NOTE 12—SUBSIDIARY GUARANTORS

HDS (the "Debt Issuer") has outstanding April 2016 Senior Unsecured Notes, which are guaranteed by certain of its subsidiaries (the "Subsidiary Guarantors"). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the April 2016 Senior Unsecured Notes (the "Non-guarantor Subsidiaries") are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS's operations in Canada.

The Debt Issuer’s payment obligations under the April 2016 Senior Unsecured Notes are jointly and severally guaranteed by the Subsidiary Guarantors and all guarantees are full and unconditional.

These guarantees are subject to release under the circumstances as described below:

(i)

concurrently with any direct or indirect sale or disposition (by merger or otherwise) of any Subsidiary Guarantor or any interest therein in accordance with the terms of the applicable indebtedness by HDS or a restricted subsidiary, following which such Subsidiary Guarantor is no longer a restricted subsidiary of HDS;

(ii)

at any time that such Subsidiary Guarantor is released from all of its obligations under all of its guarantees of payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the Senior ABL Facility;

(iii)

upon the merger or consolidation of any Subsidiary Guarantor with and into HDS or another Subsidiary Guarantor that is the surviving entity in such merger or consolidation, or upon the liquidation of such Subsidiary Guarantor following the transfer of all of its assets to HDS or another Subsidiary Guarantor;

(iv)

concurrently with any Subsidiary Guarantor becoming an unrestricted subsidiary;

(v)

during the period when the rating on the April 2016 Senior Unsecured Notes is changed to investment grade and certain covenants cease to apply while such investment grade rating is maintained, upon the merger or consolidation of any Subsidiary Guarantor with and into another subsidiary that is not a Subsidiary Guarantor with such other subsidiary being the surviving entity in such merger or consolidation, or upon liquidation of such Subsidiary Guarantor following the transfer of all of its assets to a subsidiary that is not a Subsidiary Guarantor;

(vi)

upon legal or covenant defeasance of HDS's obligations under the applicable indebtedness, or satisfaction and discharge of the indenture governing the applicable indebtedness; or

(vii)

subject to customary contingent reinstatement provisions, upon payment in full of the aggregate principal amount of all applicable indebtedness then outstanding and all other obligations guaranteed by a Subsidiary Guarantor then due and owing.

In addition, HDS has the right, upon 30 days' notice to the applicable trustee, to cause any Subsidiary Guarantor that has not guaranteed payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the Senior ABL Facility to be unconditionally released from all obligations under its Subsidiary Guarantee, and such Subsidiary Guarantee shall thereupon terminate and be discharged and of no further force or effect.

In connection with the issuance of the April 2016 Senior Unsecured Notes, HDS determined the need for compliance with Rule 3-10 of SEC Regulation S-X. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, HDS has included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(f) of SEC Regulation S-X. The following supplemental financial information sets forth, on a consolidating basis under the equity method of accounting, the condensed statements of operations and comprehensive income (loss), the condensed balance sheets and the condensed cash flow statements for the Debt Issuer, for the Subsidiary Guarantors and the Non-guarantor Subsidiaries and total consolidated Debt Issuer and subsidiaries (amounts in millions).

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


	Three Months Ended July 29, 2018
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS

Net Sales	$	—	$	1,560	$	41	$	(1)	$	1,600
Cost of sales		—		956		23		(1)		978
Gross Profit		—		604		18		—		622
Operating expenses:
Selling, general and administrative		17		353		14		—		384
Depreciation and amortization		5		20		—		—		25
Restructuring		1		1		—		—		2
Total operating expenses		23		374		14		—		411
Operating Income (Loss)		(23)		230		4		—		211
Interest expense		34		—		1		—		35
Interest (income)		—		—		—		—		—
Net (earnings) of equity affiliates		(229)		—		—		229		—
Income from Continuing Operations Before Provision for Income Taxes		172		230		3		(229)		176
Provision for income taxes		42		4		—		—		46
Income from Continuing Operations		130		226		3		(229)		130
Income from discontinued operations, net of tax		1		—		—		—		1
Net Income	$	131	$	226	$	3	$	(229)	$	131
Other comprehensive income—foreign currency translation adjustment		1		—		1		(1)		1
Total Comprehensive Income	$	132	$	226	$	4	$	(230)	$	132


	Three Months Ended July 30, 2017
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS

Net Sales	$	—	$	1,316	$	36	$	—	$	1,352
Cost of sales		—		793		20		—		813
Gross Profit		—		523		16		—		539
Operating expenses:
Selling, general and administrative		21		304		13		—		338
Depreciation and amortization		3		17		1		—		21
Total operating expenses		24		321		14		—		359
Operating Income (Loss)		(24)		202		2		—		180
Interest expense		56		31		1		(39)		49
Interest (income)		(32)		(7)		—		39		—
Net (earnings) of equity affiliates		(239)		—		—		239		—
Income from Continuing Operations Before Provision for Income Taxes		191		178		1		(239)		131
Provision for income taxes		48		1		1		—		50
Income from Continuing Operations		143		177		—		(239)		81
Income from discontinued operations, net of tax		299		61		1		—		361
Net Income	$	442	$	238	$	1	$	(239)	$	442
Other comprehensive income (loss)-foreign currency translation adjustment		(3)		—		(3)		3		(3)
Total Comprehensive Income	$	439	$	238	$	(2)	$	(236)	$	439


	Six Months Ended July 29, 2018
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS
Net Sales	$	—	$	2,912	$	78	$	(1)	$	2,989
Cost of sales		—		1,774		42		(1)		1,815
Gross Profit		—		1,138		36		—		1,174
Operating expenses:
Selling, general and administrative		38		690		28		—		756
Depreciation and amortization		9		38		—		—		47
Restructuring		6		3		—		—		9
Total operating expenses		53		731		28		—		812
Operating Income (Loss)		(53)		407		8		—		362
Interest expense		71		22		1		(25)		69
Interest (income)		(22)		(4)		—		25		(1)
Net (earnings) of equity affiliates		(390)		—		—		390		—
Income from Continuing Operations Before Provision for Income Taxes		288		389		7		(390)		294
Provision for income taxes		69		5		1		—		75
Income from Continuing Operations		219		384		6		(390)		219
Income from discontinued operations, net of tax		1		—		—		—		1
Net Income	$	220	$	384	$	6	$	(390)	$	220
Other comprehensive income-foreign currency translation adjustment		2		—		2		(2)		2
Total Comprehensive Income	$	222	$	384	$	8	$	(392)	$	222


	Six Months Ended July 30, 2017
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS
Net Sales	$	—	$	2,501	$	68	$	(1)	$	2,568
Cost of sales		—		1,509		37		(1)		1,545
Gross Profit		—		992		31		—		1,023
Operating expenses:
Selling, general and administrative		42		605		25		—		672
Depreciation and amortization		7		34		1		—		42
Total operating expenses		49		639		26		—		714
Operating Income (Loss)		(49)		353		5		—		309
Interest expense		112		66		1		(81)		98
Interest (income)		(66)		(15)		—		81		—
Net (earnings) of equity affiliates		(394)		—		—		394		—
Loss on extinguishment of debt		3		—		—		—		3
Income from Continuing Operations Before Provision for Income Taxes		296		302		4		(394)		208
Provision for income taxes		66		2		1		—		69
Income from Continuing Operations		230		300		3		(394)		139
Income from discontinued operations, net of tax		297		91		—		—		388
Net Income	$	527	$	391	$	3	$	(394)	$	527
Other comprehensive income (loss)-foreign currency translation adjustment		(2)		—		(2)		2		(2)
Total Comprehensive Income	$	525	$	391	$	1	$	(392)	$	525

CONDENSED CONSOLIDATING BALANCE SHEETS


	As of July 29, 2018
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS
ASSETS
Current assets:
Cash and cash equivalents	$	204	$	20	$	3	$	—	$	227
Receivables, net		4		815		24		—		843
Inventories		—		793		20		—		813
Intercompany receivables		—		1		—		(1)		—
Other current assets		13		31		1		—		45
Total current assets		221		1,660		48		(1)		1,928
Property and equipment, net		156		186		3		—		345
Goodwill		—		1,992		—		—		1,992
Intangible assets, net		—		202		1		—		203
Deferred tax asset		198		—		2		(81)		119
Investment in subsidiaries		4,268		—		—		(4,268)		—
Intercompany notes receivable		189		1,181		—		(1,370)		—
Other assets		13		5		—		—		18
Total assets	$	5,045	$	5,226	$	54	$	(5,720)	$	4,605
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	8	$	464	$	16	$	—	$	488
Accrued compensation and benefits		32		69		3		—		104
Current installments of long-term debt		11		—		—		—		11
Intercompany payables		—		—		1		(1)		—
Other current liabilities		124		117		6		—		247
Total current liabilities		175		650		26		(1)		850
Long-term debt, excluding current installments		2,038		—		49		—		2,087
Deferred tax liabilities		—		81		—		(81)		—
Intercompany notes payable (1)		1,181		189		—		(1,370)		—
Other liabilities		44		16		1		—		61
Total liabilities		3,438		936		76		(1,452)		2,998
Stockholder’s equity (deficit)		1,607		4,290		(22)		(4,268)		1,607
Total liabilities and stockholder’s equity (deficit)	$	5,045	$	5,226	$	54	$	(5,720)	$	4,605

(1)

During the six months ended July 29, 2018, the Parent completed a non-cash debt contribution to the Guarantor Subsidiaries of approximately $958 million.


	As of January 28, 2018
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS
ASSETS
Current assets:
Cash and cash equivalents	$	539	$	15	$	4	$	—	$	558
Receivables, net		7		584		21		—		612
Inventories		—		654		20		—		674
Intercompany receivables		—		2		—		(2)		—
Other current assets		15		15		1		—		31
Total current assets		561		1,270		46		(2)		1,875
Property and equipment, net		152		170		3		—		325
Goodwill		—		1,807		—		—		1,807
Intangible assets, net		—		90		1		—		91
Deferred tax asset		264		—		2		(61)		205
Investment in subsidiaries		2,811		—		—		(2,811)		—
Intercompany notes receivable		1,005		1,083		—		(2,088)		—
Other assets		12		3		—		—		15
Total assets	$	4,805	$	4,423	$	52	$	(4,962)	$	4,318
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	11	$	353	$	13	$	—	$	377
Accrued compensation and benefits		34		57		4		—		95
Current installments of long-term debt		11		—		—		—		11
Intercompany payables		—		—		2		(2)		—
Other current liabilities		43		88		7		—		138
Total current liabilities		99		498		26		(2)		621
Long-term debt, excluding current installments		2,032		—		58		—		2,090
Deferred tax liabilities		—		61		—		(61)		—
Intercompany notes payable		1,083		1,005		—		(2,088)		—
Other liabilities		125		16		—		—		141
Total liabilities		3,339		1,580		84		(2,151)		2,852
Stockholder's equity (deficit)		1,466		2,843		(32)		(2,811)		1,466
Total liabilities and stockholder’s equity (deficit)	$	4,805	$	4,423	$	52	$	(4,962)	$	4,318

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS


	Six Months Ended July 29, 2018
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS
Net cash flows from operating activities	$	208	$	(27)	$	5	$	—	$	186
Cash flows from investing activities
Capital expenditures		(17)		(29)		(1)		—		(47)
Payments for businesses acquired, net		—		—		(362)		—		(362)
Proceeds from sales of property and equipment		—		—		—		—		—
Investments in equity affiliates (1)		(365)		—		(3)		368		—
Proceeds from (payments of) intercompany notes		—		58		—		(58)		—
Net cash flows from investing activities	$	(382)	$	29	$	(366)	$	310	$	(409)
Cash flows from financing activities
Equity contribution (distribution) (1)		(94)		3		365		(368)		(94)
Borrowings of (repayments of) intercompany notes		(58)		—		—		58		—
Repayments of long-term debt		(5)		—		—		—		(5)
Borrowings on long-term revolver debt		—		—		10		—		10
Repayments on long-term revolver debt		—		—		(16)		—		(16)
Other financing activities		(4)		—		1		—		(3)
Net cash flows from financing activities		(161)		3		360		(310)		(108)
Effect of exchange rates on cash		—		—		—		—		—
Net increase (decrease) in cash & cash equivalents	$	(335)	$	5	$	(1)	$	—	$	(331)
Cash and cash equivalents at beginning of period		539		15		4		—		558
Cash and cash equivalents at end of period	$	204	$	20	$	3	$	—	$	227

(1)

During the six months ended July 29, 2018, the Parent completed a cash contribution of approximately $365 million to a Non-Guarantor Subsidiary to execute the purchase of A.H. Harris. Subsequent to the acquisition, the A.H. Harris entities became Guarantor Subsidiaries.


	Six Months Ended July 30, 2017
					Non-
	Debt		Subsidiary		Guarantor				Total
	Issuer		Guarantors		Subsidiaries		Eliminations		HDS
Net cash flows from operating activities	$	227	$	(41)	$	3	$	—	$	189
Cash flows from investing activities
Capital expenditures		(9)		(34)		—		—		(43)
Proceeds from sale of property and equipment		—		2		—		—		2
Proceeds from (payments of) intercompany notes		—		73		—		(73)		—
Net cash flows from investing activities	$	(9)	$	41	$	—	$	(73)	$	(41)
Cash flows from financing activities
Equity contribution		(395)		—		—		—		(395)
Borrowings of (repayments of) intercompany notes		(73)		—		—		73		—
Repayments of long-term debt		(103)		—		—		—		(103)
Borrowings on long-term revolver debt		596		—		3		—		599
Repayments on long-term revolver debt		(256)		—		(5)		—		(261)
Debt issuance costs		(6)		—		—		—		(6)
Net cash flows from financing activities		(237)		—		(2)		73		(166)
Effect of exchange rates on cash		—		—		—		—		—
Net increase (decrease) in cash & cash equivalents	$	(19)	$	—	$	1	$	—	$	(18)
Cash and cash equivalents at beginning of period		51		17		5		—		73
Cash and cash equivalents at end of period	$	32	$	17	$	6	$	—	$	55