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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended November 2, 2014

 

- OR -

 

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

 

For the transition period from          to          

 

 

 

 

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):

 

 

 

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

 

HD Supply Holdings, Inc.	Yes o No x
HD Supply, Inc.	Yes o No x

 

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

 

HD Supply Holdings, Inc.	196,047,008 shares of common stock, par value $0.01 per share
HD Supply, Inc.	1,000 shares of common stock, par value $0.01 per share, all of which were owned by HDS Holding Corporation, a wholly-owned subsidiary of HD Supply Holdings, Inc.

 

 

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INDEX TO FORM 10-Q

 

		Page
	Explanatory Note	3
	Forward-looking statements and information	3
Part I.	Financial Information
Item 1.	Financial Statements
	HD Supply Holdings, Inc.
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)	5
	Consolidated Balance Sheets as of November 2, 2014 and February 2, 2014 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)	7
	HD Supply, Inc.
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)	8
	Consolidated Balance Sheets as of November 2, 2014 and February 2, 2014 (unaudited)	9
	Consolidated Statements of Cash Flows for the Nine Months ended November 2, 2014 and November 3, 2013 (unaudited)	10
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	60
Part II.	Other Information
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	61
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 6.	Exhibits	63
Signatures		64

 

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

 

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

 

·         our ability to achieve profitability;

 

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

 

·         limitations and restrictions in the agreements governing our indebtedness;

 

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

 

·         the loss of any of our significant customers;

 

·         competitive pricing pressure from our customers;

 

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

 

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

 

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

 

·         our ability to manage fixed costs;

 

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

 

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

 

·         potential material liabilities under our self-insured programs;

 

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

 

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

 

·         our ability to identify and integrate new products; and

 

·         the significant influence our sponsors have over corporate decisions.

 

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

 

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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 (LOSS)

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

 

		Three Months Ended						Nine Months Ended
		November 2, 2014			November 3, 2013			November 2, 2014			November 3, 2013
Net Sales		$	2,488		$	2,273		$	7,096		$	6,558
Cost of sales		1,762			1,611			5,017			4,646
Gross Profit		726			662			2,079			1,912
Operating expenses:
Selling, general and administrative		467			441			1,382			1,318
Depreciation and amortization		57			61			183			181
Restructuring		—			—			7			—
Total operating expenses		524			502			1,572			1,499
Operating Income		202			160			507			413
Interest expense		115			117			347			409
Loss on extinguishment & modification of debt		—			—			2			87
Other (income) expense, net		(4		)	—			(3		)	20
Income (Loss) from Continuing Operations Before Provision for Income Taxes		91			43			161			(103		)
Provision (benefit) for income taxes		31			(8		)	54			47
Income (Loss) from Continuing Operations		60			51			107			(150		)
Income (loss) from discontinued operations, net of tax		—			—			(11		)	(2		)
Net Income (Loss)		$	60		$	51		$	96		$	(152	)
Other comprehensive income (loss) — foreign currency translation adjustment		(3		)	—			(1		)	(4		)
Total Comprehensive Income (Loss)		$	57		$	51		$	95		$	(156	)
Weighted Average Common Shares Outstanding (thousands)
Basic		194,288			191,750			193,806			158,587
Diluted		200,151			197,392			199,689			158,587
Basic Earnings Per Share(1):
Income (Loss) from Continuing Operations		$	0.31		$	0.27		$	0.55		$	(0.95	)
Income (Loss) from Discontinued Operations		$	—		$	—		$	(0.06	)	$	(0.01	)
Net Income (Loss)		$	0.31		$	0.27		$	0.50		$	(0.96	)
Diluted Earnings Per Share(1):
Income (Loss) from Continuing Operations		$	0.30		$	0.26		$	0.54		$	(0.95	)
Income (Loss) from Discontinued Operations		$	—		$	—		$	(0.06	)	$	(0.01	)
Net Income (Loss)		$	0.30		$	0.26		$	0.48		$	(0.96	)

 

(1)               May not foot due to rounding.

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

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

 

		November 2, 2014			February 2, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	107		$	115
Receivables, less allowance for doubtful accounts of $17 and $18		1,304			1,046
Inventories		1,168			1,072
Deferred tax asset		5			7
Other current assets		37			63
Total current assets		2,621			2,303
Property and equipment, net		400			405
Goodwill		3,136			3,137
Intangible assets, net		242			338
Other assets		124			141
Total assets		$	6,523		$	6,324
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	867		$	664
Accrued compensation and benefits		145			149
Current installments of long-term debt		10			10
Other current liabilities		203			270
Total current liabilities		1,225			1,093
Long-term debt, excluding current installments		5,498			5,534
Deferred tax liabilities		148			114
Other liabilities		309			347
Total liabilities		7,180			7,088
Stockholders’ equity (deficit):
Common stock, par value $0.01; 1 billion shares authorized; 195.8 million and 192.4 million shares issued and outstanding at November 2, 2014 and February 2, 2014, respectively		2			2
Paid-in capital		3,805			3,752
Accumulated deficit		(4,407		)	(4,503		)
Accumulated other comprehensive loss		(16		)	(15		)
Treasury stock, at cost, 1.5 million shares at November 2, 2014		(41		)	—
Total stockholders’ equity (deficit)		(657		)	(764		)
Total liabilities and stockholders’ equity (deficit)		$	6,523		$	6,324

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

		Nine Months Ended
		November 2, 2014			November 3, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	96		$	(152	)
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		187			184
Provision for uncollectibles		6			4
Non-cash interest expense		19			23
Payment of PIK interest & discounts upon extinguishment of debt		(1		)	(364		)
Loss on extinguishment & modification of debt		2			87
Stock-based compensation expense		12			12
Deferred income taxes		43			35
Other		—			(2		)
Changes in assets and liabilities:
(Increase) decrease in receivables		(264		)	(226		)
(Increase) decrease in inventories		(96		)	(87		)
(Increase) decrease in other current assets		26			4
Increase (decrease) in accounts payable and accrued liabilities		85			(42		)
Increase (decrease) in other long-term liabilities		6			14
Net cash provided by (used in) operating activities		121			(510		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(92		)	(96		)
Proceeds from sales of property and equipment		3			6
Proceeds from sale of investments		—			936
Settlements for businesses acquired, net of cash acquired		—			2
Net cash provided by (used in) investing activities		(89		)	848
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock in initial public offering, net of transaction fees		—			1,039
Proceeds from issuance of common stock under employee benefit plans		40			—
Purchase of treasury shares		(40		)	—
Borrowings of long-term debt		20			79
Repayments of long-term debt		(27		)	(1,621		)
Borrowings on long-term revolver debt		524			736
Repayments on long-term revolver debt		(554		)	(556		)
Debt issuance and modification costs		(3		)	(34		)
Net cash used in financing activities		(40		)	(357		)
Effect of exchange rates on cash and cash equivalents		—			(2		)
Increase (decrease) in cash and cash equivalents		$	(8	)	$	(21	)
Cash and cash equivalents at beginning of period		115			141
Cash and cash equivalents at end of period		$	107		$	120

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Amounts in millions, unaudited

 

		Three Months Ended						Nine Months Ended
		November 2, 2014			November 3, 2013			November 2, 2014			November 3, 2013
Net Sales		$	2,488		$	2,273		$	7,096		$	6,558
Cost of sales		1,762			1,611			5,017			4,646
Gross Profit		726			662			2,079			1,912
Operating expenses:
Selling, general and administrative		467			441			1,382			1,318
Depreciation and amortization		57			61			183			181
Restructuring		—			—			7			—
Total operating expenses		524			502			1,572			1,499
Operating Income		202			160			507			413
Interest expense		115			117			347			409
Loss on extinguishment & modification of debt		—			—			2			87
Other (income) expense, net		(4		)	—			(3		)	20
Income (Loss) from Continuing Operations Before Provision for Income Taxes		91			43			161			(103		)
Provision (benefit) for income taxes		31			(8		)	54			47
Income (Loss) from Continuing Operations		60			51			107			(150		)
Income (loss) from discontinued operations, net of tax		—			—			(11		)	(2		)
Net Income (Loss)		$	60		$	51		$	96		$	(152	)
Other comprehensive income (loss) — foreign currency translation adjustment		(3		)	—			(1		)	(4		)
Total Comprehensive Income (Loss)		$	57		$	51		$	95		$	(156	)

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

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

 

		November 2, 2014			February 2, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	103		$	111
Receivables, less allowance for doubtful accounts of $17 and $18		1,304			1,046
Inventories		1,168			1,072
Deferred tax asset		5			7
Other current assets		37			63
Total current assets		2,617			2,299
Property and equipment, net		400			405
Goodwill		3,136			3,137
Intangible assets, net		242			338
Other assets		124			141
Total assets		$	6,519		$	6,320
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	867		$	664
Accrued compensation and benefits		145			149
Current installments of long-term debt		10			10
Other current liabilities		202			270
Total current liabilities		1,224			1,093
Long-term debt, excluding current installments		5,498			5,534
Deferred tax liabilities		148			114
Other liabilities		309			347
Total liabilities		7,179			7,088
Stockholder’s equity (deficit):
Common stock, par value $0.01; 1,000 shares authorized; 1,000 shares issued and outstanding		—			—
Paid-in capital		3,763			3,750
Accumulated deficit		(4,407		)	(4,503		)
Accumulated other comprehensive loss		(16		)	(15		)
Total stockholder’s equity (deficit)		(660		)	(768		)
Total liabilities and stockholder’s equity (deficit)		$	6,519		$	6,320

 

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

 

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HD SUPPLY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

 

		Nine Months Ended
		November 2, 2014			November 3, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	96		$	(152	)
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		187			184
Provision for uncollectibles		6			4
Non-cash interest expense		19			23
Payment of PIK interest & discounts upon extinguishment of debt		(1		)	(364		)
Loss on extinguishment & modification of debt		2			87
Stock-based compensation expense		12			12
Deferred income taxes		43			35
Other		—			(2		)
Changes in assets and liabilities:
(Increase) decrease in receivables		(264		)	(226		)
(Increase) decrease in inventories		(96		)	(87		)
(Increase) decrease in other current assets		26			4
Increase (decrease) in accounts payable and accrued liabilities		85			(42		)
Increase (decrease) in other long-term liabilities		6			14
Net cash provided by (used in) operating activities		121			(510		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(92		)	(96		)
Proceeds from sales of property and equipment		3			6
Proceeds from sale of investments		—			936
Settlement for businesses acquired, net of cash acquired		—			2
Net cash provided by (used in) investing activities		(89		)	848
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity contribution		—			1,039
Borrowings of long-term debt		20			79
Repayments of long-term debt		(27		)	(1,621		)
Borrowings on long-term revolver debt		524			736
Repayments on long-term revolver debt		(554		)	(556		)
Debt issuance and modification costs		(3		)	(34		)
Net cash used in financing activities		(40		)	(357		)
Effect of exchange rates on cash and cash equivalents		—			(2		)
Increase (decrease) in cash and cash equivalents		$	(8	)	$	(21	)
Cash and cash equivalents at beginning of period		111			141
Cash and cash equivalents at end of period		$	103		$	120

 

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

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

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

 

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in three distinct market sectors: Maintenance, Repair & Operations; Infrastructure & Power; and Specialty Construction. Through approximately 650 locations across 48 U.S. states and seven Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 16,000 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, home builders, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services include over one million stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from infrastructure and construction to maintenance, repair and operations.

 

HD Supply is managed primarily on a product line basis and reports results of operations in four reportable segments. The reportable segments are Facilities Maintenance, Waterworks, Power Solutions, and Construction & Industrial - White Cap. Other operating segments include Hardware Solutions (previously known as Crown Bolt), Home Improvement Solutions (previously known as Repair & Remodel), Interior Solutions (previously known as Creative Touch Interiors), and HD Supply Canada. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

 

Basis of Presentation

 

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

 

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K, as amended, for the year ended February 2, 2014, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). Certain amounts in the prior-period financial statements have been reclassified to conform to the current period’s presentation.

 

Fiscal Year

 

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  Fiscal years ending February 1, 2015 (“fiscal 2014”) and February 2, 2014 (“fiscal 2013”) both include 52 weeks. The three months ended November 2, 2014 and November 3, 2013 both included 13 weeks and the nine months ended November 2, 2014 and November 3, 2013 both included 39 weeks.

 

Principles of Consolidation

 

The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS.  The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned

 

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition. The results of operations of all discontinued operations have been separately reported as discontinued operations for all periods presented.

 

Estimates

 

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

 

Self-Insurance

 

HD Supply has a high deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for medical claims and certain legal claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At November 2, 2014 and February 2, 2014, self-insurance reserves totaled approximately $97 million and $94 million, respectively.

 

NOTE 2 —PUBLIC OFFERINGS

 

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

 

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

 

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

 

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

 

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

 

NOTE 3 — DISCONTINUED OPERATIONS

 

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

 

Summary Financial Information

 

In accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations, the results of Litemor’s operations and the loss on disposal of the business are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and loss on the disposal of business, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). All Consolidated Statements of Operations and Comprehensive Income (Loss) presented have been revised to reflect this presentation.

 

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

 

		Three Months Ended						Nine Months Ended
		November 2, 2014			November 3, 2013			November 2, 2014			November 3, 2013
Net sales		$	—		$	23		$	17		$	63
Loss on disposal of discontinued operations		—			—			(15		)	(2		)
Income (loss) before provision for income taxes		$	—		$	—		$	(15	)	$	(2	)
Provision for income taxes		—			—			4			—
Income (loss) from discontinued operations, net of tax		$	—		$	—		$	(11	)	$	(2	)

 

NOTE 4 — RELATED PARTIES

 

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

 

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

 

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

 

Equity Sponsors

 

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

 

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

 

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

 

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

 

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

 

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NOTE 5 — DEBT

 

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

 

		November 2, 2014					February 2, 2014
		Outstanding Principal			Interest Rate %(1)		Outstanding Principal			Interest Rate %(1)
Senior ABL Facility due 2018		$	330		1.65		$	360		1.66
Term Loans due 2018, net of unamortized discount of $15 million and $19 million		962			4.00		966			4.50
First Priority Notes due 2019, including unamortized premium of $15 million and $18 million		1,266			8.125		1,268			8.125
Second Priority Notes due 2020		675			11.00		675			11.00
October 2012 Senior Unsecured Notes due 2020		1,000			11.50		1,000			11.50
February 2013 Senior Unsecured Notes due 2020		1,275			7.50		1,275			7.50
Total long-term debt		$	5,508				$	5,544
Less current installments		(10		)			(10		)
Long-term debt, excluding current installments		$	5,498				$	5,534

 

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

 

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

 

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

 

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

 

Senior Credit Facilities

 

Asset Based Lending Facility

 

HDS’s Senior Asset Based Lending Facility (“Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under a borrowing base).  Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and

 

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eligible accounts receivable, subject to certain reserves and other adjustments. A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of November 2, 2014, HDS has $1,116 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $54 million in letters of credit issued and including $70 million of borrowings available on qualifying cash balances).

 

The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility. The Senior ABL Facility will mature on June 28, 2018.

 

Senior Secured Term Loan Facility

 

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

 

Secured Notes

 

81/8% Senior Secured First Priority Notes due 2019

 

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

 

Redemption

 

HDS may redeem the First Priority Notes, in whole or in part, at any time (1) prior to April 15, 2015, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the indenture governing the First Priority Notes and (2) on and after April 15, 2015, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on April 15 of the year set forth below.

 

Year		Percentage
2015		106.094	%
2016		104.063	%
2017		102.031	%
2018 and thereafter		100.000	%

 

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

 

11% Senior Secured Second Priority Notes due 2020

 

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

 

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