10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 30, 2017

- OR -

oTRANSITION 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. 3100 Cumberland Boulevard, Suite 1480 Atlanta, Georgia 30339 (770) 852-9000	Delaware	26-0486780
333-159809	HD SUPPLY, INC. 3100 Cumberland Boulevard, Suite 1480 Atlanta, Georgia 30339 (770) 852-9000	Delaware	75-2007383

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 x No o
HD Supply, Inc.	Yes o No x

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, 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 x No o
HD Supply, Inc.	Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x	Accelerated filer o	Smaller reporting company o
Non-accelerated filer o   (Do not check if a smaller reporting company)
Emerging growth company o
HD Supply, Inc.
Large accelerated filer o	Accelerated filer o	Smaller reporting company o
Non-accelerated filer x   (Do not check if a smaller reporting company)
Emerging growth company o

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 provide pursuant to Section 13(a) of the Exchange Act.

HD Supply Holdings, Inc.o

HD Supply, Inc.o

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 o No x
HD Supply, Inc.	Yes o No x

The number of shares of the Registrant’s common stock outstanding as of September 1, 2017:

HD Supply Holdings, Inc.	186,646,151 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 July 30, 2017 and July 31, 2016 (unaudited)	5
	Consolidated Balance Sheets as of July 30, 2017 and January 29, 2017 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months ended July 30, 2017 and July 31, 2016 (unaudited)	7
	HD Supply, Inc.
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended July 30, 2017 and July 31, 2016 (unaudited)	8
	Consolidated Balance Sheets as of July 30, 2017 and January 29, 2017 (unaudited)	9
	Consolidated Statements of Cash Flows for the Six Months ended July 30, 2017 and July 31, 2016 (unaudited)	10
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	47
Part II.	Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	50
Signatures		51

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 January 29, 2017 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 results of operations, financial condition and liquidity, and the development of 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 and to maintain our supply chains;

·our ability to manage fixed costs;

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

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

·potential material liabilities under our self-insured programs;

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

·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. All forward-looking statements made in this report are qualified by these cautionary statements. 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
	July 30, 2017			July 31, 2016			July 30, 2017			July 31, 2016
Net Sales	$	1,352		$	1,283		$	2,568		$	2,459
Cost of sales	813			770			1,545			1,477
Gross Profit	539			513			1,023			982
Operating expenses:
Selling, general and administrative	338			317			672			625
Depreciation and amortization	21			21			42			42
Restructuring	—			4			—			11
Total operating expenses	359			342			714			678
Operating Income	180			171			309			304
Interest expense	49			69			98			154
Loss on extinguishment of debt	—			—			3			115
Income from Continuing Operations Before Provision for Income Taxes	131			102			208			35
Provision for income taxes	50			41			69			15
Income from Continuing Operations	81			61			139			20
Income from discontinued operations, net of tax	361			37			388			64
Net Income	$	442		$	98		$	527		$	84
Other comprehensive income (loss) — foreign currency translation adjustment	(3		)	(2		)	(2		)	2
Total Comprehensive Income	$	439		$	96		$	525		$	86
Weighted Average Common Shares Outstanding (thousands)
Basic	197,752			199,250			199,230			199,029
Diluted	198,954			201,978			201,010			201,615
Basic Earnings Per Share(1):
Income from Continuing Operations	$	0.41		$	0.31		$	0.70		$	0.10
Income from Discontinued Operations	$	1.83		$	0.19		$	1.95		$	0.32
Net Income	$	2.24		$	0.49		$	2.65		$	0.42
Diluted Earnings Per Share(1):
Income from Continuing Operations	$	0.41		$	0.30		$	0.69		$	0.10
Income from Discontinued Operations	$	1.81		$	0.18		$	1.93		$	0.32
Net Income	$	2.22		$	0.49		$	2.62		$	0.42

(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

	July 30, 2017			January 29,  2017
ASSETS
Current assets:
Cash and cash equivalents	$	67		$	75
Receivables, less allowance for doubtful accounts of $11 and $9	693			559
Inventories	690			606
Current assets of discontinued operations	752			575
Other current assets	33			32
Total current assets	2,235			1,847
Property and equipment, net	266			253
Goodwill	1,807			1,807
Intangible assets, net	96			102
Deferred tax asset	857			556
Non-current assets of discontinued operations	1,120			1,122
Other assets	23			20
Total assets	$	6,404		$	5,707
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	454		$	320
Accrued compensation and benefits	83			98
Current installments of long-term debt	14			14
Current liabilities of discontinued operations	354			259
Other current liabilities	189			152
Total current liabilities	1,094			843
Long-term debt, excluding current installments	4,038			3,798
Non-current liabilities of discontinued operations	41			20
Other liabilities	100			86
Total liabilities	5,273			4,747
Stockholders’ equity:
Common stock, par value $0.01; 1 billion shares authorized; 189.1 million and 201.4 million shares issued and outstanding at July 30, 2017 and January 29, 2017, respectively	2			2
Paid-in capital	4,004			3,962
Accumulated deficit	(2,408		)	(2,969		)
Accumulated other comprehensive loss	(17		)	(15		)
Treasury stock, at cost, 14.2 and 0.6 million shares at July 30, 2017 and January 29, 2017, respectively	(450		)	(20		)
Total stockholders’ equity	1,131			960
Total liabilities and stockholders’ equity	$	6,404		$	5,707

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
	July 30, 2017			July 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	527		$	84
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	50			51
Provision for uncollectibles	4			3
Non-cash interest expense	6			9
Payment of discounts upon extinguishment of debt	(4		)	—
Loss on extinguishment of debt	3			115
Stock-based compensation expense	12			11
Deferred income taxes	(223		)	52
Loss on sales of businesses, net	—			3
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(258		)	(232		)
(Increase) decrease in inventories	(141		)	(118		)
(Increase) decrease in other current assets	—			(9		)
Increase (decrease) in accounts payable and accrued liabilities	212			196
Increase (decrease) in other long-term liabilities	1			(1		)
Net cash provided by (used in) operating activities	189			164
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43		)	(32		)
Proceeds from sales of property and equipment	2			1
Proceeds from sales of businesses, net	—			37
Net cash provided by (used in) investing activities	(41		)	6
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under employee benefit plans	29			14
Purchase of treasury shares	(414		)	(14		)
Borrowings of long-term debt	—			1,000
Repayments of long-term debt	(103		)	(1,110		)
Borrowings on long-term revolver debt	599			—
Repayments on long-term revolver debt	(261		)	—
Debt issuance costs	(6		)	(15		)
Other financing activities	—			(2		)
Net cash provided by (used in) financing activities	(156		)	(127		)
Effect of exchange rates on cash and cash equivalents	—			1
Increase (decrease) in cash and cash equivalents	$	(8	)	$	44
Cash and cash equivalents at beginning of period	75			269
Cash and cash equivalents at end of period	$	67		$	313

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

7

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Amounts in millions, unaudited

	Three Months Ended						Six Months Ended
	July 30, 2017			July 31, 2016			July 30, 2017			July 31, 2016
Net Sales	$	1,352		$	1,283		$	2,568		$	2,459
Cost of sales	813			770			1,545			1,477
Gross Profit	539			513			1,023			982
Operating expenses:
Selling, general and administrative	338			317			672			625
Depreciation and amortization	21			21			42			42
Restructuring	—			4			—			11
Total operating expenses	359			342			714			678
Operating Income	180			171			309			304
Interest expense	49			69			98			154
Loss on extinguishment of debt	—			—			3			115
Other (Income) expense, net	—			—			—			—
Income from Continuing Operations Before Provision for Income Taxes	131			102			208			35
Provision for income taxes	50			41			69			15
Income from Continuing Operations	81			61			139			20
Income from discontinued operations, net of tax	361			37			388			64
Net Income	$	442		$	98		$	527		$	84
Other comprehensive income (loss) — foreign currency translation adjustment	(3		)	(2		)	(2		)	2
Total Comprehensive Income	$	439		$	96		$	525		$	86

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

8

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	July 30, 2017			January 29, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	55		$	73
Receivables, less allowance for doubtful accounts of $11 and $9	693			559
Inventories	690			606
Current assets of discontinued operations	752			575
Other current assets	33			32
Total current assets	2,223			1,845
Property and equipment, net	266			253
Goodwill	1,807			1,807
Intangible assets, net	96			102
Deferred tax asset	857			556
Non-current assets of discontinued operations	1,120			1,122
Other assets	23			20
Total assets	$	6,392		$	5,705
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	454		$	320
Accrued compensation and benefits	83			98
Current installments of long-term debt	14			14
Current liabilities of discontinued operations	354			259
Other current liabilities	151			152
Total current liabilities	1,056			843
Long-term debt, excluding current installments	4,038			3,798
Non-current liabilities of discontinued operations	41			20
Other liabilities	100			86
Total liabilities	5,235			4,747
Stockholder’s equity:
Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at July 30, 2017 and January 29, 2017	—			—
Paid-in capital	3,423			3,806
Accumulated deficit	(2,249		)	(2,833		)
Accumulated other comprehensive loss	(17		)	(15		)
Total stockholder’s equity	1,157			958
Total liabilities and stockholder’s equity	$	6,392		$	5,705

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

9

HD SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions, unaudited

	Six Months Ended
	July 30, 2017			July 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	527		$	84
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	50			51
Provision for uncollectibles	4			3
Non-cash interest expense	6			9
Payment of discounts upon extinguishment of debt	(4		)	—
Loss on extinguishment of debt	3			115
Stock-based compensation expense	12			11
Deferred income taxes	(223		)	52
Loss on sales of businesses, net	—			3
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(258		)	(232		)
(Increase) decrease in inventories	(141		)	(118		)
(Increase) decrease in other current assets	—			(9		)
Increase (decrease) in accounts payable and accrued liabilities	212			196
Increase (decrease) in other long-term liabilities	1			(1		)
Net cash provided by (used in) operating activities	189			164
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43		)	(32		)
Proceeds from sales of property and equipment	2			1
Proceeds from sales of businesses, net	—			37
Net cash provided by (used in) investing activities	(41		)	6
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity distribution	(395		)	—
Borrowings of long-term debt	—			1,000
Repayments of long-term debt	(103		)	(1,110		)
Borrowings on long-term revolver debt	599			—
Repayments on long-term revolver debt	(261		)	—
Debt issuance costs	(6		)	(15		)
Other financing activities	—			(2		)
Net cash provided by (used in) financing activities	(166		)	(127		)
Effect of exchange rates on cash and cash equivalents	—			1
Increase (decrease) in cash and cash equivalents	$	(18	)	$	44
Cash and cash equivalents at beginning of period	73			266
Cash and cash equivalents at end of period	$	55		$	310

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

10

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 260 locations across 36 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,000 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 500,000 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: Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

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 January 29, 2017, 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.  Fiscal years ending January 28, 2018 (“fiscal 2017”) and January 29, 2017 (“fiscal 2016”) both include 52 weeks.  The three months ended July 30, 2017 (“second quarter 2017”) and July 31, 2016 (“second quarter 2016”) both include 13 weeks. The six months ended July 30, 2017 and July 31, 2016 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. The results of operations of all discontinued operations have been separately reported as discontinued operations for all periods presented.

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.

11

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 certain legal claims, and is self-insured for 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 July 30, 2017 and January 29, 2017, self-insurance reserves totaled approximately $81 million and $79 million, respectively.

NOTE 2 — DISCONTINUED OPERATIONS

On June 4, 2017, the Company entered into a definitive agreement to sell its Waterworks business unit to funds affiliated with Clayton, Dubilier & Rice, LLC (“CD&R”) for $2.5 billion cash payable at closing, subject to customary regulatory approvals. On August 1, 2017, the Company completed the sale of the Waterworks business unit to funds affiliated with CD&R. For additional information on the sale of the Waterworks business unit, please see “Note 13 — Subsequent Events.”

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

Summary Financial Information

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

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

12

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended					Six Months Ended
	July 30, 2017			July 31, 2016		July 30, 2017			July 31, 2016
Net sales	$	746		$	755	$	1,403		$	1,422
Cost of sales	582			583		1,092			1,094
Gross Profit	164			172		311			328
Operating expenses:
Selling, general and administrative	100			105		197			214
Depreciation and amortization	3			3		6			6
Restructuring Charges	—			1		—			1
Total operating expenses	103			109		203			221
Operating Income	61			63		108			107
Loss on disposal of discontinued operations	—			2		—			2
Other (Income) expense, net	1			—		3			—
Income before provision (benefit) for income taxes	60			61		105			105
Provision (benefit) for income taxes	(301		)	24		(283		)	41
Income from discontinued operations, net of tax	$	361		$	37	$	388		$	64

At July 30, 2017 and January 29, 2017, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets were as follows (amounts in millions):

	July 30, 2017		January 29, 2017
Current assets:
Receivables, less allowance for doubtful accounts of $4 and $4	$	466	$	346
Inventories	283		225
Other current assets	3		4
Total current assets	752		575
Property and equipment, net	50		51
Goodwill	1,061		1,061
Intangible assets, net	9		10
Total non-current assets	1,120		1,122
Total assets of discontinued operations	$	1,872	$	1,697
Current Liabilities:
Accounts payable	$	316	$	212
Accrued compensation and benefits	32		42
Other current liabilities	6		5
Total current liabilities	354		259
Deferred tax liability	21		—
Other non-current liabilities	20		20
Total non-current liabilities	41		20
Total liabilities of discontinued operations	$	395	$	279

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Six Months Ended
	July 30, 2017			July 31, 2016
Net cash flows provided by (used in) operating activities	$	11		$	(6	)
Cash flows from investing activities:
Capital expenditures	(5		)	(4		)
Proceeds from sales of businesses, net	—			37
Proceeds from sales of property and equipment, net	2			—
Net cash flows provided by (used in) investing activities	$	(3	)	$	33

NOTE 3 — DEBT

HDS’s long-term debt as of July 30, 2017 and January 29, 2017 consisted of the following (dollars in millions):

	July 30, 2017				January 29, 2017
	Outstanding Principal			Interest Rate %(1)	Outstanding Principal			Interest Rate %(1)
Senior ABL Facility due 2022	$	762		3.29	$	421		2.38
Term B-1 Loans due 2021	535			4.05	639			3.75
Term B-2 Loans due 2023	546			4.05	549			3.75
December 2014 First Priority Notes due 2021	1,250			5.25	1,250			5.25
April 2016 Senior Unsecured Notes due 2024	1,000			5.75	1,000			5.75
Total gross long-term debt	$	4,093			$	3,859
Less unamortized discount	(7		)		(9		)
Less unamortized deferred financing costs	(34		)		(38		)
Total net long-term debt	$	4,052			$	3,812
Less current installments	(14		)		(14		)
Total net long-term debt, excluding current installments	$	4,038			$	3,798

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

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, as defined below, to repay $100 million aggregate principal of its approximately $842 million original aggregate principal tranche of term loans due 2021 (the “Term B-1 Loans”). As a result, the Company incurred a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs for $1 million each, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

On April 5, 2017, HDS entered into a Third Amendment (the “Third Amendment”) to the credit agreement governing its existing Senior ABL Facility. The Third Amendment, among other things, reduced the applicable margin for borrowings under the Senior ABL Facility, reduced the applicable commitment fee, and extended the maturity date of the Senior ABL Facility until April 5, 2022. As a result, the Company recorded a $1 million loss on extinguishment of debt, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments,” for the write-off of $1 million of unamortized deferred financing costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Senior Credit Facilities

Senior ABL Facility

HDS’s 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 $1,500 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 July 30, 2017, HDS had $530 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $30 million in letters of credit issued and including $7 million of borrowings available on qualifying cash balances). Of the approximately $762 million borrowed on the Senior ABL Facility as of July 30, 2017, approximately $62 million represents Canadian borrowings with the remainder in the U.S.

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 plus an applicable margin and (ii) in the case of Canadian dollar-denominated loans, either the banker’s 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 the Average Daily Used Percentage (as defined in the Senior ABL Facility).

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.

See “Note 13 — Subsequent Events” for additional information regarding the repayment of certain outstanding amounts under 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 with remaining aggregate principal amount of $1,081 million. Term B-1 Loans will mature on August 13, 2021 and Term B-2 Loans will mature on October 17, 2023. Both Term B-1 Loans and Term B-2 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loans with the balances payable on their respective maturity dates. Both Term B-1 Loans and Term B-2 Loans bear interest at the applicable margin for borrowings of 2.75% for LIBOR borrowings and 1.75% for base rate borrowings. The Term Loan Facility allows for a reduction to the applicable margin on the Term B-2 Loans from 2.75% per annum to 2.50% per annum upon the Company reaching a consolidated total leverage ratio of 3.0x or less.

For additional information on our Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 29, 2017.

See “Note 13 — Subsequent Events” for additional information on the Term Loan Facility.

Secured Notes

5.25% Senior Secured First Priority Notes due 2021

HDS’s 5.25% Senior Secured First Priority Notes due 2021 (the “December 2014 First Priority Notes”) bear interest at 5.25% per annum and will mature on December 15, 2021. Interest is paid semi-annually in arrears on June 15th and December 15th of each year.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Redemption

HDS may redeem the December 2014 First Priority Notes, in whole or in part, at any time (1) prior to December 15, 2017, 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 indenture governing the December 2014 First Priority Notes (as amended or supplemented, the “2014 indenture”) and (2) on and after December 15, 2017, 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 December 15 of the year set forth below.

Year	Percentage
2017	103.938	%
2018	102.625	%
2019	101.313	%
2020 and thereafter	100.000	%

In addition, at any time prior to December 15, 2017, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the December 2014 First Priority Notes with the proceeds of certain equity offerings at a redemption price of 105.25% of the principal amount of the December 2014 First Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the December 2014 First Priority Notes are redeemed, an aggregate principal amount of December 2014 First Priority Notes equal to at least 50% of the original aggregate principal amount of December 2014 First Priority Notes must remain outstanding immediately after each such redemption of December 2014 First Priority Notes.

On August 2, 2017, HDS delivered a notice of redemption to holders of its December 2014 First Priority Notes. The December 2014 First Priority Notes were redeemed on September 1 2017. For additional information, see “Note 13 — Subsequent Events.”

Collateral

The December 2014 First Priority Notes and the related guarantees are secured by a first-priority security interest in substantially all of the tangible and intangible assets of HDS and the Subsidiary Guarantors (other than the ABL Priority Collateral (as defined in the 2014 indenture), in which the December 2014 First Priority Notes and the related guarantees have a second-priority security interest), including pledges of all capital stock of HDS’s restricted subsidiaries directly owned by HDS and the Subsidiary Guarantors (but only up to 65% of each series of capital stock of each direct Foreign Subsidiary owned by HDS or any Subsidiary Guarantor), subject to certain thresholds, exceptions and permitted liens, and excluding any Excluded Assets and Excluded Subsidiary Securities (each as defined in the 2014 indenture) and together (the “Cash Flow Priority Collateral”).

The 2014 indenture governing the December 2014 First Priority Notes and the applicable collateral documents provide that any capital stock and other securities of any of HDS’s subsidiaries will be excluded from the collateral to the extent the pledge of such capital stock or other securities to secure the December 2014 First Priority Notes would cause such subsidiary to be required to file separate financial statements with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).

In connection with the December 2014 First Priority Notes, the 2014 indenture was discharged and the liens securing the December 2014 First Priority Notes were release in accordance with the terms of the 2014 indenture. For additional information, see “Note 13 — Subsequent Events.”

Unsecured Notes

5.75% Senior Unsecured Notes due 2024

HDS’s 5.75% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”) bear interest at a rate of 5.75% and will mature on April 15, 2024. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

Redemption

HDS may redeem the April 2016 Senior Unsecured Notes, in whole or in part, at any time (1) prior to April 15, 2019, 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 April 2016 Senior Unsecured

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Notes indenture (as amended or supplemented, the “2016 indenture”) and (2) on and after April 15, 2019, 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 April 15 of the year set forth below.

Year	Percentage
2019	104.313	%
2020	102.875	%
2021	101.438	%
2022 and thereafter	100.000	%

In addition, at any time prior to April 15, 2019, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the April 2016 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.75% of the principal amount in respect of the April 2016 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the April 2016 Senior Unsecured Notes are redeemed, an aggregate principal amount of April 2016 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of April 2016 Senior Unsecured Notes must remain outstanding immediately after each such redemption of April 2016 Senior Unsecured Notes.

For additional information on the December 2014 First Priority Notes and the April 2016 Senior Unsecured Notes, including guarantees and security, please refer to the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 29, 2017.

See “Note 13 — Subsequent Events” for additional information on the recently completed consent solicitation related to the April 2016 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 July 30, 2017, HDS was in compliance with all such covenants that were in effect on such date.

NOTE 4 — 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.

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of July 30, 2017 and January 29, 2017 (amounts in millions):

	As of July 30, 2017				As of January 29, 2017
	Recorded Amount(1)		Estimated Fair Value		Recorded Amount(1)		Estimated Fair Value
Senior ABL Facility	$	762	$	758	$	421	$	410
Term Loans and Notes	3,331		3,475		3,438		3,572
Total	$	4,093	$	4,233	$	3,859	$	3,982

(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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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 5 — INCOME TAXES

For the six months ended July 30, 2017, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was an expense of 33.2%. The effective rate for continuing operations for the six months ended July 31, 2016 was an expense of 42.9%.

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 audits. For the six months ended July 30, 2017, the application of stock-based compensation expense guidance in ASU No. 2016-09 resulted in discrete tax benefits of $12 million from the exercise and vesting of stock based awards, which lowered the effective tax rate by 580 basis points. For additional information on the Company’s adoption of ASU No. 2016-09, see “Note 12 — Recent Accounting Pronouncements.”

As of January 29, 2017, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP, ASC 740, “Income Taxes,” were $10 million. As of July 30, 2017, the Company’s unrecognized tax benefits remained unchanged. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of January 29, 2017 was zero and remained unchanged as of July 30, 2017.  As of January 29, 2017, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $5 million and remained unchanged as of July 30, 2017. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

NOTE 6—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 July 30, 2017 and July 31, 2016 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	July 30, 2017	July 31, 2016	July 30, 2017	July 31, 2016
Weighted-average common shares	197,752	199,250	199,230	199,029
Effect of potentially dilutive stock plan securities	1,202	2,728	1,780	2,586
Diluted weighted-average common shares	198,954	201,978	201,010	201,615
Stock plan securities excluded from dilution (1)	2,383	1,452	1,652	2,240

(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 and restricted stock units) granted under Holdings’ stock-based compensation plans.

NOTE 7 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

Receivables as of July 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

	July 30, 2017		January 29, 2017
Trade receivables, net of allowance for doubtful accounts	$	631	$	499
Vendor rebate receivables	48		50
Other receivables	14		10
Total receivables, net	$	693	$	559

18

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Current Liabilities

Other current liabilities as of July 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

	HD Supply Holdings, Inc.				HD Supply, Inc.
	July 30, 2017		January 29, 2017		July 30, 2017		January 29, 2017
Accrued interest	$	30	$	30	$	30	$	30
Accrued non-income taxes	40		30		40		30
Unsettled share repurchases	38		—		—		—
Other	81		92		81		92
Total other current liabilities	$	189	$	152	$	151	$	152

Supplemental Cash Flow Information

Cash paid for interest in the six months ended July 30, 2017 and July 31, 2016 was $92 million and $161 million, respectively. During the six months ended July 30, 2017, the Company paid $4 million of original issue discounts related to the $100 million payment on Term B-1 Loans.

Cash paid for income taxes, net of refunds, in the six months ended July 30, 2017 and July 31, 2016 was approximately $10 million and $6 million, respectively.

During the six months ended July 30, 2017, HDS executed an equity cash distribution of $395 million 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.

On June 3, 2017, Holdings’ Board of Directors authorized the Company to enter into a share repurchase program for the repurchase of up to an aggregate amount of $500 million of Holdings’ common stock. As of July 30, 2017, under this plan, Holdings has repurchased 13,449,146 shares of its common stock for $421 million. In combination with the 2014 authorized share repurchase plan, Holdings has repurchased a total of 14,267,923 shares of its common stock during the first six months of fiscal 2017 for $452 million, of which $38 million remain unsettled as of July 30, 2017.

See “Note 13 — Subsequent Events” for additional information regarding the Company’s share repurchase programs.

Significant Non-Cash Transactions

During the six months ended July 30, 2017, Holdings retired 611,433 shares of its common stock (“Retired Shares”) held as treasury shares by Holdings in the amount of $23 million. All of these shares were repurchased by Holdings pursuant to the publicly announced share repurchase program previously authorized by Holdings’ board of directors.  Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with ASC 505-30, “Equity-Treasury Stock,” Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

Build-to-Suit Lease

On February 4, 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. The lease commences upon completion of construction which is anticipated to be early 2018.

In accordance with ASC 850, “Leases,” 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

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HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

construction risk, the Company is 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 contributions by the landlord toward construction. Once the construction is completed, if the lease meets certain “sales-leaseback” criteria, the Company will remove the asset and related financial obligation from the Consolidated Balance Sheet and treat the building lease as an operating lease. If upon completion of construction, the lease does not meet the “sales-leaseback” criteria, the leased property will be treated as a capital lease and included in Property and equipment on the Consolidated Balance Sheet. As of July 30, 2017, the Consolidated Balance Sheet includes $35 million of build-to-suit assets in Construction in progress, and the corresponding financial obligation of $35 million in Other long-term liabilities in the Consolidated Balance Sheet.

NOTE 8—RESTRUCTURING ACTIVITIES

As a result of the sale of the Power Solutions business unit in fiscal 2015, management evaluated the Company’s talent alignment and functional support strategies. Consequently, during fiscal 2015, the Company initiated a restructuring plan to strategically align its leadership and functional support teams. During the six months ended July 31, 2016, the Company incurred $11 million of restructuring charges under this plan. The Company completed the activities under this plan in fiscal 2016 and does not expect to incur any additional charges. As of July 30, 2017 and January 29, 2017, the Company’s liability balance for these restructuring activities was $2 million and $4 million respectively, and is included in Other current liabilities in the Consolidated Balance Sheets. Payments for these charges are expected to be substantially complete by the end of fiscal 2017.

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Legal Matters

On July 10, 2017, a putative class action complaint was filed in the U.S. District Court for the Northern District of Georgia by The City of Hollywood Police Officers’ Retirement System (the “Retirement System complaint”) against HD Supply and certain senior members of its management (collectively, the “defendants”).  On August 8, 2017, a second class action complaint was filed in the U.S. District Court for the Northern District of Georgia by Obioma Ebisike (the “Ebisike complaint” and together with the Retirement System complaint, the “complaints”) against the defendants.  The complaints are brought individually on behalf of all persons other than defendants who purchased or otherwise acquired Company securities between November 9, 2016 and June 5, 2017.  The complaints generally allege that the defendants engaged in a fraudulent scheme to inflate the Company’s stock price by making materially false and misleading statements about the Company’s business, operational, and compliance policies that allegedly failed to disclose: (1) that the Company’s full year 2017 growth and operational leverage targets were unattainable; (2) the operational recovery of the Company’s Facilities Maintenance business unit’s supply chain was not going according to plan; and (3) the Company was exploring the sale of its Waterworks business unit.  The complaints assert claims against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and they seek (1) class certification under the Federal Rules of Civil Procedure, (2) damages in an amount to be proven at trial, (3) pre-judgment and post-judgment interest, and (4) attorneys’ fees and other costs.

On August 8, 2017, two shareholder derivative complaints were filed (one by Sean Zhou and another by James Calderaro) against the Company (the “nominal defendant”) and certain members of its senior management and board of directors (collectively, the “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, while failing to disclose: (1) that the Company’s growth and operating leverage targets for full  year 2017 were unattainable; (2) the operational recovery of the Company’s Facilities Maintenance business unit’s supply chain was not progressing as expected and would require substantial additional investment; and (3) the Company was preparing to sell its Waterworks business unit.  The complaints assert claims against the individual defendants under Section 14(a) of the Securities Exchange Act of 1934, allege

20

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HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

breaches of fiduciary duties, and assert claims under theories of 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’ actions, ask that the Company take certain actions to reform and improve its corporate governance and internal procedures, seek restitution on behalf of the Company, and seek to recover attorneys’ fees and other costs.

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.

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, if disposed of unfavorably to the Company, are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. For material matters that are reasonably possible and reasonably estimable, including matters 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.

NOTE 10 — 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 (‘‘MRO’’) 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 includes 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, and removes inter-segment transactions.

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

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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 each of the reportable segments and total continuing operations for the periods indicated (amounts in millions):

	Facilities Maintenance		Construction & Industrial		Corporate			Total Continuing Operations
Three Months Ended July 30, 2017
Net sales	$	769	$	584	$	(1	)	$	1,352
Adjusted EBITDA	156		69		(17		)	208
Depreciation(1) & Software Amortization	5		9		5			19
Other Intangible Amortization	2		—		1			3
Three Months Ended July 31, 2016
Net sales	$	741	$	544	$	(2	)	$	1,283
Adjusted EBITDA	151		68		(16		)	203
Depreciation(1) & Software Amortization	7		9		4			20
Other Intangible Amortization	2		—		1			3
Six Months Ended July 30, 2017
Net sales	$	1,451	$	1,120	$	(3	)	$	2,568
Adjusted EBITDA	273		124		(32		)	365
Depreciation(1) & Software Amortization	12		18		8			38
Other Intangible Amortization	3		—		3			6
Six Months Ended July 31, 2016
Net sales	$	1,418	$	1,045	$	(4	)	$	2,459
Adjusted EBITDA	285		117		(32		)	370
Depreciation(1) & Software Amortization	15		17		6			38
Other Intangible Amortization	3		—		3			6

(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
	July 30, 2017		July 31, 2016		July 30, 2017		July 31, 2016
Total Adjusted EBITDA	$	208	$	203	$	365	$	370
Depreciation and amortization(1)	22		23		44		44
Stock-based compensation	6		5		12		11
Restructuring	—		4		—		11
Operating income	180		171		309		304
Interest expense, net	49		69		98		154
Loss on extinguishment of debt(2)	—		—		3		115
Income from Continuing Operations Before Provision for Income Taxes	131		102		208		35
Provision for income taxes	50		41		69		15
Income from continuing operations	81		61		139		20
Income from discontinued operations, net of tax	361		37		388		64
Net income	$	442	$	98	$	527	$	84

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

(2)Represents the loss on extinguishment of debt including the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt.

22

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11—SUBSIDIARY GUARANTORS

HDS (the “Debt Issuer”) has outstanding December 2014 First Priority Notes and April 2016 Senior Unsecured Notes (collectively the “Notes”), which are guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the Notes (the “Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

The Debt Issuer’s payment obligations under the Notes are jointly and severally guaranteed by the guarantors and all guarantees are full and unconditional.

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

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

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

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

(iv)concurrently with any Subsidiary Guarantor becoming an unrestricted subsidiary;

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

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

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

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

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

23

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended July 30, 2017
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS
Net Sales	$	—		$	1,316		$	36		$	—		$	1,352
Cost of sales	—			793			20			—			813
Gross Profit	—			523			16			—			539
Operating expenses:
Selling, general and administrative	21			304			13			—			338
Depreciation and amortization	3			17			1			—			21
Total operating expenses	24			321			14			—			359
Operating Income (Loss)	(24		)	202			2			—			180
Interest expense	56			31			1			(39		)	49
Interest (income)	(32		)	(7		)	—			39			—
Net (earnings) loss of equity affiliates	(239		)	—			—			239			—
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	191			178			1			(239		)	131
Provision for income taxes	48			1			1			—			50
Income (Loss) from Continuing Operations	143			177			—			(239		)	81
Income (loss) from discontinued operations, net of tax	299			61			1			—			361
Net Income (Loss)	$	442		$	238		$	1		$	(239	)	$	442
Other comprehensive income (loss)—foreign currency translation adjustment	(3		)	—			(3		)	3			(3		)
Total Comprehensive Income (Loss)	$	439		$	238		$	(2	)	$	(236	)	$	439

	Three Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS
Net Sales	$	—		$	1,251		$	33		$	(1	)	$	1,283
Cost of sales	—			753			18			(1		)	770
Gross Profit	—			498			15			—			513
Operating expenses:
Selling, general and administrative	21			285			11			—			317
Depreciation and amortization	3			17			1			—			21
Restructuring	1			3			—			—			4
Total operating expenses	25			305			12			—			342
Operating Income (Loss)	(25		)	193			3			—			171
Interest expense	72			35			—			(38		)	69
Interest (income)	(34		)	(4		)	—			38			—
Net (earnings) loss of equity affiliates	(200		)	—			—			200			—
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	137			162			3			(200		)	102
Provision for income taxes	38			1			2			—			41
Income (Loss) from Continuing Operations	99			161			1			(200		)	61
Income (loss) from discontinued operations, net of tax	(1		)	38			—			—			37
Net Income (Loss)	$	98		$	199		$	1		$	(200	)	$	98
Other comprehensive income (loss)—foreign currency translation adjustment	(2		)	—			(2		)	2			(2		)
Total Comprehensive Income (Loss)	$	96		$	199		$	(1	)	$	(198	)	$	96

24

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)

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

	Six Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Total HDS
Net Sales	$	—		$	2,398		$	62	$	(1	)	$	2,459
Cost of sales	—			1,444			34		(1		)	1,477
Gross Profit	—			954			28		—			982
Operating expenses:
Selling, general and administrative	41			562			22		—			625
Depreciation and amortization	6			35			1		—			42
Restructuring	2			9			—		—			11
Total operating expenses	49			606			23		—			678
Operating Income (Loss)	(49		)	348			5		—			304
Interest expense	161			70			—		(77		)	154
Interest (income)	(69		)	(8		)	—		77			—
Net (earnings) loss of equity affiliates	(345		)	—			—		345			—
Loss on extinguishment of debt	115			—			—		—			115
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	89			286			5		(345		)	35
Provision (benefit) for income taxes	12			1			2		—			15
Income (Loss) from Continuing Operations	77			285			3		(345		)	20
Income (loss) from discontinued operations, net of tax	7			57			—		—			64
Net Income (Loss)	$	84		$	342		$	3	$	(345	)	$	84
Other comprehensive income (loss)—foreign currency translation adjustment	2			—			2		(2		)	2
Total Comprehensive Income (Loss)	$	86		$	342		$	5	$	(347	)	$	86

25

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS

	As of July 30, 2017
	Debt Issuer		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS
ASSETS
Current assets:
Cash and cash equivalents	$	32	$	17	$	6		$	—		$	55
Receivables, net	2		669		22			—			693
Inventories	—		670		20			—			690
Intercompany receivables	—		1		—			(1		)	—
Current assets of discontinued operations	—		752		—			—			752
Other current assets	11		21		1			—			33
Total current assets	45		2,130		49			(1		)	2,223
Property and equipment, net	89		174		3			—			266
Goodwill	—		1,807		—			—			1,807
Intangible assets, net	—		95		1			—			96
Deferred tax asset	951		—		2			(96		)	857
Non-current assets of discontinued operations	—		1,120		—			—			1.120
Investment in subsidiaries	4,289		—		—			(4,289		)	—
Intercompany notes receivable	1,005		1,032		—			(2,037		)	—
Other assets	19		4		—			—			23
Total assets	$	6,398	$	6,362	$	55		$	(6,423	)	$	6,392
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	12	$	428	$	14		$	—		$	454
Accrued compensation and benefits	30		50		3			—			83
Current installments of long-term debt	14		—		—			—			14
Intercompany payables	—		—		1			(1		)	—
Current liabilities of discontinued operations	2		352		—			—			354
Other current liabilities	52		91		8			—			151
Total current liabilities	110		921		26			(1		)	1,056
Long-term debt, excluding current installments	3,976		—		62			—			4,038
Deferred tax liabilities	—		96		—			(96		)	—
Non-current liabilities of discontinued operations	41		—		—			—			41
Intercompany notes payable	1,032		1,005		—			(2,037		)	—
Other liabilities	82		17		1			—			100
Total liabilities	5,241		2,039		89			(2,134		)	5,235
Stockholder’s equity (deficit)	1,157		4,323		(34		)	(4,289		)	1,157
Total liabilities and stockholder’s equity (deficit)	$	6,398	$	6,362	$	55		$	(6,423	)	$	6,392

26

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS (CONTINUED)

	As of January 29, 2017
	Debt Issuer		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS
ASSETS
Current assets:
Cash and cash equivalents	$	51	$	17	$	5		$	—		$	73
Receivables, net	3		540		16			—			559
Inventories	—		588		18			—			606
Intercompany receivables	—		1		—			(1		)	—
Current assets of discontinued operations	—		575		—			—			575
Other current assets	13		17		2			—			32
Total current assets	67		1,738		41			(1		)	1,845
Property and equipment, net	76		175		2			—			253
Goodwill	—		1,807		—			—			1,807
Intangible assets, net	—		101		1			—			102
Deferred tax asset	681		—		2			(127		)	556
Non-current assets of discontinued operations	—		1,122		—			—			1,122
Investment in subsidiaries	2,451		—		—			(2,451		)	—
Intercompany notes receivable	2,192		584		—			(2,776		)	—
Other assets	16		4		—			—			20
Total assets	$	5,483	$	5,531	$	46		$	(5,355	)	$	5,705
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	13	$	296	$	11		$	—		$	320
Accrued compensation and benefits	36		60		2			—			98
Current installments of long-term debt	14		—		—			—			14
Intercompany payables	—		—		1			(1		)	—
Current liabilities of discontinued operations	2		257		—			—			259
Other current liabilities	52		94		6			—			152
Total current liabilities	117		707		20			(1		)	843
Long-term debt, excluding current installments	3,737		—		61			—			3,798
Deferred tax liabilities	—		127		—			(127		)	—
Non-current liabilities of discontinued operations	20		—		—			—			20
Intercompany notes payable	584		2,192		—			(2,776		)	—
Other liabilities	67		17		2			—			86
Total liabilities	4,525		3,043		83			(2,904		)	4,747
Stockholder’s equity (deficit)	958		2,488		(37		)	(2,451		)	958
Total liabilities and stockholder’s equity (deficit)	$	5,483	$	5,531	$	46		$	(5,355	)	$	5,705

27

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

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

	Six Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Total HDS
Net cash flows from operating activities	$	242		$	(81	)	$	3	$	—		$	164
Cash flows from investing activities
Capital expenditures	(7		)	(25		)	—		—			(32		)
Proceeds from sale of property and equipment	—			1			—		—			1
Proceeds from sales of businesses, net	37			—			—		—			37
Proceeds from (payments of) intercompany notes	—			105			—		(105		)	—
Net cash flows from investing activities	$	30		$	81		$	—	$	(105	)	$	6
Cash flows from financing activities
Borrowings of (repayments of) intercompany notes	(105		)	—			—		105			—
Borrowings of long-term debt	1,000			—			—		—			1,000
Repayments of long-term debt	(1,110		)	—			—		—			(1,110		)
Debt issuance costs	(15		)	—			—		—			(15		)
Other financing activities	(1		)	(1		)	—		—			(1		)
Net cash flows from financing activities	(231		)	(1		)	—		105			(127		)
Effect of exchange rates on cash	—			—			1		—			1
Net increase (decrease) in cash & cash equivalents	$	41		$	(1	)	$	4	$	—		$	44
Cash and cash equivalents at beginning of period	233			18			15		—			266
Cash and cash equivalents at end of period	$	274		$	17		$	19	$	—		$	310

28

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

Stock Compensation — In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The ASU is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of adopting of ASU 2017-09.

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.

Statement of Cash Flows — In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The new guidance is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied retrospectively to all periods presented. On a prospective basis, the ASU will only impact the Company to the extent it has restricted cash.

Income Taxes — In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-entity Transfers of Assets Other than Inventory” (“ASU 2016-16”). The new guidance is intended to improve the accounting for intra-entity transfers of assets other than inventory by requiring recognition of income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. ASU 2016-16 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of ASU 2016-16 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The new guidance is intended to reduce diversity in practice related to certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Stock Compensation — In March 2016, the FASB issued ASU No. 2016-09, “Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016.

The Company adopted the guidance from this amendment on January 30, 2017 (the first day of fiscal 2017) recording a $56 million cumulative-effect adjustment to retained earnings in order to recognize a deferred tax asset on the excess deduction for stock option exercises over the expense recorded for book purposes. Beginning

29

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

in the first quarter of fiscal 2017, the impact to the Company will be through a credit or charge to the tax provision reflecting the difference between the amount deductible for tax purposes and the amount expensed for book purposes as options are exercised.

Leases — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new 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 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting ASU 2016-02.

Inventory — In July 2015, the FASB issued ASU No. 2015-11, “Inventory, Simplifying the Measurement of Inventory” (“ASU 2015-11”). The amended guidance requires that inventory be measured at the lower of cost and net realizable value. The amended guidance is limited to inventory measured using the first-in, first-out (“FIFO”) or average cost methods and excludes inventory measured using last-in, first-out (“LIFO”) or retail inventory methods. ASU 2015-11 is effective for annual and interim periods, beginning after December 15, 2016. The Company adopted this guidance on January 30, 2017 (the first day of fiscal 2017) with no material impact on the Company’s financial position, results of operations or cash flows.

Revenue recognition — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from contracts with customers” (“ASU 2014-09”), amended by ASU 2016-10, “Revenue from contracts with customers (Topic 606): Identifying Performance Obligations and Licensing,” ASU 2016-12, “Revenue from contracts with customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amended guidance outlines a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The update requires significant additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgements. Entities have the option of using either a full retrospective or modified approach to adopt the guidance. In July 2015, the FASB provided a one-year delay in the effective date of ASU 2014-09, to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and a permission to early adopt for annual and interim periods beginning after December 15, 2016.

The Company has performed a review of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretative guidance. The Company is reviewing customer contracts and is in the process of applying the five-step model of the new standard to each contract category identified and will compare the results to current accounting practice.  The Company plans to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard on January 29, 2018 (the first day of fiscal 2018). The Company has not yet determined whether it will adopt the provisions of ASU 2014-09 on a retrospective basis or through a cumulative adjustment to equity.

The new standard could change the amount and timing of revenue and costs under certain arrangement types and could increase the administrative burden on Company operations to properly account for customer contracts and provide the more expansive required disclosures. The Company is currently evaluating the impact of adopting ASU 2014-09, but has not yet determined what effect, if any, the new guidance will have on its financial position, results of operations or cash flows.

30

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13—SUBSEQUENT EVENTS

Sale of the Waterworks Business

On August 1, 2017, the Company completed the sale of its Waterworks business for gross cash proceeds of $2,500 million, subject to a post-closing working capital adjustment. The Company expects to pay approximately $40 million of transaction costs and recognize a pre-tax gain of approximately $925 million. In connection with the pending sale, the Company recorded a $323 million net deferred tax asset and corresponding tax benefit in discontinued operations during the second quarter of fiscal 2017 in order to recognize the outside basis difference in the Waterworks investment. The Company expects to recognize tax expense of approximately $520 million in discontinued operations in third quarter fiscal 2017 related to the sale of the Waterworks business, which includes an expense of $323 million related to utilizing the deferred tax asset associated with the outside basis difference in the Waterworks corporate subsidiary recorded as an income tax benefit in the second quarter in discontinued operations. The Company estimates that it will utilize approximately $280 million of tax-effected Federal and state net operating loss carryforwards as a result of the sale of the Waterworks business. For additional information, please see “Note 2 — Discontinued Operations.”

Repayment of the Senior ABL Facility

On August 1, 2017, HDS repaid all of the outstanding U.S. borrowings on its Senior ABL Facility. Canadian borrowings of $62 million on the Senior ABL Facility remain outstanding.

Amendment of the April 2016 Senior Unsecured Notes

On August 25, 2017, HDS entered into the Second Supplemental Indenture (the “Second Supplemental Indenture”) which amends and supplements the Indenture, dated as of April 11, 2016, as amended and supplemented by the First Supplemental Indenture, dated as of April 11, 2016 (together, the “Indenture”). The Second Supplemental Indenture effects certain Proposed Amendments (as defined below) to the Indenture pertaining to the Company’s April 2016 Senior Unsecured Notes. Holders of a majority in aggregate principal amount of the outstanding April 2016 Senior Unsecured Notes consented to the Proposed Amendments.

The Proposed Amendments (a) amend the definition of “Permitted Payments” contained in the Indenture to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the Indenture) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s consolidated leverage ratio does not exceed 3.00 to 1.00; (b) increase the interest rate for the April 2016 Senior Unsecured Notes to 7.00% per annum commencing April 15, 2019, to the extent the April 2016 Senior Unsecured Notes remain outstanding after April 15, 2019; (c) amend the definition of “Net Available Cash” contained in the Indenture to provide that proceeds from the sale of the Waterworks business unit consummated on August 1, 2017 (other than proceeds to be applied to redeem the Company’s 2021 Notes (as defined in the Second Supplemental Indenture)) shall be excluded and accordingly, the Company will not be required to apply the remaining net proceeds in accordance with the provision of the “Sale of Assets” covenant of the Indenture and (d) amend the definition of “Consolidated EBITDA” contained in the Indenture to provide that while the Company may continue to include in the calculation thereof projected cost savings, it may only do so with respect those realized as a result of actions taken or to be taken in connection with a purchase of assets from, or a sale of assets to, a third party (excluding the Waterworks Sale (as defined in the Second Supplemental Indenture)) (collectively, the “Proposed Amendments”).

As a result of entering into the Second Supplemental Indenture, the Company paid approximately $15 million in consent fees to holders of the outstanding April 2016 Senior Unsecured Notes, which will be capitalized as deferred financing costs and amortized over the expected life of the April 2016 Senior Unsecured Notes.

31

HD SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

HD SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Amendment of the Term Loan Facility

On August 31, 2017, HDS entered into a Fifth Amendment (the “Fifth Amendment”) to the credit agreement governing HDS’s existing Term Loan Facility. Pursuant to the Fifth Amendment, HDS amended its existing Term Loan Facility to, among other things, (i) refinance all the outstanding Term B-1 Loans with a new tranche of term loans (the “Term B-3 Loans”) in an aggregate principal amount of $535 million, (ii) refinance all the outstanding Term B-2 Loans with a new tranche of term loans (the “Term B-4 Loans”) in an aggregate principal amount of $546 million and (iii) amend the definition of “Permitted Payments” contained in the credit agreement to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the credit agreement) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s consolidated leverage ratio does not exceed 3.00 to 1.00.

The Term B-3 Loans bear interest at the applicable margin for borrowings of 2.25% for LIBOR borrowings and 1.25% for base rate borrowings. The Term B-3 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on August 13, 2021.

The Term B-4 Loans bear interest at the applicable margin for borrowings of 2.50% for LIBOR borrowings and 1.50% for base rate borrowings. The Term B-4 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on October 17, 2023.

The Fifth Amendment also provides for a prepayment premium equal to 1.00% of the aggregate principal amount of the applicable Term Loans being prepaid if, on or prior to March 2, 2018, the Company enters into certain repricing transactions.

In connection with the Fifth Amendment, the Company paid approximately $1 million in consent fees and expects to record a modification and extinguishment charge of approximately $3 million, which includes financing fees and other costs of approximately $1 million and approximately $2 million to write off a portion of the related unamortized discount and deferred financing costs.

Redemption of the December 2014 First Priority Notes

On September 1, 2017, HDS used a portion of the net proceeds from the sale of the Waterworks business to redeem all of the outstanding $1,250 million in aggregate principal amount of December 2014 First Priority Notes for an aggregate redemption price of approximately $1,325 million. The redemption price included an approximately $62 million make-whole premium calculated in accordance with terms of the 2014 indenture and $14 million of accrued but unpaid interest to the redemption date. The 2014 indenture, pursuant to which the December 2014 First Priority Notes were issued, was discharged and the liens securing the December 2014 First Priority Notes were released in accordance with the terms of the 2014 indenture. As a result of the redemption, the Company expects to record a $73 million loss on extinguishment of debt in the third quarter of fiscal 2017, which includes the $62 million make-whole premium and the write-off of $11 million of unamortized deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

Share Repurchase Programs

As of August 8, 2017, Holdings has completed the repurchase of all $500 million of common stock under the share repurchase program authorized in June 2017, purchasing approximately 15.9 million shares at an average price of $31.37 per share.

On August 27, 2017, Holdings’ Board of Directors authorized the Company to enter into a new share repurchase program for the repurchase of up to an aggregate $500 million of Holdings’ common stock in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

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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. We serve these markets with an integrated go-to-market strategy. We operate through approximately 260 locations across 36 U.S. states and six Canadian provinces. We have approximately 11,000 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 500,000 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 markets 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. Facilities Maintenance operates a distribution center-based model that sells its products primarily through a professional sales force, e-commerce and print catalogs.

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 reaches customers through a nationwide network of regionally organized branches as well as print catalogs and e-commerce. 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 through local retail outlets.

In addition to the reportable segments, our consolidated financial results include ‘‘Corporate.’’ Corporate includes costs related to our centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services, and removes inter-segment transactions.

Discontinued operations

On August 1, 2017, the Company completed the sale of its Waterworks business. For additional information on the sale of the Waterworks business, see “Note 13 — Subsequent Events,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

On May 31, 2016, the Company completed the sale of its Interior Solutions business.

33

The presentation of discontinued operations includes revenues and expenses of the discontinued operations, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). Prior periods presented have been revised to reflect this presentation. For additional detail related to the results of operations of the discontinued operations, see “Note 2— Discontinued Operations,” in the Notes to 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.  Fiscal years ending January 28, 2018 (“fiscal 2017”) and January 29, 2017 (“fiscal 2016”) both include 52 weeks.  The three months ended July 30, 2017 (“second quarter 2017) and July 31, 2016 (“second quarter 2016”) both include 13 weeks. The six months ended July 30, 2017 and July 31, 2016 both include 26 weeks.

Key business metrics

Net sales

We earn our Net sales primarily from the sale of construction, maintenance and renovation and improvement related products and our provision of related services to approximately 500,000 customers, including contractors, government entities, maintenance professionals and industrial businesses. We recognize sales, net of sales tax and allowances for returns and discounts, when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable and collectability is reasonably assured. Net sales in certain business units 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 title to the products is 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. Shipping and handling costs associated with outbound freight 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 profits may not be comparable to those of other companies, as other companies may include all of the costs related to their distribution network in Cost of sales.

Operating expenses

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

34

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 HDS’s 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 (a) $100 million and (b) 10% of the lesser of (i) the borrowing base and (ii) the aggregate commitments. 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 (benefit) for income taxes, and (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 January 29, 2017.

Adjusted net income is defined as Net income (loss) 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.

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;

35

·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 measures under GAAP, to Adjusted EBITDA for the periods presented (amounts in millions):

	Three Months Ended				Six Months Ended
	July 30, 2017		July 31, 2016		July 30, 2017		July 31, 2016
Net income	$	442	$	98	$	527	$	84
Less income from discontinued operations, net of tax	361		37		388		64
Income from continuing operations	81		61		139		20
Interest expense	49		69		98		154
Provision for income taxes	50		41		69		15
Depreciation and amortization (1)	22		23		44		44
Loss on extinguishment of debt (2)	—		—		3		115
Restructuring charges (3)	—		4		—		11
Stock-based compensation	6		5		12		11
Adjusted EBITDA	$	208	$	203	$	365	$	370

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

(2)Represents the loss on extinguishment of debt including the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt.

(3)Represents the costs incurred for strategic alignment of our workforce. These costs include severance, relocation costs and other related costs.

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

	Three Months Ended						Six Months Ended
	July 30, 2017			July 31, 2016			July 30, 2017			July 31, 2016
Net income	$	442		$	98		$	527		$	84
Less income from discontinued operations, net of tax	361			37			388			64
Income from continuing operations	81			61			139			20
Plus: Provision for income taxes	50			41			69			15
Less: Cash income taxes	(7		)	(5		)	(10		)	(6		)
Plus: Amortization of acquisition-related intangible assets (other than software)	3			3			6			6
Plus: Loss on extinguishment of debt (1)	—			—			3			115
Plus: Restructuring charges (2)	—			4			—			11
Adjusted Net Income	$	127		$	104		$	207		$	161

(1)Represents the loss on extinguishment of debt including the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt.

(2)Represents the costs incurred for strategic alignment of our workforce. These costs include severance, relocation costs and other related costs.

36

Consolidated results of operations

	Three Months Ended				Percentage		Six Months Ended				Percentage
Dollars in millions	July 30, 2017		July 31, 2016		Increase (Decrease)		July 30, 2017		July 31, 2016		Increase (Decrease)
Net sales	$	1,352	$	1,283	5.4	%	$	2,568	$	2,459	4.4	%
Gross Profit	539		513		5.1		1,023		982		4.2
Operating expenses:
Selling, general and administrative	338		317		6.6		672		625		7.5
Depreciation and amortization	21		21		*		42		42		*
Restructuring Charges	—		4		*		—		11		*
Total operating expenses	359		342		5.0		714		678		5.3
Operating Income	180		171		5.3		309		304		1.6
Interest expense	49		69		(29.0	)	98		154		(36.4	)
Loss on extinguishment of debt	—		—		*		3		115		(97.4	)
Income from Continuing Operations Before Provision for Income Taxes	131		102		28.4		208		35		*
Provision for income taxes	50		41		22.0		69		15		*
Income from Continuing Operations	81		61		32.8		139		20		*
Income from discontinued operations, net of tax	361		37		*		388		64		*
Net Income	$	442	$	98	*		$	527	$	84	*
Non-GAAP financial data:
Adjusted EBITDA	$	208	$	203	2.5		$	365	$	370	(1.4	)
Adjusted net income	$	127	$	104	22.1		$	207	$	161	28.6

* Not meaningful

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	% of Net Sales						% of Net Sales
	Three Months Ended				Basis Point		Six Months Ended				Basis Point
	July 30, 2017		July 31, 2016		Increase (Decrease)		July 30, 2017		July 31, 2016		Increase (Decrease)
Net sales	100.0	%	100.0	%	—		100.0	%	100.0	%	—
Gross Profit	39.9		40.0		(10	)	39.8		39.9		(10	)
Operating expenses:
Selling, general and administrative	25.0		24.8		20		26.2		25.4		80
Depreciation and amortization	1.6		1.6		—		1.6		1.7		(10	)
Restructuring Charges	—		0.3		*		—		0.4		*
Total operating expenses	26.6		26.7		(10	)	27.8		27.5		30
Operating Income	13.3		13.3		—		12.0		12.4		(40	)
Interest expense	3.6		5.4		(180	)	3.8		6.3		(250	)
Loss on extinguishment of debt	—		—		*		0.1		4.7		*
Income from Continuing Operations Before Provision for Income Taxes	9.7		7.9		180		8.1		1.4		*
Provision for income taxes	3.7		3.1		60		2.7		0.6		*
Income from Continuing Operations	6.0		4.8		120		5.4		0.8		*
Income from discontinued operations, net of tax	26.7		2.9		*		15.1		2.6		*
Net Income	32.7		7.7		*		20.5		3.4		*
Non-GAAP financial data:
Adjusted EBITDA	15.4		15.8		(40	)	14.2		15.0		(80	)
Adjusted net income	9.4		8.1		130		8.1		6.5		160

* Not meaningful

Highlights

Net sales in second quarter 2017 increased $69 million, or 5.4%, as compared to second quarter 2016. Both of our reportable segments delivered increases in Net sales. Operating income in second quarter 2017 increased $9 million, or 5.3%, as compared to second quarter 2016. Net income in second quarter 2017 increased $344 million to $442 million as compared to $98 million in second quarter 2016 due primarily to a $323 million tax benefit recorded as a result of the sale of the Waterworks business. Adjusted EBITDA in second quarter 2017 increased $5 million, or 2.5%, as compared to second quarter 2016. Adjusted net income in second quarter 2017 increased $23 million, or 22.1%, as compared to second quarter 2016 due primarily to a decline in interest expense as a result of a lower effective interest rate and lower outstanding debt balances. As of July 30, 2017, our total liquidity was $590 million. See “Liquidity and Capital Resources — External Financing” for further information.

Net sales

Net sales in second quarter 2017 increased $69 million, or 5.4%, compared to second quarter 2016 and $109 million, or 4.4%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

Both of our reportable segments delivered an increase in Net sales in second quarter 2017 and in the first six months of fiscal 2017 as compared to the same periods in fiscal 2016. The Net sales increases were primarily due to increases in market volume and growth initiatives at both of our businesses. Growth initiatives contributed approximately $36 million and $44 million in second quarter 2017 and the first six months of fiscal 2017, respectively.

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Gross profit

Gross profit increased $26 million, or 5.1%, during second quarter 2017 as compared to second quarter 2016 and $41 million, or 4.2%, during the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

Both of our reportable segments delivered an increase in Gross profit primarily due to sales growth from increased market volume and initiatives.

Gross profit as a percentage of Net sales (“gross margin”) decreased approximately 10 basis points to 39.9% in second quarter 2017 as compared to 40.0% in second quarter 2016 and approximately 10 basis points to 39.8% in the first six months of fiscal 2017 as compared to 39.9% in the same period in fiscal 2016. The decline in gross margin in both periods was primarily driven by decreasing rebar margins at our Construction & Industrial business.

Operating expenses

Operating expenses increased $17 million, or 5.0%, during second quarter 2017 as compared to second quarter 2016 and $36 million, or 5.3%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

Selling, general and administrative expenses increased $21 million, or 6.6%, in second quarter 2017 as compared to second quarter 2016 and $47 million, or 7.5%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016. 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. Restructuring charges decreased $4 million and $11 million in second quarter 2017 and the first six months of fiscal 2017, respectively, as compared to the same periods in fiscal 2016 as the Company completed restructuring activities to strategically align its workforce in fiscal 2016.

Operating expenses as a percentage of Net sales decreased approximately 10 basis points to 26.6% in second quarter 2017 as compared to second quarter 2016 and increased approximately 30 basis points to 27.8% in the first six months of fiscal 2017 as compared to the same period in fiscal 2016. Selling, general and administrative expenses as a percentage of Net sales increased approximately 20 basis points to 25.0% in second quarter 2017 and approximately 80 basis points to 26.2% in the first six months of fiscal 2017 as compared to the same periods in fiscal 2016. The increase in both periods was primarily a result of the increased investments in growth initiatives, partially offset by the decline in restructuring charges. For additional information, see “Note 8 — Restructuring Activities,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

Operating income

Operating income increased $9 million, or 5.3%, during second quarter 2017 as compared to second quarter 2016 and $5 million, or 1.6%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016. The increase in both periods was primarily due to higher sales volume, partially offset by the decrease in gross margins and increase in Operating expenses.

Operating income as a percentage of Net sales remained flat during second quarter 2017 as compared to second quarter 2016 and decreased approximately 40 basis points during the first six months of fiscal 2017 as compared to the same period in fiscal 2016. In second quarter 2017, the decline in gross margins and increase in selling, general and administrative expense as a percentage of Net sales were offset by the decline in restructuring charges. In the first six months of fiscal 2017, the decline in margins and increase in selling, general and administrative expense as a percentage of Net sales were partially offset by a decline in depreciation and amortization as a percentage of Net sales and restructuring charges.

Interest expense

Interest expense decreased $20 million, or 29.0%, during second quarter 2017 as compared to second quarter 2016 and $56 million, or 36.4%, during the first six months of fiscal 2017 as compared to the same period in fiscal 2016. The decrease in both periods was due to a lower average interest rate on our outstanding indebtedness due to debt refinancing transactions and a lower average outstanding balance as we continue to use cash flow from operations and proceeds from the sale of businesses to reduce indebtedness.

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Loss on extinguishment of debt

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, as defined below, to repay $100 million aggregate principal of its approximately $842 million original aggregate principal tranche of term loans due 2021 (the “Term B-1 Loans”). As a result, the Company incurred a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs for $1 million each, in accordance with Accounting Standards Codification (“ASC”) 470-50, “Debt — Modifications and Extinguishments.”

On April 5, 2017, HDS amended its Senior Asset Based Lending Facility due 2022 (the “Senior ABL Facility”) which, among other things, reduced the applicable margin for borrowings under the Senior ABL Facility, reduced the applicable commitment fee, and extended the maturity date of the Senior ABL Facility until April 5, 2022. As a result, the Company recorded a $1 million loss on extinguishment of debt, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments,” for the write-off of $1 million of unamortized deferred financing costs.

Provision (benefit) for income taxes

The provision (benefit) 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 Company’s income tax provision (benefit) recorded in interim periods can move from an income tax provision to income tax benefit (and vice versa) in situations in which the Company is experiencing changes between interim pre-tax income to pre-tax loss (and vice versa). The provision for income taxes from continuing operations in second quarter 2017 was an expense of $50 million compared to $41 million in second quarter 2016. The provision for income taxes in the first six months of fiscal 2017 was an expense of $69 million compared to $15 million in the first six months of fiscal 2016.

The effective rate for continuing operations for second quarter 2017 and the first six months of fiscal 2017 was an expense of 38.2% and 33.2%, respectively. The effective rate for continuing operations for second quarter 2016 and the first six months of fiscal 2016 was an expense of 40.2% and 42.9%, respectively.

In second quarter 2017 and the first six months of fiscal 2017, the application of stock-based compensation expense guidance in Accounting Standards Update (“ASU”) No. 2016-09 resulted in discrete tax benefits of $1 million and $12 million, respectively, from the exercise and vesting of stock based awards, which lowered the effective tax rate by 80 and 580 basis points, respectively. For additional information on the adoption of ASU No. 2016-09, see “Note 12 — Recent Accounting Pronouncements,” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

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 January 29, 2017, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $5 million and remained unchanged as of July 30, 2017.

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax during second quarter 2017 was $361 million, which included $60 million of pre-tax income from discontinued operations and a $301 million income tax benefit. During second quarter 2017, the Company recorded a $323 million tax benefit in Income from discontinued operations, net of tax, to recognize a net deferred tax asset for the difference between the Company’s stock basis versus its book basis of the Waterworks business unit. On August 1, 2017, the Company completed the sale of the Waterworks business and utilized the $323 million net deferred tax asset. For additional information. see “Note 2 — Discontinued Operations” and “Note 13 — Subsequent Events” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

Adjusted EBITDA

Adjusted EBITDA increased $5 million, or 2.5%, in second quarter 2017 as compared to second quarter 2016 and decreased $5 million, or 1.4%, in the first six months of fiscal 2017 as compared to the first six months of fiscal 2016. Construction & Industrial experienced an increase in Adjusted EBITDA in both periods.  Facilities Maintenance experienced an increase in Adjusted EBITDA in second quarter 2017 as compared to second quarter 2016 and a decrease in Adjusted EBITDA for the first six months of fiscal 2017 as compared to the first six months of fiscal 2016.

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The increase in Adjusted EBITDA in second quarter 2017 as compared to second quarter 2016 was primarily due to the increase in sales volume, partially offset by the decrease in gross margin and increase in Operating expenses. The decrease in Adjusted EBITDA during the first six months of fiscal 2017 as compared to the first six months in fiscal 2016 was primarily due to the decrease in gross margin and increase in Operating expenses. Adjusted EBITDA as a percentage of Net sales decreased approximately 40 basis points to 15.4% in second quarter 2017 as compared to second quarter 2016 and approximately 80 basis points to 14.2% in the first six months of fiscal 2017 as compared to the first six months of fiscal 2016.

Adjusted net income

Adjusted net income increased $23 million, or 22.1%, in second quarter 2017 as compared to second quarter 2016 and $46 million, or 28.6%, in the first six months of fiscal 2017 as compared to the first six months of fiscal 2016. The increase in Adjusted net income in both periods was primarily attributable to lower interest expense.

Results of operations by reportable segment

Facilities Maintenance

	Three Months Ended								Six Months Ended
Dollars in millions	July 30, 2017			July 31, 2016			Increase (Decrease)		July 30, 2017			July 31, 2016			Increase (Decrease)
Net sales	$	769		$	741		3.8	%	$	1,451		$	1,418		2.3	%
Operating income	$	149		$	139		7.2	%	$	258		$	258		—
% of Net sales	19.4		%	18.8		%	60	bps	17.8		%	18.2		%	(40	)bps
Depreciation and amortization	7			9			(22.2	)%	15			18			(16.7	)%
Restructuring	—			3			*		—			9			*
Adjusted EBITDA	$	156		$	151		3.3	%	$	273		$	285		(4.2	)%
% of Net sales	20.3		%	20.4		%	(10	)bps	18.8		%	20.1		%	(130	)bps

* Not meaningful

Net Sales

Net sales increased $28 million, or 3.8%, in second quarter 2017 as compared to second quarter 2016 and $33 million, or 2.3%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

The increase in Net sales in both periods was primarily due to market growth in the multifamily and hospitality industries and growth initiatives, particularly in the second quarter of 2017. 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 application, and our enabling functions, such as supply chain, data analytics, and dynamic pricing.

Adjusted EBITDA

Adjusted EBITDA increased $5 million, or 3.3%, in second quarter 2017 as compared to second quarter 2016 and decreased $12 million, or 4.2%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

The increase in Adjusted EBITDA in second quarter 2017 as compared to second quarter 2016 was primarily due to increased sales volume, partially offset by increased Selling, general and administrative expenses. The decrease in Adjusted EBITDA in the first six months of fiscal 2017 as compared to the same period in fiscal 2016 was primarily due to increased Selling, general and administrative expenses. The increase in Selling, general and administrative expenses in both periods was related to costs incurred to increase distribution center capacity and higher personnel costs in fiscal 2017 related to open positions in fiscal 2016 due to transitioning the business from San Diego to Atlanta.

Adjusted EBITDA as a percentage of Net sales decreased approximately 10 basis points in second quarter 2017 as compared to second quarter 2016 and approximately 130 basis points in the first six months of fiscal 2017 as compared to the same period in fiscal 2016. The decrease in both periods was primarily driven by an increase

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in Selling, general and administrative expenses as a percentage of Net sales due to costs incurred to increase distribution center capacity and open positions in 2016 due to transitioning the business to Atlanta, partially offset by gross margin improvements.

Construction & Industrial

	Three Months Ended								Six Months Ended
Dollars in millions	July 30, 2017			July 31, 2016			Increase (Decrease)		July 30, 2017			July 31, 2016			Increase (Decrease)
Net sales	$	584		$	544		7.4	%	$	1,120		$	1,045		7.2	%
Operating income	$	60		$	59		1.7	%	$	106		$	100		6.0	%
% of Net sales	10.3		%	10.8		%	(50	)bps	9.5		%	9.6		%	(10	)bps
Depreciation and amortization	9			9			—		18			17			5.9	%
Adjusted EBITDA	$	69		$	68		1.5	%	$	124		$	117		6.0	%
% of Net sales	11.8		%	12.5		%	(70	)bps	11.1		%	11.2		%	(10	)bps

Net Sales

Net sales increased $40 million, or 7.4%, in second quarter 2017 as compared to second quarter 2016 and $75 million, or 7.2%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

Growth initiatives contributed to the increase in Net sales in both periods driven by managed sales approach (‘‘MSA’’), new locations, and direct marketing initiatives. MSA is a structured approach to drive revenue at a regional level through analysis, tools and sales management. In addition, Net sales was positively impacted by end-market improvement in both non-residential and residential construction markets.

Adjusted EBITDA

Adjusted EBITDA increased $1 million, or 1.5%, in second quarter 2017 as compared to second quarter 2016 and $7 million, or 6.0%, in the first six months of fiscal 2017 as compared to the same period in fiscal 2016.

The increase in Adjusted EBITDA in both periods was primarily driven by growth initiatives and market volume. This increase was partially offset by lower gross margins in the second quarter and increased Selling, general and administrative expenses in both periods related to variable expenses and the hiring of additional associates to support the expanding business and drive future growth.

Adjusted EBITDA as a percentage of Net sales decreased approximately 70 basis points in second quarter 2017 as compared to second quarter 2016 and approximately 10 basis points in the first six months of fiscal 2017 as compared to the same period in fiscal 2016. The decrease in both periods was driven by declines in rebar gross margins, partially offset by product mix and category management initiatives. Rebar margins are declining due to an increase in steel costs impacted by duties and the threat of duties on imported steel. We have been unable to pass along all of the cost increases to our customers due to the competitive environment. We expect rebar margins to remain under pressure for the remainder of the year.

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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 2017, the Company’s generation of cash was primarily driven by cash receipts from operations and proceeds from stock option exercises, partially offset by net debt repayments, the payment of interest on debt, capital expenditures and purchases of treasury shares.

As of July 30, 2017, our combined liquidity of approximately $590 million was comprised of $67 million in cash and cash equivalents and $523 million of additional available borrowings (excluding $7 million of borrowings on available cash balances) under our Senior ABL Facility, based on qualifying inventory and receivables.

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

Net cash provided by (used for):

	Six Months Ended						Increase
Amounts in millions	July 30, 2017			July 31, 2016			(Decrease)
Operating activities	$	189		$	164		$	25
Investing activities	(41		)	6			(47		)
Financing activities	(156		)	(127		)	(29		)

Working capital

Working capital, excluding cash and cash equivalents, was $1,074 million as of July 30, 2017, increasing $91 million as compared to $983 million as of July 31, 2016.  Working capital, excluding the impact of discontinued operations and cash and cash equivalents increased $62 million. The increase was primarily driven by business growth, resulting in increases in Receivables and Inventory, partially offset by increases in Accounts Payable.

Operating activities

During the first six months of fiscal 2017, cash provided by operating activities was $189 million compared to $164 million in the first six months of fiscal 2016. Cash interest paid in the first six months of fiscal 2017 was $92 million, compared to $161 million in the first six months of fiscal 2016. Cash flows from operating activities included a payment of $4 million of original issue discount related to the extinguishment of a portion of the Term Loans in the first six months of fiscal 2017. Cash flows provided by operating activities for discontinued operations were $11 million in the first six months of fiscal 2017. Cash flows used by operating activities for discontinued operations were $6 million during the first six months of fiscal 2016. Excluding the cash interest payments in both periods and original issue discounts paid, cash flows from operating activities for continuing operations decreased approximately $57 million in the first six months of fiscal 2017 as compared to the first six months of fiscal 2016. The decrease in operating cash flows excluding interest, original issue discount, and discontinued operations is attributable to investments in working capital for business growth.

Investing activities

During the first six months of fiscal 2017, cash used by investing activities was $41 million, comprised of $43 million of capital expenditures, partially offset by $2 million of cash received from the sales of property and equipment.  During the first six months of fiscal 2016, cash provided by investing activities was $6 million, comprised of $38 million of proceeds from the sales of businesses and property and equipment, offset by $32 million of capital expenditures.

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Financing activities

During the first six months of fiscal 2017, cash used in financing activities was $156 million, primarily due to purchases of treasury shares of $414 million and payments for debt issuance costs of $6 million, offset by net debt borrowings of $235 million and proceeds from employee stock option exercises of $29 million.

During the first six months of fiscal 2016, cash used in financing activities was $127 million, primarily due to net debt repayments of $110 million including premiums and make-whole payments to call or redeem debt prior to maturity, payments for debt issuance costs of $15 million and purchases of treasury shares of $14 million, partially offset by proceeds from employee stock option exercises of $14 million.

External financing

As of July 30, 2017, we had an aggregate principal amount of $4,052 million of outstanding indebtedness, net of unamortized discounts and unamortized deferred financing costs of $7 million and $34 million, respectively, and $523 million of additional available borrowings under our Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $30 million in letters of credit issued and including $7 million of borrowings available on qualifying cash balances).  From time to time, depending on market conditions and other factors, the Company 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.

On September 1, 2017, HDS used a portion of the net proceeds it received from the sale of the Waterworks business to redeem all of the outstanding $1,250 million in aggregate principal amount of December 2014 First Priority Notes for an aggregate redemption price of approximately $1,325 million. The redemption price included an approximately $62 million make-whole premium calculated in accordance with the terms of the 2014 indenture and $14 million of accrued but unpaid interest to the redemption date. The 2014 indenture, pursuant to which the December 2014 First Priority Notes were issued, was discharged and the liens securing the December 2014 First Priority Notes were released in accordance with the terms of the 2014 indenture. As a result of the redemption, the Company expects to record a $73 million loss on extinguishment of debt in the third quarter of fiscal 2017, which includes the $62 million make-whole premium and the write-off off $11 million of unamortized deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

On August 31, 2017, HDS entered into a Fifth Amendment (the “Fifth Amendment”) to the credit agreement governing HDS’s existing Term Loan Facility. Pursuant to the Fifth Amendment, HDS amended its existing Term Loan Facility to, among other things, (i) refinance all the outstanding Term B-1 Loans with a new tranche of term loans (the “Term B-3 Loans”) in an aggregate principal amount of $535 million, (ii) refinance all the outstanding Term B-2 Loans with a new tranche of term loans (the “Term B-4 Loans”) in an aggregate principal amount of $546 million and (iii) amend the definition of “Permitted Payments” contained in the credit agreement to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the credit agreement) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s Consolidated Leverage Ratio (as defined in the credit agreement) does not exceed 3.00 to 1.00.

The Term B-3 Loans bear interest at the applicable margin for borrowings of 2.25% for LIBOR borrowings and 1.25% for base rate borrowings. The Term B-3 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on August 13, 2021.

The Term B-4 Loans bear interest at the applicable margin for borrowings of 2.50% for LIBOR borrowings and 1.50% for base rate borrowings. The Term B-4 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on October 17, 2023.

The Fifth Amendment also provides for a prepayment premium equal to 1.00% of the aggregate principal amount of the applicable Term Loans being prepaid if, on or prior to March 2, 2018, the Company enters into certain repricing transactions.

In connection with the Fifth Amendment, the Company paid approximately $1 million in consent fees and expects to record a modification and extinguishment charge of approximately $3 million, which includes financing fees and other costs of approximately $1 million and approximately $2 million to write off a portion of the related unamortized discount and deferred financing costs.

On August 25, 2017, HDS entered into the Second Supplemental Indenture (the “Second Supplemental Indenture”) which amends and supplements the Indenture, dated as of April 11, 2016, as amended and

44

supplemented by the First Supplemental Indenture, dated as of April 11, 2016 (together, the “Indenture”). The Second Supplemental Indenture effects certain Proposed Amendments (as defined below) to the Indenture pertaining to the Company’s April 2016 Senior Unsecured Notes. Holders of a majority in aggregate principal amount of the outstanding April 2016 Senior Unsecured Notes consented to the Proposed Amendments.

The Proposed Amendments (a) amend the definition of “Permitted Payments” contained in the Indenture to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the Indenture) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s Consolidated Leverage Ratio (as defined in the Second Supplemental Indenture) does not exceed 3.00 to 1.00; (b) increase the interest rate for the April 2016 Senior Unsecured Notes to 7.00% per annum commencing April 15, 2019, to the extent the April 2016 Senior Unsecured Notes remain outstanding after April 15, 2019; (c) amend the definition of “Net Available Cash” contained in the Indenture to provide that proceeds from the sale of the Waterworks business unit consummated on August 1, 2017 (other than proceeds to be applied to redeem the Company’s 2021 Notes (as defined in the Second Supplemental Indenture)) shall be excluded and accordingly, the Company will not be required to apply the remaining net proceeds in accordance with the provision of the “Sale of Assets” covenant of the Indenture and (d) amend the definition of “Consolidated EBITDA” contained in the Indenture to provide that while the Company may continue to include in the calculation thereof projected cost savings, it may only do so with respect those realized as a result of actions taken or to be taken in connection with a purchase of assets from, or a sale of assets to, a third party (excluding the Waterworks Sale (as defined in the Second Supplemental Indenture)) (collectively, the “Proposed Amendments”).

As a result of entering into the Second Supplemental Indenture, the Company paid approximately $15 million in consent fees to holders of the outstanding April 2016 Senior Unsecured Notes, which will be capitalized as deferred financing costs and amortized over the expected life of the April 2016 Senior Unsecured Notes.

On August 1, 2017, HDS repaid all of the outstanding U.S. borrowings on its Senior ABL Facility. Canadian borrowings of $62 million on the Senior ABL Facility remain outstanding.

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, to repay $100 million aggregate principal of its Term B-1 Loans. As a result, the Company incurred a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs for $1 million each, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

On April 5, 2017, HDS entered into a Third Amendment (the “Third Amendment”) to the credit agreement governing its existing Senior ABL Facility. The Third Amendment, among other things, reduced the applicable margin for borrowings under the Senior ABL Facility, reduced the applicable commitment fee, and extended the maturity date of the Senior ABL Facility until April 5, 2022. As a result, the Company recorded a $1 million loss on extinguishment of debt, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments,” for the write-off of $1 million of unamortized deferred financing costs.

For additional information, see “Note 3 — Debt” and “Note 13 — Subsequent Events” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

Rating agency actions

On August 17, 2017, S&P Global Ratings (“S&P”) placed HDS’s Term B-1 Loan on CreditWatch with positive implications, noting their expectations of improved recovery prospects for lenders when incorporating HDS’s anticipated repayment of its December 2014 First Priority Notes. S&P noted that once HDS’s December 2014 First Priority Notes are repaid, they anticipate raising the credit ratings on HDS’s Term B-1 Loan and Term B-2 Loan to ‘BB+’ from ‘BB’ and revise its recovery rating on the Term Loans to ‘2’. On September 1, 2017, HDS repaid all of the outstanding aggregate principal amount of its December 2014 First Priority Notes.

In March 2017, Moody’s Investor’s Service (“Moody’s”) upgraded HDS’s corporate family rating to Ba3, from B1. Moody’s cited improved credit metrics and anticipated gains from all of our business units. In related rating actions, Moody’s upgraded HDS’s senior secured term loans and senior secured notes from Ba3 to B1 and senior unsecured notes to B2 from B3. Moody’s rating outlook changed to stable from positive. Also in April 2017, S&P raised HDS’s corporate credit rating to ‘BB’ from ‘BB-’, assigned a ‘BBB-’ rating to the Senior ABL Facility, upgraded senior secured debt to ‘BB’ from ‘BB-’, and upgraded unsecured notes to ‘B+’ from ‘B’. S&P cited meaningful credit

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ratio improvement in fiscal 2016 as well as our prioritization of free cash generation for debt reduction. S&P’s outlook upgraded to stable.

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 Form 10-K for the fiscal year ended January 29, 2017.

Recent accounting pronouncements

See “Note 12 — Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.

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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 January 29, 2017.

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 July 30, 2017 (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 July 30, 2017 (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 2017 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, a putative class action complaint was filed in the U.S. District Court for the Northern District of Georgia by The City of Hollywood Police Officers’ Retirement System (the “Retirement System complaint”) against HD Supply and certain senior members of its management (collectively, the “defendants”).  On August 8, 2017, a second class action complaint was filed in the U.S. District Court for the Northern District of Georgia by Obioma Ebisike (the “Ebisike complaint” and together with the Retirement System complaint, the “complaints”) against the defendants.  The complaints are brought individually on behalf of all persons other than defendants who purchased or otherwise acquired Company securities between November 9, 2016 and June 5, 2017.  The complaints generally allege that the defendants engaged in a fraudulent scheme to inflate the Company’s stock price by making materially false and misleading statements about the Company’s business, operational, and compliance policies that allegedly failed to disclose: (1) that the Company’s full year 2017 growth and operational leverage targets were unattainable; (2) the operational recovery of the Company’s Facilities Maintenance business unit’s supply chain was not going according to plan; and (3) the Company was exploring the sale of its Waterworks business unit.  The complaints assert claims against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and they seek (1) class certification under the Federal Rules of Civil Procedure, (2) damages in an amount to be proven at trial, (3) pre-judgment and post-judgment interest, and (4) attorneys’ fees and other costs.

On August 8, 2017, two shareholder derivative complaints were filed (one by Sean Zhou and another by James Calderaro) against the Company (the “nominal defendant”) and certain members of its senior management and board of directors (collectively, the “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, while failing to disclose: (1) that the Company’s growth and operating leverage targets for full  year 2017 were

47

unattainable; (2) the operational recovery of the Company’s Facilities Maintenance business unit’s supply chain was not progressing as expected and would require substantial additional investment; and (3) the Company was preparing to sell its Waterworks business unit.  The complaints assert claims against the individual defendants under Section 14(a) of the Securities Exchange Act of 1934, allege breaches of fiduciary duties, and assert claims under theories of 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’ actions, ask that the Company take certain actions to reform and improve its corporate governance and internal procedures, seek restitution on behalf of the Company, and seek to recover attorneys’ fees and other costs.

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.

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 financial position, results of operations or cash flows of the Company if disposed of unfavorably. For material matters that are reasonably possible and reasonably estimable, including matters 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.

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 January 29, 2017.

The materialization of any risks and uncertainties identified in forward-looking statements contained in this report together with those previously disclosed in our annual report on Form 10-K for the fiscal year ended January 29, 2017 and our and HDS’s other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows.  See “Forward-looking statements and information” at the beginning of this report.

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

(c) Purchases of Equity Securities

On June 3, 2017, Holdings’ Board of Directors authorized the Company to enter into a share repurchase program for the repurchase of up to an aggregate amount of $500 million of Holdings’ common stock in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. As of August 8, 2017, Holdings has completed the repurchase of all $500 million of common stock authorized under the share repurchase program, purchasing approximately 15.9 million shares at an average price of $31.37 per share.

On August 27, 2017, Holdings’ Board of Directors authorized the Company to enter into a new share repurchase program for the repurchase of up to an aggregate amount of $500 million of Holdings’ common stock in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

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, as was disclosed in our annual report on Form 10-K filed on March 25, 2014. 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.

Issuer Purchases of Equity Securities in each fiscal month of the second quarter of fiscal 2017 are set forth in the table below:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number  of Shares  Purchased	Average  Price Paid  per Share		Total Number of  Shares Purchased as  Part of a Publicly  Announced Program	Approximate Dollar  Value of Shares that  May Yet Be  Purchased Under the  Plans or Programs (1)
May 1 - May 28	290,000	$	40.56	290,000	$	5,827,478
May 29 - June 25	3,704,230	32.15		3,704,230	386,935,423
June 26 - July 30	10,009,675	31.02		10,009,675	79,409,281
Total	14,003,905	$	31.52	14,003,905

(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.

During the six months ended July 30, 2017, Holdings retired 611,433 shares of its common stock (“Retired Shares”) held as treasury shares by Holdings in the amount of $23 million. All of these shares were repurchased by Holdings pursuant to the previously authorized share repurchase program. Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with Accounting Standards Codification 505-30, “Equity-Treasury Stock,” Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

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Item 6. Exhibits

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

Exhibit Number	Exhibit Description
2.1	Amended and Restated Agreement and Plan of Merger, dated as of July 14, 2017, by and among HD Supply Holdings, LLC, HD Supply GP & Management, Inc., HD Supply Waterworks Group, Inc., HD Supply Waterworks, Ltd., HD Supply, Inc., CD&R Plumb Buyer, LLC, CD&R Waterworks Merger Sub, LLC, CD&R WW, LLC, and CD&R WW Merger Sub, LLC (1)
3.1	Second Amended and Restated Certificate of Incorporation of HD Supply Holdings, Inc.(2)
3.2	Third Amended and Restated By-Laws of HD Supply Holdings, Inc. (2)
3.3	Certificate of Incorporation of HD Supply, Inc. (3)
3.4	Certificate of Amendment of Certificate of Incorporation of HD Supply, Inc. (4)
3.5	Amended and Restated By-Laws of HD Supply, Inc.(4)
4.1	Second Supplemental Indenture, dated as of August 25, 2017, by and among the Company, the subsidiary guarantors signatory thereto, and Wells Fargo Bank, National Association, as Trustee (5)
10.1	HD Supply Holdings, Inc. Omnibus Incentive Plan (as amended and restated effective May 17, 2017) (6)
10.2	HD Supply Holdings, Inc. Annual Incentive Plan for Executive Officers(6)
10.3	Board of Directors Compensation Policy (as amended effective May 17, 2017).
10.4	Letter of Employment, dated as of June 5, 2017, by and between HD Supply, Inc. and William P. Stengel.
10.5	Fifth Amendment to Credit Agreement, dated as of August 31, 2017, among the Company, as borrower, certain of the Company’s affiliates signatory thereto, as guarantors, Bank of America, N.A., as administrative agent, Bank of America, N.A., as collateral agent, Bank of America, N.A., as a Term B-3 Lender and Term B-4 Lender, and the other lenders party thereto. (7)
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 30(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.

(1)Previously filed in Form S-8 of HD Supply Holdings, Inc. (File No. 333-189771) filed on July 2, 2013. See Exhibit 3.1 (Certificate of Incorporation) and Exhibit 3.2 (Bylaws).

(2)Previously filed in Form S-8 of HD Supply Holdings, Inc. (File No. 333-189771) filed on July 2, 2013.  See Exhibit 3.1 (Certificate of Incorporation) and Exhibit 3.2 (Bylaws).

(3)Previously filed in Amendment No.1 to Form S-4/A of HD Supply, Inc. (File No. 333-159809) filed on July 10, 2009. See Exhibit 3.1.

(4)Previously filed in Form 8-K of HD Supply, Inc. (File No. 333-159809) filed on July 9, 2013. See Exhibit 3.1 (Certificate of Incorporation) and Exhibit 3.2 (Bylaws).

(5)Previously filed in Form 8-K of HD Supply, Inc. (File No. 333-159809) filed on August 25, 2017. See Exhibit 4.1.

(6)Previously filed in Form 8-K of HD Supply Holdings, Inc. (File No. 001-35979) filed on May 19, 2017. See Exhibit 10.1 (Omnibus Incentive Plan) and Exhibit 10.2 (Annual Incentive Plan).

(7)Previously filed in Form 8-K of HD Supply, Inc. (File No. 001-35979) filed on September 1, 2017. See Exhibit 10.1.

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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 5, 2017	By:	/s/ Joseph J. De Angelo
(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

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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 5, 2017	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

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EX-10.3

Exhibit 10.3

BOARD OF DIRECTORS COMPENSATION POLICY

(As Amended Effective May 17, 2017)

1.ANNUAL BOARD RETAINER

Each non-employee director is paid an annual fee for service of $220,000 ($280,000 for the independent Lead Director), of which $90,000 is paid in quarterly cash installments and $130,000 ($190,000 for the independent Lead Director) is paid in the form of restricted stock units (“RSUs”) under the Company’s Omnibus Incentive Plan. The number of RSUs is determined by dividing the dollar amount of the fee to be granted as RSUs by the closing stock price of a share of Company common stock on the grant date. The RSUs cliff vest on the earlier of the first anniversary of the grant date or the next annual shareholders meeting after the grant date, although directors who stop serving on the board during the year due to death, permanent disability or retirement at age 75 receive a pro-rata number of shares based on the number of days of service during the year. RSUs are credited with dividends during the one-year vesting period. As the RSUs vest, dividends credited to the RSUs similarly vest. If any RSUs are forfeited, dividends related to the forfeited shares are also forfeited.

2.ANNUAL COMMITTEE RETAINER

Each non-employee director appointed to serve as a member of a standing board committee receives the following annual cash retainer: Audit Committee: $12,500; Compensation Committee: $10,000; Nominating and Corporate Governance Committee: $7,500. The committee retainer is in addition to the board retainer. Committee Chairs are not eligible to receive the committee retainer, but instead receive the committee chair retainer described in Section 3.

3.ANNUAL COMMITTEE CHAIR RETAINER

Each non-employee director appointed to serve as chairperson of a standing board committee receives the following annual cash retainer for service as chair of each such committee: Audit Committee Chair: $25,000; Compensation Committee Chair: $20,000; Nominating and Corporate Governance Committee Chair: $15,000. The committee chair retainer is in addition to the board retainer.

4.ANNUAL BOARD CHAIRPERSON RETAINER

Any non-employee director appointed to serve as chairperson of the board of directors receives an annual cash retainer of $25,000 for service as board chairperson. The board chairperson retainer is in addition to the board retainer, and is also in addition to any committee retainer or committee chair retainer the chairman may be entitled to receive under Sections 2 or 3.

5.ANNUAL LEAD DIRECTOR RETAINER

Any non-employee director appointed to serve as independent lead director of the board of directors receives an annual cash retainer of $75,000 for service as independent lead director. The lead director retainer is in addition to the board retainer, and is also in addition to any committee retainer or committee chair retainer the lead director may be entitled to receive under Sections 2 or 3.

6.PRO RATA RETAINERS FOR NEW DIRECTORS

Director compensation is paid for the twelve-month period commencing with each annual shareholders meeting. Directors appointed to board service after the date of the annual shareholders meeting receive a pro rata portion of cash and equity retainers based on the remaining number of days during such compensation year.

7.PAYMENT OF RETAINERS

Cash retainers are paid to directors in four equal installments payable within 30 days of each quarterly board meeting for service performed before termination of board service. The grant date for the annual equity retainer is the date of the annual shareholders meeting. Shares in payment of vested equity awards will be delivered within 30 days of the vesting date. Payment of equity is in whole shares and any fractional share is paid in cash. If the director elects to defer all or any portion of the cash and equity retainers, payment is governed by the terms of the applicable deferral arrangement, as discussed below.

8.DEFERRAL OPTION FOR EQUITY RETAINER

Directors may choose to defer receipt of all or a portion of their vested RSUs to separation from board service by timely completing a deferral election form pursuant to the terms and conditions of the RSU award agreement under the Company’s Omnibus Incentive Plan. Deferred RSUs are paid at the director’s election in a lump sum or equal annual installments over a period not to exceed three years. The lump sum or first installment payment will be made within 30 days of separation from board service in the form of shares of Company common stock. During the deferral period, deferred RSUs are credited with dividends, which are paid along with the deferred RSUs at the end of the deferral period in the form of shares of Company common stock.

9.OPTION TO CONVERT CASH RETAINERS TO COMPANY STOCK

Directors may choose to convert all or a portion of their cash retainers to deferred stock units (“DSUs”) payable in shares of Company common stock on separation from board service by timely completing an election form pursuant to the terms and conditions of a DSU agreement under the Company’s Omnibus Incentive Plan. The number of DSUs is determined by dividing the cash being converted to DSUs by the closing stock price of a share of Company common stock on the date the cash retainers are otherwise payable. DSUs are fully vested at all times and are paid at the director’s election in a lump sum or equal annual installments over a period not to exceed three years. The lump sum or first installment payment will be made within 30 days of separation from board service in the form of shares of Company common stock. During the deferral period, deferred DSUs are credited with dividends, which are paid along with the deferred DSUs at the end of the deferral period in the form of shares of Company common stock.

10.TRAVEL REIMBURSEMENT

Directors are reimbursed for reasonable travel expenses incurred in connection with attending board and committee meetings, as well as travel on other board business at the request of the Company or the board (such as branch visits or other Company function). Reimbursement is subject to any maximum reimbursement as may be established by the board from time to time.

11.STOCK OWNERSHIP GUIDELINES

Directors are obliged to own shares of Company common stock valued at three times(1) the annual cash board retainer, pursuant to the terms of the Stock Ownership Guidelines adopted by the Compensation Committee.

12.MAXIMUM LIMIT ON DIRECTOR COMPENSATION

Director compensation shall be subject to a $750,000 maximum limit (both cash and equity awards) for any board compensation year, as set forth in the Company’s Omnibus Incentive Plan, or such other amount as may be set forth in any amendment or restatement of the Company’s Omnibus Incentive Plan.

13.MODIFICATION

The board reserves the right to amend or terminate, in its discretion, any component of director compensation as it deems appropriate, including the underlying plans providing such compensation.

(1)   This provision was subsequently amended to require ownership of Company common stock valued at five times the annual cash board retainer, effective August 16, 2017.

EX-10.4

Exhibit 10.4

June 5, 2017

William P. Stengel
Atlanta, GA 30339

Dear Will,

Congratulations! We are excited to confirm HD Supply’s offer of promotion to you effective June 5, 2017 in the position of President and Chief Executive Officer, HD Supply Facilities Maintenance, reporting directly to me. We are thrilled to have you continue as a part of our team in this new role, driving customer success and value creation!

As you know, HD Supply strives to create a challenging and rewarding environment where our associates can build their best lives. With endless opportunities to grow, we come together as One Team to drive excellence within ourselves and the Company. We are incredibly proud of all HD Supply has accomplished, and we know you are one of the reasons we’ve been so successful.

Please find below the details of the offer being extended to you.

This position is full time. Your initial base annual salary will be $500,000 payable in equal bi-weekly installments, which will be subject to applicable tax, voluntary and court-ordered withholding.

In addition to your base salary, you will participate in the Annual Incentive Plan for Executive Officers, which provides a target incentive of 75% of your base salary.  Your actual payout will be calculated based on performance which may include Company performance, line of business performance and/or individual performance. The incentive, if any, will be prorated based on the number of days in your new posit ion.

In addition to your salary and participation in the Annual Incentive Plan for Executive Officers, you will also have the opportunity to receive long-term incentive awards, which will be granted in such amount and equity mix as determined by the Compensation Committee of the Board of Directors at the time of grant, and which may also be subject to performance. You will be notified when the committee has Approved a grant for you and the terms of the grant. Typically, awards are approved by the committee in March each year.

HD Supply offers a competitive benefits package of health & welfare, financial, paid time-off and work/ life benefit programs for our associates and their eligible dependents that support our focus as an employer of choice. You are eligible to continue your participation in the HD Supply Health and Welfare Plan — which includes medical, dental, pharmacy, vision, medical/dental and dependent care spending accounts, life, accidental death and dismemberment, short and long-term disability and voluntary group benefit programs.

The description in this offer letter of any plans or benefits is based on current terms. HD Supply reserves the right to change or terminate any of its plans or benefits at any time.

Non-Competition and Non-Solicitation Covenants

You agree that you will not, for a period of one (1 ) year following the date of the date of your termination of employment with HD Supply (the “Restricted Period”), enter into or maintain an employment , contractual , or other

relationship, either directly or indirectly, to provide  services in the same or similar manner as you perform for HD Supply Holdings, Inc., HD Supply, Inc., HD Supply Facilities Maintenance, their parents, subsidiaries, affiliates or related entities (collectively, the “Company”) to any company or entity  engaged in any way in a business that competes directly or indirectly with the Company in the United States, Canada, or any other location in which the Company currently conducts business or may conduct business prior to the expiration of the Restricted Period.

You further agree that during the Restricted Period, you will not directly or indirectly (1) solicit or attempt to  solicit any business related to the business of the Company existing as of your termination date from any of the Company’s customers or suppliers with whom you had business contact or  about whom you received confidential information (collectively, the “Customers and Suppliers”) during the one-year period prior to your termination date; or (2) solicit any person who is an employee of the Company to terminate his or her relationship with the Company.

The above non-competition and non-solicitation provisions shall not apply in the event you are involuntarily terminated for reasons other than for Cause.

Confidentiality and Trade Secrets

You acknowledge that through your employment you have acquired and had access to, and will continue to acquire and have access to, the Company’s Confidential Information and Trade Secrets. You further acknowledge that the Company has made reasonable efforts under the circumstances to maintain the secrecy of its Trade Secrets. By signing below, you agree to hold in confidence and to not publish, disclose or use any Confidential Information or Trade Secrets for as long as the Confidential Information retains its character as confidential and is not readily available to the public, and in the case of Trade Secrets, for so long as the information remains a Trade Secret, except in connection with the good faith performance of your duties for the Company, provided that following your termination, you will not be able to publish, disclose or use the Confidential Information or Trade Secrets of the Company for any purpose, except that you may disclose Confidential Information to comply with a legal process or governmental inquiry (but only upon prompt written notice to the Company’s general counsel to the extent legally permissible).  You further agree to return all documents, disks or any other item or source containing Confidential Information or Trade Secrets, or any other Company property (as applicable), to the Company on or before your termination date. Nothing in this offer letter is intended to prohibit you from reporting possible violations of federal law to any governmental agency or entity, or from making other disclosures that are protected under the whistleblower provisions of federal law. You do not need the Company’s prior authorization to make any such reports or disclosures and you are not required to notify the Company that such reports or disclosures have been made.

“Confidential Information” shall include any data or information, other than Trade Secrets (defined below), that is valuable to the Company and not generally known to competitors of the Company or other outsiders, regardless of whether the confidential information is in printed, written, or electronic form, retained in your memory, or has been compiled or created by you. This includes, but is not limited to: technical, financial, credit marketing, personnel, staffing, payroll, computer systems, marketing, advertising, merchandising, operations, strategic planning, product, vendor, customer or store planning data, trade secrets, or other information similar to the foregoing.

“Trade Secret” means information, without regard to form, including, but not limited to, any technical or non-technical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plans, strategic plans, product plans, or list of actual or potential customers or suppliers which is not commonly known by or available to the public and which information: (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

You further acknowledge that your breach of any of the covenants contained in this section of the agreement and/or the section above entitled “Non-Competition and Non-Solicitation Covenants” would result in immediate and irreparable harm to the Company that cannot be adequately or reasonably compensated by law. Accordingly, you agree that the Company shall be entitled, if any such breach shall occur or be threatened or attempted, to seek from a

2

court a temporary, preliminary, and permanent injunction, without being required to post a bond, enjoining and restraining such breach or threatened or attempted breach by you. You acknowledge that the Company has informed you, in accordance with 18 U.S.C. § 1833(b), that you may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret where the disclosure (a) is made (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (2) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

At-Will Employment

This offer of employment does not alter your status as an at-will employee, which means that the Company and you each have the absolute power to terminate the employment relationship with or without Cause, and with or without prior notice. This offer letter should not be construed, nor is it intended to be a contract of employment for a specified period of time.

Please review this offer and indicate your acceptance of the terms by signing below and returning to your Human Resources partner, Sarah McDaniel.

We look forward to your continuing contributions as part of the HD Supply team.

Sincerely,
/S/ J. DEANGELO (06-05-2017)
Joe DeAngelo
Chairman & CEO, HD Supply, Inc.
I accept this offer of employment.
/S/ WILLIAM P. STENGEL
William P. Stengel
Date Signed:	6/5/17

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EX-21.1

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

NAME OF SUBSIDIARY	STATE ORJURISDICTION	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 GP & Management, Inc.	Delaware	(Not applicable)
HD Supply Construction Supply, Ltd.	Florida	HD Supply Construction & Industrial — White Cap
HD Supply Facilities Maintenance, Ltd.	Florida	HD Supply Facilities Maintenance
HD Supply FM Services, LLC	Delaware	(Not applicable)
HD Supply International Holdings, Inc.	Delaware	(Not applicable)
Solbelt Supply Southwest, S.A. DE C.V.	Mexico	(Not applicable)
HD Supply (Hong Kong) Limited	Hong Kong	(Not applicable)
HD Supply (Shenzhen) Company Limited	China	(Not applicable)
HD Supply Management, Inc.	Florida	(Not applicable)
HD Supply Repair & Remodel, LLC	Delaware	HD Supply Home Improvement Solutions
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 5, 2017
	/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 5, 2017
	/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 5, 2017
	/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 5, 2017
	/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 July 30, 2017 (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 5, 2017
	/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 July 30, 2017 (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 5, 2017
	/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 July 30, 2017 (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 5, 2017
	/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 July 30, 2017 (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 5, 2017
	/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

Document and Entity Information - shares	6 Months Ended
	Jul. 30, 2017	Sep. 01, 2017
Document and Entity Information
Entity Registrant Name	HD Supply Holdings, Inc.
Entity Central Index Key	0001573097
Document Type	10-Q
Document Period End Date	Jul. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--01-28
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		186,646,151
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2

XML

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (HD Supply Holdings, Inc.) - USD ($) shares in Thousands, $ in Millions		3 Months Ended		6 Months Ended
		Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Net Sales		$ 1,352	$ 1,283	$ 2,568	$ 2,459
Cost of sales		813	770	1,545	1,477
Gross Profit		539	513	1,023	982
Operating expenses:
Selling, general and administrative		338	317	672	625
Depreciation and amortization		21	21	42	42
Restructuring			4		11
Total operating expenses		359	342	714	678
Operating Income		180	171	309	304
Interest expense		49	69	98	154
Loss on extinguishment of debt				3	115
Income from Continuing Operations Before Provision for Income Taxes		131	102	208	35
Provision for income taxes		50	41	69	15
Income from Continuing Operations		81	61	139	20
Income from discontinued operations, net of tax		361	37	388	64
Net Income		442	98	527	84
Other comprehensive income (loss)- foreign currency translation adjustment		(3)	(2)	(2)	2
Total Comprehensive Income		$ 439	$ 96	$ 525	$ 86
Weighted Average Common Shares Outstanding
Basic (in shares)		197,752	199,250	199,230	199,029
Diluted (in shares)		198,954	201,978	201,010	201,615
Basic Earnings Per Share:
Income from Continuing Operations (in dollars per share)	[1]	$ 0.41	$ 0.31	$ 0.70	$ 0.10
Income from Discontinued Operations (in dollars per share)	[1]	1.83	0.19	1.95	0.32
Net Income (in dollars per share)	[1]	2.24	0.49	2.65	0.42
Diluted Earnings Per Share:
Income from Continuing Operations (in dollars per share)	[1]	0.41	0.30	0.69	0.10
Income from Discontinued Operations (in dollars per share)	[1]	1.81	0.18	1.93	0.32
Net Income (in dollars per share)	[1]	$ 2.22	$ 0.49	$ 2.62	$ 0.42

[1] May not foot due to rounding.

XML

CONSOLIDATED BALANCE SHEETS (HD Supply Holdings, Inc.) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Current assets:
Cash and cash equivalents	$ 67	$ 75
Receivables, less allowance for doubtful accounts of $11 and $9	693	559
Inventories	690	606
Current assets of discontinued operations	752	575
Other current assets	33	32
Total current assets	2,235	1,847
Property and equipment, net	266	253
Goodwill	1,807	1,807
Intangible assets, net	96	102
Deferred tax asset	857	556
Non-current assets of discontinued operations	1,120	1,122
Other assets	23	20
Total assets	6,404	5,707
Current liabilities:
Accounts payable	454	320
Accrued compensation and benefits	83	98
Current installments of long-term debt	14	14
Current liabilities of discontinued operations	354	259
Other current liabilities	189	152
Total current liabilities	1,094	843
Long-term debt, excluding current installments	4,038	3,798
Non-current liabilities of discontinued operations	41	20
Other liabilities	100	86
Total liabilities	5,273	4,747
Stockholders' equity:
Common stock, par value $0.01; 1 billion shares authorized; 189.1 million and 201.4 million shares issued and outstanding at July 30, 2017 and January 29, 2017, respectively	2	2
Paid-in capital	4,004	3,962
Accumulated deficit	(2,408)	(2,969)
Accumulated other comprehensive loss	(17)	(15)
Treasury stock, at cost, 14.2 and 0.6 million shares at July 30, 2017 and January 29, 2017, respectively	(450)	(20)
Total stockholders' equity	1,131	960
Total liabilities and stockholders' equity	$ 6,404	$ 5,707

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (HD Supply Holdings, Inc.) - USD ($) shares in Millions, $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Receivables
Receivables, allowance for doubtful accounts (in dollars)	$ 11	$ 9
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	189.1	201.4
Common stock, shares outstanding	189.1	201.4
Treasury stock
Treasury stock, shares	14.2	0.6

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (HD Supply Holdings, Inc.) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 527	$ 84
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	50	51
Provision for uncollectibles	4	3
Non-cash interest expense	6	9
Payment of discounts upon extinguishment of debt	(4)
Loss on extinguishment of debt	3	115
Stock-based compensation expense	12	11
Deferred income taxes	(223)	52
Loss on sales of businesses, net		3
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(258)	(232)
(Increase) decrease in inventories	(141)	(118)
(Increase) decrease in other current assets		(9)
Increase (decrease) in accounts payable and accrued liabilities	212	196
Increase (decrease) in other long-term liabilities	1	(1)
Net cash provided by (used in) operating activities	189	164
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43)	(32)
Proceeds from sales of property and equipment	2	1
Proceeds from sales of businesses, net		37
Net cash provided by (used in) investing activities	(41)	6
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under employee benefit plans	29	14
Purchase of treasury shares	(414)	(14)
Borrowings of long-term debt		1,000
Repayments of long-term debt	(103)	(1,110)
Borrowings on long-term revolver debt	599
Repayments on long-term revolver debt	(261)
Debt issuance costs	(6)	(15)
Other financing activities		(2)
Net cash provided by (used in) financing activities	(156)	(127)
Effect of exchange rates on cash and cash equivalents		1
Increase (decrease) in cash and cash equivalents	(8)	44
Cash and cash equivalents at beginning of period	75	269
Cash and cash equivalents at end of period	$ 67	$ 313

XML

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (HD Supply, Inc.) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Net Sales	$ 1,352	$ 1,283	$ 2,568	$ 2,459
Cost of sales	813	770	1,545	1,477
Gross Profit	539	513	1,023	982
Operating expenses:
Selling, general and administrative	338	317	672	625
Depreciation and amortization	21	21	42	42
Restructuring		4		11
Total operating expenses	359	342	714	678
Operating Income	180	171	309	304
Interest expense	49	69	98	154
Loss on extinguishment of debt			3	115
Income from Continuing Operations Before Provision for Income Taxes	131	102	208	35
Provision for income taxes	50	41	69	15
Income from Continuing Operations	81	61	139	20
Income from discontinued operations, net of tax	361	37	388	64
Net Income	442	98	527	84
Other comprehensive income (loss)- foreign currency translation adjustment	(3)	(2)	(2)	2
Total Comprehensive Income	439	96	525	86
HD Supply, Inc. (Total HDS)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Net Sales	1,352	1,283	2,568	2,459
Cost of sales	813	770	1,545	1,477
Gross Profit	539	513	1,023	982
Operating expenses:
Selling, general and administrative	338	317	672	625
Depreciation and amortization	21	21	42	42
Restructuring		4		11
Total operating expenses	359	342	714	678
Operating Income	180	171	309	304
Interest expense	49	69	98	154
Loss on extinguishment of debt			3	115
Income from Continuing Operations Before Provision for Income Taxes	131	102	208	35
Provision for income taxes	50	41	69	15
Income from Continuing Operations	81	61	139	20
Income from discontinued operations, net of tax	361	37	388	64
Net Income	442	98	527	84
Other comprehensive income (loss)- foreign currency translation adjustment	(3)	(2)	(2)	2
Total Comprehensive Income	$ 439	$ 96	$ 525	$ 86

XML

CONSOLIDATED BALANCE SHEETS (HD Supply, Inc.) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Current assets:
Cash and cash equivalents	$ 67	$ 75
Receivables, less allowance for doubtful accounts of $11 and $9	693	559
Inventories	690	606
Current assets of discontinued operations	752	575
Other current assets	33	32
Total current assets	2,235	1,847
Property and equipment, net	266	253
Goodwill	1,807	1,807
Intangible assets, net	96	102
Deferred tax asset	857	556
Non-current assets of discontinued operations	1,120	1,122
Other assets	23	20
Total assets	6,404	5,707
Current liabilities:
Accounts payable	454	320
Accrued compensation and benefits	83	98
Current installments of long-term debt	14	14
Current liabilities of discontinued operations	354	259
Other current liabilities	189	152
Total current liabilities	1,094	843
Long-term debt, excluding current installments	4,038	3,798
Non-current liabilities of discontinued operations	41	20
Other liabilities	100	86
Total liabilities	5,273	4,747
Stockholders' equity:
Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at July 30, 2017 and January 29, 2017	2	2
Paid-in capital	4,004	3,962
Accumulated deficit	(2,408)	(2,969)
Accumulated other comprehensive loss	(17)	(15)
Total stockholders' equity	1,131	960
Total liabilities and stockholders' equity	6,404	5,707
HD Supply, Inc. (Total HDS)
Current assets:
Cash and cash equivalents	55	73
Receivables, less allowance for doubtful accounts of $11 and $9	693	559
Inventories	690	606
Current assets of discontinued operations	752	575
Other current assets	33	32
Total current assets	2,223	1,845
Property and equipment, net	266	253
Goodwill	1,807	1,807
Intangible assets, net	96	102
Deferred tax asset	857	556
Non-current assets of discontinued operations	1,120	1,122
Other assets	23	20
Total assets	6,392	5,705
Current liabilities:
Accounts payable	454	320
Accrued compensation and benefits	83	98
Current installments of long-term debt	14	14
Current liabilities of discontinued operations	354	259
Other current liabilities	151	152
Total current liabilities	1,056	843
Long-term debt, excluding current installments	4,038	3,798
Non-current liabilities of discontinued operations	41	20
Other liabilities	100	86
Total liabilities	5,235	4,747
Stockholders' equity:
Common stock, par value $0.01; authorized 1,000 shares; issued and outstanding 1,000 shares at July 30, 2017 and January 29, 2017
Paid-in capital	3,423	3,806
Accumulated deficit	(2,249)	(2,833)
Accumulated other comprehensive loss	(17)	(15)
Total stockholders' equity	1,157	958
Total liabilities and stockholders' equity	$ 6,392	$ 5,705

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (HD Supply, Inc.) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Receivables
Receivables, allowance for doubtful accounts (in dollars)	$ 11	$ 9
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	189,100,000	201,400,000
Common stock, shares outstanding	189,100,000	201,400,000
HD Supply, Inc. (Total HDS)
Receivables
Receivables, allowance for doubtful accounts (in dollars)	$ 11	$ 9
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

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (HD Supply, Inc.) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 527	$ 84
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	50	51
Provision for uncollectibles	4	3
Non-cash interest expense	6	9
Payment of discounts upon extinguishment of debt	(4)
Loss on extinguishment of debt	3	115
Stock-based compensation expense	12	11
Deferred income taxes	(223)	52
Loss on sales of businesses, net		3
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(258)	(232)
(Increase) decrease in inventories	(141)	(118)
(Increase) decrease in other current assets		(9)
Increase (decrease) in accounts payable and accrued liabilities	212	196
Increase (decrease) in other long-term liabilities	1	(1)
Net cash provided by (used in) operating activities	189	164
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43)	(32)
Proceeds from sales of property and equipment	2	1
Proceeds from sales of businesses, net		37
Net cash provided by (used in) investing activities	(41)	6
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt		1,000
Repayments of long-term debt	(103)	(1,110)
Borrowings on long-term revolver debt	599
Repayments on long-term revolver debt	(261)
Debt issuance costs	(6)	(15)
Other financing activities		(2)
Net cash provided by (used in) financing activities	(156)	(127)
Effect of exchange rates on cash and cash equivalents		1
Increase (decrease) in cash and cash equivalents	(8)	44
Cash and cash equivalents at beginning of period	75	269
Cash and cash equivalents at end of period	67	313
HD Supply, Inc. (Total HDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	527	84
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	50	51
Provision for uncollectibles	4	3
Non-cash interest expense	6	9
Payment of discounts upon extinguishment of debt	(4)
Loss on extinguishment of debt	3	115
Stock-based compensation expense	12	11
Deferred income taxes	(223)	52
Loss on sales of businesses, net		3
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:
(Increase) decrease in receivables	(258)	(232)
(Increase) decrease in inventories	(141)	(118)
(Increase) decrease in other current assets		(9)
Increase (decrease) in accounts payable and accrued liabilities	212	196
Increase (decrease) in other long-term liabilities	1	(1)
Net cash provided by (used in) operating activities	189	164
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(43)	(32)
Proceeds from sales of property and equipment	2	1
Proceeds from sales of businesses, net		37
Net cash provided by (used in) investing activities	(41)	6
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity distribution	(395)
Borrowings of long-term debt		1,000
Repayments of long-term debt	(103)	(1,110)
Borrowings on long-term revolver debt	599
Repayments on long-term revolver debt	(261)
Debt issuance costs	(6)	(15)
Other financing activities		(2)
Net cash provided by (used in) financing activities	(166)	(127)
Effect of exchange rates on cash and cash equivalents		1
Increase (decrease) in cash and cash equivalents	(18)	44
Cash and cash equivalents at beginning of period	73	266
Cash and cash equivalents at end of period	$ 55	$ 310

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NATURE OF BUSINESS AND BASIS OF PRESENTATION

6 Months Ended

Jul. 30, 2017

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 260 locations across 36 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,000 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 500,000 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: Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

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 January 29, 2017, 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.  Fiscal years ending January 28, 2018 (“fiscal 2017”) and January 29, 2017 (“fiscal 2016”) both include 52 weeks.  The three months ended July 30, 2017 (“second quarter 2017”) and July 31, 2016 (“second quarter 2016”) both include 13 weeks. The six months ended July 30, 2017 and July 31, 2016 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. The results of operations of all discontinued operations have been separately reported as discontinued operations for all periods presented.

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 certain legal claims, and is self-insured for 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 July 30, 2017 and January 29, 2017, self-insurance reserves totaled approximately $81 million and $79 million, respectively.

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DISCONTINUED OPERATIONS

6 Months Ended

Jul. 30, 2017

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

NOTE 2 — DISCONTINUED OPERATIONS

On June 4, 2017, the Company entered into a definitive agreement to sell its Waterworks business unit to funds affiliated with Clayton, Dubilier & Rice, LLC (“CD&R”) for $2.5 billion cash payable at closing, subject to customary regulatory approvals. On August 1, 2017, the Company completed the sale of the Waterworks business unit to funds affiliated with CD&R. For additional information on the sale of the Waterworks business unit, please see “Note 13 — Subsequent Events.”

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

Summary Financial Information

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

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

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

	Three Months Ended					Six Months Ended
	July 30, 2017			July 31, 2016		July 30, 2017			July 31, 2016
Net sales	$	746		$	755	$	1,403		$	1,422
Cost of sales	582			583		1,092			1,094
Gross Profit	164			172		311			328
Operating expenses:
Selling, general and administrative	100			105		197			214
Depreciation and amortization	3			3		6			6
Restructuring Charges	—			1		—			1
Total operating expenses	103			109		203			221
Operating Income	61			63		108			107
Loss on disposal of discontinued operations	—			2		—			2
Other (Income) expense, net	1			—		3			—
Income before provision (benefit) for income taxes	60			61		105			105
Provision (benefit) for income taxes	(301		)	24		(283		)	41
Income from discontinued operations, net of tax	$	361		$	37	$	388		$	64

At July 30, 2017 and January 29, 2017, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets were as follows (amounts in millions):

	July 30, 2017		January 29, 2017
Current assets:
Receivables, less allowance for doubtful accounts of $4 and $4	$	466	$	346
Inventories	283		225
Other current assets	3		4
Total current assets	752		575
Property and equipment, net	50		51
Goodwill	1,061		1,061
Intangible assets, net	9		10
Total non-current assets	1,120		1,122
Total assets of discontinued operations	$	1,872	$	1,697
Current Liabilities:
Accounts payable	$	316	$	212
Accrued compensation and benefits	32		42
Other current liabilities	6		5
Total current liabilities	354		259
Deferred tax liability	21		—
Other non-current liabilities	20		20
Total non-current liabilities	41		20
Total liabilities of discontinued operations	$	395	$	279

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

	Six Months Ended
	July 30, 2017			July 31, 2016
Net cash flows provided by (used in) operating activities	$	11		$	(6	)
Cash flows from investing activities:
Capital expenditures	(5		)	(4		)
Proceeds from sales of businesses, net	—			37
Proceeds from sales of property and equipment, net	2			—
Net cash flows provided by (used in) investing activities	$	(3	)	$	33

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DEBT

6 Months Ended

Jul. 30, 2017

DEBT

DEBT

NOTE 3 — DEBT

HDS’s long-term debt as of July 30, 2017 and January 29, 2017 consisted of the following (dollars in millions):

	July 30, 2017				January 29, 2017
	Outstanding Principal			Interest Rate %(1)	Outstanding Principal			Interest Rate %(1)
Senior ABL Facility due 2022	$	762		3.29	$	421		2.38
Term B-1 Loans due 2021	535			4.05	639			3.75
Term B-2 Loans due 2023	546			4.05	549			3.75
December 2014 First Priority Notes due 2021	1,250			5.25	1,250			5.25
April 2016 Senior Unsecured Notes due 2024	1,000			5.75	1,000			5.75
Total gross long-term debt	$	4,093			$	3,859
Less unamortized discount	(7		)		(9		)
Less unamortized deferred financing costs	(34		)		(38		)
Total net long-term debt	$	4,052			$	3,812
Less current installments	(14		)		(14		)
Total net long-term debt, excluding current installments	$	4,038			$	3,798

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

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, as defined below, to repay $100 million aggregate principal of its approximately $842 million original aggregate principal tranche of term loans due 2021 (the “Term B-1 Loans”). As a result, the Company incurred a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs for $1 million each, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

On April 5, 2017, HDS entered into a Third Amendment (the “Third Amendment”) to the credit agreement governing its existing Senior ABL Facility. The Third Amendment, among other things, reduced the applicable margin for borrowings under the Senior ABL Facility, reduced the applicable commitment fee, and extended the maturity date of the Senior ABL Facility until April 5, 2022. As a result, the Company recorded a $1 million loss on extinguishment of debt, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments,” for the write-off of $1 million of unamortized deferred financing costs.

Senior Credit Facilities

Senior ABL Facility

HDS’s 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 $1,500 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 July 30, 2017, HDS had $530 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $30 million in letters of credit issued and including $7 million of borrowings available on qualifying cash balances). Of the approximately $762 million borrowed on the Senior ABL Facility as of July 30, 2017, approximately $62 million represents Canadian borrowings with the remainder in the U.S.

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 plus an applicable margin and (ii) in the case of Canadian dollar-denominated loans, either the banker’s 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 the Average Daily Used Percentage (as defined in the Senior ABL Facility).

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.

See “Note 13 — Subsequent Events” for additional information regarding the repayment of certain outstanding amounts under 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 with remaining aggregate principal amount of $1,081 million. Term B-1 Loans will mature on August 13, 2021 and Term B-2 Loans will mature on October 17, 2023. Both Term B-1 Loans and Term B-2 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loans with the balances payable on their respective maturity dates. Both Term B-1 Loans and Term B-2 Loans bear interest at the applicable margin for borrowings of 2.75% for LIBOR borrowings and 1.75% for base rate borrowings. The Term Loan Facility allows for a reduction to the applicable margin on the Term B-2 Loans from 2.75% per annum to 2.50% per annum upon the Company reaching a consolidated total leverage ratio of 3.0x or less.

For additional information on our Senior ABL Facility or Senior Term Facility (collectively, the “Senior Credit Facilities”), including guarantees and security, please refer to the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 29, 2017.

See “Note 13 — Subsequent Events” for additional information on the Term Loan Facility.

Secured Notes

5.25% Senior Secured First Priority Notes due 2021

HDS’s 5.25% Senior Secured First Priority Notes due 2021 (the “December 2014 First Priority Notes”) bear interest at 5.25% per annum and will mature on December 15, 2021. Interest is paid semi-annually in arrears on June 15th and December 15th of each year.

Redemption

HDS may redeem the December 2014 First Priority Notes, in whole or in part, at any time (1) prior to December 15, 2017, 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 indenture governing the December 2014 First Priority Notes (as amended or supplemented, the “2014 indenture”) and (2) on and after December 15, 2017, 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 December 15 of the year set forth below.

Year	Percentage
2017	103.938	%
2018	102.625	%
2019	101.313	%
2020 and thereafter	100.000	%

In addition, at any time prior to December 15, 2017, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the December 2014 First Priority Notes with the proceeds of certain equity offerings at a redemption price of 105.25% of the principal amount of the December 2014 First Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the December 2014 First Priority Notes are redeemed, an aggregate principal amount of December 2014 First Priority Notes equal to at least 50% of the original aggregate principal amount of December 2014 First Priority Notes must remain outstanding immediately after each such redemption of December 2014 First Priority Notes.

On August 2, 2017, HDS delivered a notice of redemption to holders of its December 2014 First Priority Notes. The December 2014 First Priority Notes were redeemed on September 1 2017. For additional information, see “Note 13 — Subsequent Events.”

Collateral

The December 2014 First Priority Notes and the related guarantees are secured by a first-priority security interest in substantially all of the tangible and intangible assets of HDS and the Subsidiary Guarantors (other than the ABL Priority Collateral (as defined in the 2014 indenture), in which the December 2014 First Priority Notes and the related guarantees have a second-priority security interest), including pledges of all capital stock of HDS’s restricted subsidiaries directly owned by HDS and the Subsidiary Guarantors (but only up to 65% of each series of capital stock of each direct Foreign Subsidiary owned by HDS or any Subsidiary Guarantor), subject to certain thresholds, exceptions and permitted liens, and excluding any Excluded Assets and Excluded Subsidiary Securities (each as defined in the 2014 indenture) and together (the “Cash Flow Priority Collateral”).

The 2014 indenture governing the December 2014 First Priority Notes and the applicable collateral documents provide that any capital stock and other securities of any of HDS’s subsidiaries will be excluded from the collateral to the extent the pledge of such capital stock or other securities to secure the December 2014 First Priority Notes would cause such subsidiary to be required to file separate financial statements with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).

In connection with the December 2014 First Priority Notes, the 2014 indenture was discharged and the liens securing the December 2014 First Priority Notes were release in accordance with the terms of the 2014 indenture. For additional information, see “Note 13 — Subsequent Events.”

Unsecured Notes

5.75% Senior Unsecured Notes due 2024

HDS’s 5.75% Senior Unsecured Notes due 2024 (the “April 2016 Senior Unsecured Notes”) bear interest at a rate of 5.75% and will mature on April 15, 2024. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

Redemption

HDS may redeem the April 2016 Senior Unsecured Notes, in whole or in part, at any time (1) prior to April 15, 2019, 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 April 2016 Senior Unsecured Notes indenture (as amended or supplemented, the “2016 indenture”) and (2) on and after April 15, 2019, 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 April 15 of the year set forth below.

Year	Percentage
2019	104.313	%
2020	102.875	%
2021	101.438	%
2022 and thereafter	100.000	%

In addition, at any time prior to April 15, 2019, HDS may redeem on one or more occasions up to 40% of the aggregate principal amount of the April 2016 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 105.75% of the principal amount in respect of the April 2016 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the April 2016 Senior Unsecured Notes are redeemed, an aggregate principal amount of April 2016 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of April 2016 Senior Unsecured Notes must remain outstanding immediately after each such redemption of April 2016 Senior Unsecured Notes.

For additional information on the December 2014 First Priority Notes and the April 2016 Senior Unsecured Notes, including guarantees and security, please refer to the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 29, 2017.

See “Note 13 — Subsequent Events” for additional information on the recently completed consent solicitation related to the April 2016 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 July 30, 2017, HDS was in compliance with all such covenants that were in effect on such date.

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jul. 30, 2017

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 4 — 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.

The Company’s financial instruments that are not reflected at fair value on the Consolidated Balance Sheets were as follows as of July 30, 2017 and January 29, 2017 (amounts in millions):

	As of July 30, 2017				As of January 29, 2017
	Recorded Amount(1)		Estimated Fair Value		Recorded Amount(1)		Estimated Fair Value
Senior ABL Facility	$	762	$	758	$	421	$	410
Term Loans and Notes	3,331		3,475		3,438		3,572
Total	$	4,093	$	4,233	$	3,859	$	3,982

(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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INCOME TAXES

6 Months Ended

Jul. 30, 2017

INCOME TAXES

INCOME TAXES

NOTE 5 — INCOME TAXES

For the six months ended July 30, 2017, the Company’s combined federal, state, and foreign effective tax rate for continuing operations was an expense of 33.2%. The effective rate for continuing operations for the six months ended July 31, 2016 was an expense of 42.9%.

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 audits. For the six months ended July 30, 2017, the application of stock-based compensation expense guidance in ASU No. 2016-09 resulted in discrete tax benefits of $12 million from the exercise and vesting of stock based awards, which lowered the effective tax rate by 580 basis points. For additional information on the Company’s adoption of ASU No. 2016-09, see “Note 12 — Recent Accounting Pronouncements.”

As of January 29, 2017, the Company’s unrecognized tax benefits in accordance with the income taxes principles of GAAP, ASC 740, “Income Taxes,” were $10 million. As of July 30, 2017, the Company’s unrecognized tax benefits remained unchanged. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits as of January 29, 2017 was zero and remained unchanged as of July 30, 2017.  As of January 29, 2017, the Company’s valuation allowance on its U.S. deferred tax assets was approximately $5 million and remained unchanged as of July 30, 2017. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

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BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

6 Months Ended

Jul. 30, 2017

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

NOTE 6—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 July 30, 2017 and July 31, 2016 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	July 30, 2017	July 31, 2016	July 30, 2017	July 31, 2016
Weighted-average common shares	197,752	199,250	199,230	199,029
Effect of potentially dilutive stock plan securities	1,202	2,728	1,780	2,586
Diluted weighted-average common shares	198,954	201,978	201,010	201,615
Stock plan securities excluded from dilution (1)	2,383	1,452	1,652	2,240

(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 and restricted stock units) granted under Holdings’ stock-based compensation plans.

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

6 Months Ended

Jul. 30, 2017

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

NOTE 7  — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

Receivables as of July 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

	July 30, 2017		January 29, 2017
Trade receivables, net of allowance for doubtful accounts	$	631	$	499
Vendor rebate receivables	48		50
Other receivables	14		10
Total receivables, net	$	693	$	559

Other Current Liabilities

Other current liabilities as of July 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

	HD Supply Holdings, Inc.				HD Supply, Inc.
	July 30, 2017		January 29, 2017		July 30, 2017		January 29, 2017
Accrued interest	$	30	$	30	$	30	$	30
Accrued non-income taxes	40		30		40		30
Unsettled share repurchases	38		—		—		—
Other	81		92		81		92
Total other current liabilities	$	189	$	152	$	151	$	152

Supplemental Cash Flow Information

Cash paid for interest in the six months ended July 30, 2017 and July 31, 2016 was $92 million and $161 million, respectively. During the six months ended July 30, 2017, the Company paid $4 million of original issue discounts related to the $100 million payment on Term B-1 Loans.

Cash paid for income taxes, net of refunds, in the six months ended July 30, 2017 and July 31, 2016 was approximately $10 million and $6 million, respectively.

During the six months ended July 30, 2017, HDS executed an equity cash distribution of $395 million 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.

On June 3, 2017, Holdings’ Board of Directors authorized the Company to enter into a share repurchase program for the repurchase of up to an aggregate amount of $500 million of Holdings’ common stock. As of July 30, 2017, under this plan, Holdings has repurchased 13,449,146 shares of its common stock for $421 million. In combination with the 2014 authorized share repurchase plan, Holdings has repurchased a total of 14,267,923 shares of its common stock during the first six months of fiscal 2017 for $452 million, of which $38 million remain unsettled as of July 30, 2017.

See “Note 13 — Subsequent Events” for additional information regarding the Company’s share repurchase programs.

Significant Non-Cash Transactions

During the six months ended July 30, 2017, Holdings retired 611,433 shares of its common stock (“Retired Shares”) held as treasury shares by Holdings in the amount of $23 million. All of these shares were repurchased by Holdings pursuant to the publicly announced share repurchase program previously authorized by Holdings’ board of directors.  Holdings reinstated the Retired Shares to the status of authorized but unissued shares of common stock, par value $0.01 per share, effective as of the date of retirement. In accordance with ASC 505-30, “Equity-Treasury Stock,” Holdings reversed the $0.01 par value of the Retired Shares and the excess of the cost of the Retired Shares over par value to Retained Earnings.

Build-to-Suit Lease

On February 4, 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. The lease commences upon completion of construction which is anticipated to be early 2018.

In accordance with ASC 850, “Leases,” 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 is 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 contributions by the landlord toward construction. Once the construction is completed, if the lease meets certain “sales-leaseback” criteria, the Company will remove the asset and related financial obligation from the Consolidated Balance Sheet and treat the building lease as an operating lease. If upon completion of construction, the lease does not meet the “sales-leaseback” criteria, the leased property will be treated as a capital lease and included in Property and equipment on the Consolidated Balance Sheet. As of July 30, 2017, the Consolidated Balance Sheet includes $35 million of build-to-suit assets in Construction in progress, and the corresponding financial obligation of $35 million in Other long-term liabilities in the Consolidated Balance Sheet.

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RESTRUCTURING ACTIVITIES

6 Months Ended

Jul. 30, 2017

RESTRUCTURING ACTIVITIES

RESTRUCTURING ACTIVITIES

NOTE 8—RESTRUCTURING ACTIVITIES

As a result of the sale of the Power Solutions business unit in fiscal 2015, management evaluated the Company’s talent alignment and functional support strategies. Consequently, during fiscal 2015, the Company initiated a restructuring plan to strategically align its leadership and functional support teams. During the six months ended July 31, 2016, the Company incurred $11 million of restructuring charges under this plan. The Company completed the activities under this plan in fiscal 2016 and does not expect to incur any additional charges. As of July 30, 2017 and January 29, 2017, the Company’s liability balance for these restructuring activities was $2 million and $4 million respectively, and is included in Other current liabilities in the Consolidated Balance Sheets. Payments for these charges are expected to be substantially complete by the end of fiscal 2017.

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jul. 30, 2017

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Legal Matters

On July 10, 2017, a putative class action complaint was filed in the U.S. District Court for the Northern District of Georgia by The City of Hollywood Police Officers’ Retirement System (the “Retirement System complaint”) against HD Supply and certain senior members of its management (collectively, the “defendants”).  On August 8, 2017, a second class action complaint was filed in the U.S. District Court for the Northern District of Georgia by Obioma Ebisike (the “Ebisike complaint” and together with the Retirement System complaint, the “complaints”) against the defendants.  The complaints are brought individually on behalf of all persons other than defendants who purchased or otherwise acquired Company securities between November 9, 2016 and June 5, 2017.  The complaints generally allege that the defendants engaged in a fraudulent scheme to inflate the Company’s stock price by making materially false and misleading statements about the Company’s business, operational, and compliance policies that allegedly failed to disclose: (1) that the Company’s full year 2017 growth and operational leverage targets were unattainable; (2) the operational recovery of the Company’s Facilities Maintenance business unit’s supply chain was not going according to plan; and (3) the Company was exploring the sale of its Waterworks business unit.  The complaints assert claims against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and they seek (1) class certification under the Federal Rules of Civil Procedure, (2) damages in an amount to be proven at trial, (3) pre-judgment and post-judgment interest, and (4) attorneys’ fees and other costs.

On August 8, 2017, two shareholder derivative complaints were filed (one by Sean Zhou and another by James Calderaro) against the Company (the “nominal defendant”) and certain members of its senior management and board of directors (collectively, the “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, while failing to disclose: (1) that the Company’s growth and operating leverage targets for full  year 2017 were unattainable; (2) the operational recovery of the Company’s Facilities Maintenance business unit’s supply chain was not progressing as expected and would require substantial additional investment; and (3) the Company was preparing to sell its Waterworks business unit.  The complaints assert claims against the individual defendants under Section 14(a) of the Securities Exchange Act of 1934, allege breaches of fiduciary duties, and assert claims under theories of 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’ actions, ask that the Company take certain actions to reform and improve its corporate governance and internal procedures, seek restitution on behalf of the Company, and seek to recover attorneys’ fees and other costs.

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.

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, if disposed of unfavorably to the Company, are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. For material matters that are reasonably possible and reasonably estimable, including matters 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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SEGMENT INFORMATION

6 Months Ended

Jul. 30, 2017

SEGMENT INFORMATION

SEGMENT INFORMATION

NOTE 10 — 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 (‘‘MRO’’) 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 includes 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, and removes inter-segment transactions.

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

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

	Facilities Maintenance		Construction & Industrial		Corporate			Total Continuing Operations
Three Months Ended July 30, 2017
Net sales	$	769	$	584	$	(1	)	$	1,352
Adjusted EBITDA	156		69		(17		)	208
Depreciation(1) & Software Amortization	5		9		5			19
Other Intangible Amortization	2		—		1			3
Three Months Ended July 31, 2016
Net sales	$	741	$	544	$	(2	)	$	1,283
Adjusted EBITDA	151		68		(16		)	203
Depreciation(1) & Software Amortization	7		9		4			20
Other Intangible Amortization	2		—		1			3
Six Months Ended July 30, 2017
Net sales	$	1,451	$	1,120	$	(3	)	$	2,568
Adjusted EBITDA	273		124		(32		)	365
Depreciation(1) & Software Amortization	12		18		8			38
Other Intangible Amortization	3		—		3			6
Six Months Ended July 31, 2016
Net sales	$	1,418	$	1,045	$	(4	)	$	2,459
Adjusted EBITDA	285		117		(32		)	370
Depreciation(1) & Software Amortization	15		17		6			38
Other Intangible Amortization	3		—		3			6

(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
	July 30, 2017		July 31, 2016		July 30, 2017		July 31, 2016
Total Adjusted EBITDA	$	208	$	203	$	365	$	370
Depreciation and amortization(1)	22		23		44		44
Stock-based compensation	6		5		12		11
Restructuring	—		4		—		11
Operating income	180		171		309		304
Interest expense, net	49		69		98		154
Loss on extinguishment of debt(2)	—		—		3		115
Income from Continuing Operations Before Provision for Income Taxes	131		102		208		35
Provision for income taxes	50		41		69		15
Income from continuing operations	81		61		139		20
Income from discontinued operations, net of tax	361		37		388		64
Net income	$	442	$	98	$	527	$	84

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

(2) Represents the loss on extinguishment of debt including the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt.

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SUBSIDIARY GUARANTORS

6 Months Ended

Jul. 30, 2017

SUBSIDIARY GUARANTORS

SUBSIDIARY GUARANTORS

NOTE 11—SUBSIDIARY GUARANTORS

HDS (the “Debt Issuer”) has outstanding December 2014 First Priority Notes and April 2016 Senior Unsecured Notes (collectively the “Notes”), which are guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the Notes (the “Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

The Debt Issuer’s payment obligations under the Notes are jointly and severally guaranteed by the guarantors and all guarantees are full and unconditional.

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

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

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

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

(iv) concurrently with any Subsidiary Guarantor becoming an unrestricted subsidiary;

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

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

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

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

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

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended July 30, 2017
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS
Net Sales	$	—		$	1,316		$	36		$	—		$	1,352
Cost of sales	—			793			20			—			813
Gross Profit	—			523			16			—			539
Operating expenses:
Selling, general and administrative	21			304			13			—			338
Depreciation and amortization	3			17			1			—			21
Total operating expenses	24			321			14			—			359
Operating Income (Loss)	(24		)	202			2			—			180
Interest expense	56			31			1			(39		)	49
Interest (income)	(32		)	(7		)	—			39			—
Net (earnings) loss of equity affiliates	(239		)	—			—			239			—
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	191			178			1			(239		)	131
Provision for income taxes	48			1			1			—			50
Income (Loss) from Continuing Operations	143			177			—			(239		)	81
Income (loss) from discontinued operations, net of tax	299			61			1			—			361
Net Income (Loss)	$	442		$	238		$	1		$	(239	)	$	442
Other comprehensive income (loss)—foreign currency translation adjustment	(3		)	—			(3		)	3			(3		)
Total Comprehensive Income (Loss)	$	439		$	238		$	(2	)	$	(236	)	$	439

	Three Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS
Net Sales	$	—		$	1,251		$	33		$	(1	)	$	1,283
Cost of sales	—			753			18			(1		)	770
Gross Profit	—			498			15			—			513
Operating expenses:
Selling, general and administrative	21			285			11			—			317
Depreciation and amortization	3			17			1			—			21
Restructuring	1			3			—			—			4
Total operating expenses	25			305			12			—			342
Operating Income (Loss)	(25		)	193			3			—			171
Interest expense	72			35			—			(38		)	69
Interest (income)	(34		)	(4		)	—			38			—
Net (earnings) loss of equity affiliates	(200		)	—			—			200			—
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	137			162			3			(200		)	102
Provision for income taxes	38			1			2			—			41
Income (Loss) from Continuing Operations	99			161			1			(200		)	61
Income (loss) from discontinued operations, net of tax	(1		)	38			—			—			37
Net Income (Loss)	$	98		$	199		$	1		$	(200	)	$	98
Other comprehensive income (loss)—foreign currency translation adjustment	(2		)	—			(2		)	2			(2		)
Total Comprehensive Income (Loss)	$	96		$	199		$	(1	)	$	(198	)	$	96

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

	Six Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Total HDS
Net Sales	$	—		$	2,398		$	62	$	(1	)	$	2,459
Cost of sales	—			1,444			34		(1		)	1,477
Gross Profit	—			954			28		—			982
Operating expenses:
Selling, general and administrative	41			562			22		—			625
Depreciation and amortization	6			35			1		—			42
Restructuring	2			9			—		—			11
Total operating expenses	49			606			23		—			678
Operating Income (Loss)	(49		)	348			5		—			304
Interest expense	161			70			—		(77		)	154
Interest (income)	(69		)	(8		)	—		77			—
Net (earnings) loss of equity affiliates	(345		)	—			—		345			—
Loss on extinguishment of debt	115			—			—		—			115
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	89			286			5		(345		)	35
Provision (benefit) for income taxes	12			1			2		—			15
Income (Loss) from Continuing Operations	77			285			3		(345		)	20
Income (loss) from discontinued operations, net of tax	7			57			—		—			64
Net Income (Loss)	$	84		$	342		$	3	$	(345	)	$	84
Other comprehensive income (loss)—foreign currency translation adjustment	2			—			2		(2		)	2
Total Comprehensive Income (Loss)	$	86		$	342		$	5	$	(347	)	$	86

CONDENSED CONSOLIDATING BALANCE SHEETS

	As of July 30, 2017
	Debt Issuer		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS
ASSETS
Current assets:
Cash and cash equivalents	$	32	$	17	$	6		$	—		$	55
Receivables, net	2		669		22			—			693
Inventories	—		670		20			—			690
Intercompany receivables	—		1		—			(1		)	—
Current assets of discontinued operations	—		752		—			—			752
Other current assets	11		21		1			—			33
Total current assets	45		2,130		49			(1		)	2,223
Property and equipment, net	89		174		3			—			266
Goodwill	—		1,807		—			—			1,807
Intangible assets, net	—		95		1			—			96
Deferred tax asset	951		—		2			(96		)	857
Non-current assets of discontinued operations	—		1,120		—			—			1.120
Investment in subsidiaries	4,289		—		—			(4,289		)	—
Intercompany notes receivable	1,005		1,032		—			(2,037		)	—
Other assets	19		4		—			—			23
Total assets	$	6,398	$	6,362	$	55		$	(6,423	)	$	6,392
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	12	$	428	$	14		$	—		$	454
Accrued compensation and benefits	30		50		3			—			83
Current installments of long-term debt	14		—		—			—			14
Intercompany payables	—		—		1			(1		)	—
Current liabilities of discontinued operations	2		352		—			—			354
Other current liabilities	52		91		8			—			151
Total current liabilities	110		921		26			(1		)	1,056
Long-term debt, excluding current installments	3,976		—		62			—			4,038
Deferred tax liabilities	—		96		—			(96		)	—
Non-current liabilities of discontinued operations	41		—		—			—			41
Intercompany notes payable	1,032		1,005		—			(2,037		)	—
Other liabilities	82		17		1			—			100
Total liabilities	5,241		2,039		89			(2,134		)	5,235
Stockholder’s equity (deficit)	1,157		4,323		(34		)	(4,289		)	1,157
Total liabilities and stockholder’s equity (deficit)	$	6,398	$	6,362	$	55		$	(6,423	)	$	6,392

	As of January 29, 2017
	Debt Issuer		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS
ASSETS
Current assets:
Cash and cash equivalents	$	51	$	17	$	5		$	—		$	73
Receivables, net	3		540		16			—			559
Inventories	—		588		18			—			606
Intercompany receivables	—		1		—			(1		)	—
Current assets of discontinued operations	—		575		—			—			575
Other current assets	13		17		2			—			32
Total current assets	67		1,738		41			(1		)	1,845
Property and equipment, net	76		175		2			—			253
Goodwill	—		1,807		—			—			1,807
Intangible assets, net	—		101		1			—			102
Deferred tax asset	681		—		2			(127		)	556
Non-current assets of discontinued operations	—		1,122		—			—			1,122
Investment in subsidiaries	2,451		—		—			(2,451		)	—
Intercompany notes receivable	2,192		584		—			(2,776		)	—
Other assets	16		4		—			—			20
Total assets	$	5,483	$	5,531	$	46		$	(5,355	)	$	5,705
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	13	$	296	$	11		$	—		$	320
Accrued compensation and benefits	36		60		2			—			98
Current installments of long-term debt	14		—		—			—			14
Intercompany payables	—		—		1			(1		)	—
Current liabilities of discontinued operations	2		257		—			—			259
Other current liabilities	52		94		6			—			152
Total current liabilities	117		707		20			(1		)	843
Long-term debt, excluding current installments	3,737		—		61			—			3,798
Deferred tax liabilities	—		127		—			(127		)	—
Non-current liabilities of discontinued operations	20		—		—			—			20
Intercompany notes payable	584		2,192		—			(2,776		)	—
Other liabilities	67		17		2			—			86
Total liabilities	4,525		3,043		83			(2,904		)	4,747
Stockholder’s equity (deficit)	958		2,488		(37		)	(2,451		)	958
Total liabilities and stockholder’s equity (deficit)	$	5,483	$	5,531	$	46		$	(5,355	)	$	5,705

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

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

	Six Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Total HDS
Net cash flows from operating activities	$	242		$	(81	)	$	3	$	—		$	164
Cash flows from investing activities
Capital expenditures	(7		)	(25		)	—		—			(32		)
Proceeds from sale of property and equipment	—			1			—		—			1
Proceeds from sales of businesses, net	37			—			—		—			37
Proceeds from (payments of) intercompany notes	—			105			—		(105		)	—
Net cash flows from investing activities	$	30		$	81		$	—	$	(105	)	$	6
Cash flows from financing activities
Borrowings of (repayments of) intercompany notes	(105		)	—			—		105			—
Borrowings of long-term debt	1,000			—			—		—			1,000
Repayments of long-term debt	(1,110		)	—			—		—			(1,110		)
Debt issuance costs	(15		)	—			—		—			(15		)
Other financing activities	(1		)	(1		)	—		—			(1		)
Net cash flows from financing activities	(231		)	(1		)	—		105			(127		)
Effect of exchange rates on cash	—			—			1		—			1
Net increase (decrease) in cash & cash equivalents	$	41		$	(1	)	$	4	$	—		$	44
Cash and cash equivalents at beginning of period	233			18			15		—			266
Cash and cash equivalents at end of period	$	274		$	17		$	19	$	—		$	310

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RECENT ACCOUNTING PRONOUNCEMENTS

6 Months Ended

Jul. 30, 2017

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

Stock Compensation — In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The ASU is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of adopting of ASU 2017-09.

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.

Statement of Cash Flows — In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The new guidance is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied retrospectively to all periods presented. On a prospective basis, the ASU will only impact the Company to the extent it has restricted cash.

Income Taxes — In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-entity Transfers of Assets Other than Inventory” (“ASU 2016-16”). The new guidance is intended to improve the accounting for intra-entity transfers of assets other than inventory by requiring recognition of income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. ASU 2016-16 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of ASU 2016-16 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The new guidance is intended to reduce diversity in practice related to certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Stock Compensation — In March 2016, the FASB issued ASU No. 2016-09, “Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016.

The Company adopted the guidance from this amendment on January 30, 2017 (the first day of fiscal 2017) recording a $56 million cumulative-effect adjustment to retained earnings in order to recognize a deferred tax asset on the excess deduction for stock option exercises over the expense recorded for book purposes. Beginning in the first quarter of fiscal 2017, the impact to the Company will be through a credit or charge to the tax provision reflecting the difference between the amount deductible for tax purposes and the amount expensed for book purposes as options are exercised.

Leases — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new 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 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. It is to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting ASU 2016-02.

Inventory — In July 2015, the FASB issued ASU No. 2015-11, “Inventory, Simplifying the Measurement of Inventory” (“ASU 2015-11”). The amended guidance requires that inventory be measured at the lower of cost and net realizable value. The amended guidance is limited to inventory measured using the first-in, first-out (“FIFO”) or average cost methods and excludes inventory measured using last-in, first-out (“LIFO”) or retail inventory methods. ASU 2015-11 is effective for annual and interim periods, beginning after December 15, 2016. The Company adopted this guidance on January 30, 2017 (the first day of fiscal 2017) with no material impact on the Company’s financial position, results of operations or cash flows.

Revenue recognition — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from contracts with customers” (“ASU 2014-09”), amended by ASU 2016-10, “Revenue from contracts with customers (Topic 606): Identifying Performance Obligations and Licensing,” ASU 2016-12, “Revenue from contracts with customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amended guidance outlines a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The update requires significant additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgements. Entities have the option of using either a full retrospective or modified approach to adopt the guidance. In July 2015, the FASB provided a one-year delay in the effective date of ASU 2014-09, to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and a permission to early adopt for annual and interim periods beginning after December 15, 2016.

The Company has performed a review of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretative guidance. The Company is reviewing customer contracts and is in the process of applying the five-step model of the new standard to each contract category identified and will compare the results to current accounting practice.  The Company plans to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard on January 29, 2018 (the first day of fiscal 2018). The Company has not yet determined whether it will adopt the provisions of ASU 2014-09 on a retrospective basis or through a cumulative adjustment to equity.

The new standard could change the amount and timing of revenue and costs under certain arrangement types and could increase the administrative burden on Company operations to properly account for customer contracts and provide the more expansive required disclosures. The Company is currently evaluating the impact of adopting ASU 2014-09, but has not yet determined what effect, if any, the new guidance will have on its financial position, results of operations or cash flows.

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SUBSEQUENT EVENTS

6 Months Ended

Jul. 30, 2017

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 13—SUBSEQUENT EVENTS

Sale of the Waterworks Business

On August 1, 2017, the Company completed the sale of its Waterworks business for gross cash proceeds of $2,500 million, subject to a post-closing working capital adjustment. The Company expects to pay approximately $40 million of transaction costs and recognize a pre-tax gain of approximately $925 million. In connection with the pending sale, the Company recorded a $323 million net deferred tax asset and corresponding tax benefit in discontinued operations during the second quarter of fiscal 2017 in order to recognize the outside basis difference in the Waterworks investment. The Company expects to recognize tax expense of approximately $520 million in discontinued operations in third quarter fiscal 2017 related to the sale of the Waterworks business, which includes an expense of $323 million related to utilizing the deferred tax asset associated with the outside basis difference in the Waterworks corporate subsidiary recorded as an income tax benefit in the second quarter in discontinued operations. The Company estimates that it will utilize approximately $280 million of tax-effected Federal and state net operating loss carryforwards as a result of the sale of the Waterworks business. For additional information, please see “Note 2 — Discontinued Operations.”

Repayment of the Senior ABL Facility

On August 1, 2017, HDS repaid all of the outstanding U.S. borrowings on its Senior ABL Facility. Canadian borrowings of $62 million on the Senior ABL Facility remain outstanding.

Amendment of the April 2016 Senior Unsecured Notes

On August 25, 2017, HDS entered into the Second Supplemental Indenture (the “Second Supplemental Indenture”) which amends and supplements the Indenture, dated as of April 11, 2016, as amended and supplemented by the First Supplemental Indenture, dated as of April 11, 2016 (together, the “Indenture”). The Second Supplemental Indenture effects certain Proposed Amendments (as defined below) to the Indenture pertaining to the Company’s April 2016 Senior Unsecured Notes. Holders of a majority in aggregate principal amount of the outstanding April 2016 Senior Unsecured Notes consented to the Proposed Amendments.

The Proposed Amendments (a) amend the definition of “Permitted Payments” contained in the Indenture to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the Indenture) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s consolidated leverage ratio does not exceed 3.00 to 1.00; (b) increase the interest rate for the April 2016 Senior Unsecured Notes to 7.00% per annum commencing April 15, 2019, to the extent the April 2016 Senior Unsecured Notes remain outstanding after April 15, 2019; (c) amend the definition of “Net Available Cash” contained in the Indenture to provide that proceeds from the sale of the Waterworks business unit consummated on August 1, 2017 (other than proceeds to be applied to redeem the Company’s 2021 Notes (as defined in the Second Supplemental Indenture)) shall be excluded and accordingly, the Company will not be required to apply the remaining net proceeds in accordance with the provision of the “Sale of Assets” covenant of the Indenture and (d) amend the definition of “Consolidated EBITDA” contained in the Indenture to provide that while the Company may continue to include in the calculation thereof projected cost savings, it may only do so with respect those realized as a result of actions taken or to be taken in connection with a purchase of assets from, or a sale of assets to, a third party (excluding the Waterworks Sale (as defined in the Second Supplemental Indenture)) (collectively, the “Proposed Amendments”).

As a result of entering into the Second Supplemental Indenture, the Company paid approximately $15 million in consent fees to holders of the outstanding April 2016 Senior Unsecured Notes, which will be capitalized as deferred financing costs and amortized over the expected life of the April 2016 Senior Unsecured Notes.

Amendment of the Term Loan Facility

On August 31, 2017, HDS entered into a Fifth Amendment (the “Fifth Amendment”) to the credit agreement governing HDS’s existing Term Loan Facility. Pursuant to the Fifth Amendment, HDS amended its existing Term Loan Facility to, among other things, (i) refinance all the outstanding Term B-1 Loans with a new tranche of term loans (the “Term B-3 Loans”) in an aggregate principal amount of $535 million, (ii) refinance all the outstanding Term B-2 Loans with a new tranche of term loans (the “Term B-4 Loans”) in an aggregate principal amount of $546 million and (iii) amend the definition of “Permitted Payments” contained in the credit agreement to permit an additional category of Permitted Payments permitting Restricted Payments (as defined in the credit agreement) at any time in an aggregate amount not to exceed (x) $500,000,000 and (y) thereafter, upon full use of such capacity set forth in clause (x), an additional amount, if any, such that, after giving pro forma effect to such Restricted Payment, the Company’s consolidated leverage ratio does not exceed 3.00 to 1.00.

The Term B-3 Loans bear interest at the applicable margin for borrowings of 2.25% for LIBOR borrowings and 1.25% for base rate borrowings. The Term B-3 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on August 13, 2021.

The Term B-4 Loans bear interest at the applicable margin for borrowings of 2.50% for LIBOR borrowings and 1.50% for base rate borrowings. The Term B-4 Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount and will mature on October 17, 2023.

The Fifth Amendment also provides for a prepayment premium equal to 1.00% of the aggregate principal amount of the applicable Term Loans being prepaid if, on or prior to March 2, 2018, the Company enters into certain repricing transactions.

In connection with the Fifth Amendment, the Company paid approximately $1 million in consent fees and expects to record a modification and extinguishment charge of approximately $3 million, which includes financing fees and other costs of approximately $1 million and approximately $2 million to write off a portion of the related unamortized discount and deferred financing costs.

Redemption of the December 2014 First Priority Notes

On September 1, 2017, HDS used a portion of the net proceeds from the sale of the Waterworks business to redeem all of the outstanding $1,250 million in aggregate principal amount of December 2014 First Priority Notes for an aggregate redemption price of approximately $1,325 million. The redemption price included an approximately $62 million make-whole premium calculated in accordance with terms of the 2014 indenture and $14 million of accrued but unpaid interest to the redemption date. The 2014 indenture, pursuant to which the December 2014 First Priority Notes were issued, was discharged and the liens securing the December 2014 First Priority Notes were released in accordance with the terms of the 2014 indenture. As a result of the redemption, the Company expects to record a $73 million loss on extinguishment of debt in the third quarter of fiscal 2017, which includes the $62 million make-whole premium and the write-off of $11 million of unamortized deferred financing costs, in accordance with ASC 470-50, “Debt — Modifications and Extinguishments.”

Share Repurchase Programs

As of August 8, 2017, Holdings has completed the repurchase of all $500 million of common stock under the share repurchase program authorized in June 2017, purchasing approximately 15.9 million shares at an average price of $31.37 per share.

On August 27, 2017, Holdings’ Board of Directors authorized the Company to enter into a new share repurchase program for the repurchase of up to an aggregate $500 million of Holdings’ common stock in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

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NATURE OF BUSINESS AND BASIS OF PRESENTATION (Policies)

6 Months Ended

Jul. 30, 2017

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 260 locations across 36 U.S. states and six Canadian provinces, the Company serves these markets with an integrated go-to-market strategy. HD Supply has approximately 11,000 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 500,000 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: Facilities Maintenance and Construction & Industrial. In addition, the consolidated financial statements include Corporate, which is comprised of enterprise-wide functional departments.

See “Note 2 — Discontinued Operations” for further information on the sale of the Waterworks business.

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 January 29, 2017, 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.  Fiscal years ending January 28, 2018 (“fiscal 2017”) and January 29, 2017 (“fiscal 2016”) both include 52 weeks.  The three months ended July 30, 2017 (“second quarter 2017”) and July 31, 2016 (“second quarter 2016”) both include 13 weeks. The six months ended July 30, 2017 and July 31, 2016 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. The results of operations of all discontinued operations have been separately reported as discontinued operations for all periods presented.

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 certain legal claims, and is self-insured for 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 July 30, 2017 and January 29, 2017, self-insurance reserves totaled approximately $81 million and $79 million, respectively.

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DISCONTINUED OPERATIONS (Tables)

6 Months Ended

Jul. 30, 2017

DISCONTINUED OPERATIONS

Schedule of results of operations of discontinued operations

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

	Three Months Ended					Six Months Ended
	July 30, 2017			July 31, 2016		July 30, 2017			July 31, 2016
Net sales	$	746		$	755	$	1,403		$	1,422
Cost of sales	582			583		1,092			1,094
Gross Profit	164			172		311			328
Operating expenses:
Selling, general and administrative	100			105		197			214
Depreciation and amortization	3			3		6			6
Restructuring Charges	—			1		—			1
Total operating expenses	103			109		203			221
Operating Income	61			63		108			107
Loss on disposal of discontinued operations	—			2		—			2
Other (Income) expense, net	1			—		3			—
Income before provision (benefit) for income taxes	60			61		105			105
Provision (benefit) for income taxes	(301		)	24		(283		)	41
Income from discontinued operations, net of tax	$	361		$	37	$	388		$	64

At July 30, 2017 and January 29, 2017, the carrying amounts of major classes of assets and liabilities of discontinued operations included in the Consolidated Balance Sheets were as follows (amounts in millions):

	July 30, 2017		January 29, 2017
Current assets:
Receivables, less allowance for doubtful accounts of $4 and $4	$	466	$	346
Inventories	283		225
Other current assets	3		4
Total current assets	752		575
Property and equipment, net	50		51
Goodwill	1,061		1,061
Intangible assets, net	9		10
Total non-current assets	1,120		1,122
Total assets of discontinued operations	$	1,872	$	1,697
Current Liabilities:
Accounts payable	$	316	$	212
Accrued compensation and benefits	32		42
Other current liabilities	6		5
Total current liabilities	354		259
Deferred tax liability	21		—
Other non-current liabilities	20		20
Total non-current liabilities	41		20
Total liabilities of discontinued operations	$	395	$	279

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

	Six Months Ended
	July 30, 2017			July 31, 2016
Net cash flows provided by (used in) operating activities	$	11		$	(6	)
Cash flows from investing activities:
Capital expenditures	(5		)	(4		)
Proceeds from sales of businesses, net	—			37
Proceeds from sales of property and equipment, net	2			—
Net cash flows provided by (used in) investing activities	$	(3	)	$	33

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DEBT (Tables)

6 Months Ended

Jul. 30, 2017

DEBT

Schedule of long-term debt

HDS’s long-term debt as of July 30, 2017 and January 29, 2017 consisted of the following (dollars in millions):

	July 30, 2017				January 29, 2017
	Outstanding Principal			Interest Rate %(1)	Outstanding Principal			Interest Rate %(1)
Senior ABL Facility due 2022	$	762		3.29	$	421		2.38
Term B-1 Loans due 2021	535			4.05	639			3.75
Term B-2 Loans due 2023	546			4.05	549			3.75
December 2014 First Priority Notes due 2021	1,250			5.25	1,250			5.25
April 2016 Senior Unsecured Notes due 2024	1,000			5.75	1,000			5.75
Total gross long-term debt	$	4,093			$	3,859
Less unamortized discount	(7		)		(9		)
Less unamortized deferred financing costs	(34		)		(38		)
Total net long-term debt	$	4,052			$	3,812
Less current installments	(14		)		(14		)
Total net long-term debt, excluding current installments	$	4,038			$	3,798

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

5.25% December 2014 Secured First Priority Notes due 2021

DEBT

Schedule of notes redemption

Year	Percentage
2017	103.938	%
2018	102.625	%
2019	101.313	%
2020 and thereafter	100.000	%

5.75% April 2016 Senior Unsecured Notes due 2024

DEBT

Schedule of notes redemption

Year	Percentage
2019	104.313	%
2020	102.875	%
2021	101.438	%
2022 and thereafter	100.000	%

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jul. 30, 2017

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 July 30, 2017 and January 29, 2017 (amounts in millions):

	As of July 30, 2017				As of January 29, 2017
	Recorded Amount(1)		Estimated Fair Value		Recorded Amount(1)		Estimated Fair Value
Senior ABL Facility	$	762	$	758	$	421	$	410
Term Loans and Notes	3,331		3,475		3,438		3,572
Total	$	4,093	$	4,233	$	3,859	$	3,982

(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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BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES (Tables)

6 Months Ended

Jul. 30, 2017

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 July 30, 2017 and July 31, 2016 was as follows (in thousands):

	Three Months Ended		Six Months Ended
	July 30, 2017	July 31, 2016	July 30, 2017	July 31, 2016
Weighted-average common shares	197,752	199,250	199,230	199,029
Effect of potentially dilutive stock plan securities	1,202	2,728	1,780	2,586
Diluted weighted-average common shares	198,954	201,978	201,010	201,615
Stock plan securities excluded from dilution (1)	2,383	1,452	1,652	2,240

(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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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION (Tables)

6 Months Ended

Jul. 30, 2017

SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Schedule of receivables

Receivables as of July 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

	July 30, 2017		January 29, 2017
Trade receivables, net of allowance for doubtful accounts	$	631	$	499
Vendor rebate receivables	48		50
Other receivables	14		10
Total receivables, net	$	693	$	559

Schedule of other current liabilities

Other current liabilities as of July 30, 2017 and January 29, 2017 consisted of the following (amounts in millions):

	HD Supply Holdings, Inc.				HD Supply, Inc.
	July 30, 2017		January 29, 2017		July 30, 2017		January 29, 2017
Accrued interest	$	30	$	30	$	30	$	30
Accrued non-income taxes	40		30		40		30
Unsettled share repurchases	38		—		—		—
Other	81		92		81		92
Total other current liabilities	$	189	$	152	$	151	$	152

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SEGMENT INFORMATION (Tables)

6 Months Ended

Jul. 30, 2017

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 each of the reportable segments and total continuing operations for the periods indicated (amounts in millions):

	Facilities Maintenance		Construction & Industrial		Corporate			Total Continuing Operations
Three Months Ended July 30, 2017
Net sales	$	769	$	584	$	(1	)	$	1,352
Adjusted EBITDA	156		69		(17		)	208
Depreciation(1) & Software Amortization	5		9		5			19
Other Intangible Amortization	2		—		1			3
Three Months Ended July 31, 2016
Net sales	$	741	$	544	$	(2	)	$	1,283
Adjusted EBITDA	151		68		(16		)	203
Depreciation(1) & Software Amortization	7		9		4			20
Other Intangible Amortization	2		—		1			3
Six Months Ended July 30, 2017
Net sales	$	1,451	$	1,120	$	(3	)	$	2,568
Adjusted EBITDA	273		124		(32		)	365
Depreciation(1) & Software Amortization	12		18		8			38
Other Intangible Amortization	3		—		3			6
Six Months Ended July 31, 2016
Net sales	$	1,418	$	1,045	$	(4	)	$	2,459
Adjusted EBITDA	285		117		(32		)	370
Depreciation(1) & Software Amortization	15		17		6			38
Other Intangible Amortization	3		—		3			6

(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
	July 30, 2017		July 31, 2016		July 30, 2017		July 31, 2016
Total Adjusted EBITDA	$	208	$	203	$	365	$	370
Depreciation and amortization(1)	22		23		44		44
Stock-based compensation	6		5		12		11
Restructuring	—		4		—		11
Operating income	180		171		309		304
Interest expense, net	49		69		98		154
Loss on extinguishment of debt(2)	—		—		3		115
Income from Continuing Operations Before Provision for Income Taxes	131		102		208		35
Provision for income taxes	50		41		69		15
Income from continuing operations	81		61		139		20
Income from discontinued operations, net of tax	361		37		388		64
Net income	$	442	$	98	$	527	$	84

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

(2) Represents the loss on extinguishment of debt including the write-off of unamortized deferred financing costs, original issue discount, and other assets or liabilities associated with such debt.

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SUBSIDIARY GUARANTORS (Tables)

6 Months Ended

Jul. 30, 2017

SUBSIDIARY GUARANTORS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended July 30, 2017
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS
Net Sales	$	—		$	1,316		$	36		$	—		$	1,352
Cost of sales	—			793			20			—			813
Gross Profit	—			523			16			—			539
Operating expenses:
Selling, general and administrative	21			304			13			—			338
Depreciation and amortization	3			17			1			—			21
Total operating expenses	24			321			14			—			359
Operating Income (Loss)	(24		)	202			2			—			180
Interest expense	56			31			1			(39		)	49
Interest (income)	(32		)	(7		)	—			39			—
Net (earnings) loss of equity affiliates	(239		)	—			—			239			—
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	191			178			1			(239		)	131
Provision for income taxes	48			1			1			—			50
Income (Loss) from Continuing Operations	143			177			—			(239		)	81
Income (loss) from discontinued operations, net of tax	299			61			1			—			361
Net Income (Loss)	$	442		$	238		$	1		$	(239	)	$	442
Other comprehensive income (loss)—foreign currency translation adjustment	(3		)	—			(3		)	3			(3		)
Total Comprehensive Income (Loss)	$	439		$	238		$	(2	)	$	(236	)	$	439

	Three Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS
Net Sales	$	—		$	1,251		$	33		$	(1	)	$	1,283
Cost of sales	—			753			18			(1		)	770
Gross Profit	—			498			15			—			513
Operating expenses:
Selling, general and administrative	21			285			11			—			317
Depreciation and amortization	3			17			1			—			21
Restructuring	1			3			—			—			4
Total operating expenses	25			305			12			—			342
Operating Income (Loss)	(25		)	193			3			—			171
Interest expense	72			35			—			(38		)	69
Interest (income)	(34		)	(4		)	—			38			—
Net (earnings) loss of equity affiliates	(200		)	—			—			200			—
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	137			162			3			(200		)	102
Provision for income taxes	38			1			2			—			41
Income (Loss) from Continuing Operations	99			161			1			(200		)	61
Income (loss) from discontinued operations, net of tax	(1		)	38			—			—			37
Net Income (Loss)	$	98		$	199		$	1		$	(200	)	$	98
Other comprehensive income (loss)—foreign currency translation adjustment	(2		)	—			(2		)	2			(2		)
Total Comprehensive Income (Loss)	$	96		$	199		$	(1	)	$	(198	)	$	96

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

	Six Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Total HDS
Net Sales	$	—		$	2,398		$	62	$	(1	)	$	2,459
Cost of sales	—			1,444			34		(1		)	1,477
Gross Profit	—			954			28		—			982
Operating expenses:
Selling, general and administrative	41			562			22		—			625
Depreciation and amortization	6			35			1		—			42
Restructuring	2			9			—		—			11
Total operating expenses	49			606			23		—			678
Operating Income (Loss)	(49		)	348			5		—			304
Interest expense	161			70			—		(77		)	154
Interest (income)	(69		)	(8		)	—		77			—
Net (earnings) loss of equity affiliates	(345		)	—			—		345			—
Loss on extinguishment of debt	115			—			—		—			115
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	89			286			5		(345		)	35
Provision (benefit) for income taxes	12			1			2		—			15
Income (Loss) from Continuing Operations	77			285			3		(345		)	20
Income (loss) from discontinued operations, net of tax	7			57			—		—			64
Net Income (Loss)	$	84		$	342		$	3	$	(345	)	$	84
Other comprehensive income (loss)—foreign currency translation adjustment	2			—			2		(2		)	2
Total Comprehensive Income (Loss)	$	86		$	342		$	5	$	(347	)	$	86

CONDENSED CONSOLIDATING BALANCE SHEETS

	As of July 30, 2017
	Debt Issuer		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS
ASSETS
Current assets:
Cash and cash equivalents	$	32	$	17	$	6		$	—		$	55
Receivables, net	2		669		22			—			693
Inventories	—		670		20			—			690
Intercompany receivables	—		1		—			(1		)	—
Current assets of discontinued operations	—		752		—			—			752
Other current assets	11		21		1			—			33
Total current assets	45		2,130		49			(1		)	2,223
Property and equipment, net	89		174		3			—			266
Goodwill	—		1,807		—			—			1,807
Intangible assets, net	—		95		1			—			96
Deferred tax asset	951		—		2			(96		)	857
Non-current assets of discontinued operations	—		1,120		—			—			1.120
Investment in subsidiaries	4,289		—		—			(4,289		)	—
Intercompany notes receivable	1,005		1,032		—			(2,037		)	—
Other assets	19		4		—			—			23
Total assets	$	6,398	$	6,362	$	55		$	(6,423	)	$	6,392
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	12	$	428	$	14		$	—		$	454
Accrued compensation and benefits	30		50		3			—			83
Current installments of long-term debt	14		—		—			—			14
Intercompany payables	—		—		1			(1		)	—
Current liabilities of discontinued operations	2		352		—			—			354
Other current liabilities	52		91		8			—			151
Total current liabilities	110		921		26			(1		)	1,056
Long-term debt, excluding current installments	3,976		—		62			—			4,038
Deferred tax liabilities	—		96		—			(96		)	—
Non-current liabilities of discontinued operations	41		—		—			—			41
Intercompany notes payable	1,032		1,005		—			(2,037		)	—
Other liabilities	82		17		1			—			100
Total liabilities	5,241		2,039		89			(2,134		)	5,235
Stockholder’s equity (deficit)	1,157		4,323		(34		)	(4,289		)	1,157
Total liabilities and stockholder’s equity (deficit)	$	6,398	$	6,362	$	55		$	(6,423	)	$	6,392

	As of January 29, 2017
	Debt Issuer		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS
ASSETS
Current assets:
Cash and cash equivalents	$	51	$	17	$	5		$	—		$	73
Receivables, net	3		540		16			—			559
Inventories	—		588		18			—			606
Intercompany receivables	—		1		—			(1		)	—
Current assets of discontinued operations	—		575		—			—			575
Other current assets	13		17		2			—			32
Total current assets	67		1,738		41			(1		)	1,845
Property and equipment, net	76		175		2			—			253
Goodwill	—		1,807		—			—			1,807
Intangible assets, net	—		101		1			—			102
Deferred tax asset	681		—		2			(127		)	556
Non-current assets of discontinued operations	—		1,122		—			—			1,122
Investment in subsidiaries	2,451		—		—			(2,451		)	—
Intercompany notes receivable	2,192		584		—			(2,776		)	—
Other assets	16		4		—			—			20
Total assets	$	5,483	$	5,531	$	46		$	(5,355	)	$	5,705
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	13	$	296	$	11		$	—		$	320
Accrued compensation and benefits	36		60		2			—			98
Current installments of long-term debt	14		—		—			—			14
Intercompany payables	—		—		1			(1		)	—
Current liabilities of discontinued operations	2		257		—			—			259
Other current liabilities	52		94		6			—			152
Total current liabilities	117		707		20			(1		)	843
Long-term debt, excluding current installments	3,737		—		61			—			3,798
Deferred tax liabilities	—		127		—			(127		)	—
Non-current liabilities of discontinued operations	20		—		—			—			20
Intercompany notes payable	584		2,192		—			(2,776		)	—
Other liabilities	67		17		2			—			86
Total liabilities	4,525		3,043		83			(2,904		)	4,747
Stockholder’s equity (deficit)	958		2,488		(37		)	(2,451		)	958
Total liabilities and stockholder’s equity (deficit)	$	5,483	$	5,531	$	46		$	(5,355	)	$	5,705

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

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

	Six Months Ended July 31, 2016
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Total HDS
Net cash flows from operating activities	$	242		$	(81	)	$	3	$	—		$	164
Cash flows from investing activities
Capital expenditures	(7		)	(25		)	—		—			(32		)
Proceeds from sale of property and equipment	—			1			—		—			1
Proceeds from sales of businesses, net	37			—			—		—			37
Proceeds from (payments of) intercompany notes	—			105			—		(105		)	—
Net cash flows from investing activities	$	30		$	81		$	—	$	(105	)	$	6
Cash flows from financing activities
Borrowings of (repayments of) intercompany notes	(105		)	—			—		105			—
Borrowings of long-term debt	1,000			—			—		—			1,000
Repayments of long-term debt	(1,110		)	—			—		—			(1,110		)
Debt issuance costs	(15		)	—			—		—			(15		)
Other financing activities	(1		)	(1		)	—		—			(1		)
Net cash flows from financing activities	(231		)	(1		)	—		105			(127		)
Effect of exchange rates on cash	—			—			1		—			1
Net increase (decrease) in cash & cash equivalents	$	41		$	(1	)	$	4	$	—		$	44
Cash and cash equivalents at beginning of period	233			18			15		—			266
Cash and cash equivalents at end of period	$	274		$	17		$	19	$	—		$	310

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NATURE OF BUSINESS AND BASIS OF PRESENTATION - Nature of Business (Details)	6 Months Ended
	Jul. 30, 2017 segment product location item customer employee
Nature of Business
Number of distinct market sectors in which entity specializes | item	2
Number of operating locations	260
Number of associates | employee	11,000
Number of customers | customer	500,000
Number of SKUs offered | product	500,000
Number of reportable segments | segment	2
U.S.
Nature of Business
Number of states or provinces	36
Canada
Nature of Business
Number of states or provinces	6

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NATURE OF BUSINESS AND BASIS OF PRESENTATION - Fiscal Year (Details)	3 Months Ended		6 Months Ended		12 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016	Jan. 28, 2018	Jan. 29, 2017
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Length of some fiscal years, minimum (in days)			364 days
Length of some fiscal years, maximum (in days)			371 days
Length of fiscal year (in days)					364 days	364 days
Length of fiscal quarter (in days)	91 days	91 days	182 days	182 days

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NATURE OF BUSINESS AND BASIS OF PRESENTATION - Self-Insurance (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Self-insurance reserves	$ 81	$ 79

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DISCONTINUED OPERATIONS - General Information (Details) - USD ($) $ in Millions		6 Months Ended
	Jun. 04, 2017	Jul. 31, 2016	Jul. 30, 2017
DISCONTINUED OPERATIONS
Cash consideration		$ 37
Waterworks business | Discontinued Operations, Disposed of by Sale
DISCONTINUED OPERATIONS
Cash consideration	$ 2,500
Net deferred tax assets			$ 323

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DISCONTINUED OPERATIONS - Results of Operations (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
Operating expenses:
Income (loss) from discontinued operations, net of tax	$ 361	$ 37	$ 388	$ 64
Discontinued Operations, Held-for-sale or Disposed of by Sale
Results of operations of the discontinued operations
Net Sales	746	755	1,403	1,422
Cost of sales	582	583	1,092	1,094
Gross Profit	164	172	311	328
Operating expenses:
Selling, general and administrative	100	105	197	214
Depreciation and amortization	3	3	6	6
Restructuring Charges		1		1
Total operating expenses	103	109	203	221
Operating Income	61	63	108	107
Loss on disposal of discontinued operations		2		2
Other (Income) expense, net	1		3
Income before provision (benefit) for income taxes	60	61	105	105
Provision (benefit) for income taxes	(301)	24	(283)	41
Income (loss) from discontinued operations, net of tax	$ 361	$ 37	$ 388	$ 64

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DISCONTINUED OPERATIONS - Carrying Amounts of Major Classes of Assets and Liabilities (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Current assets:
Total current assets	$ 752	$ 575
Total non-current assets	1,120	1,122
Current Liabilities:
Total current liabilities	354	259
Total non-current liabilities	41	20
Discontinued Operations, Held-for-sale or Disposed of by Sale
Current assets:
Receivables, less allowance for doubtful accounts of $0 and $4	466	346
Inventories	283	225
Other current assets	3	4
Total current assets	752	575
Property and equipment, net	50	51
Goodwill	1,061	1,061
Intangible assets, net	9	10
Total non-current assets	1,120	1,122
Total assets of discontinued operations	1,872	1,697
Allowance for doubtful accounts
Allowance for doubtful accounts	4	4
Current Liabilities:
Accounts payable	316	212
Accrued compensation and benefits	32	42
Other current liabilities	6	5
Total current liabilities	354	259
Deferred tax liability	21
Other non-current liabilities	20	20
Total non-current liabilities	41	20
Total liabilities of discontinued operations	$ 395	$ 279

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DISCONTINUED OPERATIONS - Net Cash Provided by Operating Activities and Investing Activities (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016
Cash flows from investing activities
Proceeds from sales of businesses, net		$ 37
Proceeds from sales of property and equipment, net	$ 2	1
Discontinued Operations, Held-for-sale or Disposed of by Sale
Net cash provided by operating and investing activities of the discontinued operations
Net cash flows provided by (used in) operating activities	11	(6)
Cash flows from investing activities
Capital expenditures	(5)	(4)
Proceeds from sales of businesses, net		37
Proceeds from sales of property and equipment, net	2
Net cash flows provided by (used in) investing activities	$ (3)	$ 33

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DEBT - Gross Long-term Debt - Outstanding Principal - Tabular Disclosure (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
DEBT
Total gross long-term debt	$ 4,093	$ 3,859
Secured debt | HDS (Debt Issuer) | 5.25% December 2014 Secured First Priority Notes due 2021
DEBT
Total gross long-term debt	1,250	1,250
Secured debt | HDS (Debt Issuer) | Credit facility | Senior ABL Facility due 2022
DEBT
Total gross long-term debt	762	421
Secured debt | HDS (Debt Issuer) | Credit facility | Term B-1 Loans due 2021
DEBT
Total gross long-term debt	535	639
Secured debt | HDS (Debt Issuer) | Credit facility | Term B-2 Loans due 2023
DEBT
Total gross long-term debt	546	549
Unsecured debt | HDS (Debt Issuer) | 5.75% April 2016 Senior Unsecured Notes due 2024
DEBT
Total gross long-term debt	$ 1,000	$ 1,000

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DEBT - Gross Long-term Debt - Interest Rate - Tabular Disclosure (Details) - HDS (Debt Issuer)	Jul. 30, 2017	Jan. 29, 2017
Secured debt | 5.25% December 2014 Secured First Priority Notes due 2021
DEBT
Interest rate, stated rate (as a percent)	5.25%	5.25%
Secured debt | Credit facility | Senior ABL Facility due 2022
DEBT
Interest rate, rate at end of period (as a percent)	3.29%	2.38%
Secured debt | Credit facility | Term B-1 Loans due 2021
DEBT
Interest rate, rate at end of period (as a percent)	4.05%	3.75%
Secured debt | Credit facility | Term B-2 Loans due 2023
DEBT
Interest rate, rate at end of period (as a percent)	4.05%	3.75%
Unsecured debt | 5.75% April 2016 Senior Unsecured Notes due 2024
DEBT
Interest rate, stated rate (as a percent)	5.75%	5.75%

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DEBT - Total Net Long-term Debt - Tabular Disclosure (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
DEBT
Total gross long-term debt	$ 4,093	$ 3,859
Less unamortized discount	(7)	(9)
Less unamortized deferred financing costs	(34)	(38)
Total net long-term debt	$ 4,052	$ 3,812

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DEBT - Total Long-term Debt, Excluding Current Installments - Tabular Disclosure (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
DEBT
Total net long-term debt	$ 4,052	$ 3,812
Less current installments	(14)	(14)
Total net long-term debt, excluding current installments	$ 4,038	$ 3,798

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DEBT - Term Loan Facility (Details) - Secured debt - HDS (Debt Issuer) - Credit facility - USD ($) $ in Millions			6 Months Ended
	Apr. 18, 2017	Apr. 05, 2017	Jul. 30, 2017
Term B-1 Loans due 2021
DEBT
Payment of debt	$ 100		$ 100
Aggregate principal amount	842
Loss on extinguishment & modification of debt	2
Write-off of unamortized deferred financing cost	$ 1
Senior ABL Facility due 2022
DEBT
Aggregate principal amount			$ 1,500
Loss on extinguishment & modification of debt		$ 1
Write-off of unamortized deferred financing cost		$ 1

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DEBT - Senior ABL Facility (Details) - Secured debt - HDS (Debt Issuer) - Credit facility - Senior ABL Facility due 2022 $ in Millions	6 Months Ended
	Jul. 30, 2017 USD ($) facility
DEBT
Aggregate principal amount	$ 1,500
Line of credit facility, additional available for borrowing	530
Letter of credit facility outstanding	30
Line of credit facility, available for borrowing on qualifying cash balances	7
Proceeds from Senior ABL Facility	$ 762
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
DEBT
Proceeds from Senior ABL Facility	$ 62

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DEBT - Senior Term Loan Facility (Details) - Secured debt - HDS (Debt Issuer) - Credit facility $ in Millions	6 Months Ended
	Jul. 30, 2017 USD ($)	Apr. 18, 2017 USD ($)
Term Loan Facility
DEBT
Remaining aggregate principal amount	$ 1,081
Term B-1 Loans due 2021
DEBT
Remaining aggregate principal amount		$ 842
Amortization of debt, aggregate annual amounts as a percentage of original principal amount (as a percent)	1.00%
Term B-2 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-1 Loans due 2021
DEBT
Percentage added to reference rate (as a percent)	2.75%
LIBOR | Term B-2 Loans due 2023
DEBT
Percentage added to reference rate (as a percent)	2.75%
Base | Term B-1 Loans due 2021
DEBT
Percentage added to reference rate (as a percent)	1.75%
Base | Term B-2 Loans due 2023
DEBT
Percentage added to reference rate (as a percent)	1.75%
Minimum | LIBOR | Term B-2 Loans due 2023
DEBT
Percentage added to reference rate (as a percent)	2.50%
Maximum | Term B-2 Loans due 2023
DEBT
Leverage ratio	3.0

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DEBT - 5.25% Senior Secured First Priority Notes due 2021 (Details) - Secured debt - HDS (Debt Issuer) - 5.25% December 2014 Secured First Priority Notes due 2021	6 Months Ended
	Jul. 30, 2017	Jan. 29, 2017
DEBT
Note issued, interest rate	5.25%	5.25%
Collateral pledged, percentage outstanding capital of any foreign subsidiary	65.00%
Prior to December 15, 2017
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	105.25%
Threshold percentage for debt that must remain after each redemption	50.00%
2017
DEBT
Optional prepayment price percentage	103.938%
2018
DEBT
Optional prepayment price percentage	102.625%
2019
DEBT
Optional prepayment price percentage	101.313%
2020 and thereafter
DEBT
Optional prepayment price percentage	100.00%

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DEBT - 5.75% Senior Unsecured Notes due 2024 (Details) - Unsecured debt - HDS (Debt Issuer) - 5.75% April 2016 Senior Unsecured Notes due 2024	6 Months Ended
	Jul. 30, 2017	Jan. 29, 2017
DEBT
Note issued, interest rate	5.75%	5.75%
Prior to April 15, 2019
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	105.75%
Threshold percentage for debt that must remain after each redemption	50.00%
2019
DEBT
Optional prepayment price percentage	104.313%
2020
DEBT
Optional prepayment price percentage	102.875%
2021
DEBT
Optional prepayment price percentage	101.438%
2022 and thereafter
DEBT
Optional prepayment price percentage	100.00%

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FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Recorded Amount
Financial instruments not reflected at fair value on the balance sheet
Senior ABL Facility	$ 762	$ 421
Term Loans and Notes	3,331	3,438
Total	4,093	3,859
Estimated Fair Value | Level 2
Financial instruments not reflected at fair value on the balance sheet
Senior ABL Facility	758	410
Term Loans and Notes	3,475	3,572
Total	$ 4,233	$ 3,982

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INCOME TAXES - Tax items (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jan. 29, 2017
INCOME TAXES
Combined federal, state and foreign effective tax rate for continuing operations (benefit)	33.20%	42.90%
Unrecognized tax benefits			$ 10
Net accrual for interest and penalties related to unrecognized tax benefits			0
Deferred tax assets, valuation allowance			$ 5

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INCOME TAXES - ASU No. 2016-09 (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
New Accounting Pronouncements or Change in Accounting Principle
Benefit for income taxes	$ (50)	$ (41)	$ (69)	$ (15)
ASU No. 2016-09
New Accounting Pronouncements or Change in Accounting Principle
Benefit for income taxes			$ 12
Change in effective tax rate	5.80%

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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
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
Reconciliation of basic to diluted weighted-average common shares
Weighted-average common shares	197,752	199,250	199,230	199,029
Effect of potentially dilutive stock plan securities	1,202	2,728	1,780	2,586
Diluted weighted-average common shares	198,954	201,978	201,010	201,615

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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
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
Anti-dilutive securities
Stock plan securities excluded from dilution	2,383	1,452	1,652	2,240

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Receivables (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Receivables
Trade receivables, net of allowance for doubtful accounts	$ 631	$ 499
Vendor rebate receivables	48	50
Other receivables	14	10
Total receivables, net	$ 693	$ 559

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Other Current Liabilities (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017
Other Current Liabilities
Accrued interest	$ 30	$ 30
Accrued non-income taxes	40	30
Unsettled share repurchases	38
Other	81	92
Total other current liabilities	189	152
HD Supply, Inc. (Total HDS)
Other Current Liabilities
Accrued interest	30	30
Accrued non-income taxes	40	30
Other	81	92
Total other current liabilities	$ 151	$ 152

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Supplemental Cash Flow Information (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016
Supplemental Cash Flow Information
Cash paid for interest	$ 92	$ 161
Cash paid for income taxes, net of refunds	$ 10	$ 6

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Supplemental Debt Information (Details) - USD ($) $ in Millions		6 Months Ended
	Apr. 18, 2017	Jul. 30, 2017	Jul. 31, 2016
Supplemental Cash Flow Information
Payment of debt issuance cost		$ 6	$ 15
HDS (Debt Issuer)
Supplemental Cash Flow Information
Payment of debt issuance cost		6	$ 15
Term B-1 Loans due 2021 | HDS (Debt Issuer) | Secured debt | Credit facility
Supplemental Cash Flow Information
Payment of debt issuance cost		4
Payment of debt	$ 100	$ 100

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Stock Repurchase Information (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jun. 03, 2017
Supplemental Cash Flow Information
Unsettled share repurchases	$ 38
HD Supply, Inc. (Total HDS)
Supplemental Cash Flow Information
Equity cash distribution	$ 395
Share Repurchase Program of June 2017 | Common Stock
Supplemental Cash Flow Information
Repurchase of common stock (in shares)	13,449,146
Repurchase of common stock	$ 421
Share Repurchase Program of June 2017 | Common Stock | Maximum
Supplemental Cash Flow Information
Authorized share repurchase amount		$ 500
Share Repurchase Program of 2017 and 2014 | Common Stock
Supplemental Cash Flow Information
Repurchase of common stock (in shares)	14,267,923
Repurchase of common stock	$ 452
Unsettled share repurchases	$ 38

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Significant Non-Cash Transactions (Details) - USD ($) $ / shares in Units, $ in Millions	6 Months Ended
	Jul. 30, 2017	Jan. 29, 2017
Significant Non-Cash Transactions
Retired common stock (in shares)	611,433
Retired common stock	$ 23
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01

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SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION - Build-to-Suit Lease (Details) $ in Millions	Jul. 30, 2017 USD ($)
Construction in progress
Build-to-Suit Lease
Build-to-suit assets in construction in progress	$ 35
Other long-term liabilities
Build-to-Suit Lease
Financial obligation of construction in progress	$ 35

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RESTRUCTURING ACTIVITIES - Restructuring Liability Activity (Details) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Jul. 31, 2016	Jul. 31, 2016	Jul. 30, 2017	Jan. 29, 2017
Activity for the liability balances for restructuring
Restructuring charges	$ 4	$ 11
Restructuring activities resulting from the sale of a business unit in October 2015
Activity for the liability balances for restructuring
Restructuring charges		$ 11
Restructuring activities resulting from the sale of a business unit in October 2015 | Other current liabilities
Activity for the liability balances for restructuring
Liability balance for restructuring activities			$ 2	$ 4

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COMMITMENTS AND CONTINGENCIES (Details) $ in Millions	Aug. 08, 2017 complaint	Jul. 30, 2017 USD ($)
Legal Matters
Number of shareholder derivative complaints	2
Sean Zhou
Legal Matters
Number of shareholder derivative complaints	1
James Calderaro
Legal Matters
Number of shareholder derivative complaints	1
Minimum
Legal Matters
Estimated aggregate potential loss | $		$ 0
Maximum
Legal Matters
Estimated aggregate potential loss | $		$ 10

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SEGMENT INFORMATION - General Information (Details)	6 Months Ended
	Jul. 30, 2017 segment
SEGMENT INFORMATION
Number of reportable segments	2

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SEGMENT INFORMATION - Net Sales for Each Reportable Segment (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
SEGMENT INFORMATION
Net sales	$ 1,352	$ 1,283	$ 2,568	$ 2,459
Corporate
SEGMENT INFORMATION
Net sales	(1)	(2)	(3)	(4)
Facilities Maintenance | Reportable segment
SEGMENT INFORMATION
Net sales	769	741	1,451	1,418
Construction & Industrial | Reportable segment
SEGMENT INFORMATION
Net sales	$ 584	$ 544	$ 1,120	$ 1,045

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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
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
SEGMENT INFORMATION
Adjusted EBITDA	$ 208	$ 203	$ 365	$ 370
Depreciation & Software Amortization	19	20	38	38
Other Intangible Amortization	3	3	6	6
Corporate
SEGMENT INFORMATION
Adjusted EBITDA	(17)	(16)	(32)	(32)
Depreciation & Software Amortization	5	4	8	6
Other Intangible Amortization	1	1	3	3
Facilities Maintenance | Reportable segment
SEGMENT INFORMATION
Adjusted EBITDA	156	151	273	285
Depreciation & Software Amortization	5	7	12	15
Other Intangible Amortization	2	2	3	3
Construction & Industrial | Reportable segment
SEGMENT INFORMATION
Adjusted EBITDA	69	68	124	117
Depreciation & Software Amortization	$ 9	$ 9	$ 18	$ 17

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SEGMENT INFORMATION - Reconciliation to Consolidated Financial Statements (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
SEGMENT INFORMATION
Total Adjusted EBITDA	$ 208	$ 203	$ 365	$ 370
Depreciation and amortization	22	23	44	44
Stock-based compensation	6	5	12	11
Restructuring		4		11
Operating Income	180	171	309	304
Interest expense, net	49	69	98	154
Loss on extinguishment of debt			3	115
Income from Continuing Operations Before Provision for Income Taxes	131	102	208	35
Provision for income taxes	50	41	69	15
Income from Continuing Operations	81	61	139	20
Income from discontinued operations, net of tax	361	37	388	64
Net income	$ 442	$ 98	$ 527	$ 84

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SUBSIDIARY GUARANTORS - General Information (Details)	6 Months Ended
	Jul. 30, 2017
HDS (Debt Issuer)
SUBSIDIARY GUARANTORS
Period of notice to the applicable trustee to cause subsidiary guarantor to be released from subsidiary guarantee	30 days

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SUBSIDIARY GUARANTORS - CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016	Jul. 30, 2017	Jul. 31, 2016
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Net Sales	$ 1,352	$ 1,283	$ 2,568	$ 2,459
Cost of sales	813	770	1,545	1,477
Gross Profit	539	513	1,023	982
Operating expenses:
Selling, general and administrative	338	317	672	625
Depreciation and amortization	21	21	42	42
Restructuring		4		11
Total operating expenses	359	342	714	678
Operating Income (Loss)	180	171	309	304
Interest expense	49	69	98	154
Loss on extinguishment of debt			3	115
Income from Continuing Operations Before Provision for Income Taxes	131	102	208	35
Provision for income taxes	50	41	69	15
Income from Continuing Operations	81	61	139	20
Income from discontinued operations, net of tax	361	37	388	64
Net Income	442	98	527	84
Other comprehensive income (loss)- foreign currency translation adjustment	(3)	(2)	(2)	2
Total Comprehensive Income	439	96	525	86
HDS (Debt Issuer)
Operating expenses:
Selling, general and administrative	21	21	42	41
Depreciation and amortization	3	3	7	6
Restructuring		1		2
Total operating expenses	24	25	49	49
Operating Income (Loss)	(24)	(25)	(49)	(49)
Interest expense	56	72	112	161
Interest (income)	(32)	(34)	(66)	(69)
Net (earnings) loss of equity affiliates	(239)	(200)	(394)	(345)
Loss on extinguishment of debt			3	115
Income from Continuing Operations Before Provision for Income Taxes	191	137	296	89
Provision for income taxes	48	38	66	12
Income from Continuing Operations	143	99	230	77
Income from discontinued operations, net of tax	299	(1)	297	7
Net Income	442	98	527	84
Other comprehensive income (loss)- foreign currency translation adjustment	(3)	(2)	(2)	2
Total Comprehensive Income	439	96	525	86
Subsidiary Guarantors
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Net Sales	1,316	1,251	2,501	2,398
Cost of sales	793	753	1,509	1,444
Gross Profit	523	498	992	954
Operating expenses:
Selling, general and administrative	304	285	605	562
Depreciation and amortization	17	17	34	35
Restructuring		3		9
Total operating expenses	321	305	639	606
Operating Income (Loss)	202	193	353	348
Interest expense	31	35	66	70
Interest (income)	(7)	(4)	(15)	(8)
Income from Continuing Operations Before Provision for Income Taxes	178	162	302	286
Provision for income taxes	1	1	2	1
Income from Continuing Operations	177	161	300	285
Income from discontinued operations, net of tax	61	38	91	57
Net Income	238	199	391	342
Total Comprehensive Income	238	199	391	342
Non-Guarantor Subsidiaries
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Net Sales	36	33	68	62
Cost of sales	20	18	37	34
Gross Profit	16	15	31	28
Operating expenses:
Selling, general and administrative	13	11	25	22
Depreciation and amortization	1	1	1	1
Total operating expenses	14	12	26	23
Operating Income (Loss)	2	3	5	5
Interest expense	1		1
Income from Continuing Operations Before Provision for Income Taxes	1	3	4	5
Provision for income taxes	1	2	1	2
Income from Continuing Operations		1	3	3
Income from discontinued operations, net of tax	1
Net Income	1	1	3	3
Other comprehensive income (loss)- foreign currency translation adjustment	(3)	(2)	(2)	2
Total Comprehensive Income	(2)	(1)	1	5
HD Supply, Inc. (Total HDS)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Net Sales	1,352	1,283	2,568	2,459
Cost of sales	813	770	1,545	1,477
Gross Profit	539	513	1,023	982
Operating expenses:
Selling, general and administrative	338	317	672	625
Depreciation and amortization	21	21	42	42
Restructuring		4		11
Total operating expenses	359	342	714	678
Operating Income (Loss)	180	171	309	304
Interest expense	49	69	98	154
Loss on extinguishment of debt			3	115
Income from Continuing Operations Before Provision for Income Taxes	131	102	208	35
Provision for income taxes	50	41	69	15
Income from Continuing Operations	81	61	139	20
Income from discontinued operations, net of tax	361	37	388	64
Net Income	442	98	527	84
Other comprehensive income (loss)- foreign currency translation adjustment	(3)	(2)	(2)	2
Total Comprehensive Income	439	96	525	86
Eliminations
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Net Sales		(1)	(1)	(1)
Cost of sales		(1)	(1)	(1)
Operating expenses:
Interest expense	(39)	(38)	(81)	(77)
Interest (income)	39	38	81	77
Net (earnings) loss of equity affiliates	239	200	394	345
Income from Continuing Operations Before Provision for Income Taxes	(239)	(200)	(394)	(345)
Income from Continuing Operations	(239)	(200)	(394)	(345)
Net Income	(239)	(200)	(394)	(345)
Other comprehensive income (loss)- foreign currency translation adjustment	3	2	2	(2)
Total Comprehensive Income	$ (236)	$ (198)	$ (392)	$ (347)

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SUBSIDIARY GUARANTORS - CONDENSED CONSOLIDATING BALANCE SHEETS (Details) - USD ($) $ in Millions	Jul. 30, 2017	Jan. 29, 2017	Jul. 31, 2016	Jan. 31, 2016
Current assets:
Cash and cash equivalents	$ 67	$ 75	$ 313	$ 269
Receivables, net	693	559
Inventories	690	606
Current assets of discontinued operations	752	575
Other current assets	33	32
Total current assets	2,235	1,847
Property and equipment, net	266	253
Goodwill	1,807	1,807
Intangible assets, net	96	102
Deferred tax asset	857	556
Non-current assets of discontinued operations	1,120	1,122
Other assets	23	20
Total assets	6,404	5,707
Current liabilities:
Accounts payable	454	320
Accrued compensation and benefits	83	98
Current installments of long-term debt	14	14
Current liabilities of discontinued operations	354	259
Other current liabilities	189	152
Total current liabilities	1,094	843
Long-term debt, excluding current installments	4,038	3,798
Non-current liabilities of discontinued operations	41	20
Other liabilities	100	86
Total liabilities	5,273	4,747
Stockholders' equity (deficit)	1,131	960
Total liabilities and stockholders' equity	6,404	5,707
Eliminations
Current assets:
Intercompany receivables	(1)	(1)
Total current assets	(1)	(1)
Deferred tax asset	(96)	(127)
Investment in subsidiaries	(4,289)	(2,451)
Intercompany notes receivable	(2,037)	(2,776)
Total assets	(6,423)	(5,355)
Current liabilities:
Intercompany payables	(1)	(1)
Total current liabilities	(1)	(1)
Deferred tax liabilities	(96)	(127)
Intercompany notes payable	(2,037)	(2,776)
Total liabilities	(2,134)	(2,904)
Stockholders' equity (deficit)	(4,289)	(2,451)
Total liabilities and stockholders' equity	(6,423)	(5,355)
HDS (Debt Issuer)
Current assets:
Cash and cash equivalents	32	51	274	233
Receivables, net	2	3
Other current assets	11	13
Total current assets	45	67
Property and equipment, net	89	76
Deferred tax asset	951	681
Investment in subsidiaries	4,289	2,451
Intercompany notes receivable	1,005	2,192
Other assets	19	16
Total assets	6,398	5,483
Current liabilities:
Accounts payable	12	13
Accrued compensation and benefits	30	36
Current installments of long-term debt	14	14
Current liabilities of discontinued operations	2	2
Other current liabilities	52	52
Total current liabilities	110	117
Long-term debt, excluding current installments	3,976	3,737
Non-current liabilities of discontinued operations	41	20
Intercompany notes payable	1,032	584
Other liabilities	82	67
Total liabilities	5,241	4,525
Stockholders' equity (deficit)	1,157	958
Total liabilities and stockholders' equity	6,398	5,483
Subsidiary Guarantors
Current assets:
Cash and cash equivalents	17	17	17	18
Receivables, net	669	540
Inventories	670	588
Intercompany receivables	1	1
Current assets of discontinued operations	752	575
Other current assets	21	17
Total current assets	2,130	1,738
Property and equipment, net	174	175
Goodwill	1,807	1,807
Intangible assets, net	95	101
Non-current assets of discontinued operations	1,120	1,122
Intercompany notes receivable	1,032	584
Other assets	4	4
Total assets	6,362	5,531
Current liabilities:
Accounts payable	428	296
Accrued compensation and benefits	50	60
Current liabilities of discontinued operations	352	257
Other current liabilities	91	94
Total current liabilities	921	707
Deferred tax liabilities	96	127
Intercompany notes payable	1,005	2,192
Other liabilities	17	17
Total liabilities	2,039	3,043
Stockholders' equity (deficit)	4,323	2,488
Total liabilities and stockholders' equity	6,362	5,531
Non-Guarantor Subsidiaries
Current assets:
Cash and cash equivalents	6	5	19	15
Receivables, net	22	16
Inventories	20	18
Other current assets	1	2
Total current assets	49	41
Property and equipment, net	3	2
Intangible assets, net	1	1
Deferred tax asset	2	2
Total assets	55	46
Current liabilities:
Accounts payable	14	11
Accrued compensation and benefits	3	2
Intercompany payables	1	1
Other current liabilities	8	6
Total current liabilities	26	20
Long-term debt, excluding current installments	62	61
Other liabilities	1	2
Total liabilities	89	83
Stockholders' equity (deficit)	(34)	(37)
Total liabilities and stockholders' equity	55	46
HD Supply, Inc. (Total HDS)
Current assets:
Cash and cash equivalents	55	73	$ 310	$ 266
Receivables, net	693	559
Inventories	690	606
Current assets of discontinued operations	752	575
Other current assets	33	32
Total current assets	2,223	1,845
Property and equipment, net	266	253
Goodwill	1,807	1,807
Intangible assets, net	96	102
Deferred tax asset	857	556
Non-current assets of discontinued operations	1,120	1,122
Other assets	23	20
Total assets	6,392	5,705
Current liabilities:
Accounts payable	454	320
Accrued compensation and benefits	83	98
Current installments of long-term debt	14	14
Current liabilities of discontinued operations	354	259
Other current liabilities	151	152
Total current liabilities	1,056	843
Long-term debt, excluding current installments	4,038	3,798
Non-current liabilities of discontinued operations	41	20
Other liabilities	100	86
Total liabilities	5,235	4,747
Stockholders' equity (deficit)	1,157	958
Total liabilities and stockholders' equity	$ 6,392	$ 5,705

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SUBSIDIARY GUARANTORS - CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Details) - USD ($) $ in Millions	6 Months Ended
	Jul. 30, 2017	Jul. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities	$ 189	$ 164
Cash flows from investing activities
Capital expenditures	(43)	(32)
Proceeds from sales of property and equipment	2	1
Proceeds from sales of businesses, net		37
Net cash provided by (used in) investing activities	(41)	6
Cash flows from financing activities
Borrowings of long-term debt		1,000
Repayments of long-term debt	(103)	(1,110)
Borrowings on long-term revolver debt	599
Repayments on long-term revolver debt	(261)
Debt issuance costs	(6)	(15)
Other financing activities		(2)
Net cash provided by (used in) financing activities	(156)	(127)
Effect of exchange rates on cash		1
Increase (decrease) in cash and cash equivalents	(8)	44
Cash and cash equivalents at beginning of period	75	269
Cash and cash equivalents at end of period	67	313
Eliminations
Cash flows from investing activities
Proceeds from (payments of) intercompany notes	(73)	(105)
Net cash provided by (used in) investing activities	(73)	(105)
Cash flows from financing activities
Borrowings of (repayments of) intercompany notes	73	105
Net cash provided by (used in) financing activities	73	105
HDS (Debt Issuer)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities	227	242
Cash flows from investing activities
Capital expenditures	(9)	(7)
Proceeds from sales of businesses, net		37
Net cash provided by (used in) investing activities	(9)	30
Cash flows from financing activities
Equity distribution	(395)
Borrowings of (repayments of) intercompany notes	(73)	(105)
Borrowings of long-term debt		1,000
Repayments of long-term debt	(103)	(1,110)
Borrowings on long-term revolver debt	596
Repayments on long-term revolver debt	(256)
Debt issuance costs	(6)	(15)
Other financing activities		(1)
Net cash provided by (used in) financing activities	(237)	(231)
Increase (decrease) in cash and cash equivalents	(19)	41
Cash and cash equivalents at beginning of period	51	233
Cash and cash equivalents at end of period	32	274
Subsidiary Guarantors
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities	(41)	(81)
Cash flows from investing activities
Capital expenditures	(34)	(25)
Proceeds from sales of property and equipment	2	1
Proceeds from (payments of) intercompany notes	73	105
Net cash provided by (used in) investing activities	41	81
Cash flows from financing activities
Other financing activities		(1)
Net cash provided by (used in) financing activities		(1)
Increase (decrease) in cash and cash equivalents		(1)
Cash and cash equivalents at beginning of period	17	18
Cash and cash equivalents at end of period	17	17
Non-Guarantor Subsidiaries
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities	3	3
Cash flows from financing activities
Borrowings on long-term revolver debt	3
Repayments on long-term revolver debt	(5)
Net cash provided by (used in) financing activities	(2)
Effect of exchange rates on cash		1
Increase (decrease) in cash and cash equivalents	1	4
Cash and cash equivalents at beginning of period	5	15
Cash and cash equivalents at end of period	6	19
HD Supply, Inc. (Total HDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash flows from operating activities	189	164
Cash flows from investing activities
Capital expenditures	(43)	(32)
Proceeds from sales of property and equipment	2	1
Proceeds from sales of businesses, net		37
Net cash provided by (used in) investing activities	(41)	6
Cash flows from financing activities
Equity distribution	(395)
Borrowings of long-term debt		1,000
Repayments of long-term debt	(103)	(1,110)
Borrowings on long-term revolver debt	599
Repayments on long-term revolver debt	(261)
Debt issuance costs	(6)	(15)
Other financing activities		(2)
Net cash provided by (used in) financing activities	(166)	(127)
Effect of exchange rates on cash		1
Increase (decrease) in cash and cash equivalents	(18)	44
Cash and cash equivalents at beginning of period	73	266
Cash and cash equivalents at end of period	$ 55	$ 310

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RECENT ACCOUNTING PRONOUNCEMENTS (Details) $ in Millions	Jan. 30, 2017 USD ($)
ASU No. 2016-09
RECENT ACCOUNTING PRONOUNCEMENTS
Cumulative-effect adjustment to retained earnings	$ 56

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SUBSEQUENT EVENTS (Details)								3 Months Ended	6 Months Ended
	Sep. 01, 2017 USD ($)	Aug. 31, 2017 USD ($)	Aug. 25, 2017 USD ($)	Aug. 08, 2017 USD ($) $ / shares shares	Aug. 01, 2017 USD ($)	Jun. 04, 2017 USD ($)	Apr. 05, 2017 USD ($)	Oct. 29, 2017 USD ($)	Jul. 30, 2017 USD ($) shares	Jul. 31, 2016 USD ($)	Aug. 27, 2017 USD ($)	Jun. 03, 2017 USD ($)	Jan. 29, 2017 USD ($)
Subsequent Events
Cash consideration										$ 37,000,000
Loss on extinguishment of debt									$ 3,000,000	115,000,000
Total gross long-term debt									4,093,000,000				$ 3,859,000,000
Cash paid for interest									92,000,000	161,000,000
Share Repurchase Program of June 2017 | Common Stock
Subsequent Events
Repurchase of common stock									$ 421,000,000
Repurchase of common stock (in shares) | shares									13,449,146
Maximum | Share Repurchase Program of June 2017 | Common Stock
Subsequent Events
Authorized share repurchase amount												$ 500,000,000
HDS (Debt Issuer)
Subsequent Events
Cash consideration										37,000,000
Loss on extinguishment of debt									$ 3,000,000	$ 115,000,000
HDS (Debt Issuer) | Secured debt | 5.25% December 2014 Secured First Priority Notes due 2021
Subsequent Events
Total gross long-term debt									$ 1,250,000,000				$ 1,250,000,000
Interest rate, stated rate (as a percent)									5.25%				5.25%
HDS (Debt Issuer) | Unsecured debt | 5.75% April 2016 Senior Unsecured Notes due 2024
Subsequent Events
Total gross long-term debt									$ 1,000,000,000				$ 1,000,000,000
Interest rate, stated rate (as a percent)									5.75%				5.75%
HDS (Debt Issuer) | Credit facility | Secured debt | Senior ABL Facility due 2022
Subsequent Events
Total gross long-term debt									$ 762,000,000				$ 421,000,000
Aggregate principal amount									1,500,000,000
Loss on extinguishment & modification of debt							$ 1,000,000
Write-off of unamortized deferred financing cost							$ 1,000,000
HDS (Debt Issuer) | Credit facility | Secured debt | Term Loan Facility
Subsequent Events
Aggregate principal amount									1,081,000,000
Waterworks business | Discontinued Operations, Disposed of by Sale
Subsequent Events
Cash consideration						$ 2,500,000,000
Net deferred tax asset									$ 323,000,000
Subsequent Events | Share Repurchase Program of June 2017 | Common Stock
Subsequent Events
Repurchase of common stock				$ 500,000,000
Repurchase of common stock (in shares) | shares				15,900,000
Average price of shares repurchased | $ / shares				$ 31.37
Subsequent Events | Share Repurchase Program of August 2017 | Common Stock
Subsequent Events
Authorized share repurchase amount											$ 500,000,000
Subsequent Events | 5.25% December 2014 Secured First Priority Notes due 2021
Subsequent Events
Redemption of outstanding principal of long term debt	$ 1,250,000,000
Aggregate redemption price of long term debt	1,325,000,000
Payment of make whole premium on debt	62,000,000
Cash paid for interest	$ 14,000,000
Subsequent Events | HDS (Debt Issuer) | Unsecured debt | 5.75% April 2016 Senior Unsecured Notes due 2024
Subsequent Events
Maximum permitted debt payment allowed at a given time			$ 500,000,000
Interest rate, stated rate (as a percent)			7.00%
Consent fees			$ 15,000,000
Subsequent Events | HDS (Debt Issuer) | Unsecured debt | 5.75% April 2016 Senior Unsecured Notes due 2024 | Maximum
Subsequent Events
Leverage ratio			3.00
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term Loan Facility
Subsequent Events
Maximum permitted debt payment allowed at a given time		$ 500,000,000
Consent fees		$ 1,000,000
Prepayment premium (as a percent)		1.00%
Loss on extinguishment & modification of debt		$ 3,000,000
Write-off of financing fees and other costs		1,000,000
Write-off of unamortized deferred financing cost		$ 2,000,000
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term Loan Facility | Maximum
Subsequent Events
Leverage ratio		3.00
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term B-3 Loans due 2021
Subsequent Events
Aggregate principal amount		$ 535,000,000
Amortization of debt, aggregate annual amounts as a percentage of original principal amount (as a percent)		1.00%
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term B-3 Loans due 2021 | LIBOR
Subsequent Events
Percentage added to reference rate (as a percent)		2.25%
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term B-3 Loans due 2021 | Base
Subsequent Events
Percentage added to reference rate (as a percent)		1.25%
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term B-4 Loans due 2023
Subsequent Events
Aggregate principal amount		$ 546,000,000
Amortization of debt, aggregate annual amounts as a percentage of original principal amount (as a percent)		1.00%
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term B-4 Loans due 2023 | LIBOR
Subsequent Events
Percentage added to reference rate (as a percent)		2.50%
Subsequent Events | HDS (Debt Issuer) | Credit facility | Secured debt | Term B-4 Loans due 2023 | Base
Subsequent Events
Percentage added to reference rate (as a percent)		1.50%
Subsequent Events | HDS (Debt Issuer) | Credit facility | Canada | Secured debt | Senior ABL Facility due 2022
Subsequent Events
Total gross long-term debt					$ 62,000,000
Subsequent Events | Waterworks business | Discontinued Operations, Disposed of by Sale
Subsequent Events
Cash consideration					2,500,000,000
Transaction costs					40,000,000
Pre-tax gain on disposal of discontinued operations					925,000,000
Net deferred tax asset					323,000,000
Federal and state net operating loss carryforwards					$ 280,000,000
Subsequent Events | Forecast | 5.25% December 2014 Secured First Priority Notes due 2021
Subsequent Events
Loss on extinguishment of debt								$ 73,000,000
Write-off of unamortized deferred financing cost								11,000,000
Subsequent Events | Forecast | Waterworks business | Discontinued Operations, Disposed of by Sale
Subsequent Events
Income tax expense								$ 520,000,000