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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 November 2, 2014

 

- 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

HD Supply Holdings, Inc.

 

 

 

 

 

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

 

(Do not check if a smaller reporting company)

 

HD Supply, Inc.

 

 

 

 

 

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

 

(Do not check if a smaller reporting company)

 

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

 

HD Supply Holdings, Inc.

Yes o No x

HD Supply, Inc.

Yes o No x

 

The number of shares of the registrant’s common stock outstanding as of December 5, 2014:

 

HD Supply Holdings, Inc.

196,047,008 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 (Loss) for the Three and Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of November 2, 2014 and February 2, 2014 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)

7

 

 

 

 

HD Supply, Inc.

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)

8

 

 

 

 

Consolidated Balance Sheets as of November 2, 2014 and February 2, 2014 (unaudited)

9

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)

10

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

11

 

 

 

Item 2.

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

39

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

60

 

 

 

Item 4.

Controls and Procedures

60

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

60

 

 

 

Item 1A.

Risk Factors

61

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 6.

Exhibits

63

 

 

 

Signatures

 

64

 

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 “Risk Factors” in our annual report on Form 10-K, as amended, for the fiscal year ended February 2, 2014 and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (“SEC”). Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:

 

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

 

·         our ability to achieve 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;

 

·         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;

 

3



Table of Contents

 

·         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

 

·         the significant influence our sponsors have over corporate decisions.

 

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

 

Nine Months Ended

 

 

 

November 2,
2014

 

November 3,
2013

 

November 2,
2014

 

November 3,
2013

 

Net Sales

 

$

2,488

 

$

2,273

 

$

7,096

 

$

6,558

 

Cost of sales

 

1,762

 

1,611

 

5,017

 

4,646

 

Gross Profit

 

726

 

662

 

2,079

 

1,912

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

467

 

441

 

1,382

 

1,318

 

Depreciation and amortization

 

57

 

61

 

183

 

181

 

Restructuring

 

 

 

7

 

 

Total operating expenses

 

524

 

502

 

1,572

 

1,499

 

Operating Income

 

202

 

160

 

507

 

413

 

Interest expense

 

115

 

117

 

347

 

409

 

Loss on extinguishment & modification of debt

 

 

 

2

 

87

 

Other (income) expense, net

 

(4

)

 

(3

)

20

 

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

 

91

 

43

 

161

 

(103

)

Provision (benefit) for income taxes

 

31

 

(8

)

54

 

47

 

Income (Loss) from Continuing Operations

 

60

 

51

 

107

 

(150

)

Income (loss) from discontinued operations, net of tax

 

 

 

(11

)

(2

)

Net Income (Loss)

 

$

60

 

$

51

 

$

96

 

$

(152

)

Other comprehensive income (loss) — foreign currency translation adjustment

 

(3

)

 

(1

)

(4

)

Total Comprehensive Income (Loss)

 

$

57

 

$

51

 

$

95

 

$

(156

)

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

 

 

 

 

Basic

 

194,288

 

191,750

 

193,806

 

158,587

 

Diluted

 

200,151

 

197,392

 

199,689

 

158,587

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.31

 

$

0.27

 

$

0.55

 

$

(0.95

)

Income (Loss) from Discontinued Operations

 

$

 

$

 

$

(0.06

)

$

(0.01

)

Net Income (Loss)

 

$

0.31

 

$

0.27

 

$

0.50

 

$

(0.96

)

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.30

 

$

0.26

 

$

0.54

 

$

(0.95

)

Income (Loss) from Discontinued Operations

 

$

 

$

 

$

(0.06

)

$

(0.01

)

Net Income (Loss)

 

$

0.30

 

$

0.26

 

$

0.48

 

$

(0.96

)

 


(1)               May not foot due to rounding.

 

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

 

5



Table of Contents

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

November 2, 2014

 

February 2, 2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

107

 

$

115

 

Receivables, less allowance for doubtful accounts of $17 and $18

 

1,304

 

1,046

 

Inventories

 

1,168

 

1,072

 

Deferred tax asset

 

5

 

7

 

Other current assets

 

37

 

63

 

Total current assets

 

2,621

 

2,303

 

Property and equipment, net

 

400

 

405

 

Goodwill

 

3,136

 

3,137

 

Intangible assets, net

 

242

 

338

 

Other assets

 

124

 

141

 

Total assets

 

$

6,523

 

$

6,324

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

867

 

$

664

 

Accrued compensation and benefits

 

145

 

149

 

Current installments of long-term debt

 

10

 

10

 

Other current liabilities

 

203

 

270

 

Total current liabilities

 

1,225

 

1,093

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

5,498

 

5,534

 

Deferred tax liabilities

 

148

 

114

 

Other liabilities

 

309

 

347

 

Total liabilities

 

7,180

 

7,088

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 195.8 million and 192.4 million shares issued and outstanding at November 2, 2014 and February 2, 2014, respectively

 

2

 

2

 

Paid-in capital

 

3,805

 

3,752

 

Accumulated deficit

 

(4,407

)

(4,503

)

Accumulated other comprehensive loss

 

(16

)

(15

)

Treasury stock, at cost, 1.5 million shares at November 2, 2014

 

(41

)

 

Total stockholders’ equity (deficit)

 

(657

)

(764

)

Total liabilities and stockholders’ equity (deficit)

 

$

6,523

 

$

6,324

 

 

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

 

6



Table of Contents

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

 

 

Nine Months Ended

 

 

 

November 2, 2014

 

November 3, 2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

96

 

$

(152

)

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

 

 

 

 

 

Depreciation and amortization

 

187

 

184

 

Provision for uncollectibles

 

6

 

4

 

Non-cash interest expense

 

19

 

23

 

Payment of PIK interest & discounts upon extinguishment of debt

 

(1

)

(364

)

Loss on extinguishment & modification of debt

 

2

 

87

 

Stock-based compensation expense

 

12

 

12

 

Deferred income taxes

 

43

 

35

 

Other

 

 

(2

)

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(264

)

(226

)

(Increase) decrease in inventories

 

(96

)

(87

)

(Increase) decrease in other current assets

 

26

 

4

 

Increase (decrease) in accounts payable and accrued liabilities

 

85

 

(42

)

Increase (decrease) in other long-term liabilities

 

6

 

14

 

Net cash provided by (used in) operating activities

 

121

 

(510

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(92

)

(96

)

Proceeds from sales of property and equipment

 

3

 

6

 

Proceeds from sale of investments

 

 

936

 

Settlements for businesses acquired, net of cash acquired

 

 

2

 

Net cash provided by (used in) investing activities

 

(89

)

848

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from sale of common stock in initial public offering, net of transaction fees

 

 

1,039

 

Proceeds from issuance of common stock under employee benefit plans

 

40

 

 

Purchase of treasury shares

 

(40

)

 

Borrowings of long-term debt

 

20

 

79

 

Repayments of long-term debt

 

(27

)

(1,621

)

Borrowings on long-term revolver debt

 

524

 

736

 

Repayments on long-term revolver debt

 

(554

)

(556

)

Debt issuance and modification costs

 

(3

)

(34

)

Net cash used in financing activities

 

(40

)

(357

)

Effect of exchange rates on cash and cash equivalents

 

 

(2

)

Increase (decrease) in cash and cash equivalents

 

$

(8

)

$

(21

)

Cash and cash equivalents at beginning of period

 

115

 

141

 

Cash and cash equivalents at end of period

 

$

107

 

$

120

 

 

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

 

7



Table of Contents

 

HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 2,
2014

 

November 3,
2013

 

November 2,
2014

 

November 3,
2013

 

Net Sales

 

$

2,488

 

$

2,273

 

$

7,096

 

$

6,558

 

Cost of sales

 

1,762

 

1,611

 

5,017

 

4,646

 

Gross Profit

 

726

 

662

 

2,079

 

1,912

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

467

 

441

 

1,382

 

1,318

 

Depreciation and amortization

 

57

 

61

 

183

 

181

 

Restructuring

 

 

 

7

 

 

Total operating expenses

 

524

 

502

 

1,572

 

1,499

 

Operating Income

 

202

 

160

 

507

 

413

 

Interest expense

 

115

 

117

 

347

 

409

 

Loss on extinguishment & modification of debt

 

 

 

2

 

87

 

Other (income) expense, net

 

(4

)

 

(3

)

20

 

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

 

91

 

43

 

161

 

(103

)

Provision (benefit) for income taxes

 

31

 

(8

)

54

 

47

 

Income (Loss) from Continuing Operations

 

60

 

51

 

107

 

(150

)

Income (loss) from discontinued operations, net of tax

 

 

 

(11

)

(2

)

Net Income (Loss)

 

$

60

 

$

51

 

$

96

 

$

(152

)

Other comprehensive income (loss) — foreign currency translation adjustment

 

(3

)

 

(1

)

(4

)

Total Comprehensive Income (Loss)

 

$

57

 

$

51

 

$

95

 

$

(156

)

 

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

 

8



Table of Contents

 

HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

November 2, 2014

 

February 2, 2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

103

 

$

111

 

Receivables, less allowance for doubtful accounts of $17 and $18

 

1,304

 

1,046

 

Inventories

 

1,168

 

1,072

 

Deferred tax asset

 

5

 

7

 

Other current assets

 

37

 

63

 

Total current assets

 

2,617

 

2,299

 

Property and equipment, net

 

400

 

405

 

Goodwill

 

3,136

 

3,137

 

Intangible assets, net

 

242

 

338

 

Other assets

 

124

 

141

 

Total assets

 

$

6,519

 

$

6,320

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

867

 

$

664

 

Accrued compensation and benefits

 

145

 

149

 

Current installments of long-term debt

 

10

 

10

 

Other current liabilities

 

202

 

270

 

Total current liabilities

 

1,224

 

1,093

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

5,498

 

5,534

 

Deferred tax liabilities

 

148

 

114

 

Other liabilities

 

309

 

347

 

Total liabilities

 

7,179

 

7,088

 

 

 

 

 

 

 

Stockholder’s equity (deficit):

 

 

 

 

 

Common stock, par value $0.01; 1,000 shares authorized; 1,000 shares issued and outstanding

 

 

 

Paid-in capital

 

3,763

 

3,750

 

Accumulated deficit

 

(4,407

)

(4,503

)

Accumulated other comprehensive loss

 

(16

)

(15

)

Total stockholder’s equity (deficit)

 

(660

)

(768

)

Total liabilities and stockholder’s equity (deficit)

 

$

6,519

 

$

6,320

 

 

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

 

9



Table of Contents

 

HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

 

 

Nine Months Ended

 

 

 

November 2, 2014

 

November 3, 2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

96

 

$

(152

)

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

 

 

 

 

 

Depreciation and amortization

 

187

 

184

 

Provision for uncollectibles

 

6

 

4

 

Non-cash interest expense

 

19

 

23

 

Payment of PIK interest & discounts upon extinguishment of debt

 

(1

)

(364

)

Loss on extinguishment & modification of debt

 

2

 

87

 

Stock-based compensation expense

 

12

 

12

 

Deferred income taxes

 

43

 

35

 

Other

 

 

(2

)

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(264

)

(226

)

(Increase) decrease in inventories

 

(96

)

(87

)

(Increase) decrease in other current assets

 

26

 

4

 

Increase (decrease) in accounts payable and accrued liabilities

 

85

 

(42

)

Increase (decrease) in other long-term liabilities

 

6

 

14

 

Net cash provided by (used in) operating activities

 

121

 

(510

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(92

)

(96

)

Proceeds from sales of property and equipment

 

3

 

6

 

Proceeds from sale of investments

 

 

936

 

Settlement for businesses acquired, net of cash acquired

 

 

2

 

Net cash provided by (used in) investing activities

 

(89

)

848

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Equity contribution

 

 

1,039

 

Borrowings of long-term debt

 

20

 

79

 

Repayments of long-term debt

 

(27

)

(1,621

)

Borrowings on long-term revolver debt

 

524

 

736

 

Repayments on long-term revolver debt

 

(554

)

(556

)

Debt issuance and modification costs

 

(3

)

(34

)

Net cash used in financing activities

 

(40

)

(357

)

Effect of exchange rates on cash and cash equivalents

 

 

(2

)

Increase (decrease) in cash and cash equivalents

 

$

(8

)

$

(21

)

Cash and cash equivalents at beginning of period

 

111

 

141

 

Cash and cash equivalents at end of period

 

$

103

 

$

120

 

 

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 & Power; and Specialty Construction. Through approximately 650 locations across 48 U.S. states and seven Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 16,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, home builders, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services include over one million 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 four reportable segments. The reportable segments are Facilities Maintenance, Waterworks, Power Solutions, and Construction & Industrial - White Cap. Other operating segments include Hardware Solutions (previously known as Crown Bolt), Home Improvement Solutions (previously known as Repair & Remodel), Interior Solutions (previously known as Creative Touch Interiors), and HD Supply Canada. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

 

Basis of Presentation

 

On June 12, 2013, Holdings effected a 1-for-2 reverse stock split of Holdings’ common stock. Holdings’ accompanying consolidated financial statements and notes to consolidated financial statements give retroactive effect to the reverse stock split for all periods presented. As of the date of this report, there is no preferred stock issued or outstanding.

 

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, as amended, for the year ended February 2, 2014, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). Certain amounts in the prior-period financial statements have been reclassified to conform to the current period’s presentation.

 

Fiscal Year

 

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  Fiscal years ending February 1, 2015 (“fiscal 2014”) and February 2, 2014 (“fiscal 2013”) both include 52 weeks. The three months ended November 2, 2014 and November 3, 2013 both included 13 weeks and the nine months ended November 2, 2014 and November 3, 2013 both included 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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 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 November 2, 2014 and February 2, 2014, self-insurance reserves totaled approximately $97 million and $94 million, respectively.

 

NOTE 2 —PUBLIC OFFERINGS

 

On September 11, 2014, Holdings filed an automatic shelf registration statement on Form S-3 ASR, including a prospectus, (File No. 333-198685, “Shelf Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC”). Under the Shelf Registration Statement, certain of Holdings’ stockholders, as identified in the Shelf Registration Statement, from time to time may offer and sell Holdings’ common stock, par value $0.01 per share (“Common Stock”) in one or more offerings or re-sales in amounts, at prices and on terms to be determined at the time of the offering. On September 11, 2014, certain of the Company’s stockholders, including investment funds associated with The Carlyle Group and Clayton, Dubilier & Rice, LLC, and THD Holdings, LLC (collectively, the “September Selling Stockholders”), completed the sale of 20 million shares of Holdings’ Common Stock, under the Shelf Registration Statement at a price of $27.517 per share (the “September Secondary Offering”). The Company did not receive any of the proceeds from the sale of these shares and no shares were sold by the Company. Subsequent to the September Secondary Offering, investment funds associated with The Carlyle Group, Clayton, Dubilier & Rice, LLC, and THD Holdings, LLC, included in the September Secondary Offering as September Selling Stockholders, hold approximately 9%, 9% and 4%, respectively, of Holdings’ Common Stock. Bain Capital Partners, LLC continues to hold approximately 14% of Holdings’ Common Stock. In connection with the September Secondary Offering, the Company incurred $1 million of fees, reflected in Other income (expense), net within the Consolidated Statements of Operations and Comprehensive Income (Loss).

 

On March 28, 2014, Holdings filed a registration statement on Form S-1 (File No. 333-194887, the “Secondary Registration Statement”) with the SEC to register a secondary public offering of 30 million shares of its Common Stock. All of the shares of Common Stock sold in the secondary public offering were sold by certain stockholders of Holdings (the “May Selling Stockholders”), as identified in the Secondary Registration Statement. On May 1, 2014, the Secondary Registration Statement was declared effective by the SEC and Holdings announced the pricing of the secondary public offering at a price of $26.00 per share (the “May Secondary Offering”). The underwriters for the offering were granted an option to purchase up to 4.5 million additional shares of Common Stock from the May Selling Stockholders within 30 days, which they exercised in full on May 30, 2014. On May 7, 2014, the May Selling Stockholders completed the sale of 30 million shares of Holdings’ Common Stock in the May Secondary Offering. On June 4, 2014, the May Selling Stockholders completed the sale of the additional 4.5 million shares of Common Stock to the underwriters pursuant to their option to purchase additional shares at a price of $26.00 per share. The Company did not receive any of the proceeds from the sale of these 34.5 million shares. Subsequent to these sales, investment funds associated with Clayton, Dubilier & Rice, Inc., The Carlyle Group and Bain Capital Partners, LLC (collectively the “Equity Sponsors”), included in the offering as May

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Selling Stockholders, held approximately 41% of Holdings’ Common Stock. In connection with the May Secondary Offering, the Company incurred $1 million of fees, reflected in Other income (expense), net within the Consolidated Statements of Operations and Comprehensive Income (Loss).

 

On June 26, 2013, Holdings’ Registration Statement (File No. 333-187872) was declared effective by the SEC for an initial public offering of its Common Stock. Holdings registered the offering and sale of 53,191,489 shares of Common Stock and an additional 7,978,723 shares of Common Stock sold to the underwriters for the offering pursuant to their over-allotment option at a price of $18.00 per share. On July 2, 2013, Holdings completed the offering of 61,170,212 shares of Common Stock at a price of $18.00 per share, for an aggregate offering price of $1,039 million, net of underwriters’ discounts and commissions and offering expenses of approximately $16 million.

 

The net proceeds from the initial public offering were used to (1) redeem all $950 million of HDS’s outstanding 10.50% Senior Subordinated Notes due 2021 (the “January 2013 Senior Subordinated Notes”), including the payment of a $29 million redemption premium and $29 million of accrued interest through the redemption date, and (2) pay related fees and expenses, including the payment to the Equity Sponsors of an aggregate fee of approximately $18 million to terminate the consulting agreements (See Note 4, Related Parties). The remaining net proceeds were used for general corporate purposes.

 

NOTE 3 — DISCONTINUED OPERATIONS

 

In January 2014, the Company approved the disposal of Litemor, a specialty lighting distributor within the Company’s HD Supply Canada business. During the first half of fiscal 2014, the Company initiated and finalized the disposal process of Litemor through liquidation and branch sales, resulting in a pre-tax loss on disposal of $15 million, which includes cash and non-cash charges.

 

Summary Financial Information

 

In accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations, the results of Litemor’s operations and the loss on disposal of the business are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and loss on the disposal of business, 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

 

Nine Months Ended

 

 

 

November 2,
2014

 

November 3,
2013

 

November 2,
2014

 

November 3,
2013

 

Net sales

 

$

 

$

23

 

$

17

 

$

63

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of discontinued operations

 

 

 

(15

)

(2

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

$

 

$

 

$

(15

)

$

(2

)

Provision for income taxes

 

 

 

4

 

 

Income (loss) from discontinued operations, net of tax

 

$

 

$

 

$

(11

)

$

(2

)

 

NOTE 4 — RELATED PARTIES

 

On August 30, 2007, investment funds associated with the Equity Sponsors formed Holdings (previously named HD Supply Investment Holding, Inc.) and entered into a stock purchase agreement with The Home

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Depot, Inc. (“Home Depot”) pursuant to which Home Depot agreed to sell to Holdings, or to a wholly-owned subsidiary of Holdings, certain intellectual property and all the outstanding common stock of HDS and the Canadian subsidiary CND Holdings, Inc.  On August 30, 2007, through a series of transactions, Holdings’ direct wholly-owned subsidiary, HDS Holding Corporation, acquired direct control of HDS through the merger of its wholly-owned subsidiary, HDS Acquisition Corp., with and into HDS and CND Holdings, Inc.  Through these transactions (the “2007 Transactions”), Home Depot was paid $8.2 billion in cash and 12.5% of Holdings’ then outstanding Common Stock.

 

Following the completion of Holdings’ initial public offering on July 2, 2013, the Equity Sponsors continued to hold more than 50% of Holdings’ Common Stock and Home Depot held less than 10% of Holdings’ Common Stock. Upon completion of Holdings’ secondary public offerings by certain of its stockholders on September 11, 2014 and May 7, 2014, and the sale of additional shares to the underwriters pursuant to their option to purchase additional shares on June 4, 2014, the Equity Sponsors, hold approximately 32% of Holdings’ Common Stock.

 

Equity Sponsors

 

Consulting Agreements—In connection with the closing of the 2007 Transactions, HD Supply entered into consulting agreements with the Equity Sponsors, pursuant to which the Equity Sponsors provided HD Supply with financial advisory and management consulting services and HD Supply paid the Equity Sponsors a $5 million annual aggregate fee (“Sponsor Management Fee”) and an aggregate fee equal to a specified percentage of the transaction value of certain types of transactions that HD Supply completes (“Sponsor Transaction Fee”), plus out-of-pocket expenses. The original term of these agreements ran through August 2017.

 

As specified in the agreements, HD Supply paid the Equity Sponsors a Sponsor Transaction Fee of approximately $11 million as a result of Holdings’ initial public offering on July 2, 2013.  The Sponsor Transaction Fee was considered an offering expense and, therefore, was presented as a reduction of proceeds from the initial public offering in the consolidated financial statements.

 

On July 2, 2013, in connection with the initial public offering, HD Supply paid the Equity Sponsors an aggregate fee of approximately $18 million to terminate the consulting agreements. The termination fee represented the estimated net present value of the Sponsor Management Fee payments over the then remaining term of the consulting agreements. This charge was recorded in Other (income) expense, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

 

During the three and nine months ended November 3, 2013, the Company recorded zero and $2 million, respectively of Sponsor Management Fees and related expenses, which are included in Selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Debt—Management of the Company has been informed that, as of November 2, 2014, affiliates of certain of the Equity Sponsors beneficially owned approximately $45 million aggregate principal amount of HDS’s Term Loans, as defined in Note 5, Debt.  On February 8, 2013, HDS redeemed its remaining $889 million outstanding aggregate principle of its 2007 Senior Subordinated Notes, as defined in Note 5, Debt, at a redemption price equal to 103.375% of the principal amount thereof and paid accrued and unpaid interest thereon through the redemption date. Affiliates of certain of the Equity Sponsors owned approximately 39% of the 2007 Senior Subordinated Notes that were redeemed.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 — DEBT

 

HDS’s long-term debt as of November 2, 2014 and February 2, 2014 consisted of the following (dollars in millions):

 

 

 

November 2, 2014

 

February 2, 2014

 

 

 

Outstanding
Principal

 

Interest Rate
%(1)

 

Outstanding
Principal

 

Interest Rate
%(1)

 

Senior ABL Facility due 2018

 

$

330

 

1.65

 

$

360

 

1.66

 

Term Loans due 2018, net of unamortized discount of $15 million and $19 million

 

962

 

4.00

 

966

 

4.50

 

First Priority Notes due 2019, including unamortized premium of $15 million and $18 million

 

1,266

 

8.125

 

1,268

 

8.125

 

Second Priority Notes due 2020

 

675

 

11.00

 

675

 

11.00

 

October 2012 Senior Unsecured Notes due 2020

 

1,000

 

11.50

 

1,000

 

11.50

 

February 2013 Senior Unsecured Notes due 2020

 

1,275

 

7.50

 

1,275

 

7.50

 

Total long-term debt

 

$

5,508

 

 

 

$

5,544

 

 

 

Less current installments

 

(10

)

 

 

(10

)

 

 

Long-term debt, excluding current installments

 

$

5,498

 

 

 

$

5,534

 

 

 

 


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

 

On February 6, 2014, HDS amended its Term Loan Facility, as defined below, to reduce the applicable margin for borrowings from 3.25% for LIBOR borrowings and 2.25% for base rate borrowings to 3.00% for LIBOR borrowings and 2.00% for base rate borrowings, and reduced the LIBOR floor from 1.25% to 1.00%. The Term Loan, as defined below, may be repaid at any time without penalty or premium. In addition, the amendment provided that HDS may withhold up to $150 million from repayments otherwise required to be made with the proceeds of asset sales and use such proceeds to repay any debt, including debt that is junior to the Term Loans. The amendment also extended the maturity of the Term Loans by approximately nine months, to June 28, 2018. Pursuant to the credit agreement governing HDS’s Senior ABL Facility, as defined below, the maturity date of the Senior ABL Facility is the earlier of June 28, 2018 and the maturity date of the Term Loan Facility. The amendment therefore effectively extended the maturity date of the Senior ABL Facility to June 28, 2018.

 

In connection with the amendment, HDS paid approximately $1 million in financing fees, which will be amortized into interest expense over the remaining term of the amended facility in accordance with ASC 470-50, Debt-Modifications and Extinguishments. A portion of the amendment was considered an extinguishment, resulting in a $1 million loss on extinguishment of debt for the write-off of pro-rata portions of the unamortized original issue discount and the unamortized deferred debt cost. The portion of the amendment considered a modification resulted in a charge of approximately $1 million.

 

Affiliates of certain of the Equity Sponsors owned approximately $37 million of the Term Loans as of the date of the amendment. In the amendment process, this ownership was reduced to $30 million. Management of the Company has been informed that, as of November 2, 2014, affiliates of certain of the Equity Sponsors beneficially owned approximately $45 million aggregate principal amount of HDS’s Term Loans.

 

Senior Credit Facilities

 

Asset Based Lending Facility

 

HDS’s Senior Asset Based Lending Facility (“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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 November 2, 2014, HDS has $1,116 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $54 million in letters of credit issued and including $70 million of borrowings available on qualifying cash balances).

 

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. The Senior ABL Facility will mature on June 28, 2018.

 

Senior Secured Term Loan Facility

 

HDS’s Senior Term Facility consists of a senior secured Term Loan Facility (the ‘‘Term Loan Facility,’’ the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans in an original aggregate principal amount of $1,000 million. The Term Loan Facility will mature on June 28, 2018 (the ‘‘Term Loan Maturity Date’’). The Term Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount of the Term Loan Facility with the balance payable on the Term Loan Maturity Date.

 

Secured Notes

 

81/8% Senior Secured First Priority Notes due 2019

 

HDS’s 81/8% Senior Secured First Priority Notes due 2019 (the ‘‘First Priority Notes’’), bear interest at a rate of 81/8% per annum and will mature on April 15, 2019.  Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

 

Redemption

 

HDS may redeem the First Priority Notes, in whole or in part, at any time (1) prior to April 15, 2015, 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 First Priority Notes and (2) on and after April 15, 2015, 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

 

2015

 

106.094

%

2016

 

104.063

%

2017

 

102.031

%

2018 and thereafter

 

100.000

%

 

In addition, at any time prior to April 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the First Priority Notes with the proceeds of certain equity offerings at a redemption price of 108.125% of the principal amount in respect of the First Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the First Priority Notes are redeemed, an aggregate principal amount of First Priority Notes equal to at least 50% of the original aggregate principal amount of First Priority Notes must remain outstanding immediately after each such redemption of First Priority Notes. See Note 16, Subsequent Events, for additional information regarding the First Priority Notes.

 

11% Senior Secured Second Priority Notes due 2020

 

HDS’s 11% Senior Secured Second Priority Notes due 2020 (the ‘‘Second Priority Notes’’) bear interest at a rate of 11% per annum and will mature on April 15, 2020.  Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Redemption

 

HDS may redeem the Second Priority Notes, in whole or in part, at any time (1) prior to April 15, 2016, 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 Second Priority Notes and (2) on and after April 15, 2016, 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

 

2016

 

105.500

%

2017

 

102.750

%

2018 and thereafter

 

100.000

%

 

In addition, at any time prior to April 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the Second Priority Notes with the proceeds of certain equity offerings at a redemption price of 111.000% of the principal amount in respect of the Second Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the Second Priority Notes are redeemed, an aggregate principal amount of Second Priority Notes equal to at least 50% of the original aggregate principal amount of Second Priority Notes must remain outstanding immediately after each such redemption of Second Priority Notes.

 

Collateral

 

The 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, in which the 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 (as defined in the indenture governing the First Priority Notes ) and Excluded Subsidiary Securities (as defined in the indenture governing the First Priority Notes) (the “Cash Flow Priority Collateral”).

 

The Second Priority Notes and the related guarantees are secured by a second-priority security interest in the Cash Flow Priority Collateral, subject to permitted liens. In addition, the Second Priority Notes and the related guarantees are secured by a third-priority security interest in the ABL Priority Collateral, subject to permitted liens.

 

The indentures governing the First Priority Notes, the Second 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 First Priority Notes and Second Priority Notes would cause such subsidiary to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).

 

Unsecured Notes

 

11.5% Senior Unsecured Notes due 2020

 

HDS’s 11.5% Senior Unsecured Notes due 2020 (the ‘‘October 2012 Senior Unsecured Notes’’) bear interest at 11.5% per annum and will mature on July 15, 2020. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

 

Redemption

 

HDS may redeem the October 2012 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2016, 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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.5% Senior Notes and (2) on and after October 15, 2016, 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

 

2016

 

105.750

%

2017

 

102.875

%

2018 and thereafter

 

100.000

%

 

In addition, at any time prior to October 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the October 2012 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 111.50% of the principal amount in respect of the October 2012 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the October 2012 Senior Unsecured Notes are redeemed, an aggregate principal amount of the October 2012 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of the October 2012 Senior Unsecured Notes must remain outstanding immediately after each such redemption of the October 2012 Senior Unsecured Notes.

 

7.5% Senior Unsecured Notes due 2020

 

HDS’s 7.5% Senior Unsecured Notes due 2020 (the ‘‘February 2013 Senior Unsecured Notes’’) bear interest at 7.5% per annum and will mature on July 15, 2020. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

 

Redemption

 

HDS may redeem the February 2013 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2016, 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 February 2013 Senior Notes and (2) on and after October 15, 2016, 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

 

2016

 

103.750

%

2017

 

101.875

%

2018 and thereafter

 

100.000

%

 

In addition, at any time prior to October 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the February 2013 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 107.50% of the principal amount in respect of the February 2013 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the February 2013 Senior Unsecured Notes are redeemed, an aggregate principal amount of the February 2013 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of the February 2013 Senior Unsecured Notes must remain outstanding immediately after each such redemption of the February 2013 Senior Unsecured Notes.

 

Debt Covenants

 

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on additional indebtedness and dividend payments and stipulations regarding the use of proceeds from asset dispositions. As of November 2, 2014, HDS is in compliance with all such covenants that were in effect on such date.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2013 Transactions

 

On August 1, 2013, HDS redeemed all $950 million outstanding aggregate principal amount of its January 2013 Senior Subordinated Notes due 2021 at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest thereon through the redemption date. As a result, in the second quarter of fiscal 2013 and in accordance with ASC 470-50, Debt-Modifications and Extinguishments, HDS incurred a $44 million loss on extinguishment, which included a $29 million premium payment to redeem the January 2013 Senior Subordinated Notes and approximately $15 million to write off the unamortized deferred debt cost.

 

On June 28, 2013, HDS amended its Senior ABL Facility (as defined above) to (i) reduce the applicable margin for borrowings under the Senior ABL Facility by 0.25%; (ii) reduce the commitment fee applicable thereunder by 0.125%; (iii) extend the maturity date of the Senior ABL Facility to June 28, 2018 (or the maturity date under HDS’s Term Loan Facility, if earlier); (iv) make certain changes to the borrowing base and (v) reduce the sublimit available for letters of credit under the Senior ABL Facility from $400 million to $250 million. In connection with the amendment, HDS paid approximately $2 million in financing fees which will be amortized into interest expense over the remaining term of the amended facility in accordance with ASC 470-50. A portion of the amendment was considered an extinguishment, resulting in an approximately $3 million loss on extinguishment of debt for the write-off of pro-rata unamortized deferred debt costs.

 

On February 15, 2013, HDS amended its Term Loan Facility (as defined above) to lower the borrowing margin by 275 basis points. Under this amendment, the Term Loans were subject to an interest rate equal to LIBOR (subject to a floor of 1.25%) plus a borrowing margin of 3.25% or Prime plus a borrowing margin of 2.25% at HDS’s election. The amendment also replaced the hard call provision applicable to optional prepayment of Term Loans thereunder with a soft call option, which expired on August 15, 2013. In connection with the amendment, HDS paid approximately $30 million in financing fees, of which approximately $27 million will be amortized into interest expense over the remaining term of the amended facility in accordance with ASC 470-50. A portion of the amendment was considered an extinguishment, resulting in a $5 million loss on extinguishment of debt, which included approximately $2 million of fees, $2 million to write off the pro-rata portion of unamortized original issue discount, and $1 million to write off the pro-rata portion of unamortized deferred debt cost. The portion of the amendment considered a modification resulted in a charge of $1 million.

 

On February 8, 2013, HDS redeemed its remaining $889 million outstanding aggregate principal amount of its 13.5% Senior Subordinated Notes due 2015 (the “2007 Senior Subordinated Notes”) at a redemption price equal to 103.375% of the principal amount thereof and paid accrued and unpaid interest thereon through the redemption date. As a result, in the first quarter of fiscal 2013, HDS incurred a $34 million loss on extinguishment of debt, which included a $30 million premium payment to redeem the 2007 Senior Subordinated Notes and approximately $4 million to write off the unamortized deferred debt cost.

 

NOTE 6 — GOODWILL

 

The carrying amount of goodwill by reporting unit as of November 2, 2014 and February 2, 2014 is as follows (amounts in millions):

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

November 2, 2014

 

February 2, 2014

 

 

 

Gross Goodwill

 

Accumulated
Impairments

 

Net Goodwill

 

Gross Goodwill

 

Accumulated
Impairments

 

Net Goodwill

 

Facilities Maintenance

 

$

1,603

 

$

 

$

1,603

 

$

1,603

 

$

 

$

1,603

 

Waterworks

 

1,876

 

(815

)

1,061

 

1,876

 

(815

)

1,061

 

Power Solutions

 

302

 

(99

)

203

 

303

 

(99

)

204

 

Construction & Industrial

 

183

 

(74

)

109

 

183

 

(74

)

109

 

Hardware Solutions

 

215

 

(150

)

65

 

215

 

(150

)

65

 

Home Improvement Solutions

 

125

 

(30

)

95

 

125

 

(30

)

95

 

Interior Solutions

 

67

 

(67

)

 

67

 

(67

)

 

Total goodwill

 

$

4,371

 

$

(1,235

)

$

3,136

 

$

4,372

 

$

(1,235

)

$

3,137

 

 

Goodwill represents the excess of purchase price over fair value of net assets acquired. HD Supply does not amortize goodwill, but does assess the recoverability of goodwill in the third quarter of each fiscal year. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, an interim impairment test would be performed between annual tests. Goodwill impairment testing is performed at the reporting unit level.

 

Under GAAP (ASC 350, Intangibles — Goodwill and Other), an entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.

 

Under the two-step goodwill impairment test, the first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill.  If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.

 

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill in the “pro forma” business combination accounting as described above, exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under GAAP.

 

HD Supply performed the annual goodwill impairment testing during the third quarter of fiscal 2014 for the six reporting units with goodwill balances. In accordance with GAAP, the Company elected to first assess qualitative factors on the reporting units to determine whether it is more likely than not that the fair value of each of the reporting units is less than its carrying amount. Based on this assessment, the Company determined that it is not more likely than not that the fair value of each of the reporting units is less than its carrying amount. Therefore, it was not necessary to perform the two-step goodwill impairment test for any of the reporting units.

 

There was no indication of impairment in any of the Company’s reporting units during the fiscal 2014 and fiscal 2013 annual testing.

 

The Company’s analysis was based, in part, on HD Supply’s expectation of future market conditions for each of the reporting units. Future events could cause the Company to conclude that market conditions have declined to the extent that the Company’s goodwill could be impaired.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7 — 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.

 

The Company’s financial instruments that are not reflected at fair value on the balance sheet were as follows as of November 2, 2014 and February 2, 2014 (amounts in millions):

 

 

 

As of November 2, 2014

 

As of February 2, 2014

 

 

 

Recorded
Amount
(1)

 

Estimated Fair
Value

 

Recorded
Amount
(1)

 

Estimated Fair
Value

 

Senior ABL Facility

 

$

330

 

$

321

 

$

360

 

$

351

 

Term Loans and Notes

 

5,178

 

5,629

 

5,185

 

5,737

 

Total

 

$

5,508

 

$

5,950

 

$

5,545

 

$

6,088

 

 


(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 or premiums.

 

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 8 — INCOME TAXES

 

As of November 2, 2014, the Company’s combined federal, state and foreign effective tax rate for continuing operations for fiscal 2014 is a 33.4% provision, reflecting the utilization of deferred tax assets which had previously been subject to a valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions. 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. The Company is subject to audits and examinations of its tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service (the “IRS”).  Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of provisions for income taxes.

 

With regard to the decrease in the valuation allowance and the impact the valuation allowance had on income tax expense, the valuation allowance decrease was directly impacted by the increase in U.S. pre-tax book income.  The increase in U.S. pre-tax book income resulted in the utilization of net deferred tax assets including U.S. tax net operating losses (“NOL”) that were subject to a valuation allowance. The overall decrease in the valuation allowance was partially offset by an increase of the deferred tax liability for U.S. goodwill amortization for tax purposes.  The deferred tax liability related to the Company’s U.S. tax deductible goodwill is considered a liability related to an asset with an indefinite life. Therefore, the deferred tax liability does not amortize and is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences. The Company does not believe it is “more likely than not” it will realize

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

its U.S. deferred tax assets equal to the deferred liability created by tax deductible goodwill. During the three and nine months ended November 2, 2014, the impact of the tax amortization of the indefinite lived intangibles on tax expense was an increase of $23 million and $41 million, respectively.

 

The Company’s ability to deduct its NOL carryforwards against future taxable income could be limited if an ‘‘ownership change,’’ as defined in Section 382 of the Internal Revenue Code of 1986, as amended, occurs. Management believes that an ownership change under Section 382 has occurred in 2014. Based on current estimates, management believes that this ownership change will not materially limit the Company’s ability to deduct its NOL carryforwards against future taxable income. However, no assurance can be given in this regard. Future direct or indirect changes in the ownership of Holdings common stock, including sales or acquisitions of Holdings common stock by certain stockholders and purchases and issuances of Holdings common stock by Holdings, some of which are not in the Company’s control, could result in an additional ownership change. Any resulting limitation on the use of the Company’s NOL carryforwards could result in the payment of taxes above the amounts currently estimated and have a negative effect on future results of operations and financial position.

 

As of February 2, 2014, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, Income Taxes) were $192 million. During the nine months ended November 2, 2014, the Company’s unrecognized tax benefits decreased $3 million to $189 million, respectively as a result of state audit settlements. During the three months and nine months ended November 2, 2014, the gross accrual for interest related to unrecognized tax benefits increased $2 million and $5 million, respectively. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of February 2, 2014 was $27 million and increased to $32 million as of November 2, 2014.  Over the next twelve months, it is reasonably possible that the resolution of federal and state tax examinations and statute expirations could result in a decrease in unrecognized tax benefits by up to $138 million plus a $16 million decrease in the net interest accrual.

 

During fiscal year 2010, the Company determined that it did not meet the “more likely than not” standard that substantially all of its net U.S. deferred tax assets would be realized and therefore, the Company established a valuation allowance for its net U.S. deferred tax assets. With regard to the U.S., the Company continues to believe that a full valuation allowance is needed against the majority of its net deferred tax assets. As of November 2, 2014, the Company’s U.S. valuation allowance was $990 million.

 

See Note 12, Commitments and Contingencies, for discussion of the IRS audit of the Company’s U.S. federal income tax returns.

 

NOTE 9—BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

 

The following basic and diluted weighted average common shares information is provided for HD Supply Holdings, Inc.

 

The reconciliation of basic to diluted weighted average common shares for the three and nine months ended November 2, 2014 and November 3, 2013 was as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 2,
2014

 

November 3,
2013

 

November 2,
2014

 

November 3,
2013

 

Weighted average common shares (1)

 

194,288

 

191,750

 

193,806

 

158,587

 

Effect of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Stock plans

 

5,863

 

5,642

 

5,883

 

 

Diluted weighted average common shares

 

200,151

 

197,392

 

199,689

 

158,587

 

 

 

 

 

 

 

 

 

 

 

Stock plan securities excluded from dilution (2)

 

50

 

898

 

429

 

15,358

 

 


(1)              Weighted average common shares outstanding in the three and nine months ended November 3, 2013 reflect the issuance of 61 million shares on July 2, 2013 in connection with Holdings’ initial public offering.

 

(2)              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 plans consist of securities (stock options, restricted stock and restricted stock units) granted under Holdings’ employee stock plans. Diluted weighted average common shares outstanding equals basic weighted average common shares outstanding for certain periods presented, as the effect of securities are anti-dilutive because the Company incurred net losses.

 

NOTE 10 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables consisted of the following (amounts in millions):

 

 

 

November 2, 2014

 

February 2, 2014

 

 

 

 

 

Trade receivables, net

 

$

1,198

 

$

947

 

 

 

 

 

Vendor rebate receivables

 

88

 

85

 

 

 

 

 

Other receivables

 

18

 

14

 

 

 

 

 

Total receivables, net

 

$

1,304

 

$

1,046

 

 

 

 

 

 

Other Current Liabilities

 

Other current liabilities consisted of the following (amounts in millions):

 

 

 

HD Supply Holdings, Inc.

 

HD Supply, Inc.

 

 

 

November 2, 2014

 

February 2, 2014

 

November 2, 2014

 

February 2, 2014

 

Accrued interest

 

$

21

 

$

118

 

$

21

 

$

118

 

Accrued non-income taxes

 

50

 

32

 

50

 

32

 

Other

 

132

 

120

 

131

 

120

 

Total other current liabilities

 

$

203

 

$

270

 

$

202

 

$

270

 

 

Supplemental Cash Flow Information

 

Cash paid for interest in the nine months ended November 2, 2014 and November 3, 2013 was $426 million and $512 million, respectively. Additionally, during the nine months ended November 2, 2014, the Company paid $1 million of original issue discounts related to the portion of the Term Loan amendment considered an extinguishment under ASC 470-50. During the nine months ended November 3, 2013, the Company paid $364 million of original issue discounts and paid-in-kind (“PIK”) interest related to the extinguishments of $889 million of 2007 Senior Subordinated Notes and a portion of the Term Loans.

 

Cash paid for income taxes, net of refunds, in the nine months ended November 2, 2014 and November 3, 2013 was approximately $37 million and $6 million, respectively. The payments during the nine months ended November 2, 2014 include a $27 million payment for the tentative settlement of the IRS’s audits of the Company’s U.S. federal income tax returns filed for the tax years ended on February 3, 2008 and February 1, 2009.  See Note 12, Commitments and Contingencies — Internal Revenue Service, for discussion of the IRS audit of the Company’s U.S. federal income tax returns.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11—BRANCH CLOSURE AND CONSOLIDATION ACTIVITIES

 

During the fourth quarter of fiscal 2013, management evaluated the cost structure of the Company and identified opportunities to reduce costs across its businesses, primarily through a workforce reduction of approximately 150 employees in the Power Solutions business, global support center and, to a lesser extent, its other businesses. During fiscal 2013, the Company recorded a restructuring charge of $12 million under this plan.

 

During the first half of fiscal 2014, the Company continued restructuring activities under this plan, resulting in restructuring charges of $7 million in the nine months ended November 2, 2014, for additional workforce reductions of approximately 150 employees, primarily at Facilities Maintenance and Power Solutions, and the consolidation of six Construction & Industrial — White Cap branches into three branches. These charges were recorded as restructuring within the Consolidated Statement of Operations and Comprehensive Income (Loss). The Company does not expect to incur any additional costs under this restructuring plan. The Company expects that the costs of these restructuring actions will be recovered through a permanent reduction of costs in less than one year. Payments of the employee-related cash charges are expected to be substantially complete within fiscal 2014.

 

NOTE 12 — COMMITMENTS AND CONTINGENCIES

 

Internal Revenue Service

 

The Company carried back tax net operating losses (“NOL”) from its tax years ended on February 3, 2008 and February 1, 2009 to tax years during which it was a member of Home Depot’s U.S. federal consolidated tax group. As a result of those NOL carrybacks, Home Depot received cash refunds from the IRS in the amount of approximately $354 million. Under an agreement (the “Agreement”) between the Company and Home Depot, Home Depot paid the Company the refund proceeds resulting from the NOL carrybacks.

 

In January 2013 in connection with an audit of the Company’s U.S. federal income tax returns filed for the tax years ended on February 3, 2008 and February 1, 2009, the IRS issued a Revenue Agent’s Report (“RAR”) which proposed to disallow certain deductions claimed by the Company and a significant portion of the corresponding cash refunds resulting from the Company’s NOL carrybacks. Pursuant to the terms of the Agreement, the Company would be required to reimburse Home Depot an amount equal to the disallowed refunds plus related interest. In collaboration with Home Depot, the Company challenged the proposed adjustments by the RAR by filing a formal protest with the IRS Office of Appeals. In July 2014, the Company reached a tentative settlement (“Tentative Settlement”) for approximately $27 million with the IRS Office of Appeals on the outstanding RAR. In order to stop the accrual of interest on the Tentative Settlement amount and as required under the Agreement, in August 2014 the Company made a payment of approximately $27 million to Home Depot which Home Depot then paid to the IRS. As a result of the Tentative Settlement, the Company’s deferred tax assets will increase by approximately $12 million before the impact of the valuation allowance.

 

The Tentative Settlement and the carryback claims are subject to review by the Joint Committee on Taxation (“JCT”) and the Tentative Settlement does not become effective nor are the claims finalized until the JCT reviews them without objection or the IRS Office of Appeals executes the settlement, whichever comes first. The JCT is required to review refunds in excess of $2 million.  If the JCT objects to the Tentative Settlement or other matters related to the carryback claims, the case is sent back to the IRS Office of Appeals for further consideration and could ultimately result in changes in or voiding of the Tentative Settlement.

 

In the event of an unfavorable outcome during the JCT process resulting in changes in or voiding of the Tentative Settlement, any additional unpaid assessment would continue to accrue interest at the statutory rate until resolved. If the Company is ultimately required to pay a significant amount over the amount paid as part of the Tentative Settlement to Home Depot pursuant to the terms of the Agreement (or to the IRS), the Company’s cash flows, future results of operations and financial positions could be affected in a significant and adverse manner.

 

See Note 8, Income Taxes, for further disclosures on the Company’s income taxes.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. For all other matters, except as noted below, management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters that are reasonably possible and reasonably estimable, including matters that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued for, management has estimated the aggregate range of potential loss as $0 to $15 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.

 

The Company has been informed that the Office of the United States Attorney for the Northern District of New York is conducting an investigation related to the activities of certain disadvantaged business enterprises (DBEs), including American Indian Builders and Suppliers, Inc. (AIB). In May 2011, in connection with that investigation, the government executed a search of an entity from which Waterworks purchased assets shortly before the search was executed. On June 20, 2012, in connection with that same investigation, the government executed search warrants at two Waterworks branches. On July 28, 2014, the Company received a Civil Investigative Demand (“CID”) issued by the United States Attorney’s Office for the Northern District of New York pursuant to the False Claims Act in the course of an investigation to determine whether the Company knowingly submitted false claims to the government in connection with the Company’s sales to DBEs, and, in particular, AIB, on federally funded or partially-federally funded projects. The Company is in the process of responding to the CID. The Company is updated by the government on its investigation periodically and continues to cooperate with the investigation. While the Company cannot predict the outcome, it believes a potential loss on this matter is reasonably possible but due to the current state of the investigation it is not able to estimate a range of potential loss.

 

NOTE 13 — 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 HD Supply Canada, which is organized based on geographic location and Corporate, which provides general corporate overhead support. Both HD Supply Canada and Corporate are included within “Corporate & Other.” The Company determines the 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 four 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·                  Power Solutions—Power Solutions distributes electrical transmission and distribution products, power plant MRO supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation and distribution industries.

 

·                  Construction & Industrial - White Cap—Construction & Industrial distributes specialized hardware, tools, engineered materials and safety products to non-residential and residential contractors.

 

In addition to the reportable segments, our consolidated financial results include ‘‘Corporate & Other.’’ Corporate & Other is comprised of the following operating segments: Hardware Solutions, Interior Solutions, Home Improvement Solutions and HD Supply Canada. Hardware Solutions (previously known as Crown Bolt) is a retail distribution operator providing program and packaging solutions, sourcing, distribution, and in-store service, fasteners, builders’ hardware, rope and chain and plumbing accessories, primarily serving Home Depot and other hardware stores. Interior Solutions (previously known as Creative Touch Interiors) offers turnkey supply and installation services for multiple interior finish options, including flooring, cabinets, countertops, and window coverings, along with comprehensive design center services for non-residential, residential and senior living projects. Home Improvement Solutions (previously known as Repair & Remodel) 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. HD Supply Canada is an industrial distributor that primarily focuses on servicing fasteners/industrial supplies markets operating across six Canadian provinces. Corporate & Other also 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.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

Facilities 
Maintenance

 

Waterworks

 

Power 
Solutions

 

Construction &
Industrial -
White Cap

 

Corporate & 
Other

 

Total 
Continuing 
Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 2, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

660

 

$

695

 

$

502

 

$

411

 

$

220

 

$

2,488

 

Adjusted EBITDA

 

139

 

64

 

23

 

35

 

4

 

265

 

Depreciation(1) & Software Amortization

 

12

 

2

 

2

 

5

 

10

 

31

 

Other Intangible Amortization

 

16

 

1

 

5

 

4

 

1

 

27

 

Three Months Ended November 3, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

610

 

$

633

 

$

472

 

$

352

 

$

206

 

$

2,273

 

Adjusted EBITDA

 

119

 

55

 

21

 

27

 

4

 

226

 

Depreciation(1) & Software Amortization

 

12

 

2

 

1

 

4

 

9

 

28

 

Other Intangible Amortization

 

20

 

1

 

5

 

5

 

3

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 2, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

1,950

 

$

1,911

 

$

1,451

 

$

1,144

 

$

640

 

$

7,096

 

Adjusted EBITDA

 

387

 

162

 

62

 

90

 

12

 

713

 

Depreciation(1) & Software Amortization

 

37

 

7

 

6

 

16

 

26

 

92

 

Other Intangible Amortization

 

56

 

3

 

14

 

14

 

8

 

95

 

Nine Months Ended November 3, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

1,809

 

$

1,757

 

$

1,390

 

$

998

 

$

604

 

$

6,558

 

Adjusted EBITDA

 

344

 

143

 

57

 

65

 

1

 

610

 

Depreciation(1) & Software Amortization

 

34

 

7

 

4

 

12

 

25

 

82

 

Other Intangible Amortization

 

60

 

3

 

14

 

15

 

9

 

101

 

 


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

 

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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

 

Nine Months Ended

 

 

 

November 2,

 

November 3,

 

November 2,

 

November 3,

 

 

 

2014

 

2013

 

2014

 

2013

 

Total Adjusted EBITDA

 

$

265

 

$

226

 

$

713

 

$

610

 

Depreciation and amortization (1)

 

58

 

62

 

187

 

183

 

Stock-based compensation

 

3

 

4

 

12

 

12

 

Restructuring

 

 

 

7

 

 

Management fee & related expenses paid to Equity Sponsors (2)

 

 

 

 

2

 

Other

 

2

 

 

 

 

Operating income

 

202

 

160

 

507

 

413

 

Interest expense, net

 

115

 

117

 

347

 

409

 

Loss on extinguishment & modification of debt (3)

 

 

 

2

 

87

 

Other (income) expense, net (4)

 

(4

)

 

(3

)

20

 

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

 

91

 

43

 

161

 

(103

)

Provision (benefit) for income taxes

 

31

 

(8

)

54

 

47

 

Income (loss) from continuing operations

 

60

 

51

 

107

 

(150

)

Less Income (loss) from discontinued operations, net of tax

 

 

 

(11

)

(2

)

Net Income (loss)

 

$

60

 

$

51

 

$

96

 

$

(152

)

 


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

 

(2)         The Company was previously party to consulting agreements with the Equity Sponsors whereby the Company paid the Equity Sponsors a $5 million annual aggregate management fee and related expenses.  These consulting agreements were terminated in conjunction with Holdings’ initial public offering in the second quarter of fiscal 2013.

 

(3)        Represents the loss on extinguishment of debt including the premium paid to repurchase or call the debt as well as the write-off of unamortized deferred financing costs and other assets or liabilities associated with such debt. Also includes the costs of debt modification.

 

(4)         Amount in the nine months ended November 3, 2013 represents the costs expensed in connection with Holdings’ initial public offering, including approximately $18 million paid to the Equity Sponsors in the second quarter of fiscal 2013 for termination of the consulting agreements.

 

NOTE 14—SUBSIDIARY GUARANTORS

 

As of November 2, 2014, HDS (the “Debt Issuer”) had outstanding First Priority Notes, Second Priority Notes, October 2012 Senior Unsecured Notes, and February 2013 Senior Unsecured Notes (collectively the “Notes”) 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 (“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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 ABL Facility;

 

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

 

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

 

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

 

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

 

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

 

In addition, HDS has the right, upon 30 days’ notice to the applicable trustee, to cause any Subsidiary Guarantor that has not guaranteed payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the 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 (loss), the condensed balance sheets, and the condensed statements of cash flows for the parent company issuer of the Notes, HDS, for the Subsidiary Guarantors and for the Non-guarantor Subsidiaries and total consolidated HDS 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 November 2, 2014

 

 

 

Debt Issuer

 

Subsidiary 
Guarantors

 

Non-
Guarantor 
Subsidiaries

 

Eliminations

 

Total HDS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

 

$

2,392

 

$

97

 

$

(1

)

$

2,488

 

Cost of sales

 

 

1,692

 

71

 

(1

)

1,762

 

Gross Profit

 

 

700

 

26

 

 

726

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

21

 

429

 

17

 

 

467

 

Depreciation and amortization

 

5

 

52

 

 

 

57

 

Total operating expenses

 

26

 

481

 

17

 

 

524

 

Operating Income (Loss)

 

(26

)

219

 

9

 

 

202

 

Interest expense

 

116

 

60

 

1

 

(62

)

115

 

Interest (income)

 

(61

)

 

(1

)

62

 

 

Net (earnings) loss of equity affiliates

 

(112

)

 

 

112

 

 

Loss on extinguishment & modification of debt

 

 

 

 

 

 

Other (income) expense, net

 

(4

)

 

 

 

(4

)

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

 

35

 

159

 

9

 

(112

)

91

 

Provision (benefit) for income taxes