Company Quick10K Filing
Quick10K
HD Supply Holdings
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$43.94 171 $7,500
10-Q 2019-05-05 Quarter: 2019-05-05
10-K 2019-02-03 Annual: 2019-02-03
10-Q 2018-10-28 Quarter: 2018-10-28
10-Q 2018-07-29 Quarter: 2018-07-29
10-Q 2018-04-29 Quarter: 2018-04-29
10-K 2018-01-28 Annual: 2018-01-28
10-Q 2017-10-29 Quarter: 2017-10-29
10-Q 2017-07-30 Quarter: 2017-07-30
10-Q 2017-04-30 Quarter: 2017-04-30
10-K 2017-01-29 Annual: 2017-01-29
10-Q 2016-10-30 Quarter: 2016-10-30
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-05-01 Quarter: 2016-05-01
10-K 2016-01-31 Annual: 2016-01-31
10-Q 2015-11-01 Quarter: 2015-11-01
10-Q 2015-08-02 Quarter: 2015-08-02
10-Q 2015-05-03 Quarter: 2015-05-03
10-K 2015-02-01 Annual: 2015-02-01
10-Q 2014-11-02 Quarter: 2014-11-02
10-Q 2014-08-03 Quarter: 2014-08-03
10-Q 2014-05-04 Quarter: 2014-05-04
10-K 2014-02-02 Annual: 2014-02-02
8-K 2019-07-23 Regulation FD, Exhibits
8-K 2019-06-11 Earnings, Regulation FD, Exhibits
8-K 2019-05-21 Officers, Shareholder Vote, Exhibits
8-K 2019-03-19 Earnings, Regulation FD, Exhibits
8-K 2018-12-04 Earnings, Regulation FD, Exhibits
8-K 2018-10-22 Enter Agreement
8-K 2018-10-11 Enter Agreement, Leave Agreement, Off-BS Arrangement
8-K 2018-10-01 Other Events, Exhibits
8-K 2018-10-01 Other Events, Exhibits
8-K 2018-09-06 Officers
8-K 2018-09-05 Earnings, Regulation FD, Exhibits
8-K 2018-06-21 Regulation FD, Exhibits
8-K 2018-06-05 Earnings, Regulation FD, Exhibits
8-K 2018-05-17 Shareholder Vote
8-K 2018-04-18 Officers
8-K 2018-03-05 Other Events, Exhibits
8-K 2017-12-28 Other Events, Exhibits
XRAY Dentsply Sirona 12,870
BLKB Blackbaud 3,910
LXFT Luxoft Holding 1,990
SIG Signet Jewelers 1,190
TTGT Techtarget 592
AXR Amrep 45
VTVT VTV Therapeutics 39
IBIO Ibio 16
UBER Uber 0
RTON Right On Brands 0
HDS 2019-05-05
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Nature of Business and Basis of Presentation
Note 2 - Acquisitions
Note 3 - Debt
Note 4 - Derivative Instruments
Note 5 - Fair Value Measurements
Note 6 - Leases
Note 7 - Income Taxes
Note 8 - Accumulated Other Comprehensive Income (Loss)
Note 9-Basic and Diluted Weighted Average Common Shares
Note 10 - Supplemental Balance Sheet and Cash Flow Information
Note 11 - Commitments and Contingencies
Note 12 - Segment Information
Note 13 - Revenue
Note 14-Recent Accounting Pronouncements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-3.1 a19-8114_1ex3d1.htm
EX-3.2 a19-8114_1ex3d2.htm
EX-31.1 a19-8114_1ex31d1.htm
EX-31.2 a19-8114_1ex31d2.htm
EX-31.3 a19-8114_1ex31d3.htm
EX-31.4 a19-8114_1ex31d4.htm
EX-32.1 a19-8114_1ex32d1.htm
EX-32.2 a19-8114_1ex32d2.htm
EX-32.3 a19-8114_1ex32d3.htm
EX-32.4 a19-8114_1ex32d4.htm

HD Supply Holdings Earnings 2019-05-05

HDS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-8114_110q.htm 10-Q

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 May 5, 2019

 

- OR -

 

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

 

For the transition period from          to

 


 

Commission File
Number

 

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

 

State of incorporation

 

I.R.S. Employer
Identification Number

001-35979

 

HD SUPPLY HOLDINGS, INC.

3400 Cumberland Boulevard SE

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

26-0486780

333-159809

 

HD SUPPLY, INC.

3400 Cumberland Boulevard SE

Atlanta, Georgia 30339

(770) 852-9000

 

Delaware

 

75-2007383

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

HD Supply Holdings, Inc. common stock, par value $0.01 per share

 

HDS

 

The NASDAQ Stock Market LLC

 

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

 

HD Supply Holdings, Inc.

 

Yes x No o

HD Supply, Inc.

 

Yes o No x

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

 

HD Supply Holdings, Inc.

 

Yes x No o

HD Supply, Inc.

 

Yes x No o

 

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

 

HD Supply Holdings, Inc.

Large accelerated filer x        Accelerated filer o        Smaller reporting company o

Non-accelerated filer o

Emerging growth company o

HD Supply, Inc.

Large accelerated filer o        Accelerated filer o        Smaller reporting company o

Non-accelerated filer x

Emerging growth company o

 

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

 

HD Supply Holdings, Inc. o

HD Supply, Inc. o

 

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

 

HD Supply Holdings, Inc.

 

Yes o No x

HD Supply, Inc.

 

Yes o No x

 

The number of shares of the Registrant’s common stock outstanding as of June 7, 2019:

 

HD Supply Holdings, Inc.

 

170,840,219 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 Months ended May 5, 2019 and April 29, 2018 (unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of May 5, 2019 and February 3, 2019 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months ended May 5, 2019 and April 29, 2018 (unaudited)

7

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three Months ended May 5, 2019 and April 29, 2018 (unaudited)

8

 

 

 

 

HD Supply, Inc.

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three Months ended May 5, 2019 and April 29, 2018 (unaudited)

9

 

 

 

 

Consolidated Balance Sheets as of May 5, 2019 and February 3, 2019 (unaudited)

10

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months ended May 5, 2019 and April 29, 2018 (unaudited)

11

 

 

 

 

Consolidated Statements of Stockholder’s Equity for the Three Months ended May 5, 2019 and April 29, 2018 (unaudited)

12

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

13

 

 

 

Item 2.

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

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 6.

Exhibits

39

 

 

 

Signatures

40

 

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 3, 2019 and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations, financial condition and liquidity, and the development of the industries in which we operate include:

 

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

 

·                  our ability to maintain profitability;

 

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

 

·                  limitations and restrictions in the agreements governing our indebtedness;

 

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

 

·                  the loss of any of our significant customers;

 

·                  competitive pricing pressure from our customers;

 

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

 

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

 

3


Table of Contents

 

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

 

·                  our ability to manage fixed costs;

 

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

 

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

 

·                  interruptions in the proper functioning of our information technology, or “IT” systems, including from cybersecurity threats;

 

·                  potential material liabilities under our self-insured programs;

 

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

 

·                  new and/or proposed trade policies could make sourcing product from foreign countries more difficult and more costly;

 

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

 

·                  our ability to identify and integrate new products.

 

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

 

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

 

 

 

May 5,
2019

 

April 29,
2018

 

Net Sales

 

$

1,493

 

$

1,389

 

Cost of sales

 

908

 

837

 

Gross Profit

 

585

 

552

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

392

 

372

 

Depreciation and amortization

 

25

 

22

 

Restructuring

 

(2

)

7

 

Total operating expenses

 

415

 

401

 

Operating Income

 

170

 

151

 

Interest expense

 

28

 

34

 

Interest (income)

 

 

(1

)

Income Before Provision for Income Taxes

 

142

 

118

 

Provision for income taxes

 

35

 

29

 

Net Income

 

$

107

 

$

89

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustment

 

 

1

 

Unrealized loss on cash flow hedge, net of tax of $1 and $ -

 

(5

)

 

Total Comprehensive Income

 

$

102

 

$

90

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (thousands)

 

 

 

 

 

Basic

 

170,000

 

184,326

 

Diluted

 

170,712

 

185,155

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

Basic earnings per share

 

$

0.63

 

$

0.48

 

Diluted earnings per share

 

$

0.63

 

$

0.48

 

 

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

 

 

 

May 5,
2019

 

February 3,
2019

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

40

 

$

38

 

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

 

781

 

732

 

Inventories

 

808

 

766

 

Other current assets

 

47

 

50

 

Total current assets

 

1,676

 

1,586

 

Property and equipment, net

 

378

 

370

 

Operating lease right-of-use assets

 

403

 

 

Goodwill

 

1,989

 

1,990

 

Intangible assets, net

 

185

 

191

 

Deferred tax asset

 

50

 

78

 

Other assets

 

16

 

18

 

Total assets

 

$

4,697

 

$

4,233

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

474

 

$

367

 

Accrued compensation and benefits

 

75

 

109

 

Current installments of long-term debt

 

11

 

11

 

Current lease liabilities

 

116

 

 

Other current liabilities

 

138

 

259

 

Total current liabilities

 

814

 

746

 

Long-term debt, excluding current installments

 

2,129

 

2,129

 

Long-term lease liabilities

 

301

 

 

Other liabilities

 

77

 

77

 

Total liabilities

 

3,321

 

2,952

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01; 1 billion shares authorized; 170.8 million and 170.7 million shares issued and outstanding at May 5, 2019 and February 3, 2019, respectively

 

2

 

2

 

Paid-in capital

 

4,079

 

4,067

 

Accumulated deficit

 

(1,467

)

(1,572

)

Accumulated other comprehensive loss

 

(35

)

(30

)

Treasury stock, at cost, 34.5 and 34.2 million shares at May 5, 2019 and February 3, 2019, respectively

 

(1,203

)

(1,186

)

Total stockholders’ equity

 

1,376

 

1,281

 

Total liabilities and stockholders’ equity

 

$

4,697

 

$

4,233

 

 

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

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

107

 

$

89

 

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

 

 

 

 

 

Depreciation and amortization

 

27

 

24

 

Provision for uncollectibles

 

2

 

2

 

Non-cash interest expense

 

2

 

6

 

Stock-based compensation expense

 

7

 

6

 

Deferred income taxes

 

32

 

27

 

Other

 

1

 

 

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

 

 

 

 

 

(Increase) decrease in receivables

 

(51

)

(66

)

(Increase) decrease in inventories

 

(43

)

(81

)

(Increase) decrease in other current assets

 

(5

)

(9

)

Increase (decrease) in accounts payable and accrued liabilities

 

49

 

52

 

Net cash provided by (used in) operating activities

 

128

 

50

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(26

)

(19

)

Payments for businesses acquired, net of cash acquired

 

 

(362

)

Proceeds from sales of property and equipment

 

2

 

 

Net cash provided by (used in) investing activities

 

(24

)

(381

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of common stock under employee benefit plans

 

4

 

2

 

Purchase of treasury shares

 

(12

)

(64

)

Tax withholdings on stock-based awards

 

(5

)

(6

)

Repayments of long-term debt

 

(3

)

(3

)

Repayment of financing liability

 

(88

)

 

Borrowings on long-term revolver debt

 

327

 

6

 

Repayments on long-term revolver debt

 

(325

)

(9

)

Other financing activities

 

 

(3

)

Net cash provided by (used in) financing activities

 

(102

)

(77

)

Effect of exchange rates on cash and cash equivalents

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

2

 

$

(408

)

Cash and cash equivalents at beginning of period

 

38

 

558

 

Cash and cash equivalents at end of period

 

$

40

 

$

150

 

 

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

 

7


Table of Contents

 

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in millions, shares in thousands, unaudited

 

 

 

Three Months Ended

 

 

 

May 5, 2019

 

April 29, 2018

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Common Stock

 

 

 

 

 

 

 

 

 

Beginning balance

 

204,806

 

$

2

 

203,914

 

$

2

 

Shares issued under employee benefit plans

 

561

 

 

442

 

 

Ending balance

 

205,367

 

$

2

 

204,356

 

$

2

 

Paid-in Capital

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

4,067

 

 

 

$

4,029

 

Stock-based compensation

 

 

 

7

 

 

 

6

 

Shares issued under employee benefit plans

 

 

 

5

 

 

 

2

 

Other

 

 

 

 

 

 

1

 

Ending balance

 

 

 

$

4,079

 

 

 

$

4,038

 

Accumulated Deficit

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

(1,572

)

 

 

$

(1,966

)

Cumulative effect of accounting change

 

 

 

(3

)

 

 

 

Net Income

 

 

 

107

 

 

 

89

 

Other

 

 

 

1

 

 

 

 

Ending balance

 

 

 

$

(1,467

)

 

 

$

(1,877

)

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

(30

)

 

 

$

(17

)

Unrealized loss on cash flow hedge, net of tax of $1 and $ -

 

 

 

(5

)

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

1

 

Ending balance

 

 

 

$

(35

)

 

 

$

(16

)

Treasury Stock

 

 

 

 

 

 

 

 

 

Beginning balance

 

(34,153

)

$

(1,186

)

(18,190

)

$

(582

)

Purchase of common stock

 

(271

)

(12

)

(1,807

)

(68

)

Shares withheld for taxes

 

(117

)

(5

)

(152

)

(6

)

Ending balance

 

(34,541

)

$

(1,203

)

(20,149

)

$

(656

)

 

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

170,826

 

$

1,376

 

184,207

 

$

1,491

 

 

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

 

8


Table of Contents

 

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Net Sales

 

$

1,493

 

$

1,389

 

Cost of sales

 

908

 

837

 

Gross Profit

 

585

 

552

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

392

 

372

 

Depreciation and amortization

 

25

 

22

 

Restructuring

 

(2

)

7

 

Total operating expenses

 

415

 

401

 

Operating Income

 

170

 

151

 

Interest expense

 

28

 

34

 

Interest (income)

 

 

(1

)

Income Before Provision for Income Taxes

 

142

 

118

 

Provision for income taxes

 

35

 

29

 

Net Income

 

$

107

 

$

89

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustment

 

 

1

 

Unrealized gain (loss) on cash flow hedge, net of tax of $1 and $ -

 

(5

)

 

Total Comprehensive Income

 

$

102

 

$

90

 

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

 

 

May 5,
2019

 

February 3,
2019

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

39

 

$

38

 

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

 

781

 

732

 

Inventories

 

808

 

766

 

Other current assets

 

47

 

50

 

Total current assets

 

1,675

 

1,586

 

Property and equipment, net

 

378

 

370

 

Operating lease right-of-use assets

 

403

 

 

Goodwill

 

1,989

 

1,990

 

Intangible assets, net

 

185

 

191

 

Deferred tax asset

 

50

 

78

 

Other assets

 

16

 

18

 

Total assets

 

$

4,696

 

$

4,233

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

474

 

$

367

 

Accrued compensation and benefits

 

75

 

109

 

Current installments of long-term debt

 

11

 

11

 

Current lease liabilities

 

116

 

 

Other current liabilities

 

137

 

257

 

Total current liabilities

 

813

 

744

 

Long-term debt, excluding current installments

 

2,129

 

2,129

 

Long-term lease liabilities

 

301

 

 

Other liabilities

 

77

 

77

 

Total liabilities

 

3,320

 

2,950

 

Stockholder’s equity:

 

 

 

 

 

Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at May 5, 2019 and February 3, 2019

 

 

 

Paid-in capital

 

2,719

 

2,726

 

Accumulated deficit

 

(1,308

)

(1,413

)

Accumulated other comprehensive loss

 

(35

)

(30

)

Total stockholder’s equity

 

1,376

 

1,283

 

Total liabilities and stockholder’s equity

 

$

4,696

 

$

4,233

 

 

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

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

107

 

$

89

 

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

 

 

 

 

 

Depreciation and amortization

 

27

 

24

 

Provision for uncollectibles

 

2

 

2

 

Non-cash interest expense

 

2

 

6

 

Stock-based compensation expense

 

7

 

6

 

Deferred income taxes

 

32

 

27

 

Other

 

1

 

 

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

 

 

 

 

 

(Increase) decrease in receivables

 

(51

)

(66

)

(Increase) decrease in inventories

 

(43

)

(81

)

(Increase) decrease in other current assets

 

(5

)

(9

)

Increase (decrease) in accounts payable and accrued liabilities

 

49

 

52

 

Net cash provided by (used in) operating activities

 

128

 

50

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(26

)

(19

)

Payments for businesses acquired, net of cash acquired

 

 

(362

)

Proceeds from sales of property and equipment

 

2

 

 

Net cash provided by (used in) investing activities

 

(24

)

(381

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Equity distribution to Parent

 

(14

)

(71

)

Repayments of long-term debt

 

(3

)

(3

)

Repayment of financing liability

 

(88

)

 

Borrowings on long-term revolver debt

 

327

 

6

 

Repayments on long-term revolver debt

 

(325

)

(9

)

Other financing activities

 

 

(3

)

Net cash provided by (used in) financing activities

 

(103

)

(80

)

Effect of exchange rates on cash and cash equivalents

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

1

 

$

(411

)

Cash and cash equivalents at beginning of period

 

38

 

558

 

Cash and cash equivalents at end of period

 

$

39

 

$

147

 

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

Dollars in millions, shares in thousands, unaudited

 

 

 

Three Months Ended

 

 

 

May 5, 2019

 

April 29, 2018

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Common Stock

 

 

 

 

 

 

 

 

 

Beginning balance

 

1

 

$

 

1

 

$

 

Ending balance

 

1

 

$

 

1

 

$

 

Paid-in Capital

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

2,726

 

 

 

$

3,290

 

Equity distribution to Parent

 

 

 

(14

)

 

 

(71

)

Stock-based compensation

 

 

 

7

 

 

 

6

 

Other

 

 

 

 

 

 

1

 

Ending balance

 

 

 

$

2,719

 

 

 

$

3,226

 

Accumulated Deficit

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

(1,413

)

 

 

$

(1,807

)

Cumulative effect of accounting change

 

 

 

(3

)

 

 

 

Net Income

 

 

 

107

 

 

 

89

 

Other

 

 

 

1

 

 

 

 

Ending balance

 

 

 

$

(1,308

)

 

 

$

(1,718

)

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

$

(30

)

 

 

$

(17

)

Unrealized loss on cash flow hedge, net of tax of $1 and $ -

 

 

 

(5

)

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

1

 

Ending balance

 

 

 

$

(35

)

 

 

$

(16

)

 

 

 

 

 

 

 

 

 

 

Total Stockholder’s Equity

 

1

 

$

1,376

 

1

 

$

1,492

 

 

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 two distinct market sectors: Maintenance, Repair & Operations and Specialty Construction. Through approximately 270 branches and 44 distribution centers in the U.S. and Canada, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services includes approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from construction to maintenance, repair and operations.

 

HD Supply is managed primarily on a product line basis and reports results of operations in two reportable segments. The reportable segments are Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.

 

Basis of Presentation

 

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended February 3, 2019, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).

 

Fiscal Year

 

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks.  The three months ended May 5, 2019 (“first quarter 2019”) and April 29, 2018 (“first quarter 2018”) both include 13 weeks.

 

Principles of Consolidation

 

The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS. The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition.

 

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, workers’ compensation, and is self-insured for certain legal claims and medical claims, while maintaining per employee stop-loss coverage. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience.  At May 5, 2019 and February 3, 2019, self-insurance reserves totaled approximately $48 million and $49 million, respectively.

 

NOTE 2 — ACQUISITIONS

 

HD Supply enters into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), the results of acquisitions completed by HD Supply are reflected in the Company’s consolidated financial statements from the date of acquisition forward.

 

On March 5, 2018, the Company completed the acquisition of A.H. Harris Construction Supply (“A.H. Harris”) for a purchase price of approximately $359 million, net of cash acquired and the final working capital settlement. The Company received the final working capital settlement of approximately $3 million in second quarter 2019. A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expanded Construction & Industrial’s market presence in the northeastern United States.

 

In accordance with ASC 805, the Company recorded the following assets and liabilities at fair value as of the date of the A.H. Harris acquisition: $182 million in goodwill, $123 million in definite-lived intangible assets, $12 million in property & equipment, $54 million in net working capital, and $10 million in deferred tax liabilities. The total amount of goodwill deductible for tax purposes is $19 million. The definite-lived intangible assets are comprised of $110 million in customer relationships and $13 million of trade names that will be amortized over a period of 12 years and 5 years, respectively.

 

NOTE 3 — DEBT

 

HDS’s long-term debt as of May 5, 2019 and February 3, 2019 consisted of the following (dollars in millions):

 

 

 

May 5, 2019

 

February 3, 2019

 

 

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Outstanding
Principal

 

Interest
Rate %(1)

 

Senior ABL Facility due 2022

 

$

349

 

3.89

 

$

348

 

3.83

 

Term B-5 Loans due 2023

 

1,065

 

4.23

 

1,067

 

4.25

 

October 2018 Senior Unsecured Notes due 2026

 

750

 

5.375

 

750

 

5.375

 

Total gross long-term debt

 

$

2,164

 

 

 

$

2,165

 

 

 

Less unamortized discount

 

(3

)

 

 

(4

)

 

 

Less unamortized deferred financing costs

 

(21

)

 

 

(21

)

 

 

Total net long-term debt

 

$

2,140

 

 

 

$

2,140

 

 

 

Less current installments

 

(11

)

 

 

(11

)

 

 

Total net long-term debt, excluding current installments

 

$

2,129

 

 

 

$

2,129

 

 

 

 


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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Senior Credit Facilities

 

Senior ABL Facility

 

The Senior ABL Facility (the “Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,000 million (subject to availability under a borrowing base).  Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments.  A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of May 5, 2019, HDS had $546 million of Excess Availability (as defined in the Senior ABL Facility agreement) under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $27 million in letters of credit issued and including $6 million of borrowings available on qualifying cash balances). As of May 5, 2019, approximately $51 million of the outstanding borrowings on the Senior ABL Facility are Canadian dollar-denominated borrowings.

 

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

 

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

 

Senior Term Loan Facility

 

HDS’s Senior Term Facility (the “Senior Term Facility”) consists of a senior secured term loan facility (the ‘‘Term Loan Facility,’’ and the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans in an original aggregate principal amount of $1,070 million (the “Term B-5 Loans”). The Term B-5 Loans will mature on October 17, 2023 and amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loans with the balance payable at the maturity date. The Term B-5 Loans bear interest at the applicable margin for borrowings of 1.75% for LIBOR borrowings and 0.75% for base rate borrowings.

 

For additional information on our Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to the Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended February 3, 2019.

 

Unsecured Notes

 

5.375% Senior Unsecured Notes due 2026

 

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

 

The October 2018 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS’s existing and future senior indebtedness, senior in right of payment to all of HDS’s existing and future subordinated indebtedness, and effectively subordinated to all of HDS’s existing and future

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, to the extent of the value of the collateral securing each indebtedness.

 

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

 

Redemption

 

HDS may redeem the October 2018 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2021, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the October 2018 Senior Unsecured Notes Indenture and (2) on and after October 15, 2021, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

 

Year

 

Percentage

 

2021

 

102.688

%

2022

 

101.344

%

2022 and thereafter

 

100.000

%

 

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

 

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 May 5, 2019, HDS was in compliance with all such covenants that were in effect on such date.

 

NOTE 4 — DERIVATIVE INSTRUMENTS

 

Hedge Strategy and Accounting Policy

 

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

 

Cash Flow Hedge

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

effectively converts a portion of the Company’s Term B-5 Loans from a rate of LIBOR plus 1.75% to a 4.82% fixed rate.

 

As of May 5, 2019, the fair value of the Company’s interest rate swap in the Consolidated Balance Sheet was a liability of $27 million, which was reflected as $5 million in Other current liabilities and $22 million in Other liabilities in the Consolidated Balance Sheet. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“OCI”) within Stockholders’ Equity in the Consolidated Balance Sheets and are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.  See “Note 8, Accumulated Other Comprehensive Income (Loss),” for further information.

 

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 requirements about fair value measurements.  These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

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

 

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

 

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

 

As of May 5, 2019 and February 3, 2019, the fair value measurement of the financial liability associated with the Company’s interest rate swap contract was $27 million and $20 million, respectively. The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the interest rate swap.  See “Note 4 — Derivative Instruments” for further information on the Company’s interest rate swap contract.

 

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of May 5, 2019 and February 3, 2019 (amounts in millions):

 

 

 

As of May 5, 2019

 

As of February 3, 2019

 

 

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Recorded
Amount(1)

 

Estimated
Fair Value

 

Senior ABL Facility

 

$

349

 

$

348

 

$

348

 

$

346

 

Term Loans and Notes

 

1,815

 

1,848

 

1,817

 

1,815

 

Total

 

$

2,164

 

$

2,196

 

$

2,165

 

$

2,161

 

 


(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 6 — LEASES

 

The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” and its related amendments (collectively “ASC 842”) on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. The standard requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for all leases.

 

At adoption of ASC 842, the Company recognized ROU assets for operating leases of approximately $430 million and operating lease liabilities of approximately $447 million, the difference attributable to the

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

reclassification of prepaid rent and accrued rent balances outstanding at adoption into the ROU assets and the cumulative adjustment recorded to the opening balance of retained earnings. The cumulative adjustment, net of tax, recorded to the opening balance of retained earnings was $3 million. The Company’s finance leases are immaterial. The adoption of ASC 842 did not have a material impact on the Company’s income statement. The Company’s consolidated financial statements for the three months ended May 5, 2019 are presented under ASC 842, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard, ASC 840.

 

The Company elected the package of practical expedients for existing contracts permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases, the historical assessment of whether contracts are or contain leases, and the determination of initial direct costs. The Company did not elect the hindsight practical expedient.

 

Lease Accounting Policies and Disclosures

 

The Company determines if an agreement is a lease upon inception. An agreement is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.

 

The Company has operating leases for distribution centers, warehouses, office space, and transportation vehicles. The Company has an immaterial amount of financing leases for other equipment. Certain leases for real estate contain options to extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the option period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, the Company considers all relevant economic factors that would compel the Company to exercise or not exercise an option.

 

Many of the Company’s real estate leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. The Company determined these charges are variable non-lease components and did not elect the practical expedient to combine with lease components. Additionally, many of the Company’s transportation equipment leases require additional payments based on the underlying usage of the assets. Certain lease agreements include rental payments adjusted annually based on changes in an inflation index. Due to the variable nature of these costs, the cash flows associated with these charges are expensed as incurred and not included in the lease payments used to determine the ROU asset and associated lease liability.

 

Lease ROU assets and associated liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company’s leases generally do not provide a readily determinable implicit borrowing rate. As such, the discount rate used to calculate present value is the Company’s collateralized incremental borrowing rate. The Company determines the incremental borrowing rate for each lease based primarily on its lease term. Lease expense is recognized on a straight-line basis over the lease term.

 

Total lease cost for the Company for the three months ended May 5, 2019 is $36 million and is primarily comprised of operating lease costs. Lease costs associated with finance leases and income related to sub-lease activity are immaterial for the Company.

 

As of May 5, 2019, the weighted average remaining lease term for operating leases is 5.1 years and the weighted average discount rate is 4.68%.

 

During the three months ended May 5, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $44 million and ROU assets obtained in exchange for operating lease liabilities was $3 million.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Maturities of operating lease liabilities as of May 5, 2019 were as follows (amounts in millions):

 

 

 

Fiscal Year

 

 

 

 

 

 

 

Remainder
of 2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

Total

 

Operating Lease Payments

 

$

104

 

103

 

91

 

63

 

45

 

78

 

$

484

 

Less imputed interest

 

 

 

 

 

 

 

 

 

 

 

 

 

67

 

Total discounted lease liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

417

 

 

As of May 5, 2019, the Company has additional leases which have not yet commenced. These leases will commence when the Company is granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. These leases will commence in 2019.

 

Disclosure related to periods prior to adoption of ASC 842:

 

Rental expense under operating leases was $142 million, $127 million, and $118 million in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Rental expense under operating leases for the three months ended April 29, 2018 was $34 million.

 

Future minimum aggregate rental payments under non-cancelable leases as of February 3, 2019 are as follows (amounts in millions):

 

 

 

Fiscal Year

 

 

 

 

 

 

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

Total

 

Operating Leases

 

$

140

 

104

 

88

 

61

 

42

 

78

 

$

513

 

 

Corporate headquarters

 

In February 2016, the Company entered into a build-to-suit arrangement for a leadership development and headquarters facility in Atlanta, Georgia, which began construction in 2016. In accordance with ASC 840, Leases, for build-to-suit arrangements where the Company is involved in the construction of structural improvements prior to the commencement of the lease or takes some level of construction risk, the Company was considered the owner of the assets and land during the construction period. Accordingly, during construction activities, the Company recorded a Construction in progress asset within Property and equipment and a corresponding financing liability on the Consolidated Balance Sheet for construction costs incurred by the landlord.

 

The lease commenced in February 2018, with the leased asset and corresponding financing liability valued at $87 million each. In accordance with the sale and leaseback criteria of GAAP, the build-to-suit arrangement and subsequent lease failed to qualify as a sale. Therefore, the transaction was accounted for as a financing arrangement, whereby both the leased asset and the financing liability remained on the Company’s Consolidated Balance Sheet. The asset was depreciated as if the Company was the legal owner and rental payments were allocated between interest expense and principal repayment of the financing liability.

 

The Company exercised its option to purchase the leased asset, completing the purchase on February 4, 2019 for a total purchase price of $88 million. As the purchase option was executed on the first day of fiscal 2019, the Company did not recognize an ROU asset for the finance lease and a corresponding lease liability as part of the adoption of ASC 842 and excluded the future minimum rental payments from the commitment tables disclosed above.

 

NOTE 7 — INCOME TAXES

 

The Company’s combined federal, state, and foreign effective tax rate was 24.6% for both the three months ended May 5, 2019 and the three months ended April 29, 2018.

 

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.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of May 5, 2019 and February 3, 2019, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $17 million. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of May 5, 2019 and February 3, 2019 was zero.  As of May 5, 2019 and February 3, 2019, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $7 million. Each reporting period, the Company assesses available positive and negative evidence and estimates if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

 

NOTE 8 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Accumulated OCI consists of accumulated net unrealized gains or losses associated with foreign currency translation adjustments and the changes in the fair value of derivatives designated as cash flow hedges.

 

The changes in accumulated other comprehensive income (loss) by component for the three months ended May 5, 2019 and April 29, 2018 was as follows (amounts in millions):

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Foreign currency translation adjustment:

 

 

 

 

 

Beginning balance

 

(15

)

(17

)

Other comprehensive income (loss) before reclassifications

 

 

1

 

Amounts reclassified from accumulated OCI into earnings

 

 

 

Ending balance

 

(15

)

(16

)

 

 

 

 

 

 

Cash flow hedge:

 

 

 

 

 

Beginning balance

 

(15

)

 

Other comprehensive income (loss) before reclassifications

 

(6

)

 

Amounts reclassified from accumulated OCI into earnings(1)

 

1

 

 

Ending balance

 

(20

)

 

Accumulated OCI, net of tax of $7 and $ -

 

(35

)

(16

)

 


(1) Unrealized loss reclassified into Interest expense.

 

NOTE 9—BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

 

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

 

The reconciliation of basic to diluted weighted average common shares for the three months ended May 5, 2019 and April 29, 2018 was as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Weighted-average common shares

 

170,000

 

184,326

 

Effect of potentially dilutive stock plan securities

 

712

 

829

 

Diluted weighted-average common shares

 

170,712

 

185,155

 

Stock plan securities excluded from dilution(1)

 

2,519

 

2,077

 

 


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

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

 

Receivables

 

Receivables as of May 5, 2019 and February 3, 2019 consisted of the following (amounts in millions):

 

 

 

May 5,
2019

 

February 3,
2019

 

Trade receivables, net of allowance for doubtful accounts

 

$

713

 

$

657

 

Vendor rebate receivables

 

47

 

57

 

Other receivables

 

21

 

18

 

Total receivables, net

 

$

781

 

$

732

 

 

Other Current Liabilities

 

Other current liabilities as of May 5, 2019 and February 3, 2019 consisted of the following (amounts in millions):

 

 

 

HD Supply Holdings, Inc.

 

HD Supply, Inc.

 

 

 

May 5,
2019

 

February 3,
2019

 

May 5,
2019

 

February 3,
2019

 

Corporate headquarters financing liability(1)

 

$

 

$

87

 

$

 

$

87

 

Accrued non-income taxes

 

37

 

35

 

37

 

35

 

Refund liability

 

16

 

15

 

16

 

15

 

Accrued interest

 

4

 

14

 

4

 

14

 

Unsettled share repurchases

 

1

 

2

 

 

 

Other

 

80

 

106

 

80

 

106

 

Total other current liabilities

 

$

138

 

$

259

 

$

137

 

$

257

 

 


(1)   This amount represented the financing liability for the Company’s corporate headquarters that was purchased on February 4, 2019. Please see “Note 6 — Leases” for further information on the purchase of the Company’s corporate headquarters.

 

Supplemental Cash Flow Information

 

Cash paid for interest in the three months ended May 5, 2019 and April 29, 2018 was $37 million and $42 million, respectively.

 

Cash paid for income taxes, net of refunds, in the three months ended May 5, 2019 and April 29, 2018 was approximately $4 million and $2 million, respectively.

 

During the three months ended May 5, 2019 and April 29, 2018, HDS executed equity cash distributions of $14 million and $71 million, respectively, to Holdings, via HDS’s direct parent, HDS Holding Corporation. The equity distribution from HDS and return of capital recognized by Holdings were eliminated in consolidation of Holdings and its wholly-owned subsidiaries, including HDS.

 

Share Repurchases

 

During fiscal 2014, Holdings’ Board of Directors authorized a share repurchase program to be funded from cash proceeds received from exercises of employee stock options. This share repurchase program does not obligate Holdings to acquire any particular amount of common stock, and it may be terminated at any time at Holdings’ discretion. During August 2017 and November 2018, Holdings’ Board of Directors authorized two additional share repurchase programs for up to an aggregate amount of $500 million each of Holdings’ common stock.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Holdings’ share repurchases under these plans for the three months ended May 5, 2019 and April 29, 2018 were as follows (dollars in millions):

 

 

 

Three Months Ended

 

 

 

May 5, 2019

 

April 29, 2018

 

 

 

Number
of Shares

 

Cost of
Shares

 

Number
of Shares

 

Cost of
Shares

 

November 2018 Plan

 

170,419

 

$

7

 

 

 

August 2017 Plan

 

 

 

1,774,089

 

$

67

 

April 2014 Plan

 

100,666

 

$

5

 

32,442

 

$

1

 

Total share repurchases

 

271,085

 

$

12

 

1,806,531

 

$

68

 

 

NOTE 11 — COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “securities litigation defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”).  Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the securities litigation defendants on behalf of all persons other than the securities litigation defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive.  The Amended Complaint alleges that the securities litigation defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit.  The Amended Complaint asserts claims against the securities litigation defendants under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and other costs. On September 19, 2018, the Court granted in part and denied in part the securities litigation defendants’ motion to dismiss. The matter is now in discovery.

 

On August 8, 2017, two shareholder derivative complaints were filed in the U.S. District Court for the Northern District of Georgia, naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions.  The complaints assert claims against the individual defendants under Section 14(a) of the Exchange Act, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling.  The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. On October 22, 2018, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings and administratively closing the matter until after any summary judgment motion filed relating to the Amended Complaint is adjudicated.

 

On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaint generally alleges that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding supply chain corrective actions.  The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling.  The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and internal procedures, and seeks to recover attorneys’ fees and other costs. The individual defendants moved to dismiss the complaint on November 2, 2018. On January 14, 2019, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings until after any summary judgment motions filed relating to the Amended Complaint is adjudicated.

 

The Company intends to defend these lawsuits vigorously.  Given the stage of the complaints and the claims and issues presented in the above matters, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.

 

In March 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting information and documents from calendar years 2016 and 2017 relating to, among other things, the Company’s Facilities Maintenance business unit and to the allegations of the Amended Complaint described above. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC’s investigation. We cannot currently predict the timing or outcome of this ongoing investigation.

 

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

 

NOTE 12 — SEGMENT INFORMATION

 

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

 

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

 

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

 

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

 

In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance,

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.

 

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

 

 

 

Facilities
Maintenance

 

Construction
& Industrial

 

Total
Operations

 

Three Months Ended May 5, 2019

 

 

 

 

 

 

 

Net sales

 

$

772

 

$

721

 

$

1,493

 

Adjusted EBITDA

 

134

 

69

 

203

 

Depreciation(1) & Software Amortization

 

10

 

11

 

21

 

Other Intangible Amortization

 

2

 

4

 

6

 

 

 

 

 

 

 

 

 

Three Months Ended April 29, 2018

 

 

 

 

 

 

 

Net sales

 

$

723

 

$

666

 

$

1,389

 

Adjusted EBITDA

 

123

 

67

 

190

 

Depreciation(1) & Software Amortization

 

9

 

10

 

19

 

Other Intangible Amortization

 

2

 

3

 

5

 

 


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

 

Reconciliation to Consolidated Financial Statements

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Total Adjusted EBITDA

 

$

203

 

$

190

 

Depreciation and amortization(1)

 

27

 

24

 

Stock-based compensation

 

7

 

6

 

Restructuring(2)

 

(2

)

7

 

Acquisition and integration costs(3)

 

1

 

2

 

Operating income

 

170

 

151

 

Interest expense

 

28

 

34

 

Interest (income)

 

 

(1

)

Income Before Provision for Income Taxes

 

142

 

118

 

Provision for income taxes

 

35

 

29

 

Net income

 

$

107

 

$

89

 

 


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

(2)         For the three months ended May 5, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(3)         Represents the cost incurred in the acquisition and integration of A.H. Harris Construction Supplies.

 

NOTE 13 — REVENUE

 

The Company’s revenues are earned from contracts with customers. Contracts include written agreements, as well as arrangements that are implied by customary practices or law.

 

Nature of Products and Services

 

Both Facilities Maintenance and Construction & Industrial serve unique end markets. Facilities Maintenance offers products that serve the maintenance, repair and operations (“MRO”) end market as well as value-added services. Construction & Industrial offers products used broadly across both the residential and non-residential construction end markets as well as light remodeling supplies for small remodeling contractors and trade professionals. For additional information regarding the nature of products and services offered by the Company’s reportable segments, see “Description of segments” within Item 2 of this quarterly report on Form 10-Q.

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Revenue Recognition

 

The Company recognizes revenue, net of allowances for returns and discounts and any taxes collected from the customer, when an identified performance obligation is satisfied by the transfer of control of promised products or services to the customer. The Company ships products to customers by internal fleet and third-party carriers. Transfer of control to the customer for products generally occurs at the point of destination (i.e., upon transfer of title and risk of loss of product). Transfer of control to the customer for services occurs when the customer has the right to direct the use of and obtain substantially all the remaining benefits of the asset that is created or enhanced from the service. The Company accounts for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general and administrative expenses.

 

Disaggregation of Revenue

 

The Company elected to disaggregate the revenue of Facilities Maintenance by its demand types: MRO and Property Improvement, and Construction & Industrial by its end markets: Non-Residential Construction, Residential Construction, and Other. The Company believes this disaggregation appropriately meets the objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

The table below represents disaggregated revenue for Facilities Maintenance and Construction & Industrial with Inter-segment eliminations (amounts in millions):

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Facilities Maintenance

 

 

 

 

 

Maintenance, Repair, and Operations

 

$

692

 

$

636

 

Property Improvement

 

80

 

87

 

Total Facilities Maintenance Net Sales

 

772

 

723

 

Construction & Industrial

 

 

 

 

 

Non-Residential Construction

 

497

 

449

 

Residential Construction

 

180

 

176

 

Other

 

44

 

41

 

Total Construction & Industrial Net Sales

 

721

 

666

 

Total HD Supply Net Sales

 

$

1,493

 

$

1,389

 

 

NOTE 14—RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements

 

Leases — In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842),” amended by ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),” ASU No. 2018-01, “Leases (Topic 842) — Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842) — Targeted Improvements.” The amended guidance requires companies to recognize all leases as assets and liabilities for the rights and obligations created by leased assets on the consolidated balance sheet. ASU No. 2016-02 also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. ASU No. 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU No. 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.

 

The Company adopted this guidance on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. See “Note 6 — Leases” for the Company’s lease accounting policies and disclosures.

 

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

Cloud Computing Arrangements — In August 2018, the FASB issued ASU No. 2018-15, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). The new guidance aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also provides for additional disclosure requirements regarding the nature of an entity’s hosting arrangements that are service contracts. The ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15.

 

Goodwill — In January 2017, the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The amendments in this update should be applied on a prospective basis. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Financial Instruments — In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), amended by ASU No 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” The amended guidance modifies the measurement of expected credit losses of certain financial instruments, including trade receivables. The amended guidance also prescribes additional disclosure requirements for certain financial instruments. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting ASU 2016-13.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

HD SUPPLY

 

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

 

Overview

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is combined for two registrants: HD Supply Holdings, Inc. and HD Supply, Inc.  Unless the context indicates otherwise, any reference in this discussion and analysis 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 Holdings together with its direct and indirect subsidiaries, including HDS.

 

HD Supply is one of the largest industrial distributors in North America. We believe we have leading positions in the two distinct market sectors in which we specialize: Maintenance, Repair & Operations (“MRO”) and Specialty Construction. Through approximately 270 branches and 44 distribution centers, in the U.S. and Canada, we serve these markets with an integrated go-to-market strategy. We have approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. We serve approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. Our broad range of end-to-end product lines and services include approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from construction to maintenance, repair and operations.

 

Description of segments

 

We operate our Company through two reportable segments: Facilities Maintenance and Construction & Industrial.

 

Facilities Maintenance.                 Facilities Maintenance distributes MRO products, provides value-add services and fabricates custom products. The industries that Facilities Maintenance serves include multifamily, hospitality, healthcare and institutional facilities. Products include electrical and lighting items, plumbing, HVAC products, appliances, janitorial supplies, hardware, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance and water and wastewater treatment products.

 

Construction & Industrial.  Construction & Industrial distributes specialized hardware, tools and engineered materials to non-residential and residential contractors. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, cutting tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, erosion and sediment control equipment and other engineered materials used broadly across all types of non-residential and residential construction. Construction & Industrial also includes 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.

 

In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.

 

Acquisitions

 

We enter into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations,” the results of the acquisitions we completed are reflected in our consolidated financial statements from the date of acquisition forward.

 

On March 5, 2018, our Construction & Industrial business acquired A.H. Harris Construction Supplies (“A.H. Harris”) for a purchase price of approximately $359 million in cash, adjusted for the final working capital settlement received in the three months ended August 4, 2019 (“second quarter 2019”). A.H. Harris is a leading specialty

 

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construction distributor serving the northeast and mid-Atlantic regions. This acquisition expands Construction & Industrial’s market presence in the northeastern United States. For additional detail related to the acquisition of A.H. Harris, see “Note 2, Acquisitions,” in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

 

Seasonality

 

In a typical year, our operating results are impacted by seasonality. Historically, sales of our products have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these periods. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects.

 

Fiscal Year

 

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks.  The three months ended May 5, 2019 (“first quarter 2019”) and April 29, 2018 (“first quarter 2018”) both include 13 weeks.

 

Key business metrics

 

Net sales

 

We earn our Net sales primarily from the sale of construction, maintenance, repair and operations, and renovation and improvement-related products and our provision of related services to approximately 500,000 customers, including contractors, government entities, maintenance professionals, home builders and industrial businesses. We recognize sales, net of sales tax and allowances for returns and discounts, when an identified performance obligation is satisfied by transfer of the promised goods or services to the customer. Net sales in certain business units fluctuate with the price of commodities as we seek to minimize the effects of changing commodities prices by passing such increases in the prices of certain commodity-based products to our customers.

 

We ship products to customers by internal fleet and by third-party carriers. Net sales are recognized from product sales when control of the products and services are passed to the customer, which generally occurs at the point of destination.

 

We include shipping and handling fees billed to customers in Net sales. Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through Cost of sales as inventories are sold. We account for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general and administrative expenses.

 

Gross profit

 

Gross profit primarily represents the difference between the product cost from our suppliers (net of earned rebates and discounts), including the cost of inbound freight and the sale price to our customers. The cost of outbound freight, purchasing, receiving and warehousing are included in Selling, general and administrative expenses within operating expenses. Our Gross profit may not be comparable to those of other companies, as other companies may include all of the costs related to their distribution networks in Cost of sales.

 

Operating expenses

 

Operating expenses are primarily comprised of Selling, general and administrative costs, which include payroll expenses (salaries, wages, employee benefits, payroll taxes and bonuses), outbound freight, rent, insurance, utilities, repair and maintenance and professional fees. In addition, operating expenses include depreciation and amortization and restructuring charges.

 

Adjusted EBITDA and Adjusted net income

 

Adjusted EBITDA and Adjusted net income are not recognized terms under generally accepted accounting principles in the United States of America (“GAAP”) and do not purport to be alternatives to Net income as a measure of operating performance. We present Adjusted EBITDA and Adjusted net income because each is a

 

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primary measure used by management to evaluate operating performance. In addition, we present Adjusted net income to measure our overall profitability as we believe it is an important measure of our performance. We believe the presentation of Adjusted EBITDA and Adjusted net income enhances our investors’ overall understanding of the financial performance of our business. We believe Adjusted EBITDA and Adjusted net income are helpful in highlighting operating trends, because each excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, age and book depreciation of facilities and capital investments.

 

Adjusted EBITDA is based on “Consolidated EBITDA,” a measure which is defined in HDS’s Senior Credit Facilities and used in calculating financial ratios in several material debt covenants. Borrowings under these facilities are a key source of liquidity and our ability to borrow under these facilities depends upon, among other things, our compliance with such financial ratio covenants. In particular, both facilities contain restrictive covenants that can restrict our activities if we do not maintain financial ratios calculated based on Consolidated EBITDA. Our Senior ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1:1 if our specified excess availability (including an amount by which our borrowing base exceeds the outstanding amounts) under the Senior ABL Facility falls below the greater of $100 million and 10% of the lesser of (A) the Borrowing Base and (B) the Total Facility Commitment (both as defined in the Senior ABL Facility agreement). Adjusted EBITDA is defined as Net income (loss) less Income from discontinued operations, net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision for income taxes, (iii) Depreciation and amortization and further adjusted to exclude loss on extinguishment of debt, non-cash items and certain other adjustments to Consolidated Net Income, including costs associated with capital structure enhancements permitted in calculating Consolidated EBITDA under our Senior Credit Facilities. We believe that presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate and about certain non-cash and other items. The Term Loan Facility and Senior ABL Facility permit us to make certain additional adjustments to Consolidated Net Income in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this quarterly report on Form 10-Q. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA. These covenants are important to the Company as failure to comply with certain covenants would result in a default under our Senior Credit Facilities. The material covenants in our Senior Credit Facilities are discussed in our annual report on Form 10-K for the fiscal year ended February 3, 2019.

 

Adjusted net income is defined as Net income less Income from discontinued operations, net of tax, further adjusted for loss on extinguishment of debt and certain non-cash, non-recurring, non-operational, or unusual items, net of tax.

 

We believe that Adjusted EBITDA and Adjusted net income are frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted net income measure when reporting their results. We compensate for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of Adjusted EBITDA and Adjusted net income may not be comparable to other similarly titled measures of other companies.

 

Adjusted EBITDA and Adjusted net income have limitations as analytical tools and should not be considered in isolation or as substitutes for analyzing our results as reported under GAAP. Some of these limitations are:

 

·                  Adjusted EBITDA and Adjusted net income do not reflect changes in, or cash requirements for, our working capital needs;

 

·                  Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt;

 

·                  Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes;

 

·                  Adjusted EBITDA and Adjusted net income do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and

 

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·                  although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

The following table presents a reconciliation of Net income, the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented (amounts in millions):

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Net income

 

$

107

 

$

89

 

Interest expense, net

 

28

 

33

 

Provision for income taxes

 

35

 

29

 

Depreciation and amortization(1)

 

27

 

24

 

Restructuring charges(2)

 

(2

)

7

 

Stock-based compensation

 

7

 

6

 

Acquisition and integration costs(3)

 

1

 

2

 

Adjusted EBITDA

 

$

203

 

$

190

 

 


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

(2)         For the three months ended May 5, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(3)         Represents the costs incurred in the acquisition and integration of A.H. Harris Construction Supplies.

 

The following table presents a reconciliation of Net income, the most directly comparable financial measure under GAAP, to Adjusted net income for the periods presented (amounts in millions):

 

 

 

Three Months Ended

 

 

 

May 5,
2019

 

April 29,
2018

 

Net income

 

$

107

 

$

89

 

Plus: Provision for income taxes

 

35

 

29

 

Less: Cash income taxes

 

(4

)

(2

)

Plus: Amortization of acquisition-related intangible assets (other than software)

 

6

 

5

 

Plus: Restructuring charges(1)

 

(2

)

7

 

Plus: Acquisition and integration costs(2)

 

1

 

2

 

Adjusted Net Income

 

$

143

 

$

130

 

 


(1)         For the three months ended May 5, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(2)         Represents the costs incurred in the acquisition and integration of A.H. Harris Construction Supplies.

 

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Consolidated results of operations

 

Dollars in millions

 

 

 

 

 

 

 

 

 

% of Net Sales

 

 

 

 

 

Three Months Ended

 

Percentage

 

Three Months Ended

 

Basis Point

 

 

 

May 5,
2019

 

April 29,
2018

 

Increase
(Decrease)

 

May 5,
2019

 

April 29,
2018

 

Increase
(Decrease)

 

Net sales

 

$

1,493

 

$

1,389

 

7.5

%

100.0

%

100.0

%

 

Gross Profit

 

585

 

552

 

6.0

 

39.2

 

39.7

 

(50

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

392

 

372

 

5.4

 

26.2

 

26.8

 

(60

)

Depreciation and amortization

 

25

 

22

 

13.6

 

1.7

 

1.5

 

20

 

Restructuring Charges

 

(2

)

7

 

*

 

(0.1

)

0.5

 

(60

)

Total operating expenses

 

415

 

401

 

3.5

 

27.8

 

28.8

 

(100

)

Operating Income

 

170

 

151

 

12.6

 

11.4

 

10.9

 

50

 

Interest expense

 

28

 

34

 

(17.6

)

1.9

 

2.4

 

(50

)

Interest (income)

 

 

(1

)

*

 

 

(0.1

)

10

 

Income Before Provision for Income Taxes

 

142

 

118

 

20.3

 

9.5

 

8.6

 

90

 

Provision for income taxes

 

35

 

29

 

20.7

 

2.3

 

2.2

 

10

 

Net Income

 

$

107

 

$

89

 

20.2

 

7.2

 

6.4

 

80

 

Non-GAAP financial data:

 

 

 

 

 

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