10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 4, 2019

- OR -

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to          

Commission File Number	Exact name of Registrant as specified in its charter, Address of principal executive offices and Telephone number	State of incorporation	I.R.S. Employer Identification Number
001-35979	HD SUPPLY HOLDINGS, INC. 3400 Cumberland Boulevard SE Atlanta, Georgia 30339 (770) 852-9000	Delaware	26-0486780
333-159809	HD SUPPLY, INC. 3400 Cumberland Boulevard SE Atlanta, Georgia 30339 (770) 852-9000	Delaware	75-2007383

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class	Trading Symbol	Name of Each Exchange on Which Registered
HD Supply Holdings, Inc. common stock, par value $0.01 per share	HDS	The NASDAQ Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

HD Supply Holdings, Inc.	Yes ⌧ No ◻
HD Supply, Inc.	Yes ◻ No ⌧

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

HD Supply Holdings, Inc.	Yes ⌧ No ◻
HD Supply, Inc.	Yes ⌧ No ◻

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

HD Supply Holdings, Inc.
Large accelerated filer ☒	Accelerated filer ◻	Smaller reporting company ☐
Non-accelerated filer ◻
Emerging growth company ☐

HD Supply, Inc.
Large accelerated filer ◻	Accelerated filer ◻	Smaller reporting company ☐
Non-accelerated filer ⌧
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

HD Supply Holdings, Inc. ◻

HD Supply, Inc. ◻

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

HD Supply Holdings, Inc.	Yes ☐ No ⌧
HD Supply, Inc.	Yes ☐ No ⌧

The number of shares of the Registrant’s common stock outstanding as of September 6, 2019:

HD Supply Holdings, Inc.	165,881,892 shares of common stock, par value $0.01 per share
HD Supply, Inc.	1,000 shares of common stock, par value $0.01 per share, all of which were owned by HDS Holding Corporation, a wholly-owned subsidiary of HD Supply Holdings, Inc.

INDEX TO FORM 10-Q

		Page
	Explanatory Note	3
	Forward-looking statements and information	3
Part I.	Financial Information
Item 1.	Financial Statements
	HD Supply Holdings, Inc.
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended August 4, 2019 and July 29, 2018 (unaudited)	5
	Consolidated Balance Sheets as of August 4, 2019 and February 3, 2019 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months ended August 4, 2019 and July 29, 2018 (unaudited)	7
	Consolidated Statements of Stockholders’ Equity for the Three and Six Months ended August 4, 2019 and July 29, 2018 (unaudited)	8
	HD Supply, Inc.
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended August 4, 2019 and July 29, 2018 (unaudited)	9
	Consolidated Balance Sheets as of August 4, 2019 and February 3, 2019 (unaudited)	10
	Consolidated Statements of Cash Flows for the Six Months ended August 4, 2019 and July 29, 2018 (unaudited)	11
	Consolidated Statements of Stockholder’s Equity for the Three and Six Months ended August 4, 2019 and July 29, 2018 (unaudited)	12
	Notes to Consolidated Financial Statements (unaudited)	13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44
Part II.	Other Information
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	46
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
Signatures		48

2

EXPLANATORY NOTE

This Form 10-Q is a combined quarterly report being filed separately by two registrants: HD Supply Holdings, Inc. and HD Supply, Inc.  Unless the context indicates otherwise, any reference in this report to “Holdings” refers to HD Supply Holdings, Inc., any reference to “HDS” refers to HD Supply, Inc., the indirect wholly-owned subsidiary of Holdings, and any references to “HD Supply,” the “Company,” “we,” “us” and “our” refer to HD Supply Holdings, Inc. together with its direct and indirect subsidiaries, including HDS.  Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

FORWARD-LOOKING STATEMENTS AND INFORMATION

This quarterly report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth strategies and the industries in which we operate.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements; including those factors discussed in Item 1A, Risk Factors in our annual report on Form 10-K for the fiscal year ended February 3, 2019 and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations, financial condition and liquidity, and the development of the industries in which we operate include:

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

● our ability to maintain profitability;

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

● limitations and restrictions in the agreements governing our indebtedness;

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

● the loss of any of our significant customers;

● competitive pricing pressure from our customers;

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

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

3

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

● our ability to manage fixed costs;

● the development of alternatives to distributors in the supply chain;

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

● interruptions in the proper functioning of our information technology, or “IT” systems, including from cybersecurity threats;

● potential material liabilities under our self-insured programs;

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

● new and/or proposed trade policies could make sourcing product from foreign countries more difficult and more costly;

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

● our ability to identify and integrate new products.

You should read this report completely and with the understanding that actual future results may be materially different from expectations. These cautionary statements qualify all forward-looking statements made in this report. These forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, except share and per share data, unaudited

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Net Sales	$	1,624	$	1,600	$	3,117	$	2,989
Cost of sales		991		978		1,899		1,815
Gross Profit		633		622		1,218		1,174
Operating expenses:
Selling, general and administrative		396		384		788		756
Depreciation and amortization		26		25		51		47
Restructuring		—		2		(2)		9
Total operating expenses		422		411		837		812
Operating Income		211		211		381		362
Interest expense		28		35		56		69
Interest (income)		—		—		—		(1)
Income from Continuing Operations Before Provision for Income Taxes		183		176		325		294
Provision for income taxes		48		46		83		75
Income from Continuing Operations	$	135	$	130	$	242	$	219
Income from discontinued operations, net of tax		—		1		—		1
Net Income	$	135	$	131	$	242	$	220
Other comprehensive income (loss):
Foreign currency translation adjustment		—		1		—		2
Unrealized loss on cash flow hedge, net of tax of $5, $-, $7, and $-		(16)		—		(21)		—
Total Comprehensive Income	$	119	$	132	$	221	$	222
Weighted Average Common Shares Outstanding (thousands)
Basic		169,546		182,992		169,773		183,659
Diluted		170,057		183,822		170,386		184,456
Basic Earnings Per Share(1):
Income from Continuing Operations	$	0.80	$	0.71	$	1.43	$	1.19
Income from Discontinued Operations	$	—	$	0.01	$	—	$	0.01
Net Income	$	0.80	$	0.72	$	1.43	$	1.20
Diluted Earnings Per Share(1):
Income from Continuing Operations	$	0.79	$	0.71	$	1.42	$	1.19
Income from Discontinued Operations	$	—	$	0.01	$	—	$	0.01
Net Income	$	0.79	$	0.71	$	1.42	$	1.19

(1) May not foot due to rounding.

The accompanying notes are an integral part of these consolidated financial statements.

5

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Amounts in millions, except share and per share data, unaudited

	August 4, 2019		February 3, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	41	$	38
Receivables, less allowance for doubtful accounts of $19 and $18		860		732
Inventories		821		766
Other current assets		41		50
Total current assets		1,763		1,586
Property and equipment, net		385		370
Operating lease right-of-use assets		412		—
Goodwill		1,989		1,990
Intangible assets, net		179		191
Deferred tax asset		12		78
Other assets		16		18
Total assets	$	4,756	$	4,233
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	498	$	367
Accrued compensation and benefits		70		109
Current installments of long-term debt		11		11
Current lease liabilities		114		—
Other current liabilities		165		259
Total current liabilities		858		746
Long-term debt, excluding current installments		2,062		2,129
Long-term lease liabilities		310		—
Other liabilities		95		77
Total liabilities		3,325		2,952
Stockholders’ equity:
Common stock, par value $0.01; 1 billion shares authorized; 169.1 million and 170.7 million shares issued and outstanding at August 4, 2019 and February 3, 2019, respectively		2		2
Paid-in capital		4,086		4,067
Accumulated deficit		(1,332)		(1,572)
Accumulated other comprehensive loss		(51)		(30)
Treasury stock, at cost, 36.3 and 34.2 million shares at August 4, 2019 and February 3, 2019, respectively		(1,274)		(1,186)
Total stockholders’ equity		1,431		1,281
Total liabilities and stockholders’ equity	$	4,756	$	4,233

The accompanying notes are an integral part of these consolidated financial statements.

6

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Six Months Ended
	August 4, 2019		July 29, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	242	$	220
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization		54		51
Provision for uncollectibles		5		6
Non-cash interest expense		3		11
Stock-based compensation expense		12		12
Deferred income taxes		75		70
Other		1		(1)
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables		(133)		(183)
(Increase) decrease in inventories		(56)		(104)
(Increase) decrease in other current assets		(2)		(5)
Increase (decrease) in accounts payable and accrued liabilities		85		108
Increase (decrease) in other long-term liabilities		—		1
Net cash provided by (used in) operating activities		286		186
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(54)		(47)
Proceeds from sales of property and equipment		2		—
Payments for businesses acquired, net of cash acquired		3		(362)
Net cash provided by (used in) investing activities		(49)		(409)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares		(78)		(93)
Repayments of long-term debt		(5)		(5)
Repayments of financing liabilities		(88)		—
Borrowings on long-term revolver debt		578		10
Repayments on long-term revolver debt		(642)		(16)
Proceeds from issuance of common stock under employee benefit plans		7		6
Tax withholdings on stock-based awards		(5)		(6)
Other financing activities		(1)		(3)
Net cash provided by (used in) financing activities		(234)		(107)
Effect of exchange rates on cash and cash equivalents		—		—
Increase (decrease) in cash and cash equivalents	$	3	$	(330)
Cash and cash equivalents at beginning of period		38		558
Cash and cash equivalents at end of period	$	41	$	228

The accompanying notes are an integral part of these consolidated financial statements.

7

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in millions, shares in thousands, unaudited

	Three Months Ended						Six Months Ended
	August 4, 2019			July 29, 2018			August 4, 2019				July 29, 2018
	Shares	Amount		Shares	Amount		Shares	Amount			Shares	Amount
Common Stock
Beginning balance	205,367	$	2	204,356	$	2	204,806	$	2		203,914	$	2
Shares issued under employee benefit plans	42		—	208		—	603		—		650		—
Ending balance	205,409	$	2	204,564	$	2	205,409	$	2		204,564	$	2
Paid-in Capital
Beginning balance		$	4,079		$	4,038		$	4,067			$	4,029
Stock-based compensation			5			6			12				12
Shares issued under employee benefit plans			2			5			7				7
Other			—			(2)			—				(1)
Ending balance		$	4,086		$	4,047		$	4,086			$	4,047
Accumulated Deficit
Beginning balance		$	(1,467)		$	(1,877)		$	(1,572)			$	(1,966)
Cumulative effect of accounting change			—			—			(3)				—
Net Income			135			131			242				220
Other			—			1			1				1
Ending balance		$	(1,332)		$	(1,745)		$	(1,332)			$	(1,745)
Accumulated Other Comprehensive Income (Loss)
Beginning balance		$	(35)		$	(16)		$	(30)			$	(17)
Unrealized loss on cash flow hedge, net of tax of $5, $-, $7, and $-			(16)			—			(21)				—
Foreign currency translation adjustment			—			1			—				2
Ending balance		$	(51)		$	(15)		$	(51)			$	(15)
Treasury Stock
Beginning balance	(34,541)	$	(1,203)	(20,149)	$	(656)	(34,153)	$	(1,186)	$	(18,190)	$	(582)
Purchase of common stock	(1,795)		(71)	(620)		(25)	(2,066)		(83)		(2,427)		(93)
Shares withheld for taxes	(2)		—	(9)		—	(119)		(5)		(161)		(6)
Ending balance	(36,338)	$	(1,274)	(20,778)	$	(681)	(36,338)	$	(1,274)		(20,778)	$	(681)
Total Stockholders’ Equity	169,071	$	1,431	183,786	$	1,608	169,071	$	1,431		183,786	$	1,608

The accompanying notes are an integral part of these consolidated financial statements.

8

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Net Sales	$	1,624	$	1,600	$	3,117	$	2,989
Cost of sales		991		978		1,899		1,815
Gross Profit		633		622		1,218		1,174
Operating expenses:
Selling, general and administrative		396		384		788		756
Depreciation and amortization		26		25		51		47
Restructuring		—		2		(2)		9
Total operating expenses		422		411		837		812
Operating Income		211		211		381		362
Interest expense		28		35		56		69
Interest (income)		—		—		—		(1)
Income from Continuing Operations Before Provision for Income Taxes		183		176		325		294
Provision for income taxes		48		46		83		75
Income from Continuing Operations	$	135		130	$	242		219
Income from discontinued operations, net of tax		—		1		—		1
Net Income	$	135	$	131	$	242	$	220
Other comprehensive income (loss):
Foreign currency translation adjustment		—		1		—		2
Unrealized loss on cash flow hedge, net of tax of $5, $-, $7, and $-		(16)		—		(21)		—
Total Comprehensive Income	$	119	$	132	$	221	$	222

The accompanying notes are an integral part of these consolidated financial statements.

9

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Amounts in millions, except share and per share data, unaudited

	August 4, 2019		February 3, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	41	$	38
Receivables, less allowance for doubtful accounts of $19 and $18		860		732
Inventories		821		766
Other current assets		41		50
Total current assets		1,763		1,586
Property and equipment, net		385		370
Operating lease right-of-use assets		412		—
Goodwill		1,989		1,990
Intangible assets, net		179		191
Deferred tax asset		12		78
Other assets		16		18
Total assets	$	4,756	$	4,233
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	498	$	367
Accrued compensation and benefits		70		109
Current installments of long-term debt		11		11
Current lease liabilities		114		—
Other current liabilities		158		257
Total current liabilities		851		744
Long-term debt, excluding current installments		2,062		2,129
Long-term lease liabilities		310		—
Other liabilities		95		77
Total liabilities		3,318		2,950
Stockholder’s equity:
Common stock, par value $0.01 ; authorized 1,000 shares; issued and outstanding 1,000 shares at August 4, 2019 and February 3, 2019		—		—
Paid-in capital		2,662		2,726
Accumulated deficit		(1,173)		(1,413)
Accumulated other comprehensive loss		(51)		(30)
Total stockholder’s equity		1,438		1,283
Total liabilities and stockholder’s equity	$	4,756	$	4,233

The accompanying notes are an integral part of these consolidated financial statements.

10

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Six Months Ended
	August 4, 2019		July 29, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	242	$	220
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization		54		51
Provision for uncollectibles		5		6
Non-cash interest expense		3		11
Stock-based compensation expense		12		12
Deferred income taxes		75		70
Other		1		(1)
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables		(133)		(183)
(Increase) decrease in inventories		(56)		(104)
(Increase) decrease in other current assets		(2)		(5)
Increase (decrease) in accounts payable and accrued liabilities		85		108
Increase (decrease) in other long-term liabilities		—		1
Net cash provided by (used in) operating activities		286		186
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(54)		(47)
Proceeds from sales of property and equipment		2		—
Payments for businesses acquired, net of cash acquired		3		(362)
Net cash provided by (used in) investing activities		(49)		(409)
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity distribution to Parent		(76)		(94)
Repayments of long-term debt		(5)		(5)
Repayments of financing liabilities		(88)		—
Borrowings on long-term revolver debt		578		10
Repayments on long-term revolver debt		(642)		(16)
Other financing activities		(1)		(3)
Net cash provided by (used in) financing activities		(234)		(108)
Effect of exchange rates on cash and cash equivalents		—		—
Increase (decrease) in cash and cash equivalents	$	3	$	(331)
Cash and cash equivalents at beginning of period		38		558
Cash and cash equivalents at end of period	$	41	$	227

The accompanying notes are an integral part of these consolidated financial statements.

11

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

Dollars in millions, shares in thousands, unaudited

	Three Months Ended						Six Months Ended
	August 4, 2019			July 29, 2018			August 4, 2019			July 29, 2018
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Common Stock
Beginning balance	1	$	—	1	$	—	1	$	—	1	$	—
Ending balance	1	$	—	1	$	—	1	$	—	1	$	—
Paid-in Capital
Beginning balance		$	2,719		$	3,226		$	2,726		$	3,290
Equity distribution to Parent			(62)			(23)			(76)			(94)
Stock-based compensation			5			6			12			12
Other			—			(1)			—			—
Ending balance		$	2,662		$	3,208		$	2,662		$	3,208
Accumulated Deficit
Beginning balance		$	(1,308)		$	(1,718)		$	(1,413)		$	(1,807)
Cumulative effect of accounting change			—			—			(3)			—
Net Income			135			131			242			220
Other			—			1			1			1
Ending balance		$	(1,173)		$	(1,586)		$	(1,173)		$	(1,586)
Accumulated Other Comprehensive Income (Loss)
Beginning balance		$	(35)		$	(16)		$	(30)		$	(17)
Unrealized loss on cash flow hedge, net of tax of $5, $-, $7, and $-			(16)			—			(21)			—
Foreign currency translation adjustment			—			1			—			2
Ending balance		$	(51)		$	(15)		$	(51)		$	(15)
Total Stockholder's Equity	1	$	1,438	1	$	1,607	1	$	1,438	1	$	1,607

The accompanying notes are an integral part of these consolidated financial statements.

12

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

HD Supply Holdings, Inc. (‘‘Holdings’’) indirectly owns all of the outstanding common stock of HD Supply, Inc. (“HDS”).

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in two distinct market sectors: Maintenance, Repair & Operations and Specialty Construction. Through approximately 270 branches and 44 distribution centers in the U.S. and Canada, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services includes approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from construction to maintenance, repair and operations.

HD Supply is managed primarily on a product line basis and reports results of operations in two reportable segments. The reportable segments are Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.

Basis of Presentation

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended February 3, 2019, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).

Fiscal Year

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks.  The three months ended August 4, 2019 (“second quarter 2019”) and July 29, 2018 (“second quarter 2018”) both include 13 weeks. The six months ended August 4, 2019 and July 29, 2018 both include 26 weeks.

Principles of Consolidation

The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS. The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates.

Self-Insurance

HD Supply has a high-deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for certain legal claims and medical claims, while maintaining per employee stop-loss coverage. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At August 4, 2019 and February 3, 2019, self-insurance reserves totaled approximately $52 million and $49 million, respectively.

NOTE 2 — ACQUISITIONS

HD Supply enters into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), the results of acquisitions completed by HD Supply are reflected in the Company’s consolidated financial statements from the date of acquisition forward.

On March 5, 2018, the Company completed the acquisition of A.H. Harris Construction Supplies (“A.H. Harris”) for a purchase price of approximately $359 million, net of cash acquired and the final working capital settlement. The Company received the final working capital settlement of approximately $3 million in second quarter 2019. A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expanded Construction & Industrial’s market presence in the northeastern United States.

In accordance with ASC 805, the Company recorded the following assets and liabilities at fair value as of the date of the A.H. Harris acquisition: $182 million in goodwill, $123 million in definite-lived intangible assets, $12 million in property & equipment, $54 million in net working capital, and $10 million in deferred tax liabilities. The total amount of goodwill deductible for tax purposes is $19 million. The definite-lived intangible assets are comprised of $110 million in customer relationships and $13 million of trade names that will be amortized over a period of 12 years and 5 years, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 — DEBT

HDS’s long-term debt as of August 4, 2019 and February 3, 2019 consisted of the following (dollars in millions):

	August 4, 2019			February 3, 2019
	Outstanding		Interest	Outstanding		Interest
	Principal		Rate %(1)	Principal		Rate %(1)
Senior ABL Facility due 2022	$	284	3.55	$	348	3.83
Term B-5 Loans due 2023		1,062	3.98		1,067	4.25
October 2018 Senior Unsecured Notes due 2026		750	5.375		750	5.375
Total gross long-term debt	$	2,096		$	2,165
Less unamortized discount		(3)			(4)
Less unamortized deferred financing costs		(20)			(21)
Total net long-term debt	$	2,073		$	2,140
Less current installments		(11)			(11)
Total net long-term debt, excluding current installments	$	2,062		$	2,129

(1) Represents the stated rate of interest, without including the effect of discounts, premiums, or interest rate swap agreements.

Senior Credit Facilities

Senior ABL Facility

The Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,000 million (subject to availability under a borrowing base). Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of August 4, 2019, HDS had $689 million of Excess Availability (as defined in the Senior ABL Facility agreement) under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $27 million in letters of credit issued and including $5 million of borrowings available on qualifying cash balances). As of August 4, 2019, approximately $49 million of the outstanding borrowings on the Senior ABL Facility are Canadian dollar-denominated borrowings.

At HDS’s option, the interest rates applicable to the loans under the Senior ABL Facility are based (i) in the case of U.S. dollar-denominated loans, either at London Interbank Offered Rate (“LIBOR”) plus an applicable margin, or Prime Rate (as defined in the Senior ABL Facility agreement) plus an applicable margin and (ii) in the case of Canadian dollar-denominated loans, either the Bankers’ Acceptance (“BA”) rate plus an applicable margin, or the Canadian Prime Rate plus an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the agreement governing the Senior ABL Facility, based on average Excess Availability for the previous fiscal quarter. The Senior ABL Facility also contains a letter of credit fee computed at a rate per annum equal to the Applicable Margin (as defined in the Senior ABL Facility agreement) then in effect for LIBOR Loans and an unused commitment fee subject to a pricing grid, included in the agreement governing the Senior ABL Facility, based on Excess Availability.

The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility.

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(Unaudited)

Senior Term Loan Facility

HDS’s Senior Term Facility (the “Senior Term Facility”) consists of a senior secured term loan facility (the ‘‘Term Loan Facility,’’ and the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans in an original aggregate principal amount of $1,070 million (the “Term B-5 Loans”). The Term B-5 Loans will mature on October 17, 2023 and amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loans with the balance payable at the maturity date. The Term B-5 Loans bear interest at the applicable margin for borrowings of 1.75% for LIBOR borrowings and 0.75% for base rate borrowings.

For additional information on HDS’s Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to the Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended February 3, 2019.

Unsecured Notes

5.375% Senior Unsecured Notes due 2026

HDS issued $750 million aggregate principal amount of 5.375% Senior Unsecured Notes due 2026 (the “October 2018 Senior Unsecured Notes”) under an Indenture, dated as of October 11, 2018 (the “October 2018 Senior Unsecured Notes Indenture”) among HDS, certain subsidiaries of HDS as guarantors (the “Subsidiary Guarantors”) and the Trustee. The October 2018 Senior Unsecured Notes bear interest at a rate of 5.375% per annum and will mature on October 15, 2026. Interest is paid semi-annually on April 15^th and October 15^th of each year.

The October 2018 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS’s existing and future senior indebtedness, senior in right of payment to all of HDS’s existing and future subordinated indebtedness, and effectively subordinated to all of HDS’s existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, to the extent of the value of the collateral securing each indebtedness.

The October 2018 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS’s direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the Senior ABL Facility or that guarantees HDS’s obligations under any credit facility or capital market securities. These guarantees are subject to release under customary circumstances as stipulated in the October 2018 Senior Unsecured Notes Indenture.

The October 2018 Senior Unsecured Notes and related guarantees have not been, and are not required to be, registered under the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction.

Redemption

HDS may redeem the October 2018 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2021, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the October 2018 Senior Unsecured Notes Indenture and (2) on and after October 15, 2021, at the applicable redemption price set forth below (expressed as a percentage of principal

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(Unaudited)

amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

Year	Percentage
2021	102.688	%
2022	101.344	%
2022 and thereafter	100.000	%

In addition, at any time prior to October 15, 2021, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the October 2018 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.375% of the principal amount in respect of the October 2018 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the October 2018 Senior Unsecured Notes are redeemed, an aggregate principal amount of the October 2018 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of October 2018 Senior Unsecured Notes must remain outstanding immediately after each such redemption of October 2018 Senior Unsecured Notes.

Debt covenants

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness and dividend payments and restrictions on the use of proceeds from asset dispositions. As of August 4, 2019, HDS was in compliance with all such covenants that were in effect on such date. Furthermore, while these restrictions may, at times, limit the amount of dividends, distributions or intercompany transfers that HDS or a particular subsidiary guarantor may pay or make, as applicable, the Company believes that, as of August 4, 2019, it had no such limitations.

NOTE 4 — DERIVATIVE INSTRUMENTS

Hedge Strategy and Accounting Policy

The Company enters into derivative financial instruments for hedging purposes. In hedging the exposure to variable cash flows on forecasted transactions, deferral accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the underlying exposure. If a derivative instrument either initially fails or later ceases to meet the criteria for deferral accounting, any subsequent gains or losses are recognized currently in income. Cash flows resulting from derivative financial instruments are classified in the same category as the cash flows from the items being hedged.

Cash Flow Hedge

On October 24, 2018, the Company entered into an interest rate swap agreement with a notional amount of $750 million, designated as a cash flow hedge in accordance with ASC 815, “Derivatives and Hedging ,” to hedge the variability of cash flows in interest payments associated with the Company’s variable-rate debt. The interest rate swap agreement swaps a LIBOR rate for a fixed rate of 3.07% and matures on October 17, 2023. The swap effectively converts a portion of the Company’s Term B-5 Loans from a rate of LIBOR plus 1.75% to a 4.82% fixed rate.

As of August 4, 2019, the fair value of the Company’s interest rate swap in the Consolidated Balance Sheet was a liability of $48 million, which was reflected as $9 million in Other current liabilities and $39 million in Other liabilities in the Consolidated Balance Sheet. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“OCI”) within Stockholders’ Equity

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(Unaudited)

in the Consolidated Balance Sheets and are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.  See “Note 8 - Accumulated Other Comprehensive Income (Loss),” for further information.

NOTE 5 — FAIR VALUE MEASUREMENTS

The fair value measurements and disclosure principles of GAAP (ASC 820, “Fair Value Measurements and Disclosures”) define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements.  These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly;

Level 3 — Unobservable inputs in which little or no market activity exists.

As of August 4, 2019 and February 3, 2019, the fair value measurement of the financial liability associated with the Company’s interest rate swap contract was $48 million and $20 million, respectively. The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the interest rate swap.  See “Note 4 – Derivative Instruments” for further information on the Company’s interest rate swap contract.

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of August 4, 2019 and February 3, 2019 (amounts in millions):

	As of August 4, 2019				As of February 3, 2019
	Recorded		Estimated		Recorded		Estimated
	Amount(1)		Fair Value		Amount(1)		Fair Value
Senior ABL Facility	$	284	$	283	$	348	$	346
Term Loans and Notes		1,812		1,857		1,817		1,815
Total	$	2,096	$	2,140	$	2,165	$	2,161

(1) These amounts do not include accrued interest; accrued interest is classified as Other current liabilities in the accompanying Consolidated Balance Sheets. These amounts do not include any related discounts, premiums, or deferred financing costs.

The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt.  Management’s fair value estimates were based on quoted prices for recent trades of HDS’s long-term debt, recent similar credit facilities initiated by companies with like credit quality in similar industries, quoted prices for similar instruments, and inquiries with certain investment communities.

NOTE 6 – LEASES

The Company adopted ASU No. 2016-02, “Leases (Topic 842),” and its related amendments (collectively “ASC 842”) on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. The standard requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for all leases.

At adoption of ASC 842, the Company recognized ROU assets for operating leases of approximately $430 million and operating lease liabilities of approximately $447 million, the difference attributable to the reclassification of prepaid

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(Unaudited)

rent and accrued rent balances outstanding at adoption into the ROU assets and the cumulative adjustment recorded to the opening balance of retained earnings. The cumulative adjustment, net of tax, recorded to the opening balance of retained earnings was $3 million. The Company’s finance leases are immaterial. The adoption of ASC 842 did not have a material impact on the Company’s income statement. The Company’s consolidated financial statements for the three and six months ended August 4, 2019 are presented under ASC 842, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard, ASC 840, “Leases.”

The Company elected the package of practical expedients for existing contracts permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases, the historical assessment of whether contracts are or contain leases, and the determination of initial direct costs. The Company did not elect the hindsight practical expedient.

Lease Accounting Policies and Disclosures

The Company determines if an agreement is a lease upon inception. An agreement is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.

The Company has operating leases for distribution centers, warehouses, office space, and transportation vehicles. The Company has an immaterial amount of financing leases for other equipment. Certain leases for real estate contain options to extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the option period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, the Company considers all relevant economic factors that would compel the Company to exercise or not exercise an option.

Many of the Company’s real estate leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. The Company determined these charges are variable non-lease components and did not elect the practical expedient to combine with lease components. Additionally, many of the Company’s transportation equipment leases require additional payments based on the underlying usage of the assets. Certain lease agreements include rental payments adjusted annually based on changes in an inflation index. Due to the variable nature of these costs, the cash flows associated with these charges are expensed as incurred and not included in the lease payments used to determine the ROU asset and associated lease liability.

Lease ROU assets and associated liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company’s leases generally do not provide a readily determinable implicit borrowing rate. As such, the discount rate used to calculate present value is the Company’s collateralized incremental borrowing rate. The incremental borrowing rate for each lease varies in accordance with the lease term. Lease expense is recognized on a straight-line basis over the lease term.

Total lease cost for the Company for the three and six months ended August 4, 2019 is $37 million and $73 million, respectively, and is primarily comprised of operating lease costs. Lease costs associated with finance leases and income related to sub-lease activity are immaterial for the Company.

As of August 4, 2019, the weighted average remaining lease term for operating leases is 5.1 years and the weighted average discount rate is 4.67%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the six months ended August 4, 2019, the Company’s cash flows from operating activities included $81 million of cash payments for amounts included in the measurement of operating lease liabilities. During the six months ended August 4, 2019, the Company obtained ROU assets of $40 million in exchange for operating lease liabilities.

As of August 4, 2019, maturities of operating lease liabilities were as follows (amounts in millions):

	Fiscal Year
	Remainder
	of 2019		2020		2021		2022		2023		Thereafter		Total
Operating Lease Payments	$	69		112		101		73		53		86	$	494
Less imputed interest														70
Total Discounted Lease Liability													$	424

As of August 4, 2019, the Company has additional leases which have not yet commenced, but are anticipated to commence in fiscal 2019. Commencement occurs when the Company is granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. The Company anticipates these leases will result in approximately $40 million of ROU assets obtained in exchange for lease liabilities.

Disclosure related to periods prior to adoption of ASC 842:

Rental expense under operating leases was $142 million, $127 million, and $118 million in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Rental expense under operating leases for the three and six months ended July 29, 2018 was $34 million and $68 million, respectively.

As of February 3, 2019, future minimum aggregate rental payments under non-cancelable leases were as follows (amounts in millions):

	Fiscal Year
	2019		2020		2021		2022		2023		Thereafter		Total
Operating Leases	$	140		104		88		61		42		78	$	513

Corporate headquarters

In February 2016, the Company entered into a build-to-suit arrangement for a leadership development and headquarters facility in Atlanta, Georgia, which began construction in 2016. In accordance with ASC 840, for build-to-suit arrangements where the Company is involved in the construction of structural improvements prior to the commencement of the lease or takes some level of construction risk, the Company was considered the owner of the assets and land during the construction period. Accordingly, during construction activities, the Company recorded a Construction in progress asset within Property and equipment and a corresponding financing liability on the Consolidated Balance Sheet for construction costs incurred by the landlord.

The lease commenced in February 2018, with the leased asset and corresponding financing liability valued at $87 million each. In accordance with the sale and leaseback criteria of GAAP, the build-to-suit arrangement and subsequent lease failed to qualify as a sale. Therefore, the transaction was accounted for as a financing arrangement, whereby both the leased asset and the financing liability remained on the Company’s Consolidated Balance Sheet. The asset was depreciated as if the Company was the legal owner and rental payments were allocated between interest expense and principal repayment of the financing liability.

The Company exercised its option to purchase the leased asset, completing the purchase on February 4, 2019 for a total purchase price of $88 million. As the purchase option was executed on the first day of fiscal 2019, the Company did

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(Unaudited)

not recognize an ROU asset for the finance lease and a corresponding lease liability as part of the adoption of ASC 842 and excluded the future minimum rental payments from the commitment tables disclosed above.

NOTE 7 — INCOME TAXES

The Company’s combined federal, state, and foreign effective tax rate for continuing operations was 25.5% for both the six months ended August 4, 2019 and the six months ended July 29, 2018.

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits.

As of August 4, 2019 and February 3, 2019, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $17 million. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of August 4, 2019 and February 3, 2019 was zero. As of August 4, 2019 and February 3, 2019, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $7 million. Each reporting period, the Company assesses available positive and negative evidence and estimates if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated OCI ("AOCI") consists of accumulated net unrealized gains or losses associated with foreign currency translation adjustments and the changes in the fair value of derivatives designated as cash flow hedges.

The balances and changes in AOCI, net of tax by component for the three and six months ended August 4, 2019 and July 29, 2018 was as follows (amounts in millions):

	Three Months Ended				Six Months Ended
	August 4,		July 29,		August 4,		July 29,
	2019		2018		2019		2018
Foreign currency translation adjustment:
Beginning balance	$	(15)	$	(16)	$	(15)	$	(17)
Other comprehensive income (loss) before reclassifications		—		1		—		2
Amounts reclassified from accumulated OCI into earnings		—		—		—		—
Ending balance	$	(15)	$	(15)	$	(15)	$	(15)
Cash flow hedge, net of tax:
Beginning balance	$	(20)	$	—	$	(15)	$	—
Other comprehensive income (loss) before reclassifications		(17)		—		(23)		—
Amounts reclassified from accumulated OCI into earnings(1)		1		—		2		—
Ending balance, net of tax of $12, $ -, $12, and $ -	$	(36)	$	—	$	(36)	$	—
Total ending balance of AOCI	$	(51)	$	(15)	$	(51)	$	(15)

(1) Unrealized loss reclassified into Interest expense.

NOTE 9 - BASIC AND DILUTED WEIGHTED-AVERAGE COMMON SHARES

The following basic and diluted weighted-average common shares information is provided for Holdings.

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(Unaudited)

The reconciliation of basic to diluted weighted-average common shares for the three and six months ended August 4, 2019 and July 29, 2018 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	August 4, 2019	July 29, 2018	August 4, 2019	July 29, 2018
Weighted-average common shares	169,546	182,992	169,773	183,659
Effect of potentially dilutive stock plan securities	511	830	613	797
Diluted weighted-average common shares	170,057	183,822	170,386	184,456
Stock plan securities excluded from dilution(1)	2,091	1,536	2,693	2,133

(1) Represents securities not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

Stock plan securities consist of securities (stock options, restricted stock, restricted stock units, and performance share units) granted under Holdings’ stock-based compensation plans.

NOTE 10 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

Receivables as of August 4, 2019 and February 3, 2019 consisted of the following (amounts in millions):

	August 4, 2019		February 3, 2019
Trade receivables, net of allowance for doubtful accounts	$	781	$	657
Vendor rebate receivables		61		57
Other receivables		18		18
Total receivables, net	$	860	$	732

Other Current Liabilities

Other current liabilities as of August 4, 2019 and February 3, 2019 consisted of the following (amounts in millions):

	HD Supply Holdings, Inc.				HD Supply, Inc.
	August 4, 2019		February 3, 2019		August 4, 2019		February 3, 2019
Corporate headquarters financing liability(1)	$	—	$	87	$	—	$	87
Accrued non-income taxes		36		35		36		35
Accrued interest		14		14		14		14
Unsettled share repurchases		7		2		—		—
Other		108		121		108		121
Total other current liabilities	$	165	$	259	$	158	$	257

(1) This amount represented the financing liability for the Company’s corporate headquarters that was purchased on February 4, 2019. Please see “Note 6 – Leases” for further information on the purchase of the Company’s corporate headquarters.

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(Unaudited)

Supplemental Cash Flow Information

Cash paid for interest in the six months ended August 4, 2019 and July 29, 2018 was $53 million and $61 million, respectively.

Cash paid for income taxes, net of refunds, in the six months ended August 4, 2019 and July 29, 2018 was approximately $10 million and $5 million, respectively.

During the six months ended August 4, 2019 and July 29, 2018, HDS executed equity cash distributions of $76 million and $94 million, respectively, to Holdings, via HDS’s direct parent, HDS Holding Corporation. The equity distribution from HDS and return of capital recognized by Holdings were eliminated in consolidation of Holdings and its wholly-owned subsidiaries, including HDS.

Share Repurchases

During fiscal 2014, Holdings’ Board of Directors authorized a share repurchase program to be funded from cash proceeds received from exercises of employee stock options. This share repurchase program does not obligate Holdings to acquire any particular amount of common stock, and it may be terminated at any time at Holdings’ discretion. During August 2017 and November 2018, Holdings’ Board of Directors authorized two additional share repurchase programs for up to an aggregate amount of $500 million each of Holdings’ common stock.

Holdings’ share repurchases under these plans for the six months ended August 4, 2019 and July 29, 2018 were as follows (dollars in millions):

	Six Months Ended
	August 4, 2019			July 29, 2018
	Number of	Cost of		Number of	Cost of
	Shares	Shares		Shares	Shares
November 2018 Plan	1,911,964	$	76	—	$	—
August 2017 Plan	—		—	2,298,643		88
April 2014 Plan	154,144		7	127,498		5
Total share repurchases	2,066,108	$	83	2,426,141	$	93

NOTE 11 — COMMITMENTS AND CONTINGENCIES

Legal Matters

On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “securities litigation defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”).  Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the securities litigation defendants on behalf of all persons other than the securities litigation defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive.  The Amended Complaint alleges that the securities litigation defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit.  The Amended Complaint asserts claims against the securities litigation defendants under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

other costs. On September 19, 2018, the Court granted in part and denied in part the securities litigation defendants’ motion to dismiss. The matter is now in discovery.  

On August 8, 2017, two shareholder derivative complaints were filed in the U.S. District Court for the Northern District of Georgia, naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions.  The complaints assert claims against the individual defendants under Section 14(a) of the Exchange Act, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling.  The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. On October 22, 2018, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings and administratively closing the matter until after any summary judgment motion filed relating to the Amended Complaint is adjudicated.

On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaint generally alleges that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding supply chain corrective actions.  The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling.  The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance and internal procedures, and seeks to recover attorneys’ fees and other costs. The individual defendants moved to dismiss the complaint on November 2, 2018. On January 14, 2019, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings until after any summary judgment motions filed relating to the Amended Complaint is adjudicated.

The Company intends to defend these lawsuits vigorously.  Given the stage of the complaints and the claims and issues presented in the above matters, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.

In March 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting information and documents from calendar years 2016 and 2017 relating to, among other things, the Company’s Facilities Maintenance business unit and to the allegations of the Amended Complaint described above. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC’s investigation. We cannot currently predict the timing or outcome of this ongoing investigation.

HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters with loss contingencies that are reasonably possible and reasonably estimable, including matters with loss contingencies that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued

24

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

for, management has estimated the aggregate range of potential loss as $0 to $10 million. If a material loss is probable or reasonably possible, and in either case estimable, the Company has considered it in the analysis and it is included in the discussion set forth above.

NOTE 12 — SEGMENT INFORMATION

HD Supply’s operating segments are based on management structure and internal reporting. Each segment offers different products and services to the end customer, except for Corporate, which provides general corporate overhead support. The Company determines its reportable segments in accordance with the principles of segment reporting within ASC 280, “Segment Reporting.” For purposes of evaluation under these segment reporting principles, the Chief Operating Decision Maker for HD Supply assesses HD Supply’s ongoing performance, based on the periodic review and evaluation of Net sales, Adjusted EBITDA and certain other measures for each of the operating segments.

HD Supply has two reportable segments, each of which is presented below:

● Facilities Maintenance—Facilities Maintenance distributes maintenance, repair and operations products, provides value-add services and fabricates custom products to multifamily, hospitality, healthcare and institutional facilities.

● Construction & Industrial—Construction & Industrial distributes specialized hardware, tools, engineered materials and safety products to non-residential and residential contractors. Construction & Industrial also offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals.

In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.

25

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present Net sales, Adjusted EBITDA, and other measures for both of the reportable segments and total operations for the periods indicated (amounts in millions):

							Total
	Facilities		Construction				Continuing
	Maintenance		& Industrial		Eliminations		Operations
Three Months Ended August 4, 2019
Net sales	$	830	$	795	$	(1)	$	1,624
Adjusted EBITDA		149		95		—		244
Depreciation(1) & Software Amortization		11		10		—		21
Other Intangible Amortization		2		4		—		6
Three Months Ended July 29, 2018
Net sales	$	820	$	781	$	(1)	$	1,600
Adjusted EBITDA		150		96		—		246
Depreciation(1) & Software Amortization		9		12		—		21
Other Intangible Amortization		2		4		—		6
Six Months Ended August 4, 2019
Net sales	$	1,602	$	1,516	$	(1)	$	3,117
Adjusted EBITDA		283		164		—		447
Depreciation(1) & Software Amortization		21		21		—		42
Other Intangible Amortization		4		8		—		12
Six Months Ended July 29, 2018
Net sales	$	1,543	$	1,447	$	(1)	$	2,989
Adjusted EBITDA		273		163		—		436
Depreciation(1) & Software Amortization		18		22		—		40
Other Intangible Amortization		4		7		—		11

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

26

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Reconciliation to Consolidated Financial Statements

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Total Adjusted EBITDA	$	244	$	246	$	447	$	436
Depreciation and amortization(1)		27		27		54		51
Stock-based compensation		5		6		12		12
Restructuring(2)		—		2		(2)		9
Acquisition and integration costs(3)		—		1		1		3
Other		1		(1)		1		(1)
Operating income		211		211		381		362
Interest expense		28		35		56		69
Interest (income)		—		—		—		(1)
Income from Continuing Operations Before Provision for Income Taxes		183		176		325		294
Provision for income taxes		48		46		83		75
Income from continuing operations		135		130		242		219
Income from discontinued operations, net of tax		—		1		—		1
Net income	$	135	$	131	$	242	$	220

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

(2) For the six months ended August 4, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(3) Represents the cost incurred in the acquisition and integration of A.H. Harris Construction Supplies.

NOTE 13 — REVENUE

The Company’s revenues are earned from contracts with customers. Contracts include written agreements, as well as arrangements that are implied by customary practices or law.

Nature of Products and Services

Both Facilities Maintenance and Construction & Industrial serve unique end markets. Facilities Maintenance offers products that serve the maintenance, repair and operations (“MRO”) end market as well as value-added services. Construction & Industrial offers products used broadly across both the residential and non-residential construction end markets as well as light remodeling supplies for small remodeling contractors and trade professionals. For additional information regarding the nature of products and services offered by the Company’s reportable segments, see “Description of segments” within Item 2 of this quarterly report on Form 10-Q.

Revenue Recognition

The Company recognizes revenue, net of allowances for returns and discounts and any taxes collected from the customer, when an identified performance obligation is satisfied by the transfer of control of promised products or services to the customer. The Company ships products to customers by internal fleet and third-party carriers. Transfer of control to the customer for products generally occurs at the point of destination (i.e., upon transfer of title and risk of loss of product). Transfer of control to the customer for services occurs when the customer has the right to direct the use of and obtain substantially all the remaining benefits of the asset that is created or enhanced from the service. The Company accounts

27

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general and administrative expenses.

Disaggregation of Revenue

The Company elected to disaggregate the revenue of Facilities Maintenance by its demand types: MRO and Property Improvement, and Construction & Industrial by its end markets: Non-Residential Construction, Residential Construction, and Other. The Company believes this disaggregation appropriately meets the objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The prior periods’ revenue disaggregation for Construction & Industrial has been revised by an immaterial amount.

The table below represents disaggregated revenue for Facilities Maintenance and Construction & Industrial with Inter-segment eliminations (amounts in millions):

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Facilities Maintenance
Maintenance, Repair, and Operations	$	732	$	722	$	1,424	$	1,358
Property Improvement		98		98		178		185
Total Facilities Maintenance Net Sales		830		820		1,602		1,543
Construction & Industrial
Non-Residential Construction		545		538		1,042		983
Residential Construction		198		194		378		373
Other		52		49		96		91
Total Construction & Industrial Net Sales		795		781		1,516		1,447
Inter-segment Eliminations		(1)		(1)		(1)		(1)
Total HD Supply Net Sales	$	1,624	$	1,600	$	3,117	$	2,989

NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Leases – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842),” amended by ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),” ASU No. 2018-01, “Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements.” The amended guidance requires companies to recognize all leases as assets and liabilities for the rights and obligations created by leased assets on the consolidated balance sheet. ASU No. 2016-02 also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. ASU No. 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU No. 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.

The Company adopted this guidance on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. See “Note 6 – Leases” for the Company’s lease accounting policies and disclosures.

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recently Issued Accounting Pronouncements Not Yet Adopted

Cloud Computing Arrangements – In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). The new guidance aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also provides for additional disclosure requirements regarding the nature of an entity’s hosting arrangements that are service contracts. The ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15.

Goodwill – In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The amendments in this update should be applied on a prospective basis. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), amended by ASU No 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” The amended guidance modifies the measurement of expected credit losses of certain financial instruments, including trade receivables. The amended guidance also prescribes additional disclosure requirements for certain financial instruments. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting ASU 2016-13.

29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is combined for two registrants: HD Supply Holdings, Inc. and HD Supply, Inc.  Unless the context indicates otherwise, any reference in this discussion and analysis to “Holdings” refers to HD Supply Holdings, Inc., any reference to “HDS” refers to HD Supply, Inc., the indirect wholly-owned subsidiary of Holdings, and any references to “HD Supply,” the “Company,” “we,” “us” and “our” refer to Holdings together with its direct and indirect subsidiaries, including HDS.

HD Supply is one of the largest industrial distributors in North America. We believe we have leading positions in the two distinct market sectors in which we specialize: Maintenance, Repair & Operations (“MRO”) and Specialty Construction. Through approximately 270 branches and 44 distribution centers, in the U.S. and Canada, we serve these markets with an integrated go-to-market strategy. We have approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. We serve approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. Our broad range of end-to-end product lines and services include approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from construction to maintenance, repair and operations.

Description of segments

We operate our Company through two reportable segments: Facilities Maintenance and Construction & Industrial.

Facilities Maintenance.  Facilities Maintenance distributes MRO products, provides value-add services and fabricates custom products. The industries that Facilities Maintenance serves include multifamily, hospitality, healthcare and institutional facilities. Products include electrical and lighting items, plumbing, HVAC products, appliances, janitorial supplies, hardware, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance and water and wastewater treatment products.

Construction & Industrial.  Construction & Industrial distributes specialized hardware, tools and engineered materials to non-residential and residential contractors. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, cutting tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, erosion and sediment control equipment and other engineered materials used broadly across all types of non-residential and residential construction. Construction & Industrial also includes Home Improvement Solutions, which offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals.

In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.

Acquisitions

We enter into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations,” the results of the acquisitions we completed are reflected in our consolidated financial statements from the date of acquisition forward.

30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

On March 5, 2018, our Construction & Industrial business acquired A.H. Harris Construction Supplies (“A.H. Harris”) for a purchase price of approximately $359 million in cash, adjusted for the final working capital settlement received in the three months ended August 4, 2019 (“second quarter 2019”). A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expands Construction & Industrial’s market presence in the northeastern United States. For additional detail related to the acquisition of A.H. Harris, see “Note 2 - Acquisitions,” in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

Seasonality

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

Fiscal Year

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.  The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks.  The three months ended August 4, 2019 (“second quarter 2019”) and July 29, 2018 (“second quarter 2018”) both include 13 weeks. The six months ended August 4, 2019 and July 29, 2018 both include 26 weeks.

Key business metrics

Net sales

We earn our Net sales primarily from the sale of construction, maintenance, repair and operations, and renovation and improvement-related products and our provision of related services to approximately 500,000 customers, including contractors, government entities, maintenance professionals, home builders and industrial businesses. We recognize sales, net of sales tax and allowances for returns and discounts, when an identified performance obligation is satisfied by transfer of the promised goods or services to the customer. Net sales in certain business units fluctuate with the price of commodities as we seek to minimize the effects of changing commodities prices by passing such increases in the prices of certain commodity-based products to our customers.

We ship products to customers by internal fleet and by third-party carriers. Net sales are recognized from product sales when control of the products and services are passed to the customer, which generally occurs at the point of destination.

We include shipping and handling fees billed to customers in Net sales. Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through Cost of sales as inventories are sold. We account for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general and administrative expenses.

Gross profit

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Operating expenses

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

Adjusted EBITDA and Adjusted net income

Adjusted EBITDA and Adjusted net income are not recognized terms under generally accepted accounting principles in the United States of America (“GAAP”) and do not purport to be alternatives to Net income as a measure of operating performance. We present Adjusted EBITDA and Adjusted net income because each is a primary measure used by management to evaluate operating performance. In addition, we present Adjusted net income to measure our overall profitability as we believe it is an important measure of our performance. We believe the presentation of Adjusted EBITDA and Adjusted net income enhances our investors’ overall understanding of the financial performance of our business. We believe Adjusted EBITDA and Adjusted net income are helpful in highlighting operating trends, because each excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, age and book depreciation of facilities and capital investments.

Adjusted EBITDA is based on ‘‘Consolidated EBITDA,’’ a measure which is defined in our Senior Credit Facilities and used in calculating financial ratios in several material debt covenants. Borrowings under these facilities are a key source of liquidity and our ability to borrow under these facilities depends upon, among other things, our compliance with such financial ratio covenants. In particular, both facilities contain restrictive covenants that can restrict our activities if we do not maintain financial ratios calculated based on Consolidated EBITDA. Our Senior ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1:1 if our specified excess availability (including an amount by which our borrowing base exceeds the outstanding amounts) under the Senior ABL Facility falls below the greater of $100 million and 10% of the lesser of (A) the Borrowing Base and (B) the Total Facility Commitment (both as defined in the Senior ABL Facility agreement). Adjusted EBITDA is defined as Net income (loss) less Income from discontinued operations, net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision for income taxes, (iii) Depreciation and amortization and further adjusted to exclude loss on extinguishment of debt, non-cash items and certain other adjustments to Consolidated Net Income, including costs associated with capital structure enhancements permitted in calculating Consolidated EBITDA under our Senior Credit Facilities. We believe that presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate and about certain non-cash and other items. The Term Loan Facility and Senior ABL Facility permit us to make certain additional adjustments to Consolidated Net Income in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this quarterly report on Form 10-Q. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA. These covenants are important to the Company as failure to comply with certain covenants would result in a default under our Senior Credit Facilities. The material covenants in our Senior Credit Facilities are discussed in our annual report on Form 10-K for the fiscal year ended February 3, 2019.

Adjusted net income is defined as Net income less Income from discontinued operations, net of tax, further adjusted for loss on extinguishment of debt and certain non-cash, non-recurring, non-operational, or unusual items, net of tax.

We believe that Adjusted EBITDA and Adjusted net income are frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted net income measure when reporting their results. We compensate for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of Adjusted EBITDA and Adjusted net income may not be comparable to other similarly titled measures of other companies.

32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

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

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

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

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

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

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

The following table presents a reconciliation of Net Income and Income from continuing operations, the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented (amounts in millions):

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Net income	$	135	$	131	$	242	$	220
Less income from discontinued operations, net of tax		—		1		—		1
Income from continuing operations		135		130		242		219
Interest expense		28		35		56		68
Provision for income taxes		48		46		83		75
Depreciation and amortization(1)		27		27		54		51
Restructuring charges(2)		—		2		(2)		9
Stock-based compensation		5		6		12		12
Acquisition and integration costs(3)		—		1		1		3
Other		1		(1)		1		(1)
Adjusted EBITDA	$	244	$	246	$	447	$	436

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

(2) For the six months ended August 4, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(3) Represents the costs incurred in the acquisition and integration of A.H. Harris Construction Supplies.

33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

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

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Net income	$	135	$	131	$	242	$	220
Less income from discontinued operations, net of tax		—		1		—		1
Income from continuing operations		135		130		242		219
Plus: Provision for income taxes		48		46		83		75
Less: Cash income taxes		(6)		(3)		(10)		(5)
Plus: Amortization of acquisition-related intangible assets (other than software)		6		6		12		11
Plus: Restructuring charges(1)		—		2		(2)		9
Plus: Acquisition and integration costs(2)		—		1		1		3
Adjusted Net Income	$	183	$	182	$	326	$	312

(1) For the six months ended August 4, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(2) Represents the costs incurred in the acquisition and integration of A.H. Harris Construction Supplies.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Consolidated results of operations

Dollars in millions

					Percentage						Percentage
	Three Months Ended				Increase		Six Months Ended				Increase
	August 4, 2019		July 29, 2018		(Decrease)		August 4, 2019		July 29, 2018		(Decrease)
Net sales	$	1,624	$	1,600	1.5	%	$	3,117	$	2,989	4.3	%
Gross Profit		633		622	1.8			1,218		1,174	3.7
Operating expenses:
Selling, general and administrative		396		384	3.1			788		756	4.2
Depreciation and amortization		26		25	4.0			51		47	8.5
Restructuring Charges		—		2	*			(2)		9	*
Total operating expenses		422		411	2.7			837		812	3.1
Operating Income		211		211	—			381		362	5.2
Interest expense		28		35	(20.0)			56		69	(18.8)
Interest (income)		—		—	—			—		(1)	*
Income from Continuing Operations Before Provision for Income Taxes		183		176	4.0			325		294	10.5
Provision for income taxes		48		46	4.3			83		75	10.7
Income from Continuing Operations		135		130	3.8			242		219	10.5
Income from discontinued operations, net of tax		–		1	*			–		1	*
Net Income	$	135	$	131	3.1		$	242	$	220	10.0
Non-GAAP financial data:
Adjusted EBITDA	$	244	$	246	(0.8)		$	447	$	436	2.5
Adjusted net income	$	183	$	182	0.5		$	326	$	312	4.5

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

	% of Net Sales					% of Net Sales
	Three Months Ended				Basis Point	Six Months Ended				Basis Point
	August 4,		July 29,		Increase	August 4,		July 29,		Increase
	2019		2018		(Decrease)	2019		2018		(Decrease)
Net sales	100.0	%	100.0	%	–	100.0	%	100.0	%	–
Gross Profit	39.0		38.9		10	39.1		39.3		(20)
Operating expenses:
Selling, general and administrative	24.4		24.0		40	25.4		25.3		10
Depreciation and amortization	1.6		1.6		–	1.6		1.6		–
Restructuring Charges	–		0.1		(10)	(0.1)		0.3		(40)
Total operating expenses	26.0		25.7		30	26.9		27.2		(30)
Operating Income	13.0		13.2		(20)	12.2		12.1		10
Interest expense	1.7		2.2		(50)	1.8		2.3		(50)
Interest (income)	–		—		*	–		—		*
Income from Continuing Operations Before Provision for Income Taxes	11.3		11.0		30	10.4		9.8		60
Provision for income taxes	3.0		2.9		10	2.6		2.4		20
Income from Continuing Operations	8.3		8.1		20	7.8		7.4		40
Income from discontinued operations, net of tax	–		0.1		(10)	–		—		*
Net Income	8.3		8.2		10	7.8		7.4		40
Non-GAAP financial data:
Adjusted EBITDA	15.0		15.4		(40)	14.3		14.6		(30)
Adjusted net income	11.3		11.4		(10)	10.5		10.4		10

* Not meaningful

Highlights

Net sales in second quarter 2019 increased $24 million, or 1.5%, as compared to second quarter 2018. Operating income in second quarter 2019 was flat as compared to second quarter 2018. Net income in second quarter 2019 increased $4 million, or 3.1%, to $135 million as compared to second quarter 2018. Adjusted EBITDA in second quarter 2019 decreased $2 million, or 0.8%, as compared to second quarter 2018. Adjusted net income in second quarter 2019 increased $1 million, or 0.5%, as compared to second quarter 2018 due primarily to a decline in interest expense. As of August 4, 2019, our total liquidity was $730 million. See “Liquidity and capital resources – External Financing” of this Item 2 of this quarterly report on Form 10-Q for further information.

Net sales

Net sales in second quarter 2019 increased $24 million, or 1.5%, compared to second quarter 2018 and $128 million, or 4.3%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018.  

Both of our reportable segments delivered an increase in Net sales in second quarter 2019 and in the first six months of fiscal 2019 as compared to the same periods in fiscal 2018. The Net sales increase in second quarter 2019 was primarily due to market volume increases for both businesses. The Net sales increase in the first six months of fiscal 2019 was primarily due to increases in market volume and growth initiatives at each of our businesses and, to a lesser extent, the acquisition of A.H. Harris by Construction & Industrial. Growth initiatives contributed approximately $2 million and $67 million in second quarter 2019 and the first six months of fiscal 2019, respectively. Organic sales growth, which excludes A.H. Harris sales in fiscal 2019 through March 4, 2019 (the one-year anniversary of the acquisition) was $104 million, or 3.5%, for the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Gross profit

Gross profit increased $11 million, or 1.8%, during second quarter 2019 as compared to second quarter 2018 and $44 million, or 3.7%, during the first six months of fiscal 2019 as compared to the same period in fiscal 2018.  

Both of our reportable segments delivered an increase in gross profit in both periods primarily due to sales growth from increased market volume.

Gross profit as a percentage of Net sales (“gross margin”) increased approximately 10 basis points to 39.0% in second quarter 2019 as compared to 38.9% in second quarter 2018 and decreased approximately 20 basis points to 39.1% in the first six months of fiscal 2019 as compared to 39.3% in the same period in fiscal 2018. Gross margins increased at Construction & Industrial and were flat at Facilities Maintenance in second quarter 2019 as compared to second quarter 2018. Gross margins declined at both Facilities Maintenance and Construction & Industrial during the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

Operating expenses

Operating expenses increased $11 million, or 2.7%, during second quarter 2019 as compared to second quarter 2018 and $25 million, or 3.1%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

Selling, general, and administrative expenses increased $12 million, or 3.1%, in second quarter 2019 as compared to second quarter 2018 and $32 million, or 4.2%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in both periods was primarily a result of increases in variable expenses due to higher sales volume and increased investments in growth initiatives, primarily additional personnel and facilities. Depreciation and amortization expense increased $1 million, or 4.0%, in second quarter 2019 as compared to second quarter 2018 and $4 million, or 8.5%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in both periods was primarily driven by investments in facilities and technology.

Operating expenses as a percentage of Net sales increased approximately 30 basis points to 26.0% in second quarter 2019 as compared to second quarter 2018 and decreased approximately 30 basis points to 26.9% in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. Selling, general and administrative expenses as a percentage of Net sales, increased approximately 40 basis points to 24.4% in second quarter 2019 as compared to second quarter 2018 and approximately 10 basis points to 25.4% in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in both periods was primarily a result of increased investments in growth initiatives. The increase in second quarter 2019 was also impacted by a lower sales growth than in the first six months of fiscal 2019. Restructuring charges as a percentage of Net sales declined approximately 10 basis points during second quarter 2019 as compared to second quarter 2018 and approximately 40 basis points during the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

Operating income

Operating income was flat during second quarter 2019 as compared to second quarter 2018 and increased $19 million, or 5.2%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. In second quarter 2019, the increase in gross profit was offset by higher operating expenses due to investments in the business. In the first six months of fiscal 2019, the increase in gross profit and reduction in restructuring charges were partially offset by an increase in Selling, general and administrative expenses and Depreciation and amortization expense.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Operating income as a percentage of Net sales decreased approximately 20 basis points to 13.0% during second quarter 2019 as compared to second quarter 2018 and increased approximately 10 basis points to 12.2% during the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in second quarter 2019 was primarily due to the increase in Selling, general and administrative expenses as a percentage of Net sales, partially offset by the increase in gross margins and the decrease in restructuring charges as a percentage of Net sales. The increase in the first six months of fiscal 2019 was primarily due to the decrease in restructuring charges as a percentage of Net sales, partially offset by the decline in gross margins and the increase in Selling, general and administrative expenses as a percentage of Net sales.

Interest expense

Interest expense decreased $7 million, or 20.0%, during second quarter 2019 as compared to second quarter 2018 and $13 million, or 18.8%, during the first six months of fiscal 2019 as compared to the same period in fiscal 2018.  The decrease in both periods was primarily due to a decrease in the average effective interest rate, including the impact of lower non-cash amortization of deferred financing costs as a result of refinancing activities in fiscal 2018.

Provision for income taxes

The provision for income taxes during the period is calculated by applying an estimated annual tax rate for the full fiscal year to pre-tax income for the reported period plus or minus unusual or infrequent discrete items occurring within the period. The provision for income taxes from continuing operations in second quarter 2019 was $48 million compared to $46 million in second quarter 2018. The provision for income taxes in the first six months of fiscal 2019 was $83 million compared to $75 million in the first six months of fiscal 2018.

The effective rate for continuing operations for second quarter 2019 and the first six months of fiscal 2019 was 26.2% and 25.5%, respectively. The effective rate for continuing operations for second quarter 2018 and the first six months of fiscal 2018 was 26.1% and 25.5%, respectively.

We regularly assess the realization of our net deferred tax assets and the need for any valuation allowance.  This assessment requires management to make judgments about the benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. As of August 4, 2019 and February 4, 2019, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $7 million.

Adjusted EBITDA

Adjusted EBITDA decreased $2 million, or 0.8%, in second quarter 2019 as compared to second quarter 2018 and increased $11 million, or 2.5%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. Adjusted EBITDA for both of our reportable segments declined by $1 million during second quarter 2019 as compared to second quarter 2018. The increase in Adjusted EBITDA during the first six months of fiscal 2019 as compared to the same period in fiscal 2018 was driven primarily by a $10 million increase at Facilities Maintenance.

The decrease in Adjusted EBITDA in second quarter 2019 was primarily due to the investment in future growth initiatives outpacing the growth in sales volume. The increase in Adjusted EBITDA during the first six months of fiscal 2019 as compared to the same period in fiscal 2018 was primarily due to the increase in sales volume, partially offset by the increase in Operating expenses.

Adjusted EBITDA as a percentage of Net sales decreased approximately 40 basis points to 15.0% in second quarter 2019 as compared to second quarter 2018 and decreased approximately 30 basis points to 14.3% in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in second quarter 2019 was due to the investment in growth initiatives outpacing sales growth, partially offset by the improvement in gross margin. The decrease in the first six months of fiscal 2019 was due to the investments in growth initiatives outpacing sales growth and the decline in gross margin.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Adjusted net income

Adjusted net income increased $1 million, or 0.5%, in second quarter 2019 as compared to second quarter 2018 and $14 million, or 4.5%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The increase in Adjusted net income in second quarter 2019 was attributable to lower interest expense, offset by increased cash tax payments and an increase in Selling, general and administrative expense outpacing sales growth. The increase in Adjusted net income in the first six months of fiscal 2019 was attributable to growth in operations and lower interest expense, partially offset by increased cash tax payments.

Results of operations by reportable segment

Facilities Maintenance

	Three Months Ended						Increase		Six Months Ended						Increase
Dollars in millions	August 4, 2019			July 29, 2018			(Decrease)		August 4, 2019			July 29, 2018			(Decrease)
Net sales	$	830		$	820		1.2	%	$	1,602		$	1,543		3.8	%
Operating income	$	133		$	135		(1.5)	%	$	252		$	239		5.4	%
% of Net sales		16.0	%		16.5	%	(50)	bps		15.7	%		15.5	%	20	bps
Depreciation and amortization		13			11		18.2	%		25			22		13.6	%
Other		3			4		(25.0)	%		6			12		(50.0)	%
Adjusted EBITDA	$	149		$	150		(0.7)	%	$	283		$	273		3.7	%
% of Net sales		18.0	%		18.3	%	(30)	bps		17.7	%		17.7	%	–

Net Sales

Net sales increased $10 million, or 1.2%, in second quarter 2019 as compared to second quarter 2018 and $59 million, or 3.8%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

The second quarter 2019 increase in Net sales was primarily due to growth in the institutional industry, offset by lower HVAC sales as a result of cooler weather and a disruption of operations at the new Southeast distribution center. The increase in Net sales during the first six months of fiscal 2019 was driven by growth in the multifamily, institutional, and hospitality industries and growth initiatives, partially offset by the impacts of HVAC and the Southeast distribution center in the second quarter. These growth initiatives consist of investments in personnel, products, and technology aligned with our selling channels, such as our sales force, e-commerce site and mobile applications, and our enabling functions, such as supply chain and data analytics.

Adjusted EBITDA

Adjusted EBITDA decreased $1 million, or 0.7%, in second quarter 2019 as compared to second quarter 2018 and increased $10 million, or 3.7%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

Adjusted EBITDA in both periods of 2019 as compared to the same periods in fiscal 2018 was impacted by increased Selling, general and administrative costs related to facility expansions and inflation on lease renewals. During second quarter 2019, the increase in Selling, general and administrative costs outpaced the increase in sales. During the first six months of fiscal 2019, the increase in sales volume outpaced the increase in Selling, general and administrative costs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Adjusted EBITDA as a percentage of Net sales decreased approximately 30 basis points in second quarter 2019 as compared to second quarter 2018 and was flat in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. The decrease in second quarter 2019 was driven by an increase in Selling, general and administrative expenses as a percentage of Net sales, while gross margins remained flat. During the first six months of fiscal 2019, a decline in gross margin of approximately 20 basis points was offset by a decrease in Selling, general and administrative expense as a percentage of Net sales.

Construction & Industrial

	Three Months Ended						Increase		Six Months Ended						Increase
Dollars in millions	August 4, 2019			July 29, 2018			(Decrease)		August 4, 2019			July 29, 2018			(Decrease)
Net sales	$	795		$	781		1.8	%	$	1,516		$	1,447		4.8	%
Operating income	$	78		$	76		2.6	%	$	129		$	123		4.9	%
% of Net sales		9.8	%		9.7	%	10	bps		8.5	%		8.5	%	–
Depreciation and amortization		14			16		(12.5)	%		29			29		–
Other		3			4		(25.0)	%		6			11		(45.5)	%
Adjusted EBITDA	$	95		$	96		(1.0)	%	$	164		$	163		0.6	%
% of Net sales		11.9	%		12.3	%	(40)	bps		10.8	%		11.3	%	(50)	bps

Net Sales

Net sales increased $14 million, or 1.8%, in second quarter 2019 as compared to second quarter 2018 and $69 million, or 4.8%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. On an organic basis, sales growth was approximately 3.1% for the first six months of fiscal 2019 as compared to the same period in fiscal 2018. There were no inorganic sales in second quarter 2019.

Adjusted EBITDA

Adjusted EBITDA decreased $1 million, or 1.0%, in second quarter 2019 as compared to second quarter 2018 and increased $1 million, or 0.6%, in the first six months of fiscal 2019 as compared to the same period in fiscal 2018.

The Adjusted EBITDA in both periods of 2019 as compared to the same periods in fiscal 2018 was impacted by increased Selling, general and administrative costs related to variable expense and the hiring of additional associates to drive future growth. During second quarter 2019, the increase in Selling, general and administrative costs outpaced the increase in sales volume due to growth initiatives and market volume. During the first six months of fiscal 2019, the increase in sales volume outpaced the increase in Selling, general and administrative costs.

Adjusted EBITDA as a percentage of Net sales decreased approximately 40 basis points in second quarter 2019 as compared to second quarter 2018 and approximately 50 basis points in the first six months of fiscal 2019 as compared to the same period in fiscal 2018. During second quarter 2019, the decrease was driven by an increase in Selling, general and administrative expenses as a percentage of Net sales, partially offset by an approximately 10 basis point increase in gross margin. During the first six months of fiscal 2019, the decrease was driven by both an increase in Selling, general and

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

administrative expenses as a percentage of Net sales and an approximately 20 basis point decrease in gross margin. The gross margin in both periods was negatively affected by rebar margins. Rebar gross margin rates are declining due to an increase in steel costs impacted by tariffs and duties.  We increased our pricing of rebar to offset the increase in rebar costs, but such increases were not sufficient to maintain our gross margin rate and the pricing of rebar negatively affected our overall margin rate by approximately 10 basis points in second quarter 2019 and approximately 20 basis points in the first six months of fiscal 2019 as compared to the same periods in fiscal 2018.  Rebar costs began to stabilize and the unfavorable impact on gross margins began to subside during second quarter 2019. The gross margin in the first six months of fiscal 2019 was also impacted by a greater increase in sales to large construction jobs as compared to the increase in sales to small construction jobs – sales to larger, bid-based construction jobs tend to have slightly lower margins than sales to smaller construction jobs.

Liquidity and capital resources

Sources and uses of cash

Our sources of funds, primarily from operations, cash on-hand, and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet all current obligations on a timely basis. We believe that these sources of funds will be sufficient to meet the operating needs of our business for at least the next twelve months.

During the first six months of fiscal 2019, our cash inflow was primarily driven by cash provided by operations. This inflow was offset by the purchase of our corporate headquarters, capital expenditures, net debt repayments and purchases of treasury shares.

As of August 4, 2019, our combined liquidity of approximately $730 million was comprised of $41 million in cash and cash equivalents and $689 million of additional available borrowings (excluding $5 million of borrowings on available cash balances) under our Senior ABL Facility, based on qualifying inventory and receivables.

Information about our cash flows, by category, is presented in the Consolidated Statements of Cash Flows and is summarized as follows:

Amounts in millions	Six Months Ended				Increase
Net cash provided by (used for):	August 4, 2019		July 29, 2018		(Decrease)
Operating activities	$	286	$	186	$	100
Investing activities		(49)		(409)		360
Financing activities		(234)		(107)		(127)
Free cash flow:
Operating activities	$	286	$	186	$	100
Less: Capital expenditures		(54)		(47)		(7)
Free cash flow	$	232	$	139	$	93

Working capital

Working capital, excluding cash and cash equivalents, was $864 million as of August 4, 2019, increasing $13 million as compared to $851 million as of July 29, 2018.  The increase was primarily driven by business growth, resulting in increases in Receivables and Inventory, and an increase in Accrued compensation and benefits due to timing of payments. The change in working capital also included a decrease of $87 million in Other current liabilities for the payment of the corporate headquarters financing liability and an increase of $114 million for the Current portion of lease liabilities due to the adoption of ASC 842, “Leases,” on the first day of fiscal 2019.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Operating activities

During the first six months of fiscal 2019, cash provided by operating activities was $286 million compared to $186 million in the first six months of fiscal 2018. Cash interest paid in the first six months of fiscal 2019 was $53 million, compared to $61 million in the first six months of fiscal 2018. The increase in operating cash flows excluding interest is primarily attributable to growth in earnings and efficiency in use of working capital.

Investing activities

During the first six months of fiscal 2019, cash used by investing activities was $49 million, primarily comprised of capital expenditures partially offset by the receipt of $3 million for the A.H. Harris working capital settlement.  During the first six months of fiscal 2018, cash used by investing activities was $409 million, comprised of $362 million for the acquisition of A.H. Harris and $47 million of capital expenditures.

Financing activities

During the first six months of fiscal 2019, cash used in financing activities was $234 million, primarily due to the payment of the corporate headquarters financing liability of $88 million, purchases of treasury shares of $78 million, net debt repayments of $69 million, and tax withholdings on stock-based awards of $5 million, partially offset by proceeds from employee stock option exercises of $7 million.

During the first six months of fiscal 2018, cash used in financing activities was $107 million, primarily due to purchases of treasury shares of $93 million, tax withholdings on stock-based awards of $6 million, and net debt repayments of $11 million, partially offset by proceeds from employee stock option exercises of $6 million.

External financing

As of August 4, 2019, we had an aggregate principal amount of $2,073 million of outstanding indebtedness, net of unamortized discounts and unamortized deferred financing costs of $3 million and $20 million, respectively, and $689 million of additional available borrowings under our Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $27 million in letters of credit issued and including $5 million of borrowings available on qualifying cash balances).  From time to time, depending on market conditions and other factors, we may seek to repay, redeem, repurchase or otherwise acquire or refinance all or a portion of our indebtedness. We may make such repurchases in privately negotiated transactions or otherwise.

For additional information, see “Note 3 - Debt,” in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

Critical accounting policies

Our condensed consolidated financial statements have been prepared in accordance with GAAP. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these consolidated financial statements. The Company’s critical accounting policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended February 3, 2019, except for those related to the adoption of ASC 842, “Leases.” See “Note 6 - Leases” in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q for further information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HD SUPPLY

Recent accounting pronouncements

See “Note 14 – Recent Accounting Pronouncements” in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

43

HD SUPPLY

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk associated with changes in interest rates, foreign currency exchange rate fluctuations, and certain commodity prices.  To reduce these risks, we selectively use financial instruments and other proactive management techniques. We do not use financial instruments for trading purposes or speculation. There have been no material changes in our market risk exposures as compared to those discussed in our annual report on Form 10-K for the fiscal year ended February 3, 2019.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

HD Supply Holdings, Inc.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of HD Supply Holdings, Inc., we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the HD Supply Holdings, Inc. disclosure controls and procedures were effective as of August 4, 2019 (the end of the period covered by this report).

HD Supply, Inc.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of HD Supply, Inc., we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the HD Supply, Inc. disclosure controls and procedures were effective as of August 4, 2019 (the end of the period covered by this report).

(b) Changes in internal control

There were no changes in Holdings’ or HDS’s internal control over financial reporting, as defined in the Exchange Act Rules 13a-15(f) or 15d-15(f), during the second quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, Holdings’ or HDS’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “securities litigation defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”).  Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the securities litigation defendants on behalf of all persons other than the securities litigation defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive.  The Amended Complaint alleges that the securities litigation defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit.  The Amended Complaint asserts claims against the securities litigation defendants under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and

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HD SUPPLY

other costs. On September 19, 2018, the Court granted in part and denied in part the securities litigation defendants’ motion to dismiss. The matter is now in discovery.

On August 8, 2017, two shareholder derivative complaints were filed in the U.S. District Court for the Northern District of Georgia, naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions.  The complaints assert claims against the individual defendants under Section 14(a) of the Exchange Act, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling.  The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. On October 22, 2018, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings and administratively closing the matter until after any summary judgment motion filed relating to the Amended Complaint is adjudicated.

On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaint generally alleges that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding supply chain corrective actions.  The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling.  The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance and internal procedures, and seeks to recover attorneys’ fees and other costs. The individual defendants moved to dismiss the complaint on November 2, 2018. On January 14, 2019, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings until after any summary judgment motions filed relating to the Amended Complaint is adjudicated.

The Company intends to defend these lawsuits vigorously.  Given the stage of the complaints and the claims and issues presented in the above matters, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.

In March 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting information and documents from calendar years 2016 and 2017 relating to, among other things, the Company’s Facilities Maintenance business unit and to the allegations of the Amended Complaint described above. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC’s investigation. We cannot currently predict the timing or outcome of this ongoing investigation

HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters with loss contingencies that are reasonably possible and reasonably estimable, including matters with loss contingencies that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued for, management has estimated the aggregate range of potential loss as $0 to $10 million. If a material loss is probable or reasonably possible, and in either case estimable, the Company has considered it in the analysis and it is included in the discussion set forth above.

45

HD SUPPLY

Item 1A. Risk Factors

We discuss in our filings with the SEC various risks that may materially affect our business. There have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the fiscal year ended February 3, 2019.

The materialization of any risks and uncertainties identified in forward-looking statements contained in this quarterly report on Form 10-Q together with those previously disclosed in our annual report on Form 10-K for the fiscal year ended February 3, 2019 and our and HDS’s other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our results of operations, financial condition, and liquidity, and the development of the industries in which we operate.  See “Forward-looking statements and information” at the beginning of this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities

On November 30, 2018, Holdings’ Board of Directors authorized a share repurchase program for the repurchase of up to an aggregate of $500 million of its common stock.  The Company conducts repurchases under the share repurchase program in the open market and through broker-negotiated purchases in compliance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, and subject to market conditions, restrictive covenants contained in existing debt agreements, applicable legal requirements, and other relevant factors. This share repurchase program does not obligate the Company to acquire any particular amount of its common stock, and it may be terminated at any time at the Company’s discretion. Under this plan, Holdings purchased approximately 1.9 million shares at an average price of $39.79 per share during the six months ended August 4, 2019.

In fiscal 2014, Holdings’ Board of Directors authorized a share repurchase program to be funded from cash proceeds received from exercises of employee stock options. This share repurchase program does not obligate Holdings to acquire any particular amount of common stock, and it may be terminated at any time at Holdings’ discretion. Under this plan, Holdings repurchased approximately 0.2 million shares at an average price of $43.25 per share during the six months ended August 4, 2019.

Issuer Purchases of Equity Securities in each fiscal month of the second quarter of fiscal 2019 are set forth in the table below:

ISSUER PURCHASES OF EQUITY SECURITIES

					Approximate Dollar
				Total Number of	Value of Shares that
	Total Number	Average		Shares Purchased as	May Yet Be
	of Shares	Price Paid		Part of a Publicly	Purchased Under the
Period	Purchased	per Share		Announced Program	Plans or Programs(1)
May 6 – June 2	2,969	$	43.12	2,969	$	367,398,539
June 3 – June 30	780,979		39.55	780,979		336,647,953
July 1 – August 4	1,011,075		39.58	1,011,075		298,516,521	(2)​
Total	1,795,023	$	39.57	1,795,023

(1) The total dollar value of shares that may yet be purchased increases by the amount of cash proceeds received from the exercise of employee stock options as they occur.

(2) As of August 4, 2019, the approximate dollar value of shares that may yet be repurchased under the plans or programs is almost entirely comprised of available repurchases related to the $500 million share repurchase program authorized in November 2018.

46

HD SUPPLY

Item 6. Exhibits

The following exhibits are filed or furnished with this quarterly report.

Exhibit Number	Exhibit Description
3.1	Third Amended and Restated Certificate of Incorporation of HD Supply Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to Form 10-Q of HD Supply Holdings, Inc. (File No. 001-35979) filed on June 11, 2019).
3.2	Fourth Amended and Restated By-Laws of HD Supply Holdings, Inc. ((Incorporated by reference to Exhibit 3.2 to Form 10-Q of HD Supply Holdings, Inc. (File No. 001-35979) filed on June 11, 2019).
3.3	Certificate of Incorporation of HD Supply, Inc. (Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form S-4/A of HD Supply, Inc. (File No. 33-159809 filed on July 10, 2009).
3.4	Certificate of Amendment of Certificate of Incorporation of HD Supply, Inc. (Incorporated by reference to Exhibit 3.1 to Form 8-K of HD Supply, Inc. (File No. 333-159809) filed on July 9, 2013).
3.5	Amended and Restated By-Laws of HD Supply, Inc. (Incorporated by reference to Exhibit 3.2 to Form 8-K of HD Supply, Inc. (File No. 333-159809) filed on July 9, 2013).
21.1	List of Subsidiaries.
31.1	Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply Holdings, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President, Chief Financial Officer and Chief Administrative Officer of HD Supply Holdings, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.3	Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.4	Certification of Senior Vice President, Chief Financial Officer and Chief Administrative Officer of HD Supply, Inc. pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Senior Vice President, Chief Financial Officer and Chief Administrative Officer of HD Supply Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3	Certification of Chairman of the Board, President and Chief Executive Officer of HD Supply, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.4	Certification of Senior Vice President, Chief Financial Officer and Chief Administrative Officer of HD Supply, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

47

HD SUPPLY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		HD SUPPLY HOLDINGS, INC.
		(Registrant)
September 9, 2019	By:	/s/ Joseph J. DeAngelo
(Date)		Joseph J. DeAngelo
		Chairman of the Board, President and Chief Executive Officer
		/s/ Evan J. Levitt
		Evan J. Levitt
		Senior Vice President, Chief Financial Officer and Chief
		Administrative Officer

48

HD SUPPLY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		HD SUPPLY, INC.
		(Registrant)
September 9, 2019	By:	/s/ Joseph J. DeAngelo
(Date)		Joseph J. DeAngelo
		Chairman of the Board, President and Chief Executive Officer
		/s/ Evan J. Levitt
		Evan J. Levitt
		Senior Vice President, Chief Financial Officer and Chief
		Administrative Officer

49

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

NAME OF SUBSIDIARY	STATE OR JURISDICTION	D/B/A
HDS Holding Corporation	Delaware	(Not applicable)
HD Supply, Inc.	Delaware	HD Supply
HD Supply Holdings, LLC	Florida	(Not applicable)
HD Supply Construction Supply Group, Inc.	Delaware	(Not applicable)
White Cap Construction Supply, Inc.	Delaware	(Not applicable)
HD Supply Repair & Remodel, LLC	Delaware	HD Supply Home Improvement Solutions
AH Harris Intermediate Acquisition, Inc.	Delaware	(Not applicable)
HD Supply GP & Management, Inc.	Delaware	(Not applicable)
HD Supply Construction Supply, Ltd.	Florida	HD Supply Construction & Industrial – White Cap
Kenseal Construction Products, LLC	New York	(Not applicable)
HD Supply Facilities Maintenance, Ltd.	Florida	HD Supply Facilities Maintenance
HD Supply FM Services, LLC	Delaware	(Not applicable)
Presto Distribution, LLC	Florida	(Not applicable)
HD Supply International Holdings, Inc.	Delaware	(Not applicable)
HD Supply Management, Inc.	Florida	(Not applicable)
HDS IP Holding, LLC	Nevada	(Not applicable)
HDS Canada Holdings, ULC	Nova Scotia	(Not applicable)
HDS Canada, Inc.	Nova Scotia	HD Supply Canada
HD Supply International Holdings II, LLC	Delaware	(Not applicable)
HD Supply Support Services, Inc.	Delaware	(Not applicable)

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Joseph J. DeAngelo, certify that:

1.     I have reviewed this periodic report on Form 10-Q of HD Supply Holdings, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 9, 2019

/s/ Joseph J. DeAngelo

Joseph J. DeAngelo

Chairman of the Board, President and

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Evan J. Levitt, certify that:

1.     I have reviewed this periodic report on Form 10-Q of HD Supply Holdings, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 9, 2019

/s/ Evan J. Levitt

Evan J. Levitt

Senior Vice President, Chief Financial Officer and Chief Administrative Officer

EX-31.3

Exhibit 31.3

CERTIFICATION

I, Joseph J. DeAngelo, certify that:

1.     I have reviewed this periodic report on Form 10-Q  of HD Supply, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 9, 2019

/s/ Joseph J. DeAngelo

Joseph J. DeAngelo

Chairman of the Board, President and

Chief Executive Officer

EX-31.4

Exhibit 31.4

CERTIFICATION

I, Evan J. Levitt, certify that:

1.     I have reviewed this periodic report on Form 10-Q of HD Supply, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 9, 2019

/s/ Evan J. Levitt

Evan J. Levitt

Senior Vice President, Chief Financial Officer and Chief Administrative Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, the undersigned Chairman of the Board, President and Chief Executive Officer of HD Supply Holdings, Inc. (the Company), hereby certifies that the Company’s Periodic report on Form 10-Q for the period ended August 4, 2019 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  September 9, 2019

/s/ Joseph J. DeAngelo

Joseph J. DeAngelo

Chairman of the Board, President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, the undersigned Senior Vice President and Chief Financial Officer of HD Supply Holdings, Inc. (the Company), hereby certifies that the Company’s periodic report on Form 10-Q for the period ended August 4, 2019 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  September 9, 2019

/s/ Evan J. Levitt

Evan J. Levitt

Senior Vice President, Chief Financial Officer and Chief Administrative Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report.

EX-32.3

Exhibit 32.3

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, the undersigned Chairman of the Board, President and Chief Executive Officer of HD Supply, Inc. (the Company), hereby certifies that the Company’s  periodic report on Form 10-Q for the period ended August 4, 2019 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  September 9, 2019

/s/ Joseph J. DeAngelo

Joseph J. DeAngelo

Chairman of the Board, President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report.

EX-32.4

Exhibit 32.4

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, the undersigned Senior Vice President and Chief Financial Officer of HD Supply, Inc. (the Company), hereby certifies that the Company’s periodic report on Form 10-Q for the period ended August 4, 2019 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  September 9, 2019

/s/ Evan J. Levitt

Evan J. Levitt

Senior Vice President, Chief Financial Officer and Chief Administrative Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report.

XML

DEBT - Senior ABL Facility (Details) $ in Millions	6 Months Ended
	Aug. 04, 2019 USD ($) facility	Feb. 03, 2019 USD ($)
DEBT
Outstanding borrowings	$ 2,096	$ 2,165
Secured debt | HDS | Credit facility | Senior ABL Facility
DEBT
Aggregate principal amount	1,000
Line of credit facility, Excess Availability for borrowing	689
Letter of credit facility outstanding	27
Line of credit facility, available for borrowing on qualifying cash balances	$ 5
The minimum number of incremental term loan facilities permitted to be included in the Senior ABL Facility | facility	1
The minimum number of revolving credit facility commitments permitted to be included in the Senior ABL Facility | facility	1
Canada | Secured debt | HDS | Credit facility | Senior ABL Facility
DEBT
Outstanding borrowings	$ 49

XML

DEBT - Gross Long-term Debt - Outstanding Principal - Tabular Disclosure (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
DEBT
Total gross long-term debt	$ 2,096	$ 2,165
HDS | Secured debt | Credit facility | Senior ABL Facility due 2022
DEBT
Total gross long-term debt	284	348
HDS | Secured debt | Credit facility | Term B-5 Loans due 2023
DEBT
Total gross long-term debt	1,062	1,067
HDS | Unsecured debt | October 2018 Senior Unsecured Notes due 2026
DEBT
Total gross long-term debt	$ 750	$ 750

XML

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Receivables (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Receivables
Trade receivables, net of allowance for doubtful accounts	$ 781	$ 657
Vendor rebate receivables	61	57
Other receivables	18	18
Total receivables, net	$ 860	$ 732

XML

COMMITMENTS AND CONTINGENCIES - Legal Matters (Details) $ in Millions	Aug. 04, 2019 USD ($)	Aug. 08, 2017 complaint
Legal Matters
Number of shareholder derivative complaints | complaint		2
Minimum
Legal Matters
Estimated aggregate potential loss	$ 0
Maximum
Legal Matters
Estimated aggregate potential loss	$ 10

XML

SEGMENT INFORMATION - Reconciliation to Consolidated Financial Statements (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
SEGMENT INFORMATION
Total Adjusted EBITDA	$ 244	$ 246	$ 447	$ 436
Depreciation and amortization	27	27	54	51
Stock-based compensation	5	6	12	12
Restructuring		2	(2)	9
Acquisition and integration costs		1	1	3
Other	1	(1)	1	(1)
Operating Income	211	211	381	362
Interest expense	28	35	56	69
Interest (income)				(1)
Income from Continuing Operations Before Provision for Income Taxes	183	176	325	294
Provision for income taxes	48	46	83	75
Income from continuing operations	135	130	242	219
Income from discontinued operations, net of tax		1		1
Net income	$ 135	$ 131	$ 242	$ 220

XML

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY ( Parenthetical) (HD Supply Holdings,Inc) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Aug. 04, 2019	Aug. 04, 2019
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Unrealized loss on cash flow hedge, tax	$ 5	$ 7

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INCOME TAXES

6 Months Ended

Aug. 04, 2019

INCOME TAXES

INCOME TAXES

NOTE 7 — INCOME TAXES

The Company’s combined federal, state, and foreign effective tax rate for continuing operations was 25.5% for both the six months ended August 4, 2019 and the six months ended July 29, 2018.

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits.

As of August 4, 2019 and February 3, 2019, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP (ASC 740, “Income Taxes”) were $17 million. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of August 4, 2019 and February 3, 2019 was zero. As of August 4, 2019 and February 3, 2019, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $7 million. Each reporting period, the Company assesses available positive and negative evidence and estimates if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

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CONSOLIDATED BALANCE SHEETS (HD Supply Holdings, Inc.) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Current assets:
Cash and cash equivalents	$ 41	$ 38
Receivables, less allowance for doubtful accounts of $19 and $18	860	732
Inventories	821	766
Other current assets	41	50
Total current assets	1,763	1,586
Property and equipment, net	385	370
Operating lease right of-use assets	412
Goodwill	1,989	1,990
Intangible assets, net	179	191
Deferred tax asset	12	78
Other assets	16	18
Total assets	4,756	4,233
Current liabilities:
Accounts payable	498	367
Accrued compensation and benefits	70	109
Current installments of long-term debt	11	11
Current lease liabilities	114
Other current liabilities	165	259
Total current liabilities	858	746
Long-term debt, excluding current installments	2,062	2,129
Long-term lease liabilities	310
Other liabilities	95	77
Total liabilities	3,325	2,952
Stockholders' equity:
Common stock, par value $0.01; 1 billion shares authorized; 169.1 million and 170.7 million shares issued and outstanding at August 4, 2019 and February 3, 2019, respectively	2	2
Paid-in capital	4,086	4,067
Accumulated deficit	(1,332)	(1,572)
Accumulated other comprehensive loss	(51)	(30)
Treasury stock, at cost, 36.3 and 34.2 million shares at August 4, 2019 and February 3, 2019, respectively	(1,274)	(1,186)
Total stockholders' equity	1,431	1,281
Total liabilities and stockholders' equity	$ 4,756	$ 4,233

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Aug. 04, 2019

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 11 — COMMITMENTS AND CONTINGENCIES

Legal Matters

On July 10, 2017 and August 8, 2017, shareholders filed putative class action complaints in the U.S. District Court for the Northern District of Georgia, alleging that HD Supply and certain senior members of its management (collectively, the “securities litigation defendants”) made certain false or misleading public statements in violation of the federal securities laws between November 9, 2016 and June 5, 2017, inclusive (the “original securities complaints”).  Subsequently, the two securities cases were consolidated, and, on November 16, 2017, the lead plaintiffs appointed by the Court filed a Consolidated Amended Class Action Complaint (the “Amended Complaint”) against the securities litigation defendants on behalf of all persons other than the securities litigation defendants who purchased or otherwise acquired the Company’s common stock between November 9, 2016 and June 5, 2017, inclusive.  The Amended Complaint alleges that the securities litigation defendants made certain false or misleading public statements, primarily relating to the Company’s progress in addressing certain supply chain disruption issues encountered in the Company’s Facilities Maintenance business unit.  The Amended Complaint asserts claims against the securities litigation defendants under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and seeks class certification under the Federal Rules of Civil Procedure, as well as unspecified monetary damages, pre-judgment and post-judgment interest, and attorneys’ fees and

other costs. On September 19, 2018, the Court granted in part and denied in part the securities litigation defendants’ motion to dismiss. The matter is now in discovery.  

On August 8, 2017, two shareholder derivative complaints were filed in the U.S. District Court for the Northern District of Georgia, naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaints generally allege that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding operating leverage and supply chain corrective actions.  The complaints assert claims against the individual defendants under Section 14(a) of the Exchange Act, and allege breaches of fiduciary duties, unjust enrichment, corporate waste, and insider selling.  The complaints assert a claim to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seek certain actions by the Company to modify its corporate governance and internal procedures, and seek to recover attorneys’ fees and other costs. On October 22, 2018, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings and administratively closing the matter until after any summary judgment motion filed relating to the Amended Complaint is adjudicated.

On August 29, 2018, a shareholder derivative complaint was filed in Delaware Chancery Court naming the Company as a “nominal defendant” and certain members of its senior management and board of directors as individual defendants.  The complaint generally alleges that the individual defendants caused the Company to issue false and misleading statements concerning the Company’s business, operations, and financial prospects, including misrepresentations regarding supply chain corrective actions.  The complaint asserts various common law breach of fiduciary duty claims against the individual defendants and claims of unjust enrichment and insider selling.  The complaint seeks to recover any damages sustained by the Company as a result of the individual defendants’ allegedly wrongful actions, seeks certain actions by the Company to modify its corporate governance and internal procedures, and seeks to recover attorneys’ fees and other costs. The individual defendants moved to dismiss the complaint on November 2, 2018. On January 14, 2019, upon joint motion of the parties, the Court entered an order conditionally staying the proceedings until after any summary judgment motions filed relating to the Amended Complaint is adjudicated.

The Company intends to defend these lawsuits vigorously.  Given the stage of the complaints and the claims and issues presented in the above matters, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these unresolved lawsuits.

In March 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting information and documents from calendar years 2016 and 2017 relating to, among other things, the Company’s Facilities Maintenance business unit and to the allegations of the Amended Complaint described above. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC’s investigation. We cannot currently predict the timing or outcome of this ongoing investigation.

HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and are not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. For all other matters management believes the possibility of losses from such matters is not probable, the potential loss from such matters is not reasonably estimable, or such matters are of such kind or involve such amounts that would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters with loss contingencies that are reasonably possible and reasonably estimable, including matters with loss contingencies that are probable and estimable but for which the amount that is reasonably possible is in excess of the amount that the Company has accrued

for, management has estimated the aggregate range of potential loss as $0 to $10 million. If a material loss is probable or reasonably possible, and in either case estimable, the Company has considered it in the analysis and it is included in the discussion set forth above.

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Parenthetical) (HD Supply, Inc.) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Aug. 04, 2019	Aug. 04, 2019
Unrealized gain (loss) on cash flow hedge	$ 5	$ 7
HD Supply, Inc. (Total HDS)
Unrealized gain (loss) on cash flow hedge	$ 5	$ 7

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CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (HD Supply, Inc.) - USD ($) shares in Thousands, $ in Millions	HD Supply, Inc. (Total HDS) Common Stock	HD Supply, Inc. (Total HDS) Paid-in Capital	HD Supply, Inc. (Total HDS) Accumulated Deficit	HD Supply, Inc. (Total HDS) Accumulated Other Comprehensive Income (Loss)	HD Supply, Inc. (Total HDS)	Common Stock	Paid-in Capital	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)	Total
Beginning balance at Jan. 28, 2018		$ 3,290	$ (1,807)	$ (17)		$ 2	$ 4,029	$ (1,966)	$ (17)
Beginning balance (in shares) at Jan. 28, 2018	1					203,914
Increase (decrease) in stockholders' equity
Equity distribution to Parent		(94)
Stock-based compensation		12					12
Other			1				(1)	1
Net income			220		$ 220			220		$ 220
Foreign currency translation adjustment				2					2	2
Ending balance at Jul. 29, 2018		3,208	(1,586)	(15)	$ 1,607	$ 2	4,047	(1,745)	(15)	$ 1,608
Ending balance (in shares) at Jul. 29, 2018	1				1	204,564				183,786
Beginning balance at Apr. 29, 2018		3,226	(1,718)	(16)		$ 2	4,038	(1,877)	(16)
Beginning balance (in shares) at Apr. 29, 2018	1					204,356
Increase (decrease) in stockholders' equity
Equity distribution to Parent		(23)
Stock-based compensation		6					6
Other		(1)	1				(2)	1
Net income			131		$ 131			131		$ 131
Foreign currency translation adjustment				1	1				1	1
Ending balance at Jul. 29, 2018		3,208	(1,586)	(15)	$ 1,607	$ 2	4,047	(1,745)	(15)	$ 1,608
Ending balance (in shares) at Jul. 29, 2018	1				1	204,564				183,786
Beginning balance at Feb. 03, 2019		2,726	(1,413)	(30)	$ 1,283	$ 2	4,067	(1,572)	(30)	$ 1,281
Beginning balance (in shares) at Feb. 03, 2019	1					204,806
Increase (decrease) in stockholders' equity
Cumulative effect of accounting change			(3)					(3)
Equity distribution to Parent		(76)
Stock-based compensation		12					12
Other			1					1
Net income			242		242			242		242
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0				(21)					(21)	(21)
Ending balance at Aug. 04, 2019		2,662	(1,173)	(51)	$ 1,438	$ 2	4,086	(1,332)	(51)	$ 1,431
Ending balance (in shares) at Aug. 04, 2019	1				1	205,409				169,071
Beginning balance at May. 05, 2019		2,719	(1,308)	(35)		$ 2	4,079	(1,467)	(35)
Beginning balance (in shares) at May. 05, 2019	1					205,367
Increase (decrease) in stockholders' equity
Equity distribution to Parent		(62)
Stock-based compensation		5					5
Net income			135		$ 135			135		$ 135
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0				(16)	(16)				(16)	(16)
Ending balance at Aug. 04, 2019		$ 2,662	$ (1,173)	$ (51)	$ 1,438	$ 2	$ 4,086	$ (1,332)	$ (51)	$ 1,431
Ending balance (in shares) at Aug. 04, 2019	1				1	205,409				169,071

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DEBT

6 Months Ended

Aug. 04, 2019

DEBT

DEBT

NOTE 3 — DEBT

HDS’s long-term debt as of August 4, 2019 and February 3, 2019 consisted of the following (dollars in millions):

	August 4, 2019			February 3, 2019
	Outstanding		Interest	Outstanding		Interest
	Principal		Rate %(1)	Principal		Rate %(1)
Senior ABL Facility due 2022	$	284	3.55	$	348	3.83
Term B-5 Loans due 2023		1,062	3.98		1,067	4.25
October 2018 Senior Unsecured Notes due 2026		750	5.375		750	5.375
Total gross long-term debt	$	2,096		$	2,165
Less unamortized discount		(3)			(4)
Less unamortized deferred financing costs		(20)			(21)
Total net long-term debt	$	2,073		$	2,140
Less current installments		(11)			(11)
Total net long-term debt, excluding current installments	$	2,062		$	2,129

(1) Represents the stated rate of interest, without including the effect of discounts, premiums, or interest rate swap agreements.

Senior Credit Facilities

Senior ABL Facility

The Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”) provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,000 million (subject to availability under a borrowing base). Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of August 4, 2019, HDS had $689 million of Excess Availability (as defined in the Senior ABL Facility agreement) under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $27 million in letters of credit issued and including $5 million of borrowings available on qualifying cash balances). As of August 4, 2019, approximately $49 million of the outstanding borrowings on the Senior ABL Facility are Canadian dollar-denominated borrowings.

At HDS’s option, the interest rates applicable to the loans under the Senior ABL Facility are based (i) in the case of U.S. dollar-denominated loans, either at London Interbank Offered Rate (“LIBOR”) plus an applicable margin, or Prime Rate (as defined in the Senior ABL Facility agreement) plus an applicable margin and (ii) in the case of Canadian dollar-denominated loans, either the Bankers’ Acceptance (“BA”) rate plus an applicable margin, or the Canadian Prime Rate plus an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the agreement governing the Senior ABL Facility, based on average Excess Availability for the previous fiscal quarter. The Senior ABL Facility also contains a letter of credit fee computed at a rate per annum equal to the Applicable Margin (as defined in the Senior ABL Facility agreement) then in effect for LIBOR Loans and an unused commitment fee subject to a pricing grid, included in the agreement governing the Senior ABL Facility, based on Excess Availability.

The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility.

Senior Term Loan Facility

HDS’s Senior Term Facility (the “Senior Term Facility”) consists of a senior secured term loan facility (the ‘‘Term Loan Facility,’’ and the term loans thereunder, the ‘‘Term Loans’’) providing for Term Loans in an original aggregate principal amount of $1,070 million (the “Term B-5 Loans”). The Term B-5 Loans will mature on October 17, 2023 and amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loans with the balance payable at the maturity date. The Term B-5 Loans bear interest at the applicable margin for borrowings of 1.75% for LIBOR borrowings and 0.75% for base rate borrowings.

For additional information on HDS’s Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to the Consolidated Financial Statements of our annual report on Form 10-K for the fiscal year ended February 3, 2019.

Unsecured Notes

5.375% Senior Unsecured Notes due 2026

HDS issued $750 million aggregate principal amount of 5.375% Senior Unsecured Notes due 2026 (the “October 2018 Senior Unsecured Notes”) under an Indenture, dated as of October 11, 2018 (the “October 2018 Senior Unsecured Notes Indenture”) among HDS, certain subsidiaries of HDS as guarantors (the “Subsidiary Guarantors”) and the Trustee. The October 2018 Senior Unsecured Notes bear interest at a rate of 5.375% per annum and will mature on October 15, 2026. Interest is paid semi-annually on April 15^th and October 15^th of each year.

The October 2018 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS’s existing and future senior indebtedness, senior in right of payment to all of HDS’s existing and future subordinated indebtedness, and effectively subordinated to all of HDS’s existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, to the extent of the value of the collateral securing each indebtedness.

The October 2018 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS’s direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the Senior ABL Facility or that guarantees HDS’s obligations under any credit facility or capital market securities. These guarantees are subject to release under customary circumstances as stipulated in the October 2018 Senior Unsecured Notes Indenture.

The October 2018 Senior Unsecured Notes and related guarantees have not been, and are not required to be, registered under the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction.

Redemption

HDS may redeem the October 2018 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2021, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the October 2018 Senior Unsecured Notes Indenture and (2) on and after October 15, 2021, at the applicable redemption price set forth below (expressed as a percentage of principal

amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

Year	Percentage
2021	102.688	%
2022	101.344	%
2022 and thereafter	100.000	%

In addition, at any time prior to October 15, 2021, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the October 2018 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.375% of the principal amount in respect of the October 2018 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the October 2018 Senior Unsecured Notes are redeemed, an aggregate principal amount of the October 2018 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of October 2018 Senior Unsecured Notes must remain outstanding immediately after each such redemption of October 2018 Senior Unsecured Notes.

Debt covenants

HDS’s outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness and dividend payments and restrictions on the use of proceeds from asset dispositions. As of August 4, 2019, HDS was in compliance with all such covenants that were in effect on such date. Furthermore, while these restrictions may, at times, limit the amount of dividends, distributions or intercompany transfers that HDS or a particular subsidiary guarantor may pay or make, as applicable, the Company believes that, as of August 4, 2019, it had no such limitations.

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SEGMENT INFORMATION (Tables)

6 Months Ended

Aug. 04, 2019

SEGMENT INFORMATION

Schedule of net sales, Adjusted EBITDA, and other measures for each of the reportable segments and total continuing operations

The following tables present Net sales, Adjusted EBITDA, and other measures for both of the reportable segments and total operations for the periods indicated (amounts in millions):

							Total
	Facilities		Construction				Continuing
	Maintenance		& Industrial		Eliminations		Operations
Three Months Ended August 4, 2019
Net sales	$	830	$	795	$	(1)	$	1,624
Adjusted EBITDA		149		95		—		244
Depreciation(1) & Software Amortization		11		10		—		21
Other Intangible Amortization		2		4		—		6
Three Months Ended July 29, 2018
Net sales	$	820	$	781	$	(1)	$	1,600
Adjusted EBITDA		150		96		—		246
Depreciation(1) & Software Amortization		9		12		—		21
Other Intangible Amortization		2		4		—		6
Six Months Ended August 4, 2019
Net sales	$	1,602	$	1,516	$	(1)	$	3,117
Adjusted EBITDA		283		164		—		447
Depreciation(1) & Software Amortization		21		21		—		42
Other Intangible Amortization		4		8		—		12
Six Months Ended July 29, 2018
Net sales	$	1,543	$	1,447	$	(1)	$	2,989
Adjusted EBITDA		273		163		—		436
Depreciation(1) & Software Amortization		18		22		—		40
Other Intangible Amortization		4		7		—		11

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

Schedule of reconciliation of adjusted EBITDA to income (loss) from continuing operations

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Total Adjusted EBITDA	$	244	$	246	$	447	$	436
Depreciation and amortization(1)		27		27		54		51
Stock-based compensation		5		6		12		12
Restructuring(2)		—		2		(2)		9
Acquisition and integration costs(3)		—		1		1		3
Other		1		(1)		1		(1)
Operating income		211		211		381		362
Interest expense		28		35		56		69
Interest (income)		—		—		—		(1)
Income from Continuing Operations Before Provision for Income Taxes		183		176		325		294
Provision for income taxes		48		46		83		75
Income from continuing operations		135		130		242		219
Income from discontinued operations, net of tax		—		1		—		1
Net income	$	135	$	131	$	242	$	220

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

(2) For the six months ended August 4, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(3) Represents the cost incurred in the acquisition and integration of A.H. Harris Construction Supplies.

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LEASES (Tables)

6 Months Ended

Aug. 04, 2019

LEASES

Schedule of maturities of operating lease liabilities

As of August 4, 2019, maturities of operating lease liabilities were as follows (amounts in millions):

	Fiscal Year
	Remainder
	of 2019		2020		2021		2022		2023		Thereafter		Total
Operating Lease Payments	$	69		112		101		73		53		86	$	494
Less imputed interest														70
Total Discounted Lease Liability													$	424

Schedule of future minimum rental payments under non-cancelable leases

As of February 3, 2019, future minimum aggregate rental payments under non-cancelable leases were as follows (amounts in millions):

	Fiscal Year
	2019		2020		2021		2022		2023		Thereafter		Total
Operating Leases	$	140		104		88		61		42		78	$	513

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LEASES (Details) $ in Millions	3 Months Ended	6 Months Ended
	Aug. 04, 2019 USD ($)	Aug. 04, 2019 USD ($)
LEASES
ROU assets for operating leases	$ 412	$ 412
Operating lease liabilities	424	$ 424
Package of practical expedients		true
Lease cost	$ 37	$ 73
Weighted average remaining lease term, operating leases	5 years 1 month 6 days	5 years 1 month 6 days
Weighted average discount rate, operating leases	4.67%	4.67%
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases		$ 81
ROU assets obtained in exchange for lease liabilities		40
ASU 2016-02
LEASES
ROU assets for operating leases	$ 430	430
Operating lease liabilities	$ 447	447
Cumulative-effect adjustment to retained earnings		$ 3

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INCOME TAXES - Tax items (Details) - USD ($) $ in Millions	6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Feb. 03, 2019
INCOME TAXES
Combined federal, state and foreign effective tax rate for continuing operations (benefit)	25.50%	25.50%
Unrecognized tax benefits	$ 17		$ 17
Net accrual for interest and penalties related to unrecognized tax benefits	0		0
Deferred tax assets, valuation allowance	$ 7		$ 7

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DERIVATIVE INSTRUMENTS

6 Months Ended

Aug. 04, 2019

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

NOTE 4 — DERIVATIVE INSTRUMENTS

Hedge Strategy and Accounting Policy

The Company enters into derivative financial instruments for hedging purposes. In hedging the exposure to variable cash flows on forecasted transactions, deferral accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the underlying exposure. If a derivative instrument either initially fails or later ceases to meet the criteria for deferral accounting, any subsequent gains or losses are recognized currently in income. Cash flows resulting from derivative financial instruments are classified in the same category as the cash flows from the items being hedged.

Cash Flow Hedge

On October 24, 2018, the Company entered into an interest rate swap agreement with a notional amount of $750 million, designated as a cash flow hedge in accordance with ASC 815, “Derivatives and Hedging ,” to hedge the variability of cash flows in interest payments associated with the Company’s variable-rate debt. The interest rate swap agreement swaps a LIBOR rate for a fixed rate of 3.07% and matures on October 17, 2023. The swap effectively converts a portion of the Company’s Term B-5 Loans from a rate of LIBOR plus 1.75% to a 4.82% fixed rate.

As of August 4, 2019, the fair value of the Company’s interest rate swap in the Consolidated Balance Sheet was a liability of $48 million, which was reflected as $9 million in Other current liabilities and $39 million in Other liabilities in the Consolidated Balance Sheet. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of Accumulated Other Comprehensive Income (Loss) (“OCI”) within Stockholders’ Equity

in the Consolidated Balance Sheets and are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.  See “Note 8 - Accumulated Other Comprehensive Income (Loss),” for further information.

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CONSOLIDATED BALANCE SHEETS (HD Supply, Inc.) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Current assets:
Cash and cash equivalents	$ 41	$ 38
Receivables, less allowance for doubtful accounts of $19 and $18	860	732
Inventories	821	766
Other current assets	41	50
Total current assets	1,763	1,586
Property and equipment, net	385	370
Operating lease right of-use assets	412
Goodwill	1,989	1,990
Intangible assets, net	179	191
Deferred tax asset	12	78
Other assets	16	18
Total assets	4,756	4,233
Current liabilities:
Accounts payable	498	367
Accrued compensation and benefits	70	109
Current installments of long-term debt	11	11
Current lease liabilities	114
Other current liabilities	165	259
Total current liabilities	858	746
Long-term debt, excluding current installments	2,062	2,129
Long-term lease liabilities	310
Other liabilities	95	77
Total liabilities	3,325	2,952
Stockholders' equity:
Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at August 4, 2019 and February 3, 2019	2	2
Paid-in capital	4,086	4,067
Accumulated deficit	(1,332)	(1,572)
Accumulated other comprehensive loss	(51)	(30)
Total stockholders' equity	1,431	1,281
Total liabilities and stockholders' equity	4,756	4,233
HD Supply, Inc. (Total HDS)
Current assets:
Cash and cash equivalents	41	38
Receivables, less allowance for doubtful accounts of $19 and $18	860	732
Inventories	821	766
Other current assets	41	50
Total current assets	1,763	1,586
Property and equipment, net	385	370
Operating lease right of-use assets	412
Goodwill	1,989	1,990
Intangible assets, net	179	191
Deferred tax asset	12	78
Other assets	16	18
Total assets	4,756	4,233
Current liabilities:
Accounts payable	498	367
Accrued compensation and benefits	70	109
Current installments of long-term debt	11	11
Current lease liabilities	114
Other current liabilities	158	257
Total current liabilities	851	744
Long-term debt, excluding current installments	2,062	2,129
Long-term lease liabilities	310
Other liabilities	95	77
Total liabilities	3,318	2,950
Stockholders' equity:
Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at August 4, 2019 and February 3, 2019	0	0
Paid-in capital	2,662	2,726
Accumulated deficit	(1,173)	(1,413)
Accumulated other comprehensive loss	(51)	(30)
Total stockholders' equity	1,438	1,283
Total liabilities and stockholders' equity	$ 4,756	$ 4,233

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CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY ( Parenthetical) (HD Supply,Inc) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Aug. 04, 2019	Aug. 04, 2019
Unrealized loss on cash flow hedge, tax	$ 5	$ 7
HD Supply, Inc. (Total HDS)
Unrealized loss on cash flow hedge, tax	$ 5	$ 7

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION (Tables)

6 Months Ended

Aug. 04, 2019

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Schedule of receivables

Receivables as of August 4, 2019 and February 3, 2019 consisted of the following (amounts in millions):

	August 4, 2019		February 3, 2019
Trade receivables, net of allowance for doubtful accounts	$	781	$	657
Vendor rebate receivables		61		57
Other receivables		18		18
Total receivables, net	$	860	$	732

Schedule of other current liabilities

Other current liabilities as of August 4, 2019 and February 3, 2019 consisted of the following (amounts in millions):

	HD Supply Holdings, Inc.				HD Supply, Inc.
	August 4, 2019		February 3, 2019		August 4, 2019		February 3, 2019
Corporate headquarters financing liability(1)	$	—	$	87	$	—	$	87
Accrued non-income taxes		36		35		36		35
Accrued interest		14		14		14		14
Unsettled share repurchases		7		2		—		—
Other		108		121		108		121
Total other current liabilities	$	165	$	259	$	158	$	257

(1) This amount represented the financing liability for the Company’s corporate headquarters that was purchased on February 4, 2019. Please see “Note 6 – Leases” for further information on the purchase of the Company’s corporate headquarters.

Schedule of share repurchases

Holdings’ share repurchases under these plans for the six months ended August 4, 2019 and July 29, 2018 were as follows (dollars in millions):

	Six Months Ended
	August 4, 2019			July 29, 2018
	Number of	Cost of		Number of	Cost of
	Shares	Shares		Shares	Shares
November 2018 Plan	1,911,964	$	76	—	$	—
August 2017 Plan	—		—	2,298,643		88
April 2014 Plan	154,144		7	127,498		5
Total share repurchases	2,066,108	$	83	2,426,141	$	93

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Aug. 04, 2019

FAIR VALUE MEASUREMENTS

Schedule of financial instruments that are not reflected at fair value on the balance sheet

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of August 4, 2019 and February 3, 2019 (amounts in millions):

	As of August 4, 2019				As of February 3, 2019
	Recorded		Estimated		Recorded		Estimated
	Amount(1)		Fair Value		Amount(1)		Fair Value
Senior ABL Facility	$	284	$	283	$	348	$	346
Term Loans and Notes		1,812		1,857		1,817		1,815
Total	$	2,096	$	2,140	$	2,165	$	2,161

(1) These amounts do not include accrued interest; accrued interest is classified as Other current liabilities in the accompanying Consolidated Balance Sheets. These amounts do not include any related discounts, premiums, or deferred financing costs.

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LEASES - Maturities of Lease Liabilities (Details) $ in Millions	6 Months Ended
	Aug. 04, 2019 USD ($)
Maturities of lease liabilities
2019	$ 69
2020	112
2021	101
2022	73
2023	53
Thereafter	86
Total lease payments	494
Imputed interest	(70)
Total Discounted Lease Liability	424
ROU assets obtained in exchange for lease liabilities	$ 40

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
Changes in accumulated other comprehensive income (loss)
Accumulated OCI, net of tax, beginning balance			$ (30)
Accumulated OCI, net of tax, ending balance			(30)		$ (51)
Accumulated OCI, tax	$ 5		7
AOCI, net of tax
Changes in accumulated other comprehensive income (loss)
Accumulated OCI, net of tax, ending balance					(51)	$ (15)
Foreign currency translation adjustment
Changes in accumulated other comprehensive income (loss)
Accumulated OCI, net of tax, beginning balance	(15)	$ (16)	(15)	$ (17)
Other comprehensive income (loss) before reclassifications		1		2
Accumulated OCI, net of tax, ending balance	(15)	$ (16)	(15)	$ (17)	(15)	$ (15)
Cash flow hedge, net of tax
Changes in accumulated other comprehensive income (loss)
Accumulated OCI, net of tax, beginning balance	(20)		(15)
Other comprehensive income (loss) before reclassifications	(17)		(23)
Amounts reclassified from accumulated OCI into earnings	1		2
Accumulated OCI, net of tax, ending balance	(20)		(15)		$ (36)
Accumulated OCI, tax	$ 12		$ 12

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DEBT - Total Long-term Debt, Excluding Current Installments - Tabular Disclosure (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
DEBT
Total net long-term debt	$ 2,073	$ 2,140
Less current installments	(11)	(11)
Total net long-term debt, excluding current installments	$ 2,062	$ 2,129

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ACQUISITIONS (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
	Mar. 05, 2018	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018	Feb. 03, 2019
ACQUISITIONS
Goodwill		$ 1,989		$ 1,989		$ 1,990
Net Sales		1,624	$ 1,600	$ 3,117	$ 2,989
A.H. Harris
ACQUISITIONS
Purchase price, net of cash acquired	$ 359
Proceeds from working capital		$ 3
Goodwill	182
Definite-lived intangible assets	123
Property & equipment	12
Net working capital	54
Deferred tax liabilities	10
Goodwill expected to be deductible for tax purposes	19
A.H. Harris | Customer relationships
ACQUISITIONS
Definite-lived intangible assets	$ 110
Estimated amortization periods	12 years
A.H. Harris | Trade names
ACQUISITIONS
Definite-lived intangible assets	$ 13
Estimated amortization periods	5 years

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REVENUE - Disaggregation of Revenue (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
Disaggregation of Revenue
Net sales	$ 1,624	$ 1,600	$ 3,117	$ 2,989
Inter-segment Eliminations
Disaggregation of Revenue
Net sales	(1)	(1)	(1)	(1)
Facilities Maintenance
Disaggregation of Revenue
Net sales	830	820	1,602	1,543
Facilities Maintenance | Maintenance, Repair, and Operations
Disaggregation of Revenue
Net sales	732	722	1,424	1,358
Facilities Maintenance | Property Improvement
Disaggregation of Revenue
Net sales	98	98	178	185
Construction & Industrial
Disaggregation of Revenue
Net sales	795	781	1,516	1,447
Construction & Industrial | Non-Residential Construction
Disaggregation of Revenue
Net sales	545	538	1,042	983
Construction & Industrial | Residential Construction
Disaggregation of Revenue
Net sales	198	194	378	373
Construction & Industrial | Other
Disaggregation of Revenue
Net sales	$ 52	$ 49	$ 96	$ 91

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Other Current Liabilities (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Other Current Liabilities
Corporate headquarters financing liability		$ 87
Accrued non-income taxes	$ 36	35
Accrued interest	14	14
Unsettled share repurchases	7	2
Other	108	121
Total other current liabilities	165	259
HD Supply, Inc. (Total HDS)
Other Current Liabilities
Corporate headquarters financing liability		87
Accrued non-income taxes	36	35
Accrued interest	14	14
Other	108	121
Total other current liabilities	$ 158	$ 257

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SEGMENT INFORMATION - General Information (Details)	6 Months Ended
	Aug. 04, 2019 segment
SEGMENT INFORMATION
Number of reportable segments	2

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

6 Months Ended

Aug. 04, 2019

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated OCI ("AOCI") consists of accumulated net unrealized gains or losses associated with foreign currency translation adjustments and the changes in the fair value of derivatives designated as cash flow hedges.

The balances and changes in AOCI, net of tax by component for the three and six months ended August 4, 2019 and July 29, 2018 was as follows (amounts in millions):

	Three Months Ended				Six Months Ended
	August 4,		July 29,		August 4,		July 29,
	2019		2018		2019		2018
Foreign currency translation adjustment:
Beginning balance	$	(15)	$	(16)	$	(15)	$	(17)
Other comprehensive income (loss) before reclassifications		—		1		—		2
Amounts reclassified from accumulated OCI into earnings		—		—		—		—
Ending balance	$	(15)	$	(15)	$	(15)	$	(15)
Cash flow hedge, net of tax:
Beginning balance	$	(20)	$	—	$	(15)	$	—
Other comprehensive income (loss) before reclassifications		(17)		—		(23)		—
Amounts reclassified from accumulated OCI into earnings(1)		1		—		2		—
Ending balance, net of tax of $12, $ -, $12, and $ -	$	(36)	$	—	$	(36)	$	—
Total ending balance of AOCI	$	(51)	$	(15)	$	(51)	$	(15)

(1) Unrealized loss reclassified into Interest expense.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (HD Supply Holdings, Inc.) - USD ($) shares in Millions, $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Receivables
Receivables, allowance for doubtful accounts (in dollars)	$ 19	$ 18
Common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	1,000.0	1,000.0
Common stock, shares issued	169.1	170.7
Common stock, shares outstanding	169.1	170.7
Treasury stock
Treasury stock, shares	36.3	34.2

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Document and Entity Information	6 Months Ended
	Aug. 04, 2019 shares
Document Type	10-Q
Document Period End Date	Aug. 04, 2019
Document Quarterly Report	true
Document Transition Report	false
Entity File Number	001-35979
Entity Registrant Name	HD SUPPLY HOLDINGS, INC.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	26-0486780
Entity Address, Address Line One	3400 Cumberland Boulevard SE
Entity Address, City or Town	Atlanta
Entity Address, State or Province	GA
Entity Address, Postal Zip Code	30339
City Area Code	770
Local Phone Number	852-9000
Title of 12(b) Security	HD Supply Holdings, Inc. common stock, par value $0.01 per share
Trading Symbol	HDS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Central Index Key	0001573097
Current Fiscal Year End Date	--02-02
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Amendment Flag	false
HD Supply Holdings, Inc.
Entity Common Stock, Shares Outstanding	165,881,892
HD Supply, Inc. (Total HDS)
Entity File Number	333-159809
Entity Registrant Name	HD SUPPLY, INC.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	75-2007383
Entity Address, Address Line One	3400 Cumberland Boulevard SE
Entity Address, City or Town	Atlanta
Entity Address, State or Province	GA
Entity Address, Postal Zip Code	30339
City Area Code	770
Local Phone Number	852-9000
Entity Current Reporting Status	No
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding	1,000
Entity Central Index Key	0001465264

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SEGMENT INFORMATION

6 Months Ended

Aug. 04, 2019

SEGMENT INFORMATION

SEGMENT INFORMATION

NOTE 12 — SEGMENT INFORMATION

HD Supply’s operating segments are based on management structure and internal reporting. Each segment offers different products and services to the end customer, except for Corporate, which provides general corporate overhead support. The Company determines its reportable segments in accordance with the principles of segment reporting within ASC 280, “Segment Reporting.” For purposes of evaluation under these segment reporting principles, the Chief Operating Decision Maker for HD Supply assesses HD Supply’s ongoing performance, based on the periodic review and evaluation of Net sales, Adjusted EBITDA and certain other measures for each of the operating segments.

HD Supply has two reportable segments, each of which is presented below:

● Facilities Maintenance—Facilities Maintenance distributes maintenance, repair and operations products, provides value-add services and fabricates custom products to multifamily, hospitality, healthcare and institutional facilities.

● Construction & Industrial—Construction & Industrial distributes specialized hardware, tools, engineered materials and safety products to non-residential and residential contractors. Construction & Industrial also offers light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment and other products, primarily to small remodeling contractors and trade professionals.

In addition to the reportable segments, the Company’s consolidated financial results include Corporate. Corporate incurs costs related to the Company’s centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services. All Corporate overhead costs are allocated to the reportable segments. Eliminations include the adjustments necessary to eliminate intercompany transactions.

The following tables present Net sales, Adjusted EBITDA, and other measures for both of the reportable segments and total operations for the periods indicated (amounts in millions):

							Total
	Facilities		Construction				Continuing
	Maintenance		& Industrial		Eliminations		Operations
Three Months Ended August 4, 2019
Net sales	$	830	$	795	$	(1)	$	1,624
Adjusted EBITDA		149		95		—		244
Depreciation(1) & Software Amortization		11		10		—		21
Other Intangible Amortization		2		4		—		6
Three Months Ended July 29, 2018
Net sales	$	820	$	781	$	(1)	$	1,600
Adjusted EBITDA		150		96		—		246
Depreciation(1) & Software Amortization		9		12		—		21
Other Intangible Amortization		2		4		—		6
Six Months Ended August 4, 2019
Net sales	$	1,602	$	1,516	$	(1)	$	3,117
Adjusted EBITDA		283		164		—		447
Depreciation(1) & Software Amortization		21		21		—		42
Other Intangible Amortization		4		8		—		12
Six Months Ended July 29, 2018
Net sales	$	1,543	$	1,447	$	(1)	$	2,989
Adjusted EBITDA		273		163		—		436
Depreciation(1) & Software Amortization		18		22		—		40
Other Intangible Amortization		4		7		—		11

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

Reconciliation to Consolidated Financial Statements

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Total Adjusted EBITDA	$	244	$	246	$	447	$	436
Depreciation and amortization(1)		27		27		54		51
Stock-based compensation		5		6		12		12
Restructuring(2)		—		2		(2)		9
Acquisition and integration costs(3)		—		1		1		3
Other		1		(1)		1		(1)
Operating income		211		211		381		362
Interest expense		28		35		56		69
Interest (income)		—		—		—		(1)
Income from Continuing Operations Before Provision for Income Taxes		183		176		325		294
Provision for income taxes		48		46		83		75
Income from continuing operations		135		130		242		219
Income from discontinued operations, net of tax		—		1		—		1
Net income	$	135	$	131	$	242	$	220

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

(2) For the six months ended August 4, 2019, the Company recognized a favorable termination of the lease for its former corporate headquarters.

(3) Represents the cost incurred in the acquisition and integration of A.H. Harris Construction Supplies.

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (HD Supply, Inc.) - USD ($) $ in Millions	3 Months Ended
	Aug. 04, 2019	Jul. 29, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Net Sales	$ 1,624	$ 1,600
Cost of sales	991	978
Gross Profit	633	622
Operating expenses:
Selling, general and administrative	396	384
Depreciation and amortization	26	25
Restructuring		2
Total operating expenses	422	411
Operating Income	211	211
Interest expense	28	35
Income from Continuing Operations Before Provision for Income Taxes	183	176
Provision for income taxes	48	46
Income from Continuing Operations	135	130
Income from discontinued operations, net of tax		1
Net Income	135	131
Other comprehensive income (loss):
Foreign currency translation adjustment		1
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0	(16)
Total Comprehensive Income	119	132
HD Supply, Inc. (Total HDS)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Net Sales	1,624	1,600
Cost of sales	991	978
Gross Profit	633	622
Operating expenses:
Selling, general and administrative	396	384
Depreciation and amortization	26	25
Restructuring		2
Total operating expenses	422	411
Operating Income	211	211
Interest expense	28	35
Income from Continuing Operations Before Provision for Income Taxes	183	176
Provision for income taxes	48	46
Income from Continuing Operations	135	130
Income from discontinued operations, net of tax		1
Net Income	135	131
Other comprehensive income (loss):
Foreign currency translation adjustment		1
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0	(16)
Total Comprehensive Income	$ 119	$ 132

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REVENUE (Tables)

6 Months Ended

Aug. 04, 2019

REVENUE

Schedule of Facilities Maintenance and Construction & Industrial with Inter-segment eliminations

The table below represents disaggregated revenue for Facilities Maintenance and Construction & Industrial with Inter-segment eliminations (amounts in millions):

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Facilities Maintenance
Maintenance, Repair, and Operations	$	732	$	722	$	1,424	$	1,358
Property Improvement		98		98		178		185
Total Facilities Maintenance Net Sales		830		820		1,602		1,543
Construction & Industrial
Non-Residential Construction		545		538		1,042		983
Residential Construction		198		194		378		373
Other		52		49		96		91
Total Construction & Industrial Net Sales		795		781		1,516		1,447
Inter-segment Eliminations		(1)		(1)		(1)		(1)
Total HD Supply Net Sales	$	1,624	$	1,600	$	3,117	$	2,989

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Tables)

6 Months Ended

Aug. 04, 2019

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Schedule of changes in AOCI

	Three Months Ended				Six Months Ended
	August 4,		July 29,		August 4,		July 29,
	2019		2018		2019		2018
Foreign currency translation adjustment:
Beginning balance	$	(15)	$	(16)	$	(15)	$	(17)
Other comprehensive income (loss) before reclassifications		—		1		—		2
Amounts reclassified from accumulated OCI into earnings		—		—		—		—
Ending balance	$	(15)	$	(15)	$	(15)	$	(15)
Cash flow hedge, net of tax:
Beginning balance	$	(20)	$	—	$	(15)	$	—
Other comprehensive income (loss) before reclassifications		(17)		—		(23)		—
Amounts reclassified from accumulated OCI into earnings(1)		1		—		2		—
Ending balance, net of tax of $12, $ -, $12, and $ -	$	(36)	$	—	$	(36)	$	—
Total ending balance of AOCI	$	(51)	$	(15)	$	(51)	$	(15)

(1) Unrealized loss reclassified into Interest expense.

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NATURE OF BUSINESS AND BASIS OF PRESENTATION (Policies)

6 Months Ended

Aug. 04, 2019

NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

Nature of Business

HD Supply Holdings, Inc. (‘‘Holdings’’) indirectly owns all of the outstanding common stock of HD Supply, Inc. (“HDS”).

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in two distinct market sectors: Maintenance, Repair & Operations and Specialty Construction. Through approximately 270 branches and 44 distribution centers in the U.S. and Canada, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services includes approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from construction to maintenance, repair and operations.

HD Supply is managed primarily on a product line basis and reports results of operations in two reportable segments. The reportable segments are Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.

Basis of Presentation

Basis of Presentation

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended February 3, 2019, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).

Fiscal Year

Fiscal Year

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks.  The three months ended August 4, 2019 (“second quarter 2019”) and July 29, 2018 (“second quarter 2018”) both include 13 weeks. The six months ended August 4, 2019 and July 29, 2018 both include 26 weeks.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS. The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition.

Estimates

Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates.

Self-Insurance

Self-Insurance

HD Supply has a high-deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for certain legal claims and medical claims, while maintaining per employee stop-loss coverage. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At August 4, 2019 and February 3, 2019, self-insurance reserves totaled approximately $52 million and $49 million, respectively.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (HD Supply, Inc.) - USD ($) $ in Millions	6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 242	$ 220
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	54	51
Provision for uncollectibles	5	6
Non-cash interest expense	3	11
Stock-based compensation expense	12	12
Deferred income taxes	75	70
Other	1	(1)
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(133)	(183)
(Increase) decrease in inventories	(56)	(104)
(Increase) decrease in other current assets	(2)	(5)
Increase (decrease) in accounts payable and accrued liabilities	85	108
Increase (decrease) in other long-term liabilities		1
Net cash provided by (used in) operating activities	286	186
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(54)	(47)
Proceeds from sales of property and equipment	2
Payments for businesses acquired, net of cash acquired	3	(362)
Net cash provided by (used in) investing activities	(49)	(409)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt	(5)	(5)
Repayments of financing liabilities	(88)
Borrowings on long-term revolver debt	578	10
Repayments on long-term revolver debt	(642)	(16)
Other financing activities	(1)	(3)
Net cash provided by (used in) financing activities	(234)	(107)
Effect of exchange rates on cash and cash equivalents	0	0
Increase (decrease) in cash and cash equivalents	3	(330)
Cash and cash equivalents at beginning of period	38	558
Cash and cash equivalents at end of period	41	228
HD Supply, Inc. (Total HDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	242	220
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	54	51
Provision for uncollectibles	5	6
Non-cash interest expense	3	11
Stock-based compensation expense	12	12
Deferred income taxes	75	70
Other	1	(1)
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(133)	(183)
(Increase) decrease in inventories	(56)	(104)
(Increase) decrease in other current assets	(2)	(5)
Increase (decrease) in accounts payable and accrued liabilities	85	108
Increase (decrease) in other long-term liabilities		1
Net cash provided by (used in) operating activities	286	186
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(54)	(47)
Proceeds from sales of property and equipment	2
Payments for businesses acquired, net of cash acquired	3	(362)
Net cash provided by (used in) investing activities	(49)	(409)
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity distribution to Parent	(76)	(94)
Repayments of long-term debt	(5)	(5)
Repayments of financing liabilities	(88)
Borrowings on long-term revolver debt	578	10
Repayments on long-term revolver debt	(642)	(16)
Other financing activities	(1)	(3)
Net cash provided by (used in) financing activities	(234)	(108)
Increase (decrease) in cash and cash equivalents	3	(331)
Cash and cash equivalents at beginning of period	38	558
Cash and cash equivalents at end of period	$ 41	$ 227

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ACQUISITIONS

6 Months Ended

Aug. 04, 2019

ACQUISITIONS

ACQUISITIONS

NOTE 2 — ACQUISITIONS

HD Supply enters into strategic acquisitions from time to time to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), the results of acquisitions completed by HD Supply are reflected in the Company’s consolidated financial statements from the date of acquisition forward.

On March 5, 2018, the Company completed the acquisition of A.H. Harris Construction Supplies (“A.H. Harris”) for a purchase price of approximately $359 million, net of cash acquired and the final working capital settlement. The Company received the final working capital settlement of approximately $3 million in second quarter 2019. A.H. Harris is a leading specialty construction distributor serving the northeast and mid-Atlantic regions. This acquisition expanded Construction & Industrial’s market presence in the northeastern United States.

In accordance with ASC 805, the Company recorded the following assets and liabilities at fair value as of the date of the A.H. Harris acquisition: $182 million in goodwill, $123 million in definite-lived intangible assets, $12 million in property & equipment, $54 million in net working capital, and $10 million in deferred tax liabilities. The total amount of goodwill deductible for tax purposes is $19 million. The definite-lived intangible assets are comprised of $110 million in customer relationships and $13 million of trade names that will be amortized over a period of 12 years and 5 years, respectively.

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FAIR VALUE MEASUREMENTS - Fair value on consolidated balance sheets (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Recorded Amount
Financial instruments not reflected at fair value on the balance sheet
Senior ABL Facility	$ 284	$ 348
Term Loans and Notes	1,812	1,817
Total	2,096	2,165
Estimated Fair Value | Significant Other Observable Inputs (Level 2)
Financial instruments not reflected at fair value on the balance sheet
Senior ABL Facility	283	346
Term Loans and Notes	1,857	1,815
Total	2,140	2,161
Interest rate swap | Significant Other Observable Inputs (Level 2)
Financial instruments not reflected at fair value on the balance sheet
Fair value measurement of the financial liability	$ 48	$ 20

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LEASES - Corporate headquarters (Details) - USD ($) $ in Millions	Feb. 04, 2019	Feb. 28, 2018
LEASES
Leased asset		$ 87
Financing liability		$ 87
Building
LEASES
Total purchase price	$ 88

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BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES - Anti-dilutive Securities (Details) - shares shares in Thousands	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
Anti-dilutive securities
Stock plan securities excluded from dilution	2,091	1,536	2,693	2,133

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Stock Repurchases (Details) - Common Stock $ in Millions	6 Months Ended
	Aug. 04, 2019 USD ($) item shares	Jul. 29, 2018 USD ($) shares	Nov. 30, 2018 USD ($)	Aug. 31, 2017 USD ($)
Share repurchases
Number of share repurchase programs | item	2
Authorized share repurchase amount			$ 500	$ 500
Number of Shares | shares	2,066,108	2,426,141
Cost of Shares	$ 83	$ 93
Share Repurchase Program of November 2018
Share repurchases
Number of Shares | shares	1,911,964
Cost of Shares	$ 76
Share Repurchase Program of August 2017
Share repurchases
Number of Shares | shares		2,298,643
Cost of Shares		$ 88
Share Repurchase Program of April 2014
Share repurchases
Number of Shares | shares	154,144	127,498
Cost of Shares	$ 7	$ 5

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SEGMENT INFORMATION - Adjusted EBITDA, Depreciation & Software Amortization, Other Intangible Amortization for Each Reportable Segment (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
SEGMENT INFORMATION
Adjusted EBITDA	$ 244	$ 246	$ 447	$ 436
Depreciation & Software Amortization	21	21	42	40
Other Intangible Amortization	6	6	12	11
Facilities Maintenance | Reportable segment
SEGMENT INFORMATION
Adjusted EBITDA	149	150	283	273
Depreciation & Software Amortization	11	9	21	18
Other Intangible Amortization	2	2	4	4
Construction & Industrial | Reportable segment
SEGMENT INFORMATION
Adjusted EBITDA	95	96	164	163
Depreciation & Software Amortization	10	12	21	22
Other Intangible Amortization	$ 4	$ 4	$ 8	$ 7

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DEBT - Senior Term Loan Facility (Details) - HDS - Secured debt - Credit facility $ in Millions	6 Months Ended
	Aug. 04, 2019 USD ($)
Term Loan Facility
DEBT
Aggregate principal amount	$ 1,070
Term B-5 Loans due 2023
DEBT
Amortization of debt, aggregate annual amounts as a percentage of original principal amount (as a percent)	1.00%
LIBOR | Term B-5 Loans due 2023
DEBT
Percentage added to reference rate (as a percent)	1.75%
Base | Term B-5 Loans due 2023
DEBT
Percentage added to reference rate (as a percent)	0.75%

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DEBT - Gross Long-term Debt - Interest Rate - Tabular Disclosure (Details) - HDS	Aug. 04, 2019	Feb. 03, 2019	Oct. 11, 2018
Secured debt | Credit facility | Senior ABL Facility due 2022
DEBT
Interest rate, rate at end of period (as a percent)	3.55%	3.83%
Secured debt | Credit facility | Term B-5 Loans due 2023
DEBT
Interest rate, rate at end of period (as a percent)	3.98%	4.25%
Unsecured debt | October 2018 Senior Unsecured Notes due 2026
DEBT
Interest rate, stated rate (as a percent)	5.375%	5.375%	5.375%

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NATURE OF BUSINESS AND BASIS OF PRESENTATION - Fiscal Year (Details)	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
Length of fiscal year (in days)			364 days	371 days
Length of fiscal quarter (in days)	91 days	91 days	182 days	182 days
Minimum
Length of fiscal year (in days)			364 days
Maximum
Length of fiscal year (in days)			371 days

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LEASES

6 Months Ended

Aug. 04, 2019

LEASES

LEASES

NOTE 6 – LEASES

The Company adopted ASU No. 2016-02, “Leases (Topic 842),” and its related amendments (collectively “ASC 842”) on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. The standard requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for all leases.

At adoption of ASC 842, the Company recognized ROU assets for operating leases of approximately $430 million and operating lease liabilities of approximately $447 million, the difference attributable to the reclassification of prepaid

rent and accrued rent balances outstanding at adoption into the ROU assets and the cumulative adjustment recorded to the opening balance of retained earnings. The cumulative adjustment, net of tax, recorded to the opening balance of retained earnings was $3 million. The Company’s finance leases are immaterial. The adoption of ASC 842 did not have a material impact on the Company’s income statement. The Company’s consolidated financial statements for the three and six months ended August 4, 2019 are presented under ASC 842, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard, ASC 840, “Leases.”

The Company elected the package of practical expedients for existing contracts permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases, the historical assessment of whether contracts are or contain leases, and the determination of initial direct costs. The Company did not elect the hindsight practical expedient.

Lease Accounting Policies and Disclosures

The Company determines if an agreement is a lease upon inception. An agreement is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.

The Company has operating leases for distribution centers, warehouses, office space, and transportation vehicles. The Company has an immaterial amount of financing leases for other equipment. Certain leases for real estate contain options to extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the option period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, the Company considers all relevant economic factors that would compel the Company to exercise or not exercise an option.

Many of the Company’s real estate leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. The Company determined these charges are variable non-lease components and did not elect the practical expedient to combine with lease components. Additionally, many of the Company’s transportation equipment leases require additional payments based on the underlying usage of the assets. Certain lease agreements include rental payments adjusted annually based on changes in an inflation index. Due to the variable nature of these costs, the cash flows associated with these charges are expensed as incurred and not included in the lease payments used to determine the ROU asset and associated lease liability.

Lease ROU assets and associated liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company’s leases generally do not provide a readily determinable implicit borrowing rate. As such, the discount rate used to calculate present value is the Company’s collateralized incremental borrowing rate. The incremental borrowing rate for each lease varies in accordance with the lease term. Lease expense is recognized on a straight-line basis over the lease term.

Total lease cost for the Company for the three and six months ended August 4, 2019 is $37 million and $73 million, respectively, and is primarily comprised of operating lease costs. Lease costs associated with finance leases and income related to sub-lease activity are immaterial for the Company.

As of August 4, 2019, the weighted average remaining lease term for operating leases is 5.1 years and the weighted average discount rate is 4.67%.

During the six months ended August 4, 2019, the Company’s cash flows from operating activities included $81 million of cash payments for amounts included in the measurement of operating lease liabilities. During the six months ended August 4, 2019, the Company obtained ROU assets of $40 million in exchange for operating lease liabilities.

As of August 4, 2019, maturities of operating lease liabilities were as follows (amounts in millions):

	Fiscal Year
	Remainder
	of 2019		2020		2021		2022		2023		Thereafter		Total
Operating Lease Payments	$	69		112		101		73		53		86	$	494
Less imputed interest														70
Total Discounted Lease Liability													$	424

As of August 4, 2019, the Company has additional leases which have not yet commenced, but are anticipated to commence in fiscal 2019. Commencement occurs when the Company is granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. The Company anticipates these leases will result in approximately $40 million of ROU assets obtained in exchange for lease liabilities.

Disclosure related to periods prior to adoption of ASC 842:

Rental expense under operating leases was $142 million, $127 million, and $118 million in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Rental expense under operating leases for the three and six months ended July 29, 2018 was $34 million and $68 million, respectively.

As of February 3, 2019, future minimum aggregate rental payments under non-cancelable leases were as follows (amounts in millions):

	Fiscal Year
	2019		2020		2021		2022		2023		Thereafter		Total
Operating Leases	$	140		104		88		61		42		78	$	513

Corporate headquarters

In February 2016, the Company entered into a build-to-suit arrangement for a leadership development and headquarters facility in Atlanta, Georgia, which began construction in 2016. In accordance with ASC 840, for build-to-suit arrangements where the Company is involved in the construction of structural improvements prior to the commencement of the lease or takes some level of construction risk, the Company was considered the owner of the assets and land during the construction period. Accordingly, during construction activities, the Company recorded a Construction in progress asset within Property and equipment and a corresponding financing liability on the Consolidated Balance Sheet for construction costs incurred by the landlord.

The lease commenced in February 2018, with the leased asset and corresponding financing liability valued at $87 million each. In accordance with the sale and leaseback criteria of GAAP, the build-to-suit arrangement and subsequent lease failed to qualify as a sale. Therefore, the transaction was accounted for as a financing arrangement, whereby both the leased asset and the financing liability remained on the Company’s Consolidated Balance Sheet. The asset was depreciated as if the Company was the legal owner and rental payments were allocated between interest expense and principal repayment of the financing liability.

The Company exercised its option to purchase the leased asset, completing the purchase on February 4, 2019 for a total purchase price of $88 million. As the purchase option was executed on the first day of fiscal 2019, the Company did

not recognize an ROU asset for the finance lease and a corresponding lease liability as part of the adoption of ASC 842 and excluded the future minimum rental payments from the commitment tables disclosed above.

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CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (HD Supply Holdings, Inc.) - USD ($) shares in Thousands, $ in Millions	Common Stock	Paid-in Capital	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Total
Beginning balance at Jan. 28, 2018	$ 2	$ 4,029	$ (1,966)	$ (17)	$ (582)
Beginning balance (in shares) at Jan. 28, 2018	203,914				(18,190)
Increase (decrease) in stockholders' equity
Stock-based compensation		12
Shares issued under employee benefit plans		7
Shares issued under employee benefit plans (in shares)	650
Other		(1)	1
Net income			220			$ 220
Foreign currency translation adjustment				2		2
Purchase of common stock					$ (93)
Purchase of common stock (in shares)					(2,427)
Shares withheld for taxes					$ (6)
Shares withheld for taxes (in shares)					(161)
Ending balance at Jul. 29, 2018	$ 2	4,047	(1,745)	(15)	$ (681)	$ 1,608
Ending balance (in shares) at Jul. 29, 2018	204,564				(20,778)	183,786
Beginning balance at Apr. 29, 2018	$ 2	4,038	(1,877)	(16)	$ (656)
Beginning balance (in shares) at Apr. 29, 2018	204,356				(20,149)
Increase (decrease) in stockholders' equity
Stock-based compensation		6
Shares issued under employee benefit plans		5
Shares issued under employee benefit plans (in shares)	208
Other		(2)	1
Net income			131			$ 131
Foreign currency translation adjustment				1		1
Purchase of common stock					$ (25)
Purchase of common stock (in shares)					(620)
Shares withheld for taxes (in shares)					(9)
Ending balance at Jul. 29, 2018	$ 2	4,047	(1,745)	(15)	$ (681)	$ 1,608
Ending balance (in shares) at Jul. 29, 2018	204,564				(20,778)	183,786
Beginning balance at Feb. 03, 2019	$ 2	4,067	(1,572)	(30)	$ (1,186)	$ 1,281
Beginning balance (in shares) at Feb. 03, 2019	204,806				(34,153)
Increase (decrease) in stockholders' equity
Cumulative effect of accounting change			(3)
Stock-based compensation		12
Shares issued under employee benefit plans		7
Shares issued under employee benefit plans (in shares)	603
Other			1
Net income			242			242
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0				(21)		(21)
Purchase of common stock					$ (83)
Purchase of common stock (in shares)					(2,066)
Shares withheld for taxes					$ (5)
Shares withheld for taxes (in shares)					(119)
Ending balance at Aug. 04, 2019	$ 2	4,086	(1,332)	(51)	$ (1,274)	$ 1,431
Ending balance (in shares) at Aug. 04, 2019	205,409				(36,338)	169,071
Beginning balance at May. 05, 2019	$ 2	4,079	(1,467)	(35)	$ (1,203)
Beginning balance (in shares) at May. 05, 2019	205,367				(34,541)
Increase (decrease) in stockholders' equity
Stock-based compensation		5
Shares issued under employee benefit plans		2
Shares issued under employee benefit plans (in shares)	42
Net income			135			$ 135
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0				(16)		(16)
Purchase of common stock					$ (71)
Purchase of common stock (in shares)					(1,795)
Shares withheld for taxes (in shares)					(2)
Ending balance at Aug. 04, 2019	$ 2	$ 4,086	$ (1,332)	$ (51)	$ (1,274)	$ 1,431
Ending balance (in shares) at Aug. 04, 2019	205,409				(36,338)	169,071

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Parenthetical) (HD Supply Holdings, Inc.) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Aug. 04, 2019	Aug. 04, 2019
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Unrealized loss on cash flow hedge, tax	$ 5	$ 7

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

6 Months Ended

Aug. 04, 2019

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

NOTE 10 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

Receivables as of August 4, 2019 and February 3, 2019 consisted of the following (amounts in millions):

	August 4, 2019		February 3, 2019
Trade receivables, net of allowance for doubtful accounts	$	781	$	657
Vendor rebate receivables		61		57
Other receivables		18		18
Total receivables, net	$	860	$	732

Other Current Liabilities

Other current liabilities as of August 4, 2019 and February 3, 2019 consisted of the following (amounts in millions):

	HD Supply Holdings, Inc.				HD Supply, Inc.
	August 4, 2019		February 3, 2019		August 4, 2019		February 3, 2019
Corporate headquarters financing liability(1)	$	—	$	87	$	—	$	87
Accrued non-income taxes		36		35		36		35
Accrued interest		14		14		14		14
Unsettled share repurchases		7		2		—		—
Other		108		121		108		121
Total other current liabilities	$	165	$	259	$	158	$	257

(1) This amount represented the financing liability for the Company’s corporate headquarters that was purchased on February 4, 2019. Please see “Note 6 – Leases” for further information on the purchase of the Company’s corporate headquarters.

Supplemental Cash Flow Information

Cash paid for interest in the six months ended August 4, 2019 and July 29, 2018 was $53 million and $61 million, respectively.

Cash paid for income taxes, net of refunds, in the six months ended August 4, 2019 and July 29, 2018 was approximately $10 million and $5 million, respectively.

During the six months ended August 4, 2019 and July 29, 2018, HDS executed equity cash distributions of $76 million and $94 million, respectively, to Holdings, via HDS’s direct parent, HDS Holding Corporation. The equity distribution from HDS and return of capital recognized by Holdings were eliminated in consolidation of Holdings and its wholly-owned subsidiaries, including HDS.

Share Repurchases

During fiscal 2014, Holdings’ Board of Directors authorized a share repurchase program to be funded from cash proceeds received from exercises of employee stock options. This share repurchase program does not obligate Holdings to acquire any particular amount of common stock, and it may be terminated at any time at Holdings’ discretion. During August 2017 and November 2018, Holdings’ Board of Directors authorized two additional share repurchase programs for up to an aggregate amount of $500 million each of Holdings’ common stock.

Holdings’ share repurchases under these plans for the six months ended August 4, 2019 and July 29, 2018 were as follows (dollars in millions):

	Six Months Ended
	August 4, 2019			July 29, 2018
	Number of	Cost of		Number of	Cost of
	Shares	Shares		Shares	Shares
November 2018 Plan	1,911,964	$	76	—	$	—
August 2017 Plan	—		—	2,298,643		88
April 2014 Plan	154,144		7	127,498		5
Total share repurchases	2,066,108	$	83	2,426,141	$	93

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RECENT ACCOUNTING PRONOUNCEMENTS

6 Months Ended

Aug. 04, 2019

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Leases – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842),” amended by ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),” ASU No. 2018-01, “Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements.” The amended guidance requires companies to recognize all leases as assets and liabilities for the rights and obligations created by leased assets on the consolidated balance sheet. ASU No. 2016-02 also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. ASU No. 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU No. 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.

The Company adopted this guidance on February 4, 2019 (the first day of fiscal 2019) using the cumulative adjustment transition method. See “Note 6 – Leases” for the Company’s lease accounting policies and disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

Cloud Computing Arrangements – In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). The new guidance aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also provides for additional disclosure requirements regarding the nature of an entity’s hosting arrangements that are service contracts. The ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15.

Goodwill – In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The amendments in this update should be applied on a prospective basis. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), amended by ASU No 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” The amended guidance modifies the measurement of expected credit losses of certain financial instruments, including trade receivables. The amended guidance also prescribes additional disclosure requirements for certain financial instruments. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting ASU 2016-13.

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Supplemental Cash Flow Information (Details) - USD ($) $ in Millions	6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018
Supplemental Cash Flow Information
Cash paid for interest	$ 53	$ 61
Cash paid for income taxes, net of refunds	10	5
HD Supply, Inc. (Total HDS)
Supplemental Cash Flow Information
Cash equity distribution	$ 76	$ 94

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SEGMENT INFORMATION - Net Sales for Each Reportable Segment (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
SEGMENT INFORMATION
Net sales	$ 1,624	$ 1,600	$ 3,117	$ 2,989
Eliminations
SEGMENT INFORMATION
Net sales	(1)	(1)	(1)	(1)
Facilities Maintenance | Reportable segment
SEGMENT INFORMATION
Net sales	830	820	1,602	1,543
Construction & Industrial | Reportable segment
SEGMENT INFORMATION
Net sales	$ 795	$ 781	$ 1,516	$ 1,447

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DEBT - Total Net Long-term Debt - Tabular Disclosure (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
DEBT
Total gross long-term debt	$ 2,096	$ 2,165
Less unamortized discount	(3)	(4)
Less unamortized deferred financing costs	(20)	(21)
Total net long-term debt	$ 2,073	$ 2,140

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NATURE OF BUSINESS AND BASIS OF PRESENTATION - Self-Insurance (Details) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Self-insurance reserves	$ 52	$ 49

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DEBT - 5.375% Senior Unsecured Notes due 2026 (Details) - Unsecured debt - October 2018 Senior Unsecured Notes due 2026 - USD ($) $ in Millions	6 Months Ended
	Aug. 04, 2019	Feb. 03, 2019	Oct. 11, 2018
Prior to October 15, 2021
DEBT
Threshold percentage for debt that must remain after each redemption	50.00%
HDS
DEBT
Aggregate principal amount			$ 750
Note issued, interest rate	5.375%	5.375%	5.375%
HDS | Prior to October 15, 2021
DEBT
Optional prepayment price percentage	100.00%
Percentage limit on amount that can be redeemed	40.00%
Prepayment percentage price as a percent of the principal, with proceeds from certain equity offerings	105.375%
HDS | 2021
DEBT
Optional prepayment price percentage	102.688%
HDS | 2022
DEBT
Optional prepayment price percentage	101.344%
HDS | 2023 and thereafter
DEBT
Optional prepayment price percentage	100.00%

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REVENUE

6 Months Ended

Aug. 04, 2019

REVENUE

REVENUE

NOTE 13 — REVENUE

The Company’s revenues are earned from contracts with customers. Contracts include written agreements, as well as arrangements that are implied by customary practices or law.

Nature of Products and Services

Both Facilities Maintenance and Construction & Industrial serve unique end markets. Facilities Maintenance offers products that serve the maintenance, repair and operations (“MRO”) end market as well as value-added services. Construction & Industrial offers products used broadly across both the residential and non-residential construction end markets as well as light remodeling supplies for small remodeling contractors and trade professionals. For additional information regarding the nature of products and services offered by the Company’s reportable segments, see “Description of segments” within Item 2 of this quarterly report on Form 10-Q.

Revenue Recognition

The Company recognizes revenue, net of allowances for returns and discounts and any taxes collected from the customer, when an identified performance obligation is satisfied by the transfer of control of promised products or services to the customer. The Company ships products to customers by internal fleet and third-party carriers. Transfer of control to the customer for products generally occurs at the point of destination (i.e., upon transfer of title and risk of loss of product). Transfer of control to the customer for services occurs when the customer has the right to direct the use of and obtain substantially all the remaining benefits of the asset that is created or enhanced from the service. The Company accounts

for shipping and handling costs associated with outbound freight as a fulfillment cost. Such costs are included in Selling, general and administrative expenses.

Disaggregation of Revenue

The Company elected to disaggregate the revenue of Facilities Maintenance by its demand types: MRO and Property Improvement, and Construction & Industrial by its end markets: Non-Residential Construction, Residential Construction, and Other. The Company believes this disaggregation appropriately meets the objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The prior periods’ revenue disaggregation for Construction & Industrial has been revised by an immaterial amount.

The table below represents disaggregated revenue for Facilities Maintenance and Construction & Industrial with Inter-segment eliminations (amounts in millions):

	Three Months Ended				Six Months Ended
	August 4, 2019		July 29, 2018		August 4, 2019		July 29, 2018
Facilities Maintenance
Maintenance, Repair, and Operations	$	732	$	722	$	1,424	$	1,358
Property Improvement		98		98		178		185
Total Facilities Maintenance Net Sales		830		820		1,602		1,543
Construction & Industrial
Non-Residential Construction		545		538		1,042		983
Residential Construction		198		194		378		373
Other		52		49		96		91
Total Construction & Industrial Net Sales		795		781		1,516		1,447
Inter-segment Eliminations		(1)		(1)		(1)		(1)
Total HD Supply Net Sales	$	1,624	$	1,600	$	3,117	$	2,989

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FAIR VALUE MEASUREMENTS

6 Months Ended

Aug. 04, 2019

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 5 — FAIR VALUE MEASUREMENTS

The fair value measurements and disclosure principles of GAAP (ASC 820, “Fair Value Measurements and Disclosures”) define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements.  These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly;

Level 3 — Unobservable inputs in which little or no market activity exists.

As of August 4, 2019 and February 3, 2019, the fair value measurement of the financial liability associated with the Company’s interest rate swap contract was $48 million and $20 million, respectively. The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the interest rate swap.  See “Note 4 – Derivative Instruments” for further information on the Company’s interest rate swap contract.

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of August 4, 2019 and February 3, 2019 (amounts in millions):

	As of August 4, 2019				As of February 3, 2019
	Recorded		Estimated		Recorded		Estimated
	Amount(1)		Fair Value		Amount(1)		Fair Value
Senior ABL Facility	$	284	$	283	$	348	$	346
Term Loans and Notes		1,812		1,857		1,817		1,815
Total	$	2,096	$	2,140	$	2,165	$	2,161

(1) These amounts do not include accrued interest; accrued interest is classified as Other current liabilities in the accompanying Consolidated Balance Sheets. These amounts do not include any related discounts, premiums, or deferred financing costs.

The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt.  Management’s fair value estimates were based on quoted prices for recent trades of HDS’s long-term debt, recent similar credit facilities initiated by companies with like credit quality in similar industries, quoted prices for similar instruments, and inquiries with certain investment communities.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (HD Supply Holdings, Inc.) - USD ($) $ in Millions	6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 242	$ 220
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	54	51
Provision for uncollectibles	5	6
Non-cash interest expense	3	11
Stock-based compensation expense	12	12
Deferred income taxes	75	70
Other	1	(1)
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(133)	(183)
(Increase) decrease in inventories	(56)	(104)
(Increase) decrease in other current assets	(2)	(5)
Increase (decrease) in accounts payable and accrued liabilities	85	108
Increase (decrease) in other long-term liabilities		1
Net cash provided by (used in) operating activities	286	186
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(54)	(47)
Proceeds from sales of property and equipment	2
Payments for businesses acquired, net of cash acquired	3	(362)
Net cash provided by (used in) investing activities	(49)	(409)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares	(78)	(93)
Repayments of long-term debt	(5)	(5)
Repayments of financing liabilities	(88)
Borrowings on long-term revolver debt	578	10
Repayments on long-term revolver debt	(642)	(16)
Proceeds from issuance of common stock under employee benefit plans	7	6
Tax withholdings on stock-based awards	(5)	(6)
Other financing activities	(1)	(3)
Net cash provided by (used in) financing activities	(234)	(107)
Effect of exchange rates on cash and cash equivalents	0	0
Increase (decrease) in cash and cash equivalents	3	(330)
Cash and cash equivalents at beginning of period	38	558
Cash and cash equivalents at end of period	$ 41	$ 228

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (HD Supply Holdings, Inc.) - USD ($) shares in Thousands, $ in Millions	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Net Sales	$ 1,624	$ 1,600	$ 3,117	$ 2,989
Cost of sales	991	978	1,899	1,815
Gross Profit	633	622	1,218	1,174
Operating expenses:
Selling, general and administrative	396	384	788	756
Depreciation and amortization	26	25	51	47
Restructuring		2	(2)	9
Total operating expenses	422	411	837	812
Operating Income	211	211	381	362
Interest expense	28	35	56	69
Interest (income)				(1)
Income from Continuing Operations Before Provision for Income Taxes	183	176	325	294
Provision for income taxes	48	46	83	75
Income from Continuing Operations	135	130	242	219
Income from discontinued operations, net of tax		1		1
Net Income	135	131	242	220
Other comprehensive income (loss):
Foreign currency translation adjustment		1		2
Unrealized loss on cash flow hedge, net of tax of $5, $0 , $7, and $ 0	(16)		(21)
Total Comprehensive Income	$ 119	$ 132	$ 221	$ 222
Weighted Average Common Shares Outstanding (thousands)
Basic	169,546	182,992	169,773	183,659
Diluted	170,057	183,822	170,386	184,456
Basic Earnings Per Share(1):
Income from Continuing Operations (in dollars per share)	$ 0.80	$ 0.71	$ 1.43	$ 1.19
Income from Discontinued Operations (in dollars per share)		0.01		0.01
Net Income	0.80	0.72	1.43	1.20
Diluted Earnings Per Share(1):
Income from Continuing Operations (in dollars per share)	0.79	0.71	1.42	1.19
Income from Discontinued Operations (in dollars per share)		0.01		0.01
Net Income	$ 0.79	$ 0.71	$ 1.42	$ 1.19

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BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

6 Months Ended

Aug. 04, 2019

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

NOTE 9 - BASIC AND DILUTED WEIGHTED-AVERAGE COMMON SHARES

The following basic and diluted weighted-average common shares information is provided for Holdings.

The reconciliation of basic to diluted weighted-average common shares for the three and six months ended August 4, 2019 and July 29, 2018 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	August 4, 2019	July 29, 2018	August 4, 2019	July 29, 2018
Weighted-average common shares	169,546	182,992	169,773	183,659
Effect of potentially dilutive stock plan securities	511	830	613	797
Diluted weighted-average common shares	170,057	183,822	170,386	184,456
Stock plan securities excluded from dilution(1)	2,091	1,536	2,693	2,133

(1) Represents securities not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

Stock plan securities consist of securities (stock options, restricted stock, restricted stock units, and performance share units) granted under Holdings’ stock-based compensation plans.

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BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES (Tables)

6 Months Ended

Aug. 04, 2019

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

Schedule of reconciliation of basic to diluted weighted-average common shares

The reconciliation of basic to diluted weighted-average common shares for the three and six months ended August 4, 2019 and July 29, 2018 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	August 4, 2019	July 29, 2018	August 4, 2019	July 29, 2018
Weighted-average common shares	169,546	182,992	169,773	183,659
Effect of potentially dilutive stock plan securities	511	830	613	797
Diluted weighted-average common shares	170,057	183,822	170,386	184,456
Stock plan securities excluded from dilution(1)	2,091	1,536	2,693	2,133

(1) Represents securities not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

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DEBT (Tables)

6 Months Ended

Aug. 04, 2019

DEBT

Schedule of long-term debt

HDS’s long-term debt as of August 4, 2019 and February 3, 2019 consisted of the following (dollars in millions):

	August 4, 2019			February 3, 2019
	Outstanding		Interest	Outstanding		Interest
	Principal		Rate %(1)	Principal		Rate %(1)
Senior ABL Facility due 2022	$	284	3.55	$	348	3.83
Term B-5 Loans due 2023		1,062	3.98		1,067	4.25
October 2018 Senior Unsecured Notes due 2026		750	5.375		750	5.375
Total gross long-term debt	$	2,096		$	2,165
Less unamortized discount		(3)			(4)
Less unamortized deferred financing costs		(20)			(21)
Total net long-term debt	$	2,073		$	2,140
Less current installments		(11)			(11)
Total net long-term debt, excluding current installments	$	2,062		$	2,129

(1) Represents the stated rate of interest, without including the effect of discounts, premiums, or interest rate swap agreements.

October 2018 Senior Unsecured Notes due 2026

DEBT

Schedule of notes redemption on and after October 15, 2021, at the applicable redemption price set forth below (expressed as a percentage of principal amount)

Year	Percentage
2021	102.688	%
2022	101.344	%
2022 and thereafter	100.000	%

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NATURE OF BUSINESS AND BASIS OF PRESENTATION - Nature of Business (Details)	6 Months Ended
	Aug. 04, 2019 customer category product item employee segment
Nature of Business
Number of distinct market sectors in which entity specializes | category	2
Number of associates | employee	11,500
Number of customers | customer	500,000
Number of SKUs offered | product	650,000
Number of reportable segments | segment	2
U.S. and Canada
Nature of Business
Number of branches	270
Number of distribution centers	44

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (HD Supply, Inc.) - USD ($) $ in Millions	Aug. 04, 2019	Feb. 03, 2019
Receivables
Receivables, allowance for doubtful accounts (in dollars)	$ 19	$ 18
Common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	1,000,000,000	1,000,000,000
Common stock, shares issued	169,100,000	170,700,000
Common stock, shares outstanding	169,100,000	170,700,000
HD Supply, Inc. (Total HDS)
Receivables
Receivables, allowance for doubtful accounts (in dollars)	$ 19	$ 18
Common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	1,000	1,000
Common stock, shares issued	1,000	1,000
Common stock, shares outstanding	1,000	1,000

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NATURE OF BUSINESS AND BASIS OF PRESENTATION

6 Months Ended

Aug. 04, 2019

NATURE OF BUSINESS AND BASIS OF PRESENTATION

NATURE OF BUSINESS AND BASIS OF PRESENTATION

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

HD Supply Holdings, Inc. (‘‘Holdings’’) indirectly owns all of the outstanding common stock of HD Supply, Inc. (“HDS”).

Holdings, together with its direct and indirect subsidiaries, including HDS (“HD Supply” or the “Company”), is one of the largest industrial distribution companies in North America. The Company specializes in two distinct market sectors: Maintenance, Repair & Operations and Specialty Construction. Through approximately 270 branches and 44 distribution centers in the U.S. and Canada, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,500 associates delivering localized, customer-tailored products, services and expertise. The Company serves approximately 500,000 customers, which include contractors, maintenance professionals, industrial businesses, and government entities. HD Supply’s broad range of end-to-end product lines and services includes approximately 650,000 stock-keeping units (“SKUs”) of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire life-cycle of a project from construction to maintenance, repair and operations.

HD Supply is managed primarily on a product line basis and reports results of operations in two reportable segments. The reportable segments are Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.

Basis of Presentation

In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows.  All adjustments are of a normal recurring nature unless otherwise disclosed.  Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  For a more complete discussion of the Company’s significant accounting policies and other information, you should read this report in conjunction with the Company’s annual report on Form 10-K for the year ended February 3, 2019, which includes all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).

Fiscal Year

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. The fiscal year ending February 2, 2020 (“fiscal 2019”) includes 52 weeks and the fiscal year ended February 3, 2019 (“fiscal 2018”) included 53 weeks.  The three months ended August 4, 2019 (“second quarter 2019”) and July 29, 2018 (“second quarter 2018”) both include 13 weeks. The six months ended August 4, 2019 and July 29, 2018 both include 26 weeks.

Principles of Consolidation

The consolidated financial statements of Holdings present the results of operations, financial position and cash flows of Holdings and its wholly-owned subsidiaries, including HDS. The consolidated financial statements of HDS present the results of operations, financial position and cash flows of HDS and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of businesses acquired are included from their respective dates of acquisition.

Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates.

Self-Insurance

HD Supply has a high-deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for certain legal claims and medical claims, while maintaining per employee stop-loss coverage. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At August 4, 2019 and February 3, 2019, self-insurance reserves totaled approximately $52 million and $49 million, respectively.

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BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES - Reconciliation of Basic to Diluted Weighted-Average Common Shares (Details) - shares shares in Thousands	3 Months Ended		6 Months Ended
	Aug. 04, 2019	Jul. 29, 2018	Aug. 04, 2019	Jul. 29, 2018
Reconciliation of basic to diluted weighted-average common shares
Weighted-average common shares	169,546	182,992	169,773	183,659
Effect of potentially dilutive stock plan securities	511	830	613	797
Diluted weighted-average common shares	170,057	183,822	170,386	184,456

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DERIVATIVE INSTRUMENTS (Details) - Derivatives designated as hedging instruments - Interest rate swap - Cash flow hedges - USD ($) $ in Millions	Oct. 23, 2018	Aug. 04, 2019	Oct. 24, 2018
DERIVATIVE INSTRUMENTS
Notional amount of derivative liability			$ 750
Fixed interest rate percentage			3.07%
Cash flow hedge liabilities at fair value		$ 48
Other current liabilities
DERIVATIVE INSTRUMENTS
Cash flow hedge liabilities at fair value		9
Other liabilities
DERIVATIVE INSTRUMENTS
Cash flow hedge liabilities at fair value		$ 39
LIBOR | Term B-5 Loans due 2023
DERIVATIVE INSTRUMENTS
Effective interest rate percentage			4.82%
Percentage added to reference rate (as a percent)	1.75%

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LEASES - Periods prior to adoption of ASU 842 (Details) - USD ($) $ in Millions	3 Months Ended	6 Months Ended	12 Months Ended
	Jul. 29, 2018	Jul. 29, 2018	Feb. 03, 2019	Jan. 28, 2018	Jan. 29, 2017
LEASES
Rental expense	$ 34	$ 68	$ 142	$ 127	$ 118
Future minimum aggregate rental payments under non-cancelable operating leases
Remainder of 2019			140
2020			104
2021			88
2022			61
2023			42
Thereafter			78
Total lease payments			$ 513