Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 29, 2017

 

- OR -

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 


 

Commission File
Number

 

Exact name of Registrant as specified in its charter, Address
of principal executive offices and Telephone number

 

State of incorporation

 

I.R.S. Employer
Identification Number

001-35979

 

HD SUPPLY HOLDINGS, INC.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

26-0486780

333-159809

 

HD SUPPLY, INC.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

75-2007383

 


 

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.

 

HD Supply Holdings, Inc.

 

Yes x No o

HD Supply, Inc.

 

Yes o No x

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

HD Supply Holdings, Inc.

 

Yes x No o

HD Supply, Inc.

 

Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

HD Supply Holdings, Inc.

Large accelerated filer x

Accelerated filer o

Smaller reporting company o

Non-accelerated filer o   (Do not check if a smaller reporting company)

 

Emerging growth company o

 

HD Supply, Inc.

Large accelerated filer o

Accelerated filer o

Smaller reporting company o

Non-accelerated filer x   (Do not check if a smaller reporting company)

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provide pursuant to Section 13(a) of the Exchange Act.

 

HD Supply Holdings, Inc.  o

 

 

HD Supply, Inc.  o

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

HD Supply Holdings, Inc.

 

Yes o No x

HD Supply, Inc.

 

Yes o No x

 

The number of shares of the Registrant’s common stock outstanding as of December 1, 2017:

 

HD Supply Holdings, Inc.

 

185,678,183 shares of common stock, par value $0.01 per share

HD Supply, Inc.

 

1,000 shares of common stock, par value $0.01 per share, all of which were owned by HDS Holding Corporation, a wholly-owned subsidiary of HD Supply Holdings, Inc.

 

 

 



Table of Contents

 

INDEX TO FORM 10-Q

 

 

 

 

 

Page

 

 

 

 

 

 

 

Explanatory Note

 

3

 

 

 

 

 

 

 

Forward-looking statements and information

 

3

 

 

 

 

 

Part I.

 

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

HD Supply Holdings, Inc.

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended October 29, 2017 and October 30, 2016 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Balance Sheets as of October 29, 2017 and January 29, 2017 (unaudited)

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended October 29, 2017 and October 30, 2016 (unaudited)

 

7

 

 

 

 

 

 

 

HD Supply, Inc.

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended October 29, 2017 and October 30, 2016 (unaudited)

 

8

 

 

 

 

 

 

 

Consolidated Balance Sheets as of October 29, 2017 and January 29, 2017 (unaudited)

 

9

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended October 29, 2017 and October 30, 2016 (unaudited)

 

10

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

11

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

34

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

49

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

49

 

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

49

 

 

 

 

 

Item 1A.

 

Risk Factors

 

50

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

 

 

 

 

 

Item 6.

 

Exhibits

 

52

 

 

 

 

 

Signatures

 

54

 

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EXPLANATORY NOTE

 

This Form 10-Q is a combined quarterly report being filed separately by two registrants: HD Supply Holdings, Inc. and HD Supply, Inc.  Unless the context indicates otherwise, any reference in this report to “Holdings” refers to HD Supply Holdings, Inc., any reference to “HDS” refers to HD Supply, Inc., the indirect wholly-owned subsidiary of Holdings, and any references to “HD Supply,” the “Company,” “we,” “us” and “our” refer to HD Supply Holdings, Inc. together with its direct and indirect subsidiaries, including HDS.  Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

 

FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This quarterly report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth strategies and the industries in which we operate.

 

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those factors discussed in Item 1A, Risk Factors in our annual report on Form 10-K for the fiscal year ended January 29, 2017 and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our results of operations, financial condition and liquidity, and the development of industries in which we operate include:

 

·                  inherent risks of the maintenance, repair and operations market and the non-residential and residential construction markets;

 

·                  our ability to maintain profitability;

 

·                  our ability to service our debt and to refinance all or a portion of our indebtedness;

 

·                  limitations and restrictions in the agreements governing our indebtedness;

 

·                  the competitive environment in which we operate and demand for our products and services in highly competitive and fragmented industries;

 

·                  the loss of any of our significant customers;

 

·                  competitive pricing pressure from our customers;

 

·                  our ability to identify and acquire suitable acquisition candidates on favorable terms;

 

·                  cyclicality and seasonality of the maintenance, repair and operations market and the non-residential and residential construction markets;

 

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·                  our ability to identify and develop relationships with a sufficient number of qualified suppliers and to maintain our supply chains;

 

·                  our ability to manage fixed costs;

 

·                  the development of alternatives to distributors in the supply chain;

 

·                  our ability to manage our working capital through product purchasing and customer credit policies;

 

·                  potential material liabilities under our self-insured programs;

 

·                  our ability to attract, train and retain highly qualified associates and key personnel;

 

·                  risks related to legal proceedings to which we are a party, including existing securities and shareholder derivative lawsuits;

 

·                  limitations on our income tax net operating loss carryforwards in the event of an ownership change; and

 

·                  our ability to identify and integrate new products.

 

You should read this report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, except share and per share data, unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

October 29,
2017

 

October 30,
2016

 

Net Sales

 

$

1,370

 

$

1,275

 

$

3,938

 

$

3,734

 

Cost of sales

 

828

 

763

 

2,373

 

2,240

 

Gross Profit

 

542

 

512

 

1,565

 

1,494

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

336

 

329

 

1,008

 

954

 

Depreciation and amortization

 

21

 

21

 

63

 

63

 

Restructuring

 

3

 

3

 

3

 

14

 

Total operating expenses

 

360

 

353

 

1,074

 

1,031

 

Operating Income

 

182

 

159

 

491

 

463

 

Interest expense

 

36

 

65

 

134

 

219

 

Interest income

 

(1

)

 

(1

)

 

Loss on extinguishment & modification of debt

 

78

 

59

 

81

 

174

 

Income from Continuing Operations Before Provision for Income Taxes

 

69

 

35

 

277

 

70

 

Provision for income taxes

 

23

 

15

 

92

 

30

 

Income from Continuing Operations

 

46

 

20

 

185

 

40

 

Income from discontinued operations, net of tax

 

406

 

40

 

794

 

104

 

Net Income

 

$

452

 

$

60

 

$

979

 

$

144

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

1

 

(1

)

(1

)

1

 

Total Comprehensive Income

 

$

453

 

$

59

 

$

978

 

$

145

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

 

 

 

 

Basic

 

185,651

 

199,593

 

194,704

 

199,217

 

Diluted

 

186,652

 

202,007

 

196,258

 

201,786

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.25

 

$

0.10

 

$

0.95

 

$

0.20

 

Income from Discontinued Operations

 

$

2.19

 

$

0.20

 

$

4.08

 

$

0.52

 

Net Income

 

$

2.43

 

$

0.30

 

$

5.03

 

$

0.72

 

Diluted Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.25

 

$

0.10

 

$

0.94

 

$

0.20

 

Income from Discontinued Operations

 

$

2.18

 

$

0.20

 

$

4.05

 

$

0.52

 

Net Income

 

$

2.42

 

$

0.30

 

$

4.99

 

$

0.71

 

 


(1)               May not foot due to rounding.

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

Amounts in millions, except share and per share data, unaudited

 

 

 

October 29,
2017

 

January 29,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

461

 

$

75

 

Receivables, less allowance for doubtful accounts of $11 and $9

 

689

 

559

 

Inventories

 

662

 

606

 

Current assets of discontinued operations

 

 

575

 

Other current assets

 

38

 

32

 

Total current assets

 

1,850

 

1,847

 

Property and equipment, net

 

298

 

253

 

Goodwill

 

1,807

 

1,807

 

Intangible assets, net

 

93

 

102

 

Deferred tax asset

 

298

 

556

 

Non-current assets of discontinued operations

 

 

1,122

 

Other assets

 

19

 

20

 

Total assets

 

$

4,365

 

$

5,707

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

405

 

$

320

 

Accrued compensation and benefits

 

84

 

98

 

Current installments of long-term debt

 

11

 

14

 

Current liabilities of discontinued operations

 

 

259

 

Other current liabilities

 

161

 

152

 

Total current liabilities

 

661

 

843

 

Long-term debt, excluding current installments

 

2,087

 

3,798

 

Non-current liabilities of discontinued operations

 

 

20

 

Other liabilities

 

123

 

86

 

Total liabilities

 

2,871

 

4,747

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 186.3 million and 201.4 million shares issued and outstanding at October 29, 2017 and January 29, 2017, respectively

 

2

 

2

 

Paid-in capital

 

4,018

 

3,962

 

Accumulated deficit

 

(1,956

)

(2,969

)

Accumulated other comprehensive loss

 

(16

)

(15

)

Treasury stock, at cost, 17.4 million and 0.6 million shares at October 29, 2017 and January 29, 2017, respectively

 

(554

)

(20

)

Total stockholders’ equity

 

1,494

 

960

 

Total liabilities and stockholders’ equity

 

$

4,365

 

$

5,707

 

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

 

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

979

 

$

144

 

Reconciliation of net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

73

 

76

 

Provision for uncollectibles

 

6

 

5

 

Non-cash interest expense

 

11

 

13

 

Payment of discounts upon extinguishment of debt

 

(6

)

 

Loss on extinguishment & modification of debt

 

81

 

174

 

Stock-based compensation expense

 

19

 

15

 

Deferred income taxes

 

316

 

93

 

(Gain) loss on sales of businesses, net

 

(930

)

7

 

Other

 

 

(2

)

Changes in assets and liabilities, net of the effects of acquisitions & dispositions:

 

 

 

 

 

(Increase) decrease in receivables

 

(249

)

(236

)

(Increase) decrease in inventories

 

(116

)

(119

)

(Increase) decrease in other current assets

 

1

 

 

(Increase) decrease in other assets

 

1

 

 

Increase (decrease) in accounts payable and accrued liabilities

 

132

 

134

 

Increase (decrease) in other long-term liabilities

 

2

 

 

Net cash provided by (used in) operating activities

 

320

 

304

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(65

)

(59

)

Proceeds from sales of property and equipment

 

2

 

2

 

Proceeds from sales of businesses, net

 

2,450

 

28

 

Net cash provided by (used in) investing activities

 

2,387

 

(29

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock under employee benefit plans

 

37

 

23

 

Purchase of treasury shares

 

(555

)

(24

)

Borrowings of long-term debt

 

113

 

1,547

 

Repayments of long-term debt

 

(1,526

)

(2,435

)

Borrowings on long-term revolver debt

 

624

 

510

 

Repayments on long-term revolver debt

 

(989

)

 

Debt issuance costs

 

(26

)

(19

)

Other financing activities

 

1

 

(1

)

Net cash provided by (used in) financing activities

 

(2,321

)

(399

)

Effect of exchange rates on cash and cash equivalents

 

 

1

 

Increase (decrease) in cash and cash equivalents

 

$

386

 

$

(123

)

Cash and cash equivalents at beginning of period

 

75

 

269

 

Cash and cash equivalents at end of period

 

$

461

 

$

146

 

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

October 29,
2017

 

October 30,
2016

 

Net Sales

 

$

1,370

 

$

1,275

 

$

3,938

 

$

3,734

 

Cost of sales

 

828

 

763

 

2,373

 

2,240

 

Gross Profit

 

542

 

512

 

1,565

 

1,494

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

336

 

329

 

1,008

 

954

 

Depreciation and amortization

 

21

 

21

 

63

 

63

 

Restructuring

 

3

 

3

 

3

 

14

 

Total operating expenses

 

360

 

353

 

1,074

 

1,031

 

Operating Income

 

182

 

159

 

491

 

463

 

Interest expense

 

36

 

65

 

134

 

219

 

Interest income

 

(1

)

 

(1

)

 

Loss on extinguishment & modification of debt

 

78

 

59

 

81

 

174

 

Income from Continuing Operations Before Provision for Income Taxes

 

69

 

35

 

277

 

70

 

Provision for income taxes

 

23

 

15

 

92

 

30

 

Income from Continuing Operations

 

46

 

20

 

185

 

40

 

Income from discontinued operations, net of tax

 

406

 

40

 

794

 

104

 

Net Income

 

$

452

 

$

60

 

$

979

 

$

144

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

1

 

(1

)

(1

)

1

 

Total Comprehensive Income

 

$

453

 

$

59

 

$

978

 

$

145

 

 

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

 

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Table of Contents

 

HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

Amounts in millions, except share and per share data, unaudited

 

 

 

October 29,
2017

 

January 29,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

461

 

$

73

 

Receivables, less allowance for doubtful accounts of $11 and $9

 

689

 

559

 

Inventories

 

662

 

606

 

Current assets of discontinued operations

 

 

575

 

Other current assets

 

37

 

32

 

Total current assets

 

1,849

 

1,845

 

Property and equipment, net

 

298

 

253

 

Goodwill

 

1,807

 

1,807

 

Intangible assets, net

 

93

 

102

 

Deferred tax asset

 

298

 

556

 

Non-current assets of discontinued operations

 

 

1,122

 

Other assets

 

19

 

20

 

Total assets

 

$

4,364

 

$

5,705

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

405

 

$

320

 

Accrued compensation and benefits

 

84

 

98

 

Current installments of long-term debt

 

11

 

14

 

Current liabilities of discontinued operations

 

 

259

 

Other current liabilities

 

159

 

152

 

Total current liabilities

 

659

 

843

 

Long-term debt, excluding current installments

 

2,087

 

3,798

 

Non-current liabilities of discontinued operations

 

 

20

 

Other liabilities

 

123

 

86

 

Total liabilities

 

2,869

 

4,747

 

Stockholder’s equity:

 

 

 

 

 

Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at October 29, 2017 and January 29, 2017

 

 

 

Paid-in capital

 

3,308

 

3,806

 

Accumulated deficit

 

(1,797

)

(2,833

)

Accumulated other comprehensive loss

 

(16

)

(15

)

Total stockholder’s equity

 

1,495

 

958

 

Total liabilities and stockholder’s equity

 

$

4,364

 

$

5,705

 

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

 

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

979

 

$

144

 

Reconciliation of net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

73

 

76

 

Provision for uncollectibles

 

6

 

5

 

Non-cash interest expense

 

11

 

13

 

Payment of discounts upon extinguishment of debt

 

(6

)

 

Loss on extinguishment & modification of debt

 

81

 

174

 

Stock-based compensation expense

 

19

 

15

 

Deferred income taxes

 

316

 

93

 

(Gain) loss on sales of businesses, net

 

(930

)

7

 

Other

 

 

(2

)

Changes in assets and liabilities, net of the effects of acquisitions & dispositions:

 

 

 

 

 

(Increase) decrease in receivables

 

(249

)

(236

)

(Increase) decrease in inventories

 

(116

)

(119

)

(Increase) decrease in other current assets

 

1

 

 

(Increase) decrease in other assets

 

1

 

 

Increase (decrease) in accounts payable and accrued liabilities

 

132

 

134

 

Increase (decrease) in other long-term liabilities

 

2

 

 

Net cash provided by (used in) operating activities

 

320

 

304

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(65

)

(59

)

Proceeds from sales of property and equipment

 

2

 

2

 

Proceeds from sales of businesses, net

 

2,450

 

28

 

Net cash provided by (used in) investing activities

 

2,387

 

(29

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Equity distribution

 

(516

)

 

Borrowings of long-term debt

 

113

 

1,547

 

Repayments of long-term debt

 

(1,526

)

(2,435

)

Borrowings on long-term revolver debt

 

624

 

510

 

Repayments on long-term revolver debt

 

(989

)

 

Debt issuance costs

 

(26

)

(19

)

Other financing activities

 

1

 

(1

)

Net cash provided by (used in) financing activities

 

(2,319

)

(398

)

Effect of exchange rates on cash and cash equivalents

 

 

1

 

Increase (decrease) in cash and cash equivalents

 

$

388

 

$

(122

)

Cash and cash equivalents at beginning of period

 

73

 

266

 

Cash and cash equivalents at end of period

 

$

461

 

$

144

 

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

HD Supply Holdings, Inc. (‘‘Holdings’’) indirectly owns all of the outstanding common stock of HD Supply, Inc. (“HDS”).

 

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in two distinct market sectors: Maintenance, Repair & Operations and Specialty Construction. Through approximately 220 branches and 44 distribution centers, in the U.S. and Canada, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services includes approximately 500,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from construction to maintenance, repair and operations.

 

HD Supply is managed primarily on a product line basis and reports results of operations in two reportable segments: Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

 

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

 

Basis of Presentation

 

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended January 29, 2017, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).

 

Fiscal Year

 

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  Fiscal years ending January 28, 2018 (“fiscal 2017”) and January 29, 2017 (“fiscal 2016”) both include 52 weeks.  The three months ended October 29, 2017 (“third quarter 2017”) and October 30, 2016 (“third quarter 2016”) both include 13 weeks. The nine months ended October 29, 2017 and October 30, 2016 both include 39 weeks.

 

Principles of Consolidation

 

The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS. The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition. The results of operations of all discontinued operations have been separately reported as discontinued operations for all periods presented.

 

Estimates

 

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Self-Insurance

 

HD Supply has a high deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation and certain legal claims, and is self-insured for medical claims, while maintaining per employee stop loss coverage. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience.  At October 29, 2017 and January 29, 2017, self-insurance reserves for continuing operations totaled approximately $57 million and $56 million, respectively. At January 29, 2017, self-insurance reserves classified as discontinued operations totaled approximately $23 million. See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

 

NOTE 2 — DISCONTINUED OPERATIONS

 

In August 2017, the Company completed the sale of its Waterworks business and received cash proceeds of approximately $2.4 billion, net of transaction cost payments of approximately $38 million. In the nine months ended October 29, 2017, the Company recognized a gain on the sale of the Waterworks business of approximately $725 million, net of tax of $202 million. The sale is subject to a post-closing working capital adjustment which the Company expects to settle in fiscal 2017.

 

In accordance with ASC 740, “Income Taxes,” a deferred tax asset should be recognized for the excess of the tax basis over the financial reporting carrying value of an investment in a subsidiary (“outside basis difference”) when it is apparent that the temporary difference will reverse in the foreseeable future. In connection with presenting the Waterworks business unit as a discontinued operation in the second quarter of fiscal 2017, the Company was required to re-evaluate its position related to the recognition of a deferred tax asset or liability for the outside basis difference of the Waterworks corporate subsidiary being sold. In prior years, and as required under ASC 740, deferred taxes for such outside basis difference had not been recognized because the outside basis difference was deemed permanent in nature. Due to the pending sale of the Waterworks business in the second quarter of fiscal 2017, the outside basis difference was no longer deemed to be permanent in nature and was expected to reverse in the foreseeable future. As a result, a net deferred tax asset of $323 million and a corresponding income tax benefit for the difference in the Company’s stock basis versus its book carrying value of the Waterworks corporate subsidiary was recorded in the second quarter of fiscal 2017. Since the deferred tax asset was settled by HD Supply, the deferred tax asset was not included in the assets held for sale as of July 30, 2017. However, the income statement benefit associated with recording the $323 million deferred tax asset was recorded as discontinued operations. At the completion of the sale, the Company recognized a tax expense of approximately $525 million in discontinued operations in the third quarter of fiscal 2017, which included $323 million related to utilizing the deferred tax asset recorded in the second quarter. The Company estimates that it will utilize approximately $266 million of tax-effected federal and state net operating loss carryforwards as a result of the sale of the Waterworks business.

 

In October 2017, the Company recognized a $3 million gain due to the expiration of indemnification for tax positions related to the Canadian operations of the Power Solutions business whose sale was completed by the Company in October 2015.

 

In May 2016, the Company completed the sale of its Interior Solutions business.

 

Summary Financial Information

 

In accordance with Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations,” as amended, the results of Waterworks and Interior Solutions are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain/loss on the disposition of businesses, net of tax, as one line item on the Consolidated Statements of Operations

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and Comprehensive Income. All Consolidated Statements of Operations and Comprehensive Income presented have been revised to reflect this presentation.

 

The following table provides additional detail related to the results of operations of the discontinued operations (amounts in millions):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

October 29,
2017

 

October 30,
2016

 

Net sales

 

$

10

 

$

733

 

$

1,413

 

$

2,155

 

Cost of sales

 

8

 

563

 

1,100

 

1,657

 

Gross Profit

 

2

 

170

 

313

 

498

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1

 

95

 

198

 

308

 

Depreciation and amortization

 

 

3

 

6

 

9

 

Restructuring Charges

 

 

 

 

1

 

Total operating expenses

 

1

 

98

 

204

 

318

 

Operating Income

 

1

 

72

 

109

 

180

 

(Gain) loss on disposal of discontinued operations

 

(934

)

4

 

(930

)

7

 

Other (income) expense, net

 

1

 

 

1

 

 

Income before provision for income taxes

 

934

 

68

 

1,038

 

173

 

Provision for income taxes

 

528

 

28

 

244

 

69

 

Income from discontinued operations, net of tax

 

$

406

 

$

40

 

$

794

 

$

104

 

 

At October 29, 2017 and January 29, 2017, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets were as follows (amounts in millions):

 

 

 

October 29,
2017

 

January 29,
2017

 

Current assets:

 

 

 

 

 

Receivables, less allowance for doubtful accounts of $0 and $4

 

$

 

$

346

 

Inventories

 

 

225

 

Other current assets

 

 

4

 

Total current assets

 

 

575

 

Property and equipment, net

 

 

51

 

Goodwill

 

 

1,061

 

Intangible assets, net

 

 

10

 

Total non-current assets

 

 

1,122

 

Total assets of discontinued operations

 

$

 

$

1,697

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

 

$

212

 

Accrued compensation and benefits

 

 

42

 

Other current liabilities

 

 

5

 

Total current liabilities

 

 

259

 

Other non-current liabilities

 

 

20

 

Total non-current liabilities

 

 

20

 

Total liabilities of discontinued operations

 

$

 

$

279

 

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides additional detail related to the net cash provided by operating and investing activities of the discontinued operations (amounts in millions):

 

 

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

 

 

 

 

 

 

Net cash flows provided by operating activities

 

$

28

 

$

124

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(5

)

(7

)

Proceeds from sales of businesses, net

 

2,450

 

28

 

Proceeds from sales of property and equipment, net

 

2

 

1

 

Net cash flows provided by investing activities

 

$

2,447

 

$

22

 

 

NOTE 3 — DEBT

 

HDS’s long-term debt as of October 29, 2017 and January 29, 2017 consisted of the following (dollars in millions):

 

 

 

October 29, 2017

 

January 29, 2017

 

 

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Senior ABL Facility due 2022

 

$

57

 

2.57

 

$

421

 

2.38

 

Term B-1 Loans due 2021

 

 

 

639

 

3.75

 

Term B-2 Loans due 2023

 

 

 

549

 

3.75

 

Term B-3 Loans due 2021

 

535

 

3.58

 

 

 

Term B-4 Loans due 2023

 

546

 

3.83

 

 

 

December 2014 First Priority Notes due 2021

 

 

 

1,250

 

5.25

 

April 2016 Senior Unsecured Notes due 2024

 

1,000

 

5.75

 

1,000

 

5.75

 

Total gross long-term debt

 

$

2,138

 

 

 

$

3,859

 

 

 

Less unamortized discount

 

(6

)

 

 

(9

)

 

 

Less unamortized deferred financing costs

 

(34

)

 

 

(38

)

 

 

Total net long-term debt

 

$

2,098

 

 

 

$

3,812

 

 

 

Less current installments

 

(11

)

 

 

(14

)

 

 

Total net long-term debt, excluding current installments

 

$

2,087

 

 

 

$

3,798

 

 

 

 


(1)                                 Represents the stated rate of interest, without including the effect of discounts or premiums.

 

2017 Refinancing Transactions

 

On September 1, 2017, HDS used a portion of the net proceeds from the sale of the Waterworks business to redeem all of the outstanding $1,250 million in aggregate principal amount of 5.25% Senior Secured First Priority Notes due 2021 (the “December 2014 First Priority Notes”) for an aggregate redemption price of approximately $1,325 million. The redemption price included an approximately $62 million make-whole premium calculated in accordance with terms of the indenture governing the December 2014 First Priority Notes (“the 2014 indenture”) and $14 million of accrued but unpaid interest to the redemption date. In connection with the redemption, the 2014 indenture, was satisfied and discharged and the liens securing the December 2014 First Priority Notes were released in accordance with the terms of the 2014 indenture. As a result of the redemption, the Company incurred a $73 million loss on extinguishment of debt, which includes the $62 million make-whole premium and the write-off of $11 million of unamortized deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

On August 31, 2017, HDS entered into a Fifth Amendment (the “Fifth Amendment”) to the credit agreement governing HDS’s existing Term Loan Facility, as defined below. Pursuant to the Fifth Amendment, HDS amended its existing Term Loan Facility to, among other things, (i) refinance all the outstanding term loans in an original

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

aggregate principal amount of $842 million (the “Term B-1 Loans”) with a new tranche of term loans (the “Term B-3 Loans”) in an aggregate principal amount of $535 million, (ii) refinance all the outstanding  term loans in an original aggregate principal of $550 million (the “Term B-2 Loans”) with a new tranche of term loans (the “Term B-4 Loans”) in an aggregate principal amount of $546 million and (iii) amend the definition of “Permitted Payments” contained in the credit agreement to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the credit agreement) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s Consolidated Total Leverage Ratio (as defined in the credit agreement) does not exceed 3.00 to 1.00.

 

The Fifth Amendment also provides for a prepayment premium equal to 1.00% of the aggregate principal amount of the applicable Term Loans, as defined below, being prepaid if, on or prior to March 2, 2018, the Company enters into certain repricing transactions.

 

In connection with the Fifth Amendment, the Company paid approximately $1 million in consent fees and incurred a modification and extinguishment charge of approximately $3 million, which includes financing fees and other costs of approximately $1 million and the write-off of approximately $2 million of a portion of the related unamortized discount and deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

On August 25, 2017, HDS entered into the Second Supplemental Indenture (the “Second Supplemental Indenture”) which amends and supplements the Indenture, dated as of April 11, 2016, as amended and supplemented by the First Supplemental Indenture, dated as of April 11, 2016 (together, the “2016 indenture”). Holders of a majority in aggregate principal amount of the outstanding April 2016 Senior Unsecured Notes consented to the proposed amendments included in the Second Supplemental Indenture.

 

The Second Supplemental Indenture (a) amends the definition of “Permitted Payments” contained in the 2016 indenture to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the Indenture) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s Consolidated Total Leverage Ratio (as defined in the Indenture) does not exceed 3.00 to 1.00; (b) increase the interest rate for the April 2016 Senior Unsecured Notes to 7.00% per annum commencing April 15, 2019, to the extent the April 2016 Senior Unsecured Notes remain outstanding after April 15, 2019; (c) amend the definition of “Net Available Cash” contained in the Indenture to provide that proceeds from the sale of the Waterworks business unit consummated on August 1, 2017 (other than proceeds to be applied to redeem the December 2014 First Priority Notes) shall be excluded and accordingly, the Company will not be required to apply the remaining net proceeds in accordance with the provision of the “Sale of Assets” covenant of the Indenture and (d) amend the definition of “Consolidated EBITDA” contained in the 2016 indenture to provide that while the Company may continue to include in the calculation thereof projected cost savings, it may only do so with respect those realized as a result of actions taken or to be taken in connection with a purchase of assets from, or a sale of assets to, a third party (excluding the Waterworks Sale (as defined in the Second Supplemental Indenture)).

 

As a result of entering into the Second Supplemental Indenture, the Company paid approximately $15 million in consent fees to holders of the outstanding April 2016 Senior Unsecured Notes, which are capitalized as deferred financing costs and amortized over the expected life of the April 2016 Senior Unsecured Notes. Additionally, the Company incurred a modification charge of approximately $3 million for financing fees, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, as defined below, to repay $100 million aggregate principal of its Term B-1 Loans. As a result, the Company incurred a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs for $1 million each, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On April 5, 2017, HDS entered into a Third Amendment (the “Third Amendment”) to the credit agreement governing its existing Senior ABL Facility. The Third Amendment, among other things, reduced the applicable margin for borrowings under the Senior ABL Facility, reduced the applicable commitment fee, and extended the maturity date of the Senior ABL Facility until April 5, 2022. As a result, the Company recorded a $1 million loss on extinguishment of debt, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments,” for the write-off of $1 million of unamortized deferred financing costs.

 

Senior Credit Facilities

 

Senior ABL Facility

 

HDS’s Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under a borrowing base).  Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments.  A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of October 29, 2017, HDS had $899 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $27 million in letters of credit issued and including $155 million of borrowings available on qualifying cash balances). As of October 29, 2017, all outstanding borrowings on the Senior ABL Facility are Canadian borrowings.

 

At HDS’s option, the interest rates applicable to the loans under the Senior ABL Facility are based (i) in the case of U.S. dollar-denominated loans, either at London Interbank Offered Rate (“LIBOR”) plus an applicable margin, or Prime Rate plus an applicable margin and (ii) in the case of Canadian dollar-denominated loans, either the banker’s acceptance (“BA”) rate plus an applicable margin, or the Canadian Prime Rate plus an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the agreement governing the Senior ABL Facility, based on average excess availability for the previous fiscal quarter. The Senior ABL Facility also contains a letter of credit fee computed at a rate per annum equal to the Applicable Margin (as defined in the Senior ABL Facility agreement) then in effect for LIBOR Loans and an unused commitment fee subject to a pricing grid, included in the agreement governing the Senior ABL Facility, based on the Average Daily Used Percentage (as defined in the Senior ABL Facility).

 

The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility.

 

Senior Term Loan Facility

 

HDS’s Senior Term Facility (the “Senior Term Facility”) consists of a senior secured term loan facility (the ‘‘Term Loan Facility,’’ and the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans with remaining aggregate principal amount of $1,081 million. Term B-3 Loans will mature on August 13, 2021 and Term B-4 Loans will mature on October 17, 2023. Both Term B-3 Loans and Term B-4 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loans with the balances payable on their respective maturity dates. Term B-3 Loans bear interest at the applicable margin for borrowings of 2.25% for LIBOR borrowings and 1.25% for base rate borrowings. Term B-4 Loans bear interest at the applicable margin for borrowings of 2.50% for LIBOR borrowings and 1.50% for base rate borrowings.

 

For additional information on our Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended January 29, 2017.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Secured Notes

 

5.25% Senior Secured First Priority Notes due 2021

 

HDS’s December 2014 First Priority Notes bore interest at 5.25% per annum with a maturity date of December 15, 2021. Interest was paid semi-annually in arrears on June 15th and December 15th of each year, prior to the September 1, 2017 redemption described above under “2017 Refinancing Transactions.”

 

Unsecured Notes

 

5.75% Senior Unsecured Notes due 2024

 

HDS’s 5.75% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”) bear interest at a rate of 5.75% until April 15, 2019 and 7.00% from April 15, 2019 until maturity on April 15, 2024. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

 

Redemption

 

HDS may redeem the April 2016 Senior Unsecured Notes, in whole or in part, at any time (1) prior to April 15, 2019, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the Indenture and (2) on and after April 15, 2019, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on April 15 of the year set forth below.

 

Year

 

Percentage

 

2019

 

104.313

%

2020

 

102.875

%

2021

 

101.438

%

2022 and thereafter

 

100.000

%

 

In addition, at any time prior to April 15, 2019, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the April 2016 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.75% of the principal amount in respect of the April 2016 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the April 2016 Senior Unsecured Notes are redeemed, an aggregate principal amount of April 2016 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of April 2016 Senior Unsecured Notes must remain outstanding immediately after each such redemption of April 2016 Senior Unsecured Notes.

 

For additional information on the April 2016 Senior Unsecured Notes, including guarantees and security, please refer to “2017 Refinancing Transactions,” above, and the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended January 29, 2017.

 

Debt covenants

 

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness and dividend payments and restrictions on the use of proceeds from asset dispositions. As of October 29, 2017, HDS was in compliance with all such covenants that were in effect on such date.

 

NOTE 4 — FAIR VALUE MEASUREMENTS

 

The fair value measurements and disclosure principles of GAAP, ASC 820, “Fair Value Measurements and Disclosures,” define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements.  These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly;

 

Level 3 — Unobservable inputs in which little or no market activity exists.

 

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of October 29, 2017 and January 29, 2017 (amounts in millions):

 

 

 

As of October 29, 2017

 

As of January 29, 2017

 

 

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Senior ABL Facility

 

$

57

 

$

57

 

$

421

 

$

410

 

Term Loans and Notes

 

2,081

 

2,171

 

3,438

 

3,572

 

Total

 

$

2,138

 

$

2,228

 

$

3,859

 

$

3,982

 

 


(1) These amounts do not include accrued interest; accrued interest is classified as Other current liabilities in the accompanying Consolidated Balance Sheets. These amounts do not include any related discounts, premiums, or deferred financing costs.

 

The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt.  Management’s fair value estimates were based on quoted prices for recent trades of HDS’s long-term debt, recent similar credit facilities initiated by companies with like credit quality in similar industries, quoted prices for similar instruments, and inquiries with certain investment communities.

 

NOTE 5 — INCOME TAXES

 

For the nine months ended October 29, 2017, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was an expense of 33.2%. The effective rate for continuing operations for the nine months ended October 30, 2016 was an expense of 42.9%.

 

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of audits. For the nine months ended October 29, 2017, the application of stock-based compensation expense guidance in Accounting Standards Update (“ASU”) No. 2016-09 resulted in discrete tax benefits of $14 million from the exercise and vesting of stock based awards, which lowered the effective tax rate by 510 basis points. For additional information on the Company’s adoption of ASU No. 2016-09, see “Note 12 - Recent Accounting Pronouncements.”

 

As of January 29, 2017, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP, ASC 740, “Income Taxes,” were $10 million. As of October 29, 2017, the Company’s unrecognized tax benefits decreased by $2 million. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of January 29, 2017 was zero and remained unchanged as of October 29, 2017.  As of January 29, 2017, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $5 million and remained unchanged as of October 29, 2017. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6—BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

 

The following basic and diluted weighted average common shares information is provided for Holdings.

 

The reconciliation of basic to diluted weighted average common shares for the three and nine months ended October 29, 2017 and October 30, 2016 was as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

October 29,
2017

 

October 30,
2016

 

Weighted-average common shares

 

185,651

 

199,593

 

194,704

 

199,217

 

Effect of potentially dilutive stock plan securities

 

1,001

 

2,414

 

1,554

 

2,569

 

Diluted weighted-average common shares

 

186,652

 

202,007

 

196,258

 

201,786

 

Stock plan securities excluded from dilution (1)

 

2,414

 

1,327

 

1,966

 

1,885

 

 


(1)   Represents securities not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

 

Stock plan securities consist of securities (stock options, restricted stock and restricted stock units) granted under Holdings’ stock-based compensation plans.

 

NOTE 7 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables as of October 29, 2017 and January 29, 2017 consisted of the following (amounts in millions):

 

 

 

October 29,
2017

 

January 29,
2017

 

Trade receivables, net of allowance for doubtful accounts

 

$

614

 

$

499

 

Vendor rebate receivables

 

60

 

50

 

Other receivables

 

15

 

10

 

Total receivables, net

 

$

689

 

$

559

 

 

Other Current Liabilities

 

Other current liabilities as of October 29, 2017 and January 29, 2017 consisted of the following (amounts in millions):

 

 

 

HD Supply Holdings, Inc.

 

HD Supply, Inc.

 

 

 

October 29,
2017

 

January 29,
2017

 

October 29,
2017

 

January
29, 2017

 

Accrued interest

 

$

6

 

$

30

 

$

6

 

$

30

 

Accrued non-income taxes

 

37

 

30

 

37

 

30

 

Unsettled share repurchases

 

2

 

 

 

 

Other

 

116

 

92

 

116

 

92

 

Total other current liabilities

 

$

161

 

$

152

 

$

159

 

$

152

 

 

Supplemental Cash Flow Information

 

Cash paid for interest in the nine months ended October 29, 2017 and October 30, 2016 was $148 million and $249 million, respectively. During the nine months ended October 29, 2017, the Company paid $6 million of original issue discounts related to the $100 million payment on the Term B-1 Loans and the Fifth Amendment to the Term Loan Facility.

 

Cash paid for income taxes, net of refunds, in the nine months ended October 29, 2017 and October 30, 2016 was approximately $27 million and $12 million, respectively. Cash paid for income taxes in the nine months ended October 29, 2017 includes $13 million in taxes paid related to the sale of the Waterworks business.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the nine months ended October 29, 2017, HDS executed an equity cash distribution of $516 million to Holdings, via HDS’s direct parent, HDS Holding Corporation. The equity distribution from HDS and return of capital recognized by Holdings were eliminated in consolidation of Holdings and its wholly-owned subsidiaries, including HDS.

 

On June 3, 2017, Holdings’ Board of Directors authorized the Company to enter into a share repurchase program for the repurchase of up to an aggregate amount of $500 million of Holdings’ common stock. As of October 29, 2017, under this plan, Holdings has completed the repurchase of all $500 million of common stock authorized, purchasing 15,940,337 shares of its common stock.

 

On August 25, 2017, Holdings’ Board of Directors authorized the Company to enter into a new share repurchase program for the repurchase of up to an aggregate amount of $500 million of Holdings’ common stock. As of October 29, 2017, under this plan, Holdings has repurchased 477,991 shares of its common stock for approximately $17 million.

 

In combination with the 2014 authorized share repurchase plan, Holdings has repurchased a total of 17,453,713 shares of its common stock during the first nine months of fiscal 2017 for $556 million, of which $2 million remain unsettled as of October 29, 2017.

 

Significant Non-Cash Transactions

 

During the nine months ended October 29, 2017, Holdings retired 611,433 shares of its common stock (“Retired Shares”) held as treasury shares by Holdings in the amount of $23 million. All of these shares were repurchased by Holdings pursuant to the publicly announced share repurchase program previously authorized by Holdings’ board of directors.  Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with ASC 505-30, “Equity-Treasury Stock,” Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

 

Build-to-Suit Lease

 

On February 4, 2016, the Company entered into a build-to-suit arrangement for a leadership development and headquarters facility in Atlanta, Georgia, which began construction in 2016. The lease commences upon completion of construction which is anticipated to be early 2018.

 

In accordance with ASC 850, “Leases,” for build-to-suit arrangements where the Company is involved in the construction of structural improvements prior to the commencement of the lease or takes some level of construction risk, the Company is considered the owner of the assets and land during the construction period. Accordingly, during construction activities, the Company recorded a Construction in progress asset within Property and equipment and a corresponding financing liability on the Consolidated Balance Sheet for contributions by the landlord toward construction. Once the construction is completed, if the lease meets certain “sales-leaseback” criteria, the Company will remove the asset and related financial obligation from the Consolidated Balance Sheet and treat the building lease as an operating lease. If upon completion of construction, the lease does not meet the “sales-leaseback” criteria, the leased property will be treated as a capital lease and included in Property and equipment on the Consolidated Balance Sheet. As of October 29, 2017, the Consolidated Balance Sheet includes $65 million of build-to-suit assets in Construction in progress, and the corresponding financial obligation of $65 million in Other long-term liabilities in the Consolidated Balance Sheet.

 

NOTE 8—RESTRUCTURING ACTIVITIES

 

Fiscal 2017 Restructuring Plan

 

As a result of the sale of the Waterworks business in third quarter 2017, management evaluated the Company’s talent alignment and functional support strategies. During the third quarter of fiscal 2017, management initiated a restructuring plan that included reducing workforce personnel, resulting in the recognition of $3 million of restructuring charges, primarily related to severance and other employee-related costs.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In addition to actions already taken, management expects to further restructure workforce personnel, close a C&I branch, and relocate the Company’s headquarters in early 2018. Management expects to incur a total of $10 million to $15 million under this plan, and expects a payback of the employee-related costs via a permanent reduction in personnel costs over the next one to two years.

 

The expected charges include approximately $6 million related to property lease obligations upon exiting the Company’s current headquarters location. The Company will actively pursue buyout options or subleasing opportunities for the leased property prior to its lease expiration in October 2020.

 

Payments for the charges incurred in the third quarter of fiscal 2017 are expected to be substantially complete in the next twelve months. As of October 29, 2017, the liability for these restructuring activities was $2 million and is included in Other current liabilities in the Consolidated Balance Sheets.

 

Fiscal 2015 Restructuring Plan

 

As a result of the sale of the Power Solutions business unit in fiscal 2015, management evaluated the Company’s talent alignment and functional support strategies. Consequently, during fiscal 2015, the Company initiated a restructuring plan to strategically align its leadership and functional support teams. During the nine months ended October 30, 2016, the Company incurred $14 million of restructuring charges under this plan. The Company completed the activities under this plan in fiscal 2016 and does not expect to incur any additional charges. As of October 29, 2017 and January 29, 2017, the Company’s liability balance for these restructuring activities was $2 million and $4 million respectively, and is included in Other current liabilities in the Consolidated Balance Sheets. Payments for these charges are expected to be substantially complete by the end of fiscal 2017.

 

NOTE 9 — COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”).  Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the defendants on behalf of all persons other than defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive.  The Amended Complaint alleges that defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit.  The Amended Complaint asserts claims against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and other costs.

 

On August 8, 2017, two shareholder derivative complaints were filed naming the Company as a “nominal defendant” and certain members of its senior management and board of directors (collectively, the “individual defendants”) as defendants.  The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions.  The complaints assert claims against the individual defendants under Section 14(a) of the Securities Exchange Act of 1934, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling.  The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. In October 2017, the Court consolidated the two derivative

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

actions and granted the parties’ joint scheduling order request.  The plaintiffs have until December 18, 2017, to file or designate a consolidated amended complaint.

 

The Company intends to defend these lawsuits vigorously.  Given the stage of the complaints and the claims and issues presented in the above matters, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.

 

HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters that are reasonably possible and reasonably estimable, including matters that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued for, management has estimated the aggregate range of potential loss as $0 to $10 million. If a material loss is probable or reasonably possible, and in either case estimable, the Company has considered it in the analysis and it is included in the discussion set forth above.

 

NOTE 10 — SEGMENT INFORMATION

 

HD Supply’s operating segments are based on management structure and internal reporting. Each segment offers different products and services to the end customer, except for Corporate, which provides general corporate overhead support. The Company determines its reportable segments in accordance with the principles of segment reporting within ASC 280, “Segment Reporting.” For purposes of evaluation under these segment reporting principles, the Chief Operating Decision Maker for HD Supply assesses HD Supply’s ongoing performance based on the periodic review and evaluation of Net sales, Adjusted EBITDA and certain other measures for each of the operating segments.

 

HD Supply has two reportable segments, each of which is presented below:

 

·                  Facilities Maintenance—Facilities Maintenance distributes maintenance, repair and operations (‘‘MRO’’) products, provides value-add services and fabricates custom products to multifamily, hospitality, healthcare and institutional facilities.

 

·                  Construction & Industrial—Construction & Industrial distributes specialized hardware, tools, engineered materials and safety products to non-residential and residential contractors. Construction & Industrial also offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals.

 

In addition to the reportable segments, the Company’s consolidated financial results include ‘‘Corporate.’’ Corporate includes costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services, and removes inter-segment transactions.

 

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business, a previous HD Supply reportable segment.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables present Net sales, Adjusted EBITDA, and other measures for each of the reportable segments and total continuing operations for the periods indicated (amounts in millions):

 

 

 

Facilities
Maintenance

 

Construction
& Industrial

 

Corporate

 

Total
Continuing
Operations

 

Three Months Ended October 29, 2017

 

 

 

 

 

 

 

 

 

Net sales

 

$

754

 

$

617

 

$

(1

)

$

1,370

 

Adjusted EBITDA

 

153

 

76

 

(15

)

214

 

Depreciation(1) & Software Amortization

 

7

 

9

 

3

 

19

 

Other Intangible Amortization

 

1

 

1

 

1

 

3

 

Three Months Ended October 30, 2016

 

 

 

 

 

 

 

 

 

Net sales

 

$

724

 

$

552

 

$

(1

)

$

1,275

 

Adjusted EBITDA

 

140

 

67

 

(19

)

188

 

Depreciation(1) & Software Amortization

 

8

 

7

 

4

 

19

 

Other Intangible Amortization

 

1

 

1

 

1

 

3

 

Nine Months Ended October 29, 2017

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,205

 

$

1,737

 

$

(4

)

$

3,938

 

Adjusted EBITDA

 

426

 

200

 

(47

)

579

 

Depreciation(1) & Software Amortization

 

19

 

27

 

11

 

57

 

Other Intangible Amortization

 

4

 

1

 

4

 

9

 

Nine Months Ended October 30, 2016

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,142

 

$

1,597

 

$

(5

)

$

3,734

 

Adjusted EBITDA

 

425

 

184

 

(51

)

558

 

Depreciation(1) & Software Amortization

 

23

 

24

 

10

 

57

 

Other Intangible Amortization

 

4

 

1

 

4

 

9

 

 


(1)         Depreciation includes amounts recorded within Cost of sales in the Consolidated Statements of Operations.

 

Reconciliation to Consolidated Financial Statements

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 29,
2017

 

October 30,
2016

 

October 29,
2017

 

October 30,
2016

 

Total Adjusted EBITDA

 

$

214

 

$

188

 

$

579

 

$

558

 

Depreciation and amortization(1)

 

22

 

22

 

66

 

66

 

Stock-based compensation

 

7

 

4

 

19

 

15

 

Restructuring

 

3

 

3

 

3

 

14

 

Operating Income

 

182

 

159

 

491

 

463

 

Interest expense

 

36

 

65

 

134

 

219

 

Interest income

 

(1

)

 

(1

)

 

Loss on extinguishment & modification of debt(2)

 

78

 

59

 

81

 

174

 

Income from Continuing Operations Before Provision for Income Taxes

 

69

 

35

 

277

 

70

 

Provision for income taxes

 

23

 

15

 

92

 

30

 

Income from Continuing Operations

 

46

 

20

 

185

 

40

 

Income from discontinued operations, net of tax

 

406

 

40

 

794

 

104

 

Net Income

 

$

452

 

$

60

 

$

979

 

$

144

 

 


(1)         Depreciation and amortization includes amounts recorded within Cost of sales in the Consolidated Statements of Operations.

(2)         Represents the loss on extinguishment of debt including the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt. Also includes the costs of debt modifications.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11—SUBSIDIARY GUARANTORS

 

HDS (the “Debt Issuer”) has outstanding April 2016 Senior Unsecured Notes, which are guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the April 2016 Senior Unsecured Notes (the “Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

 

The Debt Issuer’s payment obligations under the April 2016 Senior Unsecured Notes are jointly and severally guaranteed by the guarantors and all guarantees are full and unconditional.

 

These guarantees are subject to release under the circumstances as described below:

 

(i)                         concurrently with any direct or indirect sale or disposition (by merger or otherwise) of any Subsidiary Guarantor or any interest therein in accordance with the terms of the applicable indebtedness by HDS or a restricted subsidiary, following which such Subsidiary Guarantor is no longer a restricted subsidiary of HDS;

 

(ii)                      at any time that such Subsidiary Guarantor is released from all of its obligations under all of its guarantees of payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the Senior ABL Facility;

 

(iii)                   upon the merger or consolidation of any Subsidiary Guarantor with and into HDS or another Subsidiary Guarantor that is the surviving entity in such merger or consolidation, or upon the liquidation of such Subsidiary Guarantor following the transfer of all of its assets to HDS or another Subsidiary Guarantor;

 

(iv)                  concurrently with any Subsidiary Guarantor becoming an unrestricted subsidiary;

 

(v)                     during the period when the rating on the notes is changed to investment grade and certain covenants cease to apply while such investment grade rating is maintained, upon the merger or consolidation of any Subsidiary Guarantor with and into another subsidiary that is not a Subsidiary Guarantor with such other subsidiary being the surviving entity in such merger or consolidation, or upon liquidation of such Subsidiary Guarantor following the transfer of all of its assets to a subsidiary that is not a Subsidiary Guarantor;

 

(vi)                  upon legal or covenant defeasance of HDS’s obligations under the applicable indebtedness, or satisfaction and discharge of the indenture governing the applicable indebtedness; or

 

(vii)               subject to customary contingent reinstatement provisions, upon payment in full of the aggregate principal amount of all applicable indebtedness then outstanding and all other obligations guaranteed by a Subsidiary Guarantor then due and owing.

 

In addition, HDS has the right, upon 30 days’ notice to the applicable trustee, to cause any Subsidiary Guarantor that has not guaranteed payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the Senior ABL Facility to be unconditionally released from all obligations under its Subsidiary Guarantee, and such Subsidiary Guarantee shall thereupon terminate and be discharged and of no further force or effect.

 

In connection with the issuance of the April 2016 Senior Unsecured Notes, HDS determined the need for compliance with Rule 3-10 of SEC Regulation S-X. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, HDS has included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(f) of SEC Regulation S-X. The following supplemental financial information sets forth, on a consolidating basis under the equity method of accounting, the condensed consolidating statements of operations and comprehensive income (loss), the condensed consolidating balance sheets and the condensed consolidating cash flow statements for the Debt Issuer, for the Subsidiary Guarantors and the Non-guarantor Subsidiaries and total consolidated amount for the Debt Issuer and subsidiaries (amounts in millions).

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended October 29, 2017

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

1,333

 

$

37

 

$

 

$

1,370

 

Cost of sales

 

 

808

 

20

 

 

828

 

Gross Profit

 

 

525

 

17

 

 

542

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

22

 

303

 

11

 

 

336

 

Depreciation and amortization

 

4

 

17

 

 

 

21

 

Restructuring

 

2

 

1

 

 

 

3

 

Total operating expenses

 

28

 

321

 

11

 

 

360

 

Operating Income (Loss)

 

(28

)

204

 

6

 

 

182

 

Interest expense

 

43

 

33

 

 

(40

)

36

 

Interest income

 

(33

)

(8

)

 

40

 

(1

)

Loss on extinguishment & modification of debt

 

78

 

 

 

 

78

 

Net (earnings) loss of equity affiliates

 

(189

)

 

 

189

 

 

Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes

 

73

 

179

 

6

 

(189

)

69

 

Provision (Benefit) for income taxes

 

24

 

(2

)

1

 

 

23

 

Income (Loss) from Continuing Operations

 

49

 

181

 

5

 

(189

)

46

 

Income from discontinued operations, net of tax

 

403

 

 

3

 

 

406

 

Net Income (Loss)

 

$

452

 

$

181

 

$

8

 

$

(189

)

$

452

 

Other comprehensive income (loss)—foreign currency translation adjustment

 

1

 

 

1

 

(1

)

1

 

Total Comprehensive Income (Loss)

 

$

453

 

$

181

 

$

9

 

$

(190

)

$

453

 

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)

 

 

 

Three Months Ended October 30, 2016

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

1,244

 

$

31

 

$

 

$

1,275

 

Cost of sales

 

 

747

 

16

 

 

763

 

Gross Profit

 

 

497

 

15

 

 

512

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

20

 

298

 

11

 

 

329

 

Depreciation and amortization

 

4

 

17

 

 

 

21

 

Restructuring

 

1

 

2

 

 

 

3

 

Total operating expenses

 

25

 

317

 

11

 

 

353

 

Operating Income (Loss)

 

(25

)

180

 

4

 

 

159

 

Interest expense

 

70

 

34

 

1

 

(40

)

65