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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 12/10/19 HD Supply Holdings, Inc. 10-Q 11/03/19 91:8.8M Toppan Merrill/FA HD Supply, Inc. |
Document/Exhibit Description Pages Size
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i 10-Q
(Mark One)
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i November 3, 2019
- OR -
i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File |
| Exact name of Registrant as specified in its |
| State of incorporation |
| I.R.S. Employer |
| i HD
SUPPLY HOLDINGS, INC. | | i Delaware | | i 26-0486780 | |
| i HD
SUPPLY, INC. | | i Delaware | | i 75-2007383 |
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class |
| Trading Symbol |
| Name of Each Exchange on Which Registered |
i HD Supply Holdings, Inc. common stock, par value $0.01 per share | | i HDS | | The i NASDAQ Stock Market LLC |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
HD Supply Holdings, Inc. |
| i Yes ⌧ No ◻ |
HD Supply, Inc. | | Yes ◻ i No ⌧ |
Indicate by check mark whether the Registrant has submitted electronically 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. |
| i Yes ⌧ No ◻ |
HD Supply, Inc. | | i Yes ⌧ No ◻ |
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
HD Supply Holdings, Inc. |
| |
| |
| |
i Large accelerated filer ☒ | | Accelerated filer ◻ | | Smaller reporting company i ☐ | | |
Non-accelerated filer ◻ | ||||||
Emerging growth company i ☐ | | | ||||
HD Supply, Inc. |
| |
| |
| |
Large accelerated filer ◻ | | Accelerated filer ◻ | | Smaller reporting company i ☐ | | |
i Non-accelerated filer ⌧ | ||||||
Emerging growth company i ☐ | | | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
HD Supply Holdings, Inc. ◻ | |
HD Supply, Inc. ◻ | |
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 ☐ i No ⌧ |
HD Supply, Inc. | | Yes ☐ i No ⌧ |
The number of shares of the Registrant’s common stock outstanding as of December 6, 2019:
HD Supply Holdings, Inc. | | i 162,163,294 shares of common stock, par value $0.01 per share |
HD Supply, Inc. | | i 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. |
INDEX TO FORM 10-Q
| | |
| | Page |
| 3 | |
| | |
| 3 | |
| | |
| ||
| | |
| ||
| | |
| HD Supply Holdings, Inc. | |
| 5 | |
| | |
| Consolidated Balance Sheets as of November 3, 2019 and February 3, 2019 (unaudited) | 6 |
| | |
| 7 | |
| | |
| 8 | |
| | |
| HD Supply, Inc. | |
| 9 | |
| | |
| Consolidated Balance Sheets as of November 3, 2019 and February 3, 2019 (unaudited) | 10 |
| | |
| 11 | |
| | |
| 12 | |
| | |
| 13 | |
| | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |
| | |
42 | ||
| | |
42 | ||
| | |
| ||
| | |
42 | ||
| | |
43 | ||
| | |
45 | ||
| | |
47 | ||
| | |
49 | ||
2
EXPLANATORY NOTE
This Form 10-Q is a combined quarterly report being filed separately by two registrants: HD Supply Holdings, Inc. and HD Supply, Inc. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to HD Supply Holdings, Inc., any reference to “HDS” refers to HD Supply, Inc., the indirect wholly-owned subsidiary of Holdings, and any references to “HD Supply,” the “Company,” “we,” “us” and “our” refer to HD Supply Holdings, Inc. together with its direct and indirect subsidiaries, including HDS. Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.
FORWARD-LOOKING STATEMENTS AND INFORMATION
This quarterly report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth strategies and the industries in which we operate.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements; including those factors discussed in Item 1A, Risk Factors in our annual report on Form 10-K for the fiscal year ended February 3, 2019 and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations, financial condition and liquidity, and the development of the industries in which we operate include:
| ● | our ability to successfully complete the previously announced separation of our Facilities Maintenance and Construction & Industrial businesses into two independent publicly traded companies and obtain the benefits therefrom; |
| ● | the incurrence of significant transaction costs; |
| ● | the increased demands on management to prepare for and accomplish the separation; |
| ● | inherent risks of the maintenance, repair and operations market and the non-residential and residential construction markets; |
| ● | our ability to maintain profitability; |
| ● | our ability to service our debt and to refinance all or a portion of our indebtedness; |
| ● | limitations and restrictions in the agreements governing our indebtedness; |
| ● | the competitive environment in which we operate and demand for our products and services in highly competitive and fragmented industries; |
| ● | the loss of any of our significant customers; |
| ● | competitive pricing pressure from our customers; |
3
| ● | our ability to identify and acquire suitable acquisition candidates on favorable terms; |
| ● | cyclicality and seasonality of the maintenance, repair and operations market and the non-residential and residential construction markets; |
| ● | our ability to identify and develop relationships with a sufficient number of qualified suppliers to maintain our supply chains; |
| ● | our ability to manage fixed costs; |
| ● | the development of alternatives to distributors in the supply chain; |
| ● | our ability to manage our working capital through product purchasing and customer credit policies; |
| ● | interruptions in the proper functioning of our information technology, or “IT” systems, including from cybersecurity threats; |
| ● | potential material liabilities under our self-insured programs; |
| ● | our ability to attract, train and retain highly-qualified associates and key personnel; |
| ● | new and/or proposed trade policies could make sourcing product from foreign countries more difficult and more costly; |
| ● | limitations on our income tax net operating loss carryforwards in the event of an ownership change; and |
| ● | our ability to identify and integrate new products. |
You should read this report completely and with the understanding that actual future results may be materially different from expectations. These cautionary statements qualify all forward-looking statements made in this report. These forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Amounts in millions, except share and per share data, unaudited
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
|
|
|
| ||||||||
Net Sales | | $ | i 1,644 | | $ | i 1,612 | | $ | i 4,761 | | $ | i 4,601 |
Cost of sales | | | i 1,004 | |
| i 983 | | | i 2,903 | |
| i 2,798 |
Gross Profit | | | i 640 | |
| i 629 | | | i 1,858 | |
| i 1,803 |
Operating expenses: | | | | | | | | | | | | |
Selling, general, and administrative | | | i 405 | |
| i 391 | | | i 1,193 | |
| i 1,147 |
Depreciation and amortization | | | i 26 | |
| i 25 | | | i 77 | |
| i 72 |
Restructuring and separation | | | i 4 | |
| — | | | i 2 | |
| i 9 |
Total operating expenses | | | i 435 | |
| i 416 | | | i 1,272 | |
| i 1,228 |
Operating Income | | | i 205 | |
| i 213 | | | i 586 | |
| i 575 |
Interest expense | | | i 27 | |
| i 32 | | | i 83 | |
| i 101 |
Interest (income) | | | — | | | — | | | — | | | ( i 1) |
Loss on extinguishment & modification of debt | | | — | |
| i 69 | | | — | |
| i 69 |
Income from Continuing Operations Before Provision for Income Taxes | | | i 178 | | | i 112 | | | i 503 | | | i 406 |
Provision for income taxes | | | i 47 | |
| i 30 | | | i 130 | |
| i 105 |
Income from Continuing Operations | | $ | i 131 | | $ | i 82 | | $ | i 373 | | $ | i 301 |
Income from discontinued operations, net of tax | | | i 1 | |
| — | | | i 1 | | | i 1 |
Net Income | | $ | i 132 | | $ | i 82 | | $ | i 374 | | $ | i 302 |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | |
| — | | | — | |
| i 2 |
Unrealized loss on cash flow hedge, net of tax of $—, $ i 1, $ i 7, and $ i 1 | | | — | | | ( i 4) | | | ( i 21) | | | ( i 4) |
Total Comprehensive Income | | $ | i 132 | | $ | i 78 | | $ | i 353 | | $ | i 300 |
| | | | | | | | | | | | |
Weighted Average Common Shares Outstanding (thousands) | | | | | | | | | | | | |
Basic | | | i 164,638 | |
| i 182,730 | | | i 168,062 | |
| i 183,349 |
Diluted | | | i 165,142 | | | i 183,579 | | | i 168,645 | | | i 184,192 |
| | | | | | | | | | | | |
Basic Earnings Per Share(1): | | | | | | | | | | | | |
Income from Continuing Operations | | $ | i 0.80 | | $ | i 0.45 | | $ | i 2.22 | | $ | i 1.64 |
Income from Discontinued Operations | | $ | i 0.01 | | $ | — | | $ | i 0.01 | | $ | i 0.01 |
Net Income | | $ | i 0.80 | | $ | i 0.45 | | $ | i 2.23 | | $ | i 1.65 |
Diluted Earnings Per Share(1): | | | | | | | | | | | | |
Income from Continuing Operations | | $ | i 0.79 | | $ | i 0.45 | | $ | i 2.21 | | $ | i 1.63 |
Income from Discontinued Operations | | $ | i 0.01 | | $ | — | | $ | i 0.01 | | $ | i 0.01 |
Net Income | | $ | i 0.80 | | $ | i 0.45 | | $ | i 2.22 | | $ | i 1.64 |
| (1) | May not foot due to rounding. |
The accompanying notes are an integral part of these consolidated financial statements.
5
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions, except share and per share data, unaudited
| | | | | | |
|
|
| ||||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | i 37 | | $ | i 38 |
Receivables, less allowance for doubtful accounts of $ i 19 and $ i 18 | |
| i 863 | |
| i 732 |
Inventories | |
| i 802 | |
| i 766 |
Other current assets | |
| i 96 | |
| i 50 |
Total current assets | |
| i 1,798 | |
| i 1,586 |
Property and equipment, net | |
| i 397 | |
| i 370 |
Operating lease right-of-use assets | | | i 425 | | | — |
Goodwill | |
| i 1,991 | |
| i 1,990 |
Intangible assets, net | |
| i 181 | |
| i 191 |
Deferred tax assets | | | i 2 | | | i 78 |
Other assets | |
| i 13 | |
| i 18 |
Total assets | | $ | i 4,807 | | $ | i 4,233 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | i 474 | | $ | i 367 |
Accrued compensation and benefits | |
| i 87 | |
| i 109 |
Current installments of long-term debt | |
| i 11 | |
| i 11 |
Current lease liabilities | | | i 115 | | | — |
Other current liabilities | |
| i 220 | |
| i 259 |
Total current liabilities | |
| i 907 | |
| i 746 |
Long-term debt, excluding current installments | |
| i 2,138 | |
| i 2,129 |
Deferred tax liabilities | | | i 15 | | | — |
Long-term lease liabilities | | | i 323 | | | — |
Other liabilities | |
| i 96 | |
| i 77 |
Total liabilities | |
| i 3,479 | |
| i 2,952 |
Stockholders’ equity: | | | | | | |
Common stock, par value $ i i 0.01 / ; i i 1 / billion shares authorized; i 162.8 million and i 170.7 million shares issued and outstanding at November 3, 2019 and February 3, 2019, respectively | |
| i 2 | |
| i 2 |
Paid-in capital | |
| i 4,092 | |
| i 4,067 |
Accumulated deficit | |
| ( i 1,201) | |
| ( i 1,572) |
Accumulated other comprehensive loss | |
| ( i 51) | |
| ( i 30) |
Treasury stock, at cost, i 42.6 and i 34.2 million shares at November 3, 2019 and February 3, 2019, respectively | | | ( i 1,514) | | | ( i 1,186) |
Total stockholders’ equity | |
| i 1,328 | |
| i 1,281 |
Total liabilities and stockholders’ equity | | $ | i 4,807 | | $ | i 4,233 |
The accompanying notes are an integral part of these consolidated financial statements.
6
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in millions, unaudited
| | | | | | |
| | Nine Months Ended | ||||
|
|
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | i 374 | | $ | i 302 |
Reconciliation of net income to net cash provided by (used in) operating activities: | | | | | | |
Depreciation and amortization | | | i 83 | |
| i 78 |
Provision for uncollectibles | | | i 7 | |
| i 9 |
Non-cash interest expense | | | i 5 | |
| i 15 |
Payment of discounts upon extinguishment of debt | | | — | | | ( i 4) |
Loss on extinguishment & modification of debt | | | — | |
| i 69 |
Stock-based compensation expense | | | i 18 | |
| i 19 |
Deferred income taxes | | | i 102 | |
| i 97 |
Other | | | i 2 | |
| ( i 1) |
Changes in assets and liabilities, net of the effects of acquisitions & dispositions: | | | | | | |
(Increase) decrease in receivables | | | ( i 134) | |
| ( i 204) |
(Increase) decrease in inventories | | | ( i 34) | |
| ( i 94) |
(Increase) decrease in other current assets | | | ( i 2) | |
| ( i 3) |
Increase (decrease) in accounts payable and accrued liabilities | | | i 76 | |
| i 95 |
Increase (decrease) in other long-term liabilities | | | — | |
| i 1 |
Net cash provided by (used in) operating activities | | | i 497 | |
| i 379 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Capital expenditures | | | ( i 89) | |
| ( i 79) |
Payments for businesses acquired, net of cash acquired | | | ( i 9) | | | ( i 362) |
Proceeds from sales of property and equipment | | | i 2 | | | — |
Net cash provided by (used in) investing activities | | | ( i 96) | |
| ( i 441) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Purchase of treasury shares | | | ( i 320) | | | ( i 166) |
Borrowings of long-term debt | | | — | |
| i 930 |
Repayments of long-term debt | | | ( i 8) | |
| ( i 1,240) |
Repayments of financing liabilities | | | ( i 88) | | | — |
Borrowings on long-term revolver debt | | | i 978 | |
| i 100 |
Repayments on long-term revolver debt | | | ( i 964) | |
| ( i 49) |
Proceeds from issuance of common stock under employee benefit plans | | | i 7 | | | i 7 |
Tax withholdings on stock-based awards | | | ( i 6) | | | ( i 6) |
Debt issuance costs | | | — | | | ( i 18) |
Other financing activities | | | ( i 1) | | | ( i 2) |
Net cash provided by (used in) financing activities | | | ( i 402) | |
| ( i 444) |
Effect of exchange rates on cash and cash equivalents | | | i — | |
| i — |
Increase (decrease) in cash and cash equivalents | | $ | ( i 1) | | $ | ( i 506) |
Cash and cash equivalents at beginning of period | | | i 38 | |
| i 558 |
Cash and cash equivalents at end of period | | $ | i 37 | | $ | i 52 |
The accompanying notes are an integral part of these consolidated financial statements.
7
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Dollars in millions, shares in thousands, unaudited
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended | ||||||||||||||||
| | |
| | ||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount | ||||
Common Stock |
|
|
| |
|
|
|
| |
| |
|
| |
|
|
|
| |
|
Beginning balance |
| i 205,409 | | $ | i 2 |
| i 204,564 | | $ | i 2 | | i 204,806 | | $ | i 2 |
| i 203,914 | | $ | i 2 |
Net shares issued (forfeited) under employee benefit plans |
| ( i 6) | |
| — |
| i 21 | |
| — | | i 597 | |
| — |
| i 671 | |
| — |
Ending balance |
| i 205,403 | | $ | i 2 |
| i 204,585 | | $ | i 2 | | i 205,403 | | $ | i 2 |
| i 204,585 | | $ | i 2 |
Paid-in Capital |
|
| |
| |
|
| |
|
| |
| |
| |
|
| |
| |
Beginning balance |
| | | $ | i 4,086 |
| | | $ | i 4,047 | | | | $ | i 4,067 |
| | | $ | i 4,029 |
Stock-based compensation |
| | |
| i 6 |
| | |
| i 7 | | | |
| i 18 |
| | |
| i 19 |
Shares issued under employee benefit plans |
| | |
| — |
| | |
| — | | | |
| i 7 |
| | |
| i 7 |
Other |
| | |
| — |
| | |
| i 1 | | | |
| — |
| | |
| — |
Ending balance |
| — | | $ | i 4,092 |
| | | $ | i 4,055 | | | | $ | i 4,092 |
| — | | $ | i 4,055 |
Accumulated Deficit |
|
| |
| |
|
| |
| | |
| |
| |
|
| |
| |
Beginning balance |
| | | $ | ( i 1,332) |
| | | $ | ( i 1,745) | | | | $ | ( i 1,572) |
| | | $ | ( i 1,966) |
Cumulative effect of accounting change | | | | | — | | | | | — | | | | | ( i 3) | | | | | — |
Net Income |
| | |
| i 132 |
| | |
| i 82 | | | |
| i 374 |
| | |
| i 302 |
Other | | | | | ( i 1) | | | | | — | | | | | — | | | | | i 1 |
Ending balance |
| — | | $ | ( i 1,201) | | | | $ | ( i 1,663) | | | | $ | ( i 1,201) |
| — | | $ | ( i 1,663) |
Accumulated Other Comprehensive Income (Loss) |
|
| |
| |
|
| |
| | |
| |
| |
|
| |
| |
Beginning balance |
| | | $ | ( i 51) |
| | | $ | ( i 15) | | | | $ | ( i 30) |
| | | $ | ( i 17) |
Unrealized loss on cash flow hedge, net of tax of $—, $ i 1, $ i 7, and $ i 1 |
| | |
| — |
| | |
| ( i 4) | | | |
| ( i 21) |
| | |
| ( i 4) |
Foreign currency translation adjustment |
| | |
| — |
| | |
| — | | | |
| — |
| | |
| i 2 |
Other | | | | | — | | | | | ( i 1) | | | | | — | | | | | ( i 1) |
Ending balance |
| — | | $ | ( i 51) |
| | | $ | ( i 20) | | | | $ | ( i 51) |
| — | | $ | ( i 20) |
Treasury Stock |
|
| |
| |
|
| |
| | |
| |
| |
|
| |
| |
Beginning balance |
| ( i 36,338) | | $ | ( i 1,274) |
| ( i 20,778) | | $ | ( i 681) | | ( i 34,153) | | $ | ( i 1,186) | $ | ( i 18,190) | | $ | ( i 582) |
Purchase of common stock |
| ( i 6,254) | |
| ( i 240) |
| ( i 2,422) | |
| ( i 92) | | ( i 8,320) | |
| ( i 323) |
| ( i 4,849) | |
| ( i 185) |
Shares withheld for taxes |
| ( i 8) | |
| — |
| ( i 13) | |
| ( i 1) | | ( i 127) | |
| ( i 5) |
| ( i 174) | |
| ( i 7) |
Ending balance |
| ( i 42,600) | | $ | ( i 1,514) |
| ( i 23,213) | | $ | ( i 774) | | ( i 42,600) | | $ | ( i 1,514) |
| ( i 23,213) | | $ | ( i 774) |
| | | | | | | | | | | | | | | | | | | | |
Total Stockholders’ Equity |
| i 162,803 | | $ | i 1,328 |
| i 181,372 | | $ | i 1,600 | | i 162,803 | | $ | i 1,328 |
| i 181,372 | | $ | i 1,600 |
The accompanying notes are an integral part of these consolidated financial statements.
8
HD SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Amounts in millions, unaudited
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
|
|
|
| ||||||||
Net Sales | | $ | i 1,644 | | $ | i 1,612 | | $ | i 4,761 | | $ | i 4,601 |
Cost of sales | | | i 1,004 | |
| i 983 | | | i 2,903 | |
| i 2,798 |
Gross Profit | | | i 640 | |
| i 629 | | | i 1,858 | |
| i 1,803 |
Operating expenses: | | | | | | | | | | | | |
Selling, general, and administrative | | | i 405 | |
| i 391 | | | i 1,193 | |
| i 1,147 |
Depreciation and amortization | | | i 26 | |
| i 25 | | | i 77 | |
| i 72 |
Restructuring and separation | | | i 4 | |
| — | | | i 2 | |
| i 9 |
Total operating expenses | | | i 435 | |
| i 416 | | | i 1,272 | |
| i 1,228 |
Operating Income | | | i 205 | |
| i 213 | | | i 586 | |
| i 575 |
Interest expense | | | i 27 | |
| i 32 | | | i 83 | |
| i 101 |
Interest (income) | | | — | | | — | | | — | | | ( i 1) |
Loss on extinguishment & modification of debt | | | — | |
| i 69 | | | — | |
| i 69 |
Income from Continuing Operations Before Provision for Income Taxes | | | i 178 | | | i 112 | | | i 503 | | | i 406 |
Provision for income taxes | | | i 47 | | | i 30 | | | i 130 | |
| i 105 |
Income from Continuing Operations | | $ | i 131 | | $ | i 82 | | $ | i 373 | | $ | i 301 |
Income from discontinued operations, net of tax | | | i 1 | | | — | | | i 1 | | | i 1 |
Net Income | | $ | i 132 | | $ | i 82 | | $ | i 374 | | $ | i 302 |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | | | — | | | — | | | i 2 |
Unrealized loss on cash flow hedge, net of tax of $—, $ i 1, $ i 7, and $ i 1 | | | — | | | ( i 4) | | | ( i 21) | | | ( i 4) |
Total Comprehensive Income | | $ | i 132 | | $ | i 78 | | $ | i 353 | | $ | i 300 |
The accompanying notes are an integral part of these consolidated financial statements.
9
HD SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in millions, except share and per share data, unaudited
| | | | | | |
|
|
| ||||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | i 37 | | $ | i 38 |
Receivables, less allowance for doubtful accounts of $ i 19 and $ i 18 | |
| i 863 | |
| i 732 |
Inventories | |
| i 802 | |
| i 766 |
Other current assets | |
| i 96 | |
| i 50 |
Total current assets | |
| i 1,798 | |
| i 1,586 |
Property and equipment, net | |
| i 397 | |
| i 370 |
Operating lease right-of-use assets | | | i 425 | | | — |
Goodwill | |
| i 1,991 | |
| i 1,990 |
Intangible assets, net | |
| i 181 | |
| i 191 |
Deferred tax assets | | | i 2 | | | i 78 |
Other assets | |
| i 13 | |
| i 18 |
Total assets | | $ | i 4,807 | | $ | i 4,233 |
LIABILITIES AND STOCKHOLDER’S EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | i 474 | | $ | i 367 |
Accrued compensation and benefits | |
| i 87 | |
| i 109 |
Current installments of long-term debt | |
| i 11 | |
| i 11 |
Current lease liabilities | | | i 115 | | | — |
Other current liabilities | |
| i 216 | |
| i 257 |
Total current liabilities | |
| i 903 | |
| i 744 |
Long-term debt, excluding current installments | |
| i 2,138 | |
| i 2,129 |
Deferred tax liabilities | | | i 15 | | | — |
Long-term lease liabilities | | | i 323 | | | — |
Other liabilities | |
| i 96 | |
| i 77 |
Total liabilities | |
| i 3,475 | |
| i 2,950 |
Stockholder’s equity: | | | | | | |
Common stock, par value $ i i 0.01 / ; authorized i i 1,000 / shares; issued and outstanding i i 1,000 / shares at November 3, 2019 and February 3, 2019 | |
| i — | |
| i — |
Paid-in capital | |
| i 2,425 | |
| i 2,726 |
Accumulated deficit | |
| ( i 1,042) | |
| ( i 1,413) |
Accumulated other comprehensive loss | |
| ( i 51) | |
| ( i 30) |
Total stockholder’s equity | |
| i 1,332 | |
| i 1,283 |
Total liabilities and stockholder’s equity | | $ | i 4,807 | | $ | i 4,233 |
The accompanying notes are an integral part of these consolidated financial statements.
10
HD SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in millions, unaudited
| | | | | | |
| | Nine Months Ended | ||||
|
|
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | i 374 | | $ | i 302 |
Reconciliation of net income to net cash provided by (used in) operating activities: | | | | | | |
Depreciation and amortization | |
| i 83 | |
| i 78 |
Provision for uncollectibles | |
| i 7 | |
| i 9 |
Non-cash interest expense | |
| i 5 | |
| i 15 |
Payment of discounts upon extinguishment of debt | | | — | | | ( i 4) |
Loss on extinguishment & modification of debt | |
| — | |
| i 69 |
Stock-based compensation expense | |
| i 18 | |
| i 19 |
Deferred income taxes | |
| i 102 | |
| i 97 |
Other | |
| i 2 | |
| ( i 1) |
Changes in assets and liabilities, net of the effects of acquisitions & dispositions: | | | | | | |
(Increase) decrease in receivables | |
| ( i 134) | |
| ( i 204) |
(Increase) decrease in inventories | |
| ( i 34) | |
| ( i 94) |
(Increase) decrease in other current assets | |
| ( i 2) | |
| ( i 3) |
Increase (decrease) in accounts payable and accrued liabilities | |
| i 76 | |
| i 95 |
Increase (decrease) in other long-term liabilities | |
| — | |
| i 1 |
Net cash provided by (used in) operating activities | |
| i 497 | |
| i 379 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Capital expenditures | |
| ( i 89) | |
| ( i 79) |
Payments for businesses acquired, net of cash acquired | | | ( i 9) | | | ( i 362) |
Proceeds from sales of property and equipment | |
| i 2 | |
| — |
Net cash provided by (used in) investing activities | |
| ( i 96) | |
| ( i 441) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Equity distribution to Parent | | | ( i 319) | | | ( i 172) |
Borrowings of long-term debt | |
| — | |
| i 930 |
Repayments of long-term debt | |
| ( i 8) | |
| ( i 1,240) |
Repayments of financing liabilities | | | ( i 88) | | | — |
Borrowings on long-term revolver debt | |
| i 978 | |
| i 100 |
Repayments on long-term revolver debt | |
| ( i 964) | |
| ( i 49) |
Debt issuance costs | | | — | | | ( i 18) |
Other financing activities | | | ( i 1) | | | ( i 2) |
Net cash provided by (used in) financing activities | |
| ( i 402) | |
| ( i 451) |
Effect of exchange rates on cash and cash equivalents | |
| — | |
| — |
Increase (decrease) in cash and cash equivalents | | $ | ( i 1) | | $ | ( i 513) |
Cash and cash equivalents at beginning of period | | | i 38 | |
| i 558 |
Cash and cash equivalents at end of period | | $ | i 37 | | $ | i 45 |
The accompanying notes are an integral part of these consolidated financial statements.
11
HD SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
Dollars in millions, shares in thousands, unaudited
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||||||||||
|
|
|
|
| ||||||||||||||||
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | ||||
Common Stock |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
Beginning balance | | i 1 | | $ | — | | i 1 | | $ | — | | i 1 | | $ | — | | i 1 | | $ | — |
Ending balance | | i 1 | | $ | — | | i 1 | | $ | — | | i 1 | | $ | — | | i 1 | | $ | — |
Paid-in Capital | | | |
|
| | | |
|
| | | |
|
| | | |
|
|
Beginning balance | | | | $ | i 2,662 | | | | $ | i 3,208 | | | | $ | i 2,726 | | | | $ | i 3,290 |
Equity distribution to Parent | | | |
| ( i 243) | | | |
| ( i 78) | | | |
| ( i 319) | | | |
| ( i 172) |
Stock-based compensation | | | |
| i 6 | | | |
| i 7 | | | |
| i 18 | | | |
| i 19 |
Other | | | |
| — | | | |
| — | | | |
| — | | | |
| — |
Ending balance | | — | | $ | i 2,425 | | — | | $ | i 3,137 | | — | | $ | i 2,425 | | — | | $ | i 3,137 |
Accumulated Deficit | | | |
| | | | |
| | | | |
| | | | |
| |
Beginning balance | | | | $ | ( i 1,173) | | | | $ | ( i 1,586) | | | | $ | ( i 1,413) | | | | $ | ( i 1,807) |
Cumulative effect of accounting change | | | | | — | | | | | — | | | | | ( i 3) | | | | | — |
Net Income | | | |
| i 132 | | | |
| i 82 | | | |
| i 374 | | | |
| i 302 |
Other | | | | | ( i 1) | | | | | — | | | | | — | | | | | i 1 |
Ending balance | | — | | $ | ( i 1,042) | | — | | $ | ( i 1,504) | | — | | $ | ( i 1,042) | | — | | $ | ( i 1,504) |
Accumulated Other Comprehensive Income (Loss) | | | |
| | | | |
| | | | |
| | | | |
| |
Beginning balance | | | | $ | ( i 51) | | | | $ | ( i 15) | | | | $ | ( i 30) | | | | $ | ( i 17) |
Unrealized loss on cash flow hedge, net of tax of $—, $ i 1, $ i 7, and $ i 1 | | | |
| — | | | |
| ( i 4) | | | |
| ( i 21) | | | |
| ( i 4) |
Foreign currency translation adjustment | | | |
| — | | | |
| — | | | |
| — | | | |
| i 2 |
Other | | | | | — | | | | | ( i 1) | | | | | — | | | | | ( i 1) |
Ending balance | | — | | $ | ( i 51) | | — | | $ | ( i 20) | | — | | $ | ( i 51) | | — | | $ | ( i 20) |
| | | | | | | | | | | | | | | | | | | | |
Total Stockholder's Equity | | i 1 | | $ | i 1,332 | | i 1 | | $ | i 1,613 | | i 1 | | $ | i 1,332 | | i 1 | | $ | i 1,613 |
The accompanying notes are an integral part of these consolidated financial statements.
12
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
iNature 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 i two distinct market sectors: Maintenance, Repair & Operations and Specialty Construction. Through approximately i 270 branches and i 44 distribution centers in the U.S. and Canada, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately i 11,500 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately i 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services includes approximately i 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from construction to maintenance, repair and operations.
HD Supply is managed primarily on a product line basis and reports results of operations in i two reportable segments. The reportable segments are Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.
/
iBasis of Presentation
In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended February 3, 2019, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).
iFiscal Year
HD Supply’s fiscal year is a i 52- or i 53-week period ending on the Sunday nearest to January 31. The fiscal year ending February 2, 2020 (“fiscal 2019”) includes i 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included i 53 weeks. The three months ended November 3, 2019 (“third quarter 2019”) and October 28, 2018 (“third quarter 2018”) both include i i 13 / weeks. The nine months ended November 3, 2019 and October 28, 2018 both include i i 39 / weeks.
/
iPrinciples of Consolidation
The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS. The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition.
iEstimates
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.
/13
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Self-Insurance
HD Supply has a high-deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for certain legal claims and medical claims, while maintaining per employee stop-loss coverage. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At November 3, 2019 and February 3, 2019, self-insurance reserves totaled approximately $ i 51 million and $ i 49 million, respectively.
/
iNOTE 2 — ACQUISITIONS
HD Supply enters into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), the results of acquisitions completed by HD Supply are reflected in the Company’s consolidated financial statements from the date of acquisition forward.
On March 5, 2018, the Company completed the acquisition of A.H. Harris Construction Supplies (“A.H. Harris”) for a purchase price of approximately $ i 359 million, net of cash acquired and the final working capital settlement. The Company received the final working capital settlement of approximately $ i 3 million in second quarter 2019. A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expanded Construction & Industrial’s market presence in the northeastern United States.
In accordance with ASC 805, the Company recorded the following assets and liabilities at fair value as of the date of the A.H. Harris acquisition: $ i 182 million in goodwill, $ i 123 million in definite-lived intangible assets, $ i 12 million in property & equipment, $ i 54 million in net working capital, and $ i 10 million in deferred tax liabilities. The total amount of goodwill deductible for tax purposes is $ i 19 million. The definite-lived intangible assets are comprised of $ i 110 million in customer relationships and $ i 13 million of trade names that will be amortized over a period of i 12 years and i 5 years, respectively.
/
iNOTE 3 — DEBT
i
HDS’s long-term debt as of November 3, 2019 and February 3, 2019 consisted of the following (dollars in millions):
| | | | | | | | | | |
| | | ||||||||
|
| Outstanding |
| Interest |
| Outstanding |
| Interest | ||
| | Principal | | Rate %(1) | | Principal | | Rate %(1) | ||
Senior ABL Facility due 2022 | | $ | i 362 |
| i 3.32 | | $ | i 348 |
| i 3.83 |
Term B-5 Loans due 2023 | | | i 1,059 | | i 3.54 | | | i 1,067 | | i 4.25 |
October 2018 Senior Unsecured Notes due 2026 | | | i 750 | | i 5.375 | | | i 750 | | i 5.375 |
Total gross long-term debt | | $ | i 2,171 | | | | $ | i 2,165 | | |
Less unamortized discount | | | ( i 3) | | | | | ( i 4) | | |
Less unamortized deferred financing costs | | | ( i 19) | | | | | ( i 21) | | |
Total net long-term debt | | $ | i 2,149 | | | | $ | i 2,140 | | |
Less current installments | |
| ( i 11) | | | |
| ( i 11) | | |
Total net long-term debt, excluding current installments | | $ | i 2,138 | | | | $ | i 2,129 | | |
| (1) | Represents the stated rate of interest, without including the effect of discounts, premiums, or interest rate swap agreements. |
/ /14
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Senior Credit Facilities
Senior ABL Facility
The Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $ i 1,000 million (subject to availability under a borrowing base). Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of November 3, 2019, HDS had $ i 614 million of Excess Availability (as defined in the Senior ABL Facility agreement) under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $ i 24 million in letters of credit issued and including $ i 5 million of borrowings available on qualifying cash balances). As of November 3, 2019, approximately $ i 48 million of the outstanding borrowings on the Senior ABL Facility are Canadian dollar-denominated borrowings.
At HDS’s option, the interest rates applicable to the loans under the Senior ABL Facility are based (i) in the case of U.S. dollar-denominated loans, either at London Interbank Offered Rate (“LIBOR”) plus an applicable margin, or Prime Rate (as defined in the Senior ABL Facility agreement) plus an applicable margin and (ii) in the case of Canadian dollar-denominated loans, either the Bankers’ Acceptance (“BA”) rate plus an applicable margin, or the Canadian Prime Rate plus an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the agreement governing the Senior ABL Facility, based on average Excess Availability for the previous fiscal quarter. The Senior ABL Facility also contains a letter of credit fee computed at a rate per annum equal to the Applicable Margin (as defined in the Senior ABL Facility agreement) then in effect for LIBOR Loans and an unused commitment fee subject to a pricing grid, included in the agreement governing the Senior ABL Facility, based on Excess Availability.
The Senior ABL Facility also permits HDS to add i one or more incremental term loan facilities to be included in the Senior ABL Facility or i one or more revolving credit facility commitments to be included in the Senior ABL Facility.
Senior Term Loan Facility
HDS’s Senior Term Facility (the “Senior Term Facility”) consists of a senior secured term loan facility (the ‘‘Term Loan Facility,’’ and the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans in an original aggregate principal amount of $ i 1,070 million (the “Term B-5 Loans”). The Term B-5 Loans will mature on October 17, 2023 and amortize in equal quarterly installments in aggregate annual amounts equal to i 1.00% of the original principal amount of the Term Loans with the balance payable at the maturity date. The Term B-5 Loans bear interest at the applicable margin for borrowings of i 1.75% for LIBOR borrowings and i 0.75% for base rate borrowings.
For additional information on HDS’s Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended February 3, 2019.
Unsecured Notes
5.375% Senior Unsecured Notes due 2026
HDS issued $ i 750 million aggregate principal amount of i 5.375% Senior Unsecured Notes due 2026 (the “October 2018 Senior Unsecured Notes”) under an Indenture, dated as of October 11, 2018 (the “October 2018 Senior Unsecured Notes Indenture”) among HDS, certain subsidiaries of HDS as guarantors (the “Subsidiary Guarantors”) and the Trustee. The October 2018 Senior Unsecured Notes bear interest at a rate of i 5.375% per annum and will mature on October 15, 2026. Interest is paid semi-annually on April 15th and October 15th of each year.
15
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The October 2018 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS’s existing and future senior indebtedness, senior in right of payment to all of HDS’s existing and future subordinated indebtedness, and effectively subordinated to all of HDS’s existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, to the extent of the value of the collateral securing each indebtedness.
The October 2018 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS’s direct and indirect existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the Senior ABL Facility or that guarantees HDS’s obligations under any credit facility or capital market securities. These guarantees are subject to release under customary circumstances as stipulated in the October 2018 Senior Unsecured Notes Indenture.
The October 2018 Senior Unsecured Notes and related guarantees have not been, and are not required to be, registered under the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction.
Redemption
HDS may redeem the October 2018 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2021, at a price equal to i 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the October 2018 Senior Unsecured Notes Indenture and (2) on and after October 15, 2021, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.
i
| | | |
Year |
| Percentage |
|
2021 |
| i 102.688 | % |
2022 |
| i 101.344 | % |
2023 and thereafter |
| i 100.000 | % |
In addition, at any time prior to October 15, 2021, HDS may redeem on one or more occasions up to i 40% of the aggregate principal amount of the October 2018 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of i 105.375% of the principal amount in respect of the October 2018 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the October 2018 Senior Unsecured Notes are redeemed, an aggregate principal amount of the October 2018 Senior Unsecured Notes equal to at least i 50% of the original aggregate principal amount of October 2018 Senior Unsecured Notes must remain outstanding immediately after each such redemption of October 2018 Senior Unsecured Notes.
Debt covenants
HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness and dividend payments and restrictions on the use of proceeds from asset dispositions. As of November 3, 2019, HDS was in compliance with all such covenants that were in effect on such date. Furthermore, while these restrictions may, at times, limit the amount of dividends, distributions or intercompany transfers that HDS or a particular subsidiary guarantor may pay or make, as applicable, the Company believes that, as of November 3, 2019, it had no such limitations.
iNOTE 4 — DERIVATIVE INSTRUMENTS
Hedge Strategy and Accounting Policy
The Company enters into derivative financial instruments for hedging purposes. In hedging the exposure to variable cash flows on forecasted transactions, deferral accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the underlying exposure. If a derivative instrument either initially fails or later
16
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ceases to meet the criteria for deferral accounting, any subsequent gains or losses are recognized currently in income. Cash flows resulting from derivative financial instruments are classified in the same category as the cash flows from the items being hedged.
Cash Flow Hedge
On October 24, 2018, the Company entered into an interest rate swap agreement with a notional amount of $ i 750 million, designated as a cash flow hedge in accordance with ASC 815, “Derivatives and Hedging ,” to hedge the variability of cash flows in interest payments associated with the Company’s variable-rate debt. The interest rate swap agreement swaps a LIBOR rate for a fixed rate of i 3.07% and matures on October 17, 2023. The swap effectively converts a portion of the Company’s Term B-5 Loans from a rate of LIBOR plus i 1.75% to a i 4.82% fixed rate.
As of November 3, 2019, the fair value of the Company’s interest rate swap in the Consolidated Balance Sheet was a liability of $ i 48 million, which was reflected as $ i 11 million in Other current liabilities and $ i 37 million in Other liabilities in the Consolidated Balance Sheet. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“OCI”) within Stockholders’ Equity in the Consolidated Balance Sheets and are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. See “Note 8 - Accumulated Other Comprehensive Income (Loss),” for further information.
iNOTE 5 — FAIR VALUE MEASUREMENTS
The fair value measurements and disclosure principles of GAAP (ASC 820, “Fair Value Measurements and Disclosures”) define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements. These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly;
Level 3 — Unobservable inputs in which little or no market activity exists.
As of November 3, 2019 and February 3, 2019, the fair value measurement of the financial liability associated with the Company’s interest rate swap contract was $ i 48 million and $ i 20 million, respectively. The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the interest rate swap. See “Note 4 – Derivative Instruments” for further information on the Company’s interest rate swap contract.
iThe Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of November 3, 2019 and February 3, 2019 (amounts in millions):
| | | | | | | | | | | | |
| | As of November 3, 2019 | | As of February 3, 2019 | ||||||||
|
| Recorded |
| Estimated |
| Recorded |
| Estimated | ||||
| | Amount(1) | | Fair Value | | Amount(1) | | Fair Value | ||||
Senior ABL Facility | | $ | i 362 | | $ | i 361 | | $ | i 348 | | $ | i 346 |
Term Loans and Notes | |
| i 1,809 | |
| i 1,861 | |
| i 1,817 | |
| i 1,815 |
Total | | $ | i 2,171 | | $ | i 2,222 | | $ | i 2,165 | | $ | i 2,161 |
| (1) | These amounts do not include accrued interest; accrued interest is classified as Other current liabilities in the accompanying Consolidated Balance Sheets. These amounts do not include any related discounts, premiums, or deferred financing costs. |
/17
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
iNOTE 6 – LEASES
The Company adopted ASU No. 2016-02, “Leases (Topic 842),” and its related amendments (collectively “ASC 842”) on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. The standard requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for all leases.
At adoption of ASC 842, the Company recognized ROU assets for operating leases of approximately $ i 430 million and operating lease liabilities of approximately $ i 447 million, the difference attributable to the reclassification of prepaid rent and accrued rent balances outstanding at adoption into the ROU assets and the cumulative adjustment recorded to the opening balance of retained earnings. The cumulative adjustment, net of tax, recorded to the opening balance of retained earnings was $ i 3 million. The Company’s finance leases are immaterial. The adoption of ASC 842 did not have a material impact on the Company’s income statement. The Company’s consolidated financial statements for the three and nine months ended November 3, 2019 are presented under ASC 842, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard, ASC 840, “Leases.”
The Company elected the i package of practical expedients for existing contracts permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases, the historical assessment of whether contracts are or contain leases, and the determination of initial direct costs. The Company did not elect the hindsight practical expedient.
Lease Accounting Policies and Disclosures
The Company determines if an agreement is a lease upon inception. An agreement is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.
The Company has operating leases for distribution centers, warehouses, office space, and transportation vehicles. The Company has an immaterial amount of financing leases for other equipment. Certain leases for real estate contain options to extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the option period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, the Company considers all relevant economic factors that would compel the Company to exercise or not exercise an option.
Many of the Company’s real estate leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. The Company determined these charges are variable non-lease components and did not elect the practical expedient to combine with lease components. Additionally, many of the Company’s transportation equipment leases require additional payments based on the underlying usage of the assets. Certain lease agreements include rental payments adjusted annually based on changes in an inflation index. Due to the variable nature of these costs, the cash flows associated with these charges are expensed as incurred and not included in the lease payments used to determine the ROU asset and associated lease liability.
Lease ROU assets and associated liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company’s leases generally do not provide a readily determinable implicit borrowing rate. As such, the discount rate used to calculate present value is the Company’s collateralized incremental borrowing rate. The collateralized incremental borrowing rate for each lease varies in accordance with the lease term. Lease expense is recognized on a straight-line basis over the lease term.
/18
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
iThe following components of lease expense are included in Selling, general, and administrative expenses on the Consolidated Statement of Operations for the three and nine months ended November 3, 2019 (dollars in millions):
| | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||
| | | ||||
Operating Lease Cost | | $ | i 35 | | $ | i 106 |
Short-term Lease Cost |
| | i 2 |
| | i 4 |
Variable Lease Cost |
| | i 2 |
| | i 4 |
Sublease Income |
| | ( i 1) |
| | ( i 3) |
Total Lease Cost | | $ | i 38 | | $ | i 111 |
Lease costs associated with finance leases are immaterial for the Company.
As of November 3, 2019, the weighted average remaining lease term for operating leases is i 5.1 years and the weighted average discount rate is i 4.66%.
During the nine months ended November 3, 2019, the Company’s cash flows from operating activities included $ i 116 million of cash payments for amounts included in the measurement of operating lease liabilities. During the nine months ended November 3, 2019, the Company obtained ROU assets of $ i 83 million in exchange for operating lease liabilities.
i
As of November 3, 2019, maturities of operating lease liabilities were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | |
|
| Fiscal Year |
| | |
| | | |||||||||||||
|
| Remainder | | | | | | | | | | | | | | | | | | | |
| | of 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | |||||||
Operating Lease Payments | | $ | i 35 | | | i 118 | | | i 108 | | | i 80 | | | i 59 | | | i 97 | | $ | i 497 |
Less imputed interest | | | | | | | | | | | | | | | | | | | | | i 59 |
Total Discounted Lease Liability | | | | | | | | | | | | | | | | | | | | $ | i 438 |
/As of November 3, 2019, the Company has additional leases which have not yet commenced, but are anticipated to commence in fiscal 2019. Commencement occurs when the Company is granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. The Company anticipates these leases will result in approximately $ i 40 million of ROU assets obtained in exchange for lease liabilities.
Disclosure related to periods prior to adoption of ASC 842:
Rental expense under operating leases was $ i 142 million, $ i 127 million, and $ i 118 million in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Rental expense under operating leases for the three and nine months ended October 28, 2018 was $ i 36 million and $ i 104 million, respectively.
i
As of February 3, 2019, future minimum aggregate rental payments under non-cancelable leases were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | |
|
| Fiscal Year |
| |
| | |||||||||||||||
|
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | |||||||
Operating Leases | | $ | i 140 | | | i 104 | | | i 88 | | | i 61 | | | i 42 | | | i 78 | | $ | i 513 |
/19
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Corporate headquarters
In February 2016, the Company entered into a build-to-suit arrangement for a leadership development and headquarters facility in Atlanta, Georgia, which began construction in 2016. In accordance with ASC 840, for build-to-suit arrangements where the Company is involved in the construction of structural improvements prior to the commencement of the lease or takes some level of construction risk, the Company was considered the owner of the assets and land during the construction period. Accordingly, during construction activities, the Company recorded a Construction in progress asset within Property and equipment and a corresponding financing liability on the Consolidated Balance Sheet for construction costs incurred by the landlord.
The lease commenced in February 2018, with the leased asset and corresponding financing liability valued at $ i 87 million each. In accordance with the sale and leaseback criteria of GAAP, the build-to-suit arrangement and subsequent lease failed to qualify as a sale. Therefore, the transaction was accounted for as a financing arrangement, whereby both the leased asset and the financing liability remained on the Company’s Consolidated Balance Sheet. The asset was depreciated as if the Company was the legal owner and rental payments were allocated between interest expense and principal repayment of the financing liability.
The Company exercised its option to purchase the leased asset, completing the purchase on February 4, 2019 for a total purchase price of $ i 88 million. As the purchase option was executed on the first day of fiscal 2019, the Company did not recognize an ROU asset for the finance lease and a corresponding lease liability as part of the adoption of ASC 842 and excluded the future minimum rental payments from the commitment tables disclosed above.
iNOTE 7 — INCOME TAXES
For the nine months ended November 3, 2019, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was i 25.8% and i 25.9% for the nine months ended October 28, 2018.
The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as audit settlements.
As of November 3, 2019 and February 3, 2019, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $ i i 17 / million. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of November 3, 2019 and February 3, 2019 was i i zero / . As of November 3, 2019 and February 3, 2019, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $ i i 7 / million. Each reporting period, the Company assesses available positive and negative evidence and estimates if sufficient future taxable income will be generated to utilize the existing deferred tax assets.
/
iNOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated OCI ("AOCI") consists of accumulated net unrealized gains or losses associated with foreign currency translation adjustments and the changes in the fair value of derivatives designated as cash flow hedges.
20
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The balances and changes in AOCI, net of tax by component for the three and nine months ended November 3, 2019 and October 28, 2018 was as follows (amounts in millions):
i
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
| November 3, |
| October 28, |
| November 3, |
| |||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
Foreign currency translation adjustment: |
| |
|
| |
|
| |
|
| |
|
Beginning balance | | $ | ( i 15) |
| $ | ( i 15) |
| $ | ( i 15) |
| $ | ( i 17) |
Other comprehensive income (loss) before reclassifications | | | — |
| | — |
| | — |
| | i 2 |
Amounts reclassified from accumulated OCI into earnings | | | — |
| | — |
| | — |
| | — |
Ending balance | | $ | ( i 15) |
| $ | ( i 15) |
| $ | ( i 15) |
| $ | ( i 15) |
| | | | | | | | | | | | |
Cash flow hedge, net of tax: |
| | |
| |
|
| | |
| |
|
Beginning balance |
| $ | ( i 36) |
| $ | — |
| $ | ( i 15) |
| $ | — |
Other comprehensive income (loss) before reclassifications |
| | ( i 2) |
| | ( i 5) |
| | ( i 25) |
| | ( i 5) |
Amounts reclassified from accumulated OCI into earnings(1) |
| | i 2 |
| | i 1 |
| | i 4 |
| | i 1 |
Other | | | — | | | ( i 1) | | | — | | | ( i 1) |
Ending balance, net of tax of $ i 12, $ i 1 , $ i 12, and $ i 1 |
| $ | ( i 36) |
| $ | ( i 5) |
| $ | ( i 36) |
| $ | ( i 5) |
Total ending balance of AOCI |
| $ | ( i 51) |
| $ | ( i 20) |
| $ | ( i 51) |
| $ | ( i 20) |
| (1) | Unrealized loss reclassified into Interest expense. |
iNOTE 9 - BASIC AND DILUTED WEIGHTED-AVERAGE COMMON SHARES
The following basic and diluted weighted-average common shares information is provided for Holdings.
iThe reconciliation of basic to diluted weighted-average common shares for the three and nine months ended November 3, 2019 and October 28, 2018 was as follows (in thousands):
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||
|
|
|
|
| ||||
Weighted-average common shares | | i 164,638 | | i 182,730 | | i 168,062 | | i 183,349 |
Effect of potentially dilutive stock plan securities | | i 504 | | i 849 | | i 583 | | i 843 |
Diluted weighted-average common shares | | i 165,142 | | i 183,579 | | i 168,645 | | i 184,192 |
Stock plan securities excluded from dilution(1) | | i 2,025 | | i 1,460 | | i 2,741 | | i 1,900 |
| (1) | Represents securities not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. |
Stock plan securities consist of securities (stock options, restricted stock, restricted stock units, and performance share units) granted under Holdings’ stock-based compensation plans.
/
21
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION
Receivables
iReceivables as of November 3, 2019 and February 3, 2019 consisted of the following (amounts in millions):
| | | | | | |
|
|
| ||||
Trade receivables, net of allowance for doubtful accounts | | $ | i 779 | | $ | i 657 |
Vendor rebate receivables | |
| i 61 | |
| i 57 |
Other receivables | |
| i 23 | |
| i 18 |
Total receivables, net | | $ | i 863 | | $ | i 732 |
Other Current Liabilities
iOther current liabilities as of November 3, 2019 and February 3, 2019 consisted of the following (amounts in millions):
| | | | | | | | | | | | |
| | HD Supply Holdings, Inc. | | HD Supply, Inc. | ||||||||
|
|
|
|
| ||||||||
Corporate headquarters financing liability(1) | | $ | — | | $ | i 87 | | $ | — | | $ | i 87 |
Accrued legal | | | i 51 | | | i 1 | | | i 51 | | | i 1 |
Accrued non-income taxes | |
| i 42 | | | i 35 | | | i 42 | |
| i 35 |
Accrued interest | | | i 3 | | | i 14 | | | i 3 | | | i 14 |
Unsettled share repurchases | | | i 4 | | | i 2 | | | — | | | — |
Other | |
| i 120 | | | i 120 | | | i 120 | |
| i 120 |
Total other current liabilities | | $ | i 220 | | $ | i 259 | | $ | i 216 | | $ | i 257 |
| (1) | This amount represented the financing liability for the Company’s corporate headquarters that was purchased on February 4, 2019. Please see “Note 6 – Leases” for further information on the purchase of the Company’s corporate headquarters. |
/During the three months ended November 3, 2019, the Company recorded a $ i 50 million legal accrual related to litigation activities, offset by the recognition of a $ i 50 million insurance recovery included in Other current assets. For further information, see “Note 12 – Commitments and Contingencies.”
Supplemental Cash Flow Information
Cash paid for interest in the nine months ended November 3, 2019 and October 28, 2018 was $ i 89 million and $ i 103 million, respectively. During the nine months ended October 28, 2018, the Company paid $ i 4 million of original issue discounts related to the extinguishment of debt.
Cash paid for income taxes, net of refunds, in the nine months ended November 3, 2019 and October 28, 2018 was approximately $ i i 35 / million and $ i i 9 / million, respectively.
During the nine months ended November 3, 2019 and October 28, 2018, HDS executed equity cash distributions of $ i 319 million and $ i 172 million, respectively, to Holdings, via HDS’s direct parent, HDS Holding Corporation. The equity distribution from HDS and return of capital recognized by Holdings were eliminated in consolidation of Holdings and its wholly-owned subsidiaries, including HDS.
Share Repurchases
During fiscal 2014, Holdings’ Board of Directors authorized a share repurchase program to be funded from cash proceeds received from exercises of employee stock options (“April 2014 Plan”). This share repurchase program does not obligate Holdings to acquire
/22
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
any particular amount of common stock, and it may be terminated at any time at Holdings’ discretion. During August 2017 and November 2018, Holdings’ Board of Directors authorized i two additional share repurchase programs for up to an aggregate amount of $ i i 500 / million each of Holdings’ common stock (“August 2017 Plan” and “November 2018 Plan,” respectively). Holdings completed the repurchase of all $ i 500 million of common stock authorized under the August 2017 Plan in December 2018.
i
Holdings’ share repurchases under these plans for the nine months ended November 3, 2019 and October 28, 2018 were as follows (dollars in millions):
| | | | | | | | | | |
| | Nine Months Ended | ||||||||
| | | ||||||||
|
| Number of |
| Cost of |
| Number of |
| Cost of | ||
| | Shares | | Shares | | Shares | | Shares | ||
November 2018 Plan |
| i 8,161,079 | | $ | i 316 |
| — |
| $ | — |
August 2017 Plan |
| — | |
| — |
| i 4,682,396 | | | i 178 |
April 2014 Plan |
| i 158,734 | | | i 7 |
| i 165,537 | | | i 7 |
Total share repurchases |
| i 8,319,813 | | $ | i 323 |
| i 4,847,933 | | $ | i 185 |
iNOTE 11 — RESTRUCTURING AND SEPARATION ACTIVITIES
On September 24, 2019, the Company announced its intention to separate its Facilities Maintenance and Construction & Industrial businesses into i two independent publicly traded companies with the separation expected to be completed by the middle of the fiscal year ended January 31, 2021 (" fiscal 2020 “). In light of the current business environment and in order to begin the establishment of two separate standalone businesses, the Company made personnel changes and began assessing the separation process, resulting in the recognition of $ i 4 million in restructuring and separation charges in the three months ended November 3, 2019. These charges were primarily related to severance and other employee-related costs as well as costs incurred to execute the separation. The Company is in the early stages of estimating total costs for the separation of the businesses. Restructuring and separation charges in the nine months ended November 3, 2019 of $ i 2 million, reflect the favorable termination of the lease for the Company’s former corporate headquarters in the first quarter of fiscal 2019. As of November 3, 2019, remaining unpaid costs associated with these activities are immaterial.
/
iNOTE 12 — COMMITMENTS AND CONTINGENCIES
Legal Matters
On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “securities litigation defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”). Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the securities litigation defendants on behalf of all persons other than the securities litigation defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive. The Amended Complaint alleges that the securities litigation defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit. The Amended Complaint asserts claims against the securities litigation defendants under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and other costs. On September 19, 2018, the Court granted in part and denied in part the securities litigation defendants’ motion to dismiss. The parties have reached an agreement in principle to settle the litigation for a payment of $ i 50 million, subject to negotiation of definitive settlement documentation and court approval. The full settlement amount is covered under the Company’s insurance policies. The Company and individual defendants continue to dispute the allegations in the complaints, and the settlement is without any admission of the allegations in the complaints.
/23
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 8, 2017, i two shareholder derivative complaints were filed in the U.S. District Court for the Northern District of Georgia, naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants. The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions. The complaints assert claims against the individual defendants under Section 14(a) of the Exchange Act, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling. The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. On October 22, 2018, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings and administratively closing the matter until after any summary judgment motion filed relating to the Amended Complaint is adjudicated.
On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants. The complaint generally alleges that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding supply chain corrective actions. The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling. The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance and internal procedures, and seeks to recover attorneys’ fees and other costs. The individual defendants moved to dismiss the complaint on November 2, 2018. On January 14, 2019, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings until after any summary judgment motions filed relating to the Amended Complaint is adjudicated.
The Company intends to defend the derivative lawsuits vigorously. Given the stage of the complaints and the claims and issues presented, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.
In March 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting information and documents from calendar years 2016 and 2017 relating to, among other things, the Company’s Facilities Maintenance business unit and the allegations of the Amended Complaint described above. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC’s investigation. We cannot currently predict the timing or outcome of this ongoing investigation.
HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters with loss contingencies that are reasonably possible and reasonably estimable, including matters with loss contingencies that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued for, management has estimated the aggregate range of potential loss as $ i 0 to $ i 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.
iNOTE 13 — SEGMENT INFORMATION
HD Supply’s operating segments are based on management structure and internal reporting. Each segment offers different products and services to the end customer, except for Corporate, which provides general corporate overhead support. The Company determines its reportable segments in accordance with the principles of segment reporting within ASC 280, “Segment Reporting.” For purposes of
24
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
evaluation under these segment reporting principles, the Chief Operating Decision Maker for HD Supply assesses HD Supply’s ongoing performance, based on the periodic review and evaluation of Net sales, Adjusted EBITDA and certain other measures for each of the operating segments.
HD Supply has i two reportable segments, each of which is presented below:
| ● | Facilities Maintenance—Facilities Maintenance distributes maintenance, repair and operations products, provides value-add services and fabricates custom products to multifamily, hospitality, healthcare and institutional facilities. |
| ● | Construction & Industrial—Construction & Industrial distributes specialized hardware, tools, engineered materials and safety products to non-residential and residential contractors. Construction & Industrial also offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals. |
In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.
iThe following tables present Net sales, Adjusted EBITDA, and other measures for both of the reportable segments and total operations for the periods indicated (amounts in millions):
| | | | | | | | | | | | |
|
| | |
| |
| | |
| Total | ||
| | Facilities | | Construction | | | | Continuing | ||||
| | Maintenance | | & Industrial | | Eliminations | | Operations | ||||
Three Months Ended November 3, 2019 | | | | | | | | | | | | |
Net sales | | $ | i 826 | | $ | i 818 | | $ | — | | $ | i 1,644 |
Adjusted EBITDA | |
| i 149 | |
| i 98 | |
| — | |
| i 247 |
Depreciation(1) & Software Amortization | |
| i 11 | |
| i 13 | |
| — | |
| i 24 |
Other Intangible Amortization | |
| i 2 | |
| i 3 | |
| — | |
| i 5 |
| | | | | | | | | | | | |
Three Months Ended October 28, 2018 | | | | | | | | | | | | |
Net sales | | $ | i 810 | | $ | i 803 | | $ | ( i 1) | | $ | i 1,612 |
Adjusted EBITDA | |
| i 149 | |
| i 99 | |
| — | |
| i 248 |
Depreciation(1) & Software Amortization | |
| i 10 | | | i 12 | |
| — | |
| i 22 |
Other Intangible Amortization | |
| i 2 | | | i 3 | |
| — | |
| i 5 |
| | | | | | | | | | | | |
Nine Months Ended November 3, 2019 | | | | | | | | | | | | |
Net sales | | $ | i 2,428 | | $ | i 2,334 | | $ | ( i 1) | | $ | i 4,761 |
Adjusted EBITDA | |
| i 432 | |
| i 262 | |
| — | |
| i 694 |
Depreciation(1) & Software Amortization | |
| i 32 | |
| i 34 | |
| — | |
| i 66 |
Other Intangible Amortization | |
| i 6 | |
| i 11 | |
| — | |
| i 17 |
Nine Months Ended October 28, 2018 | | | | | | | | | | | | |
Net sales | | $ | i 2,353 | | $ | i 2,250 | | $ | ( i 2) | | $ | i 4,601 |
Adjusted EBITDA | |
| i 422 | |
| i 262 | |
| — | |
| i 684 |
Depreciation(1) & Software Amortization | |
| i 28 | |
| i 34 | |
| — | |
| i 62 |
Other Intangible Amortization | |
| i 6 | |
| i 10 | |
| — | |
| i 16 |
| (1) | Depreciation includes amounts recorded within Cost of sales in the Consolidated Statements of Operations. |
25
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reconciliation to Consolidated Financial Statements
i
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
|
|
|
| ||||||||
Total Adjusted EBITDA | | $ | i 247 | | $ | i 248 | | $ | i 694 | | $ | i 684 |
Depreciation and amortization(1) | | | i 29 | |
| i 27 | | | i 83 | |
| i 78 |
Stock-based compensation | | | i 6 | |
| i 7 | | | i 18 | |
| i 19 |
Restructuring and separation(2) | | | i 4 | |
| — | | | i 2 | |
| i 9 |
Acquisition and integration costs(3) | | | i 4 | | | i 2 | | | i 5 | | | i 5 |
Other | | | ( i 1) | | | ( i 1) | | | — | | | ( i 2) |
Operating income | | | i 205 | |
| i 213 | | | i 586 | |
| i 575 |
Interest expense | | | i 27 | |
| i 32 | | | i 83 | |
| i 101 |
Interest (income) | | | — | |
| — | | | — | |
| ( i 1) |
Loss on extinguishment & modification of debt(4) | | | — | | | i 69 | | | — | | | i 69 |
Income from Continuing Operations Before Provision for Income Taxes | | | i 178 | |
| i 112 | | | i 503 | |
| i 406 |
Provision for income taxes | | | i 47 | |
| i 30 | | | i 130 | |
| i 105 |
Income from continuing operations | | | i 131 | |
| i 82 | | | i 373 | |
| i 301 |
Income from discontinued operations, net of tax | | | i 1 | |
| — | | | i 1 | |
| i 1 |
Net income | | $ | i 132 | | $ | i 82 | | $ | i 374 | | $ | i 302 |
| (1) | Depreciation and amortization includes amounts recorded within Cost of sales in the Consolidated Statements of Operations. |
| (2) | Represents the costs related to separation activities and personnel changes, primarily severance and other employee-related costs. During the nine months ended November 3, 2019, the costs include a favorable termination of the lease for the Company’s former corporate headquarters. |
| (3) | Represents the cost incurred in the acquisition and integration of business acquisitions, including A.H. Harris Construction Supplies. |
| (4) | Represents the loss on extinguishment of debt including premium paid to repurchase or call the debt as well as the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt. Also includes the costs of debt modifications. |
iNOTE 14 — REVENUE
The Company’s revenues are earned from contracts with customers. Contracts include written agreements, as well as arrangements that are implied by customary practices or law.
Nature of Products and Services
Both Facilities Maintenance and Construction & Industrial serve unique end markets. Facilities Maintenance offers products that serve the maintenance, repair and operations (“MRO”) end market as well as value-added services. Construction & Industrial offers products used broadly across both the residential and non-residential construction end markets as well as light remodeling supplies for small remodeling contractors and trade professionals. For additional information regarding the nature of products and services offered by the Company’s reportable segments, see “Description of segments” within Item 2 of this quarterly report on Form 10-Q.
Revenue Recognition
The Company recognizes revenue, net of allowances for returns and discounts and any taxes collected from the customer, when an identified performance obligation is satisfied by the transfer of control of promised products or services to the customer. The Company
26
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ships products to customers by internal fleet and third-party carriers. Transfer of control to the customer for products generally occurs at the point of destination (i.e., upon transfer of title and risk of loss of product). Transfer of control to the customer for services occurs when the customer has the right to direct the use of and obtain substantially all the remaining benefits of the asset that is created or enhanced from the service. The Company accounts for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general, and administrative expenses.
Disaggregation of Revenue
The Company elected to disaggregate the revenue of Facilities Maintenance by its demand types: MRO and Property Improvement, and Construction & Industrial by its end markets: Non-Residential Construction, Residential Construction, and Other. The Company believes this disaggregation appropriately meets the objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The prior periods’ revenue disaggregation for Construction & Industrial has been revised by an immaterial amount.
i
The table below represents disaggregated revenue for Facilities Maintenance and Construction & Industrial with Inter-segment eliminations (amounts in millions):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
|
|
|
| ||||||||
Facilities Maintenance | | | | | | | | | | | | |
Maintenance, Repair, and Operations | | $ | i 727 | | $ | i 718 | | $ | i 2,151 | | $ | i 2,076 |
Property Improvement | |
| i 99 | |
| i 92 | | | i 277 | | | i 277 |
Total Facilities Maintenance Net Sales | |
| i 826 | |
| i 810 | | | i 2,428 | | | i 2,353 |
Construction & Industrial | | | | | | | | | | | | |
Non-Residential Construction | |
| i 572 | |
| i 559 | | | i 1,614 | | | i 1,542 |
Residential Construction | |
| i 194 | |
| i 196 | | | i 572 | | | i 569 |
Other | |
| i 52 | |
| i 48 | | | i 148 | | | i 139 |
Total Construction & Industrial Net Sales | |
| i 818 | |
| i 803 | | | i 2,334 | | | i 2,250 |
Inter-segment Eliminations | |
| — | |
| ( i 1) | | | ( i 1) | | | ( i 2) |
Total HD Supply Net Sales | | $ | i 1,644 | | $ | i 1,612 | | $ | i 4,761 | | $ | i 4,601 |
iNOTE 15 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
Leases – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842),” amended by ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),” ASU No. 2018-01, “Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements.” The amended guidance requires companies to recognize all leases as assets and liabilities for the rights and obligations created by leased assets on the consolidated balance sheet. ASU No. 2016-02 also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. ASU No. 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU No. 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.
The Company adopted this guidance on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. See “Note 6 – Leases” for the Company’s lease accounting policies and disclosures.
27
HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
HD SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Pronouncements Not Yet Adopted
Cloud Computing Arrangements – In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). The new guidance aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also provides for additional disclosure requirements regarding the nature of an entity’s hosting arrangements that are service contracts. The ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted in any interim period. The Company anticipates adopting the ASU in fiscal 2020. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15.
Goodwill – In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company anticipates adopting the ASU in fiscal 2020. The amendments in this update should be applied on a prospective basis. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), amended by ASU No 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” The amended guidance modifies the measurement of expected credit losses of certain financial instruments, including trade receivables. The amended guidance also prescribes additional disclosure requirements for certain financial instruments. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company anticipates adopting the ASU in fiscal 2020. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting ASU 2016-13.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is combined for two registrants: HD Supply Holdings, Inc. and HD Supply, Inc. Unless the context indicates otherwise, any reference in this discussion and analysis to “Holdings” refers to HD Supply Holdings, Inc., any reference to “HDS” refers to HD Supply, Inc., the indirect wholly-owned subsidiary of Holdings, and any references to “HD Supply,” the “Company,” “we,” “us” and “our” refer to Holdings together with its direct and indirect subsidiaries, including HDS.
HD Supply is one of the largest industrial distributors in North America. We believe we have leading positions in the two distinct market sectors in which we specialize: Maintenance, Repair & Operations (“MRO”) and Specialty Construction. Through approximately 270 branches and 44 distribution centers, in the U.S. and Canada, we serve these markets with an integrated go-to-market strategy. We have approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. We serve approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. Our broad range of end-to-end product lines and services include approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from construction to maintenance, repair and operations.
Description of segments
We operate our Company through two reportable segments: Facilities Maintenance and Construction & Industrial.
Facilities Maintenance. Facilities Maintenance distributes MRO products, provides value-add services and fabricates custom products. The industries that Facilities Maintenance serves include multifamily, hospitality, healthcare and institutional facilities. Products include electrical and lighting items, plumbing, HVAC products, appliances, janitorial supplies, hardware, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance and water and wastewater treatment products.
Construction & Industrial. Construction & Industrial distributes specialized hardware, tools and engineered materials to non-residential and residential contractors. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, cutting tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, erosion and sediment control equipment and other engineered materials used broadly across all types of non-residential and residential construction. Construction & Industrial also includes Home Improvement Solutions, which offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals.
In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.
Acquisitions
We enter into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations,” the results of the acquisitions we completed are reflected in our consolidated financial statements from the date of acquisition forward.
On March 5, 2018, our Construction & Industrial business acquired A.H. Harris Construction Supplies (“A.H. Harris”) for a purchase price of approximately $359 million in cash, adjusted for the final working capital settlement received in the second quarter of fiscal 2019. A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expands Construction & Industrial’s market presence in the northeastern United States. For additional detail related to the acquisition
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
of A.H. Harris, see “Note 2 - Acquisitions,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.
Seasonality
In a typical year, our operating results are impacted by seasonality. Historically, sales of our products have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these periods. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects.
Fiscal Year
HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks. The three months ended November 3, 2019 (“third quarter 2019”) and October 28, 2018 (“third quarter 2018”) both include 13 weeks. The nine months ended November 3, 2019 and October 28, 2018 both include 39 weeks.
Key business metrics
Net sales
We earn our Net sales primarily from the sale of construction, maintenance, repair and operations, and renovation and improvement-related products and our provision of related services to approximately 500,000 customers, including contractors, government entities, maintenance professionals, home builders and industrial businesses. We recognize sales, net of sales tax and allowances for returns and discounts, when an identified performance obligation is satisfied by transfer of the promised goods or services to the customer. Net sales in certain business units fluctuate with the price of commodities as we seek to minimize the effects of changing commodities prices by passing such increases in the prices of certain commodity-based products to our customers.
We ship products to customers by internal fleet and by third-party carriers. Net sales are recognized from product sales when control of the products and services are passed to the customer, which generally occurs at the point of destination.
We include shipping and handling fees billed to customers in Net sales. Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through Cost of sales as inventories are sold. We account for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general, and administrative expenses.
Gross profit
Gross profit primarily represents the difference between the product cost from our suppliers (net of earned rebates and discounts), including the cost of inbound freight, and the sale price to our customers. The cost of outbound freight, purchasing, receiving and warehousing are included in Selling, general, and administrative expenses within operating expenses. Our Gross profit may not be comparable to those of other companies, as other companies may include all of the costs related to their distribution networks in Cost of sales.
Operating expenses
Operating expenses are primarily comprised of Selling, general, and administrative costs, which include payroll expenses (salaries, wages, employee benefits, payroll taxes and bonuses), outbound freight, rent, insurance, utilities, repair and maintenance and professional fees. In addition, operating expenses include depreciation and amortization and restructuring charges.
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
Adjusted EBITDA and Adjusted net income
Adjusted EBITDA and Adjusted net income are not recognized terms under generally accepted accounting principles in the United States of America (“GAAP”) and do not purport to be alternatives to Net income as a measure of operating performance. We present Adjusted EBITDA and Adjusted net income because each is a primary measure used by management to evaluate operating performance. In addition, we present Adjusted net income to measure our overall profitability as we believe it is an important measure of our performance. We believe the presentation of Adjusted EBITDA and Adjusted net income enhances our investors’ overall understanding of the financial performance of our business. We believe Adjusted EBITDA and Adjusted net income are helpful in highlighting operating trends, because each excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, age and book depreciation of facilities and capital investments.
Adjusted EBITDA is based on ‘‘Consolidated EBITDA,’’ a measure which is defined in our Senior Credit Facilities and used in calculating financial ratios in several material debt covenants. Borrowings under these facilities are a key source of liquidity and our ability to borrow under these facilities depends upon, among other things, our compliance with such financial ratio covenants. In particular, both facilities contain restrictive covenants that can restrict our activities if we do not maintain financial ratios calculated based on Consolidated EBITDA. Our Senior ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1:1 if our specified excess availability (including an amount by which our borrowing base exceeds the outstanding amounts) under the Senior ABL Facility falls below the greater of $100 million and 10% of the lesser of (A) the Borrowing Base and (B) the Total Facility Commitment (both as defined in the Senior ABL Facility agreement). Adjusted EBITDA is defined as Net income (loss) less Income from discontinued operations, net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision for income taxes, (iii) Depreciation and amortization and further adjusted to exclude loss on extinguishment of debt, non-cash items and certain other adjustments to Consolidated Net Income, including costs associated with capital structure enhancements permitted in calculating Consolidated EBITDA under our Senior Credit Facilities. We believe that presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate and about certain non-cash and other items. The Term Loan Facility and Senior ABL Facility permit us to make certain additional adjustments to Consolidated Net Income in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this quarterly report on Form 10-Q. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA. These covenants are important to the Company as failure to comply with certain covenants would result in a default under our Senior Credit Facilities. The material covenants in our Senior Credit Facilities are discussed in our annual report on Form 10-K for the fiscal year ended February 3, 2019.
Adjusted net income is defined as Net income less Income from discontinued operations, net of tax, further adjusted for loss on extinguishment of debt and certain non-cash, non-recurring, non-operational, or unusual items, net of tax.
We believe that Adjusted EBITDA and Adjusted net income are frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted net income measure when reporting their results. We compensate for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of Adjusted EBITDA and Adjusted net income may not be comparable to other similarly titled measures of other companies.
Adjusted EBITDA and Adjusted net income have limitations as analytical tools and should not be considered in isolation or as substitutes for analyzing our results as reported under GAAP. Some of these limitations are:
| ● | Adjusted EBITDA and Adjusted net income do not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; |
31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
| ● | Adjusted EBITDA and Adjusted net income do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and |
| ● | although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
The following table presents a reconciliation of Net Income and Income from continuing operations, the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented (amounts in millions):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
|
|
|
| ||||||||
Net income | | $ | 132 | | $ | 82 | | $ | 374 | | $ | 302 |
Less income from discontinued operations, net of tax | | | 1 | | | — | | | 1 | | | 1 |
Income from continuing operations | | | 131 | | | 82 | | | 373 | | | 301 |
Interest expense, net | |
| 27 | |
| 32 | |
| 83 | |
| 100 |
Provision for income taxes | |
| 47 | |
| 30 | |
| 130 | |
| 105 |
Depreciation and amortization(1) | |
| 29 | |
| 27 | |
| 83 | |
| 78 |
Loss on extinguishment & modification of debt(2) | | | — | | | 69 | | | — | | | 69 |
Restructuring and separation charges(3) | |
| 4 | |
| — | |
| 2 | |
| 9 |
Stock-based compensation | |
| 6 | |
| 7 | |
| 18 | |
| 19 |
Acquisition and integration costs(4) | |
| 4 | |
| 2 | |
| 5 | |
| 5 |
Other | | | (1) | | | (1) | | | — | | | (2) |
Adjusted EBITDA | | $ | 247 | | $ | 248 | | $ | 694 | | $ | 684 |
| (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, original issue discount, and other assets or liabilities associated with such debt. Also includes the costs of debt modifications. |
| (3) | Represents the costs related to separation activities and personnel changes, primarily severance and other employee-related costs. During the nine months ended November 3, 2019, the costs include the impacts of a favorable termination of the lease for the Company’s former corporate headquarters. For additional information, see “Note 11, Restructuring and separation activities,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q. |
| (4) | Represents the costs incurred in the acquisition and integration of business acquisitions, including A.H. Harris Construction Supplies. |
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
The following table presents a reconciliation of Net Income and Income from continuing operations, the most directly comparable financial measure under GAAP, to Adjusted net income for the periods presented (amounts in millions):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
|
|
|
| ||||||||
Net income | | $ | 132 | | $ | 82 | | $ | 374 | | $ | 302 |
Less income from discontinued operations, net of tax | |
| 1 | |
| — | |
| 1 | |
| 1 |
Income from continuing operations | |
| 131 | |
| 82 | |
| 373 | |
| 301 |
Plus: Provision for income taxes | |
| 47 | |
| 30 | |
| 130 | |
| 105 |
Less: Cash income taxes | |
| (25) | |
| (4) | |
| (35) | |
| (9) |
Plus: Amortization of acquisition-related intangible assets (other than software) | |
| 5 | |
| 5 | |
| 17 | |
| 16 |
Plus: Loss on extinguishment & modification of debt(1) | | | — | | | 69 | | | — | | | 69 |
Plus: Restructuring and separation charges(2) | | | 4 | | | — | | | 2 | | | 9 |
Plus: Acquisition and integration costs(3) | | | 4 | | | 2 | | | 5 | | | 5 |
Adjusted Net Income | | $ | 166 | | $ | 184 | | $ | 492 | | $ | 496 |
| (1) | 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, original issue discount, and other assets or liabilities associated with such debt. Also includes the costs of debt modifications. |
| (2) | Represents the costs related to separation activities and personnel changes, primarily severance and other employee-related costs. During the nine months ended November 3, 2019, the costs include the impacts of a favorable termination of the lease for the Company’s former corporate headquarters. For additional information, see “Note 11, Restructuring and separation activities,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q. |
| (3) | Represents the costs incurred in the acquisition and integration of business acquisitions, including A.H. Harris Construction Supplies. |
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
Consolidated results of operations
Dollars in millions
| | | | | | | | | | | | | | | | | |
| | | | | | | | Percentage | | | | | Percentage | | |||
| | Three Months Ended | | Increase | | Nine Months Ended | | Increase | | ||||||||
|
|
|
| (Decrease) |
|
|
| (Decrease) | | ||||||||
Net sales | | $ | 1,644 | | $ | 1,612 |
| 2.0 | % | $ | 4,761 | | $ | 4,601 | | 3.5 | % |
Gross Profit | |
| 640 | |
| 629 |
| 1.7 |
| | 1,858 |
| | 1,803 |
| 3.1 | |
Operating expenses: | |
| | |
| |
| |
| | |
| | |
| | |
Selling, general, and administrative | |
| 405 | |
| 391 |
| 3.6 |
| | 1,193 |
| | 1,147 |
| 4.0 | |
Depreciation and amortization | |
| 26 | |
| 25 |
| 4.0 |
| | 77 |
| | 72 |
| 6.9 | |
Restructuring and separation | |
| 4 | |
| – |
| * |
| | 2 |
| | 9 |
| (77.8) | |
Total operating expenses | |
| 435 | |
| 416 |
| 4.6 |
| | 1,272 |
| | 1,228 |
| 3.6 | |
Operating Income | |
| 205 | |
| 213 |
| (3.8) |
| | 586 |
| | 575 |
| 1.9 | |
Interest expense | |
| 27 | |
| 32 |
| (15.6) |
| | 83 |
| | 101 |
| (17.8) | |
Interest (income) | |
| — | |
| — |
| — |
| | — |
| | (1) |
| * | |
Loss on extinguishment & modification of debt | | | — | | | 69 | | * | | | — | | | 69 | | * | |
Income from Continuing Operations Before Provision for Income Taxes | |
| 178 | |
| 112 |
| 58.9 |
| | 503 |
| | 406 |
| 23.9 | |
Provision for income taxes | |
| 47 | |
| 30 |
| 56.7 |
| | 130 |
| | 105 |
| 23.8 | |
Income from Continuing Operations | | | 131 | | | 82 | | 59.8 | | | 373 | | | 301 | | 23.9 | |
Income from discontinued operations, net of tax | | | 1 | | | – | | * | | | 1 | | | 1 | | — | |
Net Income | | $ | 132 | | $ | 82 |
| 61.0 |
| $ | 374 |
| $ | 302 |
| 23.8 | |
Non-GAAP financial data: | |
| | |
| |
| |
| | |
| | |
| | |
Adjusted EBITDA | | $ | 247 | | $ | 248 |
| (0.4) |
| $ | 694 |
| $ | 684 |
| 1.5 | |
Adjusted net income | | $ | 166 | | $ | 184 |
| (9.8) |
| $ | 492 |
| $ | 496 |
| (0.8) | |
* Not meaningful
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
| | | | | | | | | | | | |
| | Three Months Ended | | Basis Point | | Nine Months Ended | | Basis Point | ||||
| | November 3, | | October 28, | | Increase | | November 3, | | October 28, | | Increase |
|
| 2019 |
| 2018 |
| (Decrease) |
| 2019 |
| 2018 |
| (Decrease) |
Net sales |
| 100.0 | % | 100.0 | % | – |
| 100.0 | % | 100.0 | % | – |
Gross Profit |
| 38.9 |
| 39.0 |
| (10) |
| 39.0 |
| 39.2 |
| (20) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
| 24.6 |
| 24.3 |
| 30 |
| 25.1 |
| 24.9 |
| 20 |
Depreciation and amortization |
| 1.6 |
| 1.5 |
| 10 |
| 1.6 |
| 1.6 |
| — |
Restructuring and separation |
| 0.2 |
| — |
| 20 |
| — |
| 0.2 |
| (20) |
Total operating expenses |
| 26.4 |
| 25.8 |
| 60 |
| 26.7 |
| 26.7 |
| — |
Operating Income |
| 12.5 |
| 13.2 |
| (70) |
| 12.3 |
| 12.5 |
| (20) |
Interest expense |
| 1.7 |
| 2.0 |
| (30) |
| 1.7 |
| 2.2 |
| (50) |
Interest (income) |
| — |
| — |
| * |
| — |
| — |
| * |
Loss on extinguishment & modification of debt |
| — |
| 4.3 |
| (430) |
| — |
| 1.5 |
| (150) |
Income from Continuing Operations Before Provision for Income Taxes |
| 10.8 |
| 6.9 |
| 390 |
| 10.6 |
| 8.8 |
| 180 |
Provision for income taxes |
| 2.8 |
| 1.8 |
| 100 |
| 2.7 |
| 2.3 |
| 40 |
Income from Continuing Operations |
| 8.0 |
| 5.1 |
| 290 |
| 7.9 |
| 6.5 |
| 140 |
Income from discontinued operations, net of tax |
| — |
| — |
| — |
| — |
| 0.1 |
| (10) |
Net Income |
| 8.0 |
| 5.1 |
| 290 |
| 7.9 |
| 6.6 |
| 130 |
Non-GAAP financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| 15.0 |
| 15.4 |
| (40) |
| 14.6 |
| 14.9 |
| (30) |
Adjusted net income |
| 10.1 |
| 11.4 |
| (130) |
| 10.3 |
| 10.8 |
| (50) |
* Not meaningful
Highlights
Net sales in third quarter 2019 increased $32 million, or 2.0%, as compared to third quarter 2019. Operating income in third quarter 2019 decreased $8 million, or 3.8%, as compared to third quarter 2018. Net income in third quarter 2019 increased $50 million, or 61.0%, to $132 million as compared to third quarter 2018. Adjusted EBITDA in third quarter 2019 decreased $1 million, or 0.4%, as compared to third quarter 2018. Adjusted net income in third quarter 2019 decreased $18 million, or 9.8%, as compared to third quarter 2018. As of November 3, 2019, our total liquidity was $651 million. See “Liquidity and capital resources – External Financing” of this Item 2 of this quarterly report on Form 10-Q for further information.
On September 24, 2019, the Company announced its intention to separate its Facilities Maintenance and Construction & Industrial businesses into two independent publicly traded companies with the separation expected to be completed by the middle of the fiscal year ended January 31, 2021 (“ fiscal 2020 “). In light of the current business environment and in order to begin the establishment of two separate standalone businesses, the Company made personnel changes and began assessing the separation process, resulting in the recognition of $4 million in restructuring and separation charges in third quarter 2019. These charges were primarily related to severance and other employee-related costs as well as costs incurred to execute the separation. The Company is in the early stages of estimating total costs for the separation of the businesses. Restructuring and separation charges in the nine months ended November 3, 2019 of $2 million reflect the favorable termination of the lease for the Company’s former corporate headquarters in the first quarter of fiscal 2019. For additional information, see “Note 11 – Restructuring and separation activities,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.
Net sales
Net sales in third quarter 2019 increased $32 million, or 2.0%, compared to third quarter 2018 and $160 million, or 3.5%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Both of our reportable segments delivered an increase in Net sales in third quarter 2019 and in the first nine months of fiscal 2019 as compared to the same periods in fiscal 2018. The Net sales increase in third quarter 2019 was primarily due to growth initiatives for
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
both businesses. The Net sales increase in the first nine months of fiscal 2019 was primarily due to increases in market volume and growth initiatives at each of our businesses and, to a lesser extent, the acquisition of A.H. Harris by Construction & Industrial. Growth initiatives contributed approximately $29 million and $96 million in third quarter 2019 and the first nine months of fiscal 2019, respectively. Organic sales growth, which excludes A.H. Harris sales in fiscal 2019 through March 4, 2019 (the one-year anniversary of the acquisition) was $136 million, or 3.0%, for the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Gross profit
Gross profit increased $11 million, or 1.7%, during third quarter 2019 as compared to third quarter 2018 and $55 million, or 3.1%, during the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Both of our reportable segments delivered an increase in gross profit in both periods primarily due to sales growth from growth initiatives and increased market volume.
Gross profit as a percentage of Net sales (“gross margin”) decreased approximately 10 basis points to 38.9% in third quarter 2019 as compared to 39.0% in third quarter 2018 and approximately 20 basis points to 39.0% in the first nine months of fiscal 2019 as compared to 39.2% in the same period in fiscal 2018. Gross margins were flat at Construction & Industrial and decreased at Facilities Maintenance in third quarter 2019 as compared to third quarter 2018. Gross margins declined at both Facilities Maintenance and Construction & Industrial during the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Operating expenses
Operating expenses increased $19 million, or 4.6%, during third quarter 2019 as compared to third quarter 2018 and $44 million, or 3.6%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Selling, general, and administrative expenses increased $14 million, or 3.6%, in third quarter 2019 as compared to third quarter 2018 and $46 million, or 4.0%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in both periods was primarily a result of increases in variable expenses due to higher sales volume and increased investments in growth initiatives, primarily facilities. In addition, Selling, general, and administrative expenses included $4 million and $2 million of costs in third quarter 2019 and third quarter 2018, respectively, related to acquisition and integration activities. Depreciation and amortization expense increased $1 million, or 4.0%, in third quarter 2019 as compared to third quarter 2018 and $5 million, or 6.9%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in both periods was primarily driven by investments in facilities and technology.
Operating expenses as a percentage of Net sales increased approximately 60 basis points to 26.4% in third quarter 2019 as compared to third quarter 2018 and were flat at 26.7% in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. Selling, general, and administrative expenses as a percentage of Net sales, increased approximately 30 basis points to 24.6% in third quarter 2019 as compared to third quarter 2018 and approximately 20 basis points to 25.1% in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in both periods was primarily a result of increased investments in facilities and increases in variable cost rates, partially offset by a decrease in personnel costs as a percentage of Net sales.
Operating income
Operating income decreased $8 million, or 3.8%, during third quarter 2019 as compared to third quarter 2018 and increased $11 million, or 1.9%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. In third quarter 2019, the increase in gross profit was offset by higher operating expenses due to investments in the business, acquisition and integration charges and restructuring and separation charges. In the first nine months of fiscal 2019, the increase in gross profit and reduction in restructuring and separation charges were partially offset by an increase in Selling, general, and administrative expenses and Depreciation and amortization expense.
Operating income as a percentage of Net sales decreased approximately 70 basis points to 12.5% during third quarter 2019 as compared to third quarter 2018 and approximately 20 basis points to 12.3% during the first nine months of fiscal 2019 as compared to
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
the same period in fiscal 2018. The decrease in third quarter 2019 was primarily due to the increase in Selling, general, and administrative expenses and restructuring and separation charges as a percentage of Net sales and the decrease in gross margins. The decrease in the first nine months of fiscal 2019 was primarily due to the decline in gross margins and the increase in Selling, general, and administrative expenses as a percentage of Net sales, partially offset by the decrease in restructuring and separation charges as a percentage of Net sales.
Interest expense
Interest expense decreased $5 million, or 15.6%, during third quarter 2019 as compared to third quarter 2018 and $18 million, or 17.8%, during the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in both periods was primarily due to a decrease in the average effective interest rate, including the impact of lower non-cash amortization of deferred financing costs as a result of refinancing activities in fiscal 2018.
Loss on extinguishment & modification of debt
During third quarter 2018 and the first nine months of fiscal 2018, our debt refinancing and redemption activities resulted in charges of $69 million, recorded in accordance with ASC 470-50, “Debt – Modifications and Extinguishments.”
On October 22, 2018, HDS amended its senior secured term loan facility (the “Term Loan Facility”), incurring a modification and extinguishment charge of approximately $5 million, which includes financing fees and other costs of approximately $3 million and the write-off of approximately $2 million of unamortized discount and deferred financing costs.
On October 11, 2018, HDS used the net proceeds from the issuance of the 5.375% Senior Unsecured Notes due 2026 (the “October 2018 Senior Unsecured Notes”), together with available cash and borrowings on HDS’s Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”), to redeem all of the outstanding $1,000 million aggregate principal of the 5.75% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”), incurring a $64 million loss on extinguishment of debt, which includes a $56 million make-whole premium and the write-off of $8 million of unamortized deferred financing costs.
Provision for income taxes
The provision 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 provision for income taxes from continuing operations in third quarter 2019 was $47 million compared to $30 million in third quarter 2018. The provision for income taxes in the first nine months of fiscal 2019 was $130 million compared to $105 million in the first nine months of fiscal 2018.
The effective rate for continuing operations for third quarter 2019 and the first nine months of fiscal 2019 was 26.4% and 25.8%, respectively. The effective rate for continuing operations for third quarter 2018 and the first nine months of fiscal 2018 was 26.8% and 25.9%, respectively.
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. As of November 3, 2019 and February 3, 2019, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $7 million.
Adjusted EBITDA
Adjusted EBITDA decreased $1 million, or 0.4%, in third quarter 2019 as compared to third quarter 2018 and increased $10 million, or 1.5%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in Adjusted EBITDA during third quarter 2019 as compared to third quarter 2018 was driven by a $1 million decrease at Construction & Industrial. The increase in Adjusted EBITDA during the first nine months of fiscal 2019 as compared to the same period in fiscal 2018 was driven by a $10 million increase at Facilities Maintenance, primarily due to an increase in sales volume, partially offset by an increase in Operating expenses.
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
Adjusted EBITDA as a percentage of Net sales decreased approximately 40 basis points to 15.0% in third quarter 2019 as compared to third quarter 2018 and decreased approximately 30 basis points to 14.6% in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in both periods was due to the investments in growth initiatives outpacing sales growth, increases in certain variable cost rates, and the decline in gross margin.
Adjusted net income
Adjusted net income decreased $18 million, or 9.8%, in third quarter 2019 as compared to third quarter 2018 and $4 million, or 0.8%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in Adjusted net income in both periods was attributable to increased cash tax payments, partially offset by lower interest expense.
Results of operations by reportable segment
Facilities Maintenance
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Nine Months Ended |
| ||||||||||||
| | November 3, | | October 28, | | Increase | | | November 3, | | October 28, | | Increase | | ||||
Dollars in millions |
| 2019 |
| 2018 |
| (Decrease) |
|
| 2019 |
| 2018 |
| (Decrease) |
| ||||
Net sales | | $ | 826 | | $ | 810 |
| 2.0 | % | | $ | 2,428 | | $ | 2,353 |
| 3.2 | % |
Operating income | | $ | 128 | | $ | 134 |
| (4.5) | % | | $ | 380 | | $ | 373 |
| 1.9 | % |
% of Net sales | |
| 15.5 | % |
| 16.5 | % | (100) | bps | |
| 15.7 | % |
| 15.9 | % | (20) | bps |
Depreciation and amortization | |
| 13 | |
| 12 |
| 8.3 | % | |
| 38 | |
| 34 |
| 11.8 | % |
Other | |
| 8 | |
| 3 |
| * | | |
| 14 | |
| 15 |
| (6.7) | % |
Adjusted EBITDA | | $ | 149 | | $ | 149 |
| — | | | $ | 432 | | $ | 422 |
| 2.4 | % |
% of Net sales | |
| 18.0 | % |
| 18.4 | % | (40) | bps | |
| 17.8 | % |
| 17.9 | % | (10) | bps |
* Not meaningful
Net Sales
Net sales increased $16 million, or 2.0%, in third quarter 2019 as compared to third quarter 2018 and $75 million, or 3.2%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
The third quarter 2019 increase in Net sales was primarily due to growth in the multi-family and institutional industries. The increase in Net sales during the first nine months of fiscal 2019 was driven by growth in the multifamily, institutional, and hospitality industries and growth initiatives, partially offset by the impacts of a slow HVAC season and disruptions at the Southeast distribution center. The growth initiatives consist of investments in personnel, products, and technology aligned with our selling channels, such as our sales force, e-commerce site and mobile applications, and our enabling functions, such as supply chain and data analytics.
Adjusted EBITDA
Adjusted EBITDA was flat in third quarter 2019 as compared to third quarter 2018 and increased $10 million, or 2.4%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Adjusted EBITDA increased in the first nine months of 2019 as compared to the same period in fiscal 2018 as a result of increased Net sales, partially offset by increased Selling, general, and administrative expenses. The increase in Selling, general, and administrative was primarily related to facility expansions and inflation on lease renewals, partially offset by a decrease in personnel costs including incentive compensation.
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
Adjusted EBITDA as a percentage of Net sales decreased approximately 40 basis points in third quarter 2019 as compared to third quarter 2018 and approximately 10 basis points in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in both periods of fiscal 2019 was driven by a decline in gross margin of approximately 20 basis points. Third quarter 2019 also included an increase in Selling, general, and administrative expenses as a percentage of Net sales. In the first nine months of fiscal 2019, the decline in gross margin was partially offset by a decline in Selling, general, and administrative expenses as a percentage of Net sales.
Construction & Industrial
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Nine Months Ended |
| ||||||||||||
| | November 3, | | October 28, | | Increase | | | November 3, | | October 28, | | Increase | | ||||
Dollars in millions |
| 2019 |
| 2018 |
| (Decrease) |
|
| 2019 |
| 2018 |
| (Decrease) |
| ||||
Net sales | | $ | 818 | | $ | 803 |
| 1.9 | % | | $ | 2,334 | | $ | 2,250 |
| 3.7 | % |
Operating income | | $ | 76 | | $ | 79 |
| (3.8) | % | | $ | 205 | | $ | 202 |
| 1.5 | % |
% of Net sales | |
| 9.3 | % |
| 9.8 | % | (50) | bps | |
| 8.8 | % |
| 9.0 | % | (20) | bps |
Depreciation and amortization | |
| 15 | |
| 15 |
| — | | |
| 44 | |
| 44 |
| — | |
Other | |
| 7 | |
| 5 |
| 40.0 | % | |
| 13 | |
| 16 |
| (18.8) | % |
Adjusted EBITDA | | $ | 98 | | $ | 99 |
| (1.0) | % | | $ | 262 | | $ | 262 |
| — | |
% of Net sales | |
| 12.0 | % |
| 12.3 | % | (30) | bps | |
| 11.2 | % |
| 11.6 | % | (40) | bps |
Net Sales
Net sales increased $15 million, or 1.9%, in third quarter 2019 as compared to third quarter 2018 and $84 million, or 3.7%, in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. On an organic basis, sales growth was approximately 2.7% for the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. All sales during third quarter 2019 were organic.
Adjusted EBITDA
Adjusted EBITDA decreased $1 million, or 1.0%, in third quarter 2019 as compared to third quarter 2018 and was flat in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018.
Adjusted EBITDA in both periods of fiscal 2019 as compared to the same periods in fiscal 2018 was impacted by increased Selling, general, and administrative costs related to variable expense and the hiring of additional associates to drive future growth. During third quarter 2019, the increase in Selling, general, and administrative costs outpaced the increase in sales volume due to growth initiatives and market volume. During the first nine months of fiscal 2019, the increase in sales volume was offset by the increase in Selling, general, and administrative costs.
Adjusted EBITDA as a percentage of Net sales decreased approximately 30 basis points in third quarter 2019 as compared to third quarter 2018 and approximately 40 basis points in the first nine months of fiscal 2019 as compared to the same period in fiscal 2018. During third quarter 2019, the decrease was driven by an increase in Selling, general, and administrative expenses as a percentage of Net sales. During the first nine months of fiscal 2019, the decrease was driven by both an increase in Selling, general, and administrative expenses as a percentage of Net sales and an approximately 20 basis point decrease in gross margin. Selling, general, and administrative expenses as a percentage of Net sales increased in both periods due to investments in the business, resulting in increased fixed costs, and the increase in variable cost rates. The gross margin in the first nine months of fiscal 2019 was impacted by a greater increase in sales to large construction jobs as compared to the increase in sales to small construction jobs – sales to larger, bid-based construction jobs tend to have slightly lower margins than sales to smaller construction jobs.
39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
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 nine months of fiscal 2019, our cash inflow was primarily driven by cash provided by operations. This inflow was offset by the purchase of our corporate headquarters, capital expenditures, net debt repayments and purchases of treasury shares.
As of November 3, 2019, our combined liquidity of approximately $651 million was comprised of $37 million in cash and cash equivalents and $614 million of additional available borrowings (excluding $5 million of borrowings on available cash balances) under our Senior ABL Facility, based on qualifying inventory and receivables.
Information about our cash flows, by category, is presented in the Consolidated Statements of Cash Flows and is summarized as follows:
| | | | | | | | | |
Amounts in millions | | Nine Months Ended | | Increase | |||||
Net cash provided by (used for): |
|
|
| (Decrease) | |||||
Operating activities | | $ | 497 | | $ | 379 | | $ | 118 |
Investing activities | |
| (96) | |
| (441) | |
| 345 |
Financing activities | |
| (402) | |
| (444) | |
| 42 |
| | | | | | | | | |
Free cash flow: | |
| | |
|
| |
| |
Operating activities | | $ | 497 | | $ | 379 | | $ | 118 |
Less: Capital expenditures | |
| (89) | |
| (79) | |
| (10) |
Free cash flow | | $ | 408 | | $ | 300 | | $ | 108 |
Working capital
Working capital, excluding cash and cash equivalents, was $854 million as of November 3, 2019, increasing $5 million as compared to $849 million as of October 28, 2018. The change in working capital was primarily driven by a decrease of $87 million in Other current liabilities for the payment of the corporate headquarters financing liability offset by an increase of $115 million for the Current portion of lease liabilities due to the adoption of ASC 842, “Leases,” on the first day of fiscal 2019. In addition, working capital increased as a result of declines in Accrued compensation and benefits and Accounts payable due to timing of payments.
Operating activities
During the first nine months of fiscal 2019, cash provided by operating activities was $497 million compared to $397 million in the first nine months of fiscal 2018. Cash interest paid in the first nine months of fiscal 2019 was $89 million, compared to $103 million in the first nine months of fiscal 2018. The increase in operating cash flows excluding interest is primarily attributable to growth in earnings and efficiency in use of working capital.
Investing activities
During the first nine months of fiscal 2019, cash used by investing activities was $96 million, primarily comprised of $89 million of capital expenditures. During the first nine months of fiscal 2018, cash used by investing activities was $441 million, comprised of $362 million for the acquisition of A.H. Harris and $79 million of capital expenditures.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | HD SUPPLY |
Financing activities
During the first nine months of fiscal 2019, cash used in financing activities was $402 million, primarily due to purchases of treasury shares of $320 million, the payment of the corporate headquarters financing liability of $87 million, and tax withholdings on stock-based awards of $6 million, partially offset by proceeds from employee stock option exercises of $7 million and net debt borrowing of $6 million.
During the first nine months of fiscal 2018, cash used in financing activities was $444 million, primarily due to net debt repayments of $259 million including premiums to redeem debt prior to maturity, purchases of treasury shares of $166 million, payments of debt issuance costs of $18 million, and tax withholdings on stock-based awards of $6 million, partially offset by proceeds from employee stock option exercises of $7 million.
External financing
As of November 3, 2019, we had an aggregate principal amount of $2,149 million of outstanding indebtedness, net of unamortized discounts and unamortized deferred financing costs of $3 million and $19 million, respectively, and $614 million of additional available borrowings under our Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $24 million in letters of credit issued and including $5 million of borrowings available on qualifying cash balances). From time to time, depending on market conditions and other factors, we may seek to repay, redeem, repurchase or otherwise acquire or refinance all or a portion of our indebtedness. We may make such repurchases in privately negotiated transactions or otherwise.
For additional information, see “Note 3 – Debt,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.
Critical accounting policies
Our consolidated financial statements have been prepared in accordance with GAAP. 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 annual report on Form 10-K for the fiscal year ended February 3, 2019, except for those related to the adoption of ASC 842, “Leases.” See “Note 6 – Leases” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q for further information.
Recent accounting pronouncements
See “Note 15 – Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.
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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 3, 2019.
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 November 3, 2019 (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 November 3, 2019 (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 third quarter of fiscal 2019 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
On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “securities litigation defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”). Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the securities litigation defendants on behalf of all persons other than the securities litigation defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive. The Amended Complaint alleges that the securities litigation defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit. The Amended Complaint asserts claims against the securities litigation defendants under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and other costs. On September 19, 2018, the Court granted in part and denied in part the securities litigation defendants’ motion to dismiss. The parties have reached an agreement in principle to settle the litigation for a payment of $50 million, subject to negotiation of definitive settlement documentation and court approval. The full settlement amount is covered under the Company’s insurance policies. The Company and individual defendants continue to dispute the allegations in the complaints, and the settlement is without any admission of the allegations in the complaints.
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On August 8, 2017, two shareholder derivative complaints were filed in the U.S. District Court for the Northern District of Georgia, naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants. The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions. The complaints assert claims against the individual defendants under Section 14(a) of the Exchange Act, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling. The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. On October 22, 2018, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings and administratively closing the matter until after any summary judgment motion filed relating to the Amended Complaint is adjudicated.
On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants. The complaint generally alleges that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding supply chain corrective actions. The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling. The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance and internal procedures, and seeks to recover attorneys’ fees and other costs. The individual defendants moved to dismiss the complaint on November 2, 2018. On January 14, 2019, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings until after any summary judgment motions filed relating to the Amended Complaint is adjudicated.
The Company intends to defend the derivative lawsuits vigorously. Given the stage of the complaints and the claims and issues presented, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.
In March 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting information and documents from calendar years 2016 and 2017 relating to, among other things, the Company’s Facilities Maintenance business unit and the allegations of the Amended Complaint described above. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC’s investigation. We cannot currently predict the timing or outcome of this ongoing investigation.
HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters with loss contingencies that are reasonably possible and reasonably estimable, including matters with loss contingencies that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued for, management has estimated the aggregate range of potential loss as $0 to $10 million. If a material loss is probable or reasonably possible, and in either case estimable, the Company has considered it in the analysis and it is included in the discussion set forth above.
Item 1A. Risk Factors
We discuss in our filings with the SEC various risks that may materially affect our business. The information presented below supplements the risk factors set forth in our annual report on Form 10-K for the fiscal year ended February 3, 2019. Except as set forth below, for additional risk factors that could cause actual results to differ materially from those anticipated, please refer to Item 1A, Risk Factors in our annual report on Form 10-K, for the first year ended February 3, 2019.
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Our plan to separate our Facilities Maintenance and Construction & Industrial businesses into two independent publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.
On September 24, 2019, the Company announced its intention to separate its Facilities Maintenance and Construction & Industrial businesses into two independent publicly traded companies through a spinoff, with the separation expected to be completed by the middle of fiscal 2020. The spinoff is subject to certain conditions, including, among others, approval of our board of directors, declaration of the effectiveness of our registration statement on Form 10, and receipt of an opinion from our tax counsel regarding the tax-free status of the spinoff. For these and other reasons, the spinoff may not be completed during the middle of fiscal 2020, if at all.
Even if the spinoff is not completed, our ongoing businesses may be adversely affected and we may be subject to certain risks and consequences, including, among others, the following:
| ● | execution of the spinoff will require significant time and attention from management, which may distract management from the operation of our business and the execution of other initiatives that may have been beneficial to us; |
| ● | we may experience unanticipated competitive developments, including changes in the conditions of our Facilities Maintenance business’s and Construction & Industrial’s business’s respective markets; |
| ● | we may experience increased difficulties in attracting, training, retaining and motivating employees during the pendency of the spinoff and following its completion; |
| ● | we will be required to pay certain costs and expenses relating to the spinoff, such as legal, accounting and other professional fees, and may be required to pay tax costs resulting from certain internal restructuring transactions whether or not the spinoff is completed; and |
| ● | we may experience negative reactions from the financial markets if we fail to complete the spinoff. |
Any of these factors could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
The spinoff may not be beneficial.
We may not realize the strategic, financial, operational or other benefits from the spinoff. As independent publicly traded companies, the Facilities Maintenance and Construction & Industrial businesses will be smaller, less diversified companies with a narrower business focus and may be more vulnerable to changing market conditions, which could materially and adversely affect their respective businesses, financial condition, results of operations, and cash flows.
Further, there can be no assurance that the combined value of the common stock of the two publicly traded companies will be equal to our greater than what the value of our common stock would have been had the spinoff not occurred.
The spinoff may result in disruptions to, and negatively impact our relationships with, our customers, suppliers and other business partners and the relationships with the customers, suppliers and other business partners of the Construction & Industrial business.
Uncertainty related to the spinoff may lead customers, suppliers and other parties with which we currently do business or with which we and the Construction & Industrial business may do business in the future to terminate or attempt to negotiate changes in existing business relationships, or consider entering into business relationships with parties other than us or the Construction & Industrial business. These disruptions could have a material and adverse effect on our business or the Construction & Industrial business’s business, financial condition, results of operations, cash flows, and prospects. The effect of such disruptions could be exacerbated by any delays in the completion of the spinoff.
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The spinoff could result in substantial tax liability.
It is a condition to the spinoff that we receive an opinion of our tax counsel, based on certain facts, representations, covenants and assumptions set forth in such opinion, substantially to the effect that, for U.S. federal income tax purposes, the spinoff will qualify as a transaction that generally is tax-free to us and our stockholders, under Sections 368(a)(1)(D) and 355 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). The opinion will rely on, among other things, various assumptions and representations as to factual matters made by us and the Construction & Industrial business which, if inaccurate or incomplete in any material respect, could jeopardize the validity of the conclusions reached in such opinion. The opinion will not be binding on the Internal Revenue Service (the “IRS”), or the courts, and notwithstanding the tax opinion, there can be no assurance that the IRS or the courts will not challenge the qualification of the spinoff as a transaction under Sections 368(a)(1)(D) or 355 or other provisions of the Code or that any such challenge would not prevail. In addition, the IRS could determine on audit that the spinoff should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations or covenants set forth in the tax opinion are not correct or have been violated, or that the spinoff should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the distribution.
If the spinoff is ultimately determined to be taxable, the spinoff could be treated as a taxable dividend to our stockholders for U.S. federal income tax purposes, and our stockholders could incur significant U.S. federal income tax liability. In addition, we and / or the Construction & Industrial business could incur significant U.S. federal income tax liabilities or tax indemnification obligations, whether under applicable law or a tax matters agreement that we will enter into with the Construction & Industrial business, if it is ultimately determined that certain related transactions were undertaken in anticipation of the spinoff.
The materialization of any risks and uncertainties identified in forward-looking statements contained in this quarterly report on Form 10-Q together with those previously disclosed in our annual report on Form 10-K for the fiscal year ended February 3, 2019 and our and HDS’s other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our results of operations, financial condition, and liquidity, and the development of the industries in which we operate. See “Forward-looking statements and information” at the beginning of this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities
On November 30, 2018, Holdings’ Board of Directors authorized a share repurchase program for the repurchase of up to an aggregate of $500 million of its common stock. The Company conducts repurchases under the share repurchase program in the open market and through broker-negotiated purchases in compliance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, and subject to market conditions, restrictive covenants contained in existing debt agreements, applicable legal requirements, and other relevant factors. This share repurchase program does not obligate the Company to acquire any particular amount of its common stock, and it may be terminated at any time at the Company’s discretion. Under this plan, Holdings purchased approximately 8.2 million shares at an average price of $38.72 per share during the nine months ended November 3, 2019.
In 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. Under this plan, Holdings repurchased approximately 0.2 million shares at an average price of $43.14 per share during the nine months ended November 3, 2019.
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Issuer Purchases of Equity Securities in each fiscal month of the third quarter of fiscal 2019 are set forth in the table below:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | |
|
| |
| | |
| |
| Approximate Dollar |
| |
| | | | | | | Total Number of | | Value of Shares that |
| |
| | Total Number | | Average | | Shares Purchased as | | May Yet Be |
| ||
| | of Shares | | Price Paid | | Part of a Publicly | | Purchased Under the |
| ||
Period | | Purchased | | per Share | | Announced Program | | Plans or Programs(1) |
| ||
August 5 - September 1 |
| 2,949,488 | | $ | 38.04 |
| 2,949,488 | | $ | 186,329,467 | |
September 2 - September 29 |
| 1,293,909 | |
| 39.04 |
| 1,293,909 | |
| 135,945,331 | |
September 30 - November 3 |
| 2,010,308 | |
| 38.49 |
| 2,010,308 | |
| 58,627,529 | (2) |
Total |
| 6,253,705 | | $ | 38.39 |
| 6,253,705 | |
| | |
| (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. |
| (2) | As of November 3, 2019, the approximate dollar value of shares that may yet be repurchased under the plans or programs is almost entirely comprised of available repurchases related to the $500 million share repurchase program authorized in November 2018. |
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Item 6. Exhibits
The following exhibits are filed or furnished with this quarterly report.
Exhibit |
| Exhibit Description |
3.1 | | |
| | |
3.2 | | |
| | |
3.3 | | |
| | |
3.4 | | |
| | |
3.5 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
31.3 | | |
| | |
31.4 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
32.3 | | |
| | |
32.4 | | |
| | |
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101 | | Interactive data files for HD Supply Holdings, Inc. and HD Supply, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 3, 2019, formatted in Inline XBRL: (i) the Consolidated Statements of Operations and Comprehensive Income of HD Supply Holdings, Inc. (unaudited); (ii) the Consolidated Balance Sheets of HD Supply Holdings, Inc. (unaudited); (iii) the Consolidated Statements of Cash Flows of HD Supply Holdings, Inc. (unaudited); (iv) the Consolidated Statements of Stockholders’ Equity of HD Supply Holdings, Inc. (unaudited); (v) the Consolidated Statements of Operations and Comprehensive Income of HD Supply, Inc. (unaudited); (vi) the Consolidated Balance Sheets of HD Supply, Inc. (unaudited); (vii) the Consolidated Statements of Cash Flows of HD Supply, Inc. (unaudited); (viii) the Consolidated Statements of Stockholder’s Equity of HD Supply, Inc. (unaudited); and (ix) the Notes to Consolidated Financial Statements of HD Supply Holdings, Inc. and HD Supply, Inc. (unaudited). |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| | HD SUPPLY HOLDINGS, INC. |
| | (Registrant) |
| | |
| | |
By: | ||
(Date) | | |
| | Chairman of the Board, President and Chief Executive Officer |
| | |
| | |
| | /s/ Evan J. Levitt |
| | |
| | Senior Vice President, Chief Financial Officer and Chief |
| | Administrative Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| | HD SUPPLY, INC. |
| | (Registrant) |
| | |
| | |
By: | ||
(Date) | | |
| | Chairman of the Board, President and Chief Executive Officer |
| | |
| | |
| | /s/ Evan J. Levitt |
| | |
| | Senior Vice President, Chief Financial Officer and Chief |
| | Administrative Officer |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/15/26 | ||||
| 10/17/23 | ||||
| 10/15/21 | ||||
| 1/31/21 | ||||
| 2/2/20 | 10-K | |||
| 12/15/19 | ||||
| Filed as of: | 12/10/19 | 8-K | ||
| Filed on: | 12/9/19 | 8-K | ||
| 12/6/19 | ||||
| For Period end: | 11/3/19 | |||
| 10/28/19 | ||||
| 9/24/19 | 8-K | |||
| 3/4/19 | ||||
| 2/4/19 | ||||
| 2/3/19 | 10-K | |||
| 1/14/19 | 4 | |||
| 12/15/18 | ||||
| 11/30/18 | ||||
| 11/2/18 | ||||
| 10/28/18 | 10-Q | |||
| 10/24/18 | ||||
| 10/22/18 | 8-K | |||
| 10/11/18 | 8-K | |||
| 9/19/18 | ||||
| 8/29/18 | ||||
| 3/5/18 | 8-K | |||
| 11/16/17 | 4 | |||
| 8/8/17 | CORRESP | |||
| 7/10/17 | ||||
| 6/5/17 | 8-K | |||
| 1/1/17 | ||||
| 11/9/16 | 4, 8-K | |||
| List all Filings | ||||