, 2005 and January 31, 2005 (in millions):

      On May 1, 2005, we completed the acquisition of National Construction Products, Inc. (“National”), a small privately owned distributor of construction materials serving the Atlanta, Georgia area. The acquisition of National enables us to become a leader in the tilt wall construction market throughout the metro Atlanta area. The results of National’s operations have been included in our consolidated statements of income since May 1, 2005.

      On June 30, 2005, we acquired Ram Pipe and Supply, Inc. (“Ram Pipe”), a distributor of plumbing and water and sewer products serving the Yuma, Arizona area. The acquisition of Ram Pipe allows us to expand our leadership position in the plumbing and waterworks market in an attractive geographic market. The results of Ram Pipe’s operations have been included in our consolidated statements of income since June 30, 2005.

      The combined purchase price associated with the acquisitions of National and Ram Pipe consisted of $12.3 million of net cash paid for National and Ram Pipe’s net assets along with the assumption of accounts payable, accrued and other liabilities, which collectively totaled $1.9 million, subject to finalization of working capital adjustments in accordance with the respective purchase agreements. The total cost of the acquisitions was allocated to the assets acquired and liabilities assumed based on their respective preliminary fair values in accordance with SFAS No. 141, Business Combinations. Goodwill, all of which is deductible for tax purposes, and other intangible assets recorded in connection with the transactions totaled $7.0 million and $2.2 million, respectively. The goodwill and intangible assets associated with the National and Ram Pipe acquisitions were assigned entirely to our Building Materials and Plumbing/ HVAC segments, respectively. The intangible assets are subject to amortization and consist primarily of shareholder relationships, corporate customer relationships, employment agreements, and non-compete agreements that are amortized on a straight-line basis over a weighted-average useful life of approximately 9.7 years. The purchase price allocations for these acquisitions have not been finalized because the post closing settlements have not been completed and our initial determinations of fair values assigned to intangible assets other than goodwill is ongoing. The purchase price allocations are therefore subject to change based upon continuing review. Pro forma results of operations reflecting these acquisitions have not been presented because the results of operations of National and Ram Pipe are not material to our consolidated results of operations on either an individual or aggregate basis.

      During the second quarter of fiscal year 2006, we finalized working capital adjustments associated with our acquisitions of Todd Pipe and Supply (“Todd Pipe”) and Southwest Power, Inc. and Western States Electric, Inc. and their subsidiary entities (collectively referred to as “SWP/ WSE”). Todd Pipe was acquired on May 28, 2004 and is included in our Plumbing/ HVAC segment. SWP/ WSE was acquired on November 1, 2004 and is included in our Utilities segment.

      A summary of the changes in the carrying amount of goodwill by reportable segment during the six months ended July 31, 2005 is as follows (in millions):

      As of July 31, 2005 and January 31, 2005, our intangible assets were classified as follows (in millions):

      Amortization expense for amortized intangible assets was $2.3 million and $4.6 million for the three months and six months ended July 31, 2005, respectively. Estimated aggregate future amortization expense for acquisition-related intangible assets for the six months ending January 31, 2006 and future fiscal years is as follows (in millions):

      As more fully disclosed in Note 6 to the consolidated financial statements in our fiscal year 2005 Annual Report, we approved plans to close and consolidate certain branches that did not strategically fit into our core businesses and/or did not perform to our expectations. The liability balance, included in other current liabilities, related to these activities as of July 31, 2005 and January 31, 2005 was as follows (in millions):

      Long-term debt as of July 31, 2005 and January 31, 2005 consisted of the following (in millions):

      As of July 31, 2005, we were in compliance with all financial and non-financial covenants.

      On October 12, 2004, we issued $300.0 million in original principal amount of 5.5% senior notes (the “notes”) due on October 15, 2014 in a private placement pursuant to Rule 144A under the Securities Act. The notes were issued at 99.468% of their par value and are reflected in our consolidated balance sheet net of a $1.5 million and $1.6 million discount as of July 31, 2005 and January 31, 2005, respectively. On May 10, 2005, we filed an exchange offer registration statement with the SEC on Form S-4 to exchange the notes for a new issue of substantially identical notes registered under the Securities Act. On July 21, 2005 the SEC declared our registration effective, and on July 22, 2005 we announced the commencement of the exchange offer. Subsequently, on August 22, 2005, all of the original notes were tendered for the registered new notes, which are guaranteed by substantially all of our subsidiaries. Separate financial statements of the subsidiary guarantors are not provided because our parent company (issuer of the notes) has no independent assets or operations and the subsidiary guarantees are full and unconditional and joint and several. There are no significant restrictions on our parent company or subsidiaries’ ability to obtain funds from our subsidiaries by dividend or loan. Additionally, any of our subsidiaries not guaranteeing the note issuance are minor (i.e., represent less than 3% of total consolidated assets, shareholders’ equity, net sales, income before income taxes and cash flows from operating activities).

      On November 10, 2004 and November 30, 2004, we entered into separate interest rate swap contracts with two distinct financial institutions that each effectively converted $50.0 million (i.e., an aggregate of $100.0 million) of our $300.0 million in original principal amount of 5.50% notes, due October 15, 2014, to floating rate debt based on the six-month LIBOR rate plus 0.6985% and 0.79%, respectively, with semi-annual settlements through October 15, 2014. The interest rate swap contracts were designated as fair value hedges of the changes in fair value of the respective $50.0 million of 5.50% notes due to changes in the benchmark interest rate (i.e., six-month LIBOR rate). We settled the interest rate swap contracts during the second quarter of fiscal year 2006, receiving approximately $1.8 million in cash. The corresponding fair value hedge carrying value adjustment of $1.8 million recognized as a component of debt is being amortized as a favorable adjustment to interest expense over the same period in which the related interest costs on the $300.0 million notes are recognized in earnings. Approximately $0.2 million of

the fair value hedge carrying value adjustment will be recognized as an adjustment to interest expense during the next twelve months.

      Total comprehensive income, net of tax, was as follows (in millions):

      Accumulated other comprehensive income, net of tax, totaled $1.9 million as of July 31, 2005, and consisted of the net unrealized gain associated with the settlement of our ten-year treasury rate lock contract on October 5, 2004. Approximately $0.3 million of the gain will be recognized in earnings as an adjustment to interest expense during the next twelve months.

      Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share includes the additional dilutive effect of our potential common shares, which include certain employee and director stock options and unvested shares of restricted stock. The following summarizes the incremental shares from these potentially dilutive common shares, calculated using the treasury method, as included in the calculation of diluted weighted-average shares (in millions):

      Excluded from the above computations of diluted weighted-average shares outstanding during the second quarter of fiscal year 2006 were 8,000 unvested shares of restricted common stock at an average price of $32.71 per share, because their effect would have been anti-dilutive. Options to purchase 388,221 shares of common stock at an average exercise price of $30.63 during the three and six months ended July 31, 2005 were excluded from the above computations of diluted weighted-average shares outstanding because their effect would have been anti-dilutive. All stock options and restricted stock outstanding as of July 30, 2004 were dilutive and, therefore, included in the computation of diluted weighted-average shares outstanding for the three and six months ended July 30, 2004.

Legal Matters

      We are involved in various legal proceedings arising in the normal course of our business. In our opinion, none of the proceedings that have not been disclosed or recognized in our consolidated financial statements are material in relation to our consolidated operations, cash flows or financial position.

      In 1979, we acquired property that has since been used to support a branch of our Electrical business. Recently, small traces of chlorinated hydrocarbons (“hydrocarbons”) were discovered in limited soil samples. Subsequent testing of the soil revealed larger amounts of hydrocarbons that now require remediation. We currently estimate the amount of remediation to range from $1.0 million to $2.3 million, with no amount in that range being a better estimate than any other amount in that range. We are currently evaluating all available recourse related to the cost of the cleanup, and believe the previous owners caused the contamination. As it is not currently probable that we will be successful in recovering amounts from other third parties, including the previous owners and any insurance carriers, we have accrued a $1.0 million liability as of July 31, 2005 for environmental remediation, of which approximately $0.2 million relates to capitalizable equipment to be used to improve the safety of the property over its original condition.

      Based on currently available information and analysis, we believe that it is still possible that costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that could be material but cannot be estimated as of July 31, 2005. There can be no assurance that activities identified in the future will not result in additional investigations or remedial actions being required.

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

      On July 25, 2005 our Board of Directors declared a quarterly cash dividend of $0.09 per share that was paid on August 22, 2005 to shareholders of record on August 8, 2005. Dividends declared but not paid totaled $6.0 million and $4.0 million at July 31, 2005 and July 30, 2004, respectively.

      During the first six months of fiscal year 2006, net gains totaling approximately $3.3 million were recognized on the sale of surplus properties, for which we received approximately $5.7 million of cash proceeds. During the first six months of fiscal year 2005, proceeds from the sale of property and equipment consisted primarily of $32.7 million of net cash received from the sale-leaseback of a portfolio of properties associated with 18 different branches that were leased back pursuant to 15-year minimum term operating leases. The resulting leases qualified for operating lease treatment.

      On March 16, 2004, we entered into a sale-leaseback transaction in which we sold our corporate headquarters building in Orlando, Florida, excluding certain furniture and fixtures and other office equipment relating to the property, to a subsidiary of Wachovia Development Corporation (“WDC”) for $23.0 million and leased the property back for a period of 20 years. The proceeds from the sale approximated the net book value of the property sold and were paid by WDC to SunTrust Bank (“SunTrust”) for application against amounts outstanding under a separate real estate term credit agreement we had previously executed on June 5, 2002 with SunTrust.

Note 10. Stock-Based Compensation

Stock Plans

      The Amended 2005 Executive Stock Plan (the “2005 Stock Plan”) is our only active stock plan at July 31, 2005. The Amended and Restated 1997 Executive Stock Plan (the “1997 Stock Plan”), established to grant both incentive and non-incentive stock options to key employees, is replaced by the 2005 Stock Plan, and no further shares are expected to be issued under the 1997 Stock Plan. The 2005 Stock Plan authorizes the Compensation Committee of the Board of Directors (the “Compensation Committee”) to grant key employees and non-employee directors options to purchase stock, grants of stock appreciation rights (“SAR”) and grants of restricted stock, including performance-based restricted stock, for an aggregate of 2,200,000 shares of common stock. Under certain conditions the Chief Executive Officer is also authorized to make stock grants to key employees. Incentive stock options (“ISO”) are granted at prices not less than the market value on the date of grant, and non-incentive stock options are issued by the Compensation Committee, which is authorized to establish any option price at its sole discretion. The maximum term of an ISO may not exceed ten years; however, if the ISO is issued to a key employee who owns 10% or more of our stock, the maximum term of an option may not exceed five years.

      An option becomes exercisable at such times and in such installments as set forth by the Compensation Committee. Under the 2005 Stock Plan, a key employee or non-employee director may be granted one or more options, or one or more SAR, or one or more options and SAR in any combination which, individually or in the aggregate, relate to no more than 250,000 shares of stock in any calendar year. Also, no more than 250,000 shares of performance-based restricted stock may be granted to a key employee or non-employee director in any calendar year. These shares are subject to certain transfer restrictions, and vesting may be dependent upon continued employment, the satisfaction of performance objectives, or both.

Restricted Stock

      Performance-based shares: Performance-based shares are used as an incentive to increase shareholder returns with actual awards based on various criteria, including increases in the price of our common shares, earnings per share, shareholder value and net income. Compensation expense for the number of shares issued is recognized over the vesting period.

      During the first quarter of fiscal year 2006, the Compensation Committee authorized the grant of 145,288 performance-based restricted stock grants under the 1997 Stock Plan. Subsequently, during the second quarter of fiscal year 2006, the Compensation Committee authorized the grant of an additional 60,622 performance-based grants under the 2005 Stock Plan. The aggregate amount of performance-based restricted stock issued during the first six months of fiscal year 2006 totaled 205,910. These performance-based restricted stock grants provide for graded vesting only if a comparison of our total shareholder return equals or exceeds the cumulative total shareholder return of the Standard & Poor’s 500 Composite Stock Index (the “S&P index”) over a three-year period ending March 1, 2008. The market value of the performance-based restricted shares awarded during the first half of fiscal year 2006, which is based on the number of shares expected to ultimately vest in light of our performance against the S&P index and our stock price, totaled $3.5 million and was recorded as unearned compensation, a component of shareholders’ equity. A portion of the unearned compensation is expensed each reporting period based on the vesting period. The expense associated with these performance-based shares could be reversed or increase should it either become unlikely that the expected number of shares will vest or if future estimates indicate that a greater number of shares will vest, respectively.

      Non-performance based shares: During the first quarter of fiscal year 2006, the Compensation Committee authorized the grant of 19,000 non-performance based restricted stock grants under the 1997 Stock Plan. Subsequently, during the second quarter of fiscal year 2006, the Compensation Committee authorized the grant of an additional 157,500 shares of non-performance based restricted stock under the 2005 Stock Plan. The market value of the non-performance based restricted shares awarded during the

first half of fiscal year 2006 totaled $4.9 million, was recorded as unearned compensation and is being charged to expense over five year vesting periods from the date of the grants.

      During the second quarter of fiscal year 2006, we also awarded 14,400 restricted shares to non-employee directors that immediately vested under the 2005 Stock Plan. The market value of these shares totaled $0.4 million and was recognized in our consolidated results of operations during the second quarter of fiscal year 2006.

      During the first six months of fiscal year 2006, we cancelled 19,450 restricted shares previously granted, with market values at the date of grant of $0.3 million according to the provisions of the grant.

      On August 29, 2005, we completed the acquisition of TVESCO, Inc., a Tennessee based distributor of electric utility and electrical products. TVESCO, Inc. had annual sales of approximately $138 million in its latest fiscal year ended December 31, 2004, and employs 170 full-time associates. We believe the acquisition of TVESCO will strengthen the geographic footprint of our Utilities business by expanding it into the Tennessee Valley region.

      Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist the reader in better understanding and evaluating our business and results of operations. This information is a discussion and analysis of certain significant factors that have affected our results of operations for the three and six months ended July 31, 2005 and July 30, 2004, and our financial condition as of July 31, 2005. MD&A should be read in conjunction with our consolidated financial statements and the notes thereto contained herein and in our Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended January 31, 2005.

      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 share and per share amounts set forth in this report have been adjusted for the two-for-one stock split.

Forward-Looking Statements

      Certain statements made by us or incorporated by reference in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor provisions created by such sections. When used in this report, the words “believe,” “anticipate,” “estimate,” “expect,” “may,” “will,” “should,” “plan,” “intend,” “project,” and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, our expectations may not prove to be correct. Actual results or events may differ significantly from those indicated in our forward-looking statements as a result of various important factors. These factors are discussed under the caption “Item 1. Business — Risk Factors” in our Annual Report for the fiscal year ended January 31, 2005. All forward-looking statements are qualified by and should be read in conjunction with those risk factors. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business

      Founded in 1928, we are one of the largest diversified wholesale distributors of construction, repair and maintenance-related products in the United States. We distribute over 350,000 products to more than 100,000 customers through over 500 branches located in 40 states, as well as one branch located in Canada. Our principal customers include water and sewer, plumbing, electrical, and mechanical contractors; public utilities; municipalities; property management companies; and industrial companies. Although we have a national presence, we operate principally in the southeastern and southwestern United States. Our fiscal year is a 52-week period ending on January 31, with our quarters ending on the last calendar day of each quarter. Prior to fiscal year 2005, our fiscal years were 52- or 53- week periods ending on the last Friday in January. During fiscal year 2005 and prior, our quarters were 13- or 14- week periods ending on the last Friday of the quarter.

Segment Information

      We manage our business on a product line basis and report the results of our operations in seven operating segments and an Other category. The operating segments are Water & Sewer; Plumbing/ Heating, Ventilating and Air Conditioning (“HVAC”); Utilities; Maintenance, Repair and Operations (“MRO”); Electrical; Industrial Pipe, Valves and Fittings (“PVF”); and Building Materials. We include our Fire Protection and Mechanical product lines in the Other category.

      The Corporate category includes corporate level expenses not allocated to our operating segments or the Other category. Inter-segment sales are excluded from net sales presented for each segment and the Other category. Operating income for each segment and the Other category includes certain corporate

expense allocations for corporate overhead expenses, employee benefits, data processing expenses and insurance. These allocations are based on consumption or at a standard rate determined by management.

Results of Operations

Overview

      Net sales increased 16.6% to $1,333.0 million in the second quarter of fiscal year 2006, compared to $1,143.1 million reported in the same period last year, with $108.6 million of the increase relating to the impact from the acquisitions of Southwest Power, Inc./ Western States Electric, Inc. (“SWP/WSE”), Todd Pipe & Supply (“Todd Pipe”), National Construction Products, Inc. (“National”), and Ram Pipe and Supply, Inc (“Ram Pipe”). Organic sales increased 8.2%, with positive growth reported by all of our segments other than our Plumbing/ HVAC segment, which reported slightly lower organic sales mainly due to non-recurring large project work, competitive pressures and sales initiatives that were not as effective as planned, partly offset by an increase in residential projects in California, Colorado and Arizona. A higher average cost of inventory sold, a change in business mix, and some selling price weakness contributed to a 190 basis point reduction in our overall gross margin percentage to 21.8%, compared to the same period in the prior year. The decrease in the gross margin percentage was partly offset by a 100 basis point reduction in operating expenses as a percentage of net sales due primarily to leverage obtained from higher net sales, productivity improvements (including lower corporate costs), a moderation in investment spending, business mix, and net gains from the sale of surplus property. Net income decreased $0.2 million or 0.5% in the second quarter of fiscal year 2006 to $39.2 million, as compared to the prior year’s second quarter net income of $39.4 million. Diluted earnings per share in the second quarter of fiscal year 2006 totaled $0.59 on 66.6 million weighted-average shares outstanding, compared to $0.63 per diluted share reported in the prior year on 62.0 million weighted-average shares outstanding. The increase of 4.6 million weighted-average shares outstanding was primarily the result of our equity offering in October 2004, at which time an additional 4.0 million shares were issued.

      Net sales increased 20.5% to $2,572.7 million in the first six months of fiscal year 2006, compared to $2,135.9 million reported in the same period last year, with $277.6 million of the increase relating to the impact from the acquisitions of SWP/WSE, Todd Pipe, Standard Wholesale Supply Company (“Standard”), National, and Ram Pipe. Organic sales increased 8.6%, with positive growth reported by Water & Sewer, Utilities, Electrical, Industrial PVF, Building Materials, and the two product lines comprising our Other category. Our Plumbing/ HVAC and MRO segments reported flat or slightly lower organic sales. A higher average cost of inventory sold, a change in business mix and some selling price weakness contributed to a 200 basis point reduction in our overall gross margin percentage to 22.0%, compared to the same period in the prior year. The decrease in the gross margin percentage was partly offset by a 140 basis point reduction in operating expenses as a percentage of net sales due primarily to the leverage obtained from higher net sales, productivity improvements (including lower corporate costs), a moderation in investment spending, business mix, and net gains from the sale of surplus property. Net income in the first six months of fiscal year 2006 totaled $73.2 million, a $4.0 million or 5.8% increase compared to the prior year’s first six months net income of $69.2 million. Diluted earnings per share in the first six months of fiscal year 2006 totaled $1.10 on 66.6 million weighted-average shares outstanding, compared to $1.12 per diluted share reported in the prior year on 61.9 million weighted-average shares outstanding. The increase of 4.7 million weighted-average shares outstanding was primarily the result of our equity offering in October 2004.

Net Sales

      Net sales are affected by numerous factors, including, but not limited to, commodity pricing, changes in demand, seasonality, weather, competition and construction cycles. The following table presents the

major components of our consolidated net sales in the second quarter and first six months of fiscal years 2006 and 2005 (dollars in millions):

      Net sales in the second quarter of fiscal year 2006 totaled $1,333.0 million, an increase of $189.9 million or 16.6%, compared to the prior year’s second quarter net sales of $1,143.1 million. Organic sales increased by $101.3 million or 8.2%, with positive growth reported by all of our segments other than our Plumbing/ HVAC segment, which reported slightly lower organic sales due mainly to non-recurring large project work, competitive pressures and sales initiatives that were not as effective as planned, partly offset by an increase in residential projects in California, Colorado and Arizona. The increase in net sales included approximately $108.6 million from our acquisitions completed during the past year including SWP/WSE (completed in the fourth quarter of fiscal year 2005), Todd Pipe (completed in the second quarter of fiscal year 2005), National (completed in the second quarter of fiscal year 2006) and Ram Pipe (completed in the second quarter of fiscal year 2006). The remaining increase in net sales was primarily due to continued strength in commercial and residential construction; increases in project-related activity from large industrial and engineering customers in the petrochemical, power, and oil markets; and increased industrial activity. Price changes for commodity-based products were mixed, resulting in a modest price impact to our total reported net sales in the second quarter of fiscal year 2006.

      Net sales in the first six months of fiscal year 2006 totaled $2,572.7 million, an increase of $436.8 million or 20.5%, compared to the prior year’s first six months net sales of $2,135.9 million. Organic sales increased by $203.4 million or 8.6%, with positive growth reported by Water & Sewer, Utilities, Electrical, Industrial PVF, Building Materials, and the two product lines comprising our Other category. Our Plumbing/ HVAC and MRO segments reported flat or slightly lower sales. The increase in net sales included approximately $277.6 million from our acquisitions of SWP/WSE, Todd Pipe, Standard,

National, and Ram Pipe. The remaining increase in net sales was primarily due to continued strength across the commercial, residential, industrial and infrastructure end markets. Price changes for commodity-based products were mixed, resulting in a modest price impact to our total reported net sales during the first six months of fiscal year 2006.

Gross Margin

      Gross margin is affected by numerous factors, including, but not limited to product mix changes, commodity pricing, competition, vendor rebates and direct shipments compared to stock sales. Gross margin and gross margin ratio to net sales in the second quarter and first six months of fiscal years 2006 and 2005 were as follows (dollars in millions):

      Gross margin ratio to net sales totaled 21.8% and 23.7% in the second quarter of fiscal years 2006 and 2005, respectively, and 22.0% and 24.0% in the first six months of fiscal years 2006 and 2005, respectively. The decreases were mainly attributable to higher product costs, business mix and some selling price weakness. The higher product costs were primarily the result of the favorable impact in the prior year periods of higher selling prices resulting from a steep increase in commodity prices while the commensurate increase in product costs was not incurred until the inventory was replaced in subsequent months. Approximately 60 basis points of the gross margin decrease was due to a greater mix of our Utilities business, which carries a lower gross margin, but also lower expenses, as a result of the SWP/WSE acquisition. The Utilities business comprised 15.8% and 9.5% of our net sales during the second quarter of fiscal years 2006 and 2005, respectively, and 15.8% and 9.8% of our net sales during the first six months of fiscal years 2006 and 2005, respectively. Partially offsetting these negative impacts were improved purchasing leverage, resulting in higher vendor rebate income, and a slight increase in our business mix of our Industrial PVF business, which has historically generated higher margins than our other businesses.

Operating Expenses

      Operating expenses and percentage of net sales for the second quarter and first six months of fiscal years 2006 and 2005 were as follows (dollars in millions):