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EX-32.2 - EX-32.2 - HD Supply Holdings, Inc.a16-13008_1ex32d2.htm
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EX-31.2 - EX-31.2 - HD Supply Holdings, Inc.a16-13008_1ex31d2.htm
EX-31.1 - EX-31.1 - HD Supply Holdings, Inc.a16-13008_1ex31d1.htm
EX-21.1 - EX-21.1 - HD Supply Holdings, Inc.a16-13008_1ex21d1.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 July 31, 2016

 

- 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 September 2, 2016:

 

HD Supply Holdings, Inc.

201,025,941 shares of common stock, par value $0.01 per share

HD Supply, Inc.

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

 

 

 



Table of Contents

 

INDEX TO FORM 10-Q

 

 

 

Page

 

Explanatory Note

3

 

 

 

 

Forward-looking statements and information

3

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

HD Supply Holdings, Inc.

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended July 31, 2016 and August 2, 2015 (unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of July 31, 2016 and January 31, 2016 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months ended July 31, 2016 and August 2, 2015 (unaudited)

7

 

 

 

 

HD Supply, Inc.

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended July 31, 2016 and August 2, 2015 (unaudited)

8

 

 

 

 

Consolidated Balance Sheets as of July 31, 2016 and January 31, 2016 (unaudited)

9

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months ended July 31, 2016 and August 2, 2015 (unaudited)

10

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

11

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44

 

 

 

Item 4.

Controls and Procedures

44

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

47

 

2


 


Table of Contents

 

EXPLANATORY NOTE

 

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

 

Forward-looking statements and information

 

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

 

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those factors discussed in Item 1A, Risk Factors in our annual report on Form 10-K, for the fiscal year ended January 31, 2016 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, financial condition and liquidity, and the development of industries in which we operate include:

 

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

 

·      our ability to maintain profitability;

 

·      our substantial debt and our ability to incur additional debt, as well as our ability to service our debt or 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 the 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 infrastructure spending, the maintenance, repair and operations market 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 our 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;

 

·      our ability to protect our intellectual property rights;

 

·      the cost of complying with environmental, health and safety laws, as well as other legal and regulatory requirements or disclosures;

 

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

 

·      our ability to identify and integrate new products.

 

You should read this report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

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

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

July 31,
2016

 

August 2,
2015

 

Net Sales

 

$

2,016

 

$

1,937

 

$

3,797

 

$

3,597

 

Cost of sales

 

1,336

 

1,289

 

2,508

 

2,390

 

Gross Profit

 

680

 

648

 

1,289

 

1,207

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

414

 

397

 

815

 

773

 

Depreciation and amortization

 

24

 

28

 

47

 

55

 

Restructuring

 

5

 

 

12

 

 

Total operating expenses

 

443

 

425

 

874

 

828

 

Operating Income

 

237

 

223

 

415

 

379

 

Interest expense

 

69

 

106

 

154

 

212

 

Loss on extinguishment of debt

 

 

 

115

 

 

Other (income) expense, net

 

 

1

 

 

1

 

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

 

168

 

116

 

146

 

166

 

Provision (benefit) for income taxes

 

66

 

12

 

58

 

(172

)

Income from Continuing Operations

 

102

 

104

 

88

 

338

 

Income (Loss) from discontinued operations, net of tax

 

(4

)

5

 

(4

)

13

 

Net Income

 

$

98

 

$

109

 

$

84

 

$

351

 

Other comprehensive income (loss) — foreign currency translation adjustment

 

(2

)

(7

)

2

 

(2

)

Total Comprehensive Income

 

$

96

 

$

102

 

$

86

 

$

349

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

 

 

 

 

Basic

 

199,250

 

196,893

 

199,029

 

196,120

 

Diluted

 

201,978

 

201,809

 

201,615

 

201,221

 

Basic Earnings Per Share (1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.51

 

$

0.53

 

$

0.44

 

$

1.72

 

Income (Loss) from Discontinued Operations

 

$

(0.02

)

$

0.03

 

$

(0.02

)

$

0.07

 

Net Income

 

$

0.49

 

$

0.55

 

$

0.42

 

$

1.79

 

Diluted Earnings Per Share (1):

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

$

0.51

 

$

0.52

 

$

0.44

 

$

1.68

 

Income (Loss) from Discontinued Operations

 

$

(0.02

)

$

0.02

 

$

(0.02

)

$

0.06

 

Net Income

 

$

0.49

 

$

0.54

 

$

0.42

 

$

1.74

 

 


(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

 

 

 

July 31,
2016

 

January 31,
2016

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

313

 

$

269

 

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

 

1,101

 

872

 

Inventories

 

887

 

770

 

Current assets of discontinued operations

 

 

43

 

Other current assets

 

42

 

29

 

Total current assets

 

2,343

 

1,983

 

Property and equipment, net

 

306

 

310

 

Goodwill

 

2,869

 

2,869

 

Intangible assets, net

 

119

 

127

 

Deferred tax asset

 

633

 

685

 

Non-current assets of discontinued operations

 

 

20

 

Other assets

 

19

 

22

 

Total assets

 

$

6,289

 

$

6,016

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

721

 

$

490

 

Accrued compensation and benefits

 

117

 

142

 

Current installments of long-term debt

 

9

 

9

 

Current liabilities of discontinued operations

 

 

30

 

Other current liabilities

 

200

 

200

 

Total current liabilities

 

1,047

 

871

 

Long-term debt, excluding current installments

 

4,299

 

4,302

 

Non-current liabilities of discontinued operations

 

 

1

 

Other liabilities

 

102

 

98

 

Total liabilities

 

5,448

 

5,272

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 200.9 million and 200.1 million shares issued and outstanding at July 31, 2016 and January 31, 2016, respectively

 

2

 

2

 

Paid-in capital

 

3,934

 

3,909

 

Accumulated deficit

 

(3,076

)

(3,150

)

Accumulated other comprehensive loss

 

(14

)

(16

)

Treasury stock, at cost, 0.13 million and 0.06 million shares at July 31, 2016 and January 31, 2016, respectively

 

(5

)

(1

)

Total stockholders’ equity

 

841

 

744

 

Total liabilities and stockholders’ equity

 

$

6,289

 

$

6,016

 

 

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

 

 

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

84

 

$

351

 

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

 

 

 

 

 

Depreciation and amortization

 

51

 

72

 

Provision for uncollectibles

 

3

 

4

 

Non-cash interest expense

 

9

 

14

 

Loss on extinguishment of debt

 

115

 

 

Stock-based compensation expense

 

11

 

10

 

Deferred income taxes

 

52

 

19

 

Loss on sales of businesses, net

 

3

 

 

Other

 

 

(1

)

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(232

)

(252

)

(Increase) decrease in inventories

 

(118

)

(153

)

(Increase) decrease in other current assets

 

(9

)

(2

)

Increase (decrease) in accounts payable and accrued liabilities

 

196

 

217

 

Increase (decrease) in other long-term liabilities

 

(1

)

(181

)

Net cash provided by (used in) operating activities

 

164

 

98

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(32

)

(43

)

Proceeds from sales of property and equipment

 

1

 

1

 

Proceeds from sales of businesses

 

37

 

 

Net cash provided by (used in) investing activities

 

6

 

(42

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock under employee benefit plans

 

14

 

41

 

Purchase of treasury shares

 

(14

)

(31

)

Borrowings of long-term debt

 

1,000

 

 

Repayments of long-term debt

 

(1,110

)

(16

)

Borrowings on long-term revolver debt

 

 

562

 

Repayments on long-term revolver debt

 

 

(526

)

Debt issuance and modification fees

 

(15

)

 

Other financing activities

 

(2

)

(1

)

Net cash provided by (used in) financing activities

 

(127

)

29

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

1

 

(1

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

44

 

$

84

 

Cash and cash equivalents at beginning of period

 

269

 

85

 

Cash and cash equivalents at end of period

 

$

313

 

$

169

 

 

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

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

July 31,
2016

 

August 2,
2015

 

Net Sales

 

$

2,016

 

$

1,937

 

$

3,797

 

$

3,597

 

Cost of sales

 

1,336

 

1,289

 

2,508

 

2,390

 

Gross Profit

 

680

 

648

 

1,289

 

1,207

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

414

 

397

 

815

 

773

 

Depreciation and amortization

 

24

 

28

 

47

 

55

 

Restructuring

 

5

 

 

12

 

 

Total operating expenses

 

443

 

425

 

874

 

828

 

Operating Income

 

237

 

223

 

415

 

379

 

Interest expense

 

69

 

106

 

154

 

212

 

Loss on extinguishment of debt

 

 

 

115

 

 

Other (income) expense, net

 

 

1

 

 

1

 

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

 

168

 

116

 

146

 

166

 

Provision (benefit) for income taxes

 

66

 

12

 

58

 

(172

)

Income from Continuing Operations

 

102

 

104

 

88

 

338

 

Income (Loss) from discontinued operations, net of tax

 

(4

)

5

 

(4

)

13

 

Net Income

 

$

98

 

$

109

 

$

84

 

$

351

 

Other comprehensive income (loss)— foreign currency translation adjustment

 

(2

)

(7

)

2

 

(2

)

Total Comprehensive Income

 

$

96

 

$

102

 

$

86

 

$

349

 

 

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

 

 

 

July 31,
2016

 

January 31,
2016

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

310

 

$

266

 

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

 

1,101

 

872

 

Inventories

 

887

 

770

 

Current assets of discontinued operations

 

 

43

 

Other current assets

 

42

 

29

 

Total current assets

 

2,340

 

1,980

 

Property and equipment, net

 

306

 

310

 

Goodwill

 

2,869

 

2,869

 

Intangible assets, net

 

119

 

127

 

Deferred tax asset

 

633

 

685

 

Non-current assets of discontinued operations

 

 

20

 

Other assets

 

19

 

22

 

Total assets

 

$

6,286

 

$

6,013

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

721

 

$

490

 

Accrued compensation and benefits

 

117

 

142

 

Current installments of long-term debt

 

9

 

9

 

Current liabilities of discontinued operations

 

 

30

 

Other current liabilities

 

200

 

199

 

Total current liabilities

 

1,047

 

870

 

Long-term debt, excluding current installments

 

4,299

 

4,302

 

Non-current liabilities of discontinued operations

 

 

1

 

Other liabilities

 

102

 

98

 

Total liabilities

 

5,448

 

5,271

 

Stockholder’s equity:

 

 

 

 

 

Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at July 31, 2016 and January 31, 2016

 

 

 

Paid-in capital

 

3,796

 

3,786

 

Accumulated deficit

 

(2,944

)

(3,028

)

Accumulated other comprehensive loss

 

(14

)

(16

)

Total stockholder’s equity

 

838

 

742

 

Total liabilities and stockholder’s equity

 

$

6,286

 

$

6,013

 

 

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

 

 

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

84

 

$

351

 

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

 

 

 

 

 

Depreciation and amortization

 

51

 

72

 

Provision for uncollectibles

 

3

 

4

 

Non-cash interest expense

 

9

 

14

 

Loss on extinguishment of debt

 

115

 

 

Stock-based compensation expense

 

11

 

10

 

Deferred income taxes

 

52

 

19

 

Loss on sales of businesses, net

 

3

 

 

Other

 

 

(1

)

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(232

)

(252

)

(Increase) decrease in inventories

 

(118

)

(153

)

(Increase) decrease in other current assets

 

(9

)

(2

)

Increase (decrease) in accounts payable and accrued liabilities

 

196

 

217

 

Increase (decrease) in other long-term liabilities

 

(1

)

(181

)

Net cash provided by (used in) operating activities

 

164

 

98

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(32

)

(43

)

Proceeds from sales of property and equipment

 

1

 

1

 

Proceeds from sales of businesses

 

37

 

 

Net cash provided by (used in) investing activities

 

6

 

(42

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings of long-term debt

 

1,000

 

 

Repayments of long-term debt

 

(1,110

)

(16

)

Borrowings on long-term revolver debt

 

 

562

 

Repayments on long-term revolver debt

 

 

(526

)

Debt issuance and modification fees

 

(15

)

 

Other financing activities

 

(2

)

(1

)

Net cash provided by (used in) financing activities

 

(127

)

19

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

1

 

(1

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

44

 

$

74

 

Cash and cash equivalents at beginning of period

 

266

 

85

 

Cash and cash equivalents at end of period

 

$

310

 

$

159

 

 

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

 

10


 


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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

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

 

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in three distinct market sectors: Maintenance, Repair & Operations; Infrastructure; and Specialty Construction. Through approximately 500 locations across 48 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 13,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services include more than 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. In addition, the consolidated financial statements include an operating segment, Home Improvement Solutions, and Corporate, which is comprised of enterprise-wide functional departments.

 

Basis of Presentation

 

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended January 31, 2016, 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 29, 2017 (“fiscal 2016”) and January 31, 2016 (“fiscal 2015”) both include 52 weeks.  The three months ended July 31, 2016 (“second quarter 2016”) and August 2, 2015 (“second quarter 2015”) both include 13 weeks. The six months ended July 31, 2016 and August 2, 2015 both include 26 weeks.

 

Principles of Consolidation

 

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

 

Estimates

 

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Self-Insurance

 

HD Supply has a high deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability  and 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 July 31, 2016 and January 31, 2016, self-insurance reserves totaled approximately $82 million and $84 million, respectively.

 

NOTE 2 — DISCONTINUED OPERATIONS

 

In May 2016, the Company completed the sale of its Interior Solutions business, which is subject to a customary working capital adjustment. The Company received cash proceeds of approximately $34 million, net of $2 million of transaction costs. As a result of the sale, the Company recorded a $6 million pre-tax loss.

 

In October 2015, the Company completed the sale of its Power Solutions business. During the second quarter of fiscal 2016, the Company received cash proceeds of $3 million in accordance with the final working capital settlement, and, as a result, recorded an additional $3 million pre-tax gain.

 

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 Interior Solutions and Power Solutions are 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

 

Six Months Ended

 

 

 

July 31, 2016

 

August 2,
2015

 

July 31,
2016

 

August 2,
2015

 

Net sales

 

$

22

 

$

594

 

$

85

 

$

1,155

 

Cost of sales

 

18

 

499

 

65

 

970

 

Gross Profit

 

4

 

95

 

20

 

185

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

7

 

77

 

23

 

148

 

Depreciation and amortization

 

 

7

 

1

 

15

 

Total operating expenses

 

7

 

84

 

24

 

163

 

Operating Income (Loss)

 

(3

)

11

 

(4

)

22

 

Loss on sales of discontinued operations

 

3

 

 

3

 

 

Income (loss) before provision for income taxes

 

(6

)

11

 

(7

)

22

 

Provision (benefit) for income taxes

 

(2

)

6

 

(3

)

9

 

Income (loss) from discontinued operations, net of tax

 

$

(4

)

$

5

 

$

(4

)

$

13

 

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

At July 31, 2016 and January 31, 2016, 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):

 

 

 

July 31,
2016

 

January 31,
2016

 

Current assets:

 

 

 

 

 

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

 

$

 

$

31

 

Inventories

 

 

12

 

Total current assets

 

 

43

 

Intangible assets, net

 

 

3

 

Other non-current assets

 

 

17

 

Total assets of discontinued operations

 

$

 

$

63

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

 

$

19

 

Accrued compensation and benefits

 

 

2

 

Other current liabilities

 

 

9

 

Total current liabilities

 

 

30

 

Other non-current liabilities

 

 

1

 

Total liabilities of discontinued operations

 

$

 

$

31

 

 

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

 

 

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

Net cash flows provided by (used in) operating activities

 

$

(3

)

$

10

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(1

)

(3

)

Proceeds from sales of businesses, net

 

37

 

 

Net cash flows provided by (used in) investing activities

 

$

36

 

$

(3

)

 

NOTE 3 — DEBT

 

HDS’s long-term debt as of July 31, 2016 and January 31, 2016 consisted of the following (dollars in millions):

 

 

 

July 31, 2016

 

January 31, 2016

 

 

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Senior ABL Facility due 2018

 

$

 

 

$

 

 

Term Loans due 2021

 

844

 

3.75

 

848

 

3.75

 

December 2014 First Priority Notes due 2021

 

1,250

 

5.25

 

1,250

 

5.25

 

April 2016 Senior Unsecured Notes due 2024

 

1,000

 

5.75

 

 

 

October 2012 Senior Unsecured Notes due 2020

 

 

 

1,000

 

11.50

 

February 2013 Senior Unsecured Notes due 2020

 

1,275

 

7.50

 

1,275

 

7.50

 

Total gross long-term debt

 

$

4,369

 

 

 

$

4,373

 

 

 

Less unamortized discount

 

(10

)

 

 

(11

)

 

 

Less unamortized deferred financing costs

 

(51

)

 

 

(51

)

 

 

Total net long-term debt

 

$

4,308

 

 

 

$

4,311

 

 

 

Less current installments

 

(9

)

 

 

(9

)

 

 

Total net long-term debt, excluding current installments

 

$

4,299

 

 

 

$

4,302

 

 

 

 


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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On April 11, 2016, HDS issued $1,000 million of 5.75% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”) at par. HDS received approximately $985 million, net of transaction fees. The transaction fees of $15 million are reflected as deferred financing costs in the Consolidated Balance Sheets and will be amortized into interest expense over the term of the notes.

 

On April 27, 2016, HDS used the net proceeds from the April 2016 Senior Unsecured Notes issuance, together with available cash, to redeem all of the outstanding $1,000 million aggregate principal of the 11.5% Senior Unsecured Notes due 2020 (the “October 2012 Senior Unsecured Notes”), and pay a $106 million make-whole premium calculated in accordance with the terms of the indenture governing such notes and pay $4 million of accrued but unpaid interest to the redemption date. As a result, the Company incurred a $115 million loss on extinguishment of the debt, which includes the $106 million make-whole premium and the write-off of $9 million of unamortized 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 due 2018 (“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 July 31, 2016, HDS had $1,289 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 $89 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 banker’s acceptance (“BA”) rate plus an applicable margin, or the Canadian Prime Rate plus an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the agreement governing the Senior ABL Facility, based on average excess availability for the previous fiscal quarter. The Senior ABL Facility also contains a letter of credit fee computed at a rate per annum equal to the Applicable Margin (as defined in the Senior ABL Facility agreement) then in effect for LIBOR Loans (as defined in the Senior ABL Facility agreement) and an unused commitment fee subject to a pricing grid, included in the agreement governing the Senior ABL Facility, based on the Average Daily Used Percentage (as defined in the agreement).

 

The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility. 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,’’ and 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%.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For additional information on our Senior ABL Facility or Term Loan Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to Consolidated Financial Statements of our Form 10-K for the fiscal year ended January 31, 2016.

 

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 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 (both 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).

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For additional information on the December 2014 First Priority Notes, including guarantees and security, please refer to the Notes to Consolidated Financial Statements of our Form 10-K, for the fiscal year ended January 31, 2016.

 

Unsecured Notes

 

5.75% Senior Unsecured Notes due 2024

 

HDS issued $1,000 million aggregate principal amount of 5.75% Senior Notes (“April 2016 Senior Unsecured Notes”) under an Indenture, dated as of April 11, 2016 (“April 2016 Senior Unsecured Notes Indenture”) among HDS, certain subsidiaries of HDS as guarantors and the Trustee. The April 2016 Senior Unsecured Notes bear interest at a rate of 5.75% and will mature on April 15, 2024. Interest is paid semi-annually on April 15th and October 15th of each year with first interest payment scheduled October 15, 2016.

 

The April 2016 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS’s existing and future senior indebtedness, senior in right of payment to all of HDS’s existing and future subordinated indebtedness, and effectively subordinated to all of HDS’s existing and future indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities and December 2014 First Priority Notes, to the extent of the value of the collateral securing each indebtedness.

 

The April 2016 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS’s direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the Senior ABL Facility or that guarantees HDS’s obligations under any credit facility or capital markets securities. These guarantees are subject to release under customary circumstances as stipulated in the April 2016 Senior Unsecured Notes Indenture.

 

Redemption

 

HDS may redeem the April 2016 Senior Unsecured Notes, in whole or in part, at any time (1) prior to April 15, 2019, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the April 2016 Senior Unsecured Notes Indenture and (2) on and after April 15, 2019, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on April 15 of the year set forth below.

 

Year

 

Percentage

 

2019

 

104.313

%

2020

 

102.875

%

2021

 

101.438

%

2022 and thereafter

 

100.000

%

 

In addition, at any time prior to April 15, 2019, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the April 2016 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.75% of the principal amount in respect of the April 2016 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the April 2016 Senior Unsecured Notes are redeemed, an aggregate principal amount of April 2016 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of April 2016 Senior Unsecured Notes must remain outstanding immediately after each such redemption of April 2016 Senior Unsecured Notes.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 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

 

103.750

%

2017

 

101.875

%

2018 and thereafter

 

100.000

%

 

11.5% Senior Unsecured Notes due 2020

 

HDS’s 11.5% Senior Unsecured Notes due 2020 (the ‘‘October 2012 Senior Unsecured Notes’’) bore interest at 11.5% per annum with a maturity date of July 15, 2020. Interest was paid semi-annually in arrears on April 15th and October 15th of each year, prior to the April 27, 2016 redemption of all of the outstanding $1,000 million aggregate principal amount of the October 2012 Senior Unsecured Notes.

 

Debt covenants

 

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness and dividend payments and restrictions on the use of proceeds from asset dispositions. As of July 31, 2016, HDS was in compliance with all such covenants that were in effect on such date.

 

NOTE 4 — FAIR VALUE MEASUREMENTS

 

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

 

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly;

 

Level 3 — Unobservable inputs in which little or no market activity exists.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of July 31, 2016 and January 31, 2016 (amounts in millions):

 

 

 

As of July 31, 2016

 

As of January 31, 2016

 

 

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Senior ABL Facility

 

$

 

$

 

$

 

$

 

Term Loans and Notes

 

4,369

 

4,571

 

4,373

 

4,560

 

Total

 

$

4,369

 

$

4,571

 

$

4,373

 

$

4,560

 

 


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

 

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

 

NOTE 5 — INCOME TAXES

 

For the six months ended July 31, 2016, the Company’s combined federal, state, and foreign effective tax rate is an expense of 39.7%. The effective rate for continuing operations for the six months ended August 2, 2015 was a benefit of 103.6%, mainly driven by a decrease of $189 million in the Company’s unrecognized U.S. federal and state tax benefits related to the Joint Committee on Taxation’s February 19, 2015 approval and finalization of a tentative settlement with the Internal Revenue Service’s Office of Appeals in conjunction with a Revenue Agent’s report issued in January 2013. For additional information, please refer to the Notes to Consolidated Financial Statements of our Form 10-K for the fiscal year ended January 31, 2016.

 

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits.

 

As of January 31, 2016, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $9 million. As of July 31, 2016, the Company’s unrecognized tax benefits remained unchanged. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of January 31, 2016 was zero and remained unchanged as of July 31, 2016.  At July 31, 2016 and January 31, 2016, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $5 million and $6 million, respectively. Each reporting period management assesses available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

 

NOTE 6—BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

 

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

 

The reconciliation of basic to diluted weighted average common shares for the six months ended July 31, 2016 and August 2, 2015 was as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

July 31,
2016

 

August 2,
2015

 

Weighted-average common shares

 

199,250

 

196,893

 

199,029

 

196,120

 

Effect of potentially dilutive stock plan securities

 

2,728

 

4,916

 

2,586

 

5,101

 

Diluted weighted-average common shares

 

201,978

 

201,809

 

201,615

 

201,221

 

Stock plan securities excluded from dilution (1)

 

1,452

 

107

 

2,240

 

1,645

 

 


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

 

Stock plan securities consist of securities (stock options, restricted stock 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 7 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables consisted of the following (amounts in millions):

 

 

 

July 31,
2016

 

January 31,
2016

 

Trade receivables, net of allowance for doubtful accounts

 

$

1,020

 

$

784

 

Vendor rebate receivables

 

70

 

76

 

Other receivables

 

11

 

12

 

Total receivables, net

 

$

1,101

 

$

872

 

 

Other Current Liabilities

 

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

 

 

 

HD Supply Holdings, Inc.

 

HD Supply, Inc.

 

 

 

July 31,
2016

 

January 31,
2016

 

July 31,
2016

 

January 31,
2016

 

Accrued interest

 

$

57

 

$

73

 

$

57

 

$

73

 

Accrued non-income taxes

 

41

 

30

 

41

 

30

 

Other

 

102

 

97

 

102

 

96

 

Total other current liabilities

 

$

200

 

$

200

 

$

200

 

$

199

 

 

Supplemental Cash Flow Information

 

Cash paid for interest in the six months ended July 31, 2016 and August 2, 2015 was $161 million and $201 million, respectively.

 

Cash paid for income taxes, net of refunds, in the six months ended July 31, 2016 and August 2, 2015 was approximately $6 million and $9 million, respectively.

 

Significant Non-Cash Transactions

 

During the six months ended July 31, 2016, Holdings retired 319,093 shares of its common stock (“Retired Shares”) held as treasury shares by Holdings in the amount of $9 million. All of these shares were repurchased by Holdings pursuant to the publicly announced share repurchase program previously authorized by Holdings board of directors.  Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with ASC 505-30, “Equity-Treasury Stock,” Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

 

NOTE 8—RESTRUCTURING ACTIVITIES

 

During the fourth quarter of fiscal 2015 in conjunction with the sale of the Power Solutions business unit, management evaluated the Company’s talent alignment and functional support strategies. Consequently, during fiscal 2015, the Company initiated a restructuring plan to strategically align its leadership and functional support teams. Initially, the Company expected to incur approximately $10 million to $20 million of restructuring charges under the plan.  During first quarter fiscal 2016, the Company accelerated and expanded the restructuring plan. As a result, the Company now expects to incur a total of approximately $25 million to $30 million of restructuring charges under the restructuring plan, which is expected to be complete in the second half of fiscal 2016 and deliver a payback of approximately two years via a reduction in costs.

 

During the three and six months ended July 31, 2016, the Company’s activities under this restructuring plan resulted in restructuring charges of $5 million and $12 million, respectively, of which $3 million and $9 million, respectively, was incurred at the Facilities Maintenance business. During fiscal 2015, the Company incurred $9 million of restructuring charges under this plan. The Company expects to incur an additional $4 million to $9 million of restructuring charges over the next six months primarily for severance, relocation and related costs.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

Severance

 

Relocation &
Other Costs

 

Total

 

Balance—January 31, 2016

 

$

6

 

$

1

 

$

7

 

Charges

 

4

 

8

 

12

 

Cash payments

 

(5

)

(8

)

(13

)

Balance—July 31, 2016

 

$

5

 

$

1

 

$

6

 

 

NOTE 9 — COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters, 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 $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.

 

NOTE 10 — SEGMENT INFORMATION

 

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

 

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 includes the operating segment Home Improvement Solutions, which 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. Corporate &

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 July 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

741

 

$

733

 

$

489

 

$

53

 

$

2,016

 

Adjusted EBITDA

 

151

 

70

 

60

 

(8

)

273

 

Depreciation(1) & Software Amortization

 

7

 

3

 

7

 

5

 

22

 

Other Intangible Amortization

 

2

 

 

 

1

 

3

 

Three Months Ended August 2, 2015

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

733

 

$

702

 

$

455

 

$

47

 

$

1,937

 

Adjusted EBITDA

 

156

 

66

 

45

 

(10

)

257

 

Depreciation(1) & Software Amortization

 

11

 

3

 

7

 

5

 

26

 

Other Intangible Amortization

 

2

 

 

 

1

 

3

 

Six Months Ended July 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,418

 

$

1,338

 

$

936

 

$

105

 

$

3,797

 

Adjusted EBITDA

 

285

 

118

 

103

 

(18

)

488

 

Depreciation(1) & Software Amortization

 

15

 

5

 

14

 

9

 

43

 

Other Intangible Amortization

 

3

 

1

 

 

3

 

7

 

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Facilities
Maintenance

 

Waterworks

 

Construction &
Industrial –
White Cap

 

Corporate &
Other

 

Total
Continuing
Operations

 

Six Months Ended August 2, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,368

 

$

1,272

 

$

862

 

$

95

 

$

3,597

 

Adjusted EBITDA

 

278

 

111

 

79

 

(22

)

446

 

Depreciation(1) & Software Amortization

 

23

 

5

 

13

 

9

 

50

 

Other Intangible Amortization

 

3

 

1

 

 

3

 

7

 

 


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

 

Reconciliation to Consolidated Financial Statements

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 31,
2016

 

August 2,
2015

 

July 31,
2016

 

August 2,
2015

 

Total Adjusted EBITDA

 

$

273

 

$

257

 

$

488

 

$

446

 

Depreciation and amortization(1)

 

25

 

29

 

50

 

57

 

Stock-based compensation

 

5

 

5

 

11

 

10

 

Restructuring

 

5

 

 

12

 

 

Other

 

1

 

 

 

 

Operating income

 

237

 

223

 

415

 

379

 

Interest expense, net

 

69

 

106

 

154

 

212

 

Loss on extinguishment of debt(2)

 

 

 

115

 

 

Other (income) expense, net(3)

 

 

1

 

 

1

 

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

 

168

 

116

 

146

 

166

 

Provision (benefit) for income taxes

 

66

 

12

 

58

 

(172

)

Income from continuing operations

 

102

 

104

 

88

 

338

 

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

 

(4

)

5

 

(4

)

13

 

Net income (loss)

 

$

98

 

$

109

 

$

84

 

$

351

 

 


(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 redeem the debt as well as the write-off of unamortized deferred financing costs and other assets or liabilities associated with such debt.

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

 

NOTE 11—SUBSIDIARY GUARANTORS

 

HDS (the “Debt Issuer”) has outstanding December 2014 First Priority Notes, February 2013 Senior Unsecured Notes, and April 2016 Senior Unsecured Notes (collectively the “Notes”), which are guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the Notes (“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;

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

 

 

Three Months Ended July 31, 2016

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

1,984

 

$

33

 

$

(1

)

$

2,016

 

Cost of sales

 

 

1,319

 

18

 

(1

)

1,336

 

Gross Profit

 

 

665

 

15

 

 

680

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

20

 

383

 

11

 

 

414

 

Depreciation and amortization

 

3

 

20

 

1

 

 

24

 

Restructuring

 

1

 

4

 

 

 

5

 

Total operating expenses

 

24

 

407

 

12

 

 

443

 

Operating Income (Loss)

 

(24

)

258

 

3

 

 

237

 

Interest expense

 

73

 

60

 

 

(64

)

69

 

Interest (income)

 

(60

)

(4

)

 

64

 

 

Net (earnings) loss of equity affiliates

 

(200

)

 

 

200

 

 

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

 

163

 

202

 

3

 

(200

)

168

 

Provision for income taxes

 

63

 

1

 

2

 

 

66

 

Income (Loss) from Continuing Operations

 

100

 

201

 

1

 

(200

)

102

 

Income (loss) from discontinued operations, net of tax

 

(2

)

(2

)

 

 

(4

)

Net Income (Loss)

 

$

98

 

$

199

 

$

1

 

$

(200

)

$

98

 

Other comprehensive income (loss) —foreign currency translation adjustment

 

(2

)

 

(2

)

2

 

(2

)

Total Comprehensive Income (Loss)

 

$

96

 

$

199

 

$

(1

)

$

(198

)

$

96

 

 

 

 

Three Months Ended August 2, 2015

 

 

 

Debt
Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total
HDS

 

Net Sales

 

$

 

$

1,904

 

$

34

 

$

(1

)

$

1,937

 

Cost of sales

 

 

1,271

 

18

 

 

1,289

 

Gross Profit

 

 

633

 

16

 

(1

)

648

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

21

 

364

 

13

 

(1

)

397

 

Depreciation and amortization

 

4

 

23

 

1

 

 

28

 

Total operating expenses

 

25

 

387

 

14

 

(1

)

425

 

Operating Income (Loss)

 

(25

)

246

 

2

 

 

223

 

Interest expense

 

108

 

61

 

 

(63

)

106

 

Interest (income)

 

(61

)

(2

)

 

63

 

 

Net (earnings) loss of equity affiliates

 

(188

)

 

 

188

 

 

Other (income) expense, net

 

1

 

 

 

 

1

 

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

 

115

 

187

 

2

 

(188

)

116

 

Provision for income taxes

 

9

 

3

 

 

 

12

 

Income (Loss) from Continuing Operations

 

106

 

184

 

2

 

(188