S-4 1 d470883ds4.htm S-4 S-4
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As filed with the Securities and Exchange Commission on January 23, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HD Supply, Inc.*

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   5000   75-2007383

(State or other jurisdiction of

incorporation)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

Ricardo Nunez, Esq.

Senior Vice President, General Counsel and Corporate Secretary

HD Supply, Inc.

3100 Cumberland Boulevard, Suite 1480

Atlanta, Georgia 30339

(770) 852-9000

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

With a copy to:

Steven J. Slutzky, Esq.

Debevoise & Plimpton LLP

919 Third Avenue

New York, New York 10022

(212) 909-6000

 

 

 

* Information regarding additional registrants is contained in the Table of Additional Registrants on the following page.

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  

Amount

to be
Registered

   Proposed
Maximum
Offering Price
Per Unit(1)
  Proposed
Maximum
Aggregate
Offering
Price
   Amount of
Registration Fee(2)

10.50% Senior Subordinated Notes due 2021 of HD Supply, Inc.

   $950,000,000    100%   $950,000,000    $129,580(2)

Guarantees of 10.50% Senior Subordinated Notes due 2021(3)

   —      —     —      None(4)

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) promulgated under the Securities Act of 1933, as amended.
(2) The registration fee has been calculated under Rule 457(f) of the Securities Act.
(3) See the following page for a table of guarantor registrants.
(4) Each of the guarantors will fully and unconditionally guarantee the senior subordinated notes being registered hereby. Pursuant to Rule 457(n) under the Securities Act, no separate fee for the guarantee is payable.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.

 

 

 


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Table of Additional Registrants*

 

Exact Name of Registrant as Specified in its Charter

   State or Other
Jurisdiction  of
Incorporation or
Organization
   I.R.S.  Employer
Identification

Number
 

Brafasco Holdings II, Inc.

   Subsidiary Guarantor    Delaware      54-2167751   

Brafasco Holdings, Inc.

   Subsidiary Guarantor    Delaware      36-4392444   

Creative Touch Interiors, Inc.

   Subsidiary Guarantor    Maryland      52-1009987   

HD Builder Solutions Group, LLC

   Subsidiary Guarantor    Delaware      02-0647515   

HD Supply Construction Supply Group, Inc.

   Subsidiary Guarantor    Delaware      84-1380403   

HD Supply Construction Supply, Ltd.

   Subsidiary Guarantor    Florida      26-0100647   

HD Supply Distribution Services, LLC

   Subsidiary Guarantor    Delaware      20-2860740   

HD Supply Electrical, Ltd.

   Subsidiary Guarantor    Florida      26-0100654   

HD Supply Facilities Maintenance Group, Inc.

   Subsidiary Guarantor    Delaware      14-1900568   

HD Supply Facilities Maintenance, Ltd.

   Subsidiary Guarantor    Florida      52-2418852   

HD Supply GP & Management, Inc.

   Subsidiary Guarantor    Delaware      51-0374238   

HD Supply Holdings, LLC

   Subsidiary Guarantor    Florida      42-1651863   

HD Supply Management, Inc.

   Subsidiary Guarantor    Florida      43-2080574   

HD Supply Repair & Remodel, LLC

   Subsidiary Guarantor    Delaware      20-2749043   

HD Supply Support Services, Inc.

   Subsidiary Guarantor    Delaware      59-3758965   

HD Supply Utilities Group, Inc.

   Subsidiary Guarantor    Delaware      52-2048968   

HD Supply Utilities, Ltd.

   Subsidiary Guarantor    Florida      26-0100651   

HD Supply Waterworks Group, Inc.

   Subsidiary Guarantor    Delaware      05-0532711   

HD Supply Waterworks, Ltd.

   Subsidiary Guarantor    Florida      05-0550887   

HDS IP Holding, LLC

   Subsidiary Guarantor    Nevada      61-1540596   

HDS Power Solutions, Inc.

   Subsidiary Guarantor    Michigan      38-1992495   

HSI IP, Inc.

   Subsidiary Guarantor    Delaware      66-0620064   

LBM Holdings, LLC

   Subsidiary Guarantor    Delaware      59-0999516   

ProValue, LLC

   Subsidiary Guarantor    Delaware      55-0872477   

White Cap Construction Supply, Inc.

   Subsidiary Guarantor    Delaware      95-3043400   

 

* The address including zip code and telephone number including area code for each additional registrant is 3100 Cumberland Boulevard, Suite 1480, Atlanta, Georgia 30339; (770) 852-9000


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The information in this prospectus is not complete and may be changed. We may not complete this exchange offer or issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 23, 2013

PROSPECTUS

 

LOGO

HD Supply, Inc.

Offer to Exchange

$950,000,000 Outstanding 10.50% Senior Subordinated Notes due 2021

for $950,000,000 Registered 10.50% Senior Subordinated Notes 2021

HD Supply, Inc. is offering to exchange $950,000,000 aggregate principal amount of its outstanding unregistered 10.50% Senior Subordinated Notes due 2021 (the “Old Notes”) for a like principal amount of its registered 10.50% Senior Subordinated Notes due 2021 (the “New Notes”).

The terms of the New Notes are identical in all material respects to the terms of the Old Notes, except that the New Notes are registered under the Securities Act of 1933, as amended (the “Securities Act”), and will not contain restrictions on transfer or provisions relating to additional interest, will bear a different CUSIP number from the Old Notes and will not entitle their holders to registration rights.

No public market currently exists for the Old Notes or the New Notes.

The exchange offer will expire at 5:00 p.m., New York City time, on            , 2013 (the “Expiration Date”) unless we extend the Expiration Date. You should read the section called “The Exchange Offer” for further information on how to exchange your Old Notes for New Notes.

See “Risk Factors” beginning on page 23 for a discussion of risk factors that you should consider prior to tendering your Old Notes in the exchange offer and risk factors related to ownership of the New Notes.

Each broker-dealer that receives New Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of up to 90 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is            , 2013


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TABLE OF CONTENTS

 

     Pages  

Forward-Looking Statements and Information

     i   

Trademark

     iii   

Market and Industry Data

     iii   

Certain Terms Used in This Prospectus

     iv   

Summary

     1   

Risk Factors

     23   

The Exchange Offer

     49   

Use of Proceeds

     57   

Selected Historical Financial Data

     58   

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

     64   

Business

     98   

Management

     103   

Executive Compensation

     111   

Security Ownership of Certain Beneficial Owners and Management

     124   

Certain Relationships and Related Party Transactions

     127   

Description of Other Indebtedness

     130   

Description of Notes

     141   

Plan of Distribution

     211   

United States Federal Income Tax Considerations

     212   

Certain ERISA Considerations

     213   

Validity of the Notes

     214   

Where You Can Find More Information

     214   

Experts

     214   

Index to Consolidated Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this prospectus in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer or solicitation of an offer in such jurisdiction. You should not assume that the information contained in this prospectus is accurate as of any date other than the date of this prospectus. Also, you should not assume that there has been no change in the affairs of HD Supply, Inc. and its subsidiaries since the date of this prospectus.

For additional information regarding the availability of this prospectus and other information available upon request, see “Where You Can Find More Information.”


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FORWARD-LOOKING STATEMENTS AND INFORMATION

This prospectus and the information incorporated by reference herein includes forward-looking statements. 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 consolidated results of operations, financial condition, liquidity, prospects, growth strategies and the industries in which we operate and including, without limitation, statements relating to our estimated or anticipated financial performance or results.

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 consolidated 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 consolidated 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 reflected in forward-looking statements relating to our operations and business, the risks and uncertainties discussed in “Risk Factors” and those described from time to time in our other filings with the SEC. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:

 

   

Inherent risks of the residential, non-residential and public infrastructure construction and facility maintenance and repair markets;

 

   

Our ability to achieve profitability;

 

   

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

 

   

Our substantial indebtedness and our ability to incur additional indebtedness;

 

   

Limitations and restrictions in the agreements governing our indebtedness;

 

   

Our ability to obtain additional financing on acceptable terms;

 

   

Increases in interest rates;

 

   

Rating agency actions with respect to our indebtedness;

 

   

The interests of the Equity Sponsors (as defined herein);

 

   

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

 

   

Goodwill and other impairment charges;

 

   

Our obligations under long-term, non-cancelable leases;

 

   

Consolidation among our competitors;

 

   

The loss of any of our significant customers;

 

   

Failure to collect monies owed from customers, including on credit sales;

 

   

Competitive pricing pressure from our customers;

 

   

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

 

   

Variability in our revenues and earnings;

 

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Cyclicality and seasonality of the residential, non-residential and infrastructure construction and facility maintenance and repair markets;

 

   

Fluctuations in commodity and energy prices;

 

   

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

 

   

Our ability to manage fixed costs;

 

   

Changes in our product mix;

 

   

The impairment of financial institutions;

 

   

The development of alternatives to distributors in the supply chain;

 

   

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

 

   

Inclement weather, anti-terrorism measures and other disruptions to the transportation network;

 

   

Interruptions in the proper functioning of information technology (“IT”) systems;

 

   

Our ability to implement our technology initiatives;

 

   

Changes in U.S. federal, state or local regulations;

 

   

Exposure to construction defect and product liability claims and other legal proceedings;

 

   

Potential material liabilities under our self-insured programs;

 

   

Changes in U.S. health care legislation;

 

   

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

 

   

Fluctuations in foreign currency exchange rates;

 

   

Inability to protect our intellectual property rights;

 

   

Changes in U.S. and foreign tax law;

 

   

Limitations on our income tax net operating loss carry forwards in the event of an ownership change;

 

   

Our ability to identify and integrate new products;

 

   

Significant costs related to compliance with environmental, health and safety laws, including new climate change regulations; and

 

   

Our ability to achieve and maintain effective disclosure controls and internal control over our financial reporting.

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

 

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TRADEMARK

We use various trademarks, service marks and brand names, such as HD Supply (and design), Crown Bolt, National Waterworks (and design), USABluebook, Creative Touch Interiors and White Cap that we deem particularly important to the advertising activities and operation of our various lines of business and some of these marks are registered in the United States and, in some cases, other jurisdictions. This prospectus also refers to the brand names, trademarks or service marks of other companies. All brand names and other trademarks or service marks cited in this prospectus are the property of their respective holders.

MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data and forecasts, which are based on publicly available information, industry publications and surveys, reports from government agencies, reports by market research firms and our own estimates based on our management’s knowledge of and experience in the residential and commercial services industry and market segments in which we compete. We have not independently verified market and industry data from third party sources. This information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in surveys of market size. In addition, consumer preferences and the competitive landscape can and do change.

 

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CERTAIN TERMS USED IN THIS PROSPECTUS

In this prospectus, unless otherwise indicated or the context otherwise requires:

 

   

“12.0% Senior Notes” refers to the Company’s 12.0% Senior Cash Pay Notes due 2014.

 

   

“2007 Senior Subordinated Notes” refers to the Company’s 13.5% Senior Subordinated Notes due 2015.

 

   

“April 2012 First Priority Notes” refers to the Company’s outstanding 8 1/8% Senior Secured First Priority Notes due 2019 issued on April 12, 2012 in an aggregate principal amount of $950,000,000.

 

   

“April 2012 Senior Notes” refers to the Company’s 14.875% Senior Notes due 2020 issued on April 12, 2012 in an aggregate principal amount of $757,002,000.

 

   

“August 2012 First Priority Notes” refers to the Company’s outstanding 8 1/8% Senior Secured First Priority Notes due 2019 issued on August 2, 2012 in an aggregate principal amount of $300,000,000.

 

   

“Bain” refers to investment funds associated with Bain Capital Partners, LLC, or any successor to its investment management business.

 

   

“Carlyle” refers to investment funds associated with Carlyle Investment Management, LLC, or any successor to its investment management business.

 

   

“CD&R” refers to investment funds associated with Clayton, Dubilier & Rice, LLC, or any successor to its investment management business.

 

   

“Equity Sponsors” refers collectively to Bain, Carlyle and CD&R.

 

   

“Existing ABL Credit Facility” refers to the senior asset-based revolving credit facility entered into by HD Supply (as successor by merger to HDS Acquisition Subsidiary, Inc.) on August 30, 2007 (as amended by Amendment No. 1, dated as of October 3, 2007, Amendment No. 2, dated as of November 1, 2007, and Limited Consent and Amendment No. 3, dated as of March 19, 2010), in an aggregate principal amount of $2,100 million, a portion of which may be used for letters of credit or swing-line loans.

 

   

“Existing Senior Secured Credit Facility” refers to the senior secured credit facility entered into by HD Supply (as successor by merger to HDS Acquisition Subsidiary, Inc.) on August 30, 2007, as amended on October 2, 2007 and November 1, 2007, which consists of a $1,000 million term loan facility and a $300 million revolving credit facility.

 

   

“Existing Term Loan” refers to the $1,000 million term loan facility under the Existing Senior Secured Credit Facility.

 

   

“First Priority Notes” refers to the April 2012 First Priority Notes and the August 2012 First Priority Notes.

 

   

“HD Supply,” “the Company,” “we,” “our” and “us” refer to HD Supply, Inc. and its consolidated subsidiaries.

 

   

“Holding” refers to HDS Investment Holding, Inc.

 

   

“Indenture” refers to the indenture governing the Notes.

 

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“October 2012 Senior Notes” refers to the Company’s 11.50% Senior Notes due 2020 issued on October 15, 2012 in the aggregate principal amount of $1,000,000,000.

 

   

“Refinancing Transactions” refers to the transactions described in “Summary—The Refinancing Transactions.”

 

   

“Second Priority Notes” refers to the Company’s 11% Senior Secured Second Priority Notes due 2020 issued on April 12, 2012 in the aggregate principal amount of $675,000,000.

 

   

“Senior ABL Agreement” refers to the credit agreement governing the Senior ABL Facility.

 

   

“Senior ABL Facility” refers to our new revolving asset backed credit facility described in “Description of Other Indebtedness.”

 

   

“Senior Credit Facilities” refers collectively to the Senior ABL Facility and the Senior Term Facility.

 

   

“Senior Term Agreement” refers to the credit agreement governing the Senior Term Facility.

 

   

“Senior Term Facility” refers to our new term credit facility described in “Description of Other Indebtedness.”

 

   

“Subsidiary Guarantors” refers to the subsidiaries of the issuer that will guarantee the Notes.

 

   

“Transactions” refers to the transactions described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Relationship with Home Depot—Historical relationship.”

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that may be important to you. For a more complete understanding of our business and the Refinancing Transactions (as defined herein), you should read this summary together with the more detailed information and financial statements appearing elsewhere and incorporated by reference in this prospectus. You should read this entire prospectus carefully, including our consolidated financial statements and the related notes as well as the “Risk Factors” and “Forward-Looking Statements and Information” sections.

Unless otherwise indicated, the information in this prospectus excludes our Industrial, Pipe, Valve and Fitting business (“IPVF”) which we sold on March 26, 2012 to Shale-Inland Holdings, LLC. Our unaudited financial statements for the nine months ended October 28, 2012 and October 30, 2011 and our annual financial statements for each of the fiscal years ended January 29, 2012 (“fiscal 2011”), January 30, 2011 (“fiscal 2010”) and January 31, 2010 (“fiscal 2009”) have been revised to present IPVF as a discontinued operation for the periods presented.

Our Company

We are one of the largest industrial distributors in the United States and Canada based on sales serving three distinct market sectors: Infrastructure & Energy, Maintenance, Repair & Improvement and Specialty Construction. With a diverse portfolio of industry-leading distribution businesses and more than 80 years of experience, we provide a broad range of products and services to approximately 440,000 professional customers including contractors, government entities, maintenance professionals, home builders and industrial businesses. Through approximately 630 locations across the United States and Canada we have an expansive offering of approximately one million stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products at competitive prices. For the fiscal year ended January 29, 2012, we generated $7.0 billion in Net sales, $508 million of Adjusted EBITDA and incurred a Net loss of $543 million. For a reconciliation of net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA, see “—Summary Consolidated Financial Data.”

We provide localized, customer-driven services to a diverse group of end markets and customers through approximately 14,400 associates and a network of approximately 630 locations across 46 U.S. states and 9 Canadian Provinces. Our comprehensive supply chain solutions consist of services such as jobsite delivery, will call or direct-ship options. Furthermore, volume purchasing, comprehensive product assortment, product knowledge and availability allow our customers to reduce procurement costs and enhance overall workforce productivity. We believe the combination of these services with our national footprint, broad purchasing scale and extensive product offering drive our long-standing customer relationships and create competitive advantage. We reach our customers through a variety of sales channels, including a service sales force, call centers, customer service representatives and a direct marketing program. The direct marketing strategy consists of a national account sales program, a HD Supply branded website and segment-specific product catalogues. Our distribution network allows us to provide reliable, on-time delivery throughout the United States.

 

 

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Geographic Footprint

 

LOGO

Our business is differentiated by diversity in the products, businesses and end markets which we serve. The following charts summarize our revenue by line of business and end market for the fiscal year ended January 29, 2012.

 

LOGO

   LOGO

Our Industry

Through seven industrial distribution businesses in the U.S. and a Canadian operation, we provide a diverse range of products and services to professional customers in the Infrastructure & Energy, Maintenance, Repair & Improvement and Specialty Construction market sectors. Most of our businesses operate in markets with a high degree of customer and supplier fragmentation, which typically demand a high level of service and availability of a broad set of complex products from a large number of suppliers. These factors drive the importance of the distributor within the value chain and create barriers to entry for suppliers to sell directly to customers.

 

 

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Maintenance, Repair & Improvement

Our Maintenance, Repair & Improvement businesses serve customers by delivering supplies and services needed to maintain and upgrade facilities across multiple industries. The sector is a $64 billion addressable market where our demand is driven by maintenance requirements for the existing stock of U.S. structures and traditional repair and remodel construction across multiple industries. Our businesses in this sector have non-branch based operating models. Our Facilities Maintenance and Crown Bolt businesses are distribution center based models, while our Repair & Remodel business is a retail outlet primarily serving cash and carry customers. Our leadership position within this sector should allow us to capitalize on improving business conditions within the segment. We expect to benefit from an increase in demand from our customers in maintenance repair and improvement materials during periods of lower vacancy rates and high occupancy rates.

 

Multifamily Vacancy Rate

  

Multifamily Revenue Per Occupied Stock

LOGO    LOGO

Source: REIS (“United States Apartment 3Q 2012 MetroTrend Futures”)

Our businesses serving customers in Maintenance, Repair & Improvement include:

Facilities Maintenance. Supplies maintenance, repair and operations (“MRO”) products and upgrade and renovation services largely to the multifamily, healthcare, hospitality, institutional and commercial properties markets. Products include kitchen and bathroom plumbing products, heating, ventilating and air conditioning (“HVAC”) products, tools and repair materials, appliances, cabinet and drawer hardware, door hardware and locksets, fasteners, lighting, electrical maintenance supplies, safety products, guest amenities, textiles, healthcare maintenance and janitorial supplies. Facilities Maintenance is a distribution center based model.

Repair & Remodel. Offers light remodeling and construction supplies primarily to small remodeling contractors and trade professionals. Products include kitchen cabinets, windows, plumbing materials, masonry, electrical equipment, lumber, flooring and tools and tool rentals for small remodeling, home improvement and do-it-yourself residential projects. Repair & Remodel is a retail outlet business primarily serving cash and carry customers.

Crown Bolt. A retail distribution operator, providing program and packaging solutions, sourcing, distribution, and in-store service, primarily serving The Home Depot, Inc., (“Home Depot” or “THD”) and other hardware stores. Products include fasteners, builders hardware, rope and chain and plumbing accessories primarily consumed in home improvement, do-it-yourself projects and residential construction. Crown Bolt is a distribution center based model.

 

 

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Infrastructure & Energy

To support established infrastructure and economic growth, our Infrastructure & Energy businesses serve customers in the Infrastructure & Energy market sector by striving to meet their demand for the critical supplies and services used to build and maintain water systems, and for the generation, transmission, distribution and application of electrical power. The sector is a $42 billion addressable market where our demand is driven in the United States by an aging national infrastructure, an overburdened existing infrastructure, general population growth trends and the need for cost-effective energy distribution. We believe that our customers delayed required upgrades or repairs during the recent economic downturn and there is a substantial backlog of projects that will need to be addressed in the coming years from which we stand to benefit. In the utilities space specifically, we stand to capitalize upon forecasts of $55 billion in planned transmission investment by shareholder-owned utilities over the next four years.

Actual and Planned Transmission Investment by Shareholder—Owned Utilities (US$ in Millions)1

 

 

LOGO

Source: Edison Electric Institute, Business Information Group as of July 2012.

 

1 Amounts adjusted for inflation and are expressed in real 2011 dollars.
2 Planned total industry expenditures are preliminary.

The broad geographic presence of these businesses, through a regionally organized distribution network of branches, reduces our exposure to economic factors in any single region. The Infrastructure & Energy sector is made up of the following businesses:

Waterworks. Distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in all aspects of the water and wastewater industries. Products include pipes, fittings, valves, hydrants and meters for use in the construction, maintenance and repair of water and waste-water systems as well as fire-protection systems. Waterworks also provides adjacent offerings, including smart meters (AMR/AMI), high-density polyethylene (HDPE) pipe and specific engineered treatment plant products and services. Waterworks complements its product offering with various value-added services such as water meter testing and reconditioning, fusion machine rental, inventory management, hot-tapping, water systems audits, control valve testing and repair, onsite inventory trailers, manhole rehabilitation, line stopping and online material management.

Power Solutions. Distributes electrical transmission and distribution products, power plant MRO supplies, smart-grid technologies, and provides materials management and procurement outsourcing arrangements to the power generation and distribution industries. Products include conductors such as wire and cable, transformers,

 

 

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overhead transmission and distribution hardware, switches, protective devices and underground distribution, connectors used in the construction or maintenance and repair of electricity transmission and substation distribution infrastructure, and electrical wire and cable, switchgear, supplies, lighting and conduit used in residential and commercial construction.

Specialty Construction

Our Specialty Construction businesses serve professional contractors and trades by striving to meet their very distinct customized supply needs in commercial, residential and industrial applications. The sector is a $17 billion addressable market where demand is driven by single family, multifamily, commercial, municipal, and repair and remodel construction spending. White Cap is the primary business that serves this sector through a broad national presence, a regionally organized distribution network of branches. We believe we are well positioned to capitalize upon the recovery of the residential and non-residential construction sectors which are expected to see a continued rebound in the next several years from historical low levels.

 

Non-Residential Construction Spending ($)
Indexed to 2007

  

Residential Construction: Single Family Starts,
Indexed to 2007

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Source: Management estimates based on industry data.

Our businesses serving customers in this market include:

White Cap. Distributes specialized hardware, tools and building materials to professional contractors. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, and erosion and sediment control used broadly across all types of residential and non-residential construction.

Creative Touch Interiors (“CTI”). Offers turnkey supply and installation services for multiple interior finish options, including flooring, cabinets, countertops, and window coverings, along with comprehensive design center services for residential, commercial and senior living projects.

HD Supply Canada

HD Supply Canada is an industrial distributor that primarily focuses on servicing fasteners/industrial supplies and specialty lighting markets. HD Supply Canada operates across nine provinces.

 

 

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Our Strengths

We believe that our company has the following competitive strengths:

Market share leader with significant scale distributing a broad product offering to diverse end markets nationally: We operate in the large, fragmented U.S. and Canadian residential, non-residential and infrastructure construction, renovation and improvement markets. We have leading market share in our four major businesses. Facilities Maintenance is the largest distributor to multi-family properties and Power Solutions is the largest utilities distributor. Many of our competitors lack the resources and scale to compete with our product depth and knowledge, strong customer service, global sourcing capability, broad geographic coverage, and sophisticated information technology systems. Our expansive national footprint drives competitive advantage in our markets and gives us the ability to not only provide excellent national service but also leverage our purchasing power through our significant scale. As a result, we have developed leading market positions and believe that we are poised to capture additional market share and capitalize on continued consolidation in the industry.

Our broad end-market and geographic exposure, low customer concentration and diverse product and service offerings across our businesses help reduce the risks related to a single end market, customer or vendor. We serve a broad array of end markets with favorable long-term growth prospects, driven by many different factors. Furthermore, we operate approximately 630 locations strategically located across 46 U.S. States and 9 Canadian Provinces. Our broad business mix reduces our exposure to the seasonality and cyclicality of any individual end market or region. We offer approximately one million SKUs to approximately 440,000 professional customers, including contractors, government entities, maintenance professionals, home builders and industrial businesses. Our large, highly fragmented customer base has very low account concentration with our largest customer, Home Depot, representing only 3.9% of our total sales in fiscal year ending January 2012. In addition, no customer, other than Home Depot, represented more than 1.0% of our total sales in the same year.

Addressable Market Opportunity and HD Supply’s Position (US$ in Billions)

 

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1 Management estimates.
2 Sales for the year ended January 29, 2012.
3 Power Solutions is the largest utilities distributor. Facilities Maintenance is the largest distributor to multifamily properties.

Strategic supplier relationships. We have developed relationships with approximately 14,000 strategic suppliers, many of which are long-standing relationships. These supplier relationships provide us with reliable access to inventory, volume purchasing benefits and the ability to deliver a diverse product offering on a cost-effective basis. We maintain multiple suppliers for a substantial number of our products, thereby limiting the risk of product shortage for customers. We also have a sourcing office located in China in order to help us advantageously procure a number of supplies from low cost countries. Our strong supplier relationships allow us to leverage our existing relationships into strategic partnerships. We seek synergies across business lines with suppliers by aggregating purchases where possible to achieve favorable pricing and terms.

Highly integrated, industry-leading technology platform. Each of our portfolio companies has converged on a single, integrated technology platform specific to their business. Leveraging common technologies and centers of excellence across HD Supply, they provide leading capabilities for web commerce, order and warehouse management, pricing, reporting and business analytics. The core enterprise resource planning platforms are extended by a series of world-class on-premise and cloud-based solutions. Together, these provide seamless customer integration for sales, optimize receivables and inventory management, as well as highly-scalable internal processes without rework and waste.

Robust liquidity and strong cash flow generation. Historically, our strong competitive position and high quality products and services have allowed us to generate attractive and stable gross margins. These margins together with limited capital expenditures and modest working capital requirements significantly benefit our operating flexibility and ability to generate significant cash flow. As is typical with the flexibility associated with a distribution operating model, our cost structure is largely based on variable costs and furthermore capital expenditures were approximately 1.6% of our sales for the twelve months ended January 29, 2012. This operating model allows us to adjust to changing industry dynamics and as a result, in periods of decreased sales activity, we are able to generate cash flow as our costs are reduced and working capital contracts. In addition, we believe that our strong liquidity position is a strategic asset, as it allows us to serve our customers’ needs in all operating environments.

Experienced management team and strong equity sponsorship. Our management team is focused on stringent operational and financial metrics and has successfully navigated through the economic downturn in 2008 and 2009. In the fiscal year ending January 2012, sales grew by 9.0% year-over-year and our Adjusted EBITDA increased by 48% over the past two fiscal years. The strong rebound is largely attributable to the successful execution of our strategy by our senior management team, which has an average of more than 20 years of distribution, construction and diversified industry experience. Our CEO, Joseph DeAngelo, has over 25 years of global operating experience including 17 years at General Electric Company, where he gained extensive operational, sourcing and financial experience across numerous General Electric business units. Our business heads have significant experience across industries with our company and at other leading industrial companies such as General Electric Company, Arrow Electronics, Inc., Honeywell International Inc. and The Stanley Works. The presidents of our businesses have vast industry experience, the majority of which has been accrued in service at our legacy companies. Further, each of our Equity Sponsors brings a strong track record of creating value through their ownership of large distribution businesses, including Rexel S.A., Brenntag Holding GmbH & Co. KG and Wesco Aircraft Hardware Corp.

 

 

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Our Strategy

We are focused on driving strong performance and ongoing operational improvements at our businesses through the following initiatives:

Build upon strong leadership positions among our principal lines of business. Our Waterworks and White Cap lines of business currently enjoy the leading position in their respective markets. Our Facilities Maintenance line of business has the leading position in the U.S. multifamily MRO segment of the facilities MRO market and our Power Solutions line of business has the leading position in the U.S. and Canada in the utilities distribution market. We believe that our market share substantially exceeds that of the next largest competitor in each of these four markets. We believe our scale and local-market presence position us to gain further share as we expect that our suppliers and customers will continue to seek relationships with fewer, larger distributors. Our ongoing focus will be to continue to develop our principal lines of business with a focus on leveraging our strong market positions and investing locally to grow market share.

Focus on organic sales growth initiatives. Our businesses focus on acquiring new customers as well as selling new products to existing customers. We currently sell approximately one million SKUs to approximately 440,000 customers comprised of contractors, government entities, maintenance professionals, home builders and industrial businesses. Our diversity enables us to increase our sales to existing customers by satisfying a broad range of their needs across multiple lines of business. We have multiple initiatives to identify and enter adjacent markets and new geographies to expand our customer base. Our products include the materials necessary for the construction of a facility through its ongoing maintenance and through future remodeling and expansion. We continue to invest in organic growth initiatives within our principal lines of business including in the following:

 

   

Facilities Maintenance: Increase market share in multifamily, hospitality, healthcare, institutional and industrial end markets.

 

   

Waterworks: Expand into new geographies, direct-to-distribution, and adjacent product lines such as meters, treatment plants, storm drainage and fusible plastics.

 

   

White Cap: Grow local market and MSA leadership and enhance merchandising.

 

   

Power Solutions: Increase market share within the independent owned utilities market and the generation market, establish alliances in new markets and expand existing product and solution portfolio.

Continued focus on operational efficiency and margin enhancement initiatives will lead to improved cash flows. We place a particular emphasis on maintaining a strong focus on sourcing, pricing discipline and working capital optimization. As a result our financial efficiency, during what has been an otherwise difficult operating environment over the past several years, has improved as evidenced by our expansion of gross margins from 28.0% in fiscal 2009 to 28.7% in fiscal 2011. In addition, we have successfully leveraged our fixed cost infrastructure as SG&A as a percentage of sales have declined from 23.0% in fiscal 2009 to 21.8% in fiscal 2011, which has enabled our Adjusted EBITDA to grow at a CAGR of 21.7% during this period.

Gross Margin Improvement Initiatives:

 

   

Continued consolidation of our vendors to aggregate total product spend, reduction of vendor overlap across our lines of business and increased sourcing from low cost countries

 

   

Optimize our inbound freight costs, physical facilities and delivery fleet

 

   

Grow sales of private-label products which typically generate higher gross margins than leading third-party brands sold by our businesses and enhance customer loyalty. Approximately 7.1% of our fiscal 2011 sales were generated by private label products

 

 

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Operating Cost Enhancement Initiatives:

 

   

Consolidation of our back office operations reducing our overall cost structure

 

   

Investment in technology to improve efficiencies within our transportation management and our warehouse management systems

 

   

Continued optimization of investment in working capital

Proactive portfolio optimization. Through past divestitures, we have focused our portfolio around our four key business lines which we believe are positioned to achieve leading financial and strategic performance. Approximately 90% of our sales are concentrated in our primary business lines in which we believe we have companies with leading market positions. Our management team is incentivized to achieve our operational goals focused on achieving organic growth, profitability and high returns and we believe our current set of businesses will allow us to achieve these goals. We have a strong track record of integrating new businesses through “tuck-in” acquisitions and continue to evaluate accretive opportunities in adjacent geographies, customers and product categories.

Ownership and Corporate Structure

Equity Sponsor Overview

The Equity Sponsors own 83.8% of the outstanding capital stock of our parent company, Holding, without giving effect to outstanding options.

Bain Capital Partners, LLC. Established in 1984, Bain Capital Partners, LLC is one of the world’s leading private investment firms with approximately $60 billion in assets under management, over 400 investment professionals, and 10 offices in 6 countries. Bain’s affiliated advisors make private equity, public equity, leveraged debt, venture capital and absolute return investments across a wide range of industries, asset classes, and geographies. Over 28 years, Bain has completed over 460 private equity investments. Select current portfolio companies include HCA, Michael’s Stores, Bloomin’ Brands, and Sensata Technologies.

The Carlyle Group. The Carlyle Group is a global alternative asset manager with $147 billion of assets under management in 89 active funds and 52 fund of fund vehicles as of December 31, 2011. Carlyle invests across four segments—Corporate Private Equity, Real Assets, Global Market Strategies and Fund of Funds Solutions—in Africa, Asia, Australia, Europe, the Middle East, North America and South America. The Carlyle Group employs more than 1,300 people in 33 offices across six continents. Select portfolio companies include: Dunkin’ Brands Group, Nielsen, AMC and Kinder Morgan.

Clayton, Dubilier & Rice, LLC. Founded in 1978, Clayton, Dubilier & Rice, LLC is a private equity firm with an investment strategy predicated on building stronger, more profitable businesses. The firm’s professionals include a combination of financial and operating executives. Since inception, CD&R has managed the investment of approximately $16 billion in 49 U.S. and European businesses with an aggregate transaction value of approximately $80 billion. CD&R has a long history of investing in market-leading distribution businesses, including VWR International, a leading global distributor of laboratory supplies, U.S. Foodservice, the second largest broadline foodservice distributor in the United States, Rexel, the leading distributor worldwide of electrical supplies, and Diversey, a leading global manufacturer and distributor of commercial cleaning, sanitation and hygiene solutions.

 

 

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The following chart illustrates our current ownership, organizational and capital structure:

 

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* Does not give effect to outstanding options.
(1) Borrower under the Senior Credit Facilities and issuer of the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes, the October 2012 Senior Notes, the 2007 Senior Subordinated Notes, the Old Notes and the New Notes.
(2) A Canadian subsidiary of HD Supply is a borrower under the Senior ABL Facility. Each domestic subsidiary of HD Supply (other than certain excluded subsidiaries, “Excluded Subsidiaries”) currently guarantees HD Supply’s obligations under the Senior ABL Facility, and each such domestic subsidiary and certain Canadian subsidiaries of HD Supply (other than Excluded Subsidiaries) currently guarantee the obligations of the Canadian borrower under the Senior ABL Facility. The Senior ABL Facility and guarantees thereof are secured as described under “Description of Other Indebtedness—Senior Credit Facilities—Senior ABL Facility.”
(3) The New Notes will be guaranteed by each domestic subsidiary of HD Supply that is a borrower under the Senior ABL Facility or guarantees HD Supply’s indebtedness under any Credit Facility and that is a Wholly Owned Domestic Subsidiary or that guarantees Capital Markets Securities. See “Description of Notes—Subsidiary Guarantees.” These subsidiaries also guarantee the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes, the October 2012 Senior Notes, the 2007 Senior Subordinated Notes and the Old Notes. See “Description of Other Indebtedness—First Priority Notes,” “Description of Other Indebtedness—Second Priority Notes,” “Description of Other Indebtedness—April 2012 Senior Notes,” “Description of Other Indebtedness—October 2012 Senior Notes” and “Description of Other Indebtedness—2007 Senior Subordinated Notes.”

 

 

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The Refinancing Transactions

The following transactions (the “Refinancing Transactions”) occurred on April 12, 2012:

 

   

Entry into a new Senior Term Facility and the repayment of all amounts outstanding under our Existing Senior Secured Credit Facility.

 

   

Entry into a new Senior ABL facility and the repayment of all amounts outstanding under our Existing ABL Credit Facility.

 

   

Bain and Carlyle exchanged certain of the 12.0% Senior Notes held by them prior to the redemption of the 12.0% Senior Notes for a portion of the April 2012 Senior Notes (the “Sponsor Exchange”).

 

   

CD&R purchased a portion of the April 2012 Senior Notes (the “CD&R Purchase” and together with the Sponsor Exchange, the “April 2012 Senior Notes Issuance”).

 

   

The issuance of the April 2012 First Priority Notes.

 

   

The issuance of the Second Priority Notes.

 

   

The redemption of the remaining 12.0% Senior Notes.

 

   

The termination of the guarantee by Home Depot of our payment obligations for principal and interest under the Existing Term Loan under the Existing Senior Secured Credit Facility.

In addition, on August 2, 2012, we issued the August 2012 First Priority Notes.

On October 15, 2012, we issued $1 billion of the October 2012 Senior Notes at par. As a result of the issuance, we incurred $18 million in debt issuance costs. On November 8, 2012, the net proceeds from the October 2012 Senior Notes issuance were used to redeem $930 million of the outstanding 2007 Senior Subordinated Notes at a redemption price of 103.375%.

On January 16, 2013, we issued $950 million of the Old Notes at par. At closing, we paid $14 million in debt issuance costs. We intend to use the net proceeds from the Old Notes issuance to redeem $889 million of the outstanding 2007 Senior Subordinated Notes on or about February 8, 2013, at a redemption price of 103.375%.

*    *    *    *    *

HD Supply, Inc. is a Delaware corporation. Our principal executive offices are located at 3100 Cumberland Boulevard, Suite 1480, Atlanta, Georgia, and our telephone number at that address is (770) 852-9000. Our website is www.hdsupply.com. Information on our website is not incorporated in this prospectus.

 

 

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Summary of the Terms of the Exchange Offer

 

The Old Notes were issued in transactions exempt from registration under the Securities Act.

 

Notes Offered

$950,000,000 aggregate principal amount of new 10.50% Senior Subordinated Notes due 2021, which have been registered under the Securities Act.

 

  When we use the term “Notes” in this prospectus, the related discussion applies to both the Old Notes and the New Notes.

 

  The terms of the New Notes are identical in all material respects to the terms of the Old Notes, except that the New Notes are registered under the Securities Act and will not be subject to restrictions on transfer, will bear a different CUSIP and ISIN number than the Old Notes, will not entitle their holders to registration rights and will be subject to terms relating to book-entry procedures and administrative terms relating to transfers that differ from those of the Old Notes.

 

  The CUSIP numbers for the Old Notes are 40415R AL9 (Rule 144A) and U4047C AF4 (Regulation S). The ISIN numbers for the Old Notes are US40415RAL96 (Rule 144A) and USU4047CAF42 (Regulation S). The CUSIP number for the New Notes is 40415R AM7 and the ISIN number for the New Notes is US40415RAM79.

 

The Exchange Offer

You may exchange Old Notes for a like principal amount of New Notes. The consummation of the exchange offer is not conditioned upon any minimum or maximum aggregate principal amount of Old Notes being tendered for exchange.

 

Resale of New Notes

We believe the New Notes that will be issued in the exchange offer may be resold by most investors without compliance with the registration and prospectus delivery provisions of the Securities Act, subject to certain conditions. You should read the discussions under the headings “The Exchange Offer” for further information regarding the exchange offer and resale of the New Notes.

 

Registration Rights Agreement

We have undertaken the exchange offer pursuant to the terms of the exchange and registration rights agreement we entered into with the initial purchasers on January 16, 2013 (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, we agreed to use our commercially reasonable efforts to consummate an exchange offer for the Old Notes pursuant to an effective registration statement or to cause resales of the Old Notes to be registered. We have filed this registration statement to meet our obligations under the Registration Rights Agreement. If we fail to satisfy our obligations under the Registration Rights Agreement and a Registration Default occurs, the interest rate on the Registrable Securities will be increased by (i) 0.25 percent per annum for the first 90-day period beginning on the day immediately following such Registration Default and (ii) an

 

 

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additional 0.25 percent per annum with respect to each subsequent 90-day period, in each case until and including the date such Registration Default ends, up to a maximum increase of 0.50 percent per annum. See “Exchange Offer; Registration Rights.”

 

Consequences of Failure to Exchange the Old Notes

You will continue to hold Old Notes that remain subject to their existing transfer restrictions if:

 

   

you do not tender your Old Notes; or

 

   

you tender your Old Notes and they are not accepted for exchange.

 

  With some limited exceptions, we will have no obligation to register the Old Notes after we consummate the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer; Period for Tendering Old Notes.”

 

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on                     , 2013 (the “Expiration Date”), unless we extend it, in which case Expiration Date means the latest date and time to which the exchange offer is extended.

 

Interest on the New Notes

The New Notes will accrue interest from the most recent date to which interest has been paid or provided for on the Old Notes or, if no interest has been paid on the Old Notes, from the date of original issue of the Old Notes.

 

Conditions to the Exchange Offer

The exchange offer is subject to several customary conditions. We will not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes, and we may terminate or amend the exchange offer if we determine in our reasonable judgment at any time before the Expiration Date that the exchange offer would violate applicable law, any applicable interpretation of the SEC or its staff or any order of any governmental agency or court of competent jurisdiction. The foregoing conditions are for our sole benefit and may be waived by us at any time. In addition, we will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for any such Old Notes, if at any time any stop order is threatened or in effect with respect to:

 

   

the registration statement of which this prospectus constitutes a part; or

 

   

the qualification of the Indenture under the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”).

 

  See “The Exchange Offer—Conditions to the Exchange Offer.” We reserve the right to terminate or amend the exchange offer at any time prior to the Expiration Date upon the occurrence of any of the foregoing events.

 

 

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Procedures for Tendering Old Notes

If you wish to participate in the exchange offer, you must submit required documentation and effect a tender of Old Notes pursuant to the procedures for book-entry transfer (or other applicable procedures), all in accordance with the instructions described in this prospectus and in the letter of transmittal or electronic acceptance instruction. See “The Exchange Offer—Procedures for Tendering Old Notes.”

 

Guaranteed Delivery Procedures

If you wish to tender your Old Notes, but cannot properly do so prior to the Expiration Date, you may tender your Old Notes according to the guaranteed delivery procedures set forth under “The Exchange Offer—Guaranteed Delivery Procedures.”

 

Withdrawal Rights

Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old Notes, a notice of withdrawal must be actually received by the Exchange Agent at its address set forth in “The Exchange Offer—Exchange Agent” prior to 5:00 p.m., New York City time, on the Expiration Date. See “The Exchange Offer—Withdrawal Rights.”

 

Acceptance of Old Notes and Delivery of New Notes

Except in some circumstances, any and all Old Notes that are validly tendered in the exchange offer prior to 5:00 p.m., New York City time, on the Expiration Date will be accepted for exchange. The New Notes issued pursuant to the exchange offer will be delivered promptly after the Expiration Date. See “The Exchange Offer—Acceptance of Old Notes for Exchange; Delivery of New Notes.”

 

Certain U.S. Federal Tax Considerations

We believe that the exchange of the Old Notes for the New Notes will not constitute a taxable exchange for U.S. federal income tax purposes. See “Certain United States Federal Income Tax Considerations.”

 

Exchange Agent

Wells Fargo Bank, National Association is serving as the Exchange Agent for the New Notes (the “Exchange Agent”).

 

 

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Summary of the Terms of the New Notes

The terms of the New Notes offered in the exchange offer are identical in all material respects to the Old Notes, except that the New Notes:

 

   

are registered under the Securities Act and therefore will not be subject to restrictions on transfer;

 

   

will not be subject to provisions relating to additional interest;

 

   

will bear a different CUSIP and ISIN number;

 

   

will not entitle their holders to registration rights; and

 

   

will be subject to terms relating to book-entry procedures and administrative terms relating to transfers that differ from those of the Old Notes.

The following summary contains basic information about the Notes and the guarantees thereof and is not intended to be complete. Capitalized terms used in this section and not otherwise defined shall have the meaning ascribed thereto in the “Description of Notes” in this prospectus. For a more complete understanding of the Notes and the guarantees, please refer to the section entitled “Description of Notes.”

 

Issuer

HD Supply, Inc.

 

Notes Offered

$950,000,000 aggregate principal amount of 10.50 % Senior Subordinated Notes due 2021.

 

Maturity

The New Notes will mature on January 15, 2021.

 

Interest

The New Notes will bear interest at a rate of 10.50%, payable in cash on April 15 and October 15 and at maturity, commencing on April 15, 2013. Interest accrues on the New Notes from January 16, 2013.

 

Ranking

The New Notes are our unsecured senior subordinated indebtedness and rank:

 

   

subordinated in right of payment to all our existing and future senior indebtedness;

 

   

equal in right of payment with all of our existing and future senior subordinated indebtedness;

 

   

senior in right of payment to all of our existing and future indebtedness that is by its terms expressly subordinated in right of payment to the Notes;

 

   

effectively subordinated to all of our existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, the First Priority Notes and the Second Priority Notes, to the extent of the value of the collateral securing such indebtedness; and

 

   

structurally subordinated to approximately $67 million of indebtedness and other liabilities of our non-guarantor subsidiaries, including all of our foreign subsidiaries, as of October 28, 2012.

 

 

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  As of October 28, 2012, we had approximately $3.3 billion of senior secured indebtedness, net of unamortized discount of $27 million, $5.1 billion of senior indebtedness, net of unamortized discount of $56 million, and our non-guarantor subsidiaries had approximately $67 million of indebtedness. As of October 28, 2012, we also had commitments for additional borrowings under the revolving Senior ABL Facility of $867 million.

 

Guarantors

The New Notes are guaranteed, on an unsecured senior subordinated basis, by each of our direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under a senior ABL facility or that guarantees our obligations under any credit facility or capital markets securities. These guarantees are subject to release under specified circumstances. See “Description of Notes—Subsidiary Guarantees.” The guarantee of each Subsidiary Guarantor is a senior subordinated obligation of that Subsidiary Guarantor and ranks:

 

   

subordinated in right of payment to all existing and future senior indebtedness of such Subsidiary Guarantor;

 

   

equal in right of payment with all existing and future senior subordinated indebtedness of such Subsidiary Guarantor;

 

   

senior in right of payment to all existing and future indebtedness of such Subsidiary Guarantor that is by its terms expressly subordinated in right of payment to the Notes;

 

   

effectively subordinated to all existing and future secured indebtedness of such Subsidiary Guarantor, including, without limitation, indebtedness under the Senior Credit Facilities, the First Priority Notes and the Second Priority Notes, to the extent of the value of the collateral owned by such Subsidiary Guarantor; and

 

   

structurally subordinated to all indebtedness and other liabilities of any non-guarantor subsidiary of such Subsidiary Guarantor.

 

  As of October 28, 2012, the indebtedness and other liabilities of our non-guarantor subsidiaries was approximately $67 million. The New Notes are structurally subordinated to the indebtedness and other liabilities of such non-guarantor subsidiaries. Our non-guarantor subsidiaries generated approximately 6% of our Net sales for fiscal 2011 and held approximately 3% of our assets as of October 28, 2012.

 

Optional Redemption

We may redeem the Notes, in whole or in part, at any time (1) prior to January 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the make-whole premium described under “Description of Notes—Optional Redemption,” and (2) on and after January 15, 2016, at the redemption prices described under “Description of Notes—Optional Redemption,” plus accrued and unpaid interest, if any, to the redemption date.

 

 

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  In addition, at any time after July 31, 2013 and on or before July 31, 2014, we may also redeem up to 100% of the aggregate principal amount of the Notes with funds not exceeding the proceeds of certain qualified public equity offerings at the redemption prices and on the conditions described under “Description of Notes—Optional Redemption.”

 

Optional Redemption After Certain Equity Offerings

Prior to January 15, 2016, we may redeem on one or more occasions up to 35% of the original aggregate principal amount of the Notes in an amount not exceeding the net proceeds of one or more equity offerings at the redemption prices and on the conditions described under “Description of Notes—Optional Redemption.”

 

Offer to Repurchase

If we experience a change of control, we must offer to repurchase all of the Notes (unless otherwise redeemed) at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date. See “Description of Notes—Change of Control.”

 

  If we sell certain assets, under certain circumstances we must make an offer to purchase Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase. See “Description of Notes—Certain Covenants—Limitation on Sales of Assets and Subsidiary Stock.”

 

Certain Covenants

The Indenture contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:

 

   

incur more indebtedness;

 

   

pay dividends, redeem stock or make other distributions;

 

   

make investments;

 

   

create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers;

 

   

create liens;

 

   

transfer or sell assets;

 

   

merge or consolidate; and

 

   

enter into certain transactions with our affiliates.

 

  These covenants are subject to important exceptions and qualifications, which are described under “Description of Notes—Certain Covenants” and “Description of Notes—Merger and Consolidation.”

Risk Factors

In evaluating an investment in the New Notes, prospective investors should carefully consider, along with other information included in this prospectus, the specific factors set forth under “Risk Factors.”

 

 

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Ratios of Earnings to Fixed Charges

Our consolidated ratios of earnings to fixed charges for the nine-month period ended October 28, 2012, the fiscal years ended January 29, 2012, January 30, 2011, January 31, 2010 and February 1, 2009, the Successor period from August 30, 2007 to February 3, 2008 and the Predecessor period from January 29, 2007 to August 29, 2007 are as follows:

 

    Successor          Predecessor  
    Nine-month
period ended
October 28, 2012
    Fiscal year ended     Period from
Aug. 30,
2007 to

Feb. 3, 2008
         Period from
Jan.  29, 2007
to

Aug. 29, 2007
 
      Jan. 29, 2012     Jan. 30,
2011
    Jan. 31,
2010
    Feb.1,
2009
       

Ratio of earnings to fixed charges(1)

    (2     (2     (2     (2     (2     (2         1.1x   

 

(1) For the purposes of calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before provision (benefit) for income taxes plus fixed charges. Fixed charges include cash and non-cash interest expense, whether expensed or capitalized, amortization of debt issuance cost, amortization of the guarantee by Home Depot of our payment obligations for principal and interest under the Existing Term Loan (the “THD Guarantee”) and the portion of rental expense representative of the interest factor.
(2) For the nine-month period ended October 28, 2012, fiscal 2011, fiscal 2010, fiscal 2009, fiscal 2008, and the period from August 30, 2007 to February 3, 2008, our earnings were insufficient to cover fixed charges by $449 million, $484 million, $585 million, $678 million, $1,477 million and $275 million, respectively.

 

 

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Summary Consolidated and Combined Financial and Operating Data

The following table presents our summary historical financial data, as of and for the periods indicated. The summary historical financial information as of and for the nine months ended October 28, 2012 and October 30, 2011 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary historical financial data for the fiscal years ended January 29, 2012, January 30, 2011, January 31, 2010, February 1, 2009 and for the period from August 30, 2007 to February 2008 and the period from January 29, 2007 to August 29, 2007 have been derived from our historical financial statements.

On March 26, 2012, HD Supply disposed of its Industrial Pipes, Valves and Fittings (“IPVF”) business. During fiscal 2011, HD Supply disposed of its Plumbing/HVAC and SESCO/QUESCO operations. In accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations, the results of the IPVF, Plumbing/HVAC and SESCO/QUESCO operations and the gain on sale of the businesses are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on the sale of businesses, net of tax, as one line item on the Consolidated Statements of Operations. All prior period Consolidated Statements of Operations have been revised to reflect this presentation.

This “Summary Consolidated and Combined Financial and Operating Data” should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements and related notes included in “Audited Consolidated Financial Statements” and unaudited consolidated financial statement and related notes included in “Unaudited Consolidated Financial Statements.” Our historical consolidated and combined financial data may not be indicative of our future performance.

 

 

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    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Fiscal year ended
    Period
from
August 30,
2007 to
February 3,
2008
         Period
from
January 29,
2007 to
August 29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       
    (Dollars in millions)             

Consolidated Statement of Operations:

                   

Net sales

  $ 6,041      $ 5,376      $ 7,028      $ 6,449      $ 6,313      $ 8,198      $ 3,838          $ 5,903   

Cost of sales

    4,308        3,848        5,014        4,608        4,545        5,980        2,808            4,329   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross profit

    1,733        1,528        2,014        1,841        1,768        2,218        1,030            1,574   

Operating expenses:

                   

Selling, general and administrative

    1,223        1,144        1,532        1,455        1,453        1,770        860            1,208   

Depreciation and amortization

    250        245        327        341        359        374        156            105   

Restructuring

    —          —          —          8        21        31        —              —     

Goodwill impairment

    —          —          —          —          219        867        —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total operating expenses

    1,473        1,389        1,859        1,804        2,052        3,042        1,016            1,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

    260        139        155        37        (284     (824     14            261   

Interest expense

    489        477        639        623        602        644        289            220   

Interest income

    —          —          —          —          —          (3     —              —     

Loss (gain) on extinguishment of debt

    220        —          —          —          (200     —          —              —     

Other (income) expense, net

    —          (1     —          (1     (8     12        —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes and discontinued operations

    (449     (337     (484     (585     (678     (1,477     (275         41   

Provision (benefit) for income taxes

    36        59        79        28        (198     (329     (100         17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from continuing operations

    (485     (396     (563     (613     (480     (1,148     (175         24   

Income (loss) from discontinued operations, net of tax

    19        26        20        (6     (34     (107     (12         (32
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

  $ (466   $ (370   $ (543   $ (619   $ (514   $ (1,255   $ (163       $ 56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Balance sheet data (end of period):

                   

Working capital(1)

  $ 1,279        $ 1,012      $ 1,176      $ 1,925      $ 2,071      $ 2,009         

Cash and cash equivalents

    158          111        292        539        771        108         

Total assets

    7,678          6,738        7,089        7,845        9,088        10,593         

Total debt(2)

    6,915          5,462        5,249        5,775        6,056        5,800         

Total stockholder’s equity (deficit)

    (881       (428     96        688        1,175        2,433         

Other financial data (unaudited):

                   

Cash interest expense(3)

  $ 403      $ 307      $ 457      $ 365      $ 363      $ 397      $ 191          $ 220   

EBITDA(4)

    292        387        484        381        288        (455     173            370   

Adjusted EBITDA(4)

    529        406        508        411        343        476        176            401   

Capital expenditures

    80        58        115        49        58        77        75            176   

Statement of cash flows data:

                   

Cash flows provided by (used in) operating activities, net

  $ (327   $ (264   $ (165   $ 551      $ 69      $ 548      $ 364          $ 408   

Cash flows provided by (used in) investing activities, net

    (777     —          (6     (45     (41     37        (8,255         (140

Cash flows provided by (used in) financing activities, net

    1,151        111        (10     (755     (263     86        7,977            (269

 

(1) We define working capital as current assets (including cash) minus current liabilities, which include the current portion of long-term debt and accrued interest thereon.
(2) Total debt includes current and non-current installments of long-term debt and capital leases.
(3) Cash interest expense represents total interest expense in continuing operations less (i) amortization of deferred financing costs, (ii) amortization of the asset related to the estimated fair value of the THD Guarantee, (iii) paid-in-kind (“PIK”) interest expense on our 2007 Senior Subordinated Notes and April 2012 Senior Notes (iv) amortization of amounts in accumulated other comprehensive income related to derivatives and (v) amortization of original issue discounts and premium. Effective September 1, 2011, the interest expense on our 2007 Senior Subordinated Notes is no longer paid-in-kind, but rather paid in cash. Interest payments on the April 2012 Senior Notes will be paid in kind through October 2017.

 

 

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Cash interest expense is not a recognized term under GAAP and does not purport to be an alternative to interest expense. Management believes that cash interest expense is useful for analyzing the cash flow needs and debt service requirements of the Company. The following table provides a reconciliation of interest expense, the most directly comparable financial measure under GAAP, to Cash interest expense for the periods presented (amounts in millions):

 

    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Fiscal year ended
    Period
from
August 30,
2007 to
February 3,
2008
      Period
from
January 29,
2007 to
August 29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       

Interest expense

  $ 489      $ 477      $ 639      $ 623      $ 602      $ 644      $  289        $  220   

Amortization of deferred financing costs

    (18     (28     (37     (36     (33     (33     (14         —     

Amortization of THD Guarantee

    (2     (10     (13     (14     (21     (21     (9         —     

PIK interest expense on our 2007 Senior Subordinated Notes and April 2012 Senior Notes

    (63     (132     (132     (206     (182     (192     (75         —     

Amortization of amounts in accumulated other comprehensive income related to derivatives

    —          —          —          (2     (3     (1     —              —     

Amortization of original issue discounts and premium

    (3     —          —          —          —          —          —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Cash interest expense

  $ 403      $ 307      $ 457      $ 365      $ 363      $ 397      $ 191          $ 220   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

(4) EBITDA, a measure used by management to evaluate operating performance, is defined as Net income (loss) less Income (loss) from discontinued operations, net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision (benefit) for income taxes, and (iii) Depreciation and amortization. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and other debt service requirements. We believe EBITDA is helpful in highlighting trends because EBITDA 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. We further believe that EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an EBITDA measure when reporting their results. We use non-GAAP financial measures 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 EBITDA may not be comparable to other similarly titled measures of other companies.

In addition, we present Adjusted EBITDA because it is a primary measure used by management to evaluate operating performance. Adjusted EBITDA is based on “Consolidated EBITDA,” a measure used in calculating financial ratios in several material debt covenants in our Senior Term Facility and our Senior ABL Facility. 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 and our Senior ABL Facility requires us to maintain a minimum fixed charge coverage ratio if we do not maintain a specified amount of borrowing availability. Adjusted EBITDA is defined as EBITDA adjusted to exclude non-cash items and certain other adjustments to Consolidated Net Income permitted in calculating Consolidated EBITDA under our Senior Term Facility and our Senior ABL Facility. We believe that inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate and about certain non-cash items, items that we do not expect to continue at the same level and other items. The Senior Term Facility and Senior ABL Facility permit us to make certain 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 prospectus and the documents incorporated by reference herein. 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 “Description of Other Indebtedness—Senior Credit Facilities.”

EBITDA and Adjusted EBITDA 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:

 

   

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

 

 

 

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

 

   

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

 

   

EBITDA and Adjusted EBITDA 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 EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

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

 

    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Three months
ended
    Historical
Fiscal year ended
    Period
from
August 30,
2007 to
February 3,
2008
         Period
from
January 29,
2007 to
August 29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       

Net income (loss)

  $ (466   $ (370   $ (173   $ (543   $ (619   $ (514   $ (1,255   $ (163       $ 56   

Less income (loss) from discontinued operations, net of tax

    19        26        (6     20        (6     (34     107        12            32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from continuing operations

    (485     (396     (167     (563     (613     (480     (1,148     (175         24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Interest expense

    489        477        162        639        623        602        641        289            220   

Provision (benefit) from income taxes

    36        59        20        79        28        (198     (329     (100         17   

Depreciation and amortization(i)

    252        247        82        329        343        364        381        159            109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

EBITDA

  $ 292      $ 387      $ 97      $ 484      $ 381      $ 288      $ (455   $ 173          $ 370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjustments to EBITDA:

                     

Other (income) expense, net(ii)

    —          (1     1        —          (1     (8     12        —              —     

Loss (gain) on extinguishment of debt(iii)

    220        —          —          —          —          (200     —          —              —     

Goodwill impairment(iv)

    —          —          —          —          —          219        867        —              —     

Restructuring charge(v)

    —          —          —          —          8        21        32        —              —     

Stock-based compensation(vi)

    13        16        4        20        17        18        14        1            31   

Management fee & related expenses paid to Equity Sponsors(vii)

    4        4        1        5        5        5        6        2            —     

Other

    —          —          (1     (1     1        —          —          —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted EBITDA

  $ 529      $ 406      $ 102      $ 508      $ 411      $ 343      $ 476      $ 176          $ 401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

  (i) Depreciation and amortization includes amounts recorded within Cost of sales in the Consolidated and Combinded Statements of Operations.
  (ii) Represents the gains/losses associated with the changes in fair value of interest rate swap contracts not accounted for under hedge accounting and other non-operating income/expense.
  (iii) Represents the loss/(gain) on extinguishment of debt including the premium/(discount) paid to repurchase or call the debt as well as the writeoff of unamortized deferred financing costs associated with such debt.
  (iv) Represents the non-cash impairment charge of goodwill recognized during fiscal 2009 and fiscal 2008 in accordance with Accounting Standards Codification 350, Intangibles—Goodwill and Other.
  (v) Represents the costs incurred for employee reductions and branch closures or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location.
  (vi) The Predecessor period includes stock-based compensation costs for stock options, Employee Stock Purchase Plans and restricted stock. The Successor periods include stock-based compensation costs for stock options.
  (vii) The Company entered into a management agreement whereby the Company pays the Equity Sponsors a $5 million annual aggregate management fee and related expenses through August 2017.

 

 

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RISK FACTORS

Investing in the Notes involves a high degree of risk. Before you make your investment decision, you should carefully consider the risks described below and the other information contained in this prospectus, including the consolidated financial statements and the related notes. If any of the following risks actually occurs, our business, financial position, results of operations or cash flows could be materially adversely affected.

Risks Relating to the New Notes and Our Indebtedness

We have substantial debt and may incur substantial additional debt, which could adversely affect our financial health and our ability to obtain financing in the future, react to changes in our business and make payments on the New Notes.

As of October 28, 2012, we had an aggregate principal amount of $6,915 million of outstanding debt, net of unamortized discounts of $56 million and including unamortized premium of $22 million.

Our substantial debt could have important consequences for the holders of our notes. Because of our substantial debt:

 

   

a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes;

 

   

our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes and our ability to satisfy our obligations with respect to our outstanding notes may be impaired in the future;

 

   

we are exposed to the risk of increased interest rates because a portion of our borrowings, including under our debt facilities, is at variable rates of interest;

 

   

we may be at a competitive disadvantage compared to our competitors with less debt or with comparable debt at more favorable interest rates and that, as a result, may be better positioned to withstand economic downturns;

 

   

our ability to refinance indebtedness may be limited or the associated costs may increase;

 

   

our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing may be impaired in the future;

 

   

it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on and acceleration of such indebtedness;

 

   

we may be more vulnerable to general adverse economic and industry conditions; and

 

   

our flexibility to adjust to changing market conditions and our ability to withstand competitive pressures could be limited, or we may be prevented from making capital investments that are necessary or important to our operations in general, growth strategy and efforts to improve operating margins of our businesses.

Our ability to generate the significant amount of cash needed to pay interest and principal on the New Notes and service our other debt and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

As a holding company, we have no independent operations or material assets other than our ownership of equity interests in our subsidiaries and invested cash, and we depend on our subsidiaries to distribute funds to us so that we may pay our obligations and expenses, including to satisfy our obligations under the New Notes, our outstanding notes and the Senior Credit Facilities. Our ability to make scheduled payments on, or to refinance our obligations under, our debt depends on the ability of our subsidiaries to make distributions and dividends to us, which, in turn, depends on their operating results, cash requirements, financial condition, and general

 

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business conditions, and any legal and regulatory restrictions on the payment of dividends to which they may be subject, many of which may be beyond our control. In addition, while our subsidiaries currently have no legal or regulatory restrictions on payments of dividends to us, they may be subject to such restrictions in the future. If we do not receive sufficient distributions from our subsidiaries, we may not be able to meet our obligations to fund general corporate expenses or service our debt obligations.

If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or refinance our debt. We cannot make assurances that we will be able to refinance our debt on terms acceptable to us, or at all. In the future, our cash flow and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

As of October 28, 2012, approximately $1.27 billion of our First Priority Notes, including $22 million of unamortized premium, $675 million of our Second Priority Notes, $889 million of our 2007 Senior Subordinated Notes (as adjusted to reflect the redemption of a portion of the 2007 Senior Subordinated Notes on November 8, 2012), approximately $784 million of our April 2012 Senior Notes, net of $29 million unamortized discount and $1 billion of our October 2012 Senior Notes, were outstanding. The Senior Credit Facilities will mature in 2017, unless more than $450 million of 2007 Senior Subordinated Notes or any unsecured indebtedness incurred to refinance the 2007 Senior Subordinated Notes, remains outstanding on the date that is 90 days prior to its maturity date, in which case the Senior Credit Facilities will mature 90 days prior to the maturity of such 2007 Senior Subordinated Notes or such refinancing indebtedness. Similarly, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes and the October 2012 Senior Notes will mature in 2020, unless an event of default occurs because more than $450 million of 2007 Senior Subordinated Notes or any unsecured indebtedness (generally including the April 2012 Senior Notes, the October 2012 Senior Notes, the Old Notes and the New Notes) incurred to refinance the 2007 Senior Subordinated Notes, remains outstanding on the date that is 45 days prior to its maturity date (or 90 days for the First Priority Notes), in which case, the applicable indebtedness may be accelerated 45 days (or 90 days for the First Priority Notes) prior to the maturity of such 2007 Senior Subordinated Notes or refinancing indebtedness. No 2007 Senior Subordinated Notes will remain outstanding after the application of the proceeds of the offering of the Old Notes, which we expect to occur on or about February 8, 2013. All currently outstanding unsecured indebtedness incurred to refinance the 2007 Senior Subordinated Notes matures more than 45 or 90 days, as applicable, after the maturity of the Senior Credit Facilities, the First Priority Notes, the Second Priority Notes or the October 2012 Senior Notes, as applicable, except that the October 2012 Senior Notes mature before the April 2012 Senior Notes and, therefore, unless the terms of the April 2012 Senior Notes are amended or otherwise modified, holders (or the trustee) of the April 2012 Senior Notes could accelerate such April 2012 Senior Notes 45 days prior to the scheduled maturity date of the October 2012 Senior Notes, and the occurrence of the respective event of default under the April 2012 Senior Notes would, in turn, cause an event of default under the October 2012 Senior Notes. In addition, on or after the fifth anniversary of the issue date of the April 2012 Senior Notes, we will be required to redeem or pay portions of the April 2012 Senior Notes in amounts intended to ensure the April 2012 Senior Notes are not treated as applicable high yield discount obligations for U.S. federal income tax purposes (the “AHYDO mandatory prepayments”). We cannot make assurances that we will be able to refinance any of our indebtedness, including the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes (including our obligations to make the AHYDO mandatory prepayments, if any), the October 2012 Senior Notes and the Senior Credit Facilities, or obtain additional financing, particularly because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt (including the restrictions imposed by the Indenture), as well as prevailing market conditions. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our debt facilities and the indentures governing our outstanding notes restrict our ability to dispose of assets and how we use the proceeds from any such dispositions. We cannot make assurances that we will be able to consummate those dispositions, or if we do, what the timing of the dispositions will be or whether the proceeds that we realize will be adequate to meet our debt service obligations, including amounts under our outstanding notes, when due.

 

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Your right to receive payments on the New Notes is junior to all of our and the guarantors’ senior indebtedness, including our and the guarantors’ obligations under the Senior Credit Facilities, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes, the October 2012 Senior Notes and future senior debt.

The New Notes are general unsecured subordinated obligations that are junior in right of payment to all our existing and future secured and unsecured senior indebtedness, including the Senior Credit Facilities, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes and the October 2012 Senior Notes. The senior subordinated guarantees are general unsecured subordinated obligations of the guarantors that are junior in right of payment to all of the applicable guarantor’s existing and future senior indebtedness, including its guarantee of the Senior Credit Facilities, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes and the October 2012 Senior Notes. We and the guarantors may not pay principal, premium, if any, interest or other amounts on account of the New Notes or the senior subordinated guarantees in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under our Senior Credit Facilities, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to the senior indebtedness, we or the guarantors may not be permitted to pay any amount of the New Notes or the senior subordinated guarantees for a designated period of time.

Because of the subordination provisions in the New Notes and the senior subordinated guarantees, in the event of a bankruptcy, liquidation or dissolution of us or any guarantor, our or the applicable guarantor’s assets will not be available to pay obligations under the New Notes or the applicable senior subordinated guarantee until we have or the applicable guarantor has made all payments on our or its senior indebtedness, respectively. We cannot assure you that sufficient assets will remain after all these payments have been made to make any payments on the New Notes or the applicable senior subordinated guarantees, including payments of principal or interest when due.

As of October 28, 2012, we had $5.1 billion of senior indebtedness, net of unamortized discounts of $56 million and including unamortized premium of $22 million that was senior to the New Notes. As of October 28, 2012, we also had commitments for additional borrowings under the revolving Senior ABL Facility of $867 million, all of which would have been senior to the New Notes if borrowed.

Despite our current level of indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future, including secured debt. Although the indentures governing our other indebtedness, the Senior Term Agreement and the Senior ABL Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. If we incur any additional unsecured senior subordinated indebtedness that ranks equally with the New Notes, the holders of that debt will be entitled to share ratably with the holders of the New Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company. If we incur additional secured or unsecured senior indebtedness the New Notes will be subordinated to the right of our and the guarantors’ additional senior indebtedness. This may have the effect of reducing the amount of proceeds paid to you. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness, including obligations under lease arrangements that are currently recorded as operating leases even if operating leases were to be treated as debt under GAAP. In addition, the Senior ABL Facility provides commitments of up to $1,500 million (less approximately $395 million of borrowings drawn at October 28, 2012 and approximately $61 million of undrawn outstanding letters of credit with a borrowing base of approximately $1,323 million at October 28, 2012). All of those borrowings are senior to the New Notes. If new debt is added to our current debt levels, the related risks that we and the Subsidiary Guarantors now face could intensify. See “Description of Other Indebtedness.”

 

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The agreements and instruments governing our debt, including the New Notes, contain restrictions and limitations that could significantly impact our ability to operate our business and adversely affect the holders of our notes.

The Senior Credit Facilities contain covenants that, among other things, restrict or limit our ability to:

 

   

dispose of assets;

 

   

incur additional indebtedness (including guarantees of additional indebtedness);

 

   

prepay the New Notes or amend other specified debt instruments;

 

   

pay dividends and make certain payments;

 

   

create liens on assets;

 

   

engage in certain asset sales, mergers, acquisitions, consolidations or sales of all, or substantially all, of our assets;

 

   

engage in certain transactions with affiliates; and

 

   

permit restrictions on our subsidiaries ability to pay dividends.

The Indenture and the indentures governing our First Priority Notes, Second Priority Notes, April 2012 Senior Notes, October 2012 Senior Notes and, until such notes are redeemed in full, our 2007 Senior Subordinated Notes, contain restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:

 

   

incur additional debt;

 

   

pay dividends, redeem stock or make other distributions;

 

   

make certain investments;

 

   

create liens;

 

   

transfer or sell assets;

 

   

merge or consolidate with other companies; and

 

   

enter into certain transactions with our affiliates.

Our ability to comply with the covenants and restrictions contained in the Senior Credit Facilities and the indentures governing our outstanding notes may be affected by economic, financial and industry conditions beyond our control. The breach of any of these covenants or restrictions could result in a default under either the Senior Credit Facilities or the indentures governing our outstanding notes that would permit the applicable lenders or noteholders, as the case may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay debt, lenders having secured obligations, such as the lenders under the Senior Credit Facilities, could proceed against the collateral securing the secured obligations. In any such case, we may be unable to borrow under the Senior Credit Facilities and may not be able to repay amounts due under such facilities and the New Notes. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

The New Notes will be unsecured and effectively subordinated to the rights of our and the guarantors’ existing and future secured indebtedness to the extent of the value of our and our guarantors’ assets securing such indebtedness.

The Senior Credit Facilities, the First Priority Notes and the Second Priority Notes are senior to the New Notes and are secured by collateral. The New Notes and the related guarantees will be unsecured and therefore do not have the benefit of such collateral. If an event of default occurs under the Senior Credit Facilities, the First

 

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Priority Notes or the Second Priority Notes, the senior secured lenders and noteholders will have a prior right to our assets securing such indebtedness, to the exclusion of the holders of the New Notes, even if we are in default under the New Notes. In that event, our assets would first be used to repay indebtedness and other obligations secured by such assets (including amounts outstanding under the Senior Credit Facilities, the First Priority Notes and the Second Priority Notes), resulting in all or a portion of our assets being unavailable to satisfy the claims of the holders of the New Notes and other unsecured indebtedness, including, without limitation, the April 2012 Senior Notes, the October 2012 Senior Notes and, until such notes are redeemed in full, the 2007 Senior Subordinated Notes. Therefore, in the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of New Notes will participate in our remaining assets ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as such notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor. Further, if the lenders foreclose and sell the pledged interests in any subsidiary guarantor under the New Notes, then that guarantor will be released from its guarantee of the New Notes automatically and immediately upon the sale. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the New Notes. As a result, holders of New Notes may receive less, ratably, than holders of secured indebtedness.

As of October 28, 2012, approximately $3.3 billion of our indebtedness, net of unamortized discount of $27 million and including unamortized premium of $22 million, was secured. We also have commitments for additional borrowings under the revolving Senior ABL Facility of $867 million, all of which would be secured if borrowed.

The New Notes will be structurally subordinated to all obligations of our existing and future subsidiaries that do not serve as Subsidiary Guarantors of the New Notes.

The New Notes will be guaranteed, on an unsecured senior subordinated basis, by each of our direct and indirect domestic existing and future subsidiaries that is a Wholly Owned Domestic Subsidiary (other than an Excluded Subsidiary), and by each other domestic subsidiary that is a borrower under the Senior ABL Facility or that guarantees our indebtedness under any Credit Facility or Capital Markets Securities (in each case, as defined in “Description of Notes”). Our subsidiaries that do not guarantee the New Notes will have no obligation, contingent or otherwise, to pay amounts due under the New Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The New Notes will be structurally subordinated to all indebtedness and other obligations of any non-guarantor subsidiary such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary that is not a Subsidiary Guarantor, all of that subsidiary’s creditors (including trade creditors and preferred stockholders, if any) would be entitled to payment in full out of that subsidiary’s assets before we would be entitled to any payment from that subsidiary’s assets. In addition, the creditors of any unrestricted subsidiary and its subsidiaries will have a senior claim on the assets of such unrestricted subsidiary and its subsidiaries.

In addition, the indentures governing our outstanding notes, subject to certain limitations, permit these subsidiaries to incur additional indebtedness and do not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

In addition, our subsidiaries that provide, or will provide, guarantees of the New Notes will be automatically released from those guarantees in accordance with the terms of the Indenture upon the occurrence of certain events, including the following:

 

   

the designation of that Subsidiary Guarantor as an unrestricted subsidiary;

 

   

the release or discharge of any guarantee or indebtedness (including the Senior Credit Facilities) that resulted in the creation of the guarantee of the New Notes by such Subsidiary Guarantor if it would not then otherwise be required to guarantee the New Notes; or

 

   

the sale or other disposition, including the sale of substantially all the assets, of that Subsidiary Guarantor.

 

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If any subsidiary guarantee is released, no holder of the New Notes will have a claim as a creditor against that subsidiary, and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of that subsidiary will be effectively senior to the claim of any holders of the New Notes. See “Description of Notes—Subsidiary Guarantees.”

As of October 28, 2012, the indebtedness and other liabilities of our non-guarantor subsidiaries was approximately $67 million. The New Notes will be structurally subordinated to the indebtedness and other liabilities of such non-guarantor subsidiaries. Our non-guarantor subsidiaries generated approximately 6% of our Net sales for fiscal 2011 and held approximately 3% of our assets as of October 28, 2012.

We may not be able to repurchase the New Notes upon a change of control.

Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding New Notes and Old Notes, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes and the October 2012 Senior Notes and, until such notes are redeemed in full, the 2007 Senior Subordinated Notes, at 101% of their principal amount, plus accrued and unpaid interest to the purchase date. Additionally, under the Senior Term Facility and the Senior ABL Facility, a change of control (as defined therein) constitutes an event of default that permits the lenders to accelerate the maturity of borrowings under the respective agreements and terminate their commitments to lend. The source of funds for any purchase of the New Notes and the Old Notes, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes, the October 2012 Senior Notes and, until such notes are redeemed in full, the 2007 Senior Subordinated Notes, and repayment of borrowings under the Senior Term Facility and the Senior ABL Facility would be our available cash or cash generated from our and our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the New Notes upon a change of control because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a change of control and repay our other indebtedness that will become due. We may require additional financing from third parties to fund any such purchases, and we may be unable to obtain financing on satisfactory terms or at all. Further, our ability to repurchase the New Notes may be limited by law. In order to avoid the obligations to repurchase the New Notes and the Old Notes, the First Priority Notes, the Second Priority Notes, the April 2012 Senior Notes, the October 2012 Senior Notes and, until such notes are redeemed in full, the 2007 Senior Subordinated Notes, and events of default and potential breaches of the Senior Term Agreement and the Senior ABL Credit Agreement, we may have to avoid certain change of control transactions that would otherwise be beneficial to us.

In addition, some important corporate events, such as leveraged recapitalizations, may not, under the Indenture, constitute a “change of control” that would require us to repurchase the New Notes, even though those corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the New Notes. See “Description of Notes—Change of Control.”

We may have future capital needs and may not be able to obtain additional financing on acceptable terms.

Although we believe that our current cash position and the additional committed funding available under our Senior ABL Facility is sufficient for our current operations, any reductions in our available borrowing capacity, or our inability to renew or replace our debt facilities, when required or when business conditions warrant, could have a material adverse effect on our business, financial condition and results of operations. The economic conditions, credit market conditions, and economic climate affecting our industry, as well as other factors, may constrain our financing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. The market conditions and the macroeconomic conditions that affect our industry could have a material adverse effect on our ability to secure financing on favorable terms, if at all.

 

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We may be unable to secure additional financing or financing on favorable terms or our operating cash flow may be insufficient to satisfy our financial obligations under the indebtedness outstanding from time to time. Furthermore, if financing is not available when needed, or is available on unfavorable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. If additional funds are raised through the issuance of additional equity securities, our stockholders may experience significant dilution.

Increases in interest rates would increase the cost of servicing our debt and could reduce our profitability.

A significant portion of our outstanding debt, including under the Senior Credit Facilities, bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. Each 1% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $14 million based on balances as of October 28, 2012 and excluding the effect of the interest rate floor on our Senior Term Facility. Assuming all revolving loans were fully drawn, each one percentage point change in interest rates would result in a $25 million change in annual cash interest expense on our Senior Credit Facilities, excluding the effect of the interest rate floor on our Senior Term Facility. The impact of increases in interest rates could be more significant for us than it would be for some other companies because of our substantial indebtedness.

Holders of the New Notes may not be able to determine when a change of control giving rise to their right to have the New Notes repurchased has occurred following a sale of “substantially all” of our assets.

The definition of change of control in the Indenture includes a phrase relating to the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of New Notes to require us to repurchase its New Notes as a result of a sale of less than all our assets to another person may be uncertain.

Federal and state fraudulent transfer laws may permit a court to void the New Notes or the guarantees, and if that occurs, you may not receive any payments on the New Notes.

Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the New Notes and the incurrence of the guarantees of the New Notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the New Notes or the guarantees thereof could be voided as a fraudulent transfer or conveyance if we or any of the Subsidiary Guarantors, as applicable, (a) issued the New Notes or incurred the guarantee with the intent of hindering, delaying or defrauding creditors or (b) received less than reasonably equivalent value or fair consideration in return for either issuing the New Notes or incurring the guarantee and, in the case of (b) only, one of the following is also true at the time thereof:

 

   

we or any of the Subsidiary Guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the New Notes or the incurrence of the guarantee;

 

   

the issuance of the New Notes or the incurrence of the guarantee left us or any of the Subsidiary Guarantors, as applicable, with an unreasonably small amount of capital or assets to carry on the business; or

 

   

we or any of the Subsidiary Guarantors intended to, or believed that we or such Subsidiary Guarantor would, incur debts beyond our or such Subsidiary Guarantor’s ability to pay as they mature.

As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is satisfied. A court would likely find that a Subsidiary Guarantor did not receive reasonably equivalent value or fair consideration for its guarantee to the extent such Subsidiary Guarantor did not obtain a reasonably equivalent benefit from the issuance of the New Notes.

 

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We cannot be certain as to the standards a court would use to determine whether or not we or any of the Subsidiary Guarantors were insolvent at the relevant time or, regardless of the standard that a court uses, whether the New Notes or the guarantees would be subordinated to our or any of our Subsidiary Guarantors’ other debt. In general, however, a court would deem an entity insolvent if:

 

   

the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they became due.

Each subsidiary guarantee contains a provision intended to limit the Subsidiary Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its subsidiary guarantee to be a fraudulent transfer. This provision may not be effective to protect the subsidiary guarantees from being avoided under fraudulent transfer law. A recent bankruptcy court action in Florida questioned the validity of such a customary savings clause in a guaranty.

To the extent that any of the subsidiary guarantees is avoided, then, as to that subsidiary, the guaranty will not be enforceable.

If a court were to find that the issuance of the New Notes or the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the New Notes or that guarantee, could subordinate the New Notes or that guarantee to presently existing and future indebtedness of ours or of the related Subsidiary Guarantor or could require the holders of the New Notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the New Notes. Further, the avoidance of the New Notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in acceleration of that debt.

Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the New Notes to other claims against us under the principle of equitable subordination if the court determines that (1) the holders of New Notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of New Notes and (3) equitable subordination is not inconsistent with the provisions of the Bankruptcy Code.

Certain restrictive covenants in the Indenture will not apply during any time that such New Notes achieve investment grade ratings.

Most of the restrictive covenants in the Indenture will not apply during any time that the New Notes achieve investment grade ratings from Moody’s Investment Service, Inc. and Standard & Poor’s, and no default or event of default has occurred. If these restrictive covenants cease to apply, we may take actions, such as incurring additional debt or making certain dividends or distributions, which would otherwise be prohibited under the Indenture. Ratings are given by these rating agencies based upon analyses that include many subjective factors. The investment grade ratings, if granted, may not reflect all of the factors that would be important to holders of the New Notes.

The market for non-investment grade debt has been subject to severe disruptions that have caused substantial volatility in the prices of securities similar to the New Notes.

Historically, the market for non-investment grade debt has been subject to severe disruptions that have caused substantial volatility in the prices of securities similar to the New Notes. The market for the New Notes may experience similar disruptions, and any such disruptions may adversely affect the liquidity in that market or

 

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the prices at which you may sell your New Notes. Investment funds advised by entities associated with the Equity Sponsors may purchase Old Notes and New Notes in the market without any special limitation. In addition, subsequent to their initial issuance, the New Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar notes, our performance and other factors.

A downgrade, suspension or withdrawal of the rating assigned by a rating agency to the New Notes or our Senior Credit Facilities, if any, could cause the liquidity or market value of the New Notes to decline.

Our First Priority Notes, Second Priority Notes, April 2012 Senior Notes, October 2012 Senior Notes, the Old Notes and, the New Notes and, until such notes are redeemed in full, the 2007 Senior Subordinated Notes, have been rated by Standard & Poor’s Corporation and Moody’s Investor Services. Our Senior Credit Facilities have also been rated by Standard & Poor’s and Moody’s. In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, total secured debt, off balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. Our debt securities, including the New Notes offered hereby, and our debt facilities may in the future be rated by additional rating agencies. We cannot make assurances that any rating so assigned will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, circumstances relating to the basis of the rating, such as an adverse change to our business, so warrant. The interest rates and other terms within our current credit agreements are not impacted by rating agency actions. Any lowering or withdrawal of a rating by a rating agency could reduce the liquidity or market value of our outstanding notes and make our ability to raise new funds or renew maturing debt more difficult.

Risks Relating to Our Business

We are subject to inherent risks of the residential, non-residential and public infrastructure construction and facility maintenance and repair markets, including risks related to general economic conditions.

Demand for our products and services depends to a significant degree on spending in the residential, non-residential and infrastructure construction and facility maintenance and repair markets. The level of activity in these end markets depends on a variety of factors that we cannot control.

Historically, both new housing starts and residential remodeling have decreased in slow economic periods. In addition, residential construction activity can impact the level of non-residential construction activity. Other factors impacting the level of activity in the residential and nonresidential construction markets include:

 

   

changes in interest rates;

 

   

unemployment rates;

 

   

high foreclosure rates and unsold/foreclosure inventory;

 

   

unsold new housing inventory;

 

   

periods of economic slowdown or recession;

 

   

availability of financing (including the impact of disruption in the mortgage markets);

 

   

adverse changes in local, regional, or general economic conditions;

 

   

adverse changes in industrial economic outlook;

 

   

a decrease in the affordability of homes;

 

   

vacancy rates;

 

   

capacity utilization;

 

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capital spending;

 

   

commercial investment;

 

   

corporate profitability;

 

   

local, state and federal government regulation; and

 

   

shifts in populations away from the markets that we serve.

In the infrastructure construction market, the level of activity depends largely on interest rates, availability and commitment of public funds for municipal spending, capacity utilization and general economic conditions. In the facility maintenance and repair market, the level of activity depends largely on occupancy rates within multifamily, hospitality, healthcare and institutional facilities markets. Because all of our markets are sensitive to changes in the economy, downturns (or lack of substantial improvement) in the economy in any region in which we operate have adversely affected and could continue to adversely affect our business, financial condition and results of operations. For example, we distribute many of our products to waterworks contractors in connection with residential, commercial and industrial construction projects. The water and wastewater transmission products industry is affected by changes in economic conditions, including national, regional and local standards in construction activity, and the amount spent by municipalities on waterworks infrastructure. While we operate in many markets in the United States and Canada, our business is particularly impacted by changes in the economies of California, Texas, and Florida, which represented approximately 15%, 13%, and 10%, respectively, in Net sales for fiscal 2011.

In addition, the residential, non-residential and public infrastructure construction and facility maintenance and repair markets in which we compete are sensitive to general business and economic conditions in the United States and worldwide, including availability of credit, interest rates, fluctuations in capital, credit and mortgage markets, and business and consumer confidence. There was a significant decline in economic growth, both in the U.S. and globally, that began in the second half of 2007 and continued through 2009. In addition, volatility and disruption in the capital markets during that period reached unprecedented levels, with stock markets falling dramatically and credit becoming very expensive or unavailable to many companies without regard to those companies’ underlying financial strength. As a result of these developments, many lenders and institutional investors reduced, and in some cases, ceased to provide funding to borrowers. Adverse developments in global financial markets and general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including our ability and the ability of our customers and suppliers to access capital. Although there have been some indications of stabilization in the general economy and certain industries and markets in which we operate, there can be no guarantee that any improvement in these areas will continue or be sustained.

We have been, and expect to continue to be, adversely impacted by the decline in the new residential construction market since its peak in 2005.

Most of our businesses are dependent to varying degrees upon the new residential construction market. The homebuilding industry is undergoing a significant and sustained downturn. According to the U.S. Census Bureau, actual single family housing starts in the U.S. during 2011 decreased 8% from 2010 levels. We believe that the market downturn over the past several years is attributable to a variety of factors including: the lasting impact of the recent economic recession; limited credit availability; excess home inventories; a substantial reduction in speculative home investment; a decline in consumer confidence; higher unemployment; and an industry-wide softening of demand. The multi-year downturn in the homebuilding industry has resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on our business and operating results during fiscal years 2008 to 2011. In addition, the mortgage markets continue to experience disruption and reduced availability of mortgages for potential homebuyers due to more restrictive standards to qualify for mortgages, including with respect to new home construction loans.

 

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We cannot predict the duration of the current housing industry market conditions, or the timing or strength of any future recovery of housing activity in our markets. We also cannot provide any assurances that the homebuilding industry will recover to historical levels, or that the operational strategies we have implemented to address the current market conditions will be successful. Continued weakness in the new residential construction market would have a significant adverse effect on our business, financial condition and operating results. In addition, because of these factors, there may be fluctuations in our operating results, and the results for any historical period may not be indicative of results for any future period.

The non-residential construction industry continues to experience a downturn which could materially and adversely affect our business, liquidity and results of operations.

Many of our businesses are dependent on the non-residential construction industry and the slowdown and volatility of the United States economy in general is having an adverse effect on our businesses that serve this industry. According to the U.S. Census Bureau, actual non-residential construction put-in-place in the U.S. during 2011 declined 2% from 2010 levels and 16% from 2009. From time to time, our businesses that serve the non-residential construction industry have also been adversely affected in various parts of the country by declines in non-residential construction starts due to, among other things, changes in tax laws affecting the real estate industry, high interest rates and the level of residential construction activity. Continued uncertainty about current economic conditions will continue to pose a risk to our businesses that serve the non-residential construction industry as participants in this industry may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a continued material negative effect on the demand for our products and services.

We cannot predict the duration of the current market conditions, or the timing or strength of any future recovery of non-residential construction activity in our markets. Continued weakness in the non-residential construction market would have a significant adverse effect on our business, financial condition and operating results. In addition, because of these factors, there may be fluctuations in our operating results, and the results for any historical period may not be indicative of results for any future period.

Residential renovation and improvement activity levels may not return to historic levels which may negatively impact our business, liquidity and results of operations.

Certain of our businesses rely on residential renovation and improvement (including repair and remodeling) activity levels. Unlike most previous cyclical declines in new home construction in which we did not experience comparable declines in our home improvement businesses, the recent economic decline adversely affected our home improvement businesses as well. According to Moody’s Economy.com, residential improvement project spending in the United States increased only 4% in 2011. Continued high mortgage delinquency and foreclosure rates, limitations in the availability of mortgage and home improvement financing and significantly lower housing turnover, may continue to limit consumers’ spending, particularly on discretionary items, and affect their confidence level leading to continued reduced spending on home improvement projects. The impact of these economic factors specific to the home improvement industry is exacerbated by unemployment.

We cannot predict the timing or strength of a significant recovery in these markets. Continued depressed activity levels in consumer spending for home improvement and new home construction will continue to adversely affect our results of operations and our financial position. Furthermore, continued economic weakness may cause unanticipated shifts in consumer preferences and purchasing practices and in the business models and strategies of our customers. Such shifts may alter the nature and prices of products demanded by the end consumer and our customers and could adversely affect our operating performance.

We may be unable to achieve or maintain profitability.

We have set goals to progressively improve our profitability over time by growing our sales, increasing our gross margin and reducing our expenses as a percentage of sales. For the fiscal years 2011 and 2010 we had net

 

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losses of $543 million and $619 million, respectively. There can be no assurance that we will achieve our enhanced profitability goals. Factors that could significantly adversely affect our efforts to achieve these goals include, but are not limited to, the following:

 

   

failure to grow our revenue through organic growth or through acquisitions;

 

   

failure to improve our revenue mix by investing (including through acquisitions) in businesses that provide higher margins than we have been able to generate historically;

 

   

failure to achieve improvements in purchasing or to maintain or increase our rebates from vendors through our vendor consolidation and/or low-cost country initiatives;

 

   

failure to improve our gross margins through the utilization of improved pricing practices and technology and sourcing savings;

 

   

failure to maintain or reduce our overhead and support expenses as we grow;

 

   

failure to effectively evaluate future inventory reserves;

 

   

failure to collect monies owed from customers; and

 

   

failure to integrate any businesses acquired.

Any of these failures or delays may adversely affect our ability to increase our profitability.

Goodwill is subject to impairment testing and may affect future operating results.

As of October 28, 2012, goodwill represented approximately 43% of our total assets. Goodwill is not amortized and is subject to impairment testing at least annually using a fair value based approach. The identification and measurement of impairment involves the estimation of the fair value of reporting units. Accounting for impairment contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment and incorporate management assumptions about expected future cash flows and contemplate other valuation techniques. Future cash flows can be affected by changes in industry or market conditions among other things.

The recoverability of goodwill is evaluated at least annually and when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. The annual impairment test performed during the third quarter of each fiscal year resulted in no impairment of goodwill during the nine months ended October 28, 2012, nor fiscal 2011 or fiscal 2010. During fiscal 2009, we recorded a goodwill impairment charge of $224 million, of which $219 million relates to continuing operations, driven by a reduction in expected future cash flows for certain businesses primarily as a result of the decline in the residential construction market and general weakness in the U.S. economy.

In view of the general economic downturn in the U.S., we may be required to take additional impairment charges relating to our operations or close under-performing locations.

During fiscal 2009, we recorded impairment charges related to the carrying value of goodwill for four of our reporting units. While a goodwill impairment charge was not recorded during fiscal 2011 or fiscal 2010, if weakness in the residential and/or non-residential construction markets and/or the general U.S. economy continues, we may need to take additional goodwill and/or asset impairment charges relating to certain of our reporting units and asset groups. Any such non-cash charges would have an adverse effect on our financial results.

In addition, we have closed certain under-performing branches. As of January 29, 2012, approximately 235 net branches have been closed and approximately 9,000 employees have been terminated since the Transactions. We may have to close additional branches in certain of our markets. Such facility closures could have a significant adverse effect on our financial condition, operating results and cash flows.

 

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We occupy most of our facilities under long-term non-cancelable leases. We may be unable to renew leases at the end of their terms. If we close a facility, we remain obligated under the applicable lease.

Most of our facilities are located in leased premises. Many of our current leases are non-cancelable and typically have terms ranging from 3 to 10 years and most provide options to renew for specified periods of time. We believe that leases we enter into in the future will likely be long-term and non-cancelable and have similar renewal options. If we close or idle a facility, we generally remain committed to perform our obligations under the applicable lease, which includes, among other things, payment of the base rent for the balance of the lease term. Over the course of the last three fiscal years, we closed or idled facilities for which we remain liable on the lease obligations. Our obligation to continue making rental payments in respect of leases for closed or idled facilities could have a material adverse effect on our business and results of operations.

The industries in which we operate are highly competitive and fragmented, and demand for our products and services could decrease if we are not able to compete effectively.

The industries in which we operate are fragmented, including the residential, non-residential and public infrastructure construction and facility repair and maintenance markets. There is significant competition in each of our businesses. Our competition includes other wholesalers and manufacturers that sell products directly to their respective customer base and some of our customers that resell our products. To a limited extent, retailers of electrical fixtures and supplies, building materials, maintenance repair and operations supplies, and contractors’ tools also compete with us. We also expect that new competitors may develop over time as internet-based enterprises become more established and reliable and refine their service capabilities. Competition varies depending on product line, customer classification and geographic area. The principal competitive factors in our business include, but are not limited to:

 

   

availability and cost of materials and supplies;

 

   

technical product knowledge and expertise as to application and usage;

 

   

advisory or other service capabilities;

 

   

ability to build and maintain customer relationships;

 

   

effective use of technology to identify sales and operational opportunities;

 

   

same-day delivery capabilities in certain product lines; and

 

   

pricing of products and provisions of credit.

We compete with many local, regional and, in several markets and product categories, other national distributors. Several of our competitors in one or more of our businesses have substantially greater financial and other resources than us. No assurance can be given that we will be able to respond effectively to such competitive pressures. Increased competition by existing and future competitors could result in reductions in sales, prices, volumes and gross margins that could materially adversely affect our business, financial condition and results of operations. Furthermore, our success will depend, in part, on our ability to maintain our market share and gain market share from competitors.

In addition, our contracts with municipalities are often awarded and renewed through periodic competitive bidding. We may not be successful in obtaining or renewing these contracts. Our inability to replace a significant number of contracts lost through competitive bidding processes with other revenue sources within a reasonable time could be harmful to our business and financial performance.

 

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Our competitors in the residential, non-residential and infrastructure construction and facility maintenance and repair distribution markets continue to consolidate, which could cause these markets to become more competitive and could negatively impact our business.

Our competitors in the residential, non-residential and infrastructure construction and facility maintenance and repair distribution markets in the United States and Canada are consolidating. This consolidation is being driven by customer needs and supplier capabilities, which could cause the industries to become more competitive as greater economies of scale are achieved by distributors. Customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. We believe these customer needs could result in fewer distributors as the remaining distributors become larger and capable of being a consistent source of supply.

There can be no assurance that we will be able to take advantage effectively of the trend toward consolidation. The trend in our industry toward consolidation could make it more difficult for us to maintain operating margins and could also increase competition for our acquisition targets and result in higher purchase price multiples. Furthermore, as our industrial and construction customers face increased foreign competition and potentially lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market share and growth prospects.

The loss of any of our significant customers could adversely affect our financial condition.

Our ten largest customers generated approximately 9.6% of our Net sales in fiscal 2011, and our largest customer accounted for 3.9% of our Net sales in that same period. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at historical levels. During the economic downturn, some of our customers reduced their operations. For example, some homebuilder customers exited or severely curtailed building activity in certain of our markets. There is no assurance that our customers will determine to increase their operations or return to historic levels. Slow economic recovery could continue to have a significant adverse effect on our financial condition, operating results and cash flows.

In addition, consolidation among customers could also result in a loss of some of our present customers to our competitors. The loss of one or more of our significant customers or deterioration in our relations with any of them could significantly affect our financial condition, operating results and cash flows. Our Crown Bolt business is party to a strategic agreement with Home Depot, which provides a guaranteed revenue stream to Crown Bolt through January 31, 2015 by specifying minimum annual purchase requirements from Home Depot. As of October 28, 2012, the net book value of the strategic purchase agreement is $50 million and the net book value of goodwill assigned to Crown Bolt is $215 million. From time to time, we have discussions with Home Depot concerning amending, extending or replacing the current strategic purchase agreement, as well as the potential terms of any such amendment, extension or replacement. Some of the options discussed with Home Depot concerning the amendment, extension or replacement of the agreement could result in a future impairment of the strategic purchase agreement, the goodwill assigned to Crown Bolt or both, which could be significant.

Generally, our customers are not required to purchase any minimum amount of products from us. The contracts into which we have entered with most of our customers typically provide that we supply particular products or services for a certain period of time when and if ordered by the customer. Should our customers purchase our products in significantly lower quantities than they have in the past, such decreased purchases could have a material adverse effect on our financial condition, operating results and cash flows.

 

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The majority of our net sales are credit sales which are made primarily to customers whose ability to pay is dependent, in part, upon the economic strength of the industry and geographic areas in which they operate, and the failure to collect monies owed from customers could adversely affect our financial condition.

The majority of our Net sales volume in fiscal 2011 was facilitated through the extension of credit to our customers whose ability to pay is dependent, in part, upon the economic strength of the construction industry in the areas where they operate. Our businesses offer credit to customers, either through unsecured credit that is based solely upon the creditworthiness of the customer, or secured credit for materials sold for a specific job where the security lies in lien rights associated with the material going into the job. The type of credit offered depends both on the financial strength of the customer and the nature of the business in which the customer is involved. End users, resellers and other non-contractor customers generally purchase more on unsecured credit than secured credit. The inability of our customers to pay off their credit lines in a timely manner, or at all, would adversely affect our financial condition, operating results and cash flows. Furthermore, our collections efforts with respect to non-paying or slow-paying customers could negatively impact our customer relations going forward.

Because we depend on the creditworthiness of our customers, if the financial condition of our customers declines, our credit risk could increase. Significant contraction in the construction market, coupled with tightened credit availability and financial institution underwriting standards, could adversely affect certain of our customers. Should one or more of our larger customers declare bankruptcy, it could adversely affect the collectability of our accounts receivable, bad debt reserves and net income.

We are subject to competitive pricing pressure from our customers.

Certain of our largest customers historically have exerted significant pressure on their outside suppliers to keep prices low because of their market share and their ability to leverage such market share in the highly fragmented building products supply industry. The economic downturn has resulted in increased pricing pressures from our customers. If we are unable to generate sufficient cost savings to offset any price reductions, our financial condition, operating results and cash flows may be adversely affected.

We may not achieve the acquisition component of our growth strategy.

Acquisitions will continue to be an important component of our growth strategy; however, there can be no assurance that we will be able to continue to grow our business through acquisitions as we have done historically or that any businesses acquired will perform in accordance with expectations or that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove to be correct. Future acquisitions may result in the incurrence of debt and contingent liabilities and an increase in interest expense and amortization expenses and significant charges relative to integration costs. Our strategy could be impeded if we do not identify suitable acquisition candidates and our financial condition and results of operations will be adversely affected if we overpay for acquisitions.

Acquisitions involve a number of special risks, including:

 

   

problems implementing disclosure controls and procedures;

 

   

unforeseen difficulties extending internal control over financial reporting and performing the required assessment at the newly-acquired business;

 

   

potential adverse short-term effects on operating results through increased costs or otherwise;

 

   

diversion of management’s attention, failure to recruit new, and retain existing, key personnel of the acquired business;

 

   

failure to successfully implement infrastructure, logistics and systems integration;

 

   

our business growth could outpace the capability of our systems;

 

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unforeseen liabilities inherent in the acquired business that manifest themselves after the acquisition is completed; and

 

   

the risks inherent in the systems of the acquired business and risks associated with unanticipated events or liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.

In addition, we may not be able to obtain financing necessary to complete acquisitions on attractive terms or at all.

A range of factors may make our quarterly and monthly revenues and earnings variable.

We have historically experienced, and in the future expect to continue to experience, variability in revenues and earnings on a quarterly and monthly basis. The factors expected to contribute to this variability include, among others: (i) the cyclical nature of some of the markets in which we compete, including the new residential and commercial construction markets, (ii) general economic conditions in the various local markets in which we compete, (iii) the pricing policies of our competitors, (iv) the production schedules of our customers, and (v) the effects of the weather. These factors, among others, make it difficult to project our operating results on a consistent basis, which may affect the price of our securities.

The residential, non-residential and infrastructure construction and facility maintenance and repair markets are cyclical and seasonal.

Although weather patterns affect our operating results throughout the year, adverse weather historically has reduced construction and maintenance and repair activity in the first and fourth quarters in our markets. In contrast, our highest volume of Net sales historically has occurred in our second fiscal quarter. To the extent that hurricanes, severe storms, floods, other natural disasters or similar events occur in the markets in which we operate, our business may be adversely affected. In addition, most of our businesses experience seasonal variation as a result of the dependence of our customers on suitable weather to engage in construction, maintenance and renovation and improvement projects. For example, White Cap sells products used primarily in the residential and non-residential construction industry. Generally, during the winter months, construction activity declines due to inclement weather and shorter daylight hours. As a result, operating results for the businesses that experience such seasonality may vary significantly from period to period. We anticipate that fluctuations from period to period will continue in the future.

Fluctuating commodity prices may adversely impact our results of operations.

The cost of steel, aluminum, copper, ductile iron, polyvinyl chlorides (“PVC”) and other commodities used in the products we distribute can be volatile. Although we attempt to resist cost increases by our suppliers and to pass on increased costs to our customers, we are not always able to do so quickly or at all. In addition, if prices decrease for commodities used in products we distribute, we may have inventories purchased at higher prices than prevailing market prices. Significant fluctuations in the cost of the commodities used in products we distribute have in the past adversely affected, and in the future may adversely affect, our results of operations and financial condition.

If petroleum prices increase, our results of operations could be adversely affected.

Petroleum prices have fluctuated significantly in recent years. Prices and availability of petroleum products are subject to political, economic and market factors that are outside our control. Political events in petroleum-producing regions as well as hurricanes and other weather-related events may cause the price of fuel to increase. Within several of our principal and other businesses, we deliver a significant volume of products to our customers by truck. Our operating profit will be adversely affected if we are unable to obtain the fuel we require or to fully offset the anticipated impact of higher fuel prices through increased prices or fuel surcharges to our customers. Besides passing fuel costs on to customers, we have not entered into any hedging arrangements that

 

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protect against fuel price increases and we do not have any long-term fuel purchase contracts. If shortages occur in the supply of necessary petroleum products and we are not able to pass along the full impact of increased petroleum prices to our customers, our results of operations would be adversely affected.

Product shortages and cyclicality in the residential, non-residential and infrastructure construction and facility maintenance and repair markets may impair our operating results.

Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply from manufacturers or other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities. However, the loss of, or substantial decrease in the availability of, products from our suppliers, or the loss of our key supplier agreements, could adversely impact our financial condition, operating results and cash flows. In addition, supply interruptions could arise from shortages of raw materials (including petroleum products), labor disputes or weather conditions affecting products or shipments, transportation disruptions or other factors beyond our control. Short and long-term disruptions in our supply chain would result in a need to maintain higher inventory levels as we replace similar product domestically, a higher cost of product and ultimately a decrease in our Net sales and profitability. A disruption in the timely availability of our products by our key suppliers would result in a decrease in our revenues and profitability, especially in our businesses with supplier concentration, such as our Waterworks business. Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Failure by our suppliers to continue to supply us with products on commercially reasonable terms, or at all, would put pressure on our operating margins and have a material adverse effect on our financial condition, operating results and cash flows. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes, but not always passed on to our customers. Our delayed ability to pass on material price increases to our customers could adversely impact our financial condition, operating results and cash flows.

In addition, the residential, non-residential and infrastructure construction and facility maintenance and repair markets are subject to cyclical market pressures. The length and magnitude of these cycles have varied over time and by market. Prices of the products we sell are historically volatile and subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition, market speculation, government regulation and trade policies, as well as from periodic delays in the delivery of our products. We have a limited ability to control the timing and amount of changes to prices that we pay for our products. In addition, the supply of our products fluctuates based on available manufacturing capacity. A shortage of capacity, or excess capacity, in the industry can result in significant increases or declines in market prices for those products, often within a short period of time. Such price fluctuations can adversely affect our financial condition, operating results and cash flows.

We rely on third party suppliers and long supply chains, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if there is a significant interruption in our supply chains, our ability to timely and efficiently access products that meet our standards for quality could be adversely affected.

We buy our products and supplies from suppliers located throughout the world and they manufacture or purchase in the United States and abroad the products we buy from them. Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our standards for quality and our need to access products and supplies in a timely and efficient manner is a significant challenge. We may be required to replace a supplier if their products do not meet our quality or safety standards. In addition, our suppliers could discontinue selling products manufactured in foreign countries at any time for reasons that may or may not be in our control or the suppliers’ control. Our operating results and inventory levels could suffer if we are unable to promptly replace a supplier who is unwilling or unable to satisfy our requirements with a supplier providing similar products. Our suppliers’ ability to deliver products may also be affected by financing constraints caused by credit market conditions, which could negatively impact our revenue and cost of products sold, at least until alternate

 

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sources of supply are arranged. In addition, since a portion of the products that we distribute is produced in foreign countries, we are dependent on long supply chains for the successful delivery of many of our products. The length and complexity of these supply chains make them vulnerable to numerous risks, many of which are beyond our control, which could cause significant interruptions or delays in delivery of our products. Factors such as political instability, the financial instability of suppliers, suppliers’ noncompliance with applicable laws, trade restrictions, labor disputes, currency fluctuations, changes in tariff or import policies, severe weather, terrorist attacks and transport capacity and cost may disrupt these supply chains and our ability to access products and supplies. If we increase the percentage of our products that are sourced from lower-cost countries, these risks will be amplified. Moreover, these risks will be amplified by our ongoing efforts to consolidate our supplier base across our businesses. We expect more of our products will be imported in the future, which will further increase these risks. A significant interruption in our supply chains caused by any of the above factors could result in increased costs or delivery delays and result in a decrease in our Net sales and profitability.

We have substantial fixed costs and, as a result, our operating income is sensitive to changes in our net sales.

A significant portion of our expenses are fixed costs (including personnel), which do not fluctuate with Net sales. Consequently, a percentage decline in our Net sales could have a greater percentage effect on our operating income if we do not act to reduce personnel or take other cost reduction actions. Any decline in our Net sales would cause our profitability to be adversely affected. Moreover, a key element of our strategy is managing our assets, including our substantial fixed assets, more effectively, including through sales or other disposals of excess assets. Our failure to rationalize our fixed assets in the time, and within the costs, we expect could have an adverse effect on our results of operations and financial condition.

A change in our product mix could adversely affect our results of operations.

Our results may be affected by a change in our product mix. Our outlook, budgeting and strategic planning assume a certain volume mix of sales as well as a product mix of sales. If actual results vary from this projected volume and product mix of sales, our financial results could be negatively impacted.

The impairment or failure of financial institutions may adversely affect us.

We have exposure to counterparties with which we execute transactions, including U.S. and foreign commercial banks, insurance companies, investment banks, investment funds and other financial institutions, some of which may be exposed to bankruptcy, illiquidity, default or similar risks. Many of these transactions could expose us to risk in the event of the bankruptcy, receivership, default or similar event involving a counterparty. For example, one of the financial institutions that was committed to fund our Existing ABL Credit Facility failed to meet a funding request by the Company in the first quarter of 2011. While we have not realized any significant losses to date, the bankruptcy, receivership, default or similar event involving one of our financial institution counterparties could have a material adverse impact on our access to funding or our ability to meet our financing agreement obligations.

The development of alternatives to distributors in the supply chain could cause a decrease in our sales and operating results and limit our ability to grow our business.

Our customers could begin purchasing more of their product needs directly from manufacturers, which would result in decreases in our Net sales and earnings. Our suppliers could invest in infrastructure to expand their own local sales force and sell more products directly to our customers, which also would negatively impact our business. For example, multiple municipalities may outsource their entire waterworks systems to a single company, thereby increasing such company’s leverage in the marketplace and its ability to buy directly from suppliers, which may have a material adverse effect on our operating results.

 

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In addition to these factors, our customers may elect to establish their own building products manufacturing and distribution facilities, or give advantages to manufacturing or distribution intermediaries in which they have an economic stake. These changes in the supply chain could adversely affect our financial condition, operating results and cash flows.

Because our business is working-capital intensive, we rely on our ability to manage our product purchasing and customer credit policies.

Our operations are working-capital intensive, and our inventories, accounts receivable and accounts payable are significant components of our net asset base. We manage our inventories and accounts payable through our purchasing policies and our accounts receivable through our customer credit policies. If we fail to adequately manage our product purchasing or customer credit policies, our working capital and financial condition may be adversely affected.

Inclement weather, anti-terrorism measures and other disruptions to the transportation network could impact our distribution system and our operations.

Our ability to provide efficient distribution of products to our customers is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports, due to events such as the flooding from Hurricane Sandy, Hurricane Irene and the outbreaks of tornadoes in 2011, blizzards in 2010, and the hurricanes of 2005, may affect our ability to both maintain key products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our results of operations.

Furthermore, in the aftermath of terrorist attacks in the United States, federal, state and local authorities have implemented and continue to implement various security measures that affect many parts of the transportation network in the United States and abroad. Our customers typically need quick delivery and rely on our on-time delivery capabilities. If security measures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers, or may incur increased expenses to do so.

Interruptions in the proper functioning of IT systems could disrupt operations and cause unanticipated increases in costs or decreases in revenues, or both.

Because we use our information systems to, among other things, manage inventories and accounts receivable, make purchasing decisions and monitor our results of operations, the proper functioning of our IT systems is critical to the successful operation of our business. Although our IT systems are protected through physical and software safeguards and remote processing capabilities exist, IT systems are still vulnerable to natural disasters, power losses, unauthorized access, telecommunication failures and other problems. If critical IT systems fail, or are otherwise unavailable, our ability to process orders, track credit risk, identify business opportunities, maintain proper levels of inventories, collect accounts receivable and pay expenses and otherwise manage our businesses would be adversely affected.

The implementation of our technology initiatives could disrupt our operations in the near term, and our technology initiatives might not provide the anticipated benefits or might fail.

We have made, and will continue to make, significant technology investments in each of our businesses and in our administrative functions. Our technology initiatives are designed to streamline our operations to allow our associates to continue to provide high quality service to our customers and to provide our customers a better experience, while improving the quality of our internal control environment. The cost and potential problems and interruptions associated with the implementation of our technology initiatives could disrupt or reduce the efficiency of our operations in the near term. In addition, our new or upgraded technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits or the technology might fail altogether.

 

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We may experience a failure in or breach of our operational or information security systems, or those of our third party service providers, as a result cyber attacks or information security breaches.

Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber attacks. A failure in or breach of our operational or information security systems, or those of our third party service providers, as a result of cyber attacks or information security breaches could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

Third party service providers are responsible for managing a significant portion of our information systems. Our business and results of operations may be adversely affected if the third party service provider does not perform satisfactorily.

Our costs of doing business could increase as a result of U.S. federal, state or local regulations.

Our operations are principally affected by various statutes, regulations and laws in the 46 U.S. states and nine Canadian provinces in which we operate. While we are not engaged in a “regulated” industry, we are subject to various laws applicable to businesses generally, including laws affecting land usage, zoning, the environment, health and safety, transportation, labor and employment practices (including pensions), competition, immigration and other matters. Additionally, building codes may affect the products our customers are allowed to use, and consequently, changes in building codes may affect the saleability of our products. Changes in U.S. federal, state or local regulations governing the sale of some of our products could increase our costs of doing business. In addition, changes to U.S. federal, state and local tax regulations could increase our costs of doing business. We sell products to governmental customers and must comply with requirements in connection with such contracts. We cannot provide assurance that we will not incur material costs or liabilities in connection with regulatory requirements.

We deliver products to many of our customers through our own fleet of vehicles. The U.S. Department of Transportation, or the “DOT,” regulates our operations in domestic interstate commerce. We are subject to safety requirements governing interstate operations prescribed by the DOT. Vehicle dimensions and driver hours of service also remain subject to both federal and state regulation. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service could increase our costs, which, if we are unable to pass these cost increases on to our customers, would reduce our gross margins, increase our selling, general and administrative expenses and reduce our net income.

We cannot predict whether future developments in law and regulations concerning our businesses will affect our business financial condition and results of operations in a negative manner. Similarly, we cannot assess whether our businesses will be successful in meeting demands of regulatory agencies in a manner which will not materially adversely affect our business, financial condition or results of operations.

The nature of our business exposes us to construction defect and product liability claims as well as other legal proceedings.

We rely on manufacturers and other suppliers to provide us with the products we sell and distribute. As we do not have direct control over the quality of the products manufactured or supplied by such third party suppliers, we are exposed to risks relating to the quality of the products we distribute and install. It is possible that

 

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inventory from a manufacturer or supplier could be sold to our customers and later be alleged to have quality problems or to have caused personal injury, subjecting us to potential claims from customers or third parties. We have been subject to claims in the past, which have been resolved without material financial impact. We are involved in construction defect and product liability claims relating to our various construction trades and the products we distribute and manufacture and relating to products we have installed. In certain situations, we have undertaken to voluntarily remediate any defects, which can be a costly measure.

We also operate a large fleet of trucks and other vehicles and therefore face the risk of accidents. While we currently maintain insurance coverage to address a portion of these types of liabilities, we cannot make assurances that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any such insurance will provide adequate coverage against potential claims. Further, while we seek indemnification against potential liability for products liability claims from relevant parties, including but not limited to manufacturers and distributors, we cannot guarantee that we will be able to recover under such indemnification agreements. Moreover, as we increase the number of private label products we distribute, our exposure to potential liability for products liability claims may increase. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant time periods, regardless of the ultimate outcome. An unsuccessful product liability defense could be highly costly and accordingly result in a decline in revenues and profitability. In addition, uncertainties with respect to the Chinese legal system may adversely affect us in resolving claims arising from our proprietary brand products manufactured in China. Because many laws and regulations are relatively new and the Chinese legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform. Finally, even if we are successful in defending any claim relating to the products we distribute, claims of this nature could negatively impact customer confidence in our products and our company.

We are involved in a number of legal proceedings, and while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes may adversely affect our operations or increase our costs.

We are involved in a number of legal proceedings, including government inquiries and investigations, as well as class action, products liability, consumer, employment, tort and other litigation. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, including environmental remediation and other proceedings commenced by government authorities. The outcome of some of these legal proceedings and other contingencies could require us to take, or refrain from taking, actions which could adversely affect our operations or could require us to pay substantial amounts of money. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management’s attention and resources from other matters. We have been contacted by prosecutors for the South Coast Air Quality Management District (“SCAQMD”) in California regarding allegations that we sold products in violation of applicable SCAQMD VOC (volatile organic compound) rules. We have received a request for information from SCAQMD seeking information related to the alleged violations. We are in the process of responding to the request for information. We cannot predict the outcome of this matter. While we may be required to pay a fine or other penalty, which could be significant, we do not expect the outcome to have a material adverse effect on our consolidated financial condition or results of operations. See “Business—Legal proceedings.”

If we become subject to material liabilities under our self-insured programs, our financial results may be adversely affected.

We provide workers’ compensation, automobile and product/general liability coverage through a high deductible insurance program. In addition, we provide medical coverage to our employees through a self-insured preferred provider organization. Though we believe that we have adequate insurance coverage in excess of self-insured retention levels, our results of operations and financial condition may be adversely affected if the number and severity of insurance claims increases.

 

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We may see increased costs arising from health care reform.

In March 2010, the United States government enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded and imposes new and significant taxes on health insurers and health care benefits. The legislation imposes implementation effective dates which began in 2010 and extend through 2020, and many of the changes require additional guidance from government agencies or federal regulations. Therefore, due to the phased-in nature of the implementation and the lack of interpretive guidance, it is difficult to determine at this time what impact the health care reform legislation will have on our financial results. Possible adverse effects of the health reform legislation include increased costs, exposure to expanded liability and requirements for us to revise ways in which we provide healthcare and other benefits to our employees. In addition, our results of operations, financial position and cash flows could be materially adversely affected.

Our success depends upon our ability to attract, train and retain highly qualified associates and key personnel.

To be successful, we must attract, train and retain a large number of highly qualified associates while controlling related labor costs. Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates and health and other insurance costs. We compete with other businesses for these associates and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified associates in the future, including, in particular, those employed by companies we acquire. A very small proportion of our employees are currently covered by collective bargaining or other similar labor agreements. Historically, the effects of collective bargaining and other similar labor agreements on us have not been significant. However, if a larger number of our employees were to unionize, including in the wake of any future legislation that makes it easier for employees to unionize, the effect on us may be negative. Any inability by us to negotiate acceptable new contracts under these collective bargaining arrangements could cause strikes or other work stoppages, and new contracts could result in increased operating costs. If any such strikes or other work stoppages occur, or if other employees become represented by a union, we could experience a disruption of our operations and higher labor costs. Labor relations matters affecting our suppliers of products and services could also adversely affect our business from time to time.

In addition, our business results depend largely upon our executives as well as our branch managers and sales personnel, including those of companies recently acquired, and their experience, knowledge of local market dynamics and specifications and long-standing customer relationships. We customarily sign employment letters providing for an agreement not to compete with key personnel of companies we acquire in order to maintain key customer relationships and manage the transition of the acquired business. Our inability to retain or hire qualified branch managers or sales personnel at economically reasonable compensation levels would restrict our ability to grow our business, limit our ability to continue to successfully operate our business and result in lower operating results and profitability.

Fluctuations in foreign currency exchange rates may significantly reduce our revenues and profitability.

As an industrial distributor of manufactured products, our profitability is tied to the prices we pay to the manufacturers from which we purchase our products. Some of our suppliers price their products in currencies other than the U.S. dollar or incur costs of production in non-U.S. currencies. Accordingly, depreciation of the U.S. dollar against foreign currencies increases the prices we pay for these products. Even short-term currency fluctuations could adversely impact revenues and profitability if we are unable to pass higher supply costs on to our customers. Our delayed ability to pass on material price increases to our customers could adversely impact our financial condition, operating results and cash flows.

 

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If we are unable to protect our intellectual property rights, or we infringe on the intellectual property rights of others, our ability to compete could be negatively impacted.

Our ability to compete effectively depends, in part, upon our ability to protect and preserve proprietary aspects of our intellectual property, including our trademarks and customer lists. The use of our intellectual property or similar intellectual property by others could adversely impact our ability to compete, cause us to lose Net sales or otherwise harm our business. If it became necessary for us to resort to litigation to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.

Also, we cannot be certain that the products that we sell do not and will not infringe issued patents or other intellectual property rights of others. Further, we are subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the trademarks, patents and other intellectual property rights of third parties by us or our customers in connection with their use of the products that we distribute. Should we be found liable for infringement, we (or our suppliers) may be required to enter into licensing agreements (if available on acceptable terms or at all) or pay damages and cease making or selling certain products. Moreover, we may need to redesign or sell different products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs, prevent us from selling our products or negatively impact our ability to compete.

Income tax payments may ultimately differ from amounts currently recorded by us. Future tax law changes may materially increase our prospective income tax expense.

We are subject to income taxation in many jurisdictions in the U.S. as well as numerous foreign jurisdictions. Judgment is required in determining our worldwide income tax provision and, accordingly, there are many transactions and computations for which our final income tax determination is uncertain. We are routinely audited by income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates are reasonable, the ultimate outcome from any audit (or related litigation) could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material effect on earnings between the period of initial recognition of tax estimates in the financial statements and the point of ultimate tax audit settlement. Additionally, it is possible that future income tax legislation in any jurisdiction to which we are subject may be enacted that could have a material impact on our worldwide income tax provision beginning with the period that such legislation becomes effective.

We carried back tax net operating losses (“NOL”) from our tax years ended on February 3, 2008 and February 1, 2009 to tax years during which we were a member of Home Depot’s U.S. federal consolidated tax group. As a result of those NOL carrybacks, Home Depot received cash refunds from the Internal Revenue Service (“IRS”) in the amount of approximately $354 million. Under an agreement (the “Agreement”) between Holding and Home Depot, Home Depot paid to us the refund proceeds resulting from the NOL carrybacks. In connection with an audit of our U.S. federal income tax returns filed for the tax years ended on February 3, 2008 and February 1, 2009, the IRS has disallowed certain deductions claimed by us. During May 2012, the IRS issued a formal Revenue Agent’s Report challenging approximately $299 million (excluding interest) of the cash refunds resulting from our NOL carrybacks. As of October 28, 2012, we estimate the interest to which the IRS would be entitled, if successful in all claims, to be approximately $36 million. If the IRS is ultimately successful with respect to the proposed adjustments, we, pursuant to the terms of the Agreement, would be required to pay Home Depot an amount equal to the disallowed refunds plus related interest. If the IRS is successful in defending its positions with respect to the disallowed deductions, certain of those disallowed deductions may be available to us in the form of increases in our deferred tax assets by approximately $231 million before any valuation allowance. We believe that our positions with respect to the deductions and the corresponding NOL carrybacks are supported by, and consistent with, applicable tax law. In collaboration with Home Depot, we have challenged the proposed adjustments by filing a formal protest with the Office of Appeals Division within the IRS. During the administrative appeal period and as allowed under statute, we intend to vigorously defend our positions rather than pay any amount related to the proposed adjustments. In the event of an unfavorable outcome at the Office of

 

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Appeals, we will strongly consider litigating the matter in U.S. Tax Court. The unpaid assessment would continue to accrue interest at the statutory rate until resolved. If we are ultimately required to pay a significant amount related to the proposed adjustments to Home Depot pursuant to the terms of the Agreement (or to the IRS), our cash flows, future results of operations and financial positions could be affected in a significant and adverse manner.

Our income tax net operating loss carry forwards could be substantially limited if we experience an ownership change for U.S. federal income tax purposes.

As of October 28, 2012, we had significant amounts of U.S. federal net operating loss carry forwards and state net operating loss carry forwards. Our ability to deduct these net operating loss carry forwards against future taxable income could be substantially limited if we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended. In general, an ownership change would occur if there is a change in ownership of more than 50% of our stock over a three-year period. Any such limitation on the use of our net operating loss carry forwards could result in the payment of taxes above the amounts currently estimated for future periods and have a negative effect on our future results of operations and financial position.

We may not be able to identify new products and new product lines and integrate them into our distribution network, which may impact our ability to compete.

Our business depends in part on our ability to identify future products and product lines that complement existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which we compete or trends in new products. In addition, our ability to integrate new products and product lines into our distribution network could impact our ability to compete. Furthermore, the success of new products and new product lines will depend on market demand and there is a risk that new products and new product lines will not deliver expected results, which could negatively impact our future sales and results of operations.

We could incur significant costs in complying with environmental, health and safety laws or permits or as a result of satisfying any liability or obligation imposed under such laws or permits.

Our operations are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. Among other things, these laws regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of our employees and the end-users of our products, regulate the materials used in and the recycling of products and impose liability for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances. Violations of these laws and regulations or non-compliance with any conditions contained in any environmental permit can result in substantial fines or penalties, injunctive relief, requirements to install pollution or other controls or equipment, civil and criminal sanctions, permit revocations and/or facility shutdowns. We could be held liable for the costs to address contamination of any real property we have ever owned, operated or used as a disposal site. We could also incur fines, penalties, sanctions or be subject to third-party claims for property damage, personal injury or nuisance or otherwise as a result of violations of or liabilities under environmental laws of in connection with releases of hazardous or other materials. In addition, changes in, or new interpretations of, existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future, including additional investigation or other obligations with respect to any potential health hazards of our products or business activities or the imposition of new permit requirements, may lead to additional compliance or other costs that could have material adverse effect on our business, financial condition or results of operations. See “—We are involved in a number of legal proceedings, and while we cannot predict the outcome of such proceedings and other contingencies with certainty, some of these outcomes may adversely affect our operations or increase our costs.”

 

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We may be affected by global climate change or by legal, regulatory or market responses to such potential change.

Concern over climate change, including the impact of global warming, has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions. For example, in the past several years, the U.S. Congress has considered various bills that would regulate GHG emissions. While these bills have not yet received sufficient Congressional support for enactment, some form of federal climate change legislation is possible in the future. Even in the absence of such legislation, the Environmental Protection Agency, spurred by judicial interpretation of the Clean Air Act, may regulate GHG emissions, especially diesel engine emissions, and this could impose substantial costs on us. These costs include an increase in the cost of the fuel and other energy we purchase and capital costs associated with updating or replacing our internal fleet of trucks and other vehicles prematurely. In addition, new laws or future regulation could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) and our business (through the impact on our inventory availability, cost of sales, operations or demands for the products we sell). Until the timing, scope and extent of any future regulation becomes known, we cannot predict its effect on our cost structure or our operating results. Notwithstanding our dedication to being a responsible corporate citizen, it is reasonably possible that such legislation or regulation could impose material costs on us. Moreover, even without such legislation or regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies involved in the transportation of goods could harm our reputation and reduce customer demand for our services.

Our failure to maintain effective disclosure controls and internal control over financial reporting could adversely affect our business, financial position and results of operations.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. We are required to evaluate the effectiveness of our disclosure controls and internal control over financial reporting on a periodic basis and publicly disclose the results of these evaluations and related matters, in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. These reporting and other obligations place significant additional demands on our management and administrative and operational resources, including our accounting resources, which could adversely affect our operations among other things. To comply with these requirements, we have upgraded, and are continuing to upgrade our systems, including information technology, implemented additional financial and management controls, reporting systems and procedures and hired additional legal, internal audit, accounting and finance staff. We cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we grow our business, our disclosure controls and internal controls will become more complex, and we may require significantly more resources to ensure that these controls remain effective. If we are unable to continue upgrading our financial and management controls, reporting systems, information technology and procedures in a timely and effective fashion, additional management and other resources of our company may need to be devoted to assist in compliance with the disclosure and financial reporting requirements and other rules that apply to reporting companies, which could adversely affect our business, financial position and results of operations.

Due to an exemption established by rules of the SEC for non-accelerated filers, we are not required to have and have not had our independent registered public accounting firm perform an evaluation of our internal control over financial reporting as of the end of our fiscal year in accordance with the provisions of the Sarbanes-Oxley Act of 2002. Had our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act of 2002, additional control deficiencies may have been identified by our independent registered public accounting firm and those control deficiencies could have also represented one or more material weaknesses.

The interests of the Equity Sponsors may differ from the interests of holders of our debt.

As a result of the Transactions, the Equity Sponsors and their affiliates own most of the outstanding capital stock of our parent company, Holding. Holding entered into a stockholders agreement with its stockholders in

 

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connection with the closing of the Transactions which contains, among other things, provisions relating to Holding’s governance, transfer restrictions, tag-along rights, drag-along rights, preemptive rights and certain unanimous approval rights. This stockholders agreement provides that the Equity Sponsors are entitled to elect (or cause to be elected) nine out of ten of Holding’s directors, which includes three designees of each Equity Sponsor. One of the directors designated by the Equity Sponsor associated with CD&R shall serve as the chairman. See “Certain Relationships and Related Party Transactions—Stockholders agreement and stockholder arrangements”. The interests of the Equity Sponsors may differ from our interest and from those of holders of our outstanding notes in material respects. For example, the Equity Sponsors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their overall equity portfolios, even though such transactions might involve risks to holders of our outstanding notes. The Equity Sponsors are in the business of making investments in companies, and may from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers of our customers. The companies in which one or more of the Equity Sponsors invest may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Additionally, the Equity Sponsors may determine that the disposition of some or all of their interests in our company would be beneficial to the Equity Sponsors at a time when such disposition could be detrimental to the holders of our outstanding notes. If we encounter financial difficulties, or we are unable to pay our debts as they mature, the interests of our equity holders might conflict with those of the holders of our outstanding notes. In that situation, for example, the holders of our outstanding notes might want us to raise additional equity from our equity holders or other investors to reduce our leverage and pay our debts, while our equity holders might not want to increase their investment in us or have their ownership diluted and instead choose to take other actions, such as selling our assets. The Equity Sponsors have no obligation to provide us with financing and are able to sell their equity ownership in us at any time. Moreover, the Equity Sponsors’ ownership of our company may have the effect of discouraging offers to acquire control of our Company.

Risks Related to Not Participating in the Exchange Offer

You may have difficulty selling the Old Notes that you do not exchange.

If you do not exchange your Old Notes for the New Notes offered in the exchange offer, your Old Notes will continue to be subject to significant restrictions on transfer. Those transfer restrictions are described in the Indenture and arose because the Old Notes were originally issued under exemptions from the registration requirements of the Securities Act.

The Old Notes may not be offered, sold or otherwise transferred, except in compliance with the registration requirements of the Securities Act, pursuant to an exemption from registration under the Securities Act or in a transaction not subject to the registration requirements of the Securities Act, and in compliance with applicable state securities laws. The Company did not register the Old Notes under the Securities Act, and it does not intend to do so. If you do not exchange your Old Notes, your ability to sell those Old Notes will be significantly limited.

If a large number of outstanding Old Notes are exchanged for New Notes issued in the exchange offer, it may be more difficult for you to sell your unexchanged Old Notes due to the limited amounts of Old Notes that would remain outstanding following the exchange offer.

 

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THE EXCHANGE OFFER

Pursuant to the Registration Rights Agreement, we agreed to prepare and file with the SEC a registration statement on an appropriate form under the Securities Act with respect to a proposed offer to the holders of the Old Notes to issue and deliver to such holders of Old Notes, in exchange for their Old Notes, a like aggregate principal amount of New Notes that are identical in all material respects to the Old Notes, except for provisions relating to registration rights and the transfer restrictions relating to the Old Notes, and except for certain related differences described below. See “Exchange Offer; Registration Rights.”

Terms of the Exchange Offer; Period for Tendering Old Notes

This prospectus and the accompanying letter of transmittal contain the terms and conditions of the exchange offer. Upon the terms and subject to the conditions included in this prospectus and in the accompanying letter of transmittal, which together constitute the exchange offer, we will accept for exchange Old Notes which are properly tendered on or prior to the Expiration Date, unless you have previously withdrawn them.

When you tender Old Notes as provided below, our acceptance of the Old Notes will constitute a binding agreement between you and us upon the terms and subject to the conditions in this prospectus and in the accompanying letter of transmittal. In tendering Old Notes, you should also note the following important information:

 

   

You may only tender Old Notes in minimum denominations of $2,000 and any integral multiple of $1,000 in excess thereof.

 

   

We will keep the exchange offer open for not less than 20 business days, or longer if required by applicable law, after the date on which notice of the exchange offer is mailed to holders of the Old Notes. We are sending this prospectus, together with the letter of transmittal, on or about the date of this prospectus, to all of the registered holders of Old Notes at their addresses listed in the Trustee’s security register with respect to the Old Notes.

 

   

The exchange offer expires at 5:00 p.m., New York City time, on            , 2013; provided, however, that we, in our sole discretion, may extend the period of time for which the exchange offer is open.

 

   

As of the date of this prospectus, $950,000,000 aggregate principal amount of Old Notes was outstanding. The exchange offer is not conditioned upon any minimum principal amount of Old Notes being tendered.

 

   

Our obligation to accept Old Notes for exchange in the exchange offer is subject to the conditions described under “— Conditions to the Exchange Offer.”

 

   

We expressly reserve the right, at any time, to extend the period of time during which the exchange offer is open, and thereby delay acceptance of any Old Notes, by giving oral (promptly followed in writing) or written notice of an extension to the Exchange Agent and notice of that extension to the holders of Notes as described below. During any extension, all Old Notes previously tendered will remain subject to the exchange offer unless withdrawal rights are exercised as described under “—Withdrawal Rights.” Any Old Notes not accepted for exchange for any reason will be returned without expense to the tendering holder of Notes promptly after the expiration or termination of the exchange offer.

 

   

We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any Old Notes that we have not yet accepted for exchange, at any time prior to the Expiration Date. If we make a material change to the terms of the exchange offer, including the waiver of a material condition, we will, to the extent required by law, disseminate additional offer materials and extend the period of time for which the exchange offer is open so that at least five business days remain in the exchange offer following notice of a material change.

 

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We will give oral (promptly followed in writing) or written notice of any extension, amendment, termination or non-acceptance described above to holders of the Old Notes as promptly as practicable. If we extend the Expiration Date, we will give notice by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the business day after the previously scheduled Expiration Date. Without limiting the manner in which we may choose to make any public announcement and subject to applicable law, we will have no obligation to publish, advertise or otherwise communicate any public announcement other than by issuing a release to an appropriate news agency. Such announcement may state that we are extending the exchange offer for a specified period of time.

 

   

Holders of Old Notes do not have any appraisal or dissenters’ rights in connection with the exchange offer.

 

   

Old Notes which are not tendered for exchange, or are tendered but not accepted, in connection with the exchange offer will remain outstanding and be entitled to the benefits of the Indenture, but will not be entitled to any further registration rights under the Registration Rights Agreement.

 

   

We intend to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC thereunder.

 

   

By executing, or otherwise becoming bound by, the letter of transmittal, you will be making to us the representations described under “— Resale of the New Notes.”

Important rules concerning the exchange offer

You should note the following important rules concerning the exchange offer:

 

   

All questions as to the validity, form, eligibility, time of receipt and acceptance of Old Notes tendered for exchange will be determined by us in our sole discretion, which determination shall be final and binding.

 

   

We reserve the absolute right to reject any and all tenders of any particular Old Notes not properly tendered or to not accept any particular Old Notes if such acceptance might, in our judgment or the judgment of our counsel, be unlawful.

 

   

We also reserve the absolute right to waive any defects or irregularities or conditions of the exchange offer as to any particular Old Notes either before or after the Expiration Date, including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the exchange offer. Unless we agree to waive any defect or irregularity in connection with the tender of Old Notes for exchange, you must cure any defect or irregularity within any reasonable period of time as we shall determine.

 

   

Our interpretation of the terms and conditions of the exchange offer as to any particular Old Notes either before or after the Expiration Date shall be final and binding on all parties. Neither we, the Exchange Agent nor any other person shall be under any duty to notify you of any defect or irregularity with respect to any tender of Old Notes for exchange, nor shall any of them incur any liability for failing to so notify you.

Procedures for Tendering Old Notes

What to submit and how

If you, as a holder of any Old Notes, wish to tender your Old Notes for exchange in the exchange offer, you must, except as described under “— Guaranteed Delivery Procedures,” transmit the following on or prior to the Expiration Date to the Exchange Agent:

(1) if Old Notes are tendered in accordance with the book-entry procedures described under “—Book-Entry Transfer,” an Agent’s Message, as defined below, transmitted through DTC’s ATOP, or (2) a properly

 

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completed and duly executed letter of transmittal, or a facsimile copy thereof, to the Exchange Agent at the address set forth below under “—Exchange Agent,” including all other documents required by the letter of transmittal.

In addition,

(1) a timely confirmation of a book-entry transfer of Old Notes into the Exchange Agent’s account at DTC using the procedure for book-entry transfer described under “—Book-Entry Transfer” (a “Book-Entry Confirmation”), along with an Agent’s Message, must be actually received by the Exchange Agent prior to the Expiration Date, or

(2) certificates for Old Notes must be actually received by the Exchange Agent along with the letter of transmittal on or prior to the Expiration Date, or

(3) you must comply with the guaranteed delivery procedures described below.

The term “Agent’s Message” means a message, transmitted through ATOP by DTC to, and received by, the Exchange Agent and forming a part of a Book-Entry Confirmation, that states that DTC has received an express acknowledgement that the tendering holder has received and agrees to be bound by the letter of transmittal or, in the case of an Agent’s Message relating to guaranteed delivery, that such holder has received and further agrees to be bound by the notice of guaranteed delivery, and that we may enforce the letter of transmittal, and the notice of guaranteed delivery, as the case may be, against such holder.

The method of delivery of Old Notes, letters of transmittal, notices of guaranteed delivery and all other required documentation, including delivery of Old Notes through DTC and transmission of Agent’s Messages through DTC’s ATOP, is at your election and risk. Delivery will be deemed made only when all required documentation is actually received by the Exchange Agent. Delivery of documents or instructions to DTC does not constitute delivery to the Exchange Agent. If delivery is by mail, we recommend that registered mail, properly insured, with return receipt requested, be used. In all cases, sufficient time should be allowed to assure timely delivery to the Exchange Agent. Holders tendering Old Notes or transmitting Agent’s Messages through DTC’s ATOP must allow sufficient time for completion of ATOP procedures during DTC’s normal business hours. No Old Notes, Agent’s Messages, letters of transmittal, notices of guaranteed delivery or any other required documentation should be sent to us.

How to sign your letter of transmittal and other documents

Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes being surrendered for exchange are tendered:

(1) by a registered holder of the Old Notes who has not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal, or

(2) for the account of an “eligible guarantor” institution within the meaning of Rule 17Ad-15 under the Exchange Act, or a commercial bank or trust company having an office or correspondent in the United States that is a member in good standing of a medallion program recognized by the Securities Transfer Association Inc., including the Securities Transfer Agents Medallion Program (“STAMP”), the Stock Exchanges Medallion Program (“SEMP”) and the New York Stock Exchange Medallion Signature Program (“MSP”) (each, an “Eligible Institution”).

If signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, the guarantees must be by an Eligible Institution.

If the letter of transmittal is signed by a person or persons other than the registered holder or holders of Old Notes, the Old Notes must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name or names of the registered holder or holders appear on the Old Notes and with the signatures guaranteed.

 

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If the letter of transmittal or any Old Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers or corporations or others acting in a fiduciary or representative capacity, the person should so indicate when signing and, unless waived by us, proper evidence satisfactory to us of such person’s authority to so act must be submitted.

Acceptance of Old Notes for Exchange; Delivery of New Notes

Once all of the conditions to the exchange offer are satisfied or waived, we will accept all Old Notes properly tendered and not properly withdrawn, and will issue the New Notes promptly after The Expiration Date. See “—Conditions to the Exchange Offer” below. For purposes of the exchange offer, our giving of oral (promptly followed in writing) or written notice of acceptance to the Exchange Agent will be considered our acceptance of the tendered Old Notes.

In all cases, we will issue New Notes in exchange for Old Notes that are accepted for exchange only after timely receipt by the Exchange Agent of:

 

   

a Book-Entry Confirmation or Old Notes in proper form for transfer,

 

   

a properly transmitted Agent’s Message or a properly completed and duly executed letter of transmittal, and

 

   

all other required documentation.

If we do not accept any tendered Old Notes for any reason included in the terms and conditions of the exchange offer, if you submit certificates representing Old Notes in a greater principal amount than you wish to exchange or if you properly withdraw tendered Old Notes in accordance with the procedures described under “—Withdrawal Rights,” we will return any unaccepted, non-exchanged or properly withdrawn Old Notes, as the case may be, without expense to the tendering holder. In the case of Old Notes tendered by book-entry transfer into the Exchange Agent’s account at DTC using the book-entry transfer procedures described below, unaccepted, non-exchanged or properly withdrawn Old Notes will be credited to an account maintained with DTC. We will return the Old Notes or have them credited to the DTC account, as applicable, promptly after the expiration or termination of the exchange offer.

Book-Entry Transfer

The Exchange Agent will make a request to establish an account with respect to the Old Notes at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution that is a participant in DTC’s systems, including Euroclear Bank, S.A./N.V., as operator of the Euroclear System (“Euroclear”), or Clearstream Banking, société anonyme (“Clearstream”) may make book-entry delivery of Old Notes by causing DTC to transfer Old Notes into the Exchange Agent’s account at DTC in accordance with DTC’s ATOP procedures for transfer. However, the exchange for the Old Notes so tendered will only be made after timely confirmation of book-entry transfer of Old Notes into the Exchange Agent’s account, and timely receipt by the Exchange Agent of an Agent’s Message and all other documents required by the letter of transmittal. Only participants in DTC may deliver Old Notes by book-entry transfer.

Although delivery of Old Notes may be effected through book-entry transfer into the Exchange Agent’s account at DTC, the letter of transmittal, or a facsimile copy thereof, properly completed and duly executed, with any required signature guarantees, or an Agent’s Message, with all other required documentation, must in any case be transmitted to and received by the Exchange Agent at its address listed under “—Exchange Agent” on or prior to the Expiration Date, or you must comply with the guaranteed delivery procedures described below under “—Guaranteed Delivery Procedures.”

If your Old Notes are held through DTC, you must complete the accompanying form called “Instructions to Registered Holder and/or Book-Entry Participant,” which will instruct the DTC participant through whom you

 

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hold your Old Notes of your intention to tender your Old Notes or not tender your Old Notes. Please note that delivery of documents or instructions to DTC does not constitute delivery to the Exchange Agent and we will not be able to accept your tender of Old Notes until the Exchange Agent actually receives from DTC the information and documentation described under “—Acceptance of Old Notes for Exchange; Delivery of New Notes.”

Guaranteed Delivery Procedures

If you are a registered holder of Old Notes and you want to tender your Old Notes but the procedure for book-entry transfer cannot be completed prior to the Expiration Date, your Old Notes are not immediately available or time will not permit your Old Notes to reach the Exchange Agent before the Expiration Date, a tender may be effected if:

 

   

the tender is made through an Eligible Institution, as defined above,

 

   

prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution, by facsimile transmission, mail or hand delivery, a properly completed and duly executed notice of guaranteed delivery, substantially in the form provided by us, or an Agent’s Message with respect to guaranteed delivery in lieu thereof, in either case stating:

 

   

the name and address of the holder of Old Notes,

 

   

the amount of Old Notes tendered,

 

   

that the tender is being made by delivering such notice and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, a Book-Entry Confirmation or the certificates for all physically tendered Old Notes, in proper form for transfer, together with either an appropriate Agent’s Message or a properly completed and duly executed letter of transmittal in lieu thereof, and all other required documentation, will be deposited by that Eligible Institution with the Exchange Agent, and

 

   

a Book-Entry Confirmation or the certificates for all physically tendered Old Notes, in proper form for transfer, together with either an appropriate Agent’s Message or a properly completed and duly executed letter of transmittal in lieu thereof, and all other required documentation, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date.

Withdrawal Rights

You can withdraw your tender of Old Notes at any time on or prior to 5:00 p.m., New York City time, on the Expiration Date.

For a withdrawal to be effective, a written notice of withdrawal must be actually received by the Exchange Agent prior to such time, properly transmitted either through DTC’s ATOP or to the Exchange Agent at the address listed below under “—Exchange Agent.” Any notice of withdrawal must:

 

   

specify the name of the person having tendered the Old Notes to be withdrawn;

 

   

identify the Old Notes to be withdrawn;

 

   

specify the principal amount of the Old Notes to be withdrawn;

 

   

contain a statement that the tendering holder is withdrawing its election to have such Notes exchanged for New Notes;

 

   

except in the case of a notice of withdrawal transmitted through DTC’s ATOP system, be signed by the holder in the same manner as the original signature on the letter of transmittal by which the Old Notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer to have the Trustee with respect to the Old Notes register the transfer of the Old Notes in the name of the person withdrawing the tender;

 

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if certificates for Old Notes have been delivered to the Exchange Agent, specify the name in which the Old Notes are registered, if different from that of the withdrawing holder;

 

   

if certificates for Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of those certificates, specify the serial numbers of the particular certificates to be withdrawn, and, except in the case of a notice of withdrawal transmitted through DTC’s ATOP system, include a notice of withdrawal signed in the same manner as the letter of transmittal by which the Old Notes were tendered, including any required signature guarantees; and

 

   

if Old Notes have been tendered using the procedure for book-entry transfer described above, specify the name and number of the account at DTC from which the Old Notes were tendered and the name and number of the account at DTC to be credited with the withdrawn Old Notes, and otherwise comply with the procedures of DTC.

Please note that all questions as to the validity, form, eligibility and time of receipt of notices of withdrawal will be determined by us, and our determination shall be final and binding on all parties. Any Old Notes so withdrawn will be considered not to have been validly tendered for exchange for purposes of the exchange offer. New Notes will not be issued in exchange for such withdrawn Old Notes unless the Old Notes so withdrawn are validly re-tendered.

If you have properly withdrawn Old Notes and wish to re-tender them, you may do so by following one of the procedures described under “—Procedures for Tendering Old Notes” above at any time on or prior to the Expiration Date.

Conditions to the Exchange Offer

Notwithstanding any other provisions of the exchange offer, we will not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the exchange offer, if we determine in our reasonable judgment at any time before the Expiration Date that the exchange offer would violate applicable law or any applicable interpretation of the staff of the SEC.

The foregoing conditions are for our sole benefit and may be waived by us regardless of the circumstances giving rise to that condition. Our failure at any time to exercise the foregoing rights shall not be considered a waiver by us of that right. The rights described in the prior paragraph are ongoing rights which we may assert at any time and from time to time.

In addition, we will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for any such Old Notes, if at any time any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act.

We reserve the right to terminate or amend the exchange offer at any time prior to the Expiration Date upon the occurrence of any of the foregoing events.

 

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Exchange Agent

Wells Fargo Bank, National Association has been appointed as the Exchange Agent for the exchange offer. All executed letters of transmittal, notices of guaranteed delivery, notices of withdrawal and any other required documentation should be directed to the Exchange Agent at the address set forth below. Requests for additional copies of this prospectus or of the letter of transmittal and requests for notices of guaranteed delivery should be directed to the Exchange Agent, addressed as follows:

 

By mail, hand or overnight courier:    By facsimile:    For information or confirmation
by telephone:

Wells Fargo Bank, National Association

608 2nd Avenue South
Minneapolis, MN 55402

   (612) 667-6282   

Corporate Trust Operations
(800) 344-5128, Option 0

Delivery to an address other than the address of the Exchange Agent as listed above or transmission of instructions via facsimile other than as listed above does not constitute a valid delivery.

Fees and Expenses

The principal solicitation is being made by mail; however, additional solicitation may be made by telephone or in person by our officers, regular employees and affiliates. We will not pay any additional compensation to any of our officers and employees who engage in soliciting tenders. We will not make any payment to brokers, dealers or others soliciting acceptances of the exchange offer. However, we will pay the Exchange Agent reasonable and customary fees (including attorney fees and expenses) for their services and will reimburse them for their reasonable out-of-pocket expenses in connection with the exchange offer.

The estimated cash expenses to be incurred in connection with the exchange offer, including legal, accounting, SEC filing, printing and Exchange Agent expenses, will be paid by us and are estimated in the aggregate to be less than $1.0 million.

Transfer Taxes

Holders who tender their Old Notes for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct us to register New Notes in the name of, or request that Old Notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax.

Resale of the New Notes

Under existing interpretations of the staff of the SEC contained in several no-action letters to third parties, the New Notes would in general be freely transferable by holders thereof (other than affiliates of us) after the exchange offer without further registration under the Securities Act (subject to certain representations required to be made by each holder of Old Notes participating in the exchange offer, as set forth below). The relevant no-action letters include the Exxon Capital Holdings Corporation letter, which was made available by the SEC on May 13, 1988, the Morgan Stanley & Co. Incorporated letter, which was made available by the SEC on June 5, 1991, the K-111 Communications Corporation letter, which was made available by the SEC on May 14, 1993, and the Shearman & Sterling letter, which was made available by the SEC on July 2, 1993.

However, any purchaser of Old Notes who is an “affiliate” of ours or who intends to participate in the exchange offer for the purpose of distributing the New Notes:

 

   

will not be able to rely on such SEC interpretation;

 

   

will not be able to tender its Old Notes in the exchange offer; and

 

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must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of Old Notes unless such sale or transfer is made pursuant to an exemption from those requirements.

By executing, or otherwise becoming bound by, the letter of transmittal, you will represent to us that:

 

   

any New Notes to be received by you will be acquired in the ordinary course of business;

 

   

you have no arrangements or understandings with any person to participate in the distribution of the Old Notes or New Notes within the meaning of the Securities Act; and

 

   

you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

   

if you are a broker-dealer, you will receive the New Notes for your own account in exchange for the Old Notes acquired as a result of market-making activities or other trading activities and that you will deliver a prospectus in connection with any resale of New Notes (see “Plan of Distribution”);

 

   

if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the New Notes; and

 

   

you are not acting on behalf of any person that could not truthfully make any of the foregoing representations contained in this paragraph.

We have not sought, and do not intend to seek, a no-action letter from the SEC with respect to the effects of the exchange offer, and there can be no assurance that the SEC staff would make a similar determination with respect to the New Notes as it has made in previous no-action letters.

In addition, in connection with any resales of Old Notes, each participating broker-dealer receiving New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such exchanging dealer as a result of market-making activities or other trading activities, must represent that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. We have agreed that for a period of up to 90 days after the exchange offer is consummated, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”

The SEC has taken the position in the Shearman & Sterling no-action letter, which it made available on July 2, 1993, that broker-dealers may fulfill their prospectus delivery requirements with respect to the New Notes, other than a resale of an unsold allotment from the original sale of the Old Notes, by delivery of the prospectus contained in the exchange offer registration statement.

 

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USE OF PROCEEDS

The exchange offer is intended to satisfy our obligations under the Registration Rights Agreement we entered into in connection with the private offering of the Old Notes. We will not receive any cash proceeds from the issuance of the New Notes under the exchange offer. In consideration for issuing the New Notes as contemplated by this prospectus, we will receive Old Notes in like principal amounts, the terms of which are identical in all material respects to the New Notes, subject to limited exceptions. Old Notes surrendered in exchange for New Notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the New Notes will not result in any increase in our indebtedness.

 

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SELECTED HISTORICAL FINANCIAL DATA

The following table presents our selected historical financial data, as of and for the periods indicated. The selected historical financial information as of and for the nine months ended October 28, 2012 and October 30, 2011 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected historical financial data for the fiscal years ended January 29, 2012, January 30, 2011 and January 31, 2010, February 1, 2009 and for the period from August 30, 2007 to February 3, 2008 and the period from January 29, 2007 to August 29, 2007 have been derived from our historical financial statements.

On March 26, 2012, HD Supply disposed of its Industrial Pipes, Valves and Fittings (“IPVF”) business. During fiscal 2011, HD Supply disposed of its Plumbing/HVAC and SESCO/QUESCO operations. In accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations, the results of the IPVF, Plumbing/HVAC and SESCO/QUESCO operations and the gain on sale of the businesses are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on the sale of businesses, net of tax, as one line item on the Consolidated Statements of Operations. All prior period Consolidated Statements of Operations have been revised to reflect this presentation.

This “Selected Historical Financial Data” should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements and related notes included in “Audited Consolidated Financial Statements” and unaudited consolidated financial statement and related notes included in “Unaudited Consolidated Financial Statements.” Our historical consolidated and combined financial data may not be indicative of our future performance.

 

    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Fiscal year ended
    Period from
August 30,
2007 to
February 3,
2008
         Period from
January 29,
2007 to August  29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       
    (Dollars in millions)             

Consolidated Statement of Operations:

                   

Net sales

  $ 6,041      $ 5,376      $ 7,028      $ 6,449      $ 6,313      $ 8,198      $ 3,838          $ 5,903   

Cost of sales

    4,308        3,848        5,014        4,608        4,545        5,980        2,808            4,329   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross profit

    1,733        1,528        2,014        1,841        1,768        2,218        1,030            1,574   

Operating expenses:

                   

Selling, general and administrative

    1,223        1,144        1,532        1,455        1,453        1,770        860            1,208   

Depreciation and amortization

    250        245        327        341        359        374        156            105   

Restructuring

    —          —          —          8        21        31        —              —     

Goodwill impairment

    —          —          —          —          219        867        —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total operating expenses

    1,473        1,389        1,859        1,804        2,052        3,042        1,016            1,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

    260        139        155        37        (284     (824     14            261   

Interest expense

    489        477        639        623        602        644        289            220   

Interest income

    —          —          —          —          —          (3     —              —     

Loss (gain) on extinguishment of debt

    220        —          —          —          (200     —          —              —     

Other (income) expense, net

    —          (1     —          (1     (8     12        —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes and discontinued operations

    (449     (337     (484     (585     (678     (1,477     (275         41   

Provision (benefit) for income taxes

    36        59        79        28        (198     (329     (100         17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from continuing operations

    (485     (396     (563     (613     (480     (1,148     (175         24   

Income (loss) from discontinued operations, net of tax

    19        26        20        (6     (34     (107     (12         (32
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

  $ (466   $ (370   $ (543   $ (619   $ (514   $ (1,255   $ (163       $ 56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

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    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Fiscal year ended
    Period from
August 30,
2007 to
February 3,
2008
         Period from
January 29,
2007 to
August 29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       
    (Dollars in millions)             

Balance sheet data (end of period):

                   

Working capital(1)

  $ 1,279        $ 1,012      $ 1,176      $ 1,925      $ 2,071      $ 2,009         

Cash and cash equivalents

    158          111        292        539        771        108         

Total assets

    7,678          6,738        7,089        7,845        9,088        10,593         

Total debt(2)

    6,915          5,462        5,249        5,775        6,056        5,800         

Total stockholder’s equity (deficit)

    (881       (428     96        688        1,175        2,433         

Other financial data (unaudited):

                   

Cash interest expense(3)

  $ 403      $ 307      $ 457      $ 365      $ 363      $ 397      $ 191          $ 220   

EBITDA(4)

    292        387        484        381        288        (455     173            370   

Adjusted EBITDA(4)

    529        406        508        411        343        476        176            401   

Capital expenditures

    80        58        115        49        58        77        75            176   

Statement of cash flows data:

                   

Cash flows provided by (used in) operating activities, net

  $ (327   $ (264   $ (165   $ 551      $ 69      $ 548      $ 364          $ 408   

Cash flows provided by (used in) investing activities, net

    (777     —          (6     (45     (41     37        (8,255         (140

Cash flows provided by (used in) financing activities, net

    1,151        111        (10     (755     (263     86        7,977            (269

 

(1) We define working capital as current assets (including cash) minus current liabilities, which include the current portion of long-term debt and accrued interest thereon.
(2) Total debt includes current and non-current installments of long-term debt and capital leases.
(3) Cash interest expense represents total interest expense in continuing operations less (i) amortization of deferred financing costs, (ii) amortization of the asset related to the estimated fair value of the THD Guarantee, (iii) paid-in-kind (“PIK”) interest expense on our 2007 Senior Subordinated Notes and April 2012 Senior Notes (iv) amortization of amounts in accumulated other comprehensive income related to derivatives and (v) amortization of original issue discounts and premium. Effective September 1, 2011, the interest expense on our 2007 Senior Subordinated Notes is no longer paid-in-kind, but rather paid in cash. Interest payments on the April 2012 Senior Notes will be paid in kind through October 2017.

Cash interest expense is not a recognized term under GAAP and does not purport to be an alternative to interest expense. Management believes that cash interest expense is useful for analyzing the cash flow needs and debt service requirements of the Company. The following table provides a reconciliation of interest expense, the most directly comparable financial measure under GAAP, to Cash interest expense for the periods presented (amounts in millions):

 

    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Fiscal year ended
    Period
from
August 30,
2007 to
February 3,
2008
         Period
from
January 29,
2007 to
August 29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       

Interest expense

  $ 489      $ 477      $ 639      $ 623      $ 602      $ 644      $  289          $  220   

Amortization of deferred financing costs

    (18     (28     (37     (36     (33     (33     (14         —     

Amortization of THD Guarantee

    (2     (10     (13     (14     (21     (21     (9         —     

PIK interest expense on our 2007 Senior Subordinated Notes and April 2012 Senior Notes

    (63     (132     (132     (206     (182     (192     (75         —     

Amortization of amounts in accumulated other comprehensive income related to derivatives

    —          —          —          (2     (3     (1     —              —     

Amortization of original issue discounts and premium

    (3     —          —          —          —          —          —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Cash interest expense

  $ 403      $ 307      $ 457      $ 365      $ 363      $ 397      $ 191          $ 220   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

(4)

EBITDA, a measure used by management to evaluate operating performance, is defined as Net income (loss) less Income (loss) from discontinued operations, net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision (benefit) for income taxes, and (iii) Depreciation and amortization. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net

 

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  income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and other debt service requirements. We believe EBITDA is helpful in highlighting trends because EBITDA 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. We further believe that EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an EBITDA measure when reporting their results. We use non-GAAP financial measures 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 EBITDA may not be comparable to other similarly titled measures of other companies.

In addition, we present Adjusted EBITDA because it is a primary measure used by management to evaluate operating performance. Adjusted EBITDA is based on “Consolidated EBITDA,” a measure used in calculating financial ratios in several material debt covenants in our Senior Term Facility and our Senior ABL Facility. 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 and our Senior ABL Facility requires us to maintain a minimum fixed charge coverage ratio if we do not maintain a specified amount of borrowing availability. Adjusted EBITDA is defined as EBITDA adjusted to exclude non-cash items and certain other adjustments to Consolidated Net Income permitted in calculating Consolidated EBITDA under our Senior Term Facility and our Senior ABL Facility. We believe that inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate and about certain non-cash items, items that we do not expect to continue at the same level and other items. The Senior Term Facility and Senior ABL Facility permit us to make certain 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 prospectus and the documents incorporated by reference herein. 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 “Description of Other Indebtedness—Senior Credit Facilities.”

EBITDA and Adjusted EBITDA 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:

 

   

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

 

   

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

 

   

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

 

   

EBITDA and Adjusted EBITDA 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 EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

 

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

 

    Successor          Predecessor  
    Historical
Nine months ended
    Historical
Three months
ended
    Historical
Fiscal year ended
    Period
from
August 30,
2007 to
February 3,
2008
         Period
from
January 29,
2007 to
August 29,
2007
 
    October 28,
2012
    October 30,
2011
    January 29,
2012
    January 29,
2012
    January 30,
2011
    January 31,
2010
    February 1,
2009
       

Net income (loss)

  $ (466   $ (370   $ (173   $ (543   $ (619   $ (514   $ (1,255   $ (163       $ 56   

Less income (loss) from discontinued operations, net of tax

    19        26        (6     20        (6     (34     107        12            32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from continuing operations

    (485     (396     (167     (563     (613     (480     (1,148     (175         24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Interest expense

    489        477        162        639        623        602        641        289            220   

Provision (benefit) from income taxes

    36        59        20        79        28        (198     (329     (100         17   

Depreciation and amortization(i)

    252        247        82        329        343        364        381        159            109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

EBITDA

  $ 292      $ 387      $ 97      $ 484      $ 381      $ 288      $ (455   $ 173          $ 370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjustments to EBITDA:

                     

Other (income) expense, net(ii)

    —          (1     1        —          (1     (8     12        —              —     

Loss (gain) on extinguishment of debt(iii)

    220        —          —          —          —          (200     —          —              —     

Goodwill impairment(iv)

    —          —          —          —          —          219        867        —              —     

Restructuring charge(v)

    —          —          —          —          8        21        32        —              —     

Stock-based compensation(vi)

    13        16        4        20        17        18        14        1            31   

Management fee & related expenses paid to Equity Sponsors(vii)

    4        4        1        5        5        5        6        2            —     

Other

    —          —          (1     (1     1        —          —          —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted EBITDA

  $ 529      $ 406      $ 102      $ 508      $ 411      $ 343      $ 476      $ 176          $ 401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

  (i) Depreciation and amortization includes amounts recorded within Cost of sales in the Consolidated and Combinded Statements of Operations.
  (ii) Represents the gains/losses associated with the changes in fair value of interest rate swap contracts not accounted for under hedge accounting and other non-operating income/expense.
  (iii) Represents the loss/(gain) on extinguishment of debt including the premium/(discount) paid to repurchase or call the debt as well as the writeoff of unamortized deferred financing costs associated with such debt.
  (iv) Represents the non-cash impairment charge of goodwill recognized during fiscal 2009 and fiscal 2008 in accordance with Accounting Standards Codification 350, Intangibles—Goodwill and Other.
  (v) Represents the costs incurred for employee reductions and branch closures or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location.
  (vi) The Predecessor period includes stock-based compensation costs for stock options, Employee Stock Purchase Plans and restricted stock. The Successor periods include stock-based compensation costs for stock options.
  (vii) The Company entered into a management agreement whereby the Company pays the Equity Sponsors a $5 million annual aggregate management fee and related expenses through August 2017.

 

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Table of Contents

Quarterly Financial Data

The following tables present quarterly unaudited financial results for the nine months ended October 28, 2012 and the fiscal years ended January 29, 2012 (fiscal 2011) and January 30, 2011 (fiscal year 2010), reflecting the results of our IPVF, Plumbing/HVAC and SESCO/QUESCO businesses, as discontinued operations.

 

    Fiscal 2012     Fiscal 2011     Fiscal 2010  
(Dollars in millions)   Q1-12     Q2-12     Q3-12     Q1-11     Q2-11     Q3-11     Q4-11     Q1-10     Q2-10     Q3-10     Q4-10  

Net Sales

  $ 1,836      $ 2,059      $ 2,146      $ 1,608      $ 1,875      $ 1,893      $ 1,652      $ 1,552      $ 1,719      $ 1,724      $ 1,454   

Cost of Sale

    1,313        1,465        1,530        1,148        1,342        1,358        1,166        1,109        1,231        1,236        1,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    523        594        616        460        533        535        486        433        488        488        422   

Operating Expenses:

                     

Selling, General & Administrative

    397        408        418        370        385        389        388        371        370        365        349   

Depreciation & Amortization

    83        83        84        82        82        81        82        87        87        84        83   

Restructuring

    —          —          —          —          —          —          —          5        3        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    480        491        502        452        467        470        470        463        460        449        432   

Operating Income (Loss)

    43        103        114        8        66        65        16        (20     28        39        (10

Interest Expense

    166        158        165        158        159        160        162        156        155        153        159   

Loss on extinguishment of debt

    220        —          —          —          —          —          —          —          —          —          —     

Other (income) expense, net

    —          —          —          (1     —          —          1        4        (2     (1     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (343     (55     (51     (149     (93     (95     (147     (180     (125     (113     (167

Income Tax (Benefit) Expense

    33        1        2        20        15        24        20        22        (12     (15     33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from continuing operations

    (376     (56     (53     (169     (108     (119     (167     (202     (113     (98     (200

Income (loss) from discontinued operations, net of tax

    16        —          3        5        7        14        (6     —          (2     (1     (3