SEC Filing | HD Supply

View:

Download DOC

Download PDF

Download XLS

Download XBRL

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 28, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a 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
Emerging growth company o
HD Supply, Inc.
Large accelerated filer o	Accelerated filer o	Smaller reporting company o
Non-accelerated filer x
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 November 30, 2018:

HD Supply Holdings, Inc.		178,112,256 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 28, 2018 and October 29, 2017 (unaudited)	5

	Consolidated Balance Sheets as of October 28, 2018 and January 28, 2018 (unaudited)	6

	Consolidated Statements of Cash Flows for the Nine Months ended October 28, 2018 and October 29, 2017 (unaudited)	7

	HD Supply, Inc.
	Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended October 28, 2018 and October 29, 2017 (unaudited)	8

	Consolidated Balance Sheets as of October 28, 2018 and January 28, 2018 (unaudited)	9

	Consolidated Statements of Cash Flows for the Nine Months ended October 28, 2018 and October 29, 2017 (unaudited)	10

	Notes to Consolidated Financial Statements (unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	51

Part II.	Other Information

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	52

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6.	Exhibits	54

Signatures		55a

Table of Contents

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;

Table of Contents

· 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.

Table of Contents

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 28, 2018			October 29, 2017			October 28, 2018			October 29, 2017
Net Sales	$	1,612		$	1,370		$	4,601		$	3,938
Cost of sales	983			828			2,798			2,373
Gross Profit	629			542			1,803			1,565
Operating expenses:
Selling, general and administrative	391			336			1,147			1,008
Depreciation and amortization	25			21			72			63
Restructuring	—			3			9			3
Total operating expenses	416			360			1,228			1,074
Operating Income	213			182			575			491
Interest expense	32			36			101			134
Interest (income)	—			(1		)	(1		)	(1		)
Loss on extinguishment & modification of debt	69			78			69			81
Income from Continuing Operations Before Provision for Income Taxes	112			69			406			277
Provision for income taxes	30			23			105			92
Income from Continuing Operations	82			46			301			185
Income from discontinued operations, net of tax	—			406			1			794
Net Income	$	82		$	452		$	302		$	979
Other comprehensive income (loss):
Foreign currency translation adjustment	—			1			2			(1		)
Unrealized loss on cash flow hedge, net of tax of $1, $-, $1, and $-	(4		)	—			(4		)	—
Total Comprehensive Income	$	78		$	453		$	300		$	978

Weighted Average Common Shares Outstanding (thousands)
Basic	182,730			185,651			183,349			194,704
Diluted	183,579			186,652			184,192			196,258

Basic Earnings Per Share(1):
Income from Continuing Operations	$	0.45		$	0.25		$	1.64		$	0.95
Income from Discontinued Operations	$	—		$	2.19		$	0.01		$	4.08
Net Income	$	0.45		$	2.43		$	1.65		$	5.03
Diluted Earnings Per Share(1):
Income from Continuing Operations	$	0.45		$	0.25		$	1.63		$	0.94
Income from Discontinued Operations	$	—		$	2.18		$	0.01		$	4.05
Net Income	$	0.45		$	2.42		$	1.64		$	4.99

(1) May not foot due to rounding.

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

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	October 28, 2018			January 28, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	52		$	558
Receivables, less allowance for doubtful accounts of $19 and $12	860			612
Inventories	803			674
Other current assets	46			31
Total current assets	1,761			1,875
Property and equipment, net	356			325
Goodwill	1,993			1,807
Intangible assets, net	197			91
Deferred tax asset	94			205
Other assets	17			15
Total assets	$	4,418		$	4,318
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	483		$	377
Accrued compensation and benefits	105			95
Current installments of long-term debt	11			11
Other current liabilities	261			138
Total current liabilities	860			621
Long-term debt, excluding current installments	1,888			2,090
Other liabilities	70			141
Total liabilities	2,818			2,852
Stockholders’ equity:
Common stock, par value $0.01; 1 billion shares authorized; 181.4 million and 185.7 million shares issued and outstanding at October 28, 2018 and January 28, 2018, respectively	2			2
Paid-in capital	4,055			4,029
Accumulated deficit	(1,663		)	(1,966		)
Accumulated other comprehensive loss	(20		)	(17		)
Treasury stock, at cost, 23.2 and 18.2 million shares at October 28, 2018 and January 28, 2018, respectively	(774		)	(582		)
Total stockholders’ equity	1,600			1,466
Total liabilities and stockholders’ equity	$	4,418		$	4,318

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

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Nine Months Ended
	October 28, 2018			October 29, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	302		$	979
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	78			73
Provision for uncollectibles	9			6
Non-cash interest expense	15			11
Payment of discounts upon extinguishment of debt	(4		)	(6		)
Loss on extinguishment of debt	69			81
Stock-based compensation expense	19			19
Deferred income taxes	97			316
(Gain) on sales of businesses, net	—			(930		)
Other	(1		)	—
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(204		)	(249		)
(Increase) decrease in inventories	(94		)	(116		)
(Increase) decrease in other current assets	(3		)	1
(Increase) decrease in other assets	—			1
Increase (decrease) in accounts payable and accrued liabilities	95			132
Increase (decrease) in other long-term liabilities	1			2
Net cash provided by (used in) operating activities	379			320
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(79		)	(65		)
Proceeds from sales of property and equipment	—			2
Proceeds from sales of businesses, net	—			2,450
Payments for businesses acquired, net of cash acquired	(362		)	—
Net cash provided by (used in) investing activities	(441		)	2,387
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under employee benefit plans	7			37
Purchase of treasury shares	(166		)	(555		)
Tax withholdings on stock-based awards	(6		)	—
Borrowings of long-term debt	930			113
Repayments of long-term debt	(1,240		)	(1,526		)
Borrowings on long-term revolver debt	100			624
Repayments on long-term revolver debt	(49		)	(989		)
Debt issuance costs	(18		)	(26		)
Other financing activities	(2		)	1
Net cash provided by (used in) financing activities	(444		)	(2,321		)
Effect of exchange rates on cash and cash equivalents	—			—
Increase (decrease) in cash and cash equivalents	$	(506	)	$	386
Cash and cash equivalents at beginning of period	558			75
Cash and cash equivalents at end of period	$	52		$	461

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

Table of Contents

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

	Three Months Ended						Nine Months Ended
	October 28, 2018			October 29, 2017			October 28, 2018			October 29, 2017
Net Sales	$	1,612		$	1,370		$	4,601		$	3,938
Cost of sales	983			828			2,798			2,373
Gross Profit	629			542			1,803			1,565
Operating expenses:
Selling, general and administrative	391			336			1,147			1,008
Depreciation and amortization	25			21			72			63
Restructuring	—			3			9			3
Total operating expenses	416			360			1,228			1,074
Operating Income	213			182			575			491
Interest expense	32			36			101			134
Interest (income)	—			(1		)	(1		)	(1		)
Loss on extinguishment & modification of debt	69			78			69			81
Income from Continuing Operations Before Provision for Income Taxes	112			69			406			277
Provision for income taxes	30			23			105			92
Income from Continuing Operations	82			46			301			185
Income from discontinued operations, net of tax	—			406			1			794
Net Income	$	82		$	452		$	302		$	979
Other comprehensive income (loss):
Foreign currency translation adjustment	—			1			2			(1		)
Unrealized gain (loss) on cash flow hedge, net of tax of $1, $-, $1, and $-	(4		)	—			(4		)	—
Total Comprehensive Income	$	78		$	453		$	300		$	978

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

Table of Contents

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	October 28, 2018			January 28, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	45		$	558
Receivables, less allowance for doubtful accounts of $19 and $12	860			612
Inventories	803			674
Other current assets	46			31
Total current assets	1,754			1,875
Property and equipment, net	356			325
Goodwill	1,993			1,807
Intangible assets, net	197			91
Deferred tax asset	94			205
Other assets	17			15
Total assets	$	4,411		$	4,318
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	483		$	377
Accrued compensation and benefits	105			95
Current installments of long-term debt	11			11
Other current liabilities	241			138
Total current liabilities	840			621
Long-term debt, excluding current installments	1,888			2,090
Other liabilities	70			141
Total liabilities	2,798			2,852
Stockholder’s equity:
Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at October 28, 2018 and January 28, 2018	—			—
Paid-in capital	3,137			3,290
Accumulated deficit	(1,504		)	(1,807		)
Accumulated other comprehensive loss	(20		)	(17		)
Total stockholder’s equity	1,613			1,466
Total liabilities and stockholder’s equity	$	4,411		$	4,318

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

Table of Contents

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Nine Months Ended
	October 28, 2018			October 29, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	302		$	979
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	78			73
Provision for uncollectibles	9			6
Non-cash interest expense	15			11
Payment of discounts upon extinguishment of debt	(4		)	(6		)
Loss on extinguishment of debt	69			81
Stock-based compensation expense	19			19
Deferred income taxes	97			316
(Gain) on sales of businesses, net	—			(930		)
Other	(1		)	—
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(204		)	(249		)
(Increase) decrease in inventories	(94		)	(116		)
(Increase) decrease in other current assets	(3		)	1
(Increase) decrease in other assets	—			1
Increase (decrease) in accounts payable and accrued liabilities	95			132
Increase (decrease) in other long-term liabilities	1			2
Net cash provided by (used in) operating activities	379			320
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(79		)	(65		)
Proceeds from sales of property and equipment	—			2
Proceeds from sales of businesses, net	—			2,450
Payments for businesses acquired, net of cash acquired	(362		)	—
Net cash provided by (used in) investing activities	(441		)	2,387
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity distribution to Parent	(172		)	(516		)
Borrowings of long-term debt	930			113
Repayments of long-term debt	(1,240		)	(1,526		)
Borrowings on long-term revolver debt	100			624
Repayments on long-term revolver debt	(49		)	(989		)
Debt issuance costs	(18		)	(26		)
Other financing activities	(2		)	1
Net cash provided by (used in) financing activities	(451		)	(2,319		)
Effect of exchange rates on cash and cash equivalents	—			—
Increase (decrease) in cash and cash equivalents	$	(513	)	$	388
Cash and cash equivalents at beginning of period	558			73
Cash and cash equivalents at end of period	$	45		$	461

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

Table of Contents

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 ended January 29, 2018 (“fiscal 2017”) includes 52 weeks. The three months ended October 28, 2018 (“third quarter 2018”) and October 29, 2017 (“third quarter 2017”) both include 13 weeks. The nine months ended October 28, 2018 and October 29, 2017 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.

Table of Contents

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 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 October 28, 2018 and January 28, 2018, self-insurance reserves totaled approximately $55 million and $51 million, respectively.

NOTE 2 — ACQUISITIONS

HD Supply enters into strategic acquisitions from time to time 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: $186 million in goodwill, $123 million in definite-lived intangible assets, $12 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 October 28, 2018, A.H. Harris generated approximately $277 million in Net sales. During third quarter 2018 and the first nine months of fiscal 2018, the Company incurred approximately $2 million and $5 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 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. 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.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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 28, 2018		October 29, 2017			October 28, 2018			October 29, 2017
Net sales	$	—	$	10		$	—		$	1,413
Cost of sales	—		8			—			1,100
Gross Profit	—		2			—			313
Operating expenses:
Selling, general and administrative	—		1			—			198
Depreciation and amortization	—		—			—			6
Total operating expenses	—		1			—			204
Operating Income	—		1			—			109
(Gain) Loss on sales of businesses, net	—		(934		)	(1		)	(930		)
Other (Income) expense, net	—		1			—			1
Income before provision for income taxes	—		934			1			1,038
Provision (benefit) for income taxes	—		528			—			244
Income from discontinued operations, net of tax	$	—	$	406		$	1		$	794

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 28, 2018		October 29, 2017

Net cash flows provided by operating activities	$	—	$	28
Cash flows from investing activities:
Capital expenditures	—		(5		)
Proceeds from sales of businesses, net	—		2,450
Proceeds from sales of property and equipment, net	—		2
Net cash flows provided by (used in) investing activities	$	—	$	2,447

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 — DEBT

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

	October 28, 2018				January 28, 2018
	Outstanding Principal			Interest Rate %(1)	Outstanding Principal			Interest Rate %(1)
Senior ABL Facility due 2022	$	105		3.61	$	58		2.86
Term B-3 Loans due 2021	—			—	534			3.94
Term B-4 Loans due 2023	—			—	544			4.19
Term B-5 Loans due 2023	1,070			4.03	—			—
October 2018 Senior Unsecured Notes due 2026	750			5.375	—			—
April 2016 Senior Unsecured Notes due 2024	—			—	1,000			5.75
Total gross long-term debt	$	1,925			$	2,136
Less unamortized discount	(4		)		(6		)
Less unamortized deferred financing costs	(22		)		(29		)
Total net long-term debt	$	1,899			$	2,101
Less current installments	(11		)		(11		)
Total net long-term debt, excluding current installments	$	1,888			$	2,090

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

2018 Refinancing Transactions

On October 22, 2018, HDS entered into a Sixth Amendment (the “Sixth Amendment”) to the credit agreement governing HDS’s existing Senior Term Facility, as defined below. Pursuant to the Sixth Amendment, HDS amended its existing Senior Term Facility, to, among other things, refinance all the outstanding term loans in an aggregate principal of $530 million due August 2021 (the “Term B-3 Loans”) and an aggregate principal of $540 million due October 2023 (the “Term B-4 Loans”) with a new tranche of term loans (the “Term B-5 Loans”) in an original aggregate principal of $1,070 million.

Pursuant to the Sixth Amendment, the Term B-5 Loans bear interest at the rate of LIBOR plus 1.75% or base rate plus 0.75%. The Term B-5 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on October 17, 2023.

The Sixth Amendment also provides for a prepayment premium equal to 1.00% of the aggregate principal of the applicable Term Loans, as defined below, being prepaid if, on or prior to April 22, 2019, the Company enters into certain repricing transactions.

In connection with the Sixth Amendment, the Company paid approximately $5 million in consent fees. The consent fees are reflected as deferred financing costs in the Consolidated Balance Sheets and will be amortized into interest expense over the term of the loans. The Company incurred a modification and extinguishment charge of approximately $5 million, which includes financing fees and other costs of approximately $3 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 October 11, 2018, HDS issued $750 million of 5.375% Senior Unsecured Notes due 2026 (the “October 2018 Senior Unsecured Notes”) at par. HDS received approximately $741 million in proceeds, net of transaction fees. The transaction fees of $9 million are reflected as deferred financing costs in the Consolidated Balance Sheets and will be amortized into interest expense over the term of the October 2018 Senior Unsecured Notes.

HDS used the net proceeds from the October 2018 Senior Unsecured Notes issuance, together with available cash and borrowings on HDS’s Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”), to redeem all of the outstanding $1,000 million aggregate principal of the 5.75% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”), pay a $56 million make-whole premium calculated in accordance with the terms

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

of the indenture governing such notes and pay $28 million of accrued but unpaid interest. As a result, the Company incurred a $64 million loss on extinguishment of the debt, which includes the $56 million make-whole premium and write-off of $8 million of unamortized deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

Senior Credit Facilities

Senior ABL Facility

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 October 28, 2018, HDS had $868 million of Excess Availability (as defined in the Senior ABL Facility 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 $175 million of borrowings available on qualifying cash balances). As of October 28, 2018, approximately $45 million of the 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.

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 $1,070 million. The Term B-5 Loans will mature on October 17, 2023. The Term B-5 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 balance payable at the maturity date. The Term B-5 Loans bear interest at the applicable margin for borrowings of 1.75% for LIBOR borrowings and 0.75% 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.

Unsecured Notes

5.375% Senior Unsecured Notes due 2026

HDS issued $750 million aggregate principal amount of the October 2018 Senior Unsecured Notes under an Indenture, dated as of October 11, 2018 (the “October 2018 Senior Unsecured Notes Indenture”) among HDS, certain subsidiaries of HDS as guarantors (the “Subsidiary Guarantors”) and the Trustee. The October 2018 Senior Unsecured Notes bear interest at a rate of 5.375% per annum and will mature on October 15, 2026. Interest is paid semi-annually on April 15th and October 15th of each year with the first interest payment due April 15, 2019.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The October 2018 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS’s existing and future senior indebtedness, senior in right of payment to all of HDS’s existing and future subordinated indebtedness, and effectively subordinated to all of HDS’s existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, to the extent of the value of the collateral securing each indebtedness.

The October 2018 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS’s direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the Senior ABL Facility or that guarantees HDS’s obligations under any credit facility or capital market securities. These guarantees are subject to release under customary circumstances as stipulated in the October 2018 Senior Unsecured Notes Indenture.

Redemption

HDS may redeem the October 2018 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2021, 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 October 2018 Senior Unsecured Notes Indenture and (2) on and after October 15, 2021, 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 October 15 of the year set forth below.

Year	Percentage
2021	102.688	%
2022	101.344	%
2022 and thereafter	100.000	%

In addition, at any time prior to October 15, 2021, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the October 2018 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.375% of the principal amount in respect of the October 2018 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the October 2018 Senior Unsecured Notes are redeemed, an aggregate principal amount of the October 2018 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of October 2018 Senior Unsecured Notes must remain outstanding immediately after each such redemption of October 2018 Senior Unsecured Notes.

5.75% Senior Unsecured Notes due 2024

HDS’s April 2016 Senior Unsecured Notes bore interest at a rate of 5.75% per annum with a maturity date of April 15, 2024. Interest was paid semi-annually in arrears on April 15th and October 15th of each year, prior to the October 11, 2018 redemption of all of the outstanding $1,000 million aggregate principal amount of the April 2016 Senior Unsecured Notes.

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 28, 2018, HDS was in compliance with all such covenants that were in effect on such date.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 — DERIVATIVE INSTRUMENTS

Hedge Strategy and Accounting Policy

The Company enters into derivative financial instruments for hedging purposes. In hedging the exposure to variable cash flows on forecasted transactions, deferral accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the underlying exposure. If a derivative instrument either initially fails or later ceases to meet the criteria for deferral accounting, any subsequent gains or losses are recognized currently in income. Cash flows resulting from derivative financial instruments are classified in the same category as the cash flows from the items being hedged.

Cash Flow Hedge

On October 24, 2018, the Company entered into an interest rate swap agreement with a notional amount of $750 million, designated as a cash flow hedge in accordance with ASC 815, “Derivatives and Hedging”, to hedge the variability of cash flows in interest payments associated with the Company’s variable-rate debt. The interest rate swap agreement swaps a LIBOR rate for a fixed rate of 3.07% and matures on October 17, 2023. The swap effectively converts a portion of the Company’s Term B-5 Loans from a rate of LIBOR plus 1.75% to a 4.82% fixed rate.

As of October 28, 2018, the fair value of the Company’s interest rate swap was a liability of $5 million and was classified as an other liability in the Consolidated Balance Sheet. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“OCI”) within Stockholders’ Equity in the Consolidated Balance Sheets and are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. As of October 28, 2018, Accumulated OCI related to the interest rate swap agreement was a net unrealized loss of approximately $4 million, net of tax. The first monthly settlement will occur on November 30, 2018.

NOTE 6 — 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.

As of October 28, 2018 and January 28, 2018, the fair value measurement of the financial liability associated with the Company’s interest rate swap contract was $5 million and zero, respectively. The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the interest rate swap. See “Note 5 — Derivative Instruments” for further information on the Company’s interest rate swap contract.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

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 October 28, 2018 and January 28, 2018 (amounts in millions):

	As of October 28, 2018				As of January 28, 2018
	Recorded Amount(1)		Estimated Fair Value		Recorded Amount(1)		Estimated Fair Value
Senior ABL Facility	$	105	$	105	$	58	$	57
Term Loans and Notes	1,820		1,806		2,078		2,158
Total	$	1,925	$	1,911	$	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 7 — INCOME TAXES

For the nine months ended October 28, 2018, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was 25.9%. The effective rate for continuing operations for the nine months ended October 29, 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 October 28, 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 October 28, 2018 and January 28, 2018 was zero. As of October 28, 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 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.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8—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 28, 2018 and October 29, 2017 was as follows (in thousands):

	Three Months Ended		Nine Months Ended
	October 28, 2018	October 29, 2017	October 28, 2018	October 29, 2017
Weighted-average common shares	182,730	185,651	183,349	194,704
Effect of potentially dilutive stock plan securities	849	1,001	843	1,554
Diluted weighted-average common shares	183,579	186,652	184,192	196,258
Stock plan securities excluded from dilution (1)	1,460	2,414	1,900	1,966

(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 9 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

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

	October 28, 2018		January 28, 2018
Trade receivables, net of allowance for doubtful accounts	$	774	$	540
Vendor rebate receivables	68		58
Other receivables	18		14
Total receivables, net	$	860	$	612

Other Current Liabilities

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

	HD Supply Holdings, Inc.				HD Supply, Inc.
	October 28, 2018		January 28, 2018		October 28, 2018		January 28, 2018
Corporate headquarters financing liability	$	87	$	—	$	87	$	—
Accrued non-income taxes	42		27		42		27
Unsettled share repurchases	20		—		—		—
Refund liability(1)	16		—		16		—
Accrued interest	3		21		3		21
Other	93		90		93		90
Total other current liabilities	$	261	$	138	$	241	$	138

(1) This amount represents the Company’s sales return estimate as of October 28, 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 nine months ended October 28, 2018 and October 29, 2017 was $103 million and $148 million, respectively. During the nine months ended October 28, 2018 and October 29, 2017, the Company paid $4 million and $6 million, respectively, of original issue discounts related to the extinguishment of debt.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Cash paid for income taxes, net of refunds, in the nine months ended October 28, 2018 and October 29, 2017 was approximately $9 million and $27 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.

During the nine months ended October 28, 2018, HDS executed a cash equity distribution of $172 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 nine months ended October 28, 2018, under this plan, Holdings repurchased 4,682,396 shares of its common stock for approximately $178 million.

In combination with the 2014 authorized share repurchase plan (utilizing proceeds from employee stock option exercises), Holdings repurchased a total of 4,847,933 shares of its common stock during the nine months ended October 28, 2018 for approximately $185 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 10 - 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 nine months ended October 28, 2018, the Company recognized zero 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. As of October 28, 2018, remaining unpaid costs associated with the restructuring plan are immaterial.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 — 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 September 19, 2018, the Court granted in part and denied in part Defendants’ motion to dismiss. The matter is now in discovery.

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. On October 22, 2018, upon joint motion of the parties, the Court entered an order continuing the continued conditional stay of proceedings and administratively closing the matter until after any summary judgment motion filed in the securities litigation is adjudicated.

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. Defendants moved to dismiss the complaint on November 2, 2018. That motion is pending.

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

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 12 — 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 October 28, 2018
Net sales	$	810	$	803	$	(1	)	$	1,612
Adjusted EBITDA	149		99		—			248
Depreciation(1) & Software Amortization	10		12		—			22
Other Intangible Amortization	2		3		—			5
Three Months Ended October 29, 2017
Net sales	$	754	$	617	$	(1	)	$	1,370
Adjusted EBITDA	144		70		—			214
Depreciation(1) & Software Amortization	9		10		—			19
Other Intangible Amortization	1		2		—			3

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Facilities Maintenance		Construction & Industrial		Eliminations			Total Continuing Operations
Nine Months Ended October 28, 2018
Net sales	$	2,353	$	2,250	$	(2	)	$	4,601
Adjusted EBITDA	422		262		—			684
Depreciation(1) & Software Amortization	28		34		—			62
Other Intangible Amortization	6		10		—			16
Nine Months Ended October 29, 2017
Net sales	$	2,205	$	1,737	$	(4	)	$	3,938
Adjusted EBITDA	397		182		—			579
Depreciation(1) & Software Amortization	26		31		—			57
Other Intangible Amortization	6		3		—			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 28, 2018			October 29, 2017			October 28, 2018			October 29, 2017
Total Adjusted EBITDA	$	248		$	214		$	684		$	579
Depreciation and amortization(1)	27			22			78			66
Stock-based compensation	7			7			19			19
Restructuring	—			3			9			3
Acquisition and integration costs(2)	2			—			5			—
Other	(1		)	—			(2		)	—
Operating income	213			182			575			491
Interest expense	32			36			101			134
Interest (income)	—			(1		)	(1		)	(1		)
Loss on extinguishment & modification of debt(3)	69			78			69			81
Income from Continuing Operations Before Provision for Income Taxes	112			69			406			277
Provision for income taxes	30			23			105			92
Income from continuing operations	82			46			301			185
Income from discontinued operations, net of tax	—			406			1			794
Net income	$	82		$	452		$	302		$	979

(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 premium paid to repurchase or call the debt as well as 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.

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 13—SUBSIDIARY GUARANTORS

HDS (the “Debt Issuer”) has outstanding October 2018 Senior Unsecured Notes, which are guaranteed by 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 October 2018 Senior Unsecured Notes (the “Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Debt Issuer’s payment obligations under the October 2018 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) such Subsidiary Guarantor is (or, substantially concurrently with the release of the Subsidiary Guarantee of such Subsidiary Guarantor or if as a result of the release of the Subsidiary Guarantee of such Subsidiary Guarantor, will be) released from all of its obligations under all of its Guarantees of payment of any Indebtedness of HDS or any Subsidiary Guarantor under the agreements governing the Senior Credit Facilities and other capital markets securities (including by reason of ceasing to be a borrower under the Senior ABL Facility agreement);

(ii) such Subsidiary Guarantor ceases to be a domestic subsidiary of HDS pursuant to the terms of the Indenture under the indenture governing the October 2018 Senior Unsecured Notes;

(iii) in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all the capital stock of such Subsidiary Guarantor to any person that is not, or is not required to become, a Subsidiary Guarantor of HDS under the indenture governing the October 2018 Senior Unsecured Notes; and;

(iv) upon legal or covenant defeasance of the October 2018 Senior Unsecured Notes or the satisfaction and discharge of the indenture governing the October 2018 Senior Unsecured Notes.

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.

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, 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).

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

	Three Months Ended October 28, 2018
	Debt Issuer			Subsidiary Guarantors		Non- Guarantor Subsidiaries			Consolidating Adjustments			Total HDS
Net Sales	$	—		$	1,573	$	40		$	(1	)	$	1,612
Cost of sales	—			963		21			(1		)	983
Gross Profit	—			610		19			—			629
Operating expenses:
Selling, general and administrative	16			362		13			—			391
Depreciation and amortization	5			19		1			—			25
Restructuring	—			—		—			—			—
Total operating expenses	21			381		14			—			416
Operating Income (Loss)	(21		)	229		5			—			213
Interest expense	30			1		—			1			32
Interest (income)	—			1		—			(1		)	—
Loss on extinguishment & modification of debt	69			—		—			—			69
Net (earnings) of equity affiliates	(230		)	—		—			230			—
Income from Continuing Operations Before Provision for Income Taxes	110			227		5			(230		)	112
Provision for income taxes	28			2		—			—			30
Income from Continuing Operations	82			225		5			(230		)	82
Income from discontinued operations, net of tax	—			—		—			—			—
Net Income	$	82		$	225	$	5		$	(230	)	$	82
Other comprehensive income (loss):
Foreign currency translation adjustment	—			—		—			—			—
Unrealized (loss) on derivatives, net of tax of $1	(4		)	—		(4		)	4			(4		)
Total Comprehensive Income	$	78		$	225	$	1		$	(226	)	$	78

Table of Contents

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

	Three Months Ended October 29, 2017
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Consolidating Adjustments			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) of equity affiliates	(189		)	—			—		189			—
Income from Continuing Operations Before Provision for Income Taxes	73			179			6		(189		)	69
Provision for income taxes	24			(2		)	1		—			23
Income from Continuing Operations	49			181			5		(189		)	46
Income from discontinued operations, net of tax	403			—			3		—			406
Net Income	$	452		$	181		$	8	$	(189	)	$	452
Other comprehensive income (loss):
Foreign currency translation adjustment	1			—			1		(1		)	1
Unrealized (loss) on derivatives, net of tax of $-	—			—			—		—			—