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EX-10.2 - EX-10.2 - HD Supply Holdings, Inc.a15-19182_1ex10d2.htm
EX-31.1 - EX-31.1 - HD Supply Holdings, Inc.a15-19182_1ex31d1.htm
EX-10.4 - EX-10.4 - HD Supply Holdings, Inc.a15-19182_1ex10d4.htm
EX-10.3 - EX-10.3 - HD Supply Holdings, Inc.a15-19182_1ex10d3.htm
EX-31.2 - EX-31.2 - HD Supply Holdings, Inc.a15-19182_1ex31d2.htm
EX-31.4 - EX-31.4 - HD Supply Holdings, Inc.a15-19182_1ex31d4.htm
EX-32.4 - EX-32.4 - HD Supply Holdings, Inc.a15-19182_1ex32d4.htm
EX-31.3 - EX-31.3 - HD Supply Holdings, Inc.a15-19182_1ex31d3.htm
EX-32.2 - EX-32.2 - HD Supply Holdings, Inc.a15-19182_1ex32d2.htm
EX-32.1 - EX-32.1 - HD Supply Holdings, Inc.a15-19182_1ex32d1.htm
EX-32.3 - EX-32.3 - HD Supply Holdings, Inc.a15-19182_1ex32d3.htm

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 1, 2015

 

- 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 x

Accelerated filer o

Non-accelerated filer o

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 4, 2015:

 

HD Supply Holdings, Inc.

 

200,136,455 shares of common stock, par value $0.01 per share

 

 

 

HD Supply, Inc.

 

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

 

 

 



Table of Contents

 

INDEX TO FORM 10-Q

 

 

 

 

Page

 

 

 

 

 

Explanatory Note

 

3

 

 

 

 

 

Forward-looking statements and information

 

3

 

 

 

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

HD Supply Holdings, Inc.

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended November 1, 2015 and November 2, 2014 (unaudited)

 

5

 

 

 

 

 

Consolidated Balance Sheets as of November 1, 2015 and February 1, 2015 (unaudited)

 

6

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended November 1, 2015 and November 2, 2014 (unaudited)

 

7

 

 

 

 

 

HD Supply, Inc.

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended November 1, 2015 and November 2, 2014 (unaudited)

 

8

 

 

 

 

 

Consolidated Balance Sheets as of November 1, 2015 and February 1, 2015 (unaudited)

 

9

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended November 1, 2015 and November 2, 2014 (unaudited)

 

10

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

11

 

 

 

 

Item 2.

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

 

35

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

52

 

 

 

 

Item 4.

Controls and Procedures

 

52

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

52

 

 

 

 

Item 1A.

Risk Factors

 

53

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

Signatures

 

56

 

2



Table of Contents

 

EXPLANATORY NOTE

 

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

 

Forward-looking statements and information

 

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

 

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those factors discussed in Item 1A, Risk Factors in our annual report on Form 10-K, for the fiscal year ended February 1, 2015 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 maintain profitability;

 

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

 

·                  limitations and restrictions in the agreements governing our indebtedness;

 

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

 

·                  the loss of any of our significant customers;

 

·                  competitive pricing pressure from our customers;

 

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

 

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

 

3



Table of Contents

 

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

 

·                  our ability to manage fixed costs;

 

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

 

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

 

·                  potential material liabilities under our self-insured programs;

 

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

 

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

 

·                  our ability to identify and integrate new products; and

 

·                  failures in or breaches of our operational or information security systems, or those of our third-party service providers, as a result of cyber attacks or information security breaches.

 

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

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 1, 2015

 

November 2, 2014

 

November 1, 2015

 

November 2, 2014

 

Net Sales

 

$

2,012

 

$

1,914

 

$

5,740

 

$

5,427

 

Cost of sales

 

1,346

 

1,299

 

3,835

 

3,670

 

Gross Profit

 

666

 

615

 

1,905

 

1,757

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

405

 

390

 

1,211

 

1,152

 

Depreciation and amortization

 

28

 

46

 

84

 

152

 

Restructuring

 

4

 

 

4

 

6

 

Total operating expenses

 

437

 

436

 

1,299

 

1,310

 

Operating Income

 

229

 

179

 

606

 

447

 

Interest expense

 

99

 

115

 

311

 

347

 

Loss on extinguishment & modification of debt

 

100

 

 

100

 

2

 

Other (income) expense, net

 

 

(4

)

1

 

(3

)

Income from Continuing Operations Before Provision for Income Taxes

 

30

 

68

 

194

 

101

 

Provision (benefit) for income taxes

 

15

 

28

 

(155

)

41

 

Income from Continuing Operations

 

15

 

40

 

349

 

60

 

Income from discontinued operations, net of tax

 

235

 

20

 

252

 

36

 

Net Income

 

$

250

 

$

60

 

$

601

 

$

96

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

18

 

(3

)

16

 

(1

)

Total Comprehensive Income

 

$

268

 

$

57

 

$

617

 

$

95

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

 

 

 

 

Basic

 

197,529

 

194,288

 

196,589

 

193,806

 

Diluted

 

201,546

 

200,151

 

201,354

 

199,689

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.08

 

$

0.21

 

$

1.78

 

$

0.31

 

Income from Discontinued Operations

 

$

1.19

 

$

0.10

 

$

1.28

 

$

0.19

 

Net Income

 

$

1.27

 

$

0.31

 

$

3.06

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share(1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.07

 

$

0.20

 

$

1.73

 

$

0.30

 

Income from Discontinued Operations

 

$

1.17

 

$

0.10

 

$

1.25

 

$

0.18

 

Net Income

 

$

1.24

 

$

0.30

 

$

2.98

 

$

0.48

 

 


(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 1, 2015

 

February 1, 2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

77

 

$

85

 

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

 

1,092

 

868

 

Inventories

 

868

 

784

 

Deferred tax asset

 

4

 

9

 

Current assets of discontinued operations

 

 

509

 

Other current assets

 

37

 

43

 

Total current assets

 

2,078

 

2,298

 

Property and equipment, net

 

327

 

340

 

Goodwill

 

2,869

 

2,869

 

Intangible assets, net

 

134

 

145

 

Non-current assets of discontinued operations

 

 

295

 

Other assets

 

78

 

113

 

Total assets

 

$

5,486

 

$

6,060

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

651

 

$

510

 

Accrued compensation and benefits

 

129

 

144

 

Current installments of long-term debt

 

9

 

34

 

Current liabilities of discontinued operations

 

 

217

 

Other current liabilities

 

188

 

230

 

Total current liabilities

 

977

 

1,135

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

4,385

 

5,223

 

Deferred tax liabilities

 

142

 

166

 

Other liabilities

 

108

 

296

 

Total liabilities

 

5,612

 

6,820

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 199.4 million and 196.0 million shares issued and outstanding at November 1, 2015 and February 1, 2015, respectively

 

2

 

2

 

Paid-in capital

 

3,887

 

3,818

 

Accumulated deficit

 

(4,002

)

(4,540

)

Accumulated other comprehensive loss

 

(12

)

(28

)

Treasury stock, at cost, 0.04 million and 0.4 million shares at November 1, 2015 and February 1, 2015, respectively

 

(1

)

(12

)

Total stockholders’ equity (deficit)

 

(126

)

(760

)

Total liabilities and stockholders’ equity (deficit)

 

$

5,486

 

$

6,060

 

 

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 1, 2015

 

November 2, 2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

601

 

$

96

 

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

 

 

 

 

 

Depreciation and amortization

 

106

 

187

 

Provision for uncollectibles

 

5

 

6

 

Non-cash interest expense

 

18

 

19

 

Payment of discounts upon extinguishment of debt

 

(12

)

(1

)

Loss on extinguishment & modification of debt

 

100

 

2

 

Gain on sale of business

 

(186

)

 

Stock-based compensation expense

 

14

 

12

 

Deferred income taxes

 

(15

)

43

 

Other

 

(2

)

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(248

)

(264

)

(Increase) decrease in inventories

 

(124

)

(96

)

(Increase) decrease in other current assets

 

4

 

26

 

Increase (decrease) in accounts payable and accrued liabilities

 

93

 

85

 

Increase (decrease) in other long-term liabilities

 

(181

)

6

 

Net cash provided by (used in) operating activities

 

173

 

121

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(61

)

(92

)

Proceeds from sales of property and equipment

 

2

 

3

 

Proceeds from sale of business, net

 

810

 

 

Net cash provided by (used in) investing activities

 

751

 

(89

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock under employee benefit plans

 

55

 

40

 

Purchase of treasury shares

 

(51

)

(40

)

Borrowings of long-term debt

 

287

 

20

 

Repayments of long-term debt

 

(1,150

)

(27

)

Borrowings on long-term revolver debt

 

784

 

524

 

Repayments on long-term revolver debt

 

(850

)

(554

)

Debt issuance and modification costs

 

(6

)

(3

)

Other financing activities

 

1

 

 

Net cash provided by (used in) financing activities

 

(930

)

(40

)

Effect of exchange rates on cash and cash equivalents

 

(2

)

 

Increase (decrease) in cash and cash equivalents

 

$

(8

)

$

(8

)

Cash and cash equivalents at beginning of period

 

85

 

115

 

Cash and cash equivalents at end of period

 

$

77

 

$

107

 

 

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

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 1, 2015

 

November 2, 2014

 

November 1, 2015

 

November 2, 2014

 

Net Sales

 

$

2,012

 

$

1,914

 

$

5,740

 

$

5,427

 

Cost of sales

 

1,346

 

1,299

 

3,835

 

3,670

 

Gross Profit

 

666

 

615

 

1,905

 

1,757

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

405

 

390

 

1,211

 

1,152

 

Depreciation and amortization

 

28

 

46

 

84

 

152

 

Restructuring

 

4

 

 

4

 

6

 

Total operating expenses

 

437

 

436

 

1,299

 

1,310

 

Operating Income

 

229

 

179

 

606

 

447

 

Interest expense

 

99

 

115

 

311

 

347

 

Loss on extinguishment & modification of debt

 

100

 

 

100

 

2

 

Other (income) expense, net

 

 

(4

)

1

 

(3

)

Income from Continuing Operations Before Provision for Income Taxes

 

30

 

68

 

194

 

101

 

Provision (benefit) for income taxes

 

15

 

28

 

(155

)

41

 

Income from Continuing Operations

 

15

 

40

 

349

 

60

 

Income from discontinued operations, net of tax

 

235

 

20

 

252

 

36

 

Net Income

 

$

250

 

$

60

 

$

601

 

$

96

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

18

 

(3

)

16

 

(1

)

Total Comprehensive Income

 

$

268

 

$

57

 

$

617

 

$

95

 

 

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 1, 2015

 

February 1, 2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

73

 

$

85

 

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

 

1,092

 

868

 

Inventories

 

868

 

784

 

Deferred tax asset

 

4

 

9

 

Current assets of discontinued operations

 

 

509

 

Other current assets

 

37

 

43

 

Total current assets

 

2,074

 

2,298

 

Property and equipment, net

 

327

 

340

 

Goodwill

 

2,869

 

2,869

 

Intangible assets, net

 

134

 

145

 

Non-current assets of discontinued operations

 

 

295

 

Other assets

 

78

 

113

 

Total assets

 

$

5,482

 

$

6,060

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

651

 

$

510

 

Accrued compensation and benefits

 

129

 

144

 

Current installments of long-term debt

 

9

 

34

 

Current liabilities of discontinued operations

 

 

217

 

Other current liabilities

 

186

 

230

 

Total current liabilities

 

975

 

1,135

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

4,385

 

5,223

 

Deferred tax liabilities

 

142

 

166

 

Other liabilities

 

108

 

296

 

Total liabilities

 

5,610

 

6,820

 

 

 

 

 

 

 

Stockholder’s equity (deficit):

 

 

 

 

 

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

 

 

 

Paid-in capital

 

3,783

 

3,768

 

Accumulated deficit

 

(3,899

)

(4,500

)

Accumulated other comprehensive loss

 

(12

)

(28

)

Total stockholder’s equity (deficit)

 

(128

)

(760

)

Total liabilities and stockholder’s equity (deficit)

 

$

5,482

 

$

6,060

 

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

 

 

Nine Months Ended

 

 

 

November 1, 2015

 

November 2, 2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

601

 

$

96

 

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

 

 

 

 

 

Depreciation and amortization

 

106

 

187

 

Provision for uncollectibles

 

5

 

6

 

Non-cash interest expense

 

18

 

19

 

Payment of discounts upon extinguishment of debt

 

(12

)

(1

)

Loss on extinguishment & modification of debt

 

100

 

2

 

Gain on sale of a business

 

(186

)

 

 

Stock-based compensation expense

 

14

 

12

 

Deferred income taxes

 

(15

)

43

 

Other

 

(2

)

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(248

)

(264

)

(Increase) decrease in inventories

 

(124

)

(96

)

(Increase) decrease in other current assets

 

4

 

26

 

Increase (decrease) in accounts payable and accrued liabilities

 

93

 

85

 

Increase (decrease) in other long-term liabilities

 

(181

)

6

 

Net cash provided by (used in) operating activities

 

173

 

121

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(61

)

(92

)

Proceeds from sales of property and equipment

 

2

 

3

 

Proceeds from sale of business, net

 

810

 

 

Net cash provided by (used in) investing activities

 

751

 

(89

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings of long-term debt

 

287

 

20

 

Repayments of long-term debt

 

(1,150

)

(27

)

Borrowings on long-term revolver debt

 

784

 

524

 

Repayments on long-term revolver debt

 

(850

)

(554

)

Debt issuance and modification costs

 

(6

)

(3

)

Other financing activities

 

1

 

 

Net cash provided by (used in) financing activities

 

(934

)

(40

)

Effect of exchange rates on cash and cash equivalents

 

(2

)

 

Increase (decrease) in cash and cash equivalents

 

$

(12

)

$

(8

)

Cash and cash equivalents at beginning of period

 

85

 

111

 

Cash and cash equivalents at end of period

 

$

73

 

$

103

 

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

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

 

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in three distinct market sectors: Maintenance, Repair & Operations; Infrastructure; and Specialty Construction. Through approximately 550 locations across 48 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 14,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 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 includes over 800,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from infrastructure and construction to maintenance, repair and operations.

 

HD Supply is managed primarily on a product line basis and reports results of operations in three reportable segments. The reportable segments are Facilities Maintenance, Waterworks, and Construction & Industrial - White Cap. Other operating segments include Home Improvement Solutions, Interior Solutions, and HD Supply Canada. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

 

Basis of Presentation

 

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with its annual report on Form 10-K, for the year ended February 1, 2015, 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 January 31, 2016 (“fiscal 2015”) and February 1, 2015 (“fiscal 2014”) both include 52 weeks.  The three months ended November 1, 2015 (“third quarter 2015”) and November 2, 2014 (“third quarter 2014”) both include 13 weeks. The nine months ended November 1, 2015 and November 2, 2014 both include 39 weeks.

 

Principles of Consolidation

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 1, 2015 and February 1, 2015, self-insurance reserves totaled approximately $90 million and $92 million, respectively.

 

NOTE 2 — PUBLIC OFFERINGS

 

On July 28, 2015, certain of Holdings’ stockholders, including an investment fund associated with Bain Capital Partners, LLC, and THD Holdings, LLC (collectively, the “Selling Stockholders”), completed the sale of 30,539,550 shares of Holdings’ Common Stock, under the previously filed and effective shelf registration statement (including a prospectus), at a price to the Selling Stockholders of $35.44 per share. The Company did not receive any of the proceeds from the sale of these shares and no shares were sold by the Company. As a result of the sale, the investment fund associated with Bain Capital Partners, LLC, and THD Holdings, LLC no longer own any shares of Holdings’ Common Stock. In connection with the offering, the Company incurred approximately $1 million of fees, reflected in Other income (expense), net within the Consolidated Statements of Operations and Comprehensive Income.

 

During the nine months ended November 2, 2014 and in connection with fiscal 2014 public offerings, the Company incurred $2 million of fees, reflected in Other income (expense), net within the Consolidated Statements of Operations and Comprehensive Income.

 

NOTE 3 — DISCONTINUED OPERATIONS

 

In October 2015, the Company completed the sale of its Power Solutions business. The Company received cash proceeds of approximately $810 million, net of $15 million of transaction costs. The Company realized approximately $20 million in cumulative currency translation losses related to the Canadian operations of the Power Solutions business unit. As a result of the sale, the Company recorded a $186 million pre-tax gain.

 

In January 2015, the Company completed the sale of substantially all of the assets of its Hardware Solutions business. The Company received cash proceeds of approximately $198 million, net of $2 million of transaction costs. As a result of the sale, the Company recorded an $8 million pre-tax gain in fiscal 2014.

 

In January 2014, the Company approved the disposal of Litemor, a specialty lighting distributor within the Company’s HD Supply Canada business. During fiscal 2014, the Company 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” and Accounting Standards Update (“ASU”) 2014-08, “Reporting discontinued operations and disclosure of disposals of components of an entity,” the results of Power Solutions are classified as a discontinued operation. The results of the Hardware Solutions and Litemor operations and the gains/losses on sales of the businesses are also

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain/loss on the disposition of businesses, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income. All Consolidated Statements of Operations and Comprehensive Income presented have been revised to reflect this presentation.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 1,
2015

 

November 2,
2014

 

November 1,
2015

 

November 2,
2014

 

Net Sales

 

$

367

 

$

574

 

$

1,391

 

$

1,686

 

Cost of sales

 

313

 

463

 

1,185

 

1,364

 

Gross Profit

 

54

 

111

 

206

 

322

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

39

 

77

 

155

 

245

 

Depreciation and amortization

 

5

 

10

 

18

 

32

 

Restructuring

 

 

 

 

1

 

Total operating expenses

 

44

 

87

 

173

 

278

 

Gain on sale of business

 

186

 

 

186

 

 

Other (income) expense, net

 

3

 

 

3

 

 

Income before provision for income taxes

 

$

193

 

$

24

 

$

216

 

$

44

 

Provision (benefit) for income taxes

 

(42

)

4

 

(36

)

8

 

Income from discontinued operations, net of tax

 

$

235

 

$

20

 

$

252

 

$

36

 

 

At November 1, 2015 and February 1, 2015, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets were as follows (amounts in millions):

 

 

 

November 1, 2015

 

February 1, 2015

 

Current assets:

 

 

 

 

 

Receivables, less allowance for doubtful accounts of $0 and $1

 

$

 

$

221

 

Inventories

 

 

284

 

Other current assets

 

 

4

 

Total current assets

 

 

509

 

Goodwill

 

 

202

 

Intangible assets, net

 

 

55

 

Other non-current assets

 

 

38

 

Total assets of discontinued operations

 

$

 

$

804

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

 

$

178

 

Accrued compensation and benefits

 

 

18

 

Other current liabilities

 

 

21

 

Total liabilities of discontinued operations

 

$

 

$

217

 

 

For the nine months ended November 1, 2015, net cash provided by operating and investing activities, related to discontinued operations, were approximately $30 million and $808 million, respectively. Fiscal 2015 investing activities are inclusive of $810 million of net sales proceeds related to the Power Solutions transaction. For the

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

nine months ended November 2, 2014, net cash provided by operating activities and used in investing activities, related to discontinued operations, were approximately $101 million and $16 million, respectively.

 

NOTE 4 — DEBT

 

HDS’s long-term debt as of November 1, 2015 and February 1, 2015 consisted of the following (dollars in millions):

 

 

 

November 1, 2015

 

February 1, 2015

 

 

 

Outstanding
Principal

 

Interest Rate
%(1)

 

Outstanding
Principal

 

Interest Rate
%(1)

 

Senior ABL Facility due 2018

 

$

30

 

1.70

 

$

96

 

2.02

 

Term Loans due 2021, net of unamortized discount of $11 million and $14 million

 

839

 

3.75

 

961

 

4.00

 

December 2014 First Priority Notes due 2021

 

1,250

 

5.25

 

1,250

 

5.25

 

April 2012 Second Priority Notes due 2020

 

 

 

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

 

$

4,394

 

 

 

$

5,257

 

 

 

Less current installments

 

(9

)

 

 

(34

)

 

 

Long-term debt, excluding current installments

 

$

4,385

 

 

 

$

5,223

 

 

 

 


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

 

On October 13, 2015, HDS used proceeds from the sale of the Power Solutions business unit to redeem all of the outstanding $675 million aggregate principal amount of its April 2012 Second Priority Notes, as defined below, and paid a $72 million make-whole premium calculated in accordance with the terms of the indenture governing such notes and $37 million of accrued but unpaid interest to the redemption date. As a result, the Company recorded an $80 million loss on extinguishment of debt, which includes the $72 million make-whole premium and the write-off of $8 million of unamortized deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

On August 13, 2015, HDS entered into an incremental amendment (the “Incremental Agreement”) to the credit agreement governing its Term Loan Facility, as defined below, pursuant to which HDS requested a borrowing of a new $850 million tranche of senior secured term loans (“Term Loans”), the proceeds of which, together with cash on hand and available borrowings under HDS’s Senior ABL Facility, were used to prepay in full the tranche of senior secured term loans outstanding under the Term Loan Facility as of the date of the Incremental Agreement.  Pursuant to the Incremental Agreement, the Term Loans will mature on August 13, 2021 and bear interest at the reduced applicable margin for borrowings of 2.75% for LIBOR borrowings and 1.75% for base rate borrowings (down from, respectively, 3.00% and 2.00% applicable to the redeemed term loans), with the LIBOR floor to remain at 1.00%. The Term Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of such Term Loans, beginning in December 2015 with the balance payable on such Term Loans’ maturity date. The Incremental Agreement also provides for a prepayment premium equal to 1.00% of the aggregate principal amount of Term Loans being prepaid if, on or prior to February 13, 2016, the Company enters into certain repricing transactions.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In connection with the amendment, the Company recorded a modification and extinguishment charge of $20 million, which includes financing fees of $5 million and $15 million to write off a portion of the related unamortized discount and deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

 

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 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 1, 2015, HDS had $1,225 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $34 million in letters of credit issued and including $44 million of borrowings available on qualifying cash balances).

 

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

 

The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility. The Senior ABL Facility will mature on June 28, 2018 (or the maturity date under HDS’s Term Loan Facility, if earlier).

 

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 $850 million. The Term Loan Facility will mature on August 13, 2021 (the “Term Loan Maturity Date”). The Term Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loan Facility beginning December 2015 with the balance payable on the Term Loan Maturity Date. The Term Loans bear interest at the applicable margin for borrowings of 2.75% for LIBOR borrowings and 1.75% for base rate borrowings, with the LIBOR floor at 1.00%.

 

During the first quarter of fiscal 2015 and in accordance with the annual excess cash flow (“ECF”) provisions of the Term Loan Facility, the Company offered a prepayment of $34 million based on the ECF calculation for fiscal 2014.  The lenders in the Term Loan Facility accepted $16 million, which the Company paid on March 30, 2015. In accordance with the Incremental Agreement, the ECF provisions are applicable beginning with the fiscal year ending on or about February 1, 2017 (fiscal 2016) and each fiscal year thereafter. The ECF provision is not applicable to fiscal 2015.

 

For additional information on our Senior Credit Facilities, including guarantees and security, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K, for the fiscal year ended February 1, 2015.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Secured Notes

 

5.25% Senior Secured First Priority Notes due 2021

 

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

 

Redemption

 

HDS may redeem the December 2014 First Priority Notes, in whole or in part, at any time (1) prior to December 15, 2017, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the indenture governing the December 2014 First Priority Notes and (2) on and after December 15, 2017, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on December 15 of the year set forth below.

 

Year

 

Percentage

 

2017

 

103.938

%

2018

 

102.625

%

2019

 

101.313

%

2020 and thereafter

 

100.000

%

 

In addition, at any time prior to December 15, 2017, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the December 2014 First Priority Notes with the proceeds of certain equity offerings at a redemption price of 105.25% of the principal amount in respect of the December 2014 First Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the December 2014 First Priority Notes are redeemed, an aggregate principal amount of December 2014 First Priority Notes equal to at least 50% of the original aggregate principal amount of December 2014 First Priority Notes must remain outstanding immediately after each such redemption of December 2014 First Priority Notes.

 

Collateral

 

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

 

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

 

For additional information on the December 2014 First Priority Notes, including guarantees and security, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K, for the fiscal year ended February 1, 2015.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11% Senior Secured Second Priority Notes due 2020

 

HDS’s 11% Senior Secured Second Priority Notes due 2020 (the “April 2012 Second Priority Notes”) bore interest at 11% per annum and were set to mature on April 15, 2020.  Interest was paid semi-annually in arrears on April 15th and October 15th of each year, prior to the October 13, 2015 redemption.

 

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 October 2012 Senior Unsecured 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

%

 

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

%

 

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 1, 2015, HDS was in compliance with all such covenants that were in effect on such date.

 

NOTE 5 — FAIR VALUE MEASUREMENTS

 

The fair value measurements and disclosure principles of GAAP (ASC 820, Fair Value Measurements and Disclosures) define fair value, establish a framework for measuring fair value and provide disclosure

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 Consolidated Balance Sheets were as follows as of November 1, 2015 and February 1, 2015 (amounts in millions):

 

 

 

As of November 1, 2015

 

As of February 1, 2015

 

 

 

Recorded
Amount(1)

 

Estimated Fair
Value

 

Recorded
Amount(1)

 

Estimated Fair
Value

 

Senior ABL Facility

 

$

30

 

$

30

 

$

96

 

$

95

 

Term Loans and Notes

 

4,375

 

4,652

 

5,175

 

5,504

 

Total

 

$

4,405

 

$

4,682

 

$

5,271

 

$

5,599

 

 


(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 6 — INCOME TAXES

 

The Company’s combined federal, state, and foreign effective tax rate for continuing operations for the first nine months of fiscal 2015 is an 80% benefit. The benefit was mainly driven by a decrease of $189 million in the Company’s unrecognized U.S. federal and state tax benefits related to the February 19, 2015 approval and finalization of the Tentative Settlement (as defined in “Note 10, Commitment and Contingencies”) by the Joint Committee of Taxation.  In addition, the Company’s rate was impacted by 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.

 

An increase in U.S. pre-tax book income resulted in the utilization of net deferred tax assets including U.S. tax net operating losses 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” that it will realize its U.S. deferred tax assets equal to the deferred liability created by tax deductible goodwill. During the three and nine months ended November 1, 2015, the impact of the tax amortization of the indefinite lived intangibles on tax expense was an $11 million and $26 million increase, respectively.

 

As of February 1, 2015, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, Income Taxes) were $187 million. During the nine months ended November 1,

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2015, the Company’s unrecognized tax benefits decreased by $179 million to $8 million primarily driven by IRS and state audit settlements. During the three and nine months ended November 1, 2015, the Company’s interest accrual related to unrecognized tax benefits remained unchanged.  The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of February 1, 2015 was $29 million and decreased to $1 million as of November 1, 2015.  As a result of the approval and finalization of the Tentative Settlement, the tax years ending February 3, 2008 and February 1, 2009 are settled and closed to any further adjustments. Over the next twelve months, it is reasonably possible that the Company’s unrecognized tax benefits will decrease by up to $1 million.

 

At November 1, 2015 and February 1, 2015, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $845 million and $1,013 million, respectively. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Through fiscal 2013, the Company’s history of U.S. operating losses limited the weight applied to other subjective evidence such as the Company’s projections for future profitability.  With the Company’s fiscal 2014 U.S. pretax income, long carryforward periods in its U.S. federal tax losses and similar carryforward periods in a significant portion of its state tax losses, and projected fiscal 2015 and fiscal 2016 U.S. pretax income, management believes it is reasonably possible that sufficient positive evidence will exist during the next twelve months to release all or a significant portion of the valuation allowance on the Company’s U.S. deferred tax assets.

 

See “Note 10, Commitments and Contingencies,” for discussion of the IRS audit of the Company’s U.S. federal income tax returns.

 

NOTE 7—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 1, 2015 and November 2, 2014 was as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 1,
2015

 

November 2,
2014

 

November 1,
2015

 

November 2,
2014

 

Weighted average common shares

 

197,529

 

194,288

 

196,589

 

193,806

 

Effect of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Stock plans

 

4,017

 

5,863

 

4,765

 

5,883

 

Diluted weighted average common shares

 

201,546

 

200,151

 

201,354

 

199,689

 

 

 

 

 

 

 

 

 

 

 

Stock plan securities excluded from dilution (1)

 

49

 

50

 

719

 

429

 

 


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

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 8 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables consisted of the following (amounts in millions):

 

 

 

November 1, 2015

 

February 1, 2015

 

Trade receivables, net of allowance for doubtful accounts

 

$

1,001

 

$

784

 

Vendor rebate receivables

 

77

 

75

 

Other receivables

 

14

 

9

 

Total receivables, net

 

$

1,092

 

$

868

 

 

Other Current Liabilities

 

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

 

 

 

HD Supply Holdings, Inc.

 

HD Supply, Inc.

 

 

 

November 1, 2015

 

February 1, 2015

 

November 1, 2015

 

February 1, 2015

 

Accrued interest

 

$

37

 

$

98

 

$

37

 

$

98

 

Accrued non-income taxes

 

45

 

29

 

45

 

29

 

Other

 

106

 

103

 

104

 

103

 

Total other current liabilities

 

$

188

 

$

230

 

$

186

 

$

230

 

 

Supplemental Cash Flow Information

 

Cash paid for interest in the nine months ended November 1, 2015 and November 2, 2014 was $354 million and $426 million, respectively. During the nine months ended November 1, 2015, the Company paid $12 million of original issue discounts related to the portion of the August 2015 Term Loan amendment considered an extinguishment under ASC 470-50,”Debt — Modifications and Extinguishments.” Additionally, during the nine months ended November 2, 2014, the Company paid $1 million of original issue discounts related to the portion of the February 2014 Term Loan amendment considered an extinguishment under ASC 470-50.

 

Cash paid for income taxes, net of refunds, in the nine months ended November 1, 2015 and November 2, 2014 was approximately $14 million and $37 million, respectively.

 

Significant Non-Cash Transactions

 

During the three and nine months ended November 1, 2015, Holdings retired 1,384,622 and 1,976,053 shares, respectively, of its common stock (“Retired Shares”) held as Treasury Shares by Holdings in the amounts of $46 million and $63 million, respectively. All of these shares were repurchased by Holdings pursuant to the share repurchase program previously authorized.  Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with ASC 505-30, Equity-Treasury Stock, Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

 

NOTE 9—RESTRUCTURING ACTIVITIES

 

As a result of the sale of the Power Solutions business unit, management evaluated the Company’s talent alignment and functional support strategies.  Consequently, the Company expects to take a $10 million to $20 million charge over the next twelve months and expects a payback via a permanent reduction in cost over the next two years. This charge reflects costs primarily for severance, relocation and related costs.  During the three and nine months ended November 1, 2015, the Company recorded $4 million of the expected charges, primarily related to severance and other employee-related costs at Facilities Maintenance and Waterworks.  Payments for these initial charges are expected to be substantially complete in the next twelve months.  As of November 1,

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2015, the liability balances for these restructuring activities was $4 million and is included in Other current liabilities in the Consolidated Balance Sheets.

 

NOTE 10 — 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 The Home Depot Inc.’s (“Home Depot”) 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 of 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 increased by approximately $12 million before the impact of the valuation allowance.

 

The Tentative Settlement and the carryback claims were subject to review by the Joint Committee on Taxation (“JCT”) and the Tentative Settlement does not become effective nor are the carryback claims finalized until the JCT reviews them without objection or the IRS Office of Appeals executes such settlement, whichever comes first. The JCT is required to review refunds in excess of $2 million.

 

On February 19, 2015, the Company received notification the Tentative Settlement was approved by the JCT.  As a result of the approval and finalization of the Tentative Settlement, the tax years ending February 3, 2008 and February 1, 2009 are settled and closed to any further adjustments.

 

See “Note 6, Income Taxes,” for further disclosures on the Company’s income taxes.

 

Legal Matters

 

On August 11, 2015, HD Supply Waterworks, Ltd., and the United States of America, acting through the United States Attorney’s Office for the Northern District of New York and on behalf of the United States Environmental Protection Agency and the United States Department of Transportation (collectively the “United States”) entered into a civil settlement agreement in connection with the previously disclosed investigation of the Company by the United States related to the activities of certain disadvantaged business enterprises, including American Indian Builders and Suppliers, Inc. Under the terms of the settlement agreement, the Company, in exchange for a release of certain civil and administrative monetary claims, paid the United States $4.945 million, which is an amount within the Company’s previously established reserve for such matter.

 

In addition, on September 21, 2015, the Company entered into an Administrative Settlement and Compliance Agreement (the “AS&C Agreement”) with the Federal Highway Administration (“FHWA”), an Operating Administration of the United States Department of Transportation, related to the same conduct at issue in the United States investigation. Under the terms of the agreement, which will be effective for a period of three years, HD Supply Waterworks has agreed to undertake, and has already undertaken, certain remedial measures, including (a) commitment to continue to be bound by its Code of Business Conduct and Ethics; (b) a Corporate

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Compliance Program; (c) appointment of a Corporate Compliance Officer who was not involved in the conduct at issue in the United States investigation; and (d) retention of an independent monitor to evaluate Waterworks’ performance of the AS&C Agreement and to submit periodic reports directly to FHWA. In exchange, the FHWA has agreed not to initiate or pursue any suspension or debarment action against HD Supply Waterworks, the Company, or their affiliated entities, based on the conduct at issue in the United States investigation unless HD Supply Waterworks materially breaches the AS&C Agreement. While the Company believes that HD Supply Waterworks will not materially breach its obligations under the AS&C Agreement, there can be no assurances that the FHWA will not initiate or pursue any suspension or debarment proceedings in the future.

 

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, including the government matters described above, are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters, 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, if disposed of unfavorably to the Company, are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. For material matters that are reasonably possible and reasonably estimable, including matters that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued for, management has estimated the aggregate range of potential loss as $0 to $10 million. If a material loss is probable or reasonably possible, and in either case estimable, the Company has considered it in the analysis and it is included in the discussion set forth above.

 

NOTE 11 — SEGMENT INFORMATION

 

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

 

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

 

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

 

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

 

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

 

In addition to the reportable segments, the Company’s consolidated financial results include “Corporate & Other.” Corporate & Other is comprised of the following operating segments: Interior Solutions, Home Improvement Solutions and HD Supply Canada. Interior Solutions 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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Improvement Solutions 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.

 

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

 

 

 

Facilities
Maintenance

 

Waterworks

 

Construction
& Industrial -
White Cap

 

Corporate &
Other

 

Total
Continuing
Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 1, 2015

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

716

 

$

705

 

$

451

 

$

140

 

$

2,012

 

Adjusted EBITDA

 

149

 

70

 

48

 

(2

)

265

 

Depreciation(1) & Software Amortization

 

11

 

3

 

5

 

6

 

25

 

Other Intangible Amortization

 

1

 

1

 

1

 

1

 

4

 

Three Months Ended November 2, 2014

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

660

 

$

695

 

$

411

 

$

148

 

$

1,914

 

Adjusted EBITDA

 

139

 

64

 

35

 

(8

)

230

 

Depreciation(1) & Software Amortization

 

12

 

2

 

5

 

8

 

27

 

Other Intangible Amortization

 

16

 

1

 

4

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended November 1, 2015

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

2,084

 

$

1,977

 

$

1,270

 

$

409

 

$

5,740

 

Adjusted EBITDA

 

427

 

181

 

123

 

(20

)

711

 

Depreciation(1) & Software Amortization

 

34

 

8

 

18

 

17

 

77

 

Other Intangible Amortization

 

4

 

2

 

1

 

4

 

11

 

Nine Months Ended November 2, 2014

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

1,950

 

$

1,911

 

$

1,144

 

$

422

 

$

5,427

 

Adjusted EBITDA

 

387

 

162

 

90

 

(19

)

620

 

Depreciation(1) & Software Amortization

 

37

 

7

 

16

 

20

 

80

 

Other Intangible Amortization

 

56

 

3

 

14

 

3

 

76

 

 


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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reconciliation to Consolidated Financial Statements

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 1, 2015

 

November 2, 2014

 

November 1, 2015

 

November 2, 2014

 

 

 

 

 

 

 

 

 

 

 

Total Adjusted EBITDA

 

$

265

 

$

230

 

$

711

 

$

620

 

Depreciation and amortization (1)

 

29

 

48

 

88

 

156

 

Stock-based compensation

 

4

 

3

 

14

 

12

 

Restructuring

 

4

 

 

4

 

6

 

Other

 

(1

)

 

(1

)

(1

)

Operating income

 

229

 

179

 

606

 

447

 

Interest expense, net

 

99

 

115

 

311

 

347

 

Loss on extinguishment & modification of debt (2)

 

100

 

 

100

 

2

 

Other (income) expense, net (3)

 

 

(4

)

1

 

(3

)

Income from Continuing Operations Before Provision for Income Taxes

 

30

 

68

 

194

 

101

 

Provision (benefit) for income taxes (4)

 

15

 

28

 

(155

)

41

 

Income from continuing operations

 

15

 

40

 

349

 

60

 

Income from discontinued operations, net of tax

 

235

 

20

 

252

 

36

 

Net Income

 

$

250

 

$

60

 

$

601

 

$

96

 

 


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

 

(2)         Represents the loss on extinguishment of debt including the 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.

 

(3)         Represents the costs expensed in connection with secondary offerings of Holdings’ common stock by certain of Holdings’ stockholders.

 

(4)         During the nine months ended November 1, 2015, the Company recorded a reduction in unrecognized tax benefits as a result of IRS and state audit settlements. See “Note 6, Income Taxes” and “Note 10, Commitments and Contingencies” for discussion of the IRS audit settlement.

 

NOTE 12—SUBSIDIARY GUARANTORS

 

HDS (the “Debt Issuer”) has outstanding December 2014 First Priority Notes, October 2012 Senior Unsecured Notes, and February 2013 Senior Unsecured Notes (collectively the “Notes”), which are guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the Notes (“Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

 

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

 

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

 

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

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

 

 

Three Months Ended November 1, 2015

 

 

 

Debt Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total HDS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

 

$

1,982

 

$

31

 

$

(1

)

$

2,012

 

Cost of sales

 

 

1,330

 

16

 

 

1,346

 

Gross Profit

 

 

652

 

15

 

(1

)

666

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

17

 

378

 

11

 

(1

)

405

 

Depreciation and amortization

 

4

 

24

 

 

 

28

 

Restructuring Charge

 

 

4

 

 

 

4

 

Total operating expenses

 

21

 

406

 

11

 

(1

)

437

 

Operating Income (Loss)

 

(21

)

246

 

4

 

 

229

 

Interest expense

 

100

 

61

 

 

(62

)

99

 

Interest (income)

 

(60

)

(2

)

 

62

 

 

Loss on extinguishment & modification of debt

 

100

 

 

 

 

100

 

Other (income) expense, net

 

 

 

 

 

 

Net (earnings) loss of equity affiliates

 

(343

)

 

 

343

 

 

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

 

182

 

187

 

4

 

(343

)

30

 

Provision (benefit) for income taxes

 

157

 

(145

)

3

 

 

15

 

Income from Continuing Operations

 

25

 

332

 

1

 

(343

)

15

 

Income (loss) from discontinued operations, net of tax

 

225

 

13

 

(3

)

 

235

 

Net Income (Loss)

 

$

250

 

$

345

 

$

(2

)

$

(343

)

$

250

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

18

 

 

18

 

(18

)

18

 

Total Comprehensive Income (Loss)

 

$

268

 

$

345

 

$

16

 

$

(361

)

$

268

 

 

26



Table of Contents

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

 

 

 

Three Months Ended November 2, 2014

 

 

 

Debt Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total HDS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

 

$

1,881

 

$

35

 

$

(2

)

$

1,914

 

Cost of sales

 

 

1,282

 

18

 

(1

)

1,299

 

Gross Profit

 

 

599

 

17

 

(1

)

615

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

20

 

356

 

14

 

 

390

 

Depreciation and amortization