DISCONTINUED OPERATIONS

9 Months Ended

Oct. 29, 2017

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

NOTE 2 — DISCONTINUED OPERATIONS

In August 2017, the Company completed the sale of its Waterworks business and received cash proceeds of approximately $2.4 billion, net of transaction cost payments of approximately $38 million. In the nine months ended October 29, 2017, the Company recognized a gain on the sale of the Waterworks business of approximately $725 million, net of tax of $202 million. The sale is subject to a post-closing working capital adjustment which the Company expects to settle in fiscal 2017.

In accordance with ASC 740, “Income Taxes,” a deferred tax asset should be recognized for the excess of the tax basis over the financial reporting carrying value of an investment in a subsidiary (“outside basis difference”) when it is apparent that the temporary difference will reverse in the foreseeable future. In connection with presenting the Waterworks business unit as a discontinued operation in the second quarter of fiscal 2017, the Company was required to re-evaluate its position related to the recognition of a deferred tax asset or liability for the outside basis difference of the Waterworks corporate subsidiary being sold. In prior years, and as required under ASC 740, deferred taxes for such outside basis difference had not been recognized because the outside basis difference was deemed permanent in nature. Due to the pending sale of the Waterworks business in the second quarter of fiscal 2017, the outside basis difference was no longer deemed to be permanent in nature and was expected to reverse in the foreseeable future. As a result, a net deferred tax asset of $323 million and a corresponding income tax benefit for the difference in the Company’s stock basis versus its book carrying value of the Waterworks corporate subsidiary was recorded in the second quarter of fiscal 2017. Since the deferred tax asset was settled by HD Supply, the deferred tax asset was not included in the assets held for sale as of July 30, 2017. However, the income statement benefit associated with recording the $323 million deferred tax asset was recorded as discontinued operations. At the completion of the sale, the Company recognized a tax expense of approximately $525 million in discontinued operations in the third quarter of fiscal 2017, which included $323 million related to utilizing the deferred tax asset recorded in the second quarter. The Company estimates that it will utilize approximately $266 million of tax-effected federal and state net operating loss carryforwards as a result of the sale of the Waterworks business.

In October 2017, the Company recognized a $3 million gain due to the expiration of indemnification for tax positions related to the Canadian operations of the Power Solutions business whose sale was completed by the Company in October 2015.

In May 2016, the Company completed the sale of its Interior Solutions business.

Summary Financial Information

In accordance with Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations,” as amended, the results of Waterworks and Interior Solutions are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain/loss on the disposition of businesses, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income. All Consolidated Statements of Operations and Comprehensive Income presented have been revised to reflect this presentation.

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

	Three Months Ended					Nine Months Ended
	October 29, 2017			October 30, 2016		October 29, 2017			October 30, 2016
Net sales	$	10		$	733	$	1,413		$	2,155
Cost of sales	8			563		1,100			1,657
Gross Profit	2			170		313			498
Operating expenses:
Selling, general and administrative	1			95		198			308
Depreciation and amortization	—			3		6			9
Restructuring Charges	—			—		—			1
Total operating expenses	1			98		204			318
Operating Income	1			72		109			180
(Gain) loss on disposal of discontinued operations	(934		)	4		(930		)	7
Other (income) expense, net	1			—		1			—
Income before provision for income taxes	934			68		1,038			173
Provision for income taxes	528			28		244			69
Income from discontinued operations, net of tax	$	406		$	40	$	794		$	104

At October 29, 2017 and January 29, 2017, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets were as follows (amounts in millions):

	October 29, 2017		January 29, 2017
Current assets:
Receivables, less allowance for doubtful accounts of $0 and $4	$	—	$	346
Inventories	—		225
Other current assets	—		4
Total current assets	—		575
Property and equipment, net	—		51
Goodwill	—		1,061
Intangible assets, net	—		10
Total non-current assets	—		1,122
Total assets of discontinued operations	$	—	$	1,697
Current Liabilities:
Accounts payable	$	—	$	212
Accrued compensation and benefits	—		42
Other current liabilities	—		5
Total current liabilities	—		259
Other non-current liabilities	—		20
Total non-current liabilities	—		20
Total liabilities of discontinued operations	$	—	$	279

The following table provides additional detail related to the net cash provided by operating and investing activities of the discontinued operations (amounts in millions):

	Nine Months Ended
	October 29, 2017			October 30, 2016
Net cash flows provided by operating activities	$	28		$	124
Cash flows from investing activities:
Capital expenditures	(5		)	(7		)
Proceeds from sales of businesses, net	2,450			28
Proceeds from sales of property and equipment, net	2			1
Net cash flows provided by investing activities	$	2,447		$	22