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 August 2, 2015

- OR -

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

For the transition period from to

Commission File
Number

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

State of
incorporation

I.R.S. Employer

Identification
Number

001-35979

HD SUPPLY HOLDINGS, INC.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

Delaware

26-0486780

333-159809

HD SUPPLY, INC.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

Delaware

75-2007383

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

HD Supply Holdings, Inc.		Yes x No o

HD Supply, Inc.		Yes o No x

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

HD Supply Holdings, Inc.		Yes x No o

HD Supply, Inc.		Yes x No o

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

HD Supply Holdings, Inc.

Large accelerated filer x		Accelerated filer o

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

HD Supply, Inc.

Large accelerated filer o		Accelerated filer o

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

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

HD Supply Holdings, Inc.		Yes o No x

HD Supply, Inc.		Yes o No x

The number of shares of the registrant’s common stock outstanding as of September 4, 2015:

HD Supply Holdings, Inc.		199,145,408 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.

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EXPLANATORY NOTE

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

Forward-looking statements and information

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

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

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

· our ability to achieve and maintain profitability;

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

· limitations and restrictions in the agreements governing our indebtedness;

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

· the loss of any of our significant customers;

· competitive pricing pressure from our customers;

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

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

	Three Months Ended					Six Months Ended
	August 2, 2015			August 3, 2014		August 2, 2015			August 3, 2014
Net Sales	$	2,006		$	1,880	$	3,728		$	3,513
Cost of sales	1,341			1,269		2,489			2,371
Gross Profit	665			611		1,239			1,142
Operating expenses:
Selling, general and administrative	415			391		806			762
Depreciation and amortization	28			54		56			106
Restructuring	—			3		—			6
Total operating expenses	443			448		862			874
Operating Income	222			163		377			268
Interest expense	106			116		212			232
Loss on extinguishment & modification of debt	—			—		—			2
Other (income) expense, net	1			—		1			1
Income from Continuing Operations Before Provision for Income Taxes	115			47		164			33
Provision (benefit) for income taxes	13			16		(170		)	13
Income from Continuing Operations	102			31		334			20
Income from discontinued operations, net of tax	7			17		17			16
Net Income	$	109		$	48	$	351		$	36
Other comprehensive income (loss) – foreign currency translation adjustment	(7		)	1		(2		)	2
Total Comprehensive Income	$	102		$	49	$	349		$	38

Weighted Average Common Shares Outstanding (thousands)
Basic	196,893			194,227		196,120			193,543
Diluted	201,809			200,454		201,221			199,502

Basic Earnings Per Share(1):
Income from Continuing Operations	$	0.52		$	0.16	$	1.70		$	0.10
Income from Discontinued Operations	$	0.04		$	0.09	$	0.09		$	0.08
Net Income	$	0.55		$	0.25	$	1.79		$	0.19

Diluted Earnings Per Share(1):
Income from Continuing Operations	$	0.51		$	0.15	$	1.66		$	0.10
Income from Discontinued Operations	$	0.03		$	0.08	$	0.08		$	0.08
Net Income	$	0.54		$	0.24	$	1.74		$	0.18

(1) May not foot due to rounding.

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

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	August 2, 2015			February 1, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	169		$	85
Receivables, less allowance for doubtful accounts of $13 and $14	1,103			868
Inventories	883			784
Deferred tax asset	15			9
Current assets of discontinued operations	574			509
Other current assets	43			43
Total current assets	2,787			2,298
Property and equipment, net	328			340
Goodwill	2,869			2,869
Intangible assets, net	138			145
Non-current assets of discontinued operations	283			295
Other assets	100			113
Total assets	$	6,505		$	6,060

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	715		$	510
Accrued compensation and benefits	115			144
Current installments of long-term debt	—			34
Current liabilities of discontinued operations	253			217
Other current liabilities	238			230
Total current liabilities	1,321			1,135

Long-term debt, excluding current installments	5,279			5,223
Deferred tax liabilities	190			166
Other liabilities	108			296
Total liabilities	6,898			6,820

Stockholders’ equity (deficit):
Common stock, par value $0.01; 1 billion shares authorized; 199.3 million and 196.0 million shares issued and outstanding at August 2, 2015 and February 1, 2015, respectively	2			2
Paid-in capital	3,869			3,818
Accumulated deficit	(4,207		)	(4,540		)
Accumulated other comprehensive loss	(30		)	(28		)
Treasury stock, at cost, 0.8 million and 0.4 million shares at August 2, 2015 and February 1, 2015, respectively	(27		)	(12		)
Total stockholders’ equity (deficit)	(393		)	(760		)
Total liabilities and stockholders’ equity (deficit)	$	6,505		$	6,060

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

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Six Months Ended
	August 2, 2015			August 3, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	351		$	36
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	72			129
Provision for uncollectibles	4			4
Non-cash interest expense	14			12
Payment of discounts upon extinguishment of debt	—			(1		)
Loss on extinguishment & modification of debt	—			2
Stock-based compensation expense	10			9
Deferred income taxes	19			19
Other	(1		)	3
Changes in assets and liabilities:
(Increase) decrease in receivables	(252		)	(265		)
(Increase) decrease in inventories	(153		)	(108		)
(Increase) decrease in other current assets	(2		)	12
Increase (decrease) in accounts payable and accrued liabilities	217			198
Increase (decrease) in other long-term liabilities	(181		)	4
Net cash provided by (used in) operating activities	98			54
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43		)	(61		)
Proceeds from sales of property and equipment	1			1
Net cash provided by (used in) investing activities	(42		)	(60		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under employee benefit plans	41			33
Purchase of treasury shares	(31		)	(15		)
Borrowings of long-term debt	—			20
Repayments of long-term debt	(16		)	(24		)
Borrowings on long-term revolver debt	562			306
Repayments on long-term revolver debt	(526		)	(196		)
Debt issuance and modification costs	—			(3		)
Other financing activities	(1		)	(2		)
Net cash provided by (used in) financing activities	29			119
Effect of exchange rates on cash and cash equivalents	(1		)	1
Increase (decrease) in cash and cash equivalents	$	84		$	114
Cash and cash equivalents at beginning of period	85			115
Cash and cash equivalents at end of period	$	169		$	229

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

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HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

	Three Months Ended					Six Months Ended
	August 2, 2015			August 3, 2014		August 2, 2015			August 3, 2014
Net Sales	$	2,006		$	1,880	$	3,728		$	3,513
Cost of sales	1,341			1,269		2,489			2,371
Gross Profit	665			611		1,239			1,142
Operating expenses:
Selling, general and administrative	415			391		806			762
Depreciation and amortization	28			54		56			106
Restructuring	—			3		—			6
Total operating expenses	443			448		862			874
Operating Income	222			163		377			268
Interest expense	106			116		212			232
Loss on extinguishment & modification of debt	—			—		—			2
Other (income) expense, net	1			—		1			1
Income from Continuing Operations Before Provision for Income Taxes	115			47		164			33
Provision (benefit) for income taxes	13			16		(170		)	13
Income from Continuing Operations	102			31		334			20
Income from discontinued operations, net of tax	7			17		17			16
Net Income	$	109		$	48	$	351		$	36
Other comprehensive income (loss) – foreign currency translation adjustment	(7		)	1		(2		)	2
Total Comprehensive Income	$	102		$	49	$	349		$	38

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

	August 2, 2015			February 1, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	159		$	85
Receivables, less allowance for doubtful accounts of $13 and $14	1,103			868
Inventories	883			784
Deferred tax asset	15			9
Current assets of discontinued operations	574			509
Other current assets	43			43
Total current assets	2,777			2,298
Property and equipment, net	328			340
Goodwill	2,869			2,869
Intangible assets, net	138			145
Non-current assets of discontinued operations	283			295
Other assets	100			113
Total assets	$	6,495		$	6,060

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	715		$	510
Accrued compensation and benefits	115			144
Current installments of long-term debt	—			34
Current liabilities of discontinued operations	253			217
Other current liabilities	237			230
Total current liabilities	1,320			1,135

Long-term debt, excluding current installments	5,279			5,223
Deferred tax liabilities	190			166
Other liabilities	108			296
Total liabilities	6,897			6,820

Stockholder’s equity (deficit):
Common stock, par value $0.01; 1,000 shares authorized; 1,000 shares issued and outstanding	—			—
Paid-in capital	3,778			3,768
Accumulated deficit	(4,150		)	(4,500		)
Accumulated other comprehensive loss	(30		)	(28		)
Total stockholder’s equity (deficit)	(402		)	(760		)
Total liabilities and stockholder’s equity (deficit)	$	6,495		$	6,060

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

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HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Six Months Ended
	August 2, 2015			August 3, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	351		$	36
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	72			129
Provision for uncollectibles	4			4
Non-cash interest expense	14			12
Payment of discounts upon extinguishment of debt	—			(1		)
Loss on extinguishment & modification of debt	—			2
Stock-based compensation expense	10			9
Deferred income taxes	19			19
Other	(1		)	3
Changes in assets and liabilities:
(Increase) decrease in receivables	(252		)	(265		)
(Increase) decrease in inventories	(153		)	(108		)
(Increase) decrease in other current assets	(2		)	12
Increase (decrease) in accounts payable and accrued liabilities	217			198
Increase (decrease) in other long-term liabilities	(181		)	4
Net cash provided by (used in) operating activities	98			54
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43		)	(61		)
Proceeds from sales of property and equipment	1			1
Net cash provided by (used in) investing activities	(42		)	(60		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt	—			20
Repayments of long-term debt	(16		)	(24		)
Borrowings on long-term revolver debt	562			306
Repayments on long-term revolver debt	(526		)	(196		)
Debt issuance and modification costs	—			(3		)
Other financing activities	(1		)	(2		)
Net cash provided by (used in) financing activities	19			101
Effect of exchange rates on cash and cash equivalents	(1		)	1
Increase (decrease) in cash and cash equivalents	$	74		$	96
Cash and cash equivalents at beginning of period	85			111
Cash and cash equivalents at end of period	$	159		$	207

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

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

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

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in three distinct market sectors: Maintenance, Repair & Operations; Infrastructure; and Specialty Construction. Through approximately 500 locations across 48 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 14,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, home builders, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services include over 800,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from infrastructure and construction to maintenance, repair and operations.

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

Basis of Presentation

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with its annual report on Form 10-K, for the year ended February 1, 2015, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). Certain amounts in the prior-period financial statements have been reclassified to conform to the current period’s presentation.

Fiscal Year

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal years ending January 31, 2016 (“fiscal 2015”) and February 1, 2015 (“fiscal 2014”) both include 52 weeks. The three months ended August 2, 2015 (“second quarter 2015”) and August 3, 2014 (“second quarter 2014”) both include 13 weeks. The six months ended August 2, 2015 and August 3, 2014 both include 26 weeks.

Principles of Consolidation

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

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Estimates

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

Self-Insurance

HD Supply has a high deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for medical claims and certain legal claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At August 2, 2015 and February 1, 2015, self-insurance reserves totaled approximately $99 million and $92 million, respectively.

NOTE 2 — PUBLIC OFFERINGS

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

During the six months ended August 3, 2014 and in connection with fiscal 2014 public offerings, the Company incurred $1 million of fees, reflected in Other income (expense), net within the Consolidated Statements of Operations and Comprehensive Income.

NOTE 3 — DISCONTINUED OPERATIONS

In July 2015, the Company entered into a definitive agreement to sell its Power Solutions business, a leading provider of a diverse product and service offering serving investor owned utility, public power, construction and industrial markets, to Anixter Inc. for $825 million, payable in cash at closing and subject to customary post-closing working capital and other adjustments. The transaction is expected to close in the third quarter of fiscal 2015 upon the satisfaction of customary closing conditions.

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

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

Summary Financial Information

In accordance with Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations” and Accounting Standards Update (“ASU”) 2014-08, “Reporting discontinued operations and disclosure of disposals of components of an entity”, the results of Power Solutions are classified as a discontinued operation. The results of the Hardware Solutions and Litemor operations and the gains/losses on sales of the businesses are also

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

	Three Months Ended				Six Months Ended
	August 2, 2015		August 3, 2014		August 2, 2015		August 3, 2014
Net Sales	$	525	$	567	$	1,024	$	1,111
Cost of sales	448		456		872		900
Gross Profit	77		111		152		211
Operating expenses:
Selling, general and administrative	60		79		115		168
Depreciation and amortization	6		10		13		21
Restructuring	—		1		—		1
Total operating expenses	66		90		128		190

Income before provision for income taxes	$	11	$	21	$	24	$	21
Provision for income taxes	4		4		7		5
Income from discontinued operations, net of tax	$	7	$	17	$	17	$	16

At August 2, 2015 and February 1, 2015, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets are as follows (amounts in millions):

	August 2, 2015		February 1, 2015
Current assets:
Receivables, less allowance for doubtful accounts of $1 and $1	$	233	$	221
Inventories	337		284
Other current assets	4		4
Total current assets	574		509
Goodwill	202		202
Intangible assets, net	46		55
Other non-current assets	35		38
Total assets of discontinued operations	$	857	$	804

Current liabilities:
Accounts payable	$	218	$	178
Accrued compensation and benefits	12		18
Other current liabilities	23		21
Total liabilities of discontinued operations	$	253	$	217

For the six months ended August 2, 2015, net cash provided by operating activities and used in investing activities, related to discontinued operations, were approximately $11 million and $2 million, respectively. For the six months ended August 3, 2014, net cash provided by operating activities and used in investing activities, related to discontinued operations, were approximately $46 million and $9 million, respectively.

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 — DEBT

HDS’s long-term debt as of August 2, 2015 and February 1, 2015 consisted of the following (dollars in millions):

	August 2, 2015			February 1, 2015
	Outstanding Principal		Interest Rate %(1)	Outstanding Principal			Interest Rate %(1)
Senior ABL Facility due 2018	$	132	1.69	$	96		2.02
Term Loans due 2018, net of unamortized discount of $12 million and $14 million	947		4.00	961			4.00
December 2014 First Priority Notes due 2021	1,250		5.25	1,250			5.25
April 2012 Second Priority Notes due 2020	675		11.00	675			11.00
October 2012 Senior Unsecured Notes due 2020	1,000		11.50	1,000			11.50
February 2013 Senior Unsecured Notes due 2020	1,275		7.50	1,275			7.50
Total long-term debt	$	5,279		$	5,257
Less current installments	—			(34		)
Long-term debt, excluding current installments	$	5,279		$	5,223

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

Senior Credit Facilities

Asset Based Lending Facility

HDS’s Senior Asset Based Lending Facility (“Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under a borrowing base). Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of August 2, 2015, HDS has $1,334 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $34 million in letters of credit issued and including $52 million of borrowings available on qualifying cash balances).

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

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

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Senior Secured Term Loan Facility

HDS’s Senior Term Facility consists of a senior secured Term Loan Facility (the ‘‘Term Loan Facility,’’ the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans in an original aggregate principal amount of $1,000 million. The Term Loan Facility will mature on June 28, 2018 (the ‘‘Term Loan Maturity Date’’). The Term Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount of the Term Loan Facility with the balance payable on the Term Loan Maturity Date. See “Note 14, Subsequent Event” for information on the August 2015 amendment of the Term Loan Facility.

During the first quarter of fiscal 2015 and in accordance with the annual excess cash flow (“ECF”) provisions of the Term Loan Facility, the Company offered a prepayment of $34 million based on the ECF calculation for fiscal year 2014. The lenders in the Term Loan Facility accepted $16 million, which the Company paid on March 30, 2015.

The Term Loans bear interest at LIBOR (subject to a floor of 1%) plus a borrowing margin of 3% or Prime plus a borrowing margin of 2% at HDS’s election, payable at the end of each calendar quarter with respect to Prime rate draws or at the maturity of each LIBOR draw (unless a draw is for a six-, nine-, or twelve-month period, then interest shall be paid quarterly). The Term Loans may be repaid at any time without penalty or premium.

On February 6, 2014, HDS amended its Term Loan Facility to reduce the applicable margin for borrowings by 25 basis points and reduce the LIBOR floor from 1.25% to 1.00%. The amendment also extended the maturity of the Term Loans by approximately nine months, to June 28, 2018.

Secured Notes

5.25% Senior Secured First Priority Notes due 2021

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

Redemption

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

Year	Percentage
2017	103.938	%
2018	102.625	%
2019	101.313	%
2020 and thereafter	100.000	%

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

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11% Senior Secured Second Priority Notes due 2020

HDS’s 11% Senior Secured Second Priority Notes due 2020 (the ‘‘April 2012 Second Priority Notes’’) bear interest at 11% per annum and will mature on April 15, 2020. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

Redemption

HDS may redeem the April 2012 Second Priority Notes, in whole or in part, at any time (1) prior to April 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the indenture governing the April 2012 Second Priority Notes and (2) on and after April 15, 2016, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on April 15 of the year set forth below.

Year	Percentage
2016	105.500	%
2017	102.750	%
2018 and thereafter	100.000	%

Collateral

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

The April 2012 Second Priority Notes and the related guarantees are secured by a second-priority security interest in the Cash Flow Priority Collateral, subject to permitted liens. In addition, the April 2012 Second Priority Notes and the related guarantees are secured by a third-priority security interest in the ABL Priority Collateral, subject to permitted liens.

The indentures governing the December 2014 First Priority Notes, the April 2012 Second Priority Notes and the applicable collateral documents provide that any capital stock and other securities of any of HDS’s subsidiaries will be excluded from the collateral to the extent the pledge of such capital stock or other securities to secure the December 2014 First Priority Notes and April 2012 Second Priority Notes would cause such subsidiary to be required to file separate financial statements with the Securities and Exchange Commission (“SEC”) pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).

Unsecured Notes

11.5% Senior Unsecured Notes due 2020

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

Redemption

HDS may redeem the October 2012 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the indenture governing the October 2012 Senior Unsecured Notes and (2) on and after October 15, 2016, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

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Year	Percentage
2016	105.750	%
2017	102.875	%
2018 and thereafter	100.000	%

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

7.5% Senior Unsecured Notes due 2020

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

Redemption

HDS may redeem the February 2013 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the indenture governing the February 2013 Senior Notes and (2) on and after October 15, 2016, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

Year	Percentage
2016	103.750	%
2017	101.875	%
2018 and thereafter	100.000	%

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

Debt covenants

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on additional indebtedness and dividend payments and stipulations regarding the use of proceeds from asset dispositions. As of August 2, 2015, HDS is in compliance with all such covenants that were in effect on such date.

NOTE 5 — FAIR VALUE MEASUREMENTS

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

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

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

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of August 2, 2015 and February 1, 2015 (amounts in millions):

	As of August 2, 2015				As of February 1, 2015
	Recorded Amount(1)		Estimated Fair Value		Recorded Amount(1)		Estimated Fair Value
Senior ABL Facility	$	132	$	130	$	96	$	95
Term Loans and Notes	5,159		5,525		5,175		5,504
Total	$	5,291	$	5,655	$	5,271	$	5,599

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

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

NOTE 6 — INCOME TAXES

The Company’s combined federal, state, and foreign effective tax rate for continuing operations for the first six months of fiscal 2015 is a 103.7% benefit. The benefit was mainly driven by a decrease of $189 million in the Company’s unrecognized U.S. federal and state tax benefits related to the February 19, 2015 approval and finalization of the Tentative Settlement (as defined in “Note 10, Commitment and Contingencies”) by the Joint Committee of Taxation. In addition, the Company’s rate was impacted by the utilization of deferred tax assets which had previously been subject to a valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions. The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits.

An increase in U.S. pre-tax book income resulted in the utilization of net deferred tax assets including U.S. tax net operating losses that were subject to a valuation allowance. The overall decrease in the valuation allowance was partially offset by an increase of the deferred tax liability for U.S. goodwill amortization for tax purposes. The deferred tax liability related to the Company’s U.S. tax deductible goodwill is considered a liability related to an asset with an indefinite life. Therefore, the deferred tax liability does not amortize and is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences. The Company does not believe it is “more likely than not” it will realize its U.S. deferred tax assets equal to the deferred liability created by tax deductible goodwill. During the three and six months ended August 2, 2015, the impact of the tax amortization of the indefinite lived intangibles on tax expense was an $11 million and $15 million increase, respectively.

As of February 1, 2015, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, Income Taxes) were $187 million. During the six months ended August 2, 2015, the Company’s unrecognized tax benefits decreased by $177 million to $10 million primarily driven by IRS and state audit settlements. During the three months and six months ended August 2, 2015, the Company’s interest accrual related to unrecognized tax benefits remained unchanged. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of February 1, 2015 was $29 million and decreased to $1 million

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as of August 2, 2015. As a result of the approval and finalization of the Tentative Settlement, the tax years ending February 3, 2008 and February 1, 2009 are settled and closed to any further adjustments. Over the next twelve months, it is reasonably possible that the Company’s unrecognized tax benefits will decrease by up to $3 million.

At February 1, 2015 and August 2, 2015, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $1,013 million and $984 million, respectively. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Through fiscal 2013, the Company’s history of U.S. operating losses limited the weight applied to other subjective evidence such as the Company’s projections for future profitability. With the Company’s fiscal 2014 U.S. pretax income, long carryforward periods in its U.S. federal tax losses and similar carryforward periods in a significant portion of its state tax losses, and projected fiscal 2015 U.S. pretax income, management believes it is reasonably possible that sufficient positive evidence will exist during the next twelve months to release all or a significant portion of the valuation allowance on the Company’s U.S. deferred tax assets.

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

NOTE 7—BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

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

The reconciliation of basic to diluted weighted average common shares for the three and six months ended August 2, 2015 and August 3, 2014 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	August 2, 2015	August 3, 2014	August 2, 2015	August 3, 2014
Weighted average common shares	196,893	194,227	196,120	193,543
Effect of potentially dilutive securities:
Stock plans	4,916	6,227	5,101	5,959
Diluted weighted average common shares	201,809	200,454	201,221	199,502

Stock plan securities excluded from dilution (1)	107	120	1,469	1,645

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

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

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NOTE 8 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

Receivables consisted of the following (amounts in millions):

	August 2, 2015		February 1, 2015
Trade receivables, net of allowance for doubtful accounts	$	1,032	$	784
Vendor rebate receivables	63		75
Other receivables	8		9
Total receivables, net	$	1,103	$	868

Other Current Liabilities

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

	HD Supply Holdings, Inc.				HD Supply, Inc.
	August 2, 2015		February 1, 2015		August 2, 2015		February 1, 2015
Accrued interest	$	96	$	98	$	96	$	98
Accrued non-income taxes	40		29		40		29
Other	102		103		101		103
Total other current liabilities	$	238	$	230	$	237	$	230

Supplemental Cash Flow Information

Cash paid for interest in the six months ended August 2, 2015 and August 3, 2014 was $201 million and $220 million, respectively. Additionally, during the six months ended August 3, 2014, the Company paid $1 million of original issue discounts related to the portion of the Term Loan amendment considered an extinguishment under ASC 470-50,”Debt — Modifications and Extinguishments.”

Cash paid for income taxes, net of refunds, in the six months ended August 2, 2015 and August 3, 2014 was approximately $9 million and $7 million, respectively.

Significant Non-Cash Transactions

During the first quarter of fiscal 2015, Holdings retired 591,431 shares of its common stock (“Retired Shares”) held as Treasury Shares by Holdings in the amount of $17 million. All of these shares were repurchased by Holdings pursuant to the share repurchase program previously authorized. Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with ASC 505-30, Equity-Treasury Stock, Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

NOTE 9—BRANCH CLOSURE AND CONSOLIDATION ACTIVITIES

During the fourth quarter of fiscal 2013, management evaluated the cost structure of the Company and identified opportunities to reduce costs across its businesses, primarily through a workforce reduction in the global support center and, to a lesser extent, its business units.

During fiscal 2014, the Company continued restructuring activities under this plan, resulting in a restructuring charge of $3 million and $6 million in the three and six months ended August 3, 2014, respectively, for additional workforce reductions of approximately 130 employees, primarily at Facilities Maintenance and the consolidation of six Construction & Industrial — White Cap branches into three branches. These charges were recorded to operating expenses within the Consolidated Statement of Operations and Comprehensive Income. During fiscal 2014, the Company completed the restructuring activities under this plan.

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NOTE 10 — COMMITMENTS AND CONTINGENCIES

Internal Revenue Service

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

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

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

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

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

Legal Matters

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

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

	Facilities Maintenance		Waterworks		Construction & Industrial - White Cap		Corporate & Other			Total Continuing Operations

Three Months Ended August 2, 2015
Net Sales	$	733	$	702	$	431	$	140		$	2,006
Adjusted EBITDA	156		66		43		(7		)	258
Depreciation(1) & Software Amortization	11		3		7		6			27
Other Intangible Amortization	2		—		—		1			3
Three Months Ended August 3, 2014
Net Sales	$	686	$	665	$	389	$	140		$	1,880
Adjusted EBITDA	139		57		33		(5		)	224
Depreciation(1) & Software Amortization	13		3		7		5			28
Other Intangible Amortization	20		1		5		1			27

Six Months Ended August 2, 2015
Net Sales	$	1,368	$	1,272	$	819	$	269		$	3,728
Adjusted EBITDA	278		111		75		(18		)	446
Depreciation(1) & Software Amortization	23		5		13		11			52
Other Intangible Amortization	3		1		—		3			7
Six Months Ended August 3, 2014
Net Sales	$	1,290	$	1,216	$	733	$	274		$	3,513
Adjusted EBITDA	248		98		55		(11		)	390
Depreciation(1) & Software Amortization	25		5		11		12			53
Other Intangible Amortization	40		2		10		3			55

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

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Reconciliation to Consolidated Financial Statements

	Three Months Ended					Six Months Ended
	August 2, 2015		August 3, 2014			August 2, 2015			August 3, 2014

Total Adjusted EBITDA	$	258	$	224		$	446		$	390
Depreciation and amortization (1)	30		55			59			108
Stock-based compensation	5		4			10			9
Restructuring	—		3			—			6
Other	1		(1		)	—			(1		)
Operating income	222		163			377			268
Interest expense, net	106		116			212			232
Loss on extinguishment & modification of debt (2)	—		—			—			2
Other (income) expense, net (3)	1		—			1			1
Income from Continuing Operations Before Provision for Income Taxes	115		47			164			33
Provision (benefit) for income taxes (4)	13		16			(170		)	13
Income from continuing operations	102		31			334			20
Less Income from discontinued operations, net of tax	7		17			17			16
Net Income	$	109	$	48		$	351		$	36

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

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

(3) Represents the costs expensed in connection with Holdings’ public offerings.

(4) During the six months ended August 2, 2015, the Company recorded a reduction in unrecognized tax benefits as a result of IRS and state audit settlements. See “Note 6, Income Taxes” and “Note 10, Commitments and Contingencies” for discussion of the IRS audit settlement.

NOTE 12—SUBSIDIARY GUARANTORS

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

	Three Months Ended August 2, 2015
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS

Net Sales	$	—		$	1,973		$	34		$	(1	)	$	2,006
Cost of sales	—			1,324			18			(1		)	1,341
Gross Profit	—			649			16			—			665
Operating expenses:
Selling, general and administrative	22			381			12			—			415
Depreciation and amortization	3			24			1			—			28
Total operating expenses	25			405			13			—			443
Operating Income	(25		)	244			3			—			222
Interest expense	108			60			—			(62		)	106
Interest (income)	(61		)	(1		)	—			62			—
Net (earnings) loss of equity affiliates	(18		)	—			—			18			—
Other (income) expense, net	1			—			—			—			1
Income From Continuing Operations Before Provision (Benefit) for Income Taxes	(55		)	185			3			(18		)	115
Provision (benefit) for income taxes	(164		)	176			1			—			13
Income from Continuing Operations	109			9			2			(18		)	102
Income from discontinued operations, net of tax	—			3			4			—			7
Net Income	$	109		$	12		$	6		$	(18	)	$	109
Other comprehensive income (loss) – foreign currency translation adjustment	(7		)	—			(7		)	7			(7		)
Total Comprehensive Income (Loss)	$	102		$	12		$	(1	)	$	(11	)	$	102

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

	Three Months Ended August 3, 2014
	Debt Issuer			Subsidiary Guarantors		Non- Guarantor Subsidiaries		Eliminations			Total HDS

Net Sales	$	—		$	1,845	$	35	$	—		$	1,880
Cost of sales	—			1,250		19		—			1,269
Gross Profit	—			595		16		—			611
Operating expenses:
Selling, general and administrative	16			363		13		(1		)	391
Depreciation and amortization	4			50		—		—			54
Restructuring	1			2		—		—			3
Total operating expenses	21			415		13		(1		)	448
Operating Income (Loss)	(21		)	180		3		1			163
Interest expense	115			61		—		(60		)	116
Interest (income)	(62		)	1		—		61			—
Net (earnings) loss of equity affiliates	(72		)	—		—		72			—
Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes	(2		)	118		3		(72		)	47
Provision (benefit) for income taxes	(50		)	66		—		—			16
Income (Loss) from Continuing Operations	48			52		3		(72		)	31
Income (loss) from discontinued operations, net of tax	—			16		1		—			17
Net Income (Loss)	$	48		$	68	$	4	$	(72	)	$	48
Other comprehensive income (loss) – foreign currency translation adjustment	1			—		1		(1		)	1
Total Comprehensive Income (Loss)	$	49		$	68	$	5	$	(73	)	$	49

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

	Six Months Ended August 2, 2015
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS

Net Sales	$	—		$	3,666		$	63		$	(1	)	$	3,728
Cost of sales	—			2,456			34			(1		)	2,489
Gross Profit	—			1,210			29			—			1,239
Operating expenses:
Selling, general and administrative	43			740			23			—			806
Depreciation and amortization	7			48			1			—			56
Total operating expenses	50			788			24			—			862
Operating Income (Loss)	(50		)	422			5			—			377
Interest expense	215			121			—			(124		)	212
Interest (income)	(122		)	(2		)	—			124			—
Net (earnings) loss of equity affiliates	(150		)	—			—			150			—
Other (income) expense, net	1			—			—			—			1
Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes	6			303			5			(150		)	164
Provision (benefit) for income taxes	(345		)	174			1			—			(170		)
Income (Loss) from Continuing Operations	351			129			4			(150		)	334
Income (loss) from discontinued operations, net of tax	—			9			8			—			17
Net Income (Loss)	$	351		$	138		$	12		$	(150	)	$	351
Other comprehensive income (loss) – foreign currency translation adjustment	(2		)	—			(2		)	2			(2		)
Total Comprehensive Income (Loss)	$	349		$	138		$	10		$	(148	)	$	349

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

	Six Months Ended August 3, 2014
	Debt Issuer			Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS

Net Sales	$	—		$	3,448	$	65		$	—		$	3,513
Cost of sales	—			2,334		37			—			2,371
Gross Profit	—			1,114		28			—			1,142
Operating expenses:
Selling, general and administrative	33			705		25			(1		)	762
Depreciation and amortization	9			97		—			—			106
Restructuring	1			5		—			—			6
Total operating expenses	43			807		25			(1		)	874
Operating Income (Loss)	(43		)	307		3			1			268
Interest expense	232			121		—			(121		)	232
Interest (income)	(122		)	—		—			122			—
Net (earnings) loss of equity affiliates	(129		)	—		—			129			—
Other (income) expense, net	3			—		—			—			3
Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes	(27		)	186		3			(129		)	33
Provision (benefit) for income taxes	(68		)	81		—			—			13
Income (Loss) from Continuing Operations	41			105		3			(129		)	20
Income (loss) from discontinued operations, net of tax	(5		)	25		(4		)	—			16
Net Income (Loss)	$	36		$	130	$	(1	)	$	(129	)	$	36
Other comprehensive income (loss) – foreign currency translation adjustment	2			—		2			(2		)	2
Total Comprehensive Income (Loss)	$	38		$	130	$	1		$	(131	)	$	38

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS

	As of August 2, 2015
	Debt Issuer			Subsidiary Guarantors		Non-Guarantor Subsidiaries		Eliminations			Total HDS

ASSETS
Current assets:
Cash and cash equivalents	$	101		$	21	$	37	$	—		$	159
Receivables, net	1			1,084		18		—			1,103
Inventories	—			864		19		—			883
Deferred tax asset	—			66		1		(52		)	15
Current assets of discontinued operations	—			519		55		—			574
Other current assets	9			32		2		—			43
Total current assets	111			2,586		132		(52		)	2,777
Property and equipment, net	50			275		3		—			328
Goodwill	—			2,869		—		—			2,869
Intangible assets, net	—			136		2		—			138
Deferred tax asset	—			—		1		—			1
Non-current assets of discontinued operations	—			276		7		—			283
Investment in subsidiaries	3,290			—		—		(3,290		)	—
Intercompany notes receivable	2,192			559		—		(2,751		)	—
Other assets	96			3		—		—			99
Total assets	$	5,739		$	6,704	$	145	$	(6,093	)	$	6,495

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	12		$	691	$	12	$	—		$	715
Accrued compensation and benefits	34			79		2		—			115
Deferred tax liabilities	52			—		—		(52		)	—
Current liabilities of discontinued operations	—			233		20		—			253
Other current liabilities	119			111		7		—			237
Total current liabilities	217			1,114		41		(52		)	1,320

Long-term debt, excluding current installments	5,279			—		—		—			5,279
Deferred tax liabilities	8			182		—		—			190
Intercompany notes payable	559			2,192		—		(2,751		)	—
Other liabilities	78			24		6		—			108
Total liabilities	6,141			3,512		47		(2,803		)	6,897

Stockholder’s equity (deficit)	(402		)	3,192		98		(3,290		)	(402		)
Total liabilities and stockholder’s equity (deficit)	$	5,739		$	6,704	$	145	$	(6,093	)	$	6,495

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS (CONTINUED)

	As of February 1, 2015
	Debt Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total HDS

ASSETS
Current assets:
Cash and cash equivalents	$	28		$	25	$	32	$	—		$	85
Receivables, net	1			851		16		—			868
Inventories	—			767		17		—			784
Deferred tax asset	—			66		2		(59		)	9
Current assets of discontinued operations	—			455		54					509
Other current assets	12			29		2		—			43
Total current assets	41			2,193		123		(59		)	2,298
Property and equipment, net	55			283		2		—			340
Goodwill	—			2,868		1		—			2,869
Intangible assets, net	—			143		2		—			145
Deferred tax asset	8			—		1		(8		)	1
Non-current assets of discontinued operations	—			288		7		—			295
Investment in subsidiaries	3,216			—		—		(3,216		)	—
Intercompany notes receivable	2,191			611		—		(2,802		)	—
Other assets	109			3		—		—			112
Total assets	$	5,620		$	6,389	$	136	$	(6,085	)	$	6,060

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	14		$	485	$	11	$	—		$	510
Accrued compensation and benefits	50			90		4		—			144
Current installments of long-term debt	34			—		—		—			34
Deferred tax liabilities	59			—		—		(59		)	—
Current liabilities of discontinued operations	—			200		17		—			217
Other current liabilities	124			97		9		—			230
Total current liabilities	281			872		41		(59		)	1,135

Long-term debt, excluding current installments	5,223			—		—		—			5,223
Deferred tax liabilities	—			174		—		(8		)	166
Intercompany notes payable	611			2,191		—		(2,802		)	—
Other liabilities	265			26		5		—			296
Total liabilities	6,380			3,263		46		(2,869		)	6,820

Stockholder’s equity (deficit)	(760		)	3,126		90		(3,216		)	(760		)
Total liabilities and stockholder’s equity (deficit)	$	5,620		$	6,389	$	136	$	(6,085	)	$	6,060

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

	Six Months Ended August 2, 2015
	Debt Issuer			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Total HDS

Net cash flows from operating activities	$	112		$	(21	)	$	7		$	—		$	98
Cash flows from investing activities
Capital expenditures	(7		)	(35		)	(1		)	—			(43		)
Proceeds from sale of property and equipment	—			1			—			—			1
Proceeds from (payments of) intercompany notes	—			51			—			(51		)	—
Net cash flows from investing activities	(7		)	17			(1		)	(51		)	(42		)
Cash flows from financing activities
Borrowings (repayments) of intercompany notes	(51		)	—			—			51			—
Repayments of long-term debt	(16		)	—			—			—			(16		)
Borrowings on long-term revolver	562			—			—			—			562
Repayments of long-term revolver	(526		)	—			—			—			(526		)
Other financing activities	(1		)	—			—			—			(1		)
Net cash flows from financing activities	(32		)	—			—			51			19
Effect of exchange rates on cash	—			—			(1		)	—			(1		)
Net increase (decrease) in cash & cash equivalents	$	73		$	(4	)	$	5		$	—		$	74
Cash and cash equivalents at beginning of period	28			25			32			—			85
Cash and cash equivalents at end of period	$	101		$	21		$	37		$	—		$	159

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS (CONTINUED)

	Six Months Ended August 3, 2014
	Debt Issuer			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Total HDS

Net cash flows from operating activities	$	44		$	—		$	10		$	—		$	54
Cash flows from investing activities
Capital expenditures	(8		)	(53		)	—			—			(61		)
Investments in equity affiliates - Return of capital	27			—			—			(27		)	—
Proceeds from sale of property and equipment	—			1			—			—			1
Proceeds from (payments of) intercompany notes	—			56			—			(56		)	—
Net cash flows from investing activities	19			4			—			(83		)	(60		)
Cash flows from financing activities
Equity contribution (return of capital)	—			—			(27		)	27			—
Borrowings (repayments) of intercompany notes	(56		)	—			—			56			—
Borrowings of long-term debt	20			—			—			—			20
Repayments of long-term debt	(24		)	—			—			—			(24		)
Borrowings on long-term revolver	306			—			—			—			306
Repayments of long-term revolver	(196		)	—			—			—			(196		)
Debt issuance and modification fees	(3		)	—			—			—			(3		)
Other financing activities	(2		)				—			—			(2		)
Net cash flows from financing activities	45			—			(27		)	83			101
Effect of exchange rates on cash	—			—			1			—			1
Net increase (decrease) in cash & cash equivalents	$	108		$	4		$	(16	)	$	—		$	96
Cash and cash equivalents at beginning of period	53			17			41			—			111
Cash and cash equivalents at end of period	$	161		$	21		$	25		$	—		$	207

NOTE 13—RECENT ACCOUNTING PRONOUNCEMENTS

Interest — imputation of interest - In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, “Interest — Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The amended guidance requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The amended guidance is limited to the presentation of debt issuance costs. ASU 2015-03 is effective for fiscal years, and interim periods, beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s financial position or results of operations.

Discontinued operations - In April 2014, the FASB issued ASU No. 2014-08, “Reporting discontinued operations and disclosure of disposals of components of an entity” (“ASU 2014-08”). The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendment also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. During the first quarter of fiscal 2015, the

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

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.

Holdings, together with its direct and indirect subsidiaries, including HDS, is one of the largest industrial distribution companies in North America. The Company specializes in three distinct market sectors: Maintenance, Repair & Operations; Infrastructure; and Specialty Construction. Through approximately 500 locations across 48 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 14,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, home builders, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services include over 800,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from infrastructure and construction to maintenance, repair and operations.

Description of segments

We operate our Company through three reportable segments: Facilities Maintenance, Waterworks, and Construction & Industrial - White Cap.

Facilities Maintenance. Facilities Maintenance distributes Maintenance, Repair and Operations “MRO” products, provides value-add services and fabricates custom products. The markets 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.

Waterworks. Waterworks distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in the water and wastewater industries for residential and non-residential uses. Waterworks serves non-residential, residential, water systems, sewage systems and other markets. Products include pipes, fittings, valves, hydrants and meters for use in the construction, maintenance and repair of water and wastewater systems as well as fire-protection systems. Waterworks has complemented its core products through additional offerings, including smart meters (AMR/AMI), fusible piping solutions and specific engineered treatment plant products and services.

Construction & Industrial - White Cap. Construction & Industrial - White Cap 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, 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.

In addition to the reportable segments, our consolidated financial results include ‘‘Corporate & Other.’’ Corporate & Other is comprised of the following operating segments: Interior Solutions, Home Improvement Solutions and HD Supply Canada. Interior Solutions offers turnkey supply and installation services for multiple interior finish options, including flooring, cabinets, countertops, and window coverings, along with comprehensive design center services for non-residential, residential and senior living projects. Home Improvement Solutions offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals. HD Supply Canada is an industrial distributor that primarily focuses on servicing fastener/industrial supply markets operating across six Canadian provinces. Corporate & Other also includes

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costs related to our centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services, and removes inter-segment transactions.

Public Offerings

Discontinued operations

The presentation of discontinued operations includes revenues and expenses of the discontinued operations, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income. Prior periods presented have been revised to reflect this presentation. For additional detail related to the results of operations of the discontinued operations, see “Note 3, Discontinued Operations,” 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

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Key business metrics

Net sales

We earn our Net sales primarily from the sale of construction, infrastructure, maintenance 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 persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable and collectability is reasonably assured. Net sales in certain business units, particularly Waterworks, 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 third-party carriers. Net sales are recognized from product sales when title to the products is passed to the customer, which generally occurs at the point of destination for products shipped by internal fleet and at the point of shipping for products shipped by third-party carriers.

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. Shipping and handling costs associated with outbound freight 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 (including internal transfers), purchasing, receiving and warehousing are included in Selling, general and administrative expenses within operating expenses. Our Gross profits may not be comparable to those of other companies, as other companies may include all of the costs related to their distribution network 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), 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

We present Adjusted EBITDA because it is a primary measure used by management to evaluate operating performance. We believe the presentation of Adjusted EBITDA enhances investors’ overall understanding of the financial performance of our business. Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States of America (“GAAP”) and does not purport to be an alternative to Net income as a measure of operating performance. We believe Adjusted EBITDA is helpful in highlighting operating trends, because it 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. In addition, we present Adjusted net income to measure our overall profitability as we believe it is an important measure of our performance. Adjusted net income is not a recognized term under GAAP and does not purport to be an alternative to Net income as a measure of operating performance. Adjusted net income is defined as Net income less Income from discontinued operations, net of tax, further adjusted for certain non-cash, non-recurring or unusual items, net of tax. We further 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

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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					Six Months Ended
	August 2, 2015		August 3, 2014			August 2, 2015			August 3, 2014
Net income	$	109	$	48		$	351		$	36
Less income from discontinued operations, net of tax	7		17			17			16
Income from continuing operations	$	102	$	31		$	334		$	20
Interest expense	106		116			212			232
Depreciation and amortization (1)	30		55			59			108
Provision (benefit) from income taxes (2)	13		16			(170		)	13
Stock-based compensation	5		4			10			9
Restructuring (3)	—		3			—			6
Loss on extinguishment & modification of debt (4)	—		—			—			2
Costs related to public offerings (5)	1		—			1			1
Other	1		(1		)	—			(1		)
Adjusted EBITDA	$	258	$	224		$	446		$	390

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

(2) During the six months ended August 2, 2015, the Company recorded a reduction in unrecognized tax benefits as a result of IRS and state audit settlements. See “Note 6, Income Taxes” and “Note 10, Commitments and Contingencies” for discussion of the IRS audit settlement.

(3) Represents the costs incurred for workforce reductions and branch closure or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location.

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

(5) Represents the costs expensed in connection with Holdings’ secondary public offerings.

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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						Six Months Ended
	August 2, 2015			August 3, 2014			August 2, 2015			August 3, 2014
Net income	$	109		$	48		$	351		$	36
Income from discontinued operations, net of tax	7			17			17			16
Income from continuing operations	102			31			334			20
Provision (benefit) for income taxes (1)	13			16			(170		)	13
Cash paid for income taxes	(6		)	(6		)	(9		)	(7		)
Amortization of acquisition-related intangible assets (other than software)	3			27			7			55
Restructuring (2)	—			3			—			6
Loss on extinguishment & modification of debt (3)	—			—			—			2
Costs related to public offerings (4)	1			—			1			1
Adjusted net income	$	113		$	71		$	163		$	90

(1) During the six months ended August 2, 2015, the Company recorded a reduction in unrecognized tax benefits as a result of IRS and state audit settlements. See “Note 6, Income Taxes” and “Note 10, Commitments and Contingencies” for discussion of the IRS audit settlement.

(2) Represents the costs incurred for workforce reductions and branch closure or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location.

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

(4) Represents the costs expensed in connection with Holdings’ secondary public offerings.

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Consolidated results of operations

Dollars in millions

	Three Months Ended				Percentage Increase		Six Months Ended					Percentage Increase
	August 2, 2015		August 3, 2014		(Decrease)		August 2, 2015			August 3, 2014		(Decrease)
Net Sales	$	2,006	$	1,880	6.7	%	$	3,728		$	3,513	6.1	%
Gross Profit	665		611		8.8		1,239			1,142		8.5
Operating expenses:
Selling, general and administrative	415		391		6.1		806			762		5.8

Depreciation and amortization	28		54		(48.1	)	56			106		(47.2	)

Restructuring	—		3		*		—			6		*
Total operating expenses	443		448		(1.1	)	862			874		(1.4	)
Operating Income	222		163		36.2		377			268		40.7
Interest expense	106		116		(8.6	)	212			232		(8.6	)
Loss on extinguishment & modification of debt	—		—		—		—			2		*
Other (income) expense, net	1		—		*		1			1		—
Income from Continuing Operations Before Income Taxes	115		47		144.7		164			33		*

Provision (benefit) for income taxes	13		16		(18.8	)	(170		)	13		*

Income from Continuing Operations	102		31		*		334			20		*
Income from discontinued operations, net of tax	7		17		(58.8	)	17			16		6.3
Net Income	$	109	$	48	127.1		$	351		$	36	*
Non-GAAP financial data:
Adjusted EBITDA	$	258	$	224	15.2	%	$	446		$	390	14.4	%
Adjusted net income	$	113	$	71	59.2	%	$	163		$	90	81.1	%

* Not meaningful

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	% of Net Sales				Basis Point		% of Net Sales				Basis Point
	Three Months Ended				Increase		Six Months Ended				Increase
	August 3, 2014		August 4, 2013		(Decrease)		August 3, 2014		August 4, 2013		(Decrease)
Net Sales	100.0	%	100.0	%	—		100.0	%	100.0	%	—
Gross Profit	33.2		32.5		70		33.2		32.5		70
Operating expenses:
Selling, general and administrative	20.7		20.8		(10	)	21.6		21.7		(10	)
Depreciation and amortization	1.4		2.9		(150	)	1.5		3.0		(150	)
Restructuring	—		0.1		(10	)	—		0.2		(20	)
Total operating expenses	22.1		23.8		(170	)	23.1		24.9		(180	)
Operating Income	11.1		8.7		240		10.1		7.6		250
Interest expense	5.3		6.2		(90	)	5.7		6.6		(90	)
Loss on extinguishment & modification of debt	—		—		—		—		0.1		(10	)
Other (income) expense, net	—		—		—		—		—		—
Income from Continuing Operations Before Income Taxes	5.7		2.5		320		4.4		0.9		350
Provision (benefit) for income taxes	0.6		0.9		(30	)	(4.6	)	0.3		(490	)
Income from Continuing Operations	5.1		1.6		350		9.0		0.6		840
Income from discontinued operations, net of tax	0.3		1.0		(70	)	0.4		0.4		—
Net Income	5.4		2.6		280		9.4		1.0		840
Non-GAAP financial data:
Adjusted EBITDA	12.9	%	11.9	%	100		12.0	%	11.1	%	90
Adjusted net income	5.6	%	3.8	%	180		4.4	%	2.6	%	180

* Not meaningful

Highlights

Net sales in second quarter 2015 increased $126 million, or 6.7%, as compared to second quarter 2014. In second quarter 2015, each of our three reportable segments realized increases in Net sales. Operating income in second quarter 2015 increased $59 million, or 36.2%, as compared to second quarter 2014. Our growth initiatives, cost control efforts and the leverage of fixed costs, resulted in an increase to Adjusted EBITDA of $34 million, or 15.2%, in second quarter 2015 as compared to second quarter 2014. Net income in second quarter 2015 increased $61 million, to $109 million, compared to a Net income of $48 million in second quarter 2014. As of August 2, 2015, our liquidity was $1.5 billion. See “Liquidity and Capital Resources — External Financing” for further information.

In July 2015, the Company entered into a definitive agreement to sell its Power Solutions business, a leading provider of a diverse product and service offering serving investor owned utility, public power, construction and industrial markets. The transaction is expected to close in the third quarter of fiscal 2015 upon the satisfaction of customary closing conditions. In accordance with GAAP, the results of Power Solutions are reflected as discontinued operations for all periods presented.

As a result of the Power Solutions business unit sale, the company will evolve its talent alignment and functional support strategies. Consequently, the company expects to take a $10 million to $20 million charge over the next twelve months and expects a payback via a permanent reduction in cost over the next two years. This charge reflects the costs related primarily to severance, relocation and related costs.

Net sales

Net sales in second quarter 2015 increased $126 million, or 6.7%, compared to second quarter 2014 and $215 million, or 6.1%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014.

Each of our reportable segments experienced an increase in Net sales in second quarter 2015 and in the first six months of fiscal 2015 as compared to the same periods in fiscal 2014. Net sales increases, during the second quarter and first six months of fiscal 2015, were primarily due to growth initiatives at each of our businesses and, to a lesser extent, increases in market volume. Growth initiatives contributed approximately $78 million and $158 million in the second quarter and the first six months of fiscal 2015, respectively. The Net sales increases were partially offset by an unfavorable Canadian exchange rate impact, primarily at HD Supply Canada, resulting in a $5 million and $9 million reduction to Net sales in the second quarter and first six months of fiscal 2015, respectively. Additionally, the first quarter of fiscal 2015 was negatively impacted by severe winter weather and

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the second quarter of fiscal 2015 was negatively impacted by historical flooding in Texas and other regions within the central U.S.

Gross profit

Gross profit increased $54 million, or 8.8%, during second quarter 2015 as compared to second quarter 2014 and $97 million, or 8.5%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014.

Each of our reportable segments experienced an increase in Gross profit in second quarter and in the first six months of fiscal 2015 as compared to the same periods in fiscal 2014. The Gross profit increases, in both periods, were primarily due to sales growth from initiatives and market volume.

Gross profit as a percentage of Net sales (“gross margin”) increased approximately 70 basis points to 33.2% in both the second quarter and the first six months of fiscal 2015 as compared to 32.5% in both the second quarter and the first six months of fiscal 2014. The improvement in gross margin in both periods was primarily driven by our category management initiatives, localized field execution and mix of products and services.

Operating expenses

Operating expenses decreased $5 million, or 1.1%, during second quarter 2015 as compared to second quarter 2014 and $12 million, or 1.4%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014.

Selling, general and administrative expenses increased $24 million, or 6.1%, in second quarter 2015 as compared to second quarter 2014 and $44 million, or 5.8%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. The increase in both periods was primarily a result of increases in variable expenses due to higher sales volume and investments in growth initiatives. Depreciation and amortization expense decreased $26 million, or 48.1%, in second quarter 2015 as compared to second quarter 2014 and $50 million, or 47.2%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. The decrease in both periods was primarily a result of certain acquisitions-related intangible assets that became fully amortized during fiscal 2014. In addition, the second quarter and first six months of fiscal 2014 included $3 million and $6 million, respectively, of restructuring charges.

Operating expenses as a percentage of Net sales decreased approximately 170 basis points to 22.1%, in second quarter 2015 and approximately 180 basis points to 23.1% in the first six months of fiscal 2015 as compared to the same periods in 2014. The decrease in both periods was driven by a reduction in Depreciation and amortization expense as a percentage of Net sales, which decreased 150 basis points to 1.4% in second quarter 2015 as compared to second quarter 2014 and 150 basis points to 1.5% in the first six months of fiscal 2015 as compared to the same period in 2014.

Operating income

Operating income increased $59 million, or 36.2%, during second quarter 2015 as compared to second quarter 2014 and $109 million, or 40.7%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. The improvement in both periods was primarily due to higher Net sales, Gross profit and lower operating expenses as compared to the same periods in 2014.

Operating income as a percentage of Net sales increased approximately 240 basis points in second quarter 2015 as compared to second quarter 2014 and increased approximately 250 basis points in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. The improvement in both periods was primarily driven by a reduction in Depreciation and amortization expense as a percentage of Net sales and improvements in gross margins.

Interest expense

Interest expense decreased $10 million, or 8.6%, during second quarter 2015 as compared to second quarter 2014 and $20 million, or 8.6%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. The decrease in both periods was due to a lower average interest rate, and to a lesser extent, a lower average outstanding balance.

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Loss on extinguishment & modification of debt

During the first six months of fiscal 2014, our debt refinancing and redemption activities resulted in charges of $2 million. These charges were recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.

On February 6, 2014, HDS amended its Term Loan Facility to reduce the applicable margin for borrowings by 25 basis points and reduce the LIBOR floor from 1.25% to 1.00%. The amendment also extended the maturity of the term loans by approximately nine months, to June 28, 2018.

A portion of the amendment was considered an extinguishment, resulting in a $1 million loss on extinguishment of debt for the write-off of pro-rata portions of the unamortized original issue discount and the unamortized deferred debt cost. The portion of the amendment considered a modification resulted in a charge of approximately $1 million.

Other (income) expense, net

During the second quarter of fiscal 2015 and the first six months of fiscal 2014, we incurred approximately $1 million, in each period, in fees and expenses related to Holdings’ secondary public offerings.

Provision (benefit) for income taxes

The provision (benefit) for income taxes during the period is calculated by applying an estimated annual tax rate for the full fiscal year to pre-tax income for the reported period plus or minus unusual or infrequent discrete items occurring within the period. The Company’s income tax provision (benefit) recorded in interim periods can move from an income tax provision to income tax benefit (and vice versa) in situations in which the Company is experiencing changes between interim pre-tax income to pre-tax loss (and vice versa). The provision for income taxes from continuing operations in second quarter of fiscal 2015 was an expense of $13 million compared to $16 million expense in second quarter of fiscal 2014. The provision for income taxes from continuing operations in the first six months of fiscal 2015 was a benefit of $170 million compared to $13 million expense in the first six months of fiscal 2014.

The effective rate for continuing operations for the second quarter and first six months of fiscal 2015 is an expense of 11.3% and benefit of 103.7%, respectively, mainly driven by a decrease of $189 million in the Company’s unrecognized U.S. federal and state tax benefits related to the February 19, 2015, approval and finalization of the Tentative Settlement (as defined in “Note 10, Commitment and Contingencies,” in the Notes to the Consolidated Financial Statements within Item 1) by the Joint Committee of Taxation. In addition, the Company’s rate was impacted by the utilization of deferred tax assets which had previously been subject to a valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions. The effective rate for continuing operations for second quarter 2014 was a provision of 34.6%, reflecting the impact of increasing the U.S. valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions.

We regularly assess the realization of our net deferred tax assets and the need for any valuation allowance. This assessment requires management to make judgments about the benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. With the Company’s fiscal 2015 U.S. pretax income to date, long carryforward periods in its U.S. federal tax losses and similar carryforward periods in a significant portion of its state tax losses, and projected fiscal 2015 U.S. pretax income, we believe it is reasonably possible that sufficient positive evidence will exist during the next twelve months to release all or a significant portion of our valuation allowance on the Company’s U.S. deferred tax assets.

Adjusted EBITDA

Adjusted EBITDA increased $34 million, or 15.2%, in second quarter 2015 as compared to second quarter 2014, and $56 million, or 14.4%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014.

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Each of our reportable segments experienced an increase in Adjusted EBITDA in the second quarter and first six months of fiscal 2015 as compared to same periods in fiscal 2014.

The increase in Adjusted EBITDA in the second quarter and first six months of fiscal 2015 was primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 100 basis points to 12.9% in second quarter 2015 as compared to second quarter 2014 and approximately 90 basis points to 12.0% in the first six months of fiscal 2015 as compared to the same period in fiscal 2014, the increase in both periods was primarily due to gross margin improvements and a reduction in Selling, general and administrative expenses as a percentage of Net sales.

Adjusted net income

Adjusted net income increased $42 million, or 59.2%, in second quarter 2015 as compared to second quarter 2014 and $73 million, or 81.1%, in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. The increase in Adjusted net income in both periods was attributable to the sales growth, improving gross margins, and lower interest expense.

Results of operations by reportable segment

Facilities Maintenance

	Three Months Ended						Increase		Six Months Ended						Increase
Dollars in millions	August 2, 2015			August 3, 2014			(Decrease)		August 2, 2015			August 3, 2014			(Decrease)
Net sales	$	733		$	686		6.9	%	$	1,368		$	1,290		6.0	%
Operating income	$	143		$	104		37.5	%	$	252		$	181		39.2	%
% of Net sales	19.5		%	15.2		%	430	bps	18.4		%	14.0		%	440	bps
Depreciation and amortization	13			33			(60.6	)%	26			65			(60.0	)%
Restructuring	—			2			*		—			2			*
Adjusted EBITDA	$	156		$	139		12.2	%	$	278		$	248		12.1	%
% of Net sales	21.3		%	20.3		%	100	bps	20.3		%	19.2		%	110	bps

* Not meaningful

Net Sales

Net sales increased $47 million, or 6.9%, in second quarter 2015 as compared to second quarter 2014 and $78 million, or 6.0%, in the first six months of fiscal 2015 as compared to the same period of fiscal 2014.

The increases in Net sales, in both the second quarter and first six months of fiscal 2015, were primarily due to growth initiatives. These growth initiatives consist of investments in sales personnel, products and technology, aligned with our customers’ multifamily, hospitality, and healthcare industries. Net sales in the second quarter and first six months of fiscal 2015 were positively impacted by favorable market conditions in the healthcare, hospitality and multifamily industries. Net sales increases in the first six months of fiscal 2015 were partially offset by the unfavorable weather impacts at the beginning of first quarter 2015.

Adjusted EBITDA

Adjusted EBITDA increased $17 million, or 12.2%, in second quarter 2015 as compared to second quarter 2014 and $30 million, or 12.1%, in the first six months of fiscal 2015 as compared to the same period of fiscal 2014.

The increase in both periods was primarily due to volume increases and operating leverage of fixed costs through sales volume increases and cost control efforts. The increase was partially offset by increased Selling, general and administrative expenses related to the hiring of additional associates to support the expanding business and to drive future growth, and by other variable expenses driven by the volume increase.

Adjusted EBITDA as a percentage of Net sales increased approximately 100 basis points in second quarter 2015 as compared to second quarter 2014 and increased approximately 110 basis points in the first six months of

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fiscal 2015 as compared to the same period of fiscal 2014. The increase in both periods was driven primarily by a decline in Selling, general and administrative expenses as a percentage of Net sales. Selling, general and administrative expenses as a percentage of Net sales declined approximately 90 basis points in second quarter 2015 and declined approximately 100 basis points in the first six months of fiscal 2015 as compared to the same periods of fiscal 2014. This improvement in both periods was primarily due to the leverage of fixed costs through sales volumes and cost control efforts.

Waterworks

	Three Months Ended						Increase		Six Months Ended						Increase
Dollars in millions	August 2, 2015			August 3, 2014			(Decrease)		August 2, 2015			August 3, 2014			(Decrease)
Net sales	$	702		$	665		5.6	%	$	1,272		$	1,216		4.6	%
Operating income	$	63		$	53		18.9	%	$	105		$	91		15.4	%
% of Net sales	9.0		%	8.0		%	100	bps	8.3		%	7.5		%	80	bps
Depreciation and amortization	3			4			(25.0	)%	6			7			(14.3	)%
Adjusted EBITDA	$	66		$	57		15.8	%	$	111		$	98		13.3	%
% of Net sales	9.4		%	8.6		%	80	bps	8.7		%	8.1		%	60	bps

Net Sales

Net sales increased $37 million, or 5.6%, in second quarter 2015 as compared to second quarter 2014 and increased $56 million, or 4.6%, in the first six months of fiscal 2015 as compared to the same period of fiscal 2014.

Growth initiatives, including fusible piping solutions, meters, storm drainage, treatment plant, and new locations (“greenfields”), contributed to the increase in Net sales in second quarter 2015 and the first six months of fiscal 2015. Net sales in the second quarter and first six months of fiscal 2015 were also positively impacted by higher sales volume due to end-market improvements. Net sales in second quarter 2015 were negatively impacted by flooding in Texas, Oklahoma, and Arkansas, making it difficult to install underground water systems. Net sales in the first six months of fiscal 2015 were negatively impacted by severe winter weather, including frozen and wet ground in the first quarter of fiscal 2015.

Adjusted EBITDA

Adjusted EBITDA increased $9 million, or 15.8%, in second quarter 2015 as compared to second quarter 2014 and increased $13 million, or 13.3%, in the first six months of fiscal 2015 as compared to the same period of fiscal 2014.

The increase in both periods, as compared to the same periods of fiscal 2014, was due to growth initiatives, partially offset by increased Selling, general and administrative expenses, primarily personnel, related to growth initiative investments and variable costs due to the increased volume.

Adjusted EBITDA as a percentage of Net sales increased approximately 80 basis points in second quarter 2015 and approximately 60 basis points in the first six months of fiscal 2015 as compared to the same periods of fiscal 2014. The improvement in both periods was primarily a result of improvements in gross margins due to product mix and our category management initiatives.

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Construction & Industrial - White Cap

	Three Months Ended						Increase		Six Months Ended						Increase
Dollars in millions	August 2, 2015			August 3, 2014			(Decrease)		August 2, 2015			August 3, 2014			(Decrease)
Net sales	$	431		$	389		10.8	%	$	819		$	733		11.7	%
Operating income	$	36		$	21		71.4	%	$	62		$	32		93.8	%
% of Net sales	8.4		%	5.4		%	300	bps	7.6		%	4.4		%	320	bps
Depreciation and amortization	7			12			(41.7	)%	13			21			(38.1	)%
Restructuring	—			—			—		—			2			*
Adjusted EBITDA	$	43		$	33		30.3	%	$	75		$	55		36.4	%
% of Net sales	10.0		%	8.5		%	150	bps	9.2		%	7.5		%	170	bps

* Not meaningful

Net Sales

Net sales increased $42 million, or 10.8%, in second quarter 2015 as compared to second quarter 2014 and increased $86 million, or 11.7%, in the first six months of fiscal 2015 as compared to the same period of fiscal 2014.

Growth initiatives contributed to the increase in the second quarter and first six months of fiscal 2015, driven by our greenfields, Managed Sales Approach (‘‘MSA’’) and direct marketing initiatives. MSA is a structured approach to drive revenue at a regional level through analysis, tools and sales management. In addition, Construction & Industrial Net sales were positively impacted by improvements in both non-residential construction and the residential housing market.

Adjusted EBITDA

Adjusted EBITDA increased $10 million, or 30.3%, in second quarter 2015 as compared to second quarter 2014 and increased $20 million, or 36.4%, in the first six months of 2015 as compared to the same period of fiscal 2014.

The increase in Adjusted EBITDA in both periods was primarily driven by growth initiatives and market volume. This increase was partially offset by increased Selling, general and administrative expense related to variable expenses and the hiring of additional associates to support the expanding business and drive future growth.

Adjusted EBITDA as a percentage of Net sales increased approximately 150 basis points in second quarter 2015 as compared to second quarter 2014 and increased approximately 170 basis points in the first six months of fiscal 2015 as compared to the same period of fiscal 2014. The improvement in both periods was driven by improvements in gross margins and a decrease in Selling, general and administrative expenses as a percentage of Net sales of approximately 40 basis points and 50 basis points in the second quarter and first six months of fiscal 2015, respectively, due to the leverage of fixed costs through sales volume increases and cost control efforts.

Liquidity and capital resources

Sources and uses of cash

Our sources of funds, primarily from operations, cash on-hand, and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet all current obligations on a timely basis. We believe that these sources of funds will be sufficient to meet the operating needs of our business for at least the next twelve months.

During the first six months of fiscal 2015, the Company’s generation of cash was primarily driven by cash receipts from operations, net debt borrowings, and proceeds from stock option exercises, partially offset by the payment of interest on debt, capital expenditures and purchases of treasury shares.

As of August 2, 2015, our combined liquidity of approximately $1,451 million was comprised of $169 million in cash and cash equivalents and $1,282 million of additional available borrowings (excluding $52 million of borrowings on available cash balances) under our Senior ABL Facility, based on qualifying inventory and receivables.

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Information about the Company’s cash flows, by category, is presented in the Consolidated Statements of Cash Flows and is summarized as follows:

Net cash provided by (used for):

	Six Months Ended						Increase
Amounts in millions	August 2, 2015			August 3, 2014			(Decrease)

Operating activities	$	98		$	54		$	44
Investing activities	(42		)	(60		)	18
Financing activities	29			119			(90		)

Working capital

Working capital, excluding cash and cash equivalents, was $1,297 million as of August 2, 2015, increasing $88 million as compared to $1,209 million as of August 3, 2014. The increase was primarily driven by an increase in Receivables and Inventory reflecting higher sales volumes, partially offset by an increase in Accounts Payable.

Operating activities

During the first six months of fiscal 2015 cash provided by operating activities was $98 million compared to $54 million in the first six months of fiscal 2014. Cash interest paid in the first six months of fiscal 2015 was $201 million, compared to $220 million in the first six months of fiscal 2014. The first six months of fiscal 2014 also included a payment of $1 million of original issue discount related to the extinguishment of a portion of the Term Loans. Excluding the cash interest payments in both periods and original issue discount paid in fiscal 2014, cash flow from operating activities increased approximately $24 million in the first six months of fiscal 2015 as compared to the first six months of fiscal 2014.

Investing activities

During the first six months of fiscal 2015, cash used in investing activities was $42 million as compared to $60 million in the first six months of fiscal 2014. Cash used in investing activities for both periods was primarily for capital expenditures.

Financing activities

During the first six months of fiscal 2015, cash provided by financing activities was $29 million, primarily due to net debt borrowings of $20 million and $41 million of proceeds from employee stock option exercises, partially offset by purchases of treasury shares of $31 million.

During the first six months of fiscal 2014, cash provided by financing activities was $119 million, due to net debt borrowings of $106 million and $33 million of proceeds from employee stock option exercises, partially offset by purchases of treasury shares of $15 million and payments for debt issuance and modification costs.

External Financing

As of August 2, 2015, we had an aggregate principal amount of $5.3 billion of outstanding debt, net of unamortized discounts of $12 million, and $1,334 million of additional available borrowings under our Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $34 million in letters of credit issued and including $52 million of borrowings available on qualifying cash balances). From time to time, depending on market conditions and other factors, the Company may seek to repay, redeem, repurchase or otherwise acquire or refinance a portion or all of our indebtedness. We may make such repurchases in privately negotiated transactions or otherwise.

On August 13, 2015, HDS entered into an incremental amendment (the “Incremental Agreement”) to the credit agreement governing its existing Term Loan Facility, pursuant to which HDS requested a borrowing of a new $850 million tranche of senior secured term loans, the proceeds of which, together with cash on hand and available borrowings under HDS’s Senior ABL Facility, were used to prepay in full the tranche of senior secured term loans outstanding under the existing Term Loan Facility as of the date of the Incremental Agreement. The

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new Term Loans will mature on the later date of August 13, 2021 and bear interest at the reduced applicable margin for borrowings of 2.75% for LIBOR borrowings and 1.75% for base rate borrowings (down from, respectively, 3.00% and 2.00% applicable to the redeemed Term Loans), with the LIBOR floor to remain at 1.00%. The new Term Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of such Term Loans, beginning in December 2015 with the balance payable on such Term Loans’ maturity date. The Incremental Agreement also provides for a prepayment premium equal to 1.00% of the aggregate principal amount of Term Loans being prepaid if, on or prior to February 13, 2016, the Company enters into certain repricing transactions. The amended Term Loan Facility will permit the Company to pay down certain existing junior debt with asset sale proceeds, including the expected proceeds of the recently announced sale of the Power Solutions business unit. The Company expects to use the Power Solutions net sale proceeds to redeem all of the outstanding 11% April 2012 Second Priority Notes.

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

For additional information, see “Note 4, Debt,” and “Note 14, Subsequent Event,” in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q

Rating agency actions

In August 2015, Moody’s Investors Service (‘‘Moody’s’’) upgraded HDS’s corporate family rating to B2, from B3, and revised its rating outlook to positive from stable. Moody’s cited our solid operating performance and lower level of balance sheet debt. In a related rating action, Moody’s raised HDS’s Speculative Grade Liquidity Rating to SGL-2 from SGL-3, citing their expectations of higher results of free cash flows and the amount of revolving credit facility availability. Also in August 2015, Standard & Poor’s (“S&P”) raised HDS’s corporate credit rating to ‘B+’ from ‘B’. The S&P outlook remains stable.

Critical accounting policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these consolidated financial statements. The Company’s critical accounting policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K, for the fiscal year ended February 1, 2015.

Recent accounting pronouncements

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk associated with changes in interest rates, foreign currency exchange rate fluctuations and certain commodity prices. To reduce these risks, we selectively use financial instruments and other proactive management techniques. We do not use financial instruments for trading purposes or speculation. There have been no material changes in our market risk exposures as compared to those discussed in our annual report on Form 10-K, for the fiscal year ended February 1, 2015.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

HD Supply Holdings, Inc.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of HD Supply Holdings, Inc., we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the HD Supply Holdings, Inc. disclosure controls and procedures were effective as of August 2, 2015 (the end of the period covered by this report).

HD Supply, Inc.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of HD Supply, Inc., we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the HD Supply, Inc. disclosure controls and procedures were effective as of August 2, 2015 (the end of the period covered by this report).

(b) Changes in internal control

There were no changes in Holdings’ or HDS’s internal control over financial reporting, as defined in the Exchange Act Rules 13a-15(f) or 15d-15(f), during the second quarter of fiscal 2015 that have materially affected, or are reasonably likely to materially affect, Holdings’ or HDS’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

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investigation of the Company related to the activities of certain disadvantaged business enterprises, including American Indian Builders and Suppliers, Inc. Under the terms of the settlement agreement, the Company, in exchange for a release of certain civil and administrative monetary claims, paid the United States $4.945 million, which is an amount within the Company’s previously established reserve for such matter. In addition, the Company is currently in negotiations with the Federal Highway Administration (“FHWA”), an Operating Administration of the United States Department of Transportation, concerning the terms of an administrative settlement and compliance agreement related to the same conduct at issue in the United States investigation.

Item 1A. Risk Factors

We discuss in our filings with the SEC various risks that may materially affect our business. There have been no material changes to the risk factors disclosed in our annual report on Form 10-K, for the fiscal year ended February 1, 2015.

The materialization of any risks and uncertainties identified in forward-looking statements contained in this report together with those previously disclosed in our annual report on Form 10-K, for the fiscal year ended February 1, 2015 and our and HDS’s other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Forward-looking statements and information” at the beginning of this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In the first quarter of 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.

Issuer Purchases of Equity Securities in each fiscal month of the second quarter of fiscal 2015 are set forth in the table below:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)

May4 — May 31	275,500	$	32.87	275,500	$	1,858,556
June 1 — June 28	56,022	33.17		56,022	15,200,861
June 29 — August 2	348,000	35.03		348,000	8,314,806

Total	679,522	$	34.00	679,522

(1) The total dollar value of shares that may yet be purchased increases by the amount of cash proceeds received from the exercise of employee stock options as they occur.

During the first quarter of fiscal 2015, Holdings retired 591,431 shares of its common stock (“Retired Shares”) held as Treasury Shares by Holdings in the amount of $17 million. All of these shares were repurchased by Holdings pursuant to the share repurchase program previously authorized. Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with Accounting Standards Codification 505-30, Equity-Treasury Stock, Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

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Item 6. Exhibits

The following exhibits are filed or furnished with this quarterly report.

Exhibit Number		Exhibit Description
10.1		Incremental Agreement No. 1, dated as of August 13, 2015, among HD Supply, Inc., as borrower, the subsidiary guarantor parties named therein, Bank of America, N.A., as administrative agent and incremental term loan lender, and the other lender parties thereto.

21.1		List of Subsidiaries

31.1		Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply Holdings, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Senior Vice President and Chief Financial Officer of HD Supply Holdings, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.3		Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.4		Certification of Senior Vice President and Chief Financial Officer of HD Supply, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Senior Vice President and Chief Financial Officer of HD Supply Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3		Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.4		Certification of Senior Vice President and Chief Financial Officer of HD Supply, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive data files pursuant to Rule 405 of Regulation S-T.

		HD SUPPLY HOLDINGS, INC.
		(Registrant)


September 8, 2015	By:	/s/JOSEPH J. DEANGELO
(Date)		Joseph J. DeAngelo
		Chairman of the Board, President and Chief Executive Officer


		/s/ EVAN J. LEVITT
		Evan J. Levitt
		Senior Vice President and Chief Financial Officer

		HD SUPPLY, INC.
		(Registrant)


September 8, 2015	By:	/s/JOSEPH J. DEANGELO
(Date)		Joseph J. DeAngelo
		Chairman of the Board, President and Chief Executive Officer


		/s/ EVAN J. LEVITT
		Evan J. Levitt
		Senior Vice President and Chief Financial Officer

		Page
	Explanatory Note	3

	Forward-looking statements and information	3

Part I.	Financial Information

Item 1.	Financial Statements

	HD Supply Holdings, Inc.
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended August 2, 2015 and August 3, 2014 (unaudited)	5

	Consolidated Balance Sheets as of August 2, 2015 and February 1, 2015 (unaudited)	6

	Consolidated Statements of Cash Flows for the Six Months ended August 2, 2015 and August 3, 2014 (unaudited)	7

	HD Supply, Inc.
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended August 2, 2015 and August 3, 2014 (unaudited)	8

	Consolidated Balance Sheets as of August 2, 2015 and February 1, 2015 (unaudited)	9

	Consolidated Statements of Cash Flows for the Six Months ended August 2, 2015 and August 3, 2014 (unaudited)	10

	Notes to Consolidated Financial Statements (unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	51

Part II.	Other Information

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	52

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

Signatures		54