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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on June 13, 2013

Registration No. 333-187872

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



HD Supply Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or other jurisdiction of
incorporation)
  5000
(Primary Standard Industrial
Classification Code Number)
  26-0486780
(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 J. Nunez, Esq.
Senior Vice President, General Counsel and Corporate Secretary
HD Supply Holdings, 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

 

Patrick O'Brien, Esq.
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, Massachusetts 02119
(617) 951-7000



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

          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

          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. o

          If this Form is a post-effective amendment filed pursuant to Rule 462(c) 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. o

          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. o



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

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

CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of Securities
to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee(2)

 

Common stock, $0.01 par value per share

  $1,529,255,309.00   $208,591.00

 


(1)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that may be sold upon exercise of the underwriters' option to purchase additional shares.

(2)
$136,400.00 previously paid by the registrant.



          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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

   


Table of Contents

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

SUBJECT TO COMPLETION, DATED JUNE 13, 2013

53,191,489 Shares

LOGO

HD Supply Holdings, Inc.

Common Stock

        This is the initial public offering of common stock of HD Supply Holdings, Inc. We are offering 53,191,489 shares of common stock to be sold in this offering. No public market currently exists for our common stock. The initial public offering price of our common stock is expected to be between $22.00 and $25.00 per share.

        We have applied to list our common stock on the NASDAQ Global Select Market under the symbol "HDS."

        Investing in our common stock involves risks. See "Risk Factors" beginning on page 23 of this prospectus.

PRICE $            PER SHARE

           
 
 
  Price to Public
  Underwriting
Discounts and
Commissions(1)

  Proceeds to
Company

 

Per Share

  $   $   $
 

Total

  $   $   $

 

(1)
See "Underwriting" for additional compensation details.

        The underwriters also may purchase up to 7,978,723 additional shares from us at the initial offering price less the underwriting discounts and commissions.

        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 underwriters expect to deliver the shares to purchasers on or about                , 2013.

BofA Merrill Lynch   Barclays   J.P. Morgan   Credit Suisse

Citigroup   Deutsche Bank Securities   Goldman, Sachs &
Co.
  Morgan Stanley   UBS Investment Bank   Wells Fargo Securities

Baird

 

William Blair

 

Raymond James

BB&T Capital Markets

 

SunTrust Robinson Humphrey

Drexel Hamilton

 

Guzman & Company

   

The date of this prospectus is                , 2013.


Table of Contents

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TABLE OF CONTENTS

Special Note Regarding Forward-Looking Statements and Information

  ii

Trademarks

  iii

Market and Industry Data

  iii

Supplemental Information

  iii

Prospectus Summary

  1

Risk Factors

  23

Use of Proceeds

  50

Dividend Policy

  52

Capitalization

  53

Dilution

  55

Selected Consolidated Financial Data

  56

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

  60

Business

  101

Management

  118

Executive Compensation

  127

Security Ownership of Certain Beneficial Owners and Management

  146

Certain Relationships and Related Party Transactions

  150

Description of Capital Stock

  153

Shares of Common Stock Eligible for Future Sale

  158

Description of Certain Indebtedness

  160

U.S. Federal Tax Considerations for Non-U.S. Holders

  166

Underwriting

  169

Legal Matters

  175

Where You Can Find More Information

  175

Experts

  175

Index to Consolidated Financial Statements

  F-1



        You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize be distributed to you. We have not, and the underwriters 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 in which it is unlawful to make such offer or solicitation. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus.

        Prospectus Delivery Obligation: Until                , 2013 (25 days after the commencement of this offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

        For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

        This prospectus includes forward-looking statements. Some of the forward-looking statements can be identified by the use of 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 related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects and growth strategies and the industries in which we operate and including, without limitation, statements relating to our future performance.

        Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are 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 industry development may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our consolidated results of operations, financial condition and liquidity, and industry development are consistent with the forward-looking statements contained in this prospectus, 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 the risks and uncertainties discussed in "Risk Factors." Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:

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

    our ability to achieve profitability;

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

    limitations and restrictions in the agreements governing our indebtedness;

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

    the loss of any of our significant customers;

    competitive pricing pressure from our customers;

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

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

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

    our ability to manage fixed costs;

    the development of alternatives to distributors in the supply chain;

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

    potential material liabilities under our self-insured programs;

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

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

    our ability to identify and integrate new products; and

    the significant influence our sponsors have over corporate decisions.

        All forward looking statements are made only as of the date of this prospectus and we do not undertake any obligation, other than as may be required by law, to update or revise any forward looking statements to reflect future events or developments. 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.




TRADEMARKS

        We use various trademarks, service marks and brand names, such as HD Supply, 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 market sectors 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.




SUPPLEMENTAL INFORMATION

        Unless the context otherwise indicates or requires, as used in this prospectus, the terms (i) "we," "our," "us," "HD Supply," and the "Company," refer to HD Supply Holdings, Inc. and its directly and indirectly owned subsidiaries as a combined entity, except where it is clear that the terms mean only HD Supply Holdings, Inc. exclusive of its subsidiaries and (ii) the term "HDS" refers to HD Supply, Inc., our primary operating company and a wholly-owned subsidiary of HD Supply Holdings, Inc.

        Our fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal year ended February 3, 2013 (fiscal 2012) includes 53 weeks. Fiscal years ended January 29, 2012 (fiscal 2011) and January 30, 2011 (fiscal 2010) both include 52 weeks. The three months ended May 5, 2013 and April 29, 2012 both include 13 weeks.

        Unless otherwise indicated, the information in this prospectus excludes our Industrial Pipes, Valves and Fittings ("IPVF") business which we sold on March 26, 2012 to Shale-Inland Holdings, LLC. Our annual financial statements presented herein have been revised to present IPVF as a discontinued operation for the periods presented.

        The term "GAAP" refers to accounting principles generally accepted in the United States of America.



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PROSPECTUS SUMMARY

        The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus before making an investment decision.


Our Company

        We are one of the largest industrial distributors in North America. We believe we have leading positions in the three distinct market sectors in which we specialize: Maintenance, Repair & Operations; Infrastructure & Power; and Specialty Construction. These market sectors are large and fragmented, and we believe they present opportunities for significant growth. We aspire to be the "First Choice" of customers, associates, suppliers and the communities in which we operate. This aspiration drives our relentless focus and is reflected in the customer and market centricity, speed and precision, intense teamwork, process excellence and trusted relationships that define our culture. We believe this aspiration distinguishes us from other distributors and has created value for our shareholders, driven above-market growth and delivered attractive returns on invested capital.

        We estimate that the aggregate size of our currently addressable markets is approximately $110 billion annually. We define our currently addressable markets as the total dollars spent in markets where we currently offer products. We serve these markets with an integrated go-to-market strategy. We operate through over 600 locations across 46 U.S. states and nine Canadian provinces. We have approximately 15,000 associates delivering localized, customer-tailored products, services and expertise. We serve approximately 500,000 customers, which include contractors, government entities, maintenance professionals, home builders and industrial businesses. Our broad range of end-to-end product lines and services include over one million stock-keeping units ("SKUs") of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from infrastructure and construction to maintenance, repair and operations. For the fiscal year ended February 3, 2013, or fiscal 2012, we generated $8.0 billion in Net sales, representing 14.3% growth over the fiscal year ended January 29, 2012, or fiscal 2011, or 12.2% growth excluding the 53rd week of fiscal 2012; $683 million of Adjusted EBITDA, representing 34.4% growth over fiscal 2011, or 31.7% growth excluding the 53rd week of fiscal 2012; and incurred a Net loss of $1,179 million representing an increase of 117.1% over fiscal 2011, or an increase of 119.7% excluding the 53rd week of fiscal 2012. For the three months ended May 5, 2013, we generated $2.1 billion in Net sales, representing 12.6% growth over the three months ended April 29, 2012; $164 million of Adjusted EBITDA, representing 23.3% growth over the three months ended April 29, 2012; and incurred a Net loss of $131 million, representing an improvement of 63.6% over the three months ended April 29, 2012. For a reconciliation of Net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)."

        We believe our long-standing customer relationships and competitive advantages stem from our knowledgeable associates, extensive product and service offerings, national footprint, integrated technology, broad purchasing scale and strategic supplier relationships. We believe that our comprehensive supply chain solutions improve the effectiveness and efficiency of our customers' businesses. Our value-add services include customer training, material and product fabrication, kitting, jobsite delivery, will call pick up options, as well as onsite managed inventory, online material management and emergency response capabilities. Furthermore, we believe our product application knowledge, comprehensive product assortment, and sourcing expertise allow our customers to perform reliably and provide them the tools to enhance profitability. We reach our customers through a variety of sales channels, including professional outside and inside sales forces, call centers and branch supported direct marketing programs utilizing market-specific product catalogs, and business unit

 

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websites. Our distribution network allows us to provide rapid, reliable, on-time delivery and customer pickup throughout the U.S. and Canada. Additionally, we believe our highly integrated technology provides leading e-commerce and integrated workflow capabilities for our customers, while providing us unparalleled pricing, budgeting, reporting and analytical capabilities across our Company. We believe customers view us as an integral part of the value chain due to our extensive product knowledge, expansive product availability and the ability to directly integrate with their systems and workflows.

        Since 2007 we have undertaken significant operating and growth initiatives at all levels. We developed and are implementing a multi-year strategy to optimize our business mix. This strategy includes entering new markets and product lines, streamlining and upgrading our process and technology capabilities, acquiring new capabilities and selling non-core business units. At the same time, we attracted what we believe to be "best of the best" talent capitalizing on relevant experience, teamwork and change navigation. With this transformational execution behind us, we believe we are well-positioned to continue to grow our revenues at a growth rate in excess of the growth rates of the markets in which we operate.


Summary of Reportable Segments

        We operate through four reportable segments: Facilities Maintenance, Waterworks, Power Solutions and White Cap. Although these reportable segments are distinct and specialized to reflect the needs of their customers, we operate our Company with an integrated go-to-market strategy.

    Facilities Maintenance.  Facilities Maintenance distributes maintenance, repair and operations ("MRO") products, provides value-add services and fabricates custom products to multifamily, hospitality, healthcare and institutional facilities.

    Waterworks.  Waterworks distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in the water and wastewater industries for non-residential and residential uses.

    Power Solutions.  Power Solutions distributes electrical transmission and distribution products, power plant MRO supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation and distribution industries.

    White Cap.  White Cap distributes specialized hardware, tools, engineered materials and safety products to non-residential and residential contractors.

 

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        The table below is a summary of our four reportable segments.

 

 
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Overview

 

Catalog Based Distributor of MRO Products to Maintenance Professionals

 

Distributor of Water, Sewer, Storm and Fire Protection Products

 

Distributor of Utilities and Electrical Construction and Industrial Products

 

Distributor of Specialty Construction and Safety Supplies

 

Fiscal 2012 Net Sales

 

$2.2 billion

 

$2.0 billion

 

$1.8 billion

 

$1.2 billion

 

Fiscal 2012 Adjusted EBITDA(1)

 

$389 million

 

$137 million

 

$72 million

 

$56 million

 

Adjusted EBITDA Margin(2)

 

18%

 

7%

 

4%

 

5%

 

Growth(3)

 

20%

 

21%

 

40%

 

224%

 

Estimated Addressable Market Size(4)

 

$48 billion

 

$10 billion

 

$35 billion

 

$19 billion

 

Est. Market Share(4)

 

4%

 

20%

 

5%

 

6%

 

Est. Market Position(5)

 

#1 in Multifamily

 

#1 Nationally

 

#1 in Utilities

 

#1 Full Service Distributor Nationally

 

Locations

 

40 Distribution Centers in U.S.; 2 in Canada

 

238 Branches in 44 U.S. States

 

97 Branches in 26 U.S. States; 4 in Canada

 

137 Branches in 31 U.S. States

 

Approx. SKUs

 

175,000

 

300,000

 

220,000

 

230,000

 

Select Products

 

Electrical and Lighting Items; Plumbing; HVAC Products; Appliances; Janitorial Supplies; Hardware; Kitchen and Bath Cabinets; Window Coverings; Textiles and Guest Amenities; Healthcare Maintenance; Water and Wastewater Treatment Products

 

Water and Wastewater Transmission Products Including Pipe (PVC, Ductile Iron, HDPE); Fittings; Valves; Fire Protection; Metering Systems; Storm Drain; Hydrants; Fusion Machine Rental; Valve Testing and Repair

 

Pole Line Hardware; Wire and Cable; Gear and Controls; Power Equipment; Fixtures and Lighting; Meters

 

Concrete Accessories and Chemicals; Tools; Engineered Materials and Fasteners; Safety; Erosion and Waterproofing


 

 

 


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Value-add Services

 

Next Day Delivery; Customized and Fabricated Products; Renovations and Installation Services; Technical Support; Customer Training; e-Commerce Solutions

 

Proprietary PC-based Estimating Software; Job Management Reports; Electronic Billing; On-demand Customer Reports; Part Number Interchange; Material Management Online ("MMO"); Database Depot; Distributor Managed Inventory ("DMI")

 

Emergency Response Solutions; Integrated Inventory and Sourcing Solutions; IT Solutions (Virtual Warehouse, EDI, Online Ordering, Custom Online Catalog); SmartGrid; Project Services (Material Take Offs and Laydown Yards); Tool Repair

 

Pre-Bid Assistance; Product Submittals; Value Engineering; Change Order Support; Rentals (Tilt-Up Braces, Forming/Shoring, Equipment); Fabrication Including Detailing and Engineering; Tool Repair; Electronic Billing

 

Customer Examples

 

Residential Property Owners and Managers; Hotels and Lodging Facilities; Assisted Living Facilities; Institutions; Water and Wastewater Treatment Facilities

 

Professional Contractors Serving Municipalities, Non-residential and Residential Construction

 

Municipalities and Co-ops; Investor Owned Utilities; Non-residential, Residential and Mechanical Contractors; Industrial (Industrial Manufactures, MRO, Oil and Gas Contractors)

 

Professional Contractors Serving Non-residential, Residential and Industrial Construction


 

 

 


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(1)
Adjusted EBITDA is our measure of profitability for our reportable segments as presented within our consolidated financial statements in accordance with GAAP. See Note 14 to our audited consolidated financial statements.
(2)
Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by Net sales.
(3)
Growth is equal to growth in Adjusted EBITDA over fiscal 2011 and excludes the 53rd week of fiscal 2012.
(4)
Management estimates based on market data and industry knowledge. Market share is based on our revenues relative to the estimated addressable market size.
(5)
Market position is based on our revenues relative to the estimated revenues of known competitors in addressable markets. Unless stated otherwise, market position refers to management's estimate of our market position in North America within the estimated addressable markets we serve.

 

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Our Market Sectors

        We offer a diverse range of products and services to the Maintenance, Repair & Operations, Infrastructure & Power and Specialty Construction market sectors in the U.S. and Canada. The markets in which we operate have a high degree of customer and supplier fragmentation, with customers that typically demand a high level of service and availability of a broad set of complex products from a large number of suppliers. These market dynamics make the distributor a critical element within the value chain.

        The table below summarizes our market sectors, business units and end-markets, including our net sales by end-market.

GRAPHIC


*
Excludes HD Supply Canada.

(1)
Management estimates based on market data and industry knowledge.

(2)
Crown Bolt, Creative Touch Interiors, Repair & Remodel and HD Supply Canada, in addition to Corporate and Eliminations, comprise "Corporate & Other."

(3)
Figures do not foot due to rounding. Excludes HD Supply Canada.

Maintenance, Repair & Operations

        In the Maintenance, Repair & Operations market sector, our Facilities Maintenance, Crown Bolt and Repair & Remodel business units serve customers across multiple industries by primarily delivering supplies and services needed to maintain and upgrade multifamily, hospitality, healthcare and institutional facilities. Facilities Maintenance and Crown Bolt are distribution center based models, while Repair & Remodel operates through retail outlets primarily serving cash and carry customers. We

 

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estimate that this market sector currently represents an addressable market in excess of $48 billion annually with demand driven primarily by ongoing maintenance requirements of a broad range of existing structures and traditional repair and remodeling construction activity across multiple industries. We believe Facilities Maintenance customers value speed and product availability over price. In addition, we believe that our leadership position in this sector positions us to capitalize on improving business conditions across our addressable market. For example, we expect to benefit from the relative stability of demand for MRO materials during periods of lower vacancy rates within multifamily housing and higher occupancy rates within hospitality.

Infrastructure & Power

        In the Infrastructure & Power market sector, Waterworks and Power Solutions support both established infrastructure and new projects by meeting demand for critical supplies and services used to build and maintain water systems and electrical power generation, transmission and distribution infrastructure. We estimate that this market sector currently represents an addressable market in excess of $45 billion annually with demand in the U.S. driven primarily by an aging and overburdened national infrastructure, general population growth trends and the need for cost-effective energy distribution. The broad geographic presence of our business units, through a regionally organized branch distribution network, reduces our exposure to economic factors in any single region. We believe we have the potential to capitalize on a substantial backlog of deferred projects that will need to be addressed in the coming years as a result of our customers delaying much needed upgrades or repairs during the recent economic downturn as well as a recovery in the non-residential and residential construction end-markets.

Specialty Construction

        In the Specialty Construction market sector, White Cap and Creative Touch Interiors ("CTI") serve professional contractors and trades by meeting their distinct and customized supply needs in non-residential, residential and industrial applications. We estimate that this market sector currently represents an addressable market in excess of $19 billion annually with demand driven primarily by residential construction, non-residential construction, and industrial and repair and remodeling construction spending. White Cap is our primary business unit serving this sector through the broad national presence of its regionally organized branch distribution network. CTI serves its market through a network of branches and design centers. We believe we are well-positioned to benefit from the recovery from historical lows within the non-residential and residential construction end-markets.

 

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Our Strengths

        We believe that we benefit significantly from the following competitive strengths:

        Collaborative results-driven culture and exacting execution driving growth.    Our culture of customer and market centricity, speed and precision, intense teamwork, process excellence and trusted relationships promotes continuous learning and drives our entire team to perform at the highest level. Rather than singularly investing and recognizing returns in one business unit, we leverage investments in one business unit across all of our other business units.

        Leadership positions with significant scale in large, fragmented markets.    Our Facilities Maintenance, Power Solutions, Waterworks and White Cap business units are leading North American industrial distributors in each of the addressable markets they serve based on sales. We believe that our size and competitive position as well as the fragmentation and competitive dynamics of the markets we serve make them opportunity-rich for profitable growth.

        Specialized business model delivering a customer-success based value proposition.    We offer our customers a breadth of products and services tailored to their specific needs. Our local presence and intimate understanding of our customers allow us to optimize our sales coverage model. We also provide differentiated, value-add services to our customers.

        We believe that the breadth of our product and service offering provides significant competitive advantages versus smaller local and regional competitors, helping us earn new business and secure repeat business.

        Strategic diversity across customers, suppliers, geographic footprint, products and end-markets.    We believe that by developing relationships with a diverse set of customers, we gain significant visibility into the future needs of our marketplace. Our broad base of approximately 500,000 customers has low concentration with no single customer representing more than 4% of our total sales and our top 10 customers representing only approximately 8% of our total sales during fiscal 2012. We maintain relationships with approximately 15,000 suppliers and maintain multiple suppliers for many of our products, thereby limiting the risk of product shortages. Our diverse geographic footprint of over 600 locations limits our dependence on any one region. We also believe that our diversity of end-market exposures is a key competitive strength, as our growth opportunities and ability to deploy resources are not constrained by any single end-market dynamic. We believe that we stand to benefit both from large end-markets that are characterized by stable long-term growth potential, as well as from end-markets that are exposed to cyclical dynamics.

        Highly efficient and well-invested operating platform driving high returns on invested capital.    Through a series of efficiency improvements and investments in the business, we believe we have transformed our business into a highly efficient platform which is well-positioned for future growth. Our operating efficiency is evidenced by the improvement in our return on invested capital, which has increased from 9% in 2009 to 36% in 2012. Return on invested capital is a non-GAAP metric. For additional detail, including a calculation of return on invested capital, see "Selected Consolidated Financial Data."

        Transformational management team.    HD Supply's executive management team has played a vital role in establishing our leading market share positions in each of our four main business units. Our CEO, Joseph DeAngelo, has over 25 years of global operating experience, including over 17 years in various leadership roles at General Electric Company ("GE") and The Home Depot, Inc. ("Home Depot"), including Chief Operating Officer. The rest of our executive management team has an average of more than 11 years at HD Supply and its predecessors, and brings decades of experience from leading companies. Consistent themes at all levels of our management are long-tenured experience, focus on team chemistry and active presence in the field, which promote effective change.

 

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        Highly integrated technology infrastructure.    We have an integrated IT infrastructure and a number of common technologies and centers of excellence. Our access to and ability to analyze real-time data provided by our integrated IT infrastructure allows us to take appropriate and swift action across our business units, which we believe differentiates us from our smaller competitors.

        Deep and strategically aligned relationships with suppliers.    We have developed extensive and long-term relationships with many of our suppliers. We believe our above-market growth provides our suppliers with their own growth opportunities. This plus a history of close coordination, positions us as a preferred distributor for our key suppliers. We believe this provides access to new products, custom training on specialized products and early awareness of upcoming projects. Further, because they enable us to source both standard and difficult-to-find products in a timely manner, our strategic supplier relationships make us the distributor of choice to many of our customers.

        Proven results.    As a result of our strengths discussed above, we have consistently achieved above-market organic growth across our four reportable segments. Organic sales growth for fiscal 2012 compared to the growth in the relevant addressable market is illustrated in the chart below.

GRAPHIC


(1)
We define the relevant addressable market as the estimated total dollars spent in markets where a reportable segment offers products. Market growth figures are management estimates of changes in total spending in the relevant addressable market derived from third-party data sources.

(2)
Segment growth based on organic sales growth (excluding acquisitions). HD Supply growth figures exclude the 53rd week of fiscal 2012.

 

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        In addition, we have consistently achieved strong operating leverage driven by our transformational execution, lean and dynamic organization, and strategic growth initiatives. Operating leverage for fiscal 2012 is illustrated in the chart below.

GRAPHIC


(1)
Segment growth based on sales and Adjusted EBITDA growth. Both growth figures include acquisitions and exclude the 53rd week of fiscal 2012.

 

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Our Strategy

        Our objective is to strengthen our competitive position, achieve above-market rates of profitable growth and increase shareholder value through the following key strategies:

        Be the First Choice.    Our aspiration to be the "First Choice" of customers, associates, suppliers and communities drives our strategy and defines our culture. We seek to strengthen existing customer relationships and cultivate new ones through our customer-centric approach and dedication to their success.

        Our dedication to providing superior work environments, experiences and opportunities supports our efforts to be the "First Choice" of the most qualified and motivated associates in the industry. Similarly, we believe that we maintain excellent relationships with our suppliers and strive to be their first call when choosing a go-to-market strategy for their products. Consistent with our local presence and focus, we actively invest in the communities in which we operate, supporting organizations, programs and events that foster community development both financially and through the volunteer efforts of our associates.

        Continue to invest in specific, high-return initiatives.    Over the past three years, we have invested more than $600 million into specific, targeted operating and growth initiatives driving profitability and efficient growth. We will continue to leverage these initiatives and invest in additional growth initiatives. We expect these initiatives will help us maintain above market, profitable growth rates.

        Capitalize on accelerating growth across our multiple and varied end-markets.    We have made significant investments and believe we can benefit from the recovery and growth in our end-markets. We have also strategically and operationally positioned ourselves to benefit from a recovery in our end-markets that are exposed to cyclical dynamics. We believe the maintenance, repair and operations market, infrastructure spending and the non-residential and residential construction markets are entering a series of inflection points which will accelerate in sequential, overlapping stages throughout the economic cycle, as they have historically. Additionally, we believe many of our customers delayed required upgrades or repairs during the recent economic downturn, and there is a substantial backlog of projects to be addressed in the coming years. We believe our ample supply capacity and significant operating leverage will result in growth across our various end-markets.

        Continue to invest in attracting, retaining and developing world-class talent.    To be the "First Choice," we will maintain and expand our already-strong talent base. We develop our employees through specialized training and learning tools. In addition, we deliver attractive opportunities to our associates while spreading knowledge and expertise across our entire organization through frequently redeploying top talent between business units. We believe these opportunities are superior to those offered by much of our competition, and help us develop, attract and retain world-class talent. Furthermore, our focus and culture have led to investments in a range of broader associate benefits, such as our "Be Well" program, through which our CEO has challenged each employee to achieve a specified level of physical health (as measured by body mass index and other health targets), which we track and reward across the organization.

        Continue our focus on operational excellence and speed and precision of execution.    Our gross margins have increased from 28.0% in fiscal 2009 to 28.9% in fiscal 2012 and our Selling, general and administrative expenses as a percentage of sales declined from 23.0% to 20.7% during the same time period. We emphasize sourcing, pricing discipline and working capital management across all of our business units. As a result of our discipline and ability to successfully leverage our fixed cost infrastructure, our financial performance has improved through the recent downturn. Our continued focus on operational excellence enables us to drive the speed and precision necessary to be the "First Choice."

 

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        Attract new customers and develop new market opportunities.    We believe the comprehensive nature of our operations across a project lifecycle facilitates extensive, shared market awareness among our business leaders. We believe this widespread market insight enhances our customer relationships as it allows us to partner with customers in understanding their specific needs and providing quality products and services. We intend to capitalize on our market awareness of new projects to maximize sales across all of our business units. Our four principal business units can provide the materials and tools necessary to construct buildings and infrastructure above and below the ground, while also supplying the components needed to keep the operations well maintained. We believe this is the "HD Supply Advantage," or our differentiated ability to "supply the products and services to build your city and keep it running."

        Supplement strong organic growth with "tuck-in" acquisitions in core and adjacent markets.    Our organic growth is complemented by select "tuck-in" acquisitions in core and adjacent markets to supplement our product set, geographic footprint and other capabilities. Our business development team selectively pursues acquisitions that are culturally compatible and meet our growth and business model criteria. As a result of our highly efficient operations, industry-leading IT systems, strategically aligned supplier relationships and broad distribution platform, there are opportunities to achieve substantial synergies in our acquisitions, and thereby reduce our effective (post-synergy) transaction multiples.


Ownership and Corporate Information

Equity Sponsor Overview

        On August 30, 2007, investment funds associated with Bain, Carlyle and CD&R (each as defined below and, collectively our "Equity Sponsors") formed HD Supply and entered into a stock purchase agreement with Home Depot pursuant to which Home Depot agreed to sell to HD Supply, or to a wholly-owned subsidiary of HD Supply, certain intellectual property and all of the outstanding common stock of HDS and the Canadian subsidiary, CND Holdings, Inc. In connection with the closing of this transaction, we entered into a stockholders agreement with certain of our shareholders, including the Equity Sponsors and Home Depot, which provides, among other things, that the Equity Sponsors are currently entitled to elect (or cause to be elected) nine out of ten of HD Supply's directors, which includes three designees of each Equity Sponsor.

        Also in connection with the closing of this transaction, HD Supply and HDS entered into consulting agreements with the Equity Sponsors (or their respective affiliates). As specified in the agreements, we expect to pay the Equity Sponsors a transaction fee of $13 million ($14 million if the underwriters exercise their option to purchase additional shares in full) and an aggregate fee to terminate the consulting agreements of approximately $18 million in connection with the consummation of this offering. The termination fee represents the estimated net present value of the payments due over the remaining term of the consulting agreements.

        After completion of this offering we expect that the Equity Sponsors will together hold approximately 59.5% of our common stock, assuming that the underwriters do not exercise their option to purchase additional shares. As a result, we expect to qualify as and elect to be a "controlled company" within the meaning of the corporate governance rules of The NASDAQ Stock Market LLC ("NASDAQ") following the completion of this offering. This election would allow us to rely on exemptions from certain corporate governance requirements otherwise applicable to NASDAQ-listed companies. See "Risk Factors—Risks Relating to Our Common Stock and This Offering—We expect to be a "controlled company" within the meaning of the NASDAQ rules and, as a result, we will qualify for, and currently intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements."

 

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        The Equity Sponsors are in the business of making investments in companies, and may from time to time in the future acquire controlling interests in businesses that complement or directly or indirectly compete with certain portions of our business. If the Equity Sponsors pursue such acquisitions in our industry, those acquisition opportunities may not be available to us.

        Bain Capital Partners, LLC.    Established in 1984, Bain Capital Partners, LLC (along with its associated investment funds, or any successor to its investment management business, "Bain") is one of the world's leading private investment firms. Bain's affiliated funds 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 (along with its associated investment funds, or any successor to its investment management business, "Carlyle") is a global alternative asset manager with $170 billion of assets under management in 113 active funds and 67 fund of fund vehicles as of December 31, 2012. Carlyle invests across four segments—Corporate Private Equity, Real Assets, Global Market Strategies and Solutions—in Africa, Asia, Australia, Europe, the Middle East, North America and South America. Carlyle employs more than 1,400 people in 33 offices across six continents. Select portfolio companies include: Nielsen, AMC, Allison Transmission, Axalta Coating Systems, and Getty Images.

        Clayton, Dubilier & Rice, LLC.    Founded in 1978, Clayton, Dubilier & Rice, LLC (along with its associated investment funds, or any successor to its investment management business, "CD&R") is a private equity firm composed of a combination of financial and operating executives pursuing an investment strategy predicated on building stronger, more profitable businesses. Since inception, CD&R has managed the investment of more than $18 billion in 56 U.S. and European businesses with an aggregate transaction value of approximately $90 billion. CD&R has a long history of investing in market-leading distribution businesses, including US Foods, the second largest broadline foodservice distributor in the U.S., Rexel, the leading distributor worldwide of electrical supplies, Diversey, a leading global manufacturer and distributor of commercial cleaning, sanitation and hygiene solutions, and AssuraMed, a specialty retailer and distributor of medical supplies.

 

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        The following chart illustrates our ownership, organizational and capital structure, including stock ownership percentages, after giving effect to this offering:

GRAPHIC


*
Does not give effect to outstanding options.

(1)
Has pledged all of the capital stock of HDS as security for our outstanding indebtedness.

(2)
Borrower of our outstanding indebtedness. See "Description of Certain Indebtedness."

(3)
Domestic operating subsidiaries are guarantors of our outstanding indebtedness. See "Description of Certain Indebtedness."

* * * * *

        HD Supply Holdings, Inc. is a Delaware corporation. Our principal executive offices are located at 3100 Cumberland Boulevard, Suite 1480, Atlanta, Georgia 30339, and our telephone number at that address is (770) 852-9000. Our website is www.hdsupply.com. Information on, and which can be accessed through, our website is not incorporated in this prospectus.

 

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Summary of Risk Factors

        Our business is subject to a number of risks of which you should be aware and carefully consider before making an investment decision. These risks are discussed in "Risk Factors", and include but are not limited to the following:

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

    decline in the new residential construction or non-residential construction markets;

    residential renovation and improvement activity levels may not return to historic levels;

    our ability to achieve or maintain profitability;

    our ability to compete effectively;

    our ability to timely and efficiently access products that meet our standards for quality;

    interruptions to the proper functioning of our IT systems or an inability to implement our IT initiatives;

    our ability to identify new products and product lines and integrate them into our distribution network;

    our substantial level of debt;

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

    securities or industry analysts may not publish research or may publish misleading or unfavorable research about our business; and

    fulfilling our obligations incident to being a public company.

 

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The Offering

Common stock offered by us

  53,191,489 shares

Common stock outstanding after the offering

 

183,770,155 shares

Option to purchase additional shares of common stock

 

The underwriters have a 30-day option to purchase an additional 7,978,723 shares of common stock from us.

Stock exchange symbol

 

"HDS"

Use of proceeds

 

We estimate that our net proceeds from the offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $1,156 million, based on an assumed initial public offering price of $23.50, the midpoint of the price range set forth on the cover page of this prospectus. We intend to use the proceeds of this offering, together with available cash, to:

 

redeem, repurchase or otherwise acquire or retire all $950 million of the outstanding January 2013 Senior Subordinated Notes (as defined below) and to pay accrued and unpaid interest thereon through the redemption date;

 

redeem, repurchase or otherwise acquire or retire $125 million of the outstanding October 2012 Senior Notes (as defined below) and to pay accrued and unpaid interest thereon through the redemption date; and

 

pay related fees and expenses. See "Use of Proceeds."

Risk factors

 

See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to invest in shares of our common stock.

Dividend policy

 

We do not expect to pay dividends on our common stock for the foreseeable future.

        The number of shares of our common stock to be outstanding immediately following this offering is based on the number of our shares of common stock outstanding as of May 5, 2013 but excludes:

    approximately 14.7 million shares of common stock issuable upon exercise of options outstanding as of May 5, 2013 at a weighted average exercise price of $12.97 per share; and

    14.5 million shares of common stock reserved for future issuance under our omnibus incentive plan and our employee stock purchase plan, which include (i) a number of shares of restricted stock to be determined based on the initial public offering price set forth on the cover of this prospectus with an aggregate grant date value of up to approximately $6.0 million dollars and (ii) up to approximately 900,000 shares of common stock issuable upon exercise of options with an exercise price equal to the initial public offering price set forth on the cover of this prospectus; in each case, which have been or which are expected to be granted to executive officers and employees at or prior to the date the registration statement, of which this prospectus forms a part, becomes effective.

        Unless otherwise indicated, all information in this prospectus:

    assumes a 1-for-2 reverse stock split of our common stock to be effected on June 12, 2013;

    assumes no exercise by the underwriters of their option to purchase additional shares; and

    gives effect to amendments to our certificate of incorporation and by-laws to be adopted upon the completion of this offering.

 

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Summary Consolidated Financial and Operating Data

        The following table presents our summary consolidated financial data, as of and for the periods indicated. The summary consolidated financial data as of and for the three months ended May 5, 2013 and April 29, 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of February 3, 2013 and January 29, 2012 and for the fiscal years ended February 3, 2013, January 29, 2012 and January 30, 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of January 30, 2011 are derived from our unaudited financial statements which are not included in this prospectus.

        This "Summary Consolidated Financial and Operating Data" should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical consolidated financial data may not be indicative of our future performance.

 
  Three Months Ended   Fiscal Year Ended  
 
  May 5, 2013   April 29, 2012   February 3, 2013   January 29, 2012   January 30, 2011  
 
  (Dollars in millions)
 

Consolidated Statement of Operations:

                               

Net sales

  $ 2,068   $ 1,836   $ 8,035   $ 7,028   $ 6,449  

Cost of sales

    1,470     1,313     5,715     5,014     4,608  
                       

Gross profit

    598     523     2,320     2,014     1,841  

Total operating expenses

    498     480     2,149     1,859     1,804  
                       

Operating income

    100     43     171     155     37  

Interest expense, net

    147     166     658     639     623  

Loss (gain) on extinguishment of debt

    40     220     709         2  

Other (income) expense, net

    1                 (3 )
                       

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

    (88 )   (343 )   (1,196 )   (484 )   (585 )

Provision (benefit) for income taxes

    43     33     3     79     28  
                       

Income (loss) from continuing operations

    (131 )   (376 )   (1,199 )   (563 )   (613 )

Income (loss) from discontinued operations, net of tax

        16     20     20     (6 )
                       

Net income (loss)

  $ (131 ) $ (360 ) $ (1,179 ) $ (543 ) $ (619 )
                       

 

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  Three Months Ended   Fiscal Year Ended  
 
  May 5, 2013   April 29, 2012   February 3, 2013   January 29, 2012   January 30, 2011  
 
  (Dollars in millions)
 

Balance sheet data (end of period):

                               

Cash and cash equivalents(1)

  $ 88   $ 125   $ 141   $ 111   $ 292  

Total assets(2)

    6,459     6,322     7,334     6,738     7,089  

Total debt, less current maturities(3)

    6,620     5,504     6,430     5,380     5,239  

Other financial data:

                               

Working capital(4)

  $ 1,199   $ 956   $ 1,120   $ 1,012   $ 1,176  

Adjusted working capital(5)

    1,121     839     942     983     894  

Cash interest expense(6)

    139     151     535     457     365  

Adjusted EBITDA(7)

    164     133     683     508     411  

Adjusted net income (loss)(7)

    (4 )   (43 )   7     (43 )   (68 )

Capital expenditures

    32     22     115     115     49  

Depreciation(8)

    26     23     96     85     99  

Amortization of intangibles

    34     60     243     244     244  

Pro forma data(9):

                               

Pro forma Interest expense

  $ 144         $ 576              

Pro forma Net income (loss)

    (87 )         (388 )            

Pro forma Adjusted net income (loss)(10)

    (1 )         (2 )            

Pro forma as adjusted data(11):

                               

Pro forma as adjusted Interest expense

  $ 114         $ 458              

Pro forma as adjusted net income (loss)

    (57 )         (270 )            

Pro forma as adjusted Adjusted net income (loss)(12)

    29           114              

Pro forma as adjusted Adjusted net income (loss) per share, basic(12)

  $ 0.16         $ 0.62              

Pro forma as adjusted Adjusted net income (loss) per share, diluted(12)

  $ 0.15         $ 0.60              

As adjusted Total debt, less current maturities

  $ 5,545                          

(1)
Cash and cash equivalents as of February 3, 2013 excludes $936 million of cash equivalents that were restricted for the redemption of debt.

(2)
Includes $936 million of Cash equivalents restricted for debt redemption for the fiscal year ended February 3, 2013.

 

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(3)
Includes capital leases and associated discounts and premiums. Excludes $10 million, $8 million, $899 million, $82 million and $10 million of Current installments of long-term debt for the three months ended May 5, 2013 and April 29, 2012 and the fiscal years ended February 3, 2013, January 29, 2012 and January 30, 2011, respectively.

(4)
Working capital represents current assets minus current liabilities.

(5)
Adjusted working capital represents current assets, excluding restricted and unrestricted cash and cash equivalents, minus current liabilities, excluding current maturities of long-term debt. Adjusted working capital is not a recognized term under GAAP and does not purport to be an alternative to Working capital. For additional detail, including a reconciliation from Working capital, the most directly comparable financial measure under GAAP, to Adjusted working capital for the periods presented, see "Selected Consolidated Financial Data."

(6)
Cash interest expense is not a recognized term under GAAP and does not purport to be an alternative to Interest expense. For additional detail, including a reconciliation from interest expense, the most directly comparable financial measure under GAAP, to cash interest expense for the periods, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)."

(7)
Adjusted EBITDA and Adjusted net income (loss) are not recognized terms under GAAP and do not purport to be alternatives to Net income (loss) as measures of operating performance. For additional detail, including a reconciliation from Net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA and Adjusted net income (loss) for the periods presented, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)."

(8)
Depreciation includes amounts recorded within cost of sales.

(9)
The pro forma data reflects the following financing transactions, as if they occurred at the beginning of the fiscal year ended February 3, 2013 (for further description of these financing transactions, see "Management Discussion and Analysis of Financial Condition and Results of Operations—External Financing"):

(i)
the modification of the Senior Term Facility on February 15, 2013;

(ii)
the issuance of $1,275 million aggregate principal amount of 7.500% Senior Notes due 2020 (the "February 2013 Senior Unsecured Notes") at par on February 1, 2013, and the use of net proceeds to repurchase all of the outstanding 14.875% Senior Notes due 2020 issued on April 12, 2012 in an aggregate principal amount of approximately $757 million (the "April 2012 Senior Unsecured Notes"), pay a $422 million make-whole premium calculated in accordance with the April 2012 Senior Unsecured Notes indenture and pay $37 million of uncapitalized paid-in-kind ("PIK") interest thereon through February 1, 2013;

(iii)
the issuance of $950 million aggregate principal amount of 10.500% Senior Subordinated Notes due 2021 (the "January 2013 Senior Subordinated Notes") at par on January 16, 2013, and the use of the net proceeds to redeem all of the remaining $889 million of HDS's outstanding 13.5% Senior Subordinated Notes due 2015 (the "2007 Senior Subordinated Notes") at a redemption price equal to 103.375% of the principal amount thereof and pay (together with $36 million of cash on hand) accrued and unpaid interest thereon through the redemption date;

(iv)
the issuance of $1,000 million aggregate principal amount of 11.500% Senior Notes due 2020 (the "October 2012 Senior Notes") at par on October 15, 2012, and the use of the net proceeds to redeem $930 million of the outstanding 2007 Senior Subordinated Notes at a

 

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      redemption price equal to 103.375% of the principal amount thereof and to pay $23 million of accrued interest;

    (v)
    the issuance of $950 million aggregate principal amount of the 8.125% Senior Secured First Priority Notes due 2019 (the "April 2012 First Priority Notes") at par on April 12, 2012;

    (vi)
    the issuance of $675 million aggregate principal amount of the 11.000% Senior Secured Second Priority Notes due 2020 (the "Second Priority Notes") at par on April 12, 2012;

    (vii)
    the issuance of the April 2012 Senior Unsecured Notes at par on April 12, 2012;

    (viii)
    entry into a new senior term facility (the "Senior Term Facility") maturing in 2017 and providing for term loans in an aggregate principal amount of $1,000 million;

    (ix)
    entry into a new senior asset-based lending facility (the "Senior ABL Facility") maturing in 2017 and providing for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under the borrowing base);

    (x)
    the use of the proceeds of the April 2012 First Priority Notes, the Second Priority Notes, the April 2012 Senior Unsecured Notes, the Senior Term Facility and the Senior ABL Facility to repay all amounts outstanding under HDS's then existing Senior Secured Credit Facility (the "2007 Senior Secured Credit Facility"), repay all amounts outstanding under HDS's then existing ABL Credit Facility (the "2007 ABL Credit Facility"), repurchase all of HDS's remaining outstanding 12.000% Senior Cash Pay Notes due 2014 (the 12.0% Senior Notes") and pay related fees and expenses; and

    (xi)
    the issuance of $300 million additional aggregate principal amount of its 8.125% First Priority Notes due 2019 (the "August 2012 First Priority Notes") at a premium of 107.500% on August 2, 2012, and the use of the net proceeds to reduce outstanding borrowings under the Senior ABL Facility.

    Pro Forma Interest Expense

    The following table provides details of the pro forma interest expense and cash interest expense for the fiscal year ended February 3, 2013, reflecting the above financing transactions as if they occurred at the beginning of the fiscal year ended February 3, 2013:

 
   
  Gross
Principal
  Interest
Rate
  Cash
Interest
Expense
  Amortization
of Deferred
Financing
Costs
  Amortization of
Original Issue
Discounts /
Premiums
  Total
Pro Forma
Interest
Expense
 

Senior ABL Facility(a)

  (ix)   $ 300     1.960 % $ 12   $ 8   $   $ 20  

Senior Term Facility

  (i), (viii)     1,000     4.500     45     10     5     60  

First Priority Notes

  (v), (xi)     1,250     8.125     102     3     (3 )   102  

Second Priority Notes

  (vi)     675     11.000     74     2         76  

October 2012 Senior Notes

  (iv)     1,000     11.500     115     2         117  

February 2013 Senior Unsecured Notes

  (ii)     1,275     7.500     96     3         99  

January 2013 Senior Subordinated Notes

  (iii)     950     10.500     100     2         102  
                                   

                  $ 544   $ 30   $ 2   $ 576  
                                   

    (a)
    Senior ABL Facility cash interest expense includes estimated letter of credit fees and unusued commitment fees.

 

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The following table provides details of the pro forma interest expense and cash interest expense for the three months ended May 5, 2013, reflecting the modification of the Senior Term Facility on February 15, 2013 and the redemption of $889 million of the 2007 Senior Subordinated Notes on February 8, 2013 as if they occurred at the beginning of the three months ended May 5, 2013:

 
   
  Gross
Principal
  Interest
Rate
  Cash
Interest
Expense
  Amortization
of Deferred
Financing
Costs
  Amortization of
Original Issue
Discounts /
Premiums
  Total
Pro Forma
Interest
Expense
 

Senior ABL Facility(a)

  (ix)   $ 490     1.950 % $ 3   $ 2   $   $ 5  

Senior Term Facility

  (i), (viii)     995     4.500     11     2     2     15  

First Priority Notes

  (v), (xi)     1,250     8.125     25     1     (1 )   25  

Second Priority Notes

  (vi)     675     11.000     19             19  

October 2012 Senior Notes

  (iv)     1,000     11.500     29     1         30  

February 2013 Senior Unsecured Notes

  (ii)     1,275     7.500     24     1         25  

January 2013 Senior Subordinated Notes

  (iii)     950     10.500     25             25  
                                   

                  $ 136   $ 7   $ 1   $ 144  
                                   

    (a)
    Senior ABL Facility cash interest expense includes estimated letter of credit fees and unused commitment fees.

    Pro Forma Net Income (Loss)

        The following table shows the calculation of pro forma Net income (loss):

 
  Three Months
Ended
May 5, 2013
  Fiscal Year
Ended
February 3, 2013
 

Net income (loss)

  $ (131 ) $ (1,179 )

Interest expense

    147     658  

Pro forma interest expense

    (144 )   (576 )

Loss on extinguishment of debt and debt modification charges

    41     709  
           

Pro forma Net income (loss)(a)

  $ (87 ) $ (388 )
           

    (a)
    The adjustments in the table do not reflect a tax impact as the Company maintains a 100% valuation allowance on its net operating loss carryforwards.

 

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    Pro Forma Adjusted Net Income (Loss)

        The following table shows the calculation of pro forma Adjusted net income (loss):

 
  Three Months
Ended
May 5, 2013
  Fiscal Year
Ended
February 3, 2013
 

Adjusted net income (loss)

  $ (4 ) $ 7  

Cash interest expense

    139     535  

Pro forma cash interest expense

    (136 )   (544 )
           

Pro forma Adjusted net income (loss)

  $ (1 ) $ (2 )
           

(10)
Pro forma Adjusted net income (loss) is defined as pro forma Net income (loss) less Income (loss) from discontinued operations, net of tax, further adjusted for certain non-cash items, net of tax. Pro forma Adjusted net income (loss) is not a recognized term under GAAP and does not purport to be an alternative to pro forma Net income (loss).


The following table presents a reconciliation of pro forma Net income (loss) to pro forma Adjusted net income (loss) for the periods presented:

 
  Three Months
Ended
May 5, 2013
  Fiscal Year
Ended
February 3, 2013
 

Pro forma Net income (loss)

  $ (87 ) $ (388 )

Less: Income (loss) from discontinued operations, net of tax

        20  
           

Pro forma Income (loss) from continuing operations

    (87 )   (408 )

Plus: pro forma Interest expense

    144     576  

Less: pro forma Cash interest expense

    (136 )   (544 )

Plus: Provision (benefit) for income taxes

    43     3  

Less: Cash income taxes

    (2 )   (1 )

Plus: Amortization of intangibles

    34     243  

Plus: Stock-based compensation, net of tax

    3     16  

Plus: Goodwill & other intangible asset impairment

        113  
           

Pro forma Adjusted net income (loss)

  $ (1 ) $ (2 )
           
(11)
The pro forma as adjusted data reflects (i) the sale by us of 53,191,489 shares of our common stock in this offering at an assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus), (ii) the use of the net proceeds therefrom as described in "Use of Proceeds" and (iii) the entry into an amendment to HDS's Senior ABL Facility as if such amendment occurred at the beginning of the applicable period. See "Description of Certain Indebtedness—Senior Credit Facilities." The pro forma as adjusted data included herein reflects a decrease in pro forma interest expense of $118 million and $30 million for the fiscal year ended February 3, 2013 and the three months ended May 5, 2013, respectively, as a result of the repurchase, redemption, or acquisition or retirement of $950 million of the outstanding January 2013 Senior Subordinated Notes, the repurchase, redemption, or acquisition or retirement of $125 million of the outstanding October 2012 Senior Notes and the amendment of the Senior ABL Facility, as if such repurchases and amendment occurred at the beginning of the applicable period. The pro forma as adjusted data does not reflect certain one-time expenses that the Company expects to incur in connection with this offering, including (i) a transaction fee of approximately $13 million ($14 million if the underwriters exercise their option to purchase additional shares in full) and an aggregate fee to terminate the consulting agreements of approximately $18 million, in each case payable to the Equity Sponsors in accordance with the

 

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    terms of the consulting agreements, (ii) an expected 3% premium payable in connection with the Company redeeming, repurchasing, or otherwise acquiring or retiring $950 million of the outstanding January 2013 Senior Subordinated Notes, (iii) an expected 11.5% premium payable in connection with the Company redeeming, repurchasing or otherwise acquiring or retiring $125 million of the outstanding October 2012 Senior Notes and (iv) certain advisory and service fees paid in connection with the offering.

    The following table provides the adjustments to pro forma interest expense and cash interest expense for the fiscal year ended February 3, 2013, reflecting the adjustments described above as if they occurred at the beginning of the fiscal year ended February 3, 2013:

 
  Gross
Principal
  Interest
Rate
  Cash
Interest
Expense
  Amortization
of Deferred
Financing
Costs
  Amortization of
Original Issue
Discounts /
Premiums
  Total
Pro Forma
Interest
Expense
 

Pro forma interest expense

              $ 544   $ 30   $ 2   $ 576  
                               

Reduction in interest expense:

                                     

Senior ABL Facility(a)

  $ 300     1.960 %   (2 )           (2 )

October 2012 Senior Notes(b)

    125     11.500     (14 )               (14 )

January 2013 Senior Subordinated Notes

    950     10.500     (100 )   (2 )       (102 )
                               

Pro forma as adjusted interest expense

              $ 428   $ 28   $ 2   $ 458  
                               

(a)
Senior ABL Facility cash interest expense includes estimated letter of credit fees and unused commitment fees.

(b)
Gross principal for the October 2012 Senior Notes reflects the aggregate principal amount we expect to redeem, repurchase or otherwise acquire or retire in connection with this offering.

    The following table provides the adjustments to pro forma interest expense and cash interest expense for the three months ended May 5, 2013, reflecting the adjustments described above as if they occurred at the beginning of the three months ended May 5, 2013:

 
  Gross
Principal
  Interest
Rate
  Cash
Interest
Expense
  Amortization
of Deferred
Financing
Costs
  Amortization of
Original Issue
Discounts /
Premiums
  Total
Pro Forma
Interest
Expense
 

Pro forma interest expense

              $ 136   $ 7   $ 1   $ 144  
                               

Reduction in interest expense:

                                     

Senior ABL Facility(a)

  $ 490     1.950 %   (1 )           (1 )

October 2012 Senior Notes(b)

    125     11.500     (4 )               (4 )

January 2013 Senior Subordinated Notes

    950     10.500     (25 )           (25 )
                               

Pro forma as adjusted interest expense

              $ 106   $ 7   $ 1   $ 114  
                               

(a)
Senior ABL Facility cash interest expense includes estimated letter of credit fees and unused commitment fees.

(b)
Gross principal for the October 2012 Senior Notes reflects the aggregate principal amount we expect to redeem, repurchase or otherwise acquire or retire in connection with this offering.

 

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    Pro Forma As Adjusted Net Income (Loss)

        The following table shows the calculation of pro forma as adjusted net income (loss):

 
  Three Months
Ended
May 5, 2013
  Fiscal Year
Ended
February 3, 2013
 

Pro forma net income (loss)

  $ (87 ) $ (388 )

Pro forma interest expense

    144     576  

Pro forma as adjusted interest expense

    (114 )   (458 )
           

Pro forma as adjusted net income (loss)(a)

  $ (57 ) $ (270 )
           

(a)
The adjustments in the table do not reflect a tax impact as the Company maintains a 100% valuation allowance on its net operating loss carryforwards.
(12)
Pro forma as adjusted Adjusted net income (loss) is defined as pro forma as adjusted net income (loss) less Income (loss) from discontinued operations, net of tax, further adjusted for certain non-cash items, net of tax. Pro forma as adjusted Adjusted net income (loss) is not a recognized term under GAAP and does not purport to be an alternative to pro forma as adjusted net income (loss).

The following table presents a reconciliation of pro forma as adjusted net income (loss) to pro forma as adjusted Adjusted net income (loss) for the periods presented:

 
  Three Months
Ended
May 5, 2013
  Fiscal Year
Ended
February 3, 2013
 

Pro forma as adjusted net income (loss)

  $ (57 ) $ (270 )

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

        20  
           

Pro forma Income (loss) from continuing operations

    (57 )   (290 )

Plus: pro forma as adjusted Interest expense

    114     458  

Less: pro forma as adjusted Cash interest expense

    (106 )   (428 )

Plus: Provision (benefit) for income taxes

    43     3  

Less: Cash income taxes

    (2 )   (1 )

Plus: Amortization of intangibles

    34     243  

Plus: Stock-based compensation, net of tax

    3     16  

Plus: Goodwill & other intangible asset impairment

        113  
           

Pro forma as adjusted Adjusted net income (loss)

  $ 29   $ 114  
           

Adjusted weighted average common shares outstanding (in thousands)

    183,770     183,752  

Effect of potentially dilutive stock options (in thousands)(a)

    5,700     5,580  
           

Adjusted weighted average common shares outstanding, diluted (in thousands)

    189,470     189,332  

Pro forma as adjusted Adjusted net income (loss) per share, basic

  $ 0.16   $ 0.62  
           

Pro forma as adjusted Adjusted net income (loss) per share, diluted

  $ 0.15   $ 0.60  
           

    (a)
    The calculation of dilution for potentially dilutive stock options utilizes an assumed fair value of $23.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. As of May 5, 2013 and February 3, 2013, 50,000 options were excluded from this calculation as to include them would have been anti-dilutive.

 

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RISK FACTORS

        Investing in our common stock 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 our consolidated financial statements and the related notes. If any of the following risks actually occur, our business, financial position, results of operations or cash flows could be materially adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.


Risks Relating to Our Business

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

        Demand for our products and services depends to a significant degree on spending in our markets. The level of activity in our 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 non-residential and residential construction markets include:

    changes in interest rates;

    unemployment rates;

    high foreclosure rates and unsold/foreclosure inventory;

    unsold new housing inventory;

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

    adverse changes in industrial economic outlook;

    a decrease in the affordability of homes;

    vacancy rates;

    capacity utilization;

    capital spending;

    commercial investment;

    corporate profitability;

    local, state and federal government regulation; and

    shifts in populations away from the markets that we serve.

        Infrastructure spending depends largely on interest rates, availability and commitment of public funds for municipal spending, capacity utilization and general economic conditions. In the maintenance, repair and operations market, the level of activity depends largely on the number of units and 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 non-residential, residential and industrial construction projects. The water and wastewater transmission products

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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 9%, respectively, in net sales for fiscal 2012.

        In addition, the 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. 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. There was a significant decline in economic growth, both in the United States and worldwide, 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. 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 may continue to be, adversely impacted by the decline in the new residential construction market since its peak in 2005.

        Most of our business units are dependent to varying degrees upon the new residential construction market. The homebuilding industry has undergone a significant decline from its peak in 2005. According to the U.S. Census Bureau, actual single family housing starts in the U.S. during 2012 increased 24% from 2011 levels, but remain 69% below their peak in 2005. 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 2012, as compared to peak levels. 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.

        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 market continues to experience a downturn which could materially and adversely affect our business, liquidity and results of operations.

        Many of our business units are dependent on the non-residential construction market and the slowdown and volatility of the United States economy in general is having an adverse effect on our business units that serve this industry. According to the U.S. Census Bureau, actual non-residential construction put-in-place in the U.S. during 2012 increased 8% from 2011 levels, but remains 12% lower than 2009 levels. From time to time, our business units that serve the non-residential construction market have also been adversely affected in various parts of the country by declines in non-residential

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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 business units that serve the non-residential construction market 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 business units 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 business units, the recent economic decline adversely affected our home improvement business units as well. According to Moody's Economy.com, residential improvement project spending in the United States increased 10% in 2012, but remains 14% below its peak in 2006. Continued high unemployment levels, 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.

        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 achieve profitability and if achieved, 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 2012, 2011 and 2010 we had net losses of $1,179 million, $543 million and $609 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 failure to:

    grow our revenue through organic growth or through acquisitions;

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

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

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

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

    effectively evaluate future inventory reserves;

    collect monies owed from customers;

    maintain relationships with our significant customers; and

    integrate any businesses acquired.

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

We may be required to take impairment charges relating to our operations which could impact our future operating results.

        As of February 3, 2013, 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. 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 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 resulted in no impairment of goodwill during fiscal 2012, fiscal 2011 or fiscal 2010. However, during the fourth quarter of fiscal 2012, our Crown Bolt business reached an agreement to amend and extend its strategic purchase agreement with Home Depot. While the amendment extends the agreement five years through fiscal 2019, retaining Crown Bolt as the exclusive supplier of certain products to Home Depot, it eliminates the minimum purchase requirement and adjusted future pricing. These changes resulted in a reduction of expected future cash proceeds from Home Depot. We, therefore, considered this amendment a triggering event and, as such, we performed an additional goodwill impairment analysis for Crown Bolt. As a result of the analysis, we recorded a non-cash, pre-tax goodwill impairment charge of $150 million during the fourth quarter of fiscal 2012.

        We cannot accurately predict the amount and timing of any impairment of assets. In addition to the goodwill impairment charge we recorded in fiscal 2012, we may be required to take additional goodwill or other asset impairment charges relating to certain of our reporting units and asset groups, if weakness in the non-residential and/or residential construction markets and/or the general U.S. economy continues. Similarly, certain company transactions, such as the amendment to the Crown Bolt strategic purchase agreement with Home Depot, could result in additional goodwill impairment charges being recorded. Any such non-cash charges would have an adverse effect on our financial results.

In view of the general economic downturn in the United States, we may be required to close under-performing locations.

        We may have to close under-performing branches from time to time as warranted by general economic conditions and/or weakness in the industries in which we operate. For example, during the economic downturn from 2007 through fiscal 2010, we closed branches and terminated employees as part of our restructuring plans during that timeframe. Any future 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 on favorable terms or at all. Also, 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 5 years, with 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. However, there can be no assurance that we will be able to renew our current or future leases on favorable terms or at all which could have an adverse effect on our ability to operate our business and on our results of operations. In addition, if we close or idle a facility, we generally remain committed to perform our obligations under the applicable lease, which include, 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 markets in which we operate are fragmented and highly competitive. Our competition includes other distributors 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.

        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 business units 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, contracts with municipalities are often awarded and renewed through periodic competitive bidding. We may not be successful in obtaining or renewing these contracts, which could be harmful to our business and financial performance.

Our competitors continue to consolidate, which could cause markets to become more competitive and could negatively impact our business.

        Our competitors in the United States and Canada are consolidating. This consolidation is being driven by customer needs and supplier capabilities, which could cause markets 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 this 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

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operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market share and growth prospects in these markets.

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

        Our ten largest customers generated approximately 8% of our Net sales in fiscal 2012, and our largest customer, Home Depot, accounted for approximately 4% 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, a significant customer's decision to purchase our products in significantly lower quantities than they have in the past, or deterioration in our relationship with any of them could significantly affect our financial condition, operating results and cash flows. For example, during fiscal 2012 our Crown Bolt business agreed to an amendment of its strategic purchase agreement with Home Depot. While the amendment extends the agreement five years through fiscal 2019, it eliminated the minimum purchase requirement and adjusts future pricing. These changes resulted in a reduction of expected future cash proceeds from Home Depot. We, therefore, considered this amendment a triggering event and, as such, we performed an additional goodwill impairment analysis for Crown Bolt. As a result of the analysis, we recorded a non-cash, pre-tax goodwill impairment charge of $150 million during the fourth quarter of fiscal 2012.

        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.

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 2012 was facilitated through the extension of credit to our customers whose ability to pay is dependent, in part, upon the economic strength of the industry in the areas where they operate. Our business units 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 certain of our customers, if the financial condition of our customers declines, our credit risk could increase. Significant contraction in our markets, 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.

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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 may 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, an increase in interest expense and amortization expense 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 for the newly acquired business;

    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 and 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; 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 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 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 non-residential and residential 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 common stock.

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The maintenance, repair and operations market, infrastructure spending and the non-residential and residential construction markets are seasonal and cyclical.

        Although weather patterns affect our operating results throughout the year, adverse weather historically has reduced construction and maintenance and repair activity in our first and fourth fiscal quarters. 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 geographic regions in which we operate, our business may be adversely affected. In addition, most of our business units 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 non-residential and 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 business units that experience such seasonality may vary significantly from period to period. We anticipate that fluctuations from period to period will continue in the future.

        Disruptions at distribution centers or shipping ports, due to events such as work stoppages, the flooding from Hurricane Sandy in 2012, as well as disruptions caused by tornadoes, blizzards and other storms from time to time, 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.

        In addition, infrastructure spending and the non-residential and residential construction 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.

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 business units, 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

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have not entered into any hedging arrangements that 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 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, 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 business units 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 inability to pass on material price increases to our customers could adversely impact 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. These suppliers manufacture and source products from the United States and abroad. Our ability 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 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 sources of supply are arranged.

        In addition, since some of the products that we distribute are 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. For example, if the government of China were to

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reduce or withdraw the tax benefits they provide our Chinese suppliers, the cost of some of our products may increase and our margins could be reduced. We expect more of our products will be imported in the future, which will further increase these risks. 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 business units. 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 product mix of sales. If actual results vary from this projected 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. Many of these transactions could expose us to risk in the event of the bankruptcy, receivership, default or similar event involving a counterparty. 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.

        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.

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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.

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. 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 business units would be adversely affected.

        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.

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 business units 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.

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

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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.

Our costs of doing business could increase as a result of changes in 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 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 (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 (loss).

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

We will need to begin disclosing our use of 'conflict minerals' in certain of the products we distribute, which will impose costs on us and could raise reputational and other risks.

        The SEC has promulgated final rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act, regarding disclosure of the use of certain minerals, known as 'conflict minerals', that are mined from the Democratic Republic of the Congo and adjoining countries. These new requirements will require due diligence efforts in fiscal year 2013 and thereafter, with initial disclosure requirements effective in May 2014. There will be costs associated with complying with these disclosure requirements, including costs to determine which of our products are subject to the new rules and the source of any 'conflict minerals' used in those products. In addition, the implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in those products. Also, we may face reputational challenges if we are unable to verify the origins for all metals used in products through the procedures we may implement. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as

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conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a distributor.

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 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 such claims in the past, which have been resolved without material financial impact. We are currently 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 traffic 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 suppliers, 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.

        From time to time, we are also involved in government inquiries and investigations, as well as class action, consumer, employment, tort proceedings 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 informed that the Office of the United States Attorney for the Northern District of New York is conducting an investigation related to the activities of certain disadvantaged business enterprises. In May of 2011, in connection with that investigation, the government executed a search of an entity from which Waterworks purchased assets shortly before the search was executed. On June 20, 2012, in connection with that same investigation, the government executed search warrants at two Waterworks branches. The Company was updated by the government on its investigation in March 2013 and continues to cooperate with the investigation. While the Company cannot predict the outcome, it believes a potential loss on this matter is reasonably possible but due to the current state of the investigation it is not able to estimate a range of potential loss.

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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 some of 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.

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. As a result, 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 chief executive officer and senior management team 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.

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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.

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 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 "Tax Cooperation Agreement") between HD Supply 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,

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the IRS has disallowed certain deductions claimed by us. In May 2012, the IRS issued a formal Revenue Agent's Report ("RAR") challenging approximately $299 million (excluding interest) of the cash refunds resulting from our NOL carrybacks. In January 2013, the IRS issued a revised RAR reducing the challenge to approximately $131 million (excluding interest) of cash refunds from our carrybacks. The issuance of the January 2013 revised RAR formally revoked the original May 2012 RAR and reduced the amount of cash refunds the IRS is currently challenging by $168 million. As of May 5, 2013, we estimate the interest to which the IRS would be entitled, if successful in all claims, to be approximately $16 million. If the IRS is ultimately successful with respect to the proposed adjustments, pursuant to the terms of the Tax Cooperation Agreement, we would be required to reimburse 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 $63 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 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 Tax Cooperation 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 NOL carryforwards could be limited if we experience an ownership change as defined in the Internal Revenue Code.

        As of May 5, 2013, we have U.S. federal NOL carryforwards of $2.25 billion ($787 million on a tax-effected basis), comprised of $1.82 billion ($636 million on a tax-effected basis) of U.S. federal NOL carryforwards at the end of fiscal 2012 and U.S. federal income tax losses of $430 million for the first quarter of fiscal 2013 ($151 million on a tax-effected basis). Such NOL carryforwards begin to expire in fiscal 2029. We also have significant state NOL carryforwards, which begin to expire in various years between fiscal 2013 and fiscal 2030. Our ability to deduct these NOL carryforwards against future taxable income could be 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 may result from transactions increasing the aggregate ownership of certain persons (or groups of persons) in our stock by more than 50 percentage points over a testing period (generally three years). While we do not expect this offering to result in an immediate ownership change, future direct or indirect changes in the ownership of our common stock, including sales or acquisitions of our common stock by certain stockholders and purchases and issuances of our common stock by us, some of which are not in our control, could result in an ownership change. Any limitation on the use of our NOL carryforwards could result in the payment of taxes above the amounts currently estimated 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

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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. Our expansion into new markets may present competitive, distribution and regulatory challenges that differ from current ones. We may be less familiar with the target customers and may face different or additional risks, as well as increased or unexpected costs, compared to existing operations. Growth into new markets may also bring us into direct competition with companies with whom we have little or no past experience as competitors. To the extent we are reliant upon expansion into new geographic, industry and product markets for growth and do not meet the new challenges posed by such expansion, our future sales growth could be negatively impacted, our operating costs could increase, and our business operations and financial results could be negatively affected.

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 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 "Business—Legal Proceedings."

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 products and services.

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

        Upon completion of this offering, we will be 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. 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.

        We have not been 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 last 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.

Future changes in financial accounting standards may significantly change our reported results of operations.

        GAAP is subject to interpretation by the Financial Accounting Standards Board ("FASB"), the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

        Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, revenue recognition, impairment of long-lived assets, leases and related economic transactions, intangibles, self-insurance, income taxes, property and equipment, litigation, and stock-based compensation are highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us (i) could require us to make changes to our accounting systems to implement these changes that could increase our operating costs and (ii) could significantly change our reported or expected financial performance.

        In an exposure draft issued in August 2010 and revised in May 2013, the FASB, together with the International Accounting Standards Board ("IASB"), proposed a comprehensive set of changes in

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accounting for leases. The lease accounting model contemplated by these changes is a "right of use" model that assumes that each lease creates an asset (the lessee's right to use the leased asset) and a liability (the future rent payment obligations) which should be reflected on a lessee's balance sheet to fairly represent the lease transaction and the lessee's related financial obligations. We conduct operations primarily under leases that are accounted for as operating leases, with no related assets and liabilities on our balance sheet. The proposed changes would require that substantially all of our operating leases be recognized as assets and liabilities on our balance sheet. The effective date has not been determined. Comments on the revised exposure draft are due by September 13, 2013. Changes in lease accounting rules or their interpretation, or changes in underlying assumptions, estimates or judgments by us could significantly change our reported or expected financial performance.


Risks Relating to Our Indebtedness

We have substantial debt and may incur substantial additional debt, which could adversely affect our financial health, reduce our profitability, limit our ability to obtain financing in the future and pursue certain business opportunities and reduce the value of your investment.

        As of May 5, 2013, we had an aggregate principal amount of $6,630 million of outstanding debt, net of unamortized discounts of $22 million and including unamortized premium of $20 million. In fiscal 2012 we incurred $658 million of interest expense.

        The amount of our debt or such other obligations could have important consequences for holders of our common stock, including, but not limited to:

    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 other purposes may be impaired in the future;

    we are exposed to the risk of increased interest rates because a portion of our borrowings 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 business units.

        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

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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.

        We cannot make assurances that we will be able to refinance any of our indebtedness, or obtain additional financing, particularly because of our high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt, 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, when due.

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 agreements governing our indebtedness 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. 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, our Senior ABL Facility provides a commitment of up to $1.5 billion subject to a borrowing base. As of May 5, 2013, we are able to borrow an additional $744 million under the Senior ABL Facility. If new debt is added to our current debt levels, the related risks that we now face could intensify. See "Description of Certain Indebtedness."

The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business and adversely affect the holders of our common stock.

        Our Senior ABL Facility and our Senior Term Facility (together, the "Senior Credit Facilities") contain covenants that, among other things, restrict or limit our subsidiaries' ability to:

    dispose of assets;

    incur additional indebtedness (including guarantees of additional indebtedness);

    prepay or amend our various 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 consensual restrictions on our subsidiaries' ability to pay dividends.

        The indentures governing our outstanding notes contain restrictive covenants that, among other things, limit the ability of our subsidiaries to:

    incur additional debt;

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    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 indebtedness, lenders having secured obligations, such as the lenders under the Senior Credit Facilities, could proceed against the collateral securing the secured obligations. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

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.

        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 we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering.

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 $15 million based on balances as of May 5, 2013 and excluding the effect of the interest rate floor on

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our Senior Term Facility. Assuming all revolving loans were fully drawn, each one percentage point increase in interest rates would result in a $25 million increase 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.

We may not be able to repurchase our existing 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 notes, including our First Priority Notes (as defined below), Second Priority Notes, October 2012 Senior Notes, February 2013 Senior Unsecured Notes and January 2013 Senior Subordinated Notes, until such notes are redeemed in full. 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. We may not be able to satisfy the obligations 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. Consequently, 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 our existing notes may be limited by law. In order to avoid the obligations to repurchase our existing notes and events of default and potential breaches of the credit agreement governing the Senior Term Facility, and the credit agreement governing the Senior ABL Facility, we may have to avoid certain change of control transactions that would otherwise be beneficial to us.


Risks Relating to Our Common Stock and This Offering

HD Supply is a holding company with no operations of its own, and it depends on its subsidiaries for cash to fund all of its operations and expenses, including to make future dividend payments, if any.

        Our operations are conducted almost entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to pay dividends is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans. We do not currently expect to declare or pay dividends on our common stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common stock, our credit facilities significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock.

Our common stock has no prior public market and the market price of our common stock may be volatile and could decline after this offering.

        Prior to this offering, there has not been a public market for our common stock, and an active market for our common stock may not develop or be sustained after this offering. We will negotiate the initial public offering price per share with the representatives of the underwriters and therefore, that price may not be indicative of the market price of our common stock after this offering. We cannot assure you that an active public market for our common stock will develop after this offering or, if it does develop, it may not be sustained. In the absence of a public trading market, you may not be able to liquidate your investment in our common stock. In addition, the market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:

    industry or general market conditions;

    domestic and international economic factors unrelated to our performance;

    changes in our customers' preferences;

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    new regulatory pronouncements and changes in regulatory guidelines;

    actual or anticipated fluctuations in our quarterly operating results;

    changes in securities analysts' estimates of our financial performance or lack of research and reports by industry analysts;

    action by institutional stockholders or other large stockholders (including the Equity Sponsors), including future sales;

    speculation in the press or investment community;

    investor perception of us and our industry;

    changes in market valuations or earnings of similar companies;

    announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;

    developments or disputes concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with intellectual property lawsuits we may initiate, or in which we may be named as defendants;

    failure to complete significant sales;

    any future sales of our common stock or other securities; and

    additions or departures of key personnel.

        In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price. The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company's securities, class action litigation has often been instituted against such company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management's attention and resources, which would harm our business, operating results and financial condition.

Future sales of shares by existing stockholders could cause our stock price to decline.

        Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Based on shares outstanding as of May 5, 2013, upon completion of this offering, we will have 183,770,155 outstanding shares of common stock (or 191,748,878 outstanding shares of common stock, assuming exercise of the underwriters' overallotment option in full). All of the shares sold pursuant to this offering will be immediately tradeable without restriction under the Securities Act unless held by "affiliates", as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock outstanding as of May 5, 2013 will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject, in certain cases, to applicable volume, means of sale, holding period and other limitations of Rule 144 or pursuant to an exception from registration under Rule 701 under the Securities Act, subject to the terms of the lock-up agreements entered into among us, the representatives of the underwriters and stockholders holding more than 99% of our common stock prior to this offering. Upon completion of this offering, we intend to file one or more registration statements under the Securities Act to register the shares of common stock to be issued under our equity compensation plans and, as a result, all shares of common stock acquired upon exercise of stock options granted under our plans will also be freely tradable under the Securities Act, subject to the terms of the lock-up agreements, unless purchased by our affiliates. As of May 5, 2013, there were stock options outstanding to purchase a total of approximately 14.7 million shares of our common stock. In addition, 14.5 million shares of common stock are reserved for future issuance under our omnibus incentive plan and our employee stock purchase plan.

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        We, stockholders holding more than 99% of our common stock prior to this offering, our executive officers and directors have agreed to a "lock-up," meaning that, subject to certain exceptions, neither we nor they will sell any shares of our common stock without the prior consent of the representatives of the underwriters, for 180 days after the date of this prospectus. Following the expiration of this 180-day lock-up period, approximately 130 million shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. See "Shares of Common Stock Eligible for Future Sale" for a discussion of the shares of common stock that may be sold into the public market in the future. In addition, certain of our significant stockholders may distribute shares that they hold to their investors who themselves may then sell into the public market following the expiration of the lock-up period. Such sales may not be subject to the volume, manner of sale, holding period and other limitations of Rule 144A. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. The representatives of the underwriters may, in their sole discretion and at any time, release all or any portion of the securities subject to lock-up agreements entered into in connection with this offering. See "Underwriting."

        In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement or employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

        The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If there is no coverage of our company by securities or industry analysts, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage; if one or more of these analysts downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

A few significant stockholders control the direction of our business. If the ownership of our common stock continues to be highly concentrated, it could prevent you and other stockholders from influencing significant corporate decisions.

        Following the completion of this offering, CD&R, Carlyle and Bain will each beneficially own approximately 19.8% of the outstanding shares of our common stock, assuming that the underwriters do not exercise their option to purchase additional shares. As a result, the Equity Sponsors will exercise significant influence over all matters requiring stockholder approval for the foreseeable future, including approval of significant corporate transactions, which may reduce the market price of our common stock.

        We entered into a stockholders agreement with certain of our stockholders, including the Equity Sponsors and Home Depot, which contains, among other things, provisions relating to our governance and certain unanimous approval rights. This stockholders agreement provides that the Equity Sponsors are currently entitled to elect (or cause to be elected) nine out of ten of HD Supply'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 our existing stockholders, including our Equity Sponsors, may conflict with the interests of our other stockholders. Our Board of Directors intends to adopt corporate governance

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guidelines that will, among other things, address potential conflicts between a director's interests and our interests. In addition, we intend to adopt a code of business conduct that, among other things, requires our employees to avoid actions or relationships that might conflict or appear to conflict with their job responsibilities or the interests of HD Supply and to disclose their outside activities, financial interests or relationships that may present a possible conflict of interest or the appearance of a conflict to management or corporate counsel. These corporate governance guidelines and code of business ethics will not, by themselves, prohibit transactions with our principal stockholders.

Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, will be expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price.

        Following this offering, we will be subject to the reporting and corporate governance requirements, the listing standards of NASDAQ and the Sarbanes-Oxley Act of 2002, that apply to issuers of listed equity, which will impose certain new compliance costs and obligations upon us. The changes necessitated by publicly listing our equity will require a significant commitment of additional resources and management oversight which will increase our operating costs. These changes will also place additional demands on our finance and accounting staff and on our financial accounting and information systems. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors' fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we will be required, among other things, to:

    define and expand the roles and the duties of our Board of Directors and its committees; and

    institute more comprehensive compliance, investor relations and internal audit functions.

        In particular, beginning with the year ending February 1, 2015 our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002. If our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal control over financial reporting (at such time as it is required to do so), investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, NASDAQ, or other regulatory authorities.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

        Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, our amended and restated certificate of incorporation and amended and restated by-laws will:

    authorize the issuance of "blank check" preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;

    establish a classified Board of Directors, as a result of which our board will be divided into three classes, with each class serving for staggered three-year terms, which prevents stockholders from electing an entirely new Board of Directors at an annual meeting;

    limit the ability of stockholders to remove directors if the Sponsors collectively cease to own more than 50% of our voting common stock;

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    provide that vacancies on the Board of Directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;

    prohibit stockholders from calling special meetings of stockholders if the Sponsors collectively cease to own more than 50% of our voting common stock;

    prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders if the Sponsors collectively cease to own more than 50% of our voting common stock;

    establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

    require the approval of holders of at least 75% of the outstanding shares of our voting common stock to amend the by-laws and certain provisions of the certificate of incorporation if the Sponsors collectively cease to own more than 50% of our common stock.

        These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. See "Description of Capital Stock—Anti-Takeover Effects of our Certificate of Incorporation and By-laws."

        Our amended and restated certificate of incorporation and amended and restated by-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.

Investors purchasing common stock in this offering will experience immediate and substantial dilution as a result of this offering and future equity issuances.

        If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the book value of your stock, because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. The net tangible deficit per share, calculated as of May 5, 2013 and after giving effect to the offering (assuming an initial public offering price of $23.50 per share, the midpoint of the price range set forth on the cover page of this prospectus), is $22.54. Investors purchasing common stock in this offering will experience immediate and substantial dilution of $46.04 a share, based on an initial public offering price of $23.50, which is the midpoint of the price range set forth on the cover page of this prospectus. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering. In addition, if the underwriters exercise their over-allotment option, or if we issue additional equity securities in the future, investors purchasing common stock in this offering will experience additional dilution. See "Dilution."

We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

        We do not intend to declare and pay dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

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We expect to be a "controlled company" within the meaning of the NASDAQ rules and, as a result, we will qualify for, and currently intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

        After completion of this offering we expect that our Equity Sponsors will hold more than 50% of our common stock. If that occurs, we expect to qualify as a "controlled company" within the meaning of the corporate governance rules of NASDAQ. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including:

    the requirement that a majority of the board of directors consist of independent directors;

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities, or otherwise have director nominees selected by vote of a majority of the independent directors;

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and

    the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

        Accordingly, we intend to rely on exemptions from certain corporate governance requirements. As a result, we may not have a majority of independent directors, our compensation committee and nominating and corporate governance committee may not consist entirely of independent directors and the board committees may not be subject to annual performance evaluations. Additionally, we are only required to have one independent audit committee member upon the listing of our common stock on NASDAQ, a majority of independent audit committee members within 90 days from the date of listing and all independent audit committee members within one year from the date of listing. Consequently, you will not have the same protections afforded to stockholders of companies that are subject to all of NASDAQ corporate governance rules and requirements. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

        In addition, we are a party to a stockholders agreement pursuant to which the Equity Sponsors currently have the ability to cause the election of a majority of our Board. Under the terms of the amended and restated stockholders agreement, the affiliates of the Equity Sponsors who are stockholders of HD Supply are entitled to elect (or cause to be elected) nine out of ten of our directors, which will include three designees of each Equity Sponsor. The tenth director is our Chief Executive Officer. The Equity Sponsors, through their stockholder affiliates, will have control over matters requiring stockholder approval and our business. See "Certain Relationships and Related Party Transactions—Stockholders agreement and stockholder arrangements." The concentrated holdings of funds affiliated with the Equity Sponsors, certain provisions of the amended and restated stockholders agreement and the majority of the board being comprised of designees of the Equity Sponsors may result in a delay or the deterrence of possible changes in control of our company, which may reduce the market price of our common stock. The interests of the Equity Sponsors may not always coincide with the interests of the other holders of our common stock. The Equity Sponsors are in the business of making investments in companies, and may from time to time in the future acquire controlling interests in businesses that complement or directly or indirectly compete with certain portions of our business. If the Equity Sponsors pursue such acquisitions in our industry, those acquisition opportunities may not be available to us. We urge you to read the discussions under the headings "Certain Relationships and Related Party Transactions" and "Security Ownership of Certain Beneficial Owners and Management" for further information about the equity interests held by the Equity Sponsors.

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USE OF PROCEEDS

        Based upon an assumed initial public offering price of $23.50 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering of approximately $1,156 million, after deducting estimated underwriting discounts and commissions in connection with this offering and estimated offering expenses payable by us of $35 million. See "Underwriting."

        We intend to use the proceeds of this offering to:

    redeem, repurchase or otherwise acquire or retire all $950 million of the outstanding January 2013 Senior Subordinated Notes and to pay accrued and unpaid interest thereon through the redemption date;

    redeem, repurchase or otherwise acquire or retire $125 million of the outstanding October 2012 Senior Notes and to pay accrued and unpaid interest thereon through the redemption date; and

    pay related fees and expenses, including the expected payment to the Equity Sponsors of a transaction fee of approximately $13 million ($14 million if the underwriters exercise their option to purchase additional shares in full) and an aggregate fee to terminate the consulting agreements of approximately $18 million in connection with the consummation of this offering.

        The terms of the indenture governing the January 2013 Senior Subordinated Notes provide that at any time and from time to time after July 31, 2013 and on or before July 31, 2014, HDS may at its option redeem January 2013 Senior Subordinated Notes in an aggregate principal amount equal to up to 100% of the January 2013 Senior Subordinated Notes with funds in an equal aggregate amount not exceeding the aggregate proceeds of any one or more qualified public offering, at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest. The January 2013 Senior Subordinated Notes mature on January 15, 2021 and bear interest at a rate of 10.50% per annum. HDS issued the January 2013 Senior Subordinated Notes at par on January 16, 2013, and used the net proceeds of their issuance to redeem all of the remaining $889 million of HDS's outstanding 2007 Senior Subordinated Notes at a redemption price equal to 103.375% of the principal amount thereof and pay (together with $36 million of cash on hand) accrued and unpaid interest thereon through the redemption date.

        The terms of the indenture governing the October 2012 Senior Notes provide that at any time and from time to time prior to October 15, 2015, HDS may at its option redeem October 2012 Senior Notes in an aggregate principal amount equal to up to 35% of original aggregate principal amount of the October 2012 Senior Notes with funds in an equal aggregate amount not exceeding the aggregate proceeds of any one or more equity offerings, at a redemption price equal to 111.50% of the principal amount thereof, plus accrued and unpaid interest. The October 2012 Senior Notes mature on July 15, 2020 and bear interest at a rate of 11.50% per annum. HDS issued the October 2012 Senior Notes at par on October 15, 2012, and used the net proceeds of their issuance to redeem a portion of HDS's outstanding 2007 Senior Subordinated Notes at a redemption price equal to 103.375% of the principal amount thereof and pay accrued and unpaid interest thereon through the redemption date.

        In connection with this offering, we intend either to issue a notice of redemption to holders of the outstanding January 2013 Senior Subordinated Notes and October 2012 Senior Notes or to repurchase or otherwise acquire or retire January 2013 Senior Subordinated Notes and October 2012 Senior Notes. This prospectus does not constitute a notice of redemption under the indenture governing the January 2013 Senior Subordinated Notes or the October 2012 Senior Notes nor an offer to tender for, or purchase, any January 2013 Senior Subordinated Notes, October 2012 Senior Notes or any other security.

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        A $1.00 increase or decrease in the assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease the net proceeds to us from this offering by $50 million assuming the number of shares offered by us remains the same and after deducting estimated underwriting discounts and commission and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease the net proceeds to us to us by $22 million, assuming no change in the assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

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DIVIDEND POLICY

        We do not currently expect to declare or pay dividends on our common stock for the foreseeable future. Instead, we intend to retain earnings to finance the growth and development of our business and for working capital and general corporate purposes. Our ability to pay dividends to holders of our common stock is limited by our ability to obtain cash or other assets from our subsidiaries. Further, the covenants in the agreements governing our existing indebtedness, including our Senior Credit Facilities, significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. Any payment of dividends will be at the discretion of our Board of Directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that our Board of Directors may deem relevant.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization on a consolidated basis as of May 5, 2013:

    on an actual basis; and

    on an as adjusted basis to give effect to (i) the sale by us of 53,191,489 shares of our common stock in this offering at an assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) and (ii) the use of the net proceeds therefrom as described in "Use of Proceeds."

        You should read this table in conjunction with the sections of this prospectus entitled "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Certain Indebtedness" and our consolidated financial statements and related notes included elsewhere in this prospectus.

 
  As of May 5, 2013  
 
  Actual   As Adjusted(1)  
 
  (Dollars in millions, except
share and per share
amounts)

 

Cash and cash equivalents

  $ 88   $ 93  
           

Debt:

             

Senior ABL Facility

  $ 490   $ 490  

Senior Term Facility, net of amortized discount of $22 million as of May 5, 2013

    970     970  

First Priority Notes, including unamortized premium of $20 million as of May 5, 2013

    1,270     1,270  

Second Priority Notes

    675     675  

October 2012 Senior Unsecured Notes

    1,000     875  

February 2013 Senior Unsecured Notes

    1,275     1,275  

January 2013 Senior Subordinated Notes

    950      
             

Total Long Term Debt (including current portion)

  $ 6,630   $ 5,555  
           

Stockholders' equity (deficit):

             

Common stock, par value $0.01 per share, 1,000,000,000 shares authorized: (i) Actual: 130,584,166 shares issued and 130,578,666 shares outstanding and (ii) As adjusted: 183,775,655 shares issued and 183,770,155 shares outstanding

  $ 1   $ 2  

Preferred stock, par value $0.01 per share, 100,000,000 shares authorized; no shares issued and outstanding, Actual and As Adjusted

         

Additional paid-in capital

    2,698     3,853  

Accumulated deficit

    (4,416 )   (4,476 )

Accumulated other comprehensive loss

    (3 )   (3 )
             

Total stockholders' equity (deficit)

  $ (1,720 ) $ (624 )
           

Total capitalization

  $ 4,910   $ 4,931  
           

(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, our as adjusted cash and cash equivalents, additional paid-in capital and stockholders' equity by $50 million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting estimated underwriting

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    discounts and commissions and estimated offering expenses. Each 1,000,000 increase or decrease in the number of shares offered by us would increase or decrease, as applicable, as our adjusted cash and cash equivalents, additional paid-in capital and stockholders' equity by $22 million assuming no change in the assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

            The share information as of May 5, 2013 shown in the table above excludes:

    approximately 14.7 million shares of common stock issuable upon exercise of options outstanding as of May 5, 2013 at a weighted average exercise price of $12.97 per share; and

    14.5 million shares of common stock reserved for future issuance under our omnibus incentive plan and our employee stock purchase plan.

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DILUTION

        If you invest in our common stock, the book value of your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering.

        Our net tangible deficit as of May 5, 2013 was $5,298 million, and net tangible deficit per share was $40.57. Net tangible deficit per share before the offering has been determined by dividing net tangible deficit (total book value of tangible assets less total liabilities) by the number of shares of common stock outstanding at May 5, 2013, after giving effect to a 1-for-2 reverse stock split of our common stock effected on June 12, 2013.

        After giving effect to the sale of shares of our common stock in this offering at an assumed initial public offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible deficit at May 5, 2013 would have been $4,141 million, or $22.54 per share. This represents an immediate decrease in net tangible deficit per share of $18.03 to the existing stockholders and dilution in net tangible book value per share of $46.04 to new investors who purchase shares in this offering. The following table illustrates this per share dilution to new investors:

Assumed initial public offering price per share

        $ 23.50  

Net tangible deficit per share as of May 5, 2013

  $ (40.57 )      

Increase per share attributable to this offering

    18.03        
             

Net tangible deficit, as adjusted to give effect to this offering

          (22.54 )
             

Dilution in net tangible deficit to new investors in this offering

        $ 46.04  
             

        A $1.00 increase or decrease in the assumed initial offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease our net tangible deficit as adjusted to give effect to this offering by $0.28 per share, assuming that the number of shares offered by us set forth on the cover page of this prospectus remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease our net tangible deficit as adjusted to give effect to this offering by $0.25 per share, assuming the assumed initial offering price of $23.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        The following table summarizes, as of May 5, 2013, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering:

 
  Shares Purchased   Total Consideration    
 
 
  Average
Price
Per Share
 
 
  Number   Percent   Amount   Percent  
 
  (Shares in thousands)
  (Dollars in millions)
   
 

Existing stockholders

    130,579     71.1 % $ 2,611     67.6 % $ 19.99  

New investors

   
53,191
   
28.9

%
 
1,250
   
32.4
 
$

23.50
 
                       

Total

    183,770     100 % $ 3,861     100 % $ 21.01  
                       

        The share information as of May 5, 2013 shown in the table above excludes:

    approximately 14.7 million shares of common stock issuable upon exercise of options outstanding as of May 5, 2013 at a weighted average exercise price of $12.97 per share; and

    14.5 million shares of common stock reserved for future issuance under our omnibus incentive plan and our employee stock purchase plan.

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SELECTED CONSOLIDATED FINANCIAL DATA

        The following table presents our summary consolidated financial data, as of and for the periods indicated. The selected consolidated financial data as of and for the three months ended May 5, 2013 and April 29, 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of February 3, 2013 and January 29, 2012 and for the fiscal years ended February 3, 2013, January 29, 2012 and January 30, 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of January 30, 2011 and as of, and for, the fiscal years ended January 31, 2010 and February 1, 2009 are derived from our unaudited consolidated financial statements which are not included in this prospectus.

        This "Selected Consolidated Financial Data" should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes included elsewhere in this prospectus. Our consolidated financial data may not be indicative of our future performance.

 
  Three Months Ended   Fiscal Year Ended  
 
  May 5,
2013
  April 29,
2012
  February 3,
2013
  January 29,
2012
  January 30,
2011
  January 31,
2010
  February 1,
2009
 
 
  (Dollars in millions, except share and per share data)
 

Consolidated statement of operations data:

                                           

Net sales

  $ 2,068   $ 1,836   $ 8,035   $ 7,028   $ 6,449   $ 6,313   $ 8,198  

Cost of sales

    1,470     1,313     5,715     5,014     4,608     4,545     5,980  
                               

Gross profit

    598     523     2,320     2,014     1,841     1,768     2,218  

Operating expenses:

                                           

Selling, general and administrative

    439     397     1,661     1,532     1,455     1,453     1,770  

Depreciation and amortization

    59     83     336     327     341     359     374  

Restructuring

                    8     21     31  

Goodwill and other intangible asset impairment

            152             219     867  
                               

Total operating expenses

    498     480     2,149     1,859     1,804     2,052     3,042  
                               

Operating income (loss)

    100     43     171     155     37     (284 )   (824 )

Interest expense

    147     166     658     639     623     602     644  

Interest income

                            (3 )

Loss (gain) on extinguishment of debt

    40     220     709         2     (200 )    

Other (income) expense, net

    1                 (3 )   (8 )   12  
                               

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

    (88 )   (343 )   (1,196 )   (484 )   (585 )   (678 )   (1,477 )

Provision (benefit) for income taxes

    43     33     3     79     28     (198 )   (329 )
                               

Income (loss) from continuing operations

    (131 )   (376 )   (1,199 )   (563 )   (613 )   (480 )   (1,148 )

Income (loss) from discontinued operations, net of tax

        16     20     20     (6 )   (34 )   (107 )
                               

Net income (loss)

  $ (131 ) $ (360 ) $ (1,179 ) $ (543 ) $ (619 ) $ (514 ) $ (1,255 )
                               

Weighted Average Common Shares Outstanding

                                           

Basic and Diluted

    130,578,670     130,555,360     130,561,078     130,557,173     130,521,886     130,485,625     130,485,625  

Basic and Diluted Earnings Per Share:

                                           

Income (loss) from Continuing Operations

  $ (1.00 ) $ (2.88 ) $ (9.18 ) $ (4.31 ) $ (4.70 ) $ (3.68 ) $ (8.80 )

Income (loss) from Discontinued Operations

  $   $ 0.12   $ 0.15   $ 0.15   $ (0.05 ) $ (0.26 ) $ (0.82 )
                               

Net income (loss)

  $ (1.00 ) $ (2.76 ) $ (9.03 ) $ (4.16 ) $ (4.74 ) $ (3.94 ) $ (9.62 )
                               

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  Three Months Ended   Fiscal Year Ended  
 
  May 5,
2013
  April 29,
2012
  February 3,
2013
  January 29,
2012
  January 30,
2011
  January 31,
2010
  February 1,
2009
 
 
  (Dollars in millions, except share and per share data)
 

Balance sheet data (end of period):

                                           

Cash and cash equivalents(1)

  $ 88   $ 125   $ 141   $ 111   $ 292   $ 539   $ 771  

Total assets(2)

    6,459     6,322     7,334     6,738     7,089     7,845     9,088  

Total debt, less current maturities(3)

    6,620     5,504     6,430     5,380     5,239     5,765     6,046  

Total stockholders' equity (deficit)

    (1,720 )   (780 )   (1,591 )   (428 )   96     688     1,175  

Other financial data:

                                           

Working capital(4)

  $ 1,199   $ 956   $ 1,120   $ 1,012   $ 1,176   $ 1,925   $ 2,071  

Adjusted working capital(5)

    1,121     839     942     983     894     1,396     1,310  

Cash interest expense(6)

    139     151     535     457     365     363     397  

Adjusted EBITDA(7)

    164     133     683     508     411     343     476  

Adjusted net income (loss)(7)

    (4 )   (43 )   7     (43 )   (68 )   (166 )   (186 )

Capital expenditures

    32     22     115     115     49     58     77  

Depreciation(8)

    26     23     96     85     99     121     130  

Amortization of intangibles

    34     60     243     244     244     243     251  

Return on invested capital(9)

    35.8 %   26.7 %   36.0 %   24.6 %   16.2 %   9.0 %   15.0 %

Statement of cash flows data:

                                           

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

  $ (557 ) $ (264 ) $ (681 ) $ (165 ) $ 551   $ 69   $ 548  

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

    905     440     (800 )   (6 )   (45 )   (41 )   37  

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

    (401 )   (163 )   1,511     (10 )   (755 )   (263 )   86  

(1)
Cash and cash equivalents as of February 3, 2013 excludes $936 million of cash equivalents that were restricted for the redemption of debt.

(2)
Includes $936 million of Cash equivalents restricted for debt redemption for the fiscal year ended February 3, 2013.

(3)
Includes capital leases and associated discounts and premiums. Excludes $10 million, $8 million, $899 million, $82 million, $10 million, $10 million and $10 million of Current installments of long-term debt for the three months ended May 5, 2013 and April 29, 2012 and the fiscal years ended February 3, 2013, January 29, 2012, January 30, 2011, January 31, 2010 and February 1, 2009, respectively.

(4)
Working capital represents current assets minus current liabilities.

(5)
Adjusted working capital represents current assets, excluding restricted and unrestricted cash and cash equivalents, minus current liabilities, excluding current maturities of long-term debt. Adjusted working capital is not a recognized term under GAAP and does not purport to be an alternative to Working capital. Management believes that Adjusted working capital is useful in analyzing the cash flow and working capital needs of the Company. We exclude restricted and unrestricted cash and cash equivalents and current maturities of long-term debt to evaluate the investment in working capital required to support our business independent of capital structure and financing decisions. For the reconciliation of Working capital, the most directly comparable financial measure under GAAP, to Adjusted working capital for the periods presented, see the table on Return on invested capital within footnote (9) below.

(6)
Cash interest expense is not a recognized term under GAAP and does not purport to be an alternative to interest expense. For additional detail, including a reconciliation from interest expense, the most directly comparable financial measure under GAAP, to cash interest expense for the periods, See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)."

(7)
Adjusted EBITDA and Adjusted net income (loss) are not recognized terms under GAAP and do not purport to be an alternative to net income (loss) as measures of operating performance. For additional detail, including a reconciliation from net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA and Adjusted net income (loss) for the periods presented, See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)."

(8)
Depreciation includes amounts recorded within cost of sales.

(9)
Return on invested capital ("ROIC") is not a recognized term under GAAP. We believe ROIC is a meaningful metric for investors because it measures how effectively the Company uses capital to generate operating income.

    We define ROIC as operating income for the four most recently completed fiscal quarters, adjusted for certain non-recurring items and stock-based compensation plus the amortization of intangibles, on a tax-effected basis, as a percent of average total invested capital. Average total invested capital is the average of property and equipment, net, plus Adjusted working capital and certain other assets and liabilities for the last five fiscal quarters. We include in ROIC the amounts related to the businesses we disposed of, and reflect as discontinued operations, for the periods in which we owned them. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used

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    by our management to calculate ROIC may differ from the methods other companies use to calculate their ROIC. We encourage you to understand the methods used by other companies to calculate ROIC before comparing their ROIC to ours.

    The following table presents the calculation of ROIC for the periods presented:

 
  Period Ended   Fiscal Year Ended  
 
  May 5,
2013
  April 29,
2012
  February 3,
2013
  January 29,
2012
  January 30,
2011
  January 31,
2010
  February 1,
2009
 
 
  (Dollars in millions)
 

After-tax return:

                                           

Operating income (loss)

    228     190     171     155     37     (284 )   (824 )

Adjustments:

                                           

Amortization of intangibles

    217     243     243     244     244     243     251  

Stock-based compensation(i)

    14     21     16     20     17     18     14  

Management fee and related expenses paid to Equity Sponsors(ii)

    5     5     5     5     5     5     6  

Restructuring charge(iii)

                    8     21     32  

Goodwill and other intangible asset impairment(iv)

    152         152             219     867  

Other

                (1 )            

Impact of discontinued operations(v)

        33     8     34     11     1     112  
                               

Pre-tax return

    616     492     595     457     322     223     458  

Tax rate(vi)

    39 %   39 %   39 %   39 %   39 %   39 %   39 %

Tax expense

    (240 )   (192 )   (232 )   (178 )   (126 )   (87 )   (179 )
                               

After-tax return

    376     300     363     279     196     136     279  
                               

                                           

Total invested capital (end of period):

                                           

Current assets

    2,309     2,092     3,163     2,326     2,381     2,802     3,413  

Current liabilities

    (1,110 )   (1,136 )   (2,043 )   (1,314 )   (1,205 )   (877 )   (1,342 )

Working capital

    1,199     956     1,120     1,012     1,176     1,925     2,071  

Cash and cash equivalents, including restricted cash

    (88 )   (125 )   (1,077 )   (111 )   (292 )   (539 )   (771 )

Short-term debt(vii)

    10     8     899     82     10     10     10  
                               

Adjusted working capital

    1,121     839     942     983     894     1,396     1,310  

Property and equipment, net

    397     370     395     398     390     453     545  

Other assets

    175     122     165     128     176     188     251  

Deferred tax liabilities

    (106 )   (109 )   (104 )   (111 )   (101 )   (203 )   (194 )

Other liabilities

    (343 )   (353 )   (348 )   (361 )   (448 )   (312 )   (331 )
                               

Total invested capital

    1,244     869     1,050     1,037     911     1,522     1,581  
                               

Average total invested capital(viii)

    1,050     1,126     1,009     1,134     1,212     1,514     1,857  
                               

Return on invested capital

   
35.8

%
 
26.7

%
 
36.0

%
 
24.6

%
 
16.2

%
 
9.0

%
 
15.0

%
                               

(i)
Represents the stock-based compensation costs for stock options.

(ii)
We entered into consulting agreements whereby we have agreed to pay the Equity Sponsors a $4.5 million annual aggregate management fee and related expenses through August 2017. As specified in the agreements, we expect to pay the Equity Sponsors a transaction fee of approximately $13 million ($14 million if the underwriters exercise their option to purchase additional shares in full) and an aggregate fee to terminate the consulting agreements of approximately $18 million in connection with the consummation of this offering. The termination fee represents the estimated net present value of the payments over the estimated term of the consulting agreements.

(iii)
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.

(iv)
Represents the non-cash impairment charge of goodwill and an intangible asset recognized in accordance with Accounting Standards Codification 350, Intangibles—Goodwill and Other.

(v)
Impact of discontinued operations represents the operating income plus amortization of intangibles plus restructuring charges plus goodwill and other intangible asset impairments for discontinued operations.

(vi)
Tax rate is based on the statutory federal income tax rate of 35% and an assumed blended state income tax rate, net of federal income tax benefit, of 4%.

(vii)
On February 8, 2013, the entire $889 million aggregate principal amount of the 2007 Senior Subordinated Notes was redeemed.

(viii)
Average total invested capital is calculated using total invested capital over the five most recent fiscal quarters.

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Quarterly Financial Data

        The following tables present a summary of certain quarterly financial data for the three months ended May 5, 2013 and the fiscal years ended February 3, 2013 and January 29, 2012.

 
  Fiscal 2013   Fiscal 2012   Fiscal 2011  
 
  Q1-13   Q4-12   Q3-12   Q2-12   Q1-12   Q4-11   Q3-11   Q2-11   Q1-11  
 
  (Dollars in millions)
 

Net income (loss)

  $ (131 ) $ (713 ) $ (50 ) $ (56 ) $ (360 ) $ (173 ) $ (105 ) $ (101 ) $ (164 )

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

        1     3         16     (6 )   14     7     5  
                                       

Income (loss) from continuing operations

    (131 )   (714 )   (53 )   (56 )   (376 )   (167 )   (119 )   (108 )   (169 )

Interest expense, net

    147     169     165     158     166     162     160     159     158  

Provision (benefit) for income taxes

    43     (33 )   2     1     33     20     24     15     20  

Depreciation and amortization(1)

    60     87     85     84     83     82     82     82     83  

Other (income) expense, net(2)

    1                     1             (1 )

Loss on extinguishment of debt(3)

    40     489             220                  

Goodwill and other intangible asset impairment(4)

        152                              

Stock-based compensation(5)

    3     3     3     5     5     4     7     5     4  

Management fee & related expenses paid to Equity Sponsors(6)

    1     1     1     2     1     1     1     2     1  

Other

            1     (2 )   1     (1 )            
                                       

Adjusted EBITDA(7)

  $ 164   $ 154   $ 204   $ 192   $ 133   $ 102   $ 155   $ 155   $ 96  
                                       

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

(2)
Represents the costs of debt modification, 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.

(3)
Represents the loss on extinguishment of debt including the premium paid to call the debt as well as the write-off of unamortized deferred financing costs associated with such debt.

(4)
Represents the non-cash impairment charge of goodwill and an intangible asset recognized during the fourth quarter of fiscal 2012 in accordance with Accounting Standards Codification 350, Intangibles—Goodwill and Other.

(5)
Represents stock-based compensation costs for stock options.

(6)
We entered into consulting agreements whereby we have agreed to pay the Equity Sponsors a $4.5 million annual aggregate management fee and related expenses through August 2017. As specified in the agreements, we expect to pay the Equity Sponsors a transaction fee of approximately $13 million ($14 million if the underwriters exercise their option to purchase additional shares in full) and an aggregate fee to terminate the consulting agreements of approximately $18 million in connection with the consummation of this offering. The termination fee represents the estimated net present value of the payments over the remaining term of the consulting agreements.

(7)
Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income (loss) as a measure of operating performance. For additional detail, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)."

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

Overview

        We are one of the largest industrial distributors in North America. We believe we have leading positions in the three distinct market sectors in which we specialize: Maintenance, Repair & Operations; Infrastructure & Power; and Specialty Construction. We estimate that the aggregate size of our currently addressable markets is approximately $110 billion annually. We serve these markets with an integrated go-to-market strategy. We operate through over 600 locations across 46 U.S. states and nine Canadian provinces. We have approximately 15,000 associates delivering localized, customer-tailored products, services and expertise. We serve approximately 500,000 customers, which include contractors, government entities, maintenance professionals, home builders and industrial businesses. Our broad range of end-to-end product lines and services include over one million SKUs of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from infrastructure and construction to maintenance, repair and operations.

Description of Segments

        We operate our Company through four reportable segments: Facilities Maintenance, Waterworks, Power Solutions and White Cap.

        Facilities Maintenance.    Facilities Maintenance distributes MRO products, provides value-add services and fabricates custom products. We estimate that our Facilities Maintenance business unit serves a currently addressable market of $48 billion annually, which includes multifamily, hospitality, healthcare and institutional facilities. Products include electrical and lighting items, plumbing, HVAC products, appliances, janitorial supplies, hardware, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance and water and wastewater treatment products.

        Waterworks.    Waterworks distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in the water and wastewater industries for residential and non-residential uses. We estimate that our Waterworks business unit serves a currently addressable market of $10 billion annually, which includes the non-residential, residential, water systems, sewage systems and other markets. Products include pipes, fittings, valves, hydrants and meters for use in the construction, maintenance and repair of water and wastewater systems as well as fire-protection systems. Waterworks has complemented its core products through additional offerings, including smart meters (AMR/AMI), HDPE pipes and specific engineered treatment plant products and services.

        Power Solutions.    Power Solutions distributes electrical transmission and distribution products, power plant MRO supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation and distribution industries. We estimate that our Power Solutions business unit serves a currently addressable market of $35 billion annually, which includes the utilities and electrical markets. Products include conductors such as wire and cable, transformers, 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 non-residential and residential construction.

        White Cap.    White Cap distributes specialized hardware, tools and engineered materials to non-residential and residential contractors. We estimate that our White Cap business unit serves a currently addressable market of $19 billion annually. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, erosion and sediment control equipment and other engineered materials used broadly across all types of non-residential and residential construction.

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        In addition to the reportable segments, our consolidated financial results include "Corporate and Other." Corporate & Other is comprised of the following business units: Crown Bolt, CTI, Repair & Remodel and HD Supply Canada. Crown Bolt is a retail distribution operator providing program and packaging solutions, sourcing, distribution, and in-store service, fasteners, builders' hardware, rope and chain and plumbing accessories, primarily serving Home Depot and other hardware stores. 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 non-residential, residential and senior living projects. Our Repair & Remodel business unit offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals. HD Supply Canada is an industrial distributor that primarily focuses on servicing fasteners/industrial supplies and specialty lighting markets which operates across nine provinces. Corporate & Other also includes costs related to our centralized support functions, which include finance, information technology, human resources, legal, supply chain and other support services and removes inter-segment transactions.

Recent Acquisitions

        We enter into select strategic acquisitions to supplement our product set, geographic footprint and other capabilities. In accordance with the acquisition method of accounting under Accounting Standards Codification ("ASC") 805, Business Combinations, the results of the acquisitions we completed are reflected in our consolidated financial statements from the date of acquisition forward.

        On December 3, 2012, we purchased substantially all of the assets of Water Products of Oklahoma, Inc., Arkansas Water Products, LLC, and Municipal Water Works Supply, LP (collectively, "Water Products") for approximately $52 million. These businesses distribute water, sewer, gas and related products such as pipes, valves, fittings, hydrants, pumps and meters, and offer maintenance products and repair services primarily to municipalities and contractors. The businesses are operated as part of the Waterworks segment.

        On June 29, 2012, we purchased Peachtree Business Products LLC ("Peachtree") for approximately $196 million. Headquartered in Marietta, Georgia, Peachtree specializes in customizable business and property marketing supplies, serving residential and commercial property managers, medical facilities, schools and universities, churches and funeral homes. Peachtree is operated as part of the Facilities Maintenance segment.

        On May 2, 2011, we closed on a transaction to acquire substantially all of the assets of Rexford Albany Municipal Supply Company, Inc. ("RAMSCO") for approximately $21 million. RAMSCO specializes in distributing water, sanitary and storm sewer materials primarily to municipalities and contractors through four locations in upstate New York. This business is operated as part of our Waterworks segment.

Discontinued Operations

        On March 26, 2012, we sold all of the issued and outstanding equity interests in our IPVF business to Shale-Inland Holdings, LLC. We received cash proceeds of approximately $477 million, net of $5 million of transaction costs. As a result of the sale, we recorded a $12 million pre-tax gain in fiscal 2012.

        On September 9, 2011, we sold all of the issued and outstanding equity interests in our Plumbing/HVAC business to Hajoca Corporation. We received cash proceeds of approximately $116 million, net of $8 million remaining in escrow and $4 million of transaction costs. As a result of the sale, we recorded a $7 million pre-tax gain in fiscal 2011. During fiscal 2012, the Company paid an additional $1 million in transaction costs and received $4 million from escrow.

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        In accordance with ASC 205-20, Discontinued Operations, the results of these operations as well as the gains on sales of businesses are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and the gain on the sale of businesses, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). All Consolidated Statements of Operations and Comprehensive Income (Loss) presented have been revised to reflect this presentation. For additional detail related to the results of operations of the discontinued operations, see Note 3 to our audited consolidated financial statements.

The Refinancing Transactions

        During fiscal 2012 and the first quarter of fiscal 2013, we refinanced all of our outstanding indebtedness. For a description of the refinancings, see "—External Financing."

Key Business Metrics

Net Sales

        We earn our Net sales primarily from the sale of construction, infrastructure, maintenance and renovation and improvement related products and our provision of related services to approximately 500,000 customers, including contractors, government entities, maintenance professionals, home builders and industrial businesses. We recognize sales, net of sales tax and allowances for returns and discounts, when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable and collectability is reasonably assured. Net sales in certain business units, particularly Waterworks and Power Solutions, fluctuate with the price of commodities as we seek to minimize the effects of changing commodities prices by passing such increases in the prices of certain commodity-based products to our customers.

        We ship products to customers predominantly by internal fleet and to a lesser extent by third-party carriers. Net sales are recognized from product sales when title to the products is passed to the customer, which generally occurs at the point of destination for products shipped by internal fleet and at the point of shipping for products shipped by third-party carriers.

        We include shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with outbound freight are included in Selling, general and administrative expenses and totaled $29 million and $26 million for the three months ended May 5, 2013 and the three months ended April 29, 2012, respectively, and $116 million, $96 million and $91 million in fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

Gross profit

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

Operating expenses

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

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Cash interest expense, Adjusted EBITDA and Adjusted net income (loss)

    Cash interest expense:

        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 (as defined below), (iii) PIK interest expense on our 2007 Senior Subordinated Notes and April 2012 Senior Unsecured 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 was no longer paid-in-kind, but rather paid in cash.

        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:

 
  Three Months
Ended
  Fiscal Year Ended  
 
  May 5,
2013
  April 29,
2012
  February 3,
2013
  January 29,
2012
  January 30,
2011
  January 31,
2010
  February 1,
2009
 
 
  (Dollars in millions)
 

Interest expense

  $ 147   $ 166   $ 658   $ 639   $ 623   $ 602   $ 644  

Amortization of deferred financing costs

    (7 )   (7 )   (23 )   (37 )   (36 )   (33 )   (33 )

Amortization of THD Guarantee

        (2 )   (2 )   (13 )   (14 )   (21 )   (21 )

PIK interest expense on our 2007 Senior Subordinated Notes and April 2012 Senior Unsecured Notes(a)

        (6 )   (93 )   (132 )   (206 )   (182 )   (192 )

Amortization of amounts in accumulated other comprehensive income related to derivatives

                    (2 )   (3 )   (1 )

Amortization of original issue discounts and premium

    (1 )       (5 )                
                               

Cash interest expense

  $ 139   $ 151   $ 535   $ 457   $ 365   $ 363   $ 397  
                               

(Increase) decrease in accrued interest

    121     178     86     (101 )   (2 )   3      
                               

Cash interest payments(b)

  $ 260   $ 329   $ 621   $ 356   $ 363   $ 366   $ 397  
                               

(a)
PIK interest expense in the fiscal year ended February 3, 2013 represents PIK interest incurred on the April 2012 Senior Unsecured Notes. In October 2012, $56 million of this interest was capitalized at the first interest payment date. The entire $93 million of interest was paid in cash upon extinguishment of these notes on February 1, 2013.

(b)
In addition to the cash interest payments noted in the table, in the year ended February 3, 2013, the Company paid $502 million of original issue discounts and PIK interest related to the extinguishment of all of the 14.875% Senior Notes and $930 million of the 2007 Senior Subordinated Notes. In addition, during the three months ended May 5, 2013, the Company paid $364 million of original issue discounts and PIK interest related to the extinguishments of $889 million of 2007 Senior Subordinated Notes and a portion of the term loans under the Senior Term Facility (the "Term Loans").

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    Adjusted EBITDA and Adjusted net income (loss):

        We present Adjusted EBITDA because it is a primary measure used by management to evaluate operating performance. We believe the presentation of Adjusted EBITDA enhances investors' overall understanding of the financial performance of our business. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to Net income (loss) as a measure of operating performance. We believe Adjusted EBITDA is helpful in highlighting operating trends, because it excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, age and book depreciation of facilities and capital investments. In addition, we present Adjusted net income (loss) to measure our overall profitability as we believe it is an important measure of our performance. Adjusted net income (loss) is not a recognized term under GAAP and does not purport to be an alternative to Net income (loss) as a measure of operating performance. Adjusted net income (loss) is defined as Net income (loss) less Income (loss) from discontinued operations, net of tax, further adjusted for certain non-cash items, net of tax. We further believe that Adjusted EBITDA and Adjusted net income (loss) are frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted net income (loss) measure when reporting their results. We compensate for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of Adjusted EBITDA and Adjusted net income (loss) may not be comparable to other similarly titled measures of other companies.

        Adjusted EBITDA is based on "Consolidated EBITDA," a measure which is defined in our Senior Term Facility and Senior ABL Facility and used in calculating financial ratios in several material debt covenants. Borrowings under these facilities are a key source of liquidity and our ability to borrow under these facilities depends upon, among other things, our compliance with such financial ratio covenants. In particular, both facilities contain restrictive covenants that can restrict our activities if we do not maintain financial ratios calculated based on Consolidated EBITDA and our Senior ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1:1 if our specified excess availability (including an amount by which our borrowing base exceeds the outstanding amounts) under the Senior ABL Facility falls below the greater of $150 million and 10% of the aggregate commitments. Adjusted EBITDA 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, (iii) Depreciation and amortization and further 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 presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate and about certain non-cash and other items. The Senior Term Facility and Senior ABL Facility permit us to make certain additional adjustments to Consolidated Net Income in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this prospectus. 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 Certain Indebtedness—Senior Credit Facilities."

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

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

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

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

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

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

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

 
  Three Months
Ended
  Fiscal Year Ended  
 
  May 5,
2013
  April 29,
2012
  February 3,
2013
  January 29,
2012
  January 30,
2011
  January 31,
2010
  February 1,
2009
 
 
  (Dollars in millions)
 

Net income (loss)

  $ (131 ) $ (360 ) $ (1,179 ) $ (543 ) $ (619 ) $ (514 ) $ (1,255 )

Less: Income (loss) from discontinued operations, net of tax

        16     20     20     (6 )   (34 )   (107 )
                               

Income (loss) from continuing operations

    (131 )   (376 )   (1,199 )   (563 )   (613 )   (480 )   (1,148 )
                               

Interest expense, net

    147     166     658     639     623     602     641  

Provision (benefit) for income taxes

    43     33     3     79     28     (198 )   (329 )

Depreciation and amortization(i)

    60     83     339     329     343     364     381  

Other (income) expense, net(ii)

    1                 (3 )   (8 )   12  

Loss (gain) on extinguishment of debt(iii)

    40     220     709         2     (200 )    

Goodwill and other intangible asset impairment(iv)

            152             219     867  

Restructuring charge(v)

                    8     21     32  

Stock-based compensation(vi)

    3     5     16     20     17     18     14  

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

    1     1     5     5     5     5     6  

Other

        1         (1 )   1          
                               

Adjusted EBITDA

  $ 164   $ 133   $ 683   $ 508   $ 411   $ 343   $ 476  
                               

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

(ii)
Represents the costs of debt modification, 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.

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(iii)
Represents the loss/(gain) on extinguishment of debt including the premium/(discount) paid to repurchase or call the debt as well as the write-off of unamortized deferred financing costs and other assets associated with such debt.

(iv)
Represents the non-cash impairment charge of goodwill and an intangible asset recognized 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)
Represents the stock-based compensation costs for stock options.

(vii)
We entered into consulting agreements whereby we have agreed to pay the Equity Sponsors a $4.5 million annual aggregate management fee and related expenses through August 2017. As specified in the agreements, we expect to pay the Equity Sponsors a transaction fee of approximately $13 million ($14 million if the underwriters exercise their option to purchase additional shares in full) and an aggregate fee to terminate the consulting agreements of approximately $18 million in connection with the consummation of this offering. The termination fee represents the estimated net present value of the payments over the estimated term of the consulting agreements.

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

 
  Three Months
Ended
  Fiscal Year Ended  
 
  May 5,
2013
  April 29,
2012
  February 3,
2013
  January 29,
2012
  January 30,
2011
  January 31,
2010
  February 1,
2009
 
 
  (Dollars in millions)
 

Net income (loss)

  $ (131 ) $ (360 ) $ (1,179 ) $ (543 ) $ (619 ) $ (514 ) $ (1,255 )

Less: Income (loss) from discontinued operations, net of tax

        16     20     20     (6 )   (34 )   (107 )
                               

Income (loss) from continuing operations

    (131 )   (376 )   (1,199 )   (563 )   (613 )   (480 )   (1,148 )
                               

Adjustments, net of tax:

                                           

Interest expense, net

    147     166     658     639     623     602     644  

Cash interest expense

    (139 )   (151 )   (535 )   (457 )   (365 )   (363 )   (476 )

Provision (benefit) for income taxes

    43     33     3     79     28     (198 )   (329 )

Cash income tax payments (i)

    (2 )       (1 )   (5 )   (4 )   (7 )   (9 )

Amortization of intangibles

    34     60     243     244     244     243     251  

Loss (gain) on extinguishment and modification of debt(ii)

    41     220     709         2     (200 )    

Stock-based compensation(iii)

    3     5     16     20     17     18     14  

Goodwill and other intangible asset impairment(iv)

            113             219     867  
                               

Adjusted net income (loss)

  $ (4 ) $ (43 ) $ 7   $ (43 ) $ (68 ) $ (166 ) $ (186 )
                               

(i)
Excludes $220 million and $134 million tax refunds received during the years ended January 30, 2011 and January 31, 2010, respectively, from net operating losses carried back into prior tax years.

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

(iii)
Represents the stock-based compensation costs for stock options.

(iv)
Represents the non-cash impairment charge of goodwill and an intangible asset recognized in accordance with Accounting Standards Codification 350, Intangibles—Goodwill and Other.

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Relationship with Home Depot

Historical relationship

        On August 30, 2007, investment funds associated with the Equity Sponsors formed HD Supply and entered into a stock purchase agreement with Home Depot pursuant to which Home Depot agreed to sell to HD Supply or to a wholly-owned subsidiary of HD Supply certain intellectual property and all of the outstanding common stock of HDS and the Canadian subsidiary, CND Holdings, Inc. On August 30, 2007, through a series of transactions, HD Supply's direct wholly-owned subsidiary, HDS Holding Corporation, acquired direct control of HDS (through the merger of its wholly-owned subsidiary, HDS Acquisition Corp., with and into HDS) and the Canadian subsidiary, CND Holdings, Inc. Through these transactions (the "2007 Acquisition"), Home Depot was paid cash of approximately $8.2 billion and 12.5% of HD Supply's common stock worth $325 million.

Strategic agreement

        On the closing date of the 2007 Acquisition, Home Depot entered into a strategic purchase agreement with Crown Bolt. This agreement provides a guaranteed revenue stream to Crown Bolt through January 31, 2015 by specifying minimum annual purchase requirements from Home Depot. During fiscal 2012 and fiscal 2011, Crown Bolt recorded an additional $19 million and $20 million, respectively, in net sales to satisfy the minimum purchase requirement provisions under the strategic purchase agreement. On February 1, 2013, Crown Bolt reached an agreement to amend and extend its strategic purchase agreement with Home Depot. While the amendment extends the agreement five years through January 31, 2020, retaining Crown Bolt as the exclusive supplier of certain products to Home Depot, it eliminates the minimum purchase requirement and additionally reduces future pricing by approximately $20 million annually. These changes resulted in a reduction of expected future cash proceeds from Home Depot. We, therefore, considered this amendment a triggering event and, as such, performed an additional goodwill impairment analysis for Crown Bolt. As a result of the analysis, Crown Bolt recorded a non-cash, pre-tax goodwill impairment charge of $150 million during the fourth quarter of fiscal 2012. Additionally, we recorded a $2 million charge to write off an unamortized tradename as a result of the discontinued use of the tradename. For more information on these charges, see "—Critical Accounting Policies—Goodwill" and in Note 5 to our audited consolidated financial statements.

        HD Supply derived revenue from the sale of products to Home Depot of $296 million, $275 million, and $299 million in fiscal 2012, fiscal 2011, and fiscal 2010, respectively. HD Supply derived revenue from the sale of products to Home Depot of $65 million and $69 million in the three months ended May 5, 2013 and April 29, 2012, respectively.

Tax Sharing Arrangements

        For a discussion of tax sharing arrangements with Home Depot, including the risk that we may be required to reimburse Home Depot an amount equal to a contested tax refund plus related interest, see "Risk Factors—Risks Relating to Our Business—Income tax payments may ultimately differ from amounts currently recorded by us. Future tax law changes may materially increase our prospective income tax expense," and "Certain Relationships and Related Party Transactions—Tax sharing arrangements."

Seasonality

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

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Basis of Presentation

        HD Supply's fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal year ended February 3, 2013 (fiscal 2012) includes 53 weeks. Fiscal years ended January 29, 2012 (fiscal 2011) and January 30, 2011 (fiscal 2010) both include 52 weeks. The impact of a 53rd week in fiscal 2012 led to increased net sales of $148 million and increased Adjusted EBITDA of $14 million. The three months ended May 5, 2013 and April 29, 2012 both included 13 weeks.

Consolidated Results of Operations—Three Months Ended May 5, 2013 and April 29, 2012

 
   
   
   
  % of Net Sales  
 
  Three Months
Ended
   
  Three Months
Ended
 
 
  May 5,
2013
  April 29,
2012
  Percentage
Increase
(Decrease)
  May 5,
2013
  April 29,
2012
 

Net Sales

  $ 2,068   $ 1,836     12.6 %   100.0 %   100.0 %

Gross Profit

    598     523     14.3     28.9     28.5  

Operating expenses:

                               

Selling, general and administrative

    439     397     10.6     21.2     21.6  

Depreciation and amortization

    59     83     (28.9 )   2.9     4.6  
                         

Total operating expenses

    498     480     3.8     24.1     26.2  

Operating Income

    100     43     132.6     4.8     2.3  

Interest expense

    147     166     (11.4 )   7.1     9.0  

Loss on extinguishment of debt

    40     220     *     2.0     12.0  

Other (income) expense, net

    1         *          
                         

Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes

    (88 )   (343 )   *     (4.3 )   (18.7 )

Provision (benefit) for income taxes

    43     33     30.3     2.0     1.8  
                         

Income (Loss) from Continuing Operations

    (131 )   (376 )   *     (6.3 )   (20.5 )

Income (loss) from discontinued operations, net of tax

        16     *         0.9  
                         

Net Income (Loss)

  $ (131 ) $ (360 )   *     (6.3 )   (19.6 )
                         

Non-GAAP financial data:

                               

Adjusted EBITDA

  $ 164   $ 133     23.3     7.9     7.2  

*
Not meaningful

Three Months Ended May 5, 2013 Compared to Three Months Ended April 29, 2012

Highlights

        Net sales in first quarter 2013 increased $232 million, or 12.6%, compared to first quarter 2012. Each of our four reportable segments realized increases in Net sales. Operating income in first quarter 2013 increased $57 million, or 133%, as compared to first quarter 2012. Our sales initiatives and investments in the business resulted in an increase to Adjusted EBITDA of $31 million, or 23.3%, in first quarter 2013 as compared to first quarter 2012.

        During first quarter 2013, we extinguished all of the $889 million outstanding 2007 Senior Subordinated Notes, incurring a loss on extinguishment of approximately $34 million. In addition, we amended the Term Loan Facility to lower the borrowing margin by 275 basis points and replace the hard call provision applicable to optional prepayments of the Term Loans with a soft call option. In connection with the amendment, we recognized an approximately $5 million loss on extinguishment of debt related to the portion of the amendment considered an extinguishment. As of May 5, 2013, our liquidity was $785 million.

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Net sales

        Net sales in first quarter 2013 increased $232 million, or 12.6%, compared to first quarter 2012. Each of our reportable segments experienced an increase in Net sales in first quarter 2013 as compared to first quarter 2012. The Net sales increases were primarily due to sales initiatives at each of our businesses and, to a lesser extent, increases in market volume and acquisitions. Organic sales growth was 10.4% for first quarter 2013 as compared to first quarter 2012. Our fiscal 2012 acquisitions provided $40 million of non-organic sales growth.

Gross profit

        Gross profit increased $75 million, or 14.3%, during first quarter 2013 as compared to first quarter 2012. The increase in Gross profit, driven by our Facilities Maintenance, White Cap and Waterworks businesses, was primarily due to sales initiatives, volume increases and product mix.

        Gross profit as a percentage of Net sales ("gross margin") increased approximately 40 basis points to 28.9% in first quarter 2013 as compared to 28.5% in first quarter 2012. The improvement in gross margin was driven by our Facilities Maintenance and White Cap businesses.

Operating expenses

        Operating expenses increased $18 million, or 3.8%, during first quarter 2013 as compared to first quarter 2012.

        Selling, general and administrative expenses increased $42 million, or 10.6%, in first quarter 2013 as compared to first quarter 2012. The increase is primarily as a result of increases in variable expenses due to higher sales volume. Depreciation and amortization expense decreased $24 million, or 28.9%, in first quarter 2013 as compared to first quarter 2012 primarily as a result of certain intangible assets becoming fully amortized during fiscal 2012.

        Operating expenses as a percentage of Net sales decreased approximately 210 basis points to 24.1% in the first quarter 2013 as compared to first quarter 2012. The lower Depreciation and amortization expense resulted in approximately 170 basis points of the total decrease. Selling, general and administrative expenses as a percentage of Net sales decreased approximately 40 basis points in first quarter 2013 as compared to first quarter 2012. The improvement reflects the leverage of fixed costs through sales volume increases, primarily at Waterworks, Power Solutions, and CTI. These improvements were partially offset by increases in Selling, general and administrative expenses as a percentage of Net sales at Facilities Maintenance and White Cap due to the impact of the investment in sales force additions and greenfields since first quarter 2012 to support continued growth in our business.

Operating income (loss)

        Operating income increased $57 million during first quarter 2013 as compared to first quarter 2012, as a result of the improvement in Net sales and Gross profit and the reduction in Depreciation and amortization expense.

        Operating income as a percentage of Net sales increased approximately 250 basis points first quarter 2013 as compared to first quarter 2012. The improvement was driven by the reduction in Depreciation and amortization expense, improvements in gross margins and control over growth in Selling, general and administrative expense.

Interest expense

        Interest expense decreased $19 million, or 11.4%, during first quarter 2013 as compared to first quarter 2012. The decrease in interest expense is due to a lower average interest rate on our outstanding indebtedness, partially offset by a higher average outstanding balance.

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Loss on extinguishment of debt

        In first quarter 2013, HDS redeemed all of the $889 million outstanding 2007 Senior Subordinated Notes at redemption price of 103.375% of the principal amount thereof. As a result, we reported a $34 million loss on extinguishment, which includes a $30 million premium payment to redeem the 2007 Senior Subordinated Notes and approximately $4 million to write off the unamortized deferred debt cost.

        In addition, during first quarter 2013, HDS amended its Term Loan Facility to lower the borrowing margin by 275 basis points and replace the hard call provision applicable to optional prepayment of Term Loans thereunder with a soft call option. A portion of the amendment was considered an extinguishment in accordance with ASC 470-50, Debt-Modifications and Extinguishments, resulting in a $5 million loss on extinguishment of debt, which included approximately $2 million of fees, $2 million to write off the pro-rata portion of unamortized original issue discount, and $1 million to write off the pro-rata portion of unamortized deferred debt cost. For additional information, see Note 4 to our unaudited consolidated financial statements included elsewhere in this prospectus.

        In connection with the refinancing of the senior portion of our debt structure in first quarter 2012, we recorded a charge of $220 million in accordance with ASC 470-50, Debt-Modifications and Extinguishments. This charge consisted of $150 million for the premium paid to the holders of the 2007 Senior Notes, as contractually required, upon early extinguishment, $46 million of unamortized deferred debt costs and $24 million to write off the remaining unamortized value associated with the THD Guarantee. For additional information, see Note 4 to our unaudited consolidated financial statements included elsewhere in this prospectus.

Other (income) expense, net

        A significant portion of the amendment of the Term Loan Facility during first quarter 2013 was considered a modification in accordance with ASC 470-50, Debt-Modifications and Extinguishments. As a result, we incurred approximately $1 million in financing fees that were expensed.

Provision (benefit) for income taxes

        The provision for income taxes from continuing operations in first quarter 2013 was $43 million compared to $33 million in first quarter 2012. The effective rate for continuing operations for first quarter 2013 was a provision of 48.4%, reflecting the impact of increasing the U.S. valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions. The effective rate for continuing operations in first quarter 2012 was a provision of 9.5%, reflecting the impact of increasing the U.S. valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions.

        We regularly assess the realization of our net deferred tax assets and the need for any valuation allowance. This assessment requires management to make judgments about the benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets.

Adjusted EBITDA

        Adjusted EBITDA increased $31 million, or 23.3%, in first quarter 2013 as compared to first quarter 2012. Each of our reportable segments experienced an increase in Adjusted EBITDA in first quarter 2013 as compared to first quarter 2012.

        The increase in Adjusted EBITDA in first quarter 2013 is primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 70 basis points to 7.9% in first quarter 2013 as compared to first quarter 2012, primarily due to gross margin improvements and the leverage of fixed costs through sales volume increases.

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Consolidated Results of Operations—Fiscal Years 2012, 2011, 2010

 
   
   
   
  Increase
(Decrease)
 
 
  Fiscal Year  
 
  2012
vs.
2011
  2011
vs.
2010
 
 
  2012   2011   2010  
 
  (Dollars in millions)
 

Net sales

  $ 8,035   $ 7,028   $ 6,449     14.3 %   9.0 %

Gross profit

    2,320     2,014     1,841     15.2     9.4  

Operating expenses:

                               

Selling, general & administrative

    1,661     1,532     1,455     8.4     5.3  

Depreciation & amortization

    336     327     341     2.8     (4.1 )

Restructuring

            8           *

Goodwill and other intangible asset impairment

    152               *     *
                           

Total operating expenses

    2,149     1,859     1,804     15.6     3.0  

Operating income (loss)

   
171
   
155
   
37
   
10.3
   
*

Interest expense

    658     639     623     3.0     2.6  

Loss on extinguishment of debt

    709         2       *     *

Other (income) expense, net

            (3 )         *
                           

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

    (1,196 )   (484 )   (585 )     *     *

Provision (benefit) for income taxes

    3     79     28       *     *
                           

Income (loss) from continuing operations

  $ (1,199 ) $ (563 ) $ (613 )     *     *
                           

Non-GAAP Financial Data:

                               

Adjusted EBITDA(1)

  $ 683   $ 508   $ 411     34.4     23.6  

*
not meaningful.


(1)
See "—Key Business Metrics" for a reconciliation of Net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented.

 
  % of Net sales  
 
  Fiscal Year  
 
  2012   2011   2010  

Net sales

    100.0 %   100.0 %   100.0 %

Gross profit

    28.9     28.7     28.5  

Operating expenses:

                   

Selling, general & administrative

    20.7     21.8     22.6  

Depreciation & amortization

    4.2     4.7     5.2  

Restructuring

            0.1  

Goodwill & other intangible asset impairment

    1.9          
               

Total operating expenses

    26.8     26.5     27.9  

Operating income (loss)

   
2.1
   
2.2
   
0.6
 

Interest expense

    8.2     9.1     9.7  

Loss on extinguishment of debt

    8.8         *  

Other (income) expense, net

            *  
               

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

    (14.9 )   (6.9 )   (9.1 )

Provision (benefit) for income taxes

    *     1.1     0.4  
               

Income (loss) from continuing operations

    (14.9 )   (8.0 )   (9.5 )
               

Non-GAAP Financial Data:

                   

Adjusted EBITDA

    8.5     7.2     6.4  

*
not meaningful.

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Fiscal 2012 Compared to Fiscal 2011

Highlights

        Net sales in fiscal 2012 increased $1,007 million, or 14.3%, compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $859 million, or 12.2%, as compared to fiscal 2011. All of our business units realized increases in Net sales, led by Facilities Maintenance, Waterworks, Power Solutions and White Cap. Operating income increased $16 million, or 10.3%, during fiscal 2012 as compared to fiscal 2011, negatively impacted by the goodwill and other intangible asset impairment and positively impacted by the 53rd week in fiscal 2012. Excluding the impairment and the 53rd week, Operating income increased $154 million, or 99.4%, during fiscal 2012 as compared to fiscal 2011. Adjusted EBITDA increased by $175 million, or 34.4%, in fiscal 2012 as compared to fiscal 2011. In addition, on a 52-week basis, Adjusted EBITDA grew $161 million, or 31.7%, in fiscal 2012 as compared to fiscal 2011. This growth was driven by our sales initiatives, continued focus on margin expansion and cost control, geographic and product line expansions through acquisitions and greenfields, and improvements in the markets we serve.

        During fiscal 2012, Crown Bolt and Home Depot agreed to an amendment and five-year extension of the strategic purchase agreement, which eliminated the minimum purchase requirement beginning with fiscal 2013, but retains Crown Bolt as the exclusive supplier of products purchased by Home Depot from Crown Bolt through January 31, 2020. In addition, we refinanced all of our outstanding indebtedness, extending our closest principal maturity from 2015 to 2017 and lowered our future cash interest payments. We maintain strong liquidity with $981 million available as of February 3, 2013.

Net sales

        Net sales increased $1,007 million, or 14.3%, to $8,035 million during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $859 million, or 12.2%, as compared to fiscal 2011.

        For the full year and on a 52-week basis, each of our business units experienced an increase in Net sales during fiscal 2012 as compared to fiscal 2011. The Net sales increases were primarily due to sales initiatives at each of our business units and, to a lesser extent, increases in market volume and acquisitions. Organic sales growth on a 52-week basis was 11.4% for fiscal 2012 as compared to fiscal 2011.

Gross profit

        Gross profit increased $306 million, or 15.2%, to $2,320 million during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Gross profit increased $264 million, or 13.1%, as compared to fiscal 2011.

        An increase in gross profit in fiscal 2012 was experienced across all of our business units, driven by Facilities Maintenance, Waterworks, Power Solutions and White Cap.

        Gross profit as a percentage of Net sales ("gross margin") increased approximately 20 basis points to 28.9% in fiscal 2012 from 28.7% in fiscal 2011. The improvement was driven by Facilities Maintenance and White Cap.

Operating expenses

        Operating expenses increased $290 million, or 15.6%, to $2,149 million during fiscal 2012 as compared to fiscal 2011. Excluding the $152 million goodwill and other intangible asset impairment, operating expenses increased $138 million, or 7.4%, during fiscal 2012 as compared to fiscal 2011.

        Selling, general and administrative expenses increased $129 million, or 8.4%, in fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week, Selling, general and administrative

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expenses increased $101 million, or 6.6%, in fiscal 2012 as compared to fiscal 2011. This was primarily a result of an increase in variable expenses due to higher sales volumes and investment in sales initiatives. Depreciation and amortization expense increased by $9 million, or 2.8%, in fiscal 2012 as compared to fiscal 2011. The increase was due to investment in property and equipment.

        Operating expenses as a percentage of Net sales increased approximately 30 basis points to 26.8% in fiscal 2012 as compared to fiscal 2011, primarily due to the goodwill and other intangible asset impairment charge. Excluding the impairment charge, Operating expenses as a percentage of Net sales decreased approximately 160 basis points to 24.9% in fiscal 2012 as compared to fiscal 2011. The improvement reflects the leverage of fixed costs through sales volume increases primarily at White Cap and Waterworks, and, to a lesser extent, Facilities Maintenance.

Operating income (loss)

        Operating income increased $16 million, or 10.3%, during fiscal 2012 as compared to fiscal 2011, negatively impacted by the goodwill and other intangible asset impairment and positively impacted by the 53rd week in fiscal 2012. Excluding the impairment and the 53rd week, Operating income increased $154 million, or 99.4%, during fiscal 2012 as compared to fiscal 2011. The improvement was due to the increase in Net sales and Gross profit and control over the growth in Operating expenses.

        Operating income as a percentage of Net sales decreased approximately 10 basis points in fiscal 2012 as compared to fiscal 2011, impacted negatively by the goodwill and other intangible asset impairment charge. Excluding the impairment charge, Operating income as a percentage of Net sales increased approximately 180 basis points to 4.0% in fiscal 2012 as compared to fiscal 2011, driven by Facilities Maintenance, Waterworks, Power Solutions and White Cap.

Interest expense

        Interest expense increased $19 million, or 3.0%, during fiscal 2012 as compared to fiscal 2011. The increase was primarily due to the additional interest expense paid as a result of the shortened call period on the early extinguishment of the 12.0% Senior Notes and an increase in outstanding borrowings, partially offset by lower amortization of deferred debt costs, only one fiscal quarter of amortization of the intangible asset value assigned to Home Depot's guarantee of HDS's payment obligations for principal and interest under HDS's then outstanding term loan (the "2007 Term Loan") under the 2007 Senior Secured Credit Facility ("THD Guarantee") in fiscal 2012, and a reduction in effective interest rates from our refinancing activity.

Loss on extinguishment of debt

        During fiscal 2012, our debt refinancing and redemption activities resulted in charges of $709 million recorded in accordance with GAAP (ASC 470-50, Debt-Modifications and Extinguishments).

        In connection with the refinancing of most of our debt instruments in the first quarter of fiscal 2012, we recorded a charge of $220 million, which consisted of $150 million for the premium paid to the holders of 12.0% Senior Notes, as contractually required, upon early extinguishment, a $46 million write-off of unamortized deferred debt costs and $24 million to write off the remaining unamortized value associated with the THD Guarantee that was terminated in the refinancing.

        In connection with the partial redemption of HDS's 2007 Senior Subordinated Notes in the fourth quarter of fiscal 2012, we recorded a charge of $37 million, which included a $31 million premium payment to redeem the 2007 Senior Subordinated Notes and $5 million to write off the pro-rata portion of the unamortized deferred debt costs.

        In connection with the repurchase of our April 2012 Senior Unsecured Notes in the fourth quarter of fiscal 2012, we recorded a charge of $452 million, which consisted of a $422 million make-whole

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premium payment, a $28 million write-off of unamortized original issue discount, and $2 million write-off of unamortized deferred debt costs.

Provision (benefit) for income taxes

        The provision for income taxes from continuing operations in fiscal 2012 was $3 million compared to $79 million in fiscal 2011. The effective rate for continuing operations for fiscal 2012 was an expense of 0.2%, reflecting the impact of a $442 million increase in the U.S. valuation allowance on deferred tax assets driven by the uncertainty regarding our ability to utilize the NOL for fiscal 2012. The U.S. valuation allowance for fiscal 2012 includes an increase of $44 million related to deferred tax liabilities generated by indefinite life intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences. The fiscal 2012 effective tax rate was also impacted by a reduction in deferred tax liabilities of $39 million related to the goodwill impairment for book purposes. The fiscal 2012 goodwill impairment created a deferred tax asset which reduced the fiscal 2012 tax expense by decreasing the deferred tax liability associated with indefinite life intangibles which prior to the impairment could not serve as a source of taxable income.

        In addition, the tax expense for fiscal 2012 was also reduced by an adjustment to the Company's valuation allowance as a result of the acquisition of additional deferred tax liabilities in conjunction with the Peachtree acquisition. The Company recorded a $6 million reduction in income tax expense associated with an adjustment to the Company's valuation allowance as a result of the Peachtree acquisition. The impact to the Company's income tax rate of acquiring Peachtree's net deferred tax liability is recorded in the Company's financial statements outside of Peachtree's purchase accounting. Peachtree's net deferred tax liability of $6 million recorded in purchase accounting is available to the Company as a source of future taxable income to support the realization of the Company's deferred tax assets which results in lowering the Company's valuation allowance and income tax expense by such amount.

        The effective rate for continuing operations for fiscal 2011 was an expense of 16.4%, reflecting the impact of a $259 million increase in the U.S. valuation allowance on deferred tax assets driven by the uncertainty regarding our ability to utilize the NOL for fiscal 2011. The U.S. valuation allowance for fiscal 2011 includes an increase of $58 million related to deferred tax liabilities generated by indefinite lived intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences.

        We regularly assess the realization of our net deferred tax assets and the need for any valuation allowance. This assessment requires management to make judgments as to the recoverability of the deferred tax assets and if it is determined that it is "more likely than not" that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is "more likely than not" that the Company would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences, and tax planning strategies are considered.

Adjusted EBITDA

        Adjusted EBITDA increased by $175 million, or 34.4%, in fiscal 2012 as compared to fiscal 2011. On a 52-week basis, Adjusted EBITDA increased $161 million, or 31.7%, as compared to fiscal 2011.

        The increase in Adjusted EBITDA in fiscal 2012 is primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 130 basis points to 8.5% in fiscal 2012 as compared to fiscal 2011, primarily due to the leverage of fixed costs through sales volume increases and efforts to control variable expenses.

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Fiscal 2011 Compared to Fiscal 2010

Highlights

        Net sales in fiscal 2011 increased $579 million, or 9.0%, compared to fiscal 2010. The increase was driven by Facilities Maintenance, Waterworks, Power Solutions and White Cap. Despite continued weakness in the economy, during fiscal 2011, our sales initiatives, continued focus on margin expansion and cost control resulted in an increase in our Operating income of $118 million and our Adjusted EBITDA of $97 million, or 23.6%, as compared to fiscal 2010. In addition, we continued to maintain strong liquidity, with $1.2 billion available as of January 29, 2012.

Net sales

        Net sales increased $579 million, or 9.0%, to $7,028 million during fiscal 2011 as compared to fiscal 2010.

        Net sales were positively impacted by sales initiatives, improvements in the energy market, and commodity prices. The increase was led by Facilities Maintenance with an increase of $188 million, or 11.2%, in fiscal 2011 as compared to fiscal 2010.

Gross profit

        Gross profit increased $173 million, or 9.4%, to $2,014 million during fiscal 2011 as compared to fiscal 2010.

        The improvements in gross profit were primarily due to increased sales volumes across most of our business units. Gross margin increased approximately 20 basis points to 28.7% in fiscal 2011 from 28.5% in fiscal 2010, primarily as a result of product mix.

Operating expenses

        Operating expenses increased $55 million, or 3.0%, to $1,859 million during fiscal 2011 as compared to fiscal 2010.

        Selling, general and administrative expenses increased at our four largest business units during fiscal 2011 as compared to fiscal 2010, primarily as a result of increases in variable expenses due to sales volume increases and, to a lesser extent, an increase in employee benefits related to the restoration of the Company's match on the 401(k) defined contribution plan. Selling, general and administrative expenses as a percentage of Net sales declined approximately 80 basis points to 21.8% in fiscal 2011 as compared to fiscal 2010, through the leverage of fixed costs through sales volume increases and efforts to control variable expenses.

        Depreciation and amortization expense declined primarily due to lower capital expenditures in recent years. During fiscal 2010, we recorded $8 million of restructuring charges under the fiscal 2009 restructuring plan.

Operating income (loss)

        Operating income of $155 million increased $118 million during fiscal 2011 as compared to fiscal 2010, as a result of the improvement in Net sales and Gross profit and control over growth in Operating expenses. Operating income as a percentage of Net sales increased approximately 160 basis points in fiscal 2011 as compared to fiscal 2010. The improvement was driven by White Cap and Facilities Maintenance.

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Interest expense

        Interest expense associated with interest-bearing debt was higher in fiscal 2011 as compared to fiscal 2010. The increase was due to an increase in the principal of the 2007 Senior Subordinated Notes due to the paid-in-kind interest capitalization, partially offset by a decline in average debt balances on the 2007 ABL Credit Facility and the existing cash flow revolving credit facility as compared to fiscal 2010. Interest expense in fiscal 2011 was also positively impacted by a reduction in interest rates on our variable rate debt as compared to fiscal 2010.

Loss on extinguishment of debt

        In connection with the amendment of HDS's debt agreements in fiscal 2010, we prepaid $30 million aggregate principal of the 2007 Term Loan. As a result of this extinguishment, we wrote-off the unamortized pro-rata portion of the THD Guarantee and the unamortized pro-rata portion of the deferred debt costs, resulting in a charge of $2 million.

Other (income) expense, net

        During fiscal 2010, we recognized a $6 million gain related to the valuation of our interest rate swaps. In addition, in connection with the amendment of our debt agreements in fiscal 2010, we incurred $3 million of financing fees that were recorded to Other (income) expense, net.

Provision (benefit) for income taxes

        The provision (benefit) for income taxes from continuing operations increased to a $79 million provision in fiscal 2011 from a $28 million provision in fiscal 2010. The effective rate for continuing operations for fiscal 2011 was an expense of 16.4%, reflecting the impact of a $259 million increase in the U.S. valuation allowance on deferred tax assets. The U.S. valuation allowance for fiscal 2011 included an increase of $58 million related to deferred tax liabilities generated by indefinite lived intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences. The effective rate for continuing operations for fiscal 2010 was an expense of 4.8% driven by the impact of a $228 million increase in the valuation allowance on deferred tax assets.

Adjusted EBITDA

        Adjusted EBITDA increased $97 million, or 23.6%, in fiscal 2011 as compared to fiscal 2010. The increase in Adjusted EBITDA is primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 80 basis points to 7.2% in fiscal 2011, primarily due to the leverage of fixed costs through sales volume increases and efforts to control variable expenses.

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Table of Contents

Results of Operations by Reportable Segment

Facilities Maintenance

 
  Three Months Ended    
 
 
  May 5, 2013   April 29, 2012   Increase (Decrease)  
 
  (Dollars in millions)
   
 

Net sales

  $ 561   $ 497     12.9 %

Operating income (loss)

  $ 69