HD Supply
HD Supply Holdings, Inc. (Form: 10-Q, Received: 06/06/2017 06:04:10)

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 April 30, 2017

 

- OR -

 

o

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

 

For the transition period from            to

 


 

Commission File
Number

 

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

 

State of incorporation

 

I.R.S. Employer
Identification Number

001-35979

 

HD SUPPLY HOLDINGS, INC.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

26-0486780

333-159809

 

HD SUPPLY, INC.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

75-2007383

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

HD Supply Holdings, Inc.

 

Yes x No o

HD Supply, Inc.

 

Yes o No x

 

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

 

HD Supply Holdings, Inc.

 

Yes x No o

HD Supply, Inc.

 

Yes x No o

 

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

 

HD Supply Holdings, Inc.

Large accelerated filer x

Accelerated filer o

Smaller reporting company o

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

 

Emerging growth company o

 

HD Supply, Inc.

Large accelerated filer o

Accelerated filer o

Smaller reporting company o

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

Emerging growth company o

 

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

 

HD Supply Holdings, Inc.   o

 

 

HD Supply, Inc.   o

 

 

 

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

 

HD Supply Holdings, Inc.

 

Yes o No x

HD Supply, Inc.

 

Yes o No x

 

The number of shares of the Registrant’s common stock outstanding as of June 2, 2017:

 

HD Supply Holdings, Inc.

 

202,659,525 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 FOR M 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 (Loss) for the Three Months ended April 30, 2017 and May 1, 2016 (unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of April 30, 2017 and January 29, 2017 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months ended April 30, 2017 and May 1, 2016 (unaudited)

7

 

 

 

 

HD Supply, Inc.

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months ended April 30, 2017 and May 1, 2016 (unaudited)

8

 

 

 

 

Consolidated Balance Sheets as of April 30, 2017 and January 29, 2017 (unaudited)

9

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months ended April 30, 2017 and May 1, 2016 (unaudited)

10

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

11

 

 

 

Item 2.

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

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 6.

Exhibits

44

 

 

 

Signatures

45

 

2



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 29, 2017 and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations, financial condition and liquidity, and the development of industries in which we operate include:

 

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

 

3



Table of Contents

 

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

 

·                   our ability to manage fixed costs;

 

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

 

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

 

·                   potential material liabilities under our self-insured programs;

 

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

 

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

 

·                   our ability to identify and integrate new products; and

 

·       our ability to complete the sale of our Waterworks business.

 

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.

 

4



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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

 

 

 

Three Months Ended

 

 

 

April 30,
2017

 

May 1,
2016

 

Net Sales

 

$

1,873

 

$

1,781

 

Cost of sales

 

1,242

 

1,172

 

Gross Profit

 

631

 

609

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

431

 

401

 

Depreciation and amortization

 

24

 

23

 

Restructuring

 

 

7

 

Total operating expenses

 

455

 

431

 

Operating Income

 

176

 

178

 

Interest expense

 

49

 

85

 

Loss on extinguishment of debt

 

3

 

115

 

Other (Income) expense, net

 

2

 

 

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

 

122

 

(22

)

Provision (benefit) for income taxes

 

37

 

(8

)

Income (Loss) from Continuing Operations

 

85

 

(14

)

Income from discontinued operations, net of tax

 

 

 

Net Income (Loss)

 

$

85

 

$

(14

)

Other comprehensive income (loss) — foreign currency translation adjustment

 

1

 

4

 

Total Comprehensive Income (Loss)

 

$

86

 

$

(10

)

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

Basic

 

200,708

 

198,808

 

Diluted

 

203,017

 

198,808

 

 

 

 

 

 

 

Basic Earnings Per Share(1):

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.42

 

$

(0.07

)

Income from Discontinued Operations

 

$

 

$

 

Net Income (Loss)

 

$

0.42

 

$

(0.07

)

Diluted Earnings Per Share (1) :

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.42

 

$

(0.07

)

Income from Discontinued Operations

 

$

 

$

 

Net Income (Loss)

 

$

0.42

 

$

(0.07

)

 


(1)                May not foot due to rounding.

 

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 BALANCE SHEETS

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

 

 

 

April 30,
2017

 

January 29,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

70

 

$

75

 

Receivables, less allowance for doubtful accounts of $14 and $13

 

1,015

 

904

 

Inventories

 

913

 

831

 

Other current assets

 

40

 

37

 

Total current assets

 

2,038

 

1,847

 

Property and equipment, net

 

309

 

303

 

Goodwill

 

2,869

 

2,869

 

Intangible assets, net

 

109

 

112

 

Deferred tax asset

 

579

 

556

 

Other assets

 

22

 

20

 

Total assets

 

$

5,926

 

$

5,707

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

721

 

$

532

 

Accrued compensation and benefits

 

84

 

140

 

Current installments of long-term debt

 

14

 

14

 

Other current liabilities

 

156

 

157

 

Total current liabilities

 

975

 

843

 

Long-term debt, excluding current installments

 

3,716

 

3,798

 

Other liabilities

 

112

 

106

 

Total liabilities

 

4,803

 

4,747

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 202.9 million and 201.4 million shares issued and outstanding at April 30, 2017 and January 29, 2017, respectively

 

2

 

2

 

Paid-in capital

 

3,994

 

3,962

 

Accumulated deficit

 

(2,850

)

(2,969

)

Accumulated other comprehensive loss

 

(14

)

(15

)

Treasury stock, at cost, 0.2 and 0.6 million shares at April 30, 2017 and January 29, 2017, respectively

 

(9

)

(20

)

Total stockholders’ equity

 

1,123

 

960

 

Total liabilities and stockholders’ equity

 

$

5,926

 

$

5,707

 

 

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

 

 

 

Three Months Ended

 

 

 

April 30,
2017

 

May 1,
2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

85

 

$

(14

)

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

 

 

 

 

 

Depreciation and amortization

 

25

 

25

 

Provision for uncollectibles

 

2

 

1

 

Non-cash interest expense

 

3

 

4

 

Payment of discounts upon extinguishment of debt

 

(4

)

 

Loss on extinguishment of debt

 

3

 

115

 

Stock-based compensation expense

 

6

 

6

 

Deferred income taxes

 

34

 

(9

)

Other

 

(1

)

 

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

 

 

 

 

 

(Increase) decrease in receivables

 

(113

)

(81

)

(Increase) decrease in inventories

 

(83

)

(91

)

(Increase) decrease in other current assets

 

(3

)

(20

)

Increase (decrease) in accounts payable and accrued liabilities

 

129

 

140

 

Increase (decrease) in other long-term liabilities

 

 

 

Net cash provided by (used in) operating activities

 

83

 

76

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(24

)

(17

)

Proceeds from sales of property and equipment

 

2

 

 

Net cash provided by (used in) investing activities

 

(22

)

(17

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock under employee benefit plans

 

25

 

6

 

Purchase of treasury shares

 

(9

)

(9

)

Borrowings of long-term debt

 

 

1,000

 

Repayments of long-term debt

 

(100

)

(1,108

)

Borrowings on long-term revolver debt

 

75

 

 

Repayments on long-term revolver debt

 

(55

)

 

Debt issuance costs

 

(5

)

(14

)

Other financing activities

 

3

 

(2

)

Net cash provided by (used in) financing activities

 

(66

)

(127

)

Effect of exchange rates on cash and cash equivalents

 

 

2

 

Increase (decrease) in cash and cash equivalents

 

$

(5

)

$

(66

)

Cash and cash equivalents at beginning of period

 

75

 

269

 

Cash and cash equivalents at end of period

 

$

70

 

$

203

 

 

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 (LOSS)

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

 

 

April 30,
2017

 

May 1,
2016

 

Net Sales

 

$

1,873

 

$

1,781

 

Cost of sales

 

1,242

 

1,172

 

Gross Profit

 

631

 

609

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

431

 

401

 

Depreciation and amortization

 

24

 

23

 

Restructuring

 

 

7

 

Total operating expenses

 

455

 

431

 

Operating Income

 

176

 

178

 

Interest expense

 

49

 

85

 

Loss on extinguishment of debt

 

3

 

115

 

Other (Income) expense, net

 

2

 

 

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

 

122

 

(22

)

Provision (benefit) for income taxes

 

37

 

(8

)

Income (Loss) from Continuing Operations

 

85

 

(14

)

Income from discontinued operations, net of tax

 

 

 

Net Income (Loss)

 

$

85

 

$

(14

)

Other comprehensive income (loss) — foreign currency translation adjustment

 

1

 

4

 

Total Comprehensive Income (Loss)

 

$

86

 

$

(10

)

 

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

 

 

 

April 30,
2017

 

January 29,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

52

 

$

73

 

Receivables, less allowance for doubtful accounts of $14 and $13

 

1,015

 

904

 

Inventories

 

913

 

831

 

Other current assets

 

40

 

37

 

Total current assets

 

2,020

 

1,845

 

Property and equipment, net

 

309

 

303

 

Goodwill

 

2,869

 

2,869

 

Intangible assets, net

 

109

 

112

 

Deferred tax asset

 

579

 

556

 

Other assets

 

22

 

20

 

Total assets

 

$

5,908

 

$

5,705

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

721

 

$

532

 

Accrued compensation and benefits

 

84

 

140

 

Current installments of long-term debt

 

14

 

14

 

Other current liabilities

 

154

 

157

 

Total current liabilities

 

973

 

843

 

Long-term debt, excluding current installments

 

3,716

 

3,798

 

Other liabilities

 

112

 

106

 

Total liabilities

 

4,801

 

4,747

 

Stockholder’s equity:

 

 

 

 

 

Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at April 30, 2017 and January 29, 2017

 

 

 

Paid-in capital

 

3,812

 

3,806

 

Accumulated deficit

 

(2,691

)

(2,833

)

Accumulated other comprehensive loss

 

(14

)

(15

)

Total stockholder’s equity

 

1,107

 

958

 

Total liabilities and stockholder’s equity

 

$

5,908

 

$

5,705

 

 

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 CASH FLOWS

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

 

 

April 30,
2017

 

May 1,
2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

85

 

$

(14

)

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

 

 

 

 

 

Depreciation and amortization

 

25

 

25

 

Provision for uncollectibles

 

2

 

1

 

Non-cash interest expense

 

3

 

4

 

Payment of discounts upon extinguishment of debt

 

(4

)

 

Loss on extinguishment of debt

 

3

 

115

 

Stock-based compensation expense

 

6

 

6

 

Deferred income taxes

 

34

 

(9

)

Other

 

(1

)

 

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

 

 

 

 

 

(Increase) decrease in receivables

 

(113

)

(81

)

(Increase) decrease in inventories

 

(83

)

(91

)

(Increase) decrease in other current assets

 

(3

)

(20

)

Increase (decrease) in accounts payable and accrued liabilities

 

129

 

140

 

Increase (decrease) in other long-term liabilities

 

 

 

Net cash provided by (used in) operating activities

 

83

 

76

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(24

)

(17

)

Proceeds from sales of property and equipment

 

2

 

 

Net cash provided by (used in) investing activities

 

(22

)

(17

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings of long-term debt

 

 

1,000

 

Repayments of long-term debt

 

(100

)

(1,108

)

Borrowings on long-term revolver debt

 

75

 

 

Repayments on long-term revolver debt

 

(55

)

 

Debt issuance costs

 

(5

)

(14

)

Other financing activities

 

3

 

(2

)

Net cash provided by (used in) financing activities

 

(82

)

(124

)

Effect of exchange rates on cash and cash equivalents

 

 

2

 

Increase (decrease) in cash and cash equivalents

 

$

(21

)

$

(63

)

Cash and cash equivalents at beginning of period

 

73

 

266

 

Cash and cash equivalents at end of period

 

$

52

 

$

203

 

 

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 three distinct market sectors: Maintenance, Repair & Operations; Infrastructure; and Specialty Construction. Through approximately 500 locations across 48 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 14,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 530,000 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 845,000 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 infrastructure and construction to maintenance, repair and operations.

 

HD Supply is managed primarily on a product line basis and reports results of operations in three reportable segments. The reportable segments are Facilities Maintenance, Waterworks, and Construction & Industrial. In addition, the consolidated financial statements include Corporate, 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 29, 2017, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).

 

F iscal Year

 

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  Fiscal years ending January 28, 2018 (“fiscal 2017”) and January 29, 2017 (“fiscal 2016”) both include 52 weeks.  The three months ended April 30, 2017 (“first quarter 2017”) and May 1, 2016 (“first quarter 2016”) both include 13 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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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 medical claims, while maintaining per employee stop loss coverage, and certain legal claims. 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 April 30, 2017 and January 29, 2017, self-insurance reserves totaled approximately $78 million and $79 million, respectively.

 

NOTE 2 — DISCONTINUED OPERATIONS

 

On May 31, 2016, the Company completed the sale of its Interior Solutions business. In accordance with Accounting Standards Codification (“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 Interior Solutions is 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 (Loss). All Consolidated Statements of Operations and Comprehensive Income (Loss) presented have been revised to reflect this presentation.

 

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

 

 

 

Three Months Ended

 

 

 

April 30,
2017

 

May 1,
2016

 

Net sales

 

$

 

$

63

 

Cost of sales

 

 

47

 

Gross Profit

 

 

16

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

 

15

 

Depreciation and amortization

 

 

1

 

Total operating expenses

 

 

16

 

Operating Income

 

 

 

(Gain) loss on disposal of discontinued operations

 

 

 

Income (loss) before provision for income taxes

 

 

 

Provision (benefit) for income taxes

 

 

 

Income (loss) from discontinued operations, net of tax

 

$

 

$

 

 

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

 

 

 

Three Months Ended

 

 

 

April 30,
2017

 

May 1,
2016

 

Net cash flows from operating activities

 

$

 

$

1

 

Capital expenditures

 

 

 

Net cash flows provided by (used in) investing activities

 

$

 

$

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 — DEBT

 

HDS’s long-term debt as of April 30, 2017 and January 29, 2017 consisted of the following (dollars in millions):

 

 

 

April 30, 2017

 

January 29, 2017

 

 

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Senior ABL Facility due 2022

 

$

439

 

2.65

 

$

421

 

2.38

 

Term B-1 Loans due 2021

 

537

 

3.90

 

639

 

3.75

 

Term B-2 Loans due 2024

 

547

 

3.90

 

549

 

3.75

 

December 2014 First Priority Notes due 2021

 

1,250

 

5.25

 

1,250

 

5.25

 

April 2016 Senior Unsecured Notes due 2024

 

1,000

 

5.75

 

1,000

 

5.75

 

Total gross long-term debt

 

$

3,773

 

 

 

$

3,859

 

 

 

Less unamortized discount

 

(8

)

 

 

(9

)

 

 

Less unamortized deferred financing costs

 

(35

)

 

 

(38

)

 

 

Total net long-term debt

 

$

3,730

 

 

 

$

3,812

 

 

 

Less current installments

 

(14

)

 

 

(14

)

 

 

Total net long-term debt, excluding current installments

 

$

3,716

 

 

 

$

3,798

 

 

 

 


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

 

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, to repay $100 million aggregate principal of its approximately $842 million original aggregate principal tranche of term loans due 2021 (the “Term B-1 Loans”). As a result, the Company incurred a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs for $1 million each, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

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

 

Senior Credit Facilities

 

Senior ABL Facility

 

HDS’s Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under a borrowing base).  Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments.  A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of April 30, 2017, HDS had $795 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $30 million in letters of credit issued and including $123 million of borrowings available on qualifying cash balances). Of the approximately $439 million borrowed on the Senior ABL Facility as of April 30, 2017, approximately $58 million represents Canadian borrowings with the remainder in the U.S.

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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 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 $1,392 million. Term B-1 Loans will mature on August 13, 2021 and Term B-2 Loans will mature on October 17, 2023. Both Term B-1 Loans and Term B-2 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. Both Term B-1 Loans and Term B-2 Loans bear interest at the applicable margin for borrowings of 2.75% for LIBOR borrowings and 1.75% for base rate borrowings. The Term Loan Facility allows for a reduction to the applicable margin on the Term B-2 Loans from 2.75% per annum to 2.50% per annum upon the Company reaching a consolidated total leverage ratio of 3.0x or less.

 

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 29, 2017.

 

Secured Notes

 

5.25% Senior Secured First Priority Notes due 2021

 

HDS’s 5.25% Senior Secured First Priority Notes due 2021 (the “December 2014 First Priority Notes”) bear interest at 5.25% per annum and will mature on December 15, 2021. Interest is paid semi-annually in arrears on June 15 th  and December 15 th  of each year.

 

Redemption

 

HDS may redeem the December 2014 First Priority Notes, in whole or in part, at any time (1) prior to December 15, 2017, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the indenture governing the December 2014 First Priority Notes and (2) on and after December 15, 2017, 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 December 15 of the year set forth below.

 

Year

 

Percentage

 

2017

 

103.938

%

2018

 

102.625

%

2019

 

101.313

%

2020 and thereafter

 

100.000

%

 

In addition, at any time prior to December 15, 2017, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the December 2014 First Priority Notes with the proceeds of certain equity offerings at a redemption price of 105.25% of the principal amount of the December 2014 First Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

December 2014 First Priority Notes are redeemed, an aggregate principal amount of December 2014 First Priority Notes equal to at least 50% of the original aggregate principal amount of December 2014 First Priority Notes must remain outstanding immediately after each such redemption of December 2014 First Priority Notes.

 

Collateral

 

The December 2014 First Priority Notes and the related guarantees are secured by a first-priority security interest in substantially all of the tangible and intangible assets of HDS and the Subsidiary Guarantors (other than the ABL Priority Collateral (as defined in the indenture governing the December 2014 First Priority Notes), in which the December 2014 First Priority Notes and the related guarantees have a second-priority security interest), including pledges of all capital stock of HDS’s restricted subsidiaries directly owned by HDS and the Subsidiary Guarantors (but only up to 65% of each series of capital stock of each direct Foreign Subsidiary owned by HDS or any Subsidiary Guarantor), subject to certain thresholds, exceptions and permitted liens, and excluding any Excluded Assets and Excluded Subsidiary Securities (each as defined in the indenture governing the December 2014 First Priority Notes) and together (the “Cash Flow Priority Collateral”).

 

The indenture governing the December 2014 First Priority Notes and the applicable collateral documents provide that any capital stock and other securities of any of HDS’s subsidiaries will be excluded from the collateral to the extent the pledge of such capital stock or other securities to secure the December 2014 First Priority Notes would cause such subsidiary to be required to file separate financial statements with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).

 

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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 5.25% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”) bear interest at a rate of 5.75% and will mature on April 15, 2024. Interest is paid semi-annually on April 15 th  and October 15 th  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 December 2014 First Priority Notes and 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 29, 2017.

 

Debt covenants

 

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness and dividend payments and restrictions on the use of proceeds from asset dispositions. As of April 30, 2017, HDS was in compliance with all such covenants that were in effect on such date.

 

NOTE 4 — FAIR VALUE MEASUREMENTS

 

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

 

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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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 April 30, 2017 and January 29, 2017 (amounts in millions):

 

 

 

As of April 30, 2017

 

As of January 29, 2017

 

 

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Senior ABL Facility

 

$

439

 

$

433

 

$

421

 

$

410

 

Term Loans and Notes

 

3,334

 

3,477

 

3,438

 

3,572

 

Total

 

$

3,773

 

$

3,910

 

$

3,859

 

$

3,982

 

 


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

 

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

 

NOTE 5 — INCOME TAXES

 

For the three months ended April 30, 2017, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was an expense of 30.3%. The effective rate for continuing operations for the three months ended May 1, 2016 was a benefit of 36.4%.

 

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of audits. For the three months ended April 30, 2017, the application of ASU No. 2016-09 resulted in discrete tax benefits of $11 million from the exercise and vesting of stock based awards, which lowered the effective tax rate by 900 basis points. For additional information on the adoption of ASU 2016-09, see “Note 12, Recent Accounting Pronouncements.”

 

As of January 29, 2017, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $10 million. As of April 30, 2017, the Company’s unrecognized tax benefits remained unchanged. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of January 29, 2017 was zero and remained unchanged as of April 30, 2017.  As of January 29, 2017, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $5 million and remained unchanged as of April 30, 2017. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

 

NOTE 6—BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

 

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

 

The reconciliation of basic to diluted weighted average common shares for the three months ended April 30, 2017 and May 1, 2016 was as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

April 30, 2017

 

May 1, 2016

 

Weighted-average common shares

 

200,708

 

198,808

 

Effect of potentially dilutive stock plan securities

 

2,309

 

 

Diluted weighted-average common shares

 

203,017

 

198,808

 

Stock plan securities excluded from dilution (1)

 

1,294

 

7,358

 

 


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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Stock plan securities consist of securities (stock options, restricted stock and restricted stock units) granted under Holdings’ stock-based compensation plans. Diluted weighted average common shares outstanding equals basic weighted average common shares outstanding for the three months ended May 1, 2016, as the effect of securities are anti-dilutive because the Company incurred net losses.

 

NOTE 7 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables as of April 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

 

 

 

April 30,
2017

 

January 29,
2017

 

Trade receivables, net of allowance for doubtful accounts

 

$

940

 

$

804

 

Vendor rebate receivables

 

66

 

89

 

Other receivables

 

9

 

11

 

Total receivables, net

 

$

1,015

 

$

904

 

 

Other Current Liabilities

 

Other current liabilities as of April 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

 

 

 

HD Supply Holdings, Inc.

 

HD Supply, Inc.

 

 

 

April 30,
2017

 

January 29,
2017

 

April 30,
2017

 

January
29, 2017

 

Accrued interest

 

$

32

 

$

30

 

$

32

 

$

30

 

Accrued non-income taxes

 

41

 

31

 

41

 

31

 

Other

 

83

 

96

 

81

 

96

 

Total other current liabilities

 

$

156

 

$

157

 

$

154

 

$

157

 

 

Supplemental Cash Flow Information

 

Cash paid for interest in the three months ended April 30, 2017 and May 1, 2016 was $44 million and $119 million, respectively. During the three months ended April 30, 2017, the Company paid $4 million of original issue discounts related to the $100 million payment on Term B-1 Loans.

 

Cash paid for income taxes, net of refunds, in the three months ended April 30, 2017 and May 1, 2016 was approximately $3 million and $1 million, respectively.

 

Significant Non-Cash Transactions

 

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

 

Build-to-Suit Lease

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In accordance with ASC 850, “Leases,” for build-to-suit arrangements where the Company is involved in the construction of structural improvements prior to the commencement of the lease or takes some level of construction risk, the Company is considered the owner of the assets and land during the construction period. Accordingly, during construction activities, the Company recorded a Construction in progress asset within Property and equipment and a corresponding financing liability on the Consolidated Balance Sheet for contributions by the landlord toward construction. Once the construction is completed, if the lease meets certain “sales-leaseback” criteria, the Company will remove the asset and related financial obligation from the Consolidated Balance Sheet and treat the building lease as an operating lease. If upon completion of construction, the lease does not meet the “sales-leaseback” criteria, the leased property will be treated as a capital lease and included in Property and equipment on the Consolidated Balance Sheet. As of April 30, 2017, the Consolidated Balance Sheet includes $26 million of build-to-suit assets in Construction in progress, and the corresponding financial obligation of $26 million in Other long-term liabilities in the Consolidated Balance Sheet.

 

NOTE 8—RESTRUCTURING ACTIVITIES

 

As a result of the sale of the Power Solutions business unit in fiscal 2015, management evaluated the Company’s talent alignment and functional support strategies. Consequently, during fiscal 2015, the Company initiated a restructuring plan to strategically align its leadership and functional support teams. During the three months ended May 1, 2016, the Company incurred $7 million of restructuring charges under this plan. The Company completed the activities under this plan in fiscal 2016 and does not expect to incur any additional charges. As of April 30, 2017 and January 29, 2017, the Company’s liability balance for these restructuring activities was $4 million and $5 million respectively, and is included in Other current liabilities in the Consolidated Balance Sheets. Payments for these charges are expected to be substantially complete by the end of fiscal 2017.

 

NOTE 9 — COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

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

 

NOTE 10 — SEGMENT INFORMATION

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

·                   Waterworks —Waterworks distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in the water and wastewater industries for non-residential and residential uses.

 

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

 

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

 

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

 

 

 

Facilities
Maintenance

 

Waterworks

 

Construction
& Industrial

 

Corporate

 

Total
Continuing
Operations

 

Three Months Ended April 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

682

 

$

657

 

$

536

 

$

(2

)

$

1,873

 

Adjusted EBITDA

 

117

 

51

 

55

 

(16

)

207

 

Depreciation(1) & Software Amortization

 

7

 

3

 

9

 

3

 

22

 

Other Intangible Amortization

 

1

 

 

 

2

 

3

 

Three Months Ended May 1, 2016

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

677

 

$

605

 

$

501

 

$

(2

)

$

1,781

 

Adjusted EBITDA

 

134

 

48

 

49

 

(16

)

215

 

Depreciation(1) & Software Amortization

 

8

 

2

 

8

 

3

 

21

 

Other Intangible Amortization

 

1

 

1

 

 

2

 

4

 

 


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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reconciliation to Consolidated Financial Statements

 

 

 

Three Months Ended

 

 

 

April 30, 2017

 

May 1, 2016

 

Total Adjusted EBITDA

 

$

207

 

$

215

 

Depreciation and amortization(1)

 

25

 

25

 

Stock-based compensation

 

6

 

6

 

Restructuring

 

 

7

 

Other

 

 

(1

)

Operating income

 

176

 

178

 

Interest expense, net

 

49

 

85

 

Loss on extinguishment of debt(2)

 

3

 

115

 

Other (income) expense, net

 

2

 

 

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

 

122

 

(22

)

Provision (benefit) for income taxes

 

37

 

(8

)

Income (loss) from continuing operations

 

85

 

(14

)

Less Income from discontinued operations, net of tax

 

 

 

Net income (loss)

 

$

85

 

$

(14

)

 


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

 

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

 

NOTE 11—SUBSIDIARY GUARANTORS

 

HDS (the “Debt Issuer”) has outstanding December 2014 First Priority Notes and April 2016 Senior Unsecured Notes (collectively the “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 Notes (the “Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 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, the condensed balance sheets and the condensed statements of cash flows 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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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 (LOSS)

 

 

 

Three Months Ended April 30, 2017

 

 

 

Debt
 Issuer

 

Subsidiary
 Guarantors

 

Non-Guarantor
 Subsidiaries

 

Elim-
inations

 

Total
 HDS

 

Net Sales

 

$

 

$

1,842

 

$

32

 

$

(1

)

$

1,873

 

Cost of sales

 

 

1,226

 

17

 

(1

)

1,242

 

Gross Profit

 

 

616

 

15

 

 

631

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

21

 

398

 

12

 

 

431

 

Depreciation and amortization

 

4

 

20

 

 

 

24

 

Restructuring

 

 

 

 

 

 

Total operating expenses

 

25

 

418

 

12

 

 

455

 

Operating Income (Loss)

 

(25

)

198

 

3

 

 

176

 

Interest expense

 

56

 

51

 

1

 

(59

)

49

 

Interest (income)

 

(51

)

(8

)

 

59

 

 

Net (earnings) loss of equity affiliates

 

(155

)

 

 

155

 

 

Loss on extinguishment of debt

 

3

 

 

 

 

3

 

Other (income) expense, net

 

2

 

 

 

 

2

 

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

 

120

 

155

 

2

 

(155

)

122

 

Provision (benefit) for income taxes

 

35

 

2

 

 

 

37

 

Income (Loss) from Continuing Operations

 

85

 

153

 

2

 

(155

)

85

 

Income (loss) from discontinued operations, net of tax

 

 

 

 

 

 

Net Income (Loss)

 

$

85

 

$

153

 

$

2

 

$

(155

)

$

85

 

Other comprehensive income—foreign currency translation adjustment

 

1

 

 

1

 

(1

)

1

 

Total Comprehensive Income (Loss)

 

$

86

 

$

153

 

$

3

 

$

(156

)

$

86

 

 

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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 (LOSS) (CONTINUED)

 

 

 

Three Months Ended May 1, 2016

 

 

 

Debt
 Issuer

 

Subsidiary
 Guarantors

 

Non-
Guarantor
 Subsidiaries

 

Elim-
inations

 

Total
 HDS

 

Net Sales

 

$

 

$

1,752

 

$

29

 

$

 

$

1,781

 

Cost of sales

 

 

1,156

 

16

 

 

1,172

 

Gross Profit

 

 

596

 

13

 

 

609

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

20

 

370

 

11

 

 

401

 

Depreciation and amortization

 

3

 

20

 

 

 

23

 

Restructuring

 

1

 

6

 

 

 

7

 

Total operating expenses

 

24

 

396

 

11

 

 

431

 

Operating Income (Loss)

 

(24

)

200

 

2

 

 

178

 

Interest expense

 

89

 

61

 

 

(65

)

85

 

Interest (income)

 

(61

)

(4

)

 

65

 

 

Net (earnings) loss of equity affiliates

 

(145

)

 

 

145

 

 

Loss on extinguishment of debt

 

115

 

 

 

 

115

 

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

 

(22

)

143

 

2

 

(145

)

(22

)

Provision (benefit) for income taxes

 

(8

)

 

 

 

(8

)

Income (Loss) from Continuing Operations

 

(14

)

143

 

2

 

(145

)

(14

)

Income (loss) from discontinued operations, net of tax

 

 

 

 

 

 

Net Income (Loss)

 

$

(14

)

$

143

 

$

2

 

$

(145

)

$

(14

)

Other comprehensive income—foreign currency translation adjustment

 

4

 

 

4

 

(4

)

4

 

Total Comprehensive Income (Loss)

 

$

(10

)

$

143

 

$

6

 

$

(149

)

$

(10

)

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

 

 

 

As of April 30, 2017

 

 

 

Debt 
Issuer

 

Subsidiary
 Guarantors

 

Non-
Guarantor
 Subsidiaries

 

Elim-
inations

 

Total
 HDS

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30

 

$

18

 

$

4

 

$

 

$

52

 

Receivables, net

 

2

 

995

 

18

 

 

1,015

 

Inventories

 

 

895

 

18

 

 

913

 

Intercompany receivables

 

 

1

 

 

(1

)

 

Other current assets

 

14

 

24

 

2

 

 

40

 

Total current assets

 

46

 

1,933

 

42

 

(1

)

2,020

 

Property and equipment, net

 

81

 

225

 

3

 

 

309

 

Goodwill

 

 

2,869

 

 

 

2,869

 

Intangible assets, net

 

 

108

 

1

 

 

109

 

Deferred tax asset

 

705

 

 

2

 

(128

)

579

 

Investment in subsidiaries

 

3,624

 

 

 

(3,624

)

 

Intercompany notes receivable

 

1,005

 

511

 

 

(1,516

)

 

Other assets

 

18

 

4

 

 

 

22

 

Total assets

 

$

5,479

 

$

5,650

 

$

48

 

$

(5,269

)

$

5,908

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

12

 

$

696

 

$

13

 

$

 

$

721

 

Accrued compensation and benefits

 

29

 

53

 

2

 

 

84

 

Current installments of long-term debt

 

14

 

 

 

 

14

 

Intercompany payables

 

 

 

1

 

(1

)

 

Other current liabilities

 

56

 

93

 

5

 

 

154

 

Total current liabilities

 

111

 

842

 

21

 

(1

)

973

 

Long-term debt, excluding current installments

 

3,658

 

 

58

 

 

3,716

 

Deferred tax liabilities

 

 

128

 

 

(128

)

 

Intercompany notes payable

 

511

 

1,005

 

 

(1,516

)

 

Other liabilities

 

92

 

18

 

2

 

 

112

 

Total liabilities

 

4,372

 

1,993

 

81

 

(1,645

)

4,801

 

Stockholder’s equity (deficit)

 

1,107

 

3,657

 

(33

)

(3,624

)

1,107

 

Total liabilities and stockholder’s equity (deficit)

 

$

5,479

 

$

5,650

 

$

48

 

$

(5,269

)

$

5,908

 

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS (CONTINUED)

 

 

 

As of January 29, 2017

 

 

 

Debt
 Issuer

 

Subsidiary
 Guarantors

 

Non-
Guarantor
 Subsidiaries

 

Elim-
inations

 

Total
 HDS

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51

 

$

17

 

$

5

 

$

 

$

73

 

Receivables, net

 

3

 

885

 

16

 

 

904

 

Inventories

 

 

813

 

18

 

 

831

 

Intercompany receivables

 

 

1

 

 

(1

)

 

Other current assets

 

13

 

22

 

2

 

 

37

 

Total current assets

 

67

 

1,738

 

41

 

(1

)

1,845

 

Property and equipment, net

 

76

 

225

 

2

 

 

303

 

Goodwill

 

 

2,869

 

 

 

2,869

 

Intangible assets, net

 

 

111

 

1

 

 

112

 

Deferred tax asset

 

681

 

 

2

 

(127

)

556

 

Investment in subsidiaries

 

2,451

 

 

 

(2,451

)

 

Intercompany notes receivable

 

2,192

 

584

 

 

(2,776

)

 

Other assets

 

16

 

4

 

 

 

20

 

Total assets

 

$

5,483

 

$

5,531

 

$

46

 

$

(5,355

)

$

5,705

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

13

 

$

508

 

$

11

 

$

 

$

532