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 July 29, 2018

 

- 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.

3400 Cumberland Boulevard SE

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

26-0486780

333-159809

 

HD SUPPLY, INC.

3400 Cumberland Boulevard SE

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 September 3, 2018:

 

HD Supply Holdings, Inc.

 

183,776,667 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 Six Months ended July 29, 2018 and July 30, 2017 (unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of July 29, 2018 and January 28, 2018 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months ended July 29, 2018 and July 30, 2017 (unaudited)

7

 

 

 

 

HD Supply, Inc.

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended July 29, 2018 and July 30, 2017 (unaudited)

8

 

 

 

 

Consolidated Balance Sheets as of July 29, 2018 and January 28, 2018 (unaudited)

9

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months ended July 29, 2018 and July 30, 2017 (unaudited)

10

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

11

 

 

 

Item 2.

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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44

 

 

 

Item 4.

Controls and Procedures

44

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 6.

Exhibits

47

 

 

 

Signatures

48

 

2


 


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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 28, 2018 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 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;

 

3



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

 

·                  interruptions in the proper functioning of our information technology, or “IT” systems, including from cybersecurity threats;

 

·                  potential material liabilities under our self-insured programs;

 

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

 

·                  new and/or proposed trade policies could make sourcing product from foreign countries more difficult and more costly;

 

·                  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

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

July 29,
2018

 

July 30,
2017

 

Net Sales

 

$

1,600

 

$

1,352

 

$

2,989

 

$

2,568

 

Cost of sales

 

978

 

813

 

1,815

 

1,545

 

Gross Profit

 

622

 

539

 

1,174

 

1,023

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

384

 

338

 

756

 

672

 

Depreciation and amortization

 

25

 

21

 

47

 

42

 

Restructuring

 

2

 

 

9

 

 

Total operating expenses

 

411

 

359

 

812

 

714

 

Operating Income

 

211

 

180

 

362

 

309

 

Interest expense

 

35

 

49

 

69

 

98

 

Interest (income)

 

 

 

(1

)

 

Loss on extinguishment of debt

 

 

 

 

3

 

Income from Continuing Operations Before Provision for Income Taxes

 

176

 

131

 

294

 

208

 

Provision for income taxes

 

46

 

50

 

75

 

69

 

Income from Continuing Operations

 

130

 

81

 

219

 

139

 

Income from discontinued operations, net of tax

 

1

 

361

 

1

 

388

 

Net Income

 

$

131

 

$

442

 

$

220

 

$

527

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

1

 

(3

)

2

 

(2

)

Total Comprehensive Income

 

$

132

 

$

439

 

$

222

 

$

525

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

 

 

 

 

Basic

 

182,992

 

197,752

 

183,659

 

199,230

 

Diluted

 

183,822

 

198,954

 

184,456

 

201,010

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.71

 

$

0.41

 

$

1.19

 

$

0.70

 

Income from Discontinued Operations

 

$

0.01

 

$

1.83

 

$

0.01

 

$

1.95

 

Net Income

 

$

0.72

 

$

2.24

 

$

1.20

 

$

2.65

 

Diluted Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.71

 

$

0.41

 

$

1.19

 

$

0.69

 

Income from Discontinued Operations

 

$

0.01

 

$

1.81

 

$

0.01

 

$

1.93

 

Net Income

 

$

0.71

 

$

2.22

 

$

1.19

 

$

2.62

 

 


(1)               May not foot due to rounding.

 

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

 

5



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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

July 29,
2018

 

January 28,
2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

228

 

$

558

 

Receivables, less allowance for doubtful accounts of $17 and $12

 

843

 

612

 

Inventories

 

813

 

674

 

Other current assets

 

45

 

31

 

Total current assets

 

1,929

 

1,875

 

Property and equipment, net

 

345

 

325

 

Goodwill

 

1,992

 

1,807

 

Intangible assets, net

 

203

 

91

 

Deferred tax asset

 

119

 

205

 

Other assets

 

18

 

15

 

Total assets

 

$

4,606

 

$

4,318

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

488

 

$

377

 

Accrued compensation and benefits

 

104

 

95

 

Current installments of long-term debt

 

11

 

11

 

Other current liabilities

 

247

 

138

 

Total current liabilities

 

850

 

621

 

Long-term debt, excluding current installments

 

2,087

 

2,090

 

Other liabilities

 

61

 

141

 

Total liabilities

 

2,998

 

2,852

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 183.8 million and 185.7 million shares issued and outstanding at July 29, 2018 and January 28, 2018, respectively

 

2

 

2

 

Paid-in capital

 

4,047

 

4,029

 

Accumulated deficit

 

(1,745

)

(1,966

)

Accumulated other comprehensive loss

 

(15

)

(17

)

Treasury stock, at cost, 20.8 and 18.2 million shares at July 29, 2018 and January 28, 2018, respectively

 

(681

)

(582

)

Total stockholders’ equity

 

1,608

 

1,466

 

Total liabilities and stockholders’ equity

 

$

4,606

 

$

4,318

 

 

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

 

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Table of Contents

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

 

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

220

 

$

527

 

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

 

 

 

 

 

Depreciation and amortization

 

51

 

50

 

Provision for uncollectibles

 

6

 

4

 

Non-cash interest expense

 

11

 

6

 

Payment of discounts upon extinguishment of debt

 

 

(4

)

Loss on extinguishment of debt

 

 

3

 

Stock-based compensation expense

 

12

 

12

 

Deferred income taxes

 

70

 

(223

)

Other

 

(1

)

 

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

 

 

 

 

 

(Increase) decrease in receivables

 

(183

)

(258

)

(Increase) decrease in inventories

 

(104

)

(141

)

(Increase) decrease in other current assets

 

(5

)

 

Increase (decrease) in accounts payable and accrued liabilities

 

108

 

212

 

Increase (decrease) in other long-term liabilities

 

1

 

1

 

Net cash provided by (used in) operating activities

 

186

 

189

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(47

)

(43

)

Proceeds from sales of property and equipment

 

 

2

 

Payments for businesses acquired, net of cash acquired

 

(362

)

 

Net cash provided by (used in) investing activities

 

(409

)

(41

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock under employee benefit plans

 

6

 

29

 

Purchase of treasury shares

 

(93

)

(414

)

Tax withholdings on stock-based awards

 

(6

)

 

Repayments of long-term debt

 

(5

)

(103

)

Borrowings on long-term revolver debt

 

10

 

599

 

Repayments on long-term revolver debt

 

(16

)

(261

)

Debt issuance costs

 

 

(6

)

Other financing activities

 

(3

)

 

Net cash provided by (used in) financing activities

 

(107

)

(156

)

Effect of exchange rates on cash and cash equivalents

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

(330

)

$

(8

)

Cash and cash equivalents at beginning of period

 

558

 

75

 

Cash and cash equivalents at end of period

 

$

228

 

$

67

 

 

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 STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

July 29,
2018

 

July 30,
2017

 

Net Sales

 

$

1,600

 

$

1,352

 

$

2,989

 

$

2,568

 

Cost of sales

 

978

 

813

 

1,815

 

1,545

 

Gross Profit

 

622

 

539

 

1,174

 

1,023

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

384

 

338

 

756

 

672

 

Depreciation and amortization

 

25

 

21

 

47

 

42

 

Restructuring

 

2

 

 

9

 

 

Total operating expenses

 

411

 

359

 

812

 

714

 

Operating Income

 

211

 

180

 

362

 

309

 

Interest expense

 

35

 

49

 

69

 

98

 

Interest (income)

 

 

 

(1

)

 

Loss on extinguishment of debt

 

 

 

 

3

 

Income from Continuing Operations Before Provision for Income Taxes

 

176

 

131

 

294

 

208

 

Provision for income taxes

 

46

 

50

 

75

 

69

 

Income from Continuing Operations

 

130

 

81

 

219

 

139

 

Income from discontinued operations, net of tax

 

1

 

361

 

1

 

388

 

Net Income

 

$

131

 

$

442

 

$

220

 

$

527

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

1

 

(3

)

2

 

(2

)

Total Comprehensive Income

 

$

132

 

$

439

 

$

222

 

$

525

 

 

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

 

 

 

July 29,
2018

 

January 28,
2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

227

 

$

558

 

Receivables, less allowance for doubtful accounts of $17 and $12

 

843

 

612

 

Inventories

 

813

 

674

 

Other current assets

 

45

 

31

 

Total current assets

 

1,928

 

1,875

 

Property and equipment, net

 

345

 

325

 

Goodwill

 

1,992

 

1,807

 

Intangible assets, net

 

203

 

91

 

Deferred tax asset

 

119

 

205

 

Other assets

 

18

 

15

 

Total assets

 

$

4,605

 

$

4,318

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

488

 

$

377

 

Accrued compensation and benefits

 

104

 

95

 

Current installments of long-term debt

 

11

 

11

 

Other current liabilities

 

247

 

138

 

Total current liabilities

 

850

 

621

 

Long-term debt, excluding current installments

 

2,087

 

2,090

 

Other liabilities

 

61

 

141

 

Total liabilities

 

2,998

 

2,852

 

Stockholder’s equity:

 

 

 

 

 

Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at July 29, 2018 and January 28, 2018

 

 

 

Paid-in capital

 

3,208

 

3,290

 

Accumulated deficit

 

(1,586

)

(1,807

)

Accumulated other comprehensive loss

 

(15

)

(17

)

Total stockholder’s equity

 

1,607

 

1,466

 

Total liabilities and stockholder’s equity

 

$

4,605

 

$

4,318

 

 

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

 

 

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

220

 

$

527

 

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

 

 

 

 

 

Depreciation and amortization

 

51

 

50

 

Provision for uncollectibles

 

6

 

4

 

Non-cash interest expense

 

11

 

6

 

Payment of discounts upon extinguishment of debt

 

 

(4

)

Loss on extinguishment of debt

 

 

3

 

Stock-based compensation expense

 

12

 

12

 

Deferred income taxes

 

70

 

(223

)

Other

 

(1

)

 

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

 

 

 

 

 

(Increase) decrease in receivables

 

(183

)

(258

)

(Increase) decrease in inventories

 

(104

)

(141

)

(Increase) decrease in other current assets

 

(5

)

 

Increase (decrease) in accounts payable and accrued liabilities

 

108

 

212

 

Increase (decrease) in other long-term liabilities

 

1

 

1

 

Net cash provided by (used in) operating activities

 

186

 

189

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(47

)

(43

)

Proceeds from sales of property and equipment

 

 

2

 

Payments for businesses acquired, net of cash acquired

 

(362

)

 

Net cash provided by (used in) investing activities

 

(409

)

(41

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Equity distribution to Parent

 

(94

)

(395

)

Repayments of long-term debt

 

(5

)

(103

)

Borrowings on long-term revolver debt

 

10

 

599

 

Repayments on long-term revolver debt

 

(16

)

(261

)

Debt issuance costs

 

 

(6

)

Other financing activities

 

(3

)

 

Net cash provided by (used in) financing activities

 

(108

)

(166

)

Effect of exchange rates on cash and cash equivalents

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

(331

)

$

(18

)

Cash and cash equivalents at beginning of period

 

558

 

73

 

Cash and cash equivalents at end of period

 

$

227

 

$

55

 

 

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 270 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 650,000 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. The reportable segments are Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.

 

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 28, 2018, 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.  The fiscal year ending February 3, 2019 (“fiscal 2018”) includes 53 weeks and the fiscal year ending January 29, 2018 (“fiscal 2017”) includes 52 weeks.  The three months ended July 29, 2018 (“second quarter 2018”) and July 30, 2017 (“second quarter 2017”) both include 13 weeks. The six months ended July 29, 2018 and July 30, 2017 both include 26 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, 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 is self-insured for certain legal claims and 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 July 29, 2018 and January 28, 2018, self-insurance reserves totaled approximately $56 million and $51 million, respectively.

 

NOTE 2 — ACQUISITION

 

HD Supply enters into strategic acquisitions to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), the results of acquisitions completed by HD Supply are reflected in the Company’s consolidated financial statements from the date of acquisition forward.

 

On March 5, 2018, the Company completed the acquisition of A.H. Harris Construction Supply (“A.H. Harris”) for a purchase price of approximately $362 million, net of cash acquired and subject to a final working capital adjustment. A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expands Construction & Industrial’s market presence in the northeastern United States.

 

In accordance with ASC 805, the Company provisionally recorded the following assets and liabilities at fair value as of the date of the A.H. Harris acquisition: $185 million in goodwill, $123 million in definite-lived intangible assets, $13 million in property & equipment, $57 million in net working capital, and $17 million in deferred tax liabilities. The total amount of goodwill expected to be deductible for tax purposes is $19 million. The definite-lived intangible assets are comprised of $110 million in customer relationships and $13 million of trade names that will be amortized over a period of 12 years and 5 years, respectively.

 

From March 5, 2018 to July 29, 2018, A.H. Harris generated approximately $164 million in Net sales. During second quarter 2018 and the first six months of fiscal 2018, the Company incurred approximately $1 million and $3 million of costs, respectively, related to the acquisition and integration of A.H. Harris. The Company expects to incur a total of $8 million to $10 million of acquisition and integration costs during fiscal 2018.

 

NOTE 3 — DISCONTINUED OPERATIONS

 

In August 2017, the Company completed the sale of its Waterworks business. In accordance with ASC 205-20, “Discontinued Operations” and Accounting Standards Update (“ASU”) 2014-08, “Reporting discontinued operations and disclosure of disposals of components of an entity,” the results of Waterworks are classified as a discontinued operation. 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 and Comprehensive Income. All Consolidated Statements of Operations and Comprehensive Income presented have been revised to reflect this presentation.

 

In connection with presenting the Waterworks business unit as a discontinued operation in the second quarter of fiscal 2017, a net deferred tax asset of $323 million and corresponding income tax benefit for the difference in the Company’s stock basis versus its book carrying value of the Waterworks subsidiary was recorded in the second quarter of fiscal 2017. Upon recording the gain on the sale of Waterworks in the third quarter of fiscal 2017, the Company recognized a tax expense in discontinued operations, which included $323 million related to utilizing the deferred tax asset originally recorded in the second quarter of fiscal 2017.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

July 29,
2018

 

July 30,
2017

 

Net sales

 

$

 

$

746

 

$

 

$

1,403

 

Cost of sales

 

 

582

 

 

1,092

 

Gross Profit

 

 

164

 

 

311

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

100

 

 

197

 

Depreciation and amortization

 

 

3

 

 

6

 

Total operating expenses

 

 

103

 

 

203

 

Operating Income

 

 

61

 

 

108

 

(Gain) Loss on sales of businesses, net

 

(1

)

 

(1

)

 

Other (Income) expense, net

 

 

1

 

 

3

 

Income before provision (benefit) for income taxes

 

1

 

60

 

1

 

105

 

Provision (benefit) for income taxes

 

 

(301

)

 

(283

)

Income from discontinued operations, net of tax

 

$

1

 

$

361

 

$

1

 

$

388

 

 

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

 

 

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

 

 

 

 

 

 

Net cash flows provided by operating activities

 

$

 

$

17

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

 

(5

)

Proceeds from sales of property and equipment, net

 

 

2

 

Net cash flows provided by (used in) investing activities

 

$

 

$

(3

)

 

NOTE 4 — DEBT

 

HDS’s long-term debt as of July 29, 2018 and January 28, 2018 consisted of the following (dollars in millions):

 

 

 

July 29, 2018

 

January 28, 2018

 

 

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Senior ABL Facility due 2022

 

$

49

 

3.07

 

$

58

 

2.86

 

Term B-3 Loans due 2021

 

531

 

4.33

 

534

 

3.94

 

Term B-4 Loans due 2023

 

542

 

4.58

 

544

 

4.19

 

April 2016 Senior Unsecured Notes due 2024

 

1,000

 

5.75

 

1,000

 

5.75

 

Total gross long-term debt

 

$

2,122

 

 

 

$

2,136

 

 

 

Less unamortized discount

 

(5

)

 

 

(6

)

 

 

Less unamortized deferred financing costs

 

(19

)

 

 

(29

)

 

 

Total net long-term debt

 

$

2,098

 

 

 

$

2,101

 

 

 

Less current installments

 

(11

)

 

 

(11

)

 

 

Total net long-term debt, excluding current installments

 

$

2,087

 

 

 

$

2,090

 

 

 

 


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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 $1,000 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 July 29, 2018, HDS had $924 million of Excess Availability (as defined in the agreement) under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $27 million in letters of credit issued and including $134 million of borrowings available on qualifying cash balances). As of July 29, 2018, 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 Excess Availability.

 

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.

 

Per the Third Amendment to the credit agreement governing the existing Senior ABL Facility, the Senior ABL Facility will mature on April 5, 2022 (the stated “Maturity Date”) or 60 days before the maturity date of any outstanding principal balance that is greater than or equal to $250 million (“Material Indebtedness”) unless, before such date, the Material Indebtedness has been (a) refinanced to extend the maturity date at least 60 days after the stated Maturity Date, (b) adequately reserved for by the Administrative Agent, (c) cash collateralized pursuant to arrangements reasonably acceptable to the Administrative Agent, or (d) any combination of the above actions or items.

 

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 in an original aggregate principal amount of $1,081 million. The tranche of term loans in an original aggregate principal amount of $535 million (the “Term B-3 Loans”) will mature on August 13, 2021. The tranche of term loans in an original aggregate principal amount of $546 million (the “Term B-4 Loans”) will mature on October 17, 2023. Both the Term B-3 Loans and the 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. The 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. The 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 the Consolidated Financial Statements of our Form 10-K for the fiscal year ended January 28, 2018.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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% per annum from April 15, 2019 until maturity on April 15, 2024. Interest is paid semi-annually 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 April 2016 Senior Unsecured Notes 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 the Notes to the Consolidated Financial Statements of our Form 10-K for the fiscal year ended January 28, 2018.

 

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 July 29, 2018, HDS was in compliance with all such covenants that were in effect on such date.

 

NOTE 5 — 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:

 

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.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of July 29, 2018 and January 28, 2018 (amounts in millions):

 

 

 

As of July 29, 2018

 

As of January 28, 2018

 

 

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Senior ABL Facility

 

$

49

 

$

49

 

$

58

 

$

57

 

Term Loans and Notes

 

2,073

 

2,133

 

2,078

 

2,158

 

Total

 

$

2,122

 

$

2,182

 

$

2,136

 

$

2,215

 

 


(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 6 — INCOME TAXES

 

For the six months ended July 29, 2018, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was 25.5%. The effective rate for continuing operations for the six months ended July 30, 2017 was 33.2%.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code.  The Tax Act lowered the Company’s federal statutory rate from 35% to 21%. 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 future audits.

 

As of July 29, 2018 and January 28, 2018, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $16 million. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of July 29, 2018 and January 28, 2018 was zero.  As of July 29, 2018 and January 28, 2018, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $7 million. Each reporting period, the Company assesses available positive and negative evidence and estimates if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

 

As of July 29, 2018, the Company has completed its evaluation of its indefinite reinvestment assertion as a result of the Tax Act and has asserted that its Canadian earnings are permanently reinvested until such time that the Canadian borrowings under the Senior ABL Facility, which was initially drawn on during fiscal 2016, are paid off.  No provision for U.S. federal and state income taxes or foreign withholding taxes has been made in the Company’s current year consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be permanently reinvested.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7—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 six months ended July 29, 2018 and July 30, 2017 was as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

July 29,
2018

 

July 30,
2017

 

Weighted-average common shares

 

182,992

 

197,752

 

183,659

 

199,230

 

Effect of potentially dilutive stock plan securities

 

830

 

1,202

 

797

 

1,780

 

Diluted weighted-average common shares

 

183,822

 

198,954

 

184,456

 

201,010

 

Stock plan securities excluded from dilution(1)

 

1,536

 

2,383

 

2,133

 

1,652

 

 


(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, restricted stock units, and performance share units) granted under Holdings’ stock-based compensation plans.

 

NOTE 8 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables as of July 29, 2018 and January 28, 2018 consisted of the following (amounts in millions):

 

 

 

July 29,
2018

 

January 28,
2018

 

Trade receivables, net of allowance for doubtful accounts

 

$

770

 

$

540

 

Vendor rebate receivables

 

57

 

58

 

Other receivables

 

16

 

14

 

Total receivables, net

 

$

843

 

$

612

 

 

Other Current Liabilities

 

Other current liabilities as of July 29, 2018 and January 28, 2018 consisted of the following (amounts in millions):

 

 

 

July 29,
2018

 

January 28,
2018

 

Corporate headquarters financing liability

 

$

87

 

$

 

Accrued non-income taxes

 

36

 

27

 

Accrued interest

 

17

 

21

 

Refund liability(1)

 

15

 

 

Other

 

92

 

90

 

Total other current liabilities

 

$

247

 

$

138

 

 


(1)         This amount represents the Company’s sales return estimate as of July 29, 2018 classified as a Current liability within the Consolidated Balance Sheet as required per ASC 606, Revenue from Contracts with Customers. The sales return estimate as of January 28, 2018 was approximately $12 million and was classified within Net receivables within the Consolidated Balance Sheet.

 

Supplemental Cash Flow Information

 

Cash paid for interest in the six months ended July 29, 2018 and July 30, 2017 was $61 million and $92 million, respectively. During the six months ended July 30, 2017, the Company paid $4 million of original issue discounts related to the extinguishment of debt.

 

Cash paid for income taxes, net of refunds, in the six months ended July 29, 2018 and July 30, 2017 was approximately $5 million and $10 million, respectively.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the six months ended July 29, 2018, HDS executed a cash equity distribution of $94 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 August 25, 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. During the six months ended July 29, 2018, under this plan, Holdings repurchased 2,298,643 shares of its common stock for approximately $88 million.

 

In combination with the 2014 authorized share repurchase plan (utilizing proceeds from employee stock option exercises), Holdings repurchased a total of 2,426,141 shares of its common stock during the six months ended July 29, 2018 for approximately $93 million.

 

Significant Non-Cash Transactions

 

Build-to-Suit Lease

 

In February 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. In accordance with ASC 840, “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 construction costs incurred by the landlord.

 

The lease commenced in February 2018, with the leased asset and corresponding financing liability valued at $87 million each. In accordance with the sale and leaseback criteria of GAAP, the build-to-suit arrangement and subsequent lease failed to qualify as a sale. Therefore, the transaction is accounted for as a financing arrangement, whereby both the leased asset and the financing liability remain on the Company’s Consolidated Balance Sheet. The asset is depreciated as if the Company is the legal owner and rental payments are allocated between interest expense and principal repayment of the financing liability.

 

In April 2018, the Company exercised its option to purchase the leased asset in February 2019 for $87 million. As a result, the financing liability is classified as a Current liability within the Consolidated Balance Sheet.

 

NOTE 9—RESTRUCTURING ACTIVITIES

 

Fiscal 2017 Plan

 

As a result of the sale of the Waterworks business in fiscal 2017, management evaluated the Company’s alignment and functional support strategies. During fiscal 2017, the Company initiated a restructuring plan that included reducing workforce personnel, realigning talent, and closing a Construction & Industrial branch. In addition, the Company relocated its headquarters in first quarter 2018. During the three and six months ended July 29, 2018, the Company recognized $2 million and $9 million, respectively, of restructuring charges, primarily related to property lease obligations upon exiting the Company’s previous headquarters location, and, to a lesser extent, severance and other employee-related costs.

 

During fiscal 2017, the Company recognized $6 million of restructuring charges under this plan. Activities under this plan were completed in the second quarter of fiscal 2018 and no further charges are expected under this plan. The Company expects a payback of the employee-related costs via a reduction in personnel costs over the next one to two years. The Company is actively pursuing buyout options and subleasing opportunities for the Company’s previous headquarters location prior to its lease expiration in October 2020.

 

Payments for severance and employee-related costs incurred under this plan are expected to be substantially complete by the end of fiscal 2018. Payments related to the property lease obligations of the Company’s previous

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

headquarters location will continue until the expiration of the lease in October 2020 or until a buyout option is negotiated.

 

The following table presents the activity for the liability balances, included in Other current liabilities and Other liabilities in the Consolidated Balance Sheets (amounts in millions):

 

 

 

Severance

 

Relocation &
Other Costs

 

Occupancy
Costs

 

Total

 

Balance—January 28, 2018

 

$

2

 

$

1

 

$

 

$

3

 

Charges

 

2

 

2

 

5

 

9

 

Cash payments

 

(2

)

(3

)

(1

)

(6

)

Other

 

 

 

2

 

2

 

Balance—July 29, 2018

 

$

2

 

$

 

$

6

 

$

8

 

 

NOTE 10 — 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.  Defendants moved to dismiss the Consolidated Amended Complaint in December 2017.  That motion is pending.

 

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 actions and granted the parties’ joint scheduling order request.  On December 5, 2017, the Court entered an order staying all activity in the case until a ruling is issued on the motion to dismiss filed in the consolidated securities litigation described above.

 

On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court 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 complaint generally alleges 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 supply chain corrective actions.  The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling.  The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance and internal procedures, and seeks to recover attorneys’ fees and other costs.

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 consolidated 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 11 — 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 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 incurs 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. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.

 

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

 

 

 

Facilities
Maintenance

 

Construction
& Industrial

 

Eliminations

 

Total
Continuing
Operations

 

Three Months Ended July 29, 2018

 

 

 

 

 

 

 

 

 

Net sales

 

$

820

 

$

781

 

$

(1

)

$

1,600

 

Adjusted EBITDA

 

150

 

96

 

 

246

 

Depreciation(1) & Software Amortization

 

9

 

12

 

 

21

 

Other Intangible Amortization

 

2

 

4

 

 

6

 

Three Months Ended July 30, 2017

 

 

 

 

 

 

 

 

 

Net sales

 

$

769

 

$

584

 

$

(1

)

$

1,352

 

Adjusted EBITDA

 

145

 

63

 

 

208

 

Depreciation(1) & Software Amortization

 

8

 

11

 

 

19

 

Other Intangible Amortization

 

3

 

 

 

3

 

Six Months Ended July 29, 2018

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,543

 

$

1,447

 

$

(1

)

$

2,989

 

Adjusted EBITDA

 

273

 

163

 

 

436

 

Depreciation(1) & Software Amortization

 

18

 

22

 

 

40

 

Other Intangible Amortization

 

4

 

7

 

 

11

 

Six Months Ended July 30, 2017

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,451

 

$

1,120

 

$

(3

)

$

2,568

 

Adjusted EBITDA

 

253

 

112

 

 

365

 

Depreciation(1) & Software Amortization

 

17

 

21

 

 

38

 

Other Intangible Amortization

 

5

 

1

 

 

6

 

 


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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reconciliation to Consolidated Financial Statements

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 29,
2018

 

July 30,
2017

 

July 29,
2018

 

July 30,
2017

 

Total Adjusted EBITDA

 

$

246

 

$

208

 

$

436

 

$

365

 

Depreciation and amortization(1)

 

27

 

22

 

51

 

44

 

Stock-based compensation

 

6

 

6

 

12

 

12

 

Restructuring

 

2

 

 

9

 

 

Acquisition and integration costs(2)

 

1

 

 

3

 

 

Other

 

(1

)

 

(1

)

 

Operating income

 

211

 

180

 

362

 

309

 

Interest expense

 

35

 

49

 

69

 

98

 

Interest (income)

 

 

 

(1

)

 

Loss on extinguishment of debt(3)

 

 

 

 

3

 

Income from Continuing Operations Before Provision for Income Taxes

 

176

 

131

 

294

 

208

 

Provision for income taxes

 

46

 

50

 

75

 

69

 

Income from continuing operations

 

130

 

81

 

219

 

139

 

Income from discontinued operations, net of tax

 

1

 

361

 

1

 

388

 

Net income

 

$

131

 

$

442

 

$

220

 

$

527

 

 


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

(2)         Represents the cost incurred in the acquisition and integration of A.H. Harris Construction Supplies.

(3)         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.

 

On March 5, 2018, the Company completed the acquisition of A.H. Harris for a purchase price of approximately $362 million, net of cash acquired. The acquisition reduced total assets of the Corporate reportable segment by the purchase price and increased total assets of the Construction & Industrial reportable segment by approximately $414 million.

 

NOTE 12—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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Debt Issuer’s payment obligations under the April 2016 Senior Unsecured Notes are jointly and severally guaranteed by the Subsidiary 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 April 2016 Senior Unsecured 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 statements of operations and comprehensive income (loss), the condensed balance sheets and the condensed cash flow statements for the Debt Issuer, for the Subsidiary Guarantors and the Non-guarantor Subsidiaries and total consolidated Debt Issuer and subsidiaries (amounts in millions).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

 

 

Three Months Ended July 29, 2018

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

1,560

 

$

41

 

$

(1

)

$

1,600

 

Cost of sales

 

 

956

 

23

 

(1

)

978

 

Gross Profit

 

 

604

 

18

 

 

622

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

17

 

353

 

14

 

 

384

 

Depreciation and amortization

 

5

 

20

 

 

 

25

 

Restructuring

 

1

 

1

 

 

 

2

 

Total operating expenses

 

23

 

374

 

14

 

 

411

 

Operating Income (Loss)

 

(23

)

230

 

4

 

 

211

 

Interest expense

 

34

 

 

1

 

 

35

 

Interest (income)

 

 

 

 

 

 

Net (earnings) of equity affiliates

 

(229

)

 

 

229

 

 

Income from Continuing Operations Before Provision for Income Taxes

 

172

 

230

 

3

 

(229

)

176

 

Provision for income taxes

 

42

 

4

 

 

 

46

 

Income from Continuing Operations

 

130

 

226

 

3

 

(229

)

130

 

Income from discontinued operations, net of tax

 

1

 

 

 

 

1

 

Net Income

 

$

131

 

$

226

 

$

3

 

$

(229

)

$

131

 

Other comprehensive income—foreign currency translation adjustment

 

1

 

 

1

 

(1

)

1

 

Total Comprehensive Income

 

$

132

 

$

226

 

$

4

 

$

(230

)

$

132

 

 

 

 

Three Months Ended July 30, 2017

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

1,316

 

$

36

 

$

 

$

1,352

 

Cost of sales

 

 

793

 

20

 

 

813

 

Gross Profit

 

 

523

 

16

 

 

539

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

21

 

304

 

13

 

 

338

 

Depreciation and amortization

 

3

 

17

 

1

 

 

21

 

Total operating expenses

 

24

 

321

 

14

 

 

359

 

Operating Income (Loss)

 

(24

)

202

 

2

 

 

180

 

Interest expense

 

56

 

31

 

1

 

(39

)

49

 

Interest (income)

 

(32

)

(7

)

 

39

 

 

Net (earnings) of equity affiliates

 

(239

)

 

 

239

 

 

Income from Continuing Operations Before Provision for Income Taxes

 

191

 

178

 

1

 

(239

)

131

 

Provision for income taxes

 

48

 

1

 

1

 

 

50

 

Income from Continuing Operations

 

143

 

177

 

 

(239

)

81

 

Income from discontinued operations, net of tax

 

299

 

61

 

1

 

 

361

 

Net Income

 

$

442

 

$

238

 

$

1

 

$

(239

)

$

442

 

Other comprehensive income (loss)—foreign currency translation adjustment

 

(3

)

 

(3

)

3

 

(3

)

Total Comprehensive Income

 

$

439

 

$

238

 

$

(2

)

$

(236

)

$

439

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

 

 

 

Six Months Ended July 29, 2018

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

2,912

 

$

78

 

$

(1

)

$

2,989

 

Cost of sales

 

 

1,774

 

42

 

(1

)

1,815

 

Gross Profit

 

 

1,138

 

36

 

 

1,174

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

38

 

690

 

28

 

 

756

 

Depreciation and amortization

 

9

 

38

 

 

 

47

 

Restructuring

 

6

 

3

 

 

 

9

 

Total operating expenses

 

53

 

731

 

28

 

 

812

 

Operating Income (Loss)

 

(53

)

407

 

8

 

 

362

 

Interest expense

 

71

 

22

 

1

 

(25

)

69

 

Interest (income)

 

(22

)

(4

)

 

25

 

(1

)

Net (earnings) of equity affiliates

 

(390

)

 

 

390

 

 

Income from Continuing Operations Before Provision for Income Taxes

 

288

 

389

 

7

 

(390

)

294

 

Provision for income taxes

 

69

 

5

 

1

 

 

75

 

Income from Continuing Operations

 

219

 

384

 

6

 

(390

)

219

 

Income from discontinued operations, net of tax

 

1