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 and Specialty Construction. Through
approximately 270 branches and 44 distribution centers, in the U.S. and Canada,
the Company serves these markets with an integrated go-to-market strategy. We
have approximately 11,500 associates delivering localized, customer-tailored
products, services and expertise. We serve approximately 500,000 customers,
which include contractors, maintenance professionals, home builders, industrial
businesses, and government entities. Our broad range of end-to-end product lines
and services include approximately 600,000 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 supplies, HVAC products, appliances, janitorial supplies, hardware,
kitchen and bath cabinets, window coverings, textiles and guest amenities,
healthcare maintenance and water and wastewater treatment products.

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

In addition to the reportable segments, our consolidated financial results
include "Corporate and Eliminations" which incurs 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. All Corporate operating overhead costs are
allocated to the reportable segments. Interest expense, interest income, other
non-operating income and expense, and provision for income taxes are not
allocated to the reportable segments. The Company does not allocate Corporate
assets to its reportable segments.

Acquisitions

We enter into strategic acquisitions from time to time to expand into new markets, net platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the



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acquisition method of accounting under Accounting Standards Codification ("ASC")
805, Business Combinations, the results of the acquisitions we completed are
reflected in our consolidated financial statements from the date of the
acquisition forward.

On March 5, 2018, our Construction & Industrial business acquired A.H. Harris
Construction Supplies ("A.H. Harris") for a purchase price of approximately
$359 million in cash, adjusted for the final working capital settlement received
in the second half of fiscal 2019. A.H. Harris is a leading specialty
construction distributor serving the northeast and mid-Atlantic regions. This
acquisition expands Construction & Industrial's market presence in the
northeastern United States. For additional detail related to the acquisition of
A.H. Harris, see "Note 2, Acquisitions," in the Notes to the Consolidated
Financial Statements within "Part II. Item 8. Financial Statements and
Supplementary Data" of this annual report on Form 10-K.

Discontinued operations


In August 2017, the Company completed the sale of its Waterworks business.
Including the final working capital settlement of approximately $29 million in
January 2018, the Company received cash proceeds of approximately $2.4 billion,
net of $38 million of transaction cost payments. Including the final working
capital settlement, the Company recognized a gain on sale of the Waterworks
business of approximately $732 million, net of tax of $197 million.

In accordance with ASC 205-20, Discontinued Operations, the results of the
Waterworks operation and the gain/loss on the sale and disposal of the business
are classified as discontinued operations. The presentation of discontinued
operations includes revenues and expenses of the discontinued operations and
gain on the sale of the business, 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. For additional detail related to the results of
operations of the discontinued operations, see "Note 3, Discontinued
Operations," in the Notes to the Consolidated Financial Statements within
"Part II. Item 8. Financial Statements and Supplementary Data" of this annual
report on Form 10-K.

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


Our fiscal year is a 52- or 53-week period ending on the Sunday nearest to
January 31. The fiscal year ended February 2, 2020 ("fiscal 2019") included 52
weeks. The fiscal year ended February 3, 2019 ("fiscal 2018") included 53 weeks.
The fiscal year ended January 29, 2018 ("fiscal 2017") included 52 weeks.

Key business metrics

Net sales


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

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

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

Gross profit

Gross profit primarily represents the difference between the product cost from
our suppliers (net of earned rebates and discounts) including the cost of
inbound freight and the sale price to our customers. The cost of outbound
freight, purchasing, receiving and warehousing are included in Selling, general
and administrative expenses within operating expenses. Our Gross 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), rent, insurance, utilities, repair and
maintenance and professional fees. In addition, operating expenses include
depreciation and amortization, and restructuring charges.

Adjusted EBITDA and Adjusted net income



Adjusted EBITDA and Adjusted net income are not recognized terms under generally
accepted accounting principles in the U.S. ("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 covenants that can restrict our activities
if we do not maintain financial ratios calculated based on Consolidated EBITDA.
Our Senior ABL Facility requires us to maintain a minimum fixed charge coverage
ratio of 1:1 if our specified excess availability (including an amount by which
our borrowing base exceeds the outstanding amounts) under the Senior ABL
Facility falls below the greater of $100 million and 10% of the lesser of
(A) the Borrowing Base and (B) the Total Facility Commitment (each, as defined
in the Senior ABL Facility). Adjusted EBITDA is defined as Net income 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

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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 annual report on Form 10-K. 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
"Part II. Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity, capital resources and financial condition
- External Financing."

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


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

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

? Adjusted EBITDA and Adjusted net income do not reflect changes in, or cash

requirements for, our working capital needs;

? Adjusted EBITDA does not reflect our interest expense, or the requirements

necessary to service interest or principal payments on our debt;

? Adjusted EBITDA does not reflect our income tax expenses or the cash

requirements to pay our taxes;

Adjusted EBITDA and Adjusted net income do not reflect historical cash

? expenditures or future requirements for capital expenditures or contractual

commitments; and

although depreciation and amortization charges are non-cash charges, the assets

? being depreciated and amortized will often have to be replaced in the future,


   and Adjusted EBITDA does not reflect any cash requirements for such
   replacements.


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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):

Fiscal Year Ended

February 2,      February 3,   

January 28, January 29, January 31,


                                                2020             2019             2018             2017             2016
Net income                                  $         452    $         394    $         970    $         196    $       1,472
Less income from discontinued
operations, net of tax                                  1                3              803              130              272
Income from continuing operations                     451              391              167               66            1,200
Interest expense, net                                 110              129              164              269              394
Provision (benefit) for income taxes(i)               162              135              193               51          (1,170)
Depreciation and amortization(ii)                     113              106               90               88              100
Loss on extinguishment & modification of
debt(iii)                                               -               69               84              179              100
Restructuring and separation charges(iv)                8                9                6                7                8
Stock­based compensation                               23               26               26               20               16
Acquisition and integration costs(v)                    5                6 

              1                -                -
Other                                                   1                -                -                -                2
Adjusted EBITDA                             $         873    $         871    $         731    $         680    $         650


    During the fiscal year ended January 31, 2016, the Company recorded a

$1,007 million tax benefit for the reversal of substantially all of the (i) valuation allowance on its U.S. net deferred tax assets and a $189 million

tax benefit for the reduction in unrecognized tax benefits as a result of IRS

and state audit settlements.

(ii) Depreciation and amortization includes amounts recorded within Cost of sales

in the Consolidated Statements of Operations.

Represents the loss on extinguishment of debt, including the premium paid

to repurchase or call the debt, as well as the write-off of unamortized (iii) deferred financing costs, original issue discount, and other assets or

liabilities associated with such debt. Also includes the costs of debt


      modification.


     Represents the costs incurred for separation activities and strategic

alignment of workforce. For additional information, see "Note 15, (iv) Restructuring and Separation Activities" in the Notes to the Consolidated

Financial Statements within "Part II. Item 8. Financial Statements and

Supplementary Data."

(v) Represents the costs incurred in the acquisition and integration of business


    acquisitions, including A.H. Harris.


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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):






                                                                           Fiscal Year Ended
                                            February 2,      February 3,      January 28,      January 29,      January 31,
                                               2020             2019             2018             2017             2016
Net income                                 $         452    $         394    $         970    $         196    $       1,472
Less income from discontinued
operations, net of tax                                 1                3              803              130              272
Income from continuing operations                    451              391              167               66            1,200
Plus: Provision (benefit) for income
taxes(i)                                             162              135              193               51          (1,170)
Less: Cash income taxes(ii)                         (53)             (13)             (16)             (13)             (16)
Plus: Amortization of
acquisition­related intangible assets
(other than software)                                 23               22               12               12               12
Plus: Loss on extinguishment &
modification of debt(iii)                              -               69               84              179              100
Restructuring and separation
charges(iv)                                            8                9                6                7                8
Acquisition and integration costs(v)                   5                6  

             1                -                -
Other                                                  -                -                -                -                1
Adjusted Net Income                        $         596    $         619    $         447    $         302    $         135

During the fiscal year ended January 31, 2016, the Company recorded a

$1,007 million tax benefit for the reversal of substantially all of the (i) valuation allowance on its U.S. net deferred tax assets and a $189 million

tax benefit for the reduction in unrecognized tax benefits as a result of IRS

and state audit settlements.

Cash paid for income taxes in the fiscal year ended January 28, 2018 (ii) excludes $13 million in tax payments related to the sale of the Waterworks

business unit.

Represents the loss on extinguishment of debt, including the premium paid

to repurchase or call the debt, as well as the write-off of unamortized (iii) deferred financing costs, original issue discount, and other assets or

liabilities associated with such debt. Also includes the costs of debt


      modifications.


     Represents the costs incurred for separation activities and strategic

alignment of workforce. For additional information, see "Note 15, (iv) Restructuring and Separation Activities" in the Notes to the Consolidated

Financial Statements within "Part II. Item 8. Financial Statements and

Supplementary Data."

(v) Represents the costs incurred in the acquisition and integration of business


    acquisitions, including A.H. Harris.


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Consolidated results of operations






                                                                                     Percentage
                                                 Fiscal Year                    Increase (Decrease)
Dollars in millions                      2019        2018        2017     

2019 vs. 2018    2018 vs. 2017
Net sales                              $  6,146    $  6,047    $  5,121              1.6             18.1
Gross profit                              2,403       2,375       2,033              1.2             16.8
Operating expenses:
Selling, general & administrative         1,566       1,543       1,334    

         1.5             15.7
Depreciation & amortization                 106          99          85              7.1             16.5
Restructuring and separation                  8           9           6           (11.1)             50.0
Total operating expenses                  1,680       1,651       1,425              1.8             15.9
Operating income                            723         724         608            (0.1)             19.1
Interest expense                            110         130         166           (15.4)           (21.7)
Interest (income)                             -         (1)         (2)                *           (50.0)
Loss on extinguishment &
modification of debt                          -          69          84                *           (17.9)
Income from continuing operations
before provision for income taxes           613         526         360             16.5             46.1
Provision for income taxes                  162         135         193             20.0           (30.1)
Income from continuing operations           451         391         167    

        15.3                *
Income from discontinued
operations, net of tax                        1           3         803           (66.7)                *
Net Income                             $    452    $    394    $    970             14.7           (59.4)

Non­GAAP Financial Data:
Adjusted EBITDA                        $    873    $    871    $    731              0.2             19.2
Adjusted net income                    $    596    $    619    $    447            (3.7)             38.5


* not meaningful


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                                            % of Net sales                   Basis Point
                                              Fiscal Year                Increase (Decrease)
                                       2019      2018      2017     2019 vs. 2018    2018 vs. 2017
Net sales                              100.0 %   100.0 %   100.0 %              -                -
Gross profit                            39.1      39.3      39.7             (20)             (40)
Operating expenses:

Selling, general & administrative       25.5      25.5      26.0           

    -             (50)
Depreciation & amortization              1.7       1.7       1.7                -                -
Restructuring and separation             0.1       0.1       0.1                -                -
Total operating expenses                27.3      27.3      27.8                -             (50)
Operating income                        11.8      12.0      11.9             (20)               10
Interest expense                         1.8       2.2       3.2             (40)            (100)
Interest (income)                          -         -         -                -                -
Loss on extinguishment &
modification of debt                       -       1.1       1.7            (110)             (60)
Income from continuing operations
before provision for income taxes       10.0       8.7       7.0              130              170
Provision for income taxes               2.6       2.2       3.8               40            (160)
Income from continuing operations        7.4       6.5       3.2           

   90              330
Income from discontinued
operations, net of tax                     -         -      15.7                *                *
Net Income                               7.4       6.5      18.9               90                *

Non­GAAP Financial Data:
Adjusted EBITDA                         14.2      14.4      14.3             (20)               10
Adjusted net income                      9.7      10.2       8.7             (50)              150


* Not meaningful

Fiscal 2019 compared to fiscal 2018

Highlights


Net sales in fiscal 2019 increased $99 million, or 1.6%, compared to fiscal
2018. Operating income in fiscal 2019 decreased $1 million, or 0.1%, to $723
million during fiscal 2019 as compared to fiscal 2018. Net income in fiscal 2019
increased $58 million to $452 million as compared to fiscal 2018. Adjusted
EBITDA in fiscal 2019 increased $2 million, or 0.2%, as compared to fiscal 2018.
Adjusted net income in fiscal 2019 decreased $23 million, or 3.7%, as compared
to fiscal 2018. As of February 2, 2020, our liquidity was $628 million. See
"Liquidity, capital resources and financial condition" for further information.

On September 24, 2019, the Company announced its intention to separate its
Facilities Maintenance and Construction & Industrial businesses into two
independent publicly traded companies with the separation expected to be
completed in the middle of fiscal 2020. In light of the current business
environment and in order to begin the establishment of two separate standalone
businesses, the Company made personnel changes and began assessing the
separation process, resulting in the recognition of $8 million in restructuring
and separation charges in fiscal 2019. These charges were primarily related to
professional fees incurred to execute the separation, and, to a lesser extent,
severance and other employee-related costs. The Company is in the early stages
of estimating total costs for the separation of the businesses. Fiscal 2019
included the reversal of $2 million of restructuring expenses originally
recognized in fiscal 2018. The reversal resulted from the favorable termination
of the lease associated with the Company's previous corporate headquarters,
which was exited in fiscal 2018. For additional information, see "Note 15,
Restructuring and Separation Activities" in the Notes to Consolidated Financial
Statements within "Part II. Item 8. Financial Statements and Supplementary
Data."

Net sales

Net sales increased $99 million, or 1.6%, to $6,146 million during fiscal 2019 as compared to fiscal 2018.



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Both of our reportable segments delivered an increase in Net sales during fiscal
2019 as compared to fiscal 2018. The Net sales increases were primarily due to
increases in market volume and growth initiatives at each of our businesses and,
to a lesser extent, the acquisition of A.H. Harris by Construction & Industrial.
Organic sales growth, which excludes A.H. Harris sales in fiscal 2019 through
March 4, 2019 (the one-year anniversary of the acquisition), was $75 million, or
1.2%, during fiscal 2019 as compared to fiscal 2018. In addition, fiscal 2019
included 52 weeks as compared to 53 weeks in fiscal 2018. On a 52-week basis,
organic sales growth was $179 million, or 3.0%, during fiscal 2019 as compared
to fiscal 2018. Growth initiatives contributed approximately $101 million in
fiscal 2019.

Gross profit

Gross profit increased $28 million, or 1.2%, to $2,403 million during fiscal 2019 as compared to fiscal 2018.



Both of our reportable segments delivered an increase in Gross profit in fiscal
2019 as compared to fiscal 2018 due to sales growth from growth initiatives and
increased market volume.

Gross profit as a percentage of Net sales ("gross margin") decreased approximately 20 basis points to 39.1% in fiscal 2019 as compared to 39.3% in fiscal 2018. Gross margins declined at both Facilities Maintenance and Construction & Industrial in fiscal 2019 as compared to fiscal 2018.

Operating expenses

Operating expenses increased $29 million, or 1.8%, during fiscal 2019 as compared to fiscal 2018.



Selling, general, and administrative expenses increased $23 million, or 1.5%,
during fiscal 2019 as compared to fiscal 2018. The increase was primarily a
result of increases in variable expenses due to higher sales volume and
increased investments in growth initiatives, primarily facilities. In addition,
Selling, general, and administrative expenses included $5 million and $6 million
of costs in fiscal 2019 and fiscal 2018, respectively, related to acquisition
and integration activities. Depreciation and amortization expense increased $7
million, or 7.1%, during fiscal 2019 as compared to fiscal 2018, primarily due
to investments in facilities and technology.

Operating expenses as a percentage of Net sales was flat in fiscal 2019 as compared to fiscal 2018.

Operating income



Operating income decreased $1 million, or 0.1%, to $723 million during fiscal
2019 as compared to fiscal 2018. The increase in Selling, general, and
administrative expenses and Depreciation and amortization expense were partially
offset by an increase in gross profit and reduction in restructuring and
separation charges.

Operating income as a percentage of Net sales decreased approximately 20 basis
points to 11.8% in fiscal 2019 as compared to fiscal 2018. The decline in gross
margin and increased investments in growth initiatives were partially offset by
the leverage of fixed costs through sales volume increases.

Interest expense



Interest expense decreased $20 million, or 15.4%, during fiscal 2019 as compared
to fiscal 2018. The decrease was primarily due to a decrease in the average
effective interest rate, including the impact of lower non-cash amortization of
deferred financing costs as a result of refinancing activities in fiscal 2018.

Loss on extinguishment and modification of debt

During fiscal 2018, our debt refinancing and redemption activities resulted in charges of $69 million recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.


On October 22, 2018, HDS amended its senior secured term loan facility (the
"Term Loan Facility"), incurring a modification and extinguishment charge of $5
million, which includes financing fees and other costs of $3 million and the
write-off of $2 million of unamortized discount and deferred financing costs.

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On October 11, 2018, HDS used the net proceeds from the issuance of the 5.375%
Senior Unsecured Notes due 2026 (the "October 2018 Senior Unsecured Notes"),
together with available cash and borrowings on HDS's Senior Asset Based Lending
Facility due 2022 (the "Senior ABL Facility"), to redeem all of the outstanding
$1,000 million aggregate principal of the 5.75% Senior Unsecured Notes due 2024
(the "April 2016 Senior Unsecured Notes"), incurring a $64 million loss on
extinguishment of debt, which includes a $56 million make-whole premium and the
write-off of $8 million of unamortized deferred financing costs.

See "Liquidity, capital resources and financial condition - External financing" for further information.

Provision (benefit) for income taxes



The provision for income taxes from continuing operations in fiscal 2019 was
$162 million compared to $135 million in fiscal 2018. The effective rate for
continuing operations for fiscal 2019 was 26.4%, which was primarily impacted by
the geographical mix of where income was generated and state income tax law
changes. The effective rate for continuing operations for fiscal 2018 was 25.7%
which was primarily impacted by the geographical mix of where income was
generated.

As of the end of fiscal 2019, the minimum amount of future taxable income that
needs to be generated to realize the deferred tax assets is approximately $893
million for U.S. state tax purposes. The current level of pre-tax earnings under
GAAP is sufficient to generate the minimum amount of future taxable income to
realize our U.S. federal and the majority of our state tax deferred assets prior
to their expiration. As of the end of fiscal 2019 and fiscal 2018, the Company's
remaining valuation allowance on its U.S. deferred tax assets was approximately
$6 million and $7 million, respectively.

As of February 2, 2020, the Company has approximately $47 million of tax-effected state NOL carryforwards that can be used to offset cash income taxes due on future earnings.

Adjusted EBITDA



Adjusted EBITDA increased $2 million, or 0.2%, in fiscal 2019 as compared to
fiscal 2018. Construction & Industrial generated an increase in Adjusted EBITDA
in fiscal 2019 as compared to fiscal 2018, while Facilities Maintenance was flat
in fiscal 2019 as compared to fiscal 2018.

The increase in Adjusted EBITDA was primarily due to the increase in sales
volume, partially offset by the increase in Operating expenses. Adjusted EBITDA
as a percentage of Net sales decreased approximately 20 basis points to 14.2% in
fiscal 2019 as compared to fiscal 2018, primarily due to investments in growth
initiatives, increases in certain variable cost rates, and a decline in gross
margin.

Adjusted net income

Adjusted net income decreased $23 million, or 3.7%, in fiscal 2019 as compared to fiscal 2018. The decrease in Adjusted net income was attributable to increased cash tax payments, partially offset by lower interest expense.

Fiscal 2018 compared to fiscal 2017

Highlights



Net sales in fiscal 2018 increased $926 million, or 18.1%, compared to fiscal
2017. Operating income in fiscal 2018 increased $116 million, or 19.1%, to
$724 million during fiscal 2018 as compared to fiscal 2017. Net income in fiscal
2018 decreased $576 million to $394 million as compared to fiscal 2017 due
primarily to an $800 million decrease in Income from discontinued operations,
net of tax. Adjusted EBITDA in fiscal 2018 increased $140 million, or 19.2%, as
compared to fiscal 2017. Adjusted net income in fiscal 2018 increased
$172 million, or 38.5%, as compared to fiscal 2017 due primarily to growth in
operations, and to a lesser extent, a decline in interest expense as a result of
lower outstanding debt balances. As of February 3, 2019, our liquidity was
$589 million. See "Liquidity, capital resources and financial condition" for
further information.

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On March 5, 2018, the Company completed the acquisition of A.H. Harris, expanding Construction & Industrial's market presence in the northeastern U.S.


In fiscal 2017, the Company completed the sale of its Waterworks business. The
Company recognized a gain on the sale of approximately $732 million, net of tax
of $197 million, reflected in Income from discontinued operations, net of tax,
in the Consolidated Statement of Operations. For additional information, see
"Note 3, Discontinued Operations," in the Notes to the Consolidated Financial
Statements within "Part II. Item 8. Financial Statements and Supplementary
Data."

As a result of the sale of the Waterworks business in fiscal 2017, management
evaluated the Company's talent alignment and functional support strategies.
Consequently, during the second half of fiscal 2017, management initiated a
restructuring plan that included reducing workforce personnel and realigning
talent. In addition, the Company relocated its corporate headquarters in fiscal
2018. Management completed the activities under this plan during second quarter
2018, resulting in a total of $15 million in charges incurred during fiscal 2017
and fiscal 2018. For additional information, see "Note 15, Restructuring and
Separation Activities" in the Notes to the Consolidated Financial Statements
within "Part II. Item 8. Financial Statements and Supplementary Data."

Net sales

Net sales increased $926 million, or 18.1%, to $6,047 million during fiscal 2018 as compared to fiscal 2017.



Both of our reportable segments delivered an increase in Net sales during fiscal
2018 as compared to fiscal 2017. The Net sales increases were primarily due to
increases in market volume, growth initiatives at each of our businesses, and
the acquisition of A.H. Harris by Construction & Industrial. In addition, fiscal
2018 included 53 weeks, as compared to 52 weeks in fiscal 2017, and a reduction
in selling days due to the timing of holidays. Organic sales growth, net of
change in selling days, was $473 million, or 9.2%, during fiscal 2018 as
compared to fiscal 2017. Growth initiatives contributed approximately
$285 million in fiscal 2018.

Gross profit

Gross profit increased $342 million, or 16.8%, to $2,375 million during fiscal 2018 as compared to fiscal 2017.

Both of our reportable segments delivered an increase in Gross profit in fiscal 2018 as compared to fiscal 2017 due to sales growth from increased market volume, growth initiatives, and the acquisition of A.H. Harris.



Gross margin decreased approximately 40 basis points to 39.3% in fiscal 2018 as
compared to 39.7% in fiscal 2017. The acquisition of A.H. Harris contributed to
the decline in gross margin, unfavorably impacting gross margin by approximately
40 basis points during fiscal 2018 as compared to fiscal 2017. Gross margin was
also unfavorably impacted by organic Net sales growth, net of change in
selling days in the lower margin Construction & Industrial business at 12.4%
outpacing growth in the higher margin Facilities Maintenance business at 6.6%.
These unfavorable impacts were partially offset by an improvement in gross
margin of approximately 40 basis points at Facilities Maintenance in fiscal

2018
as compared to fiscal 2017.

Operating expenses

Operating expenses increased $226 million, or 15.9%, during fiscal 2018 as compared to fiscal 2017.



Selling, general and administrative expenses increased $209 million, or 15.7%,
during fiscal 2018 as compared to fiscal 2017. The increase was primarily a
result of the acquisition of A.H. Harris, increases in variable expenses due to
higher sales volume and increased investments in growth initiatives, primarily
additional personnel and license fees for new technologies.

Operating expenses as a percentage of Net sales decreased approximately 50 basis
points to 27.3%, in fiscal 2018 as compared to fiscal 2017. Selling, general and
administrative expenses as a percentage of Net sales

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decreased approximately 50 basis points to 25.5% in fiscal 2018 as compared to
fiscal 2017. The decrease was primarily a result of the leverage of fixed costs
through sales volume increases, partially offset by increased investments in
growth initiatives.

Operating income

Operating income increased $116 million, or 19.1%, to $724 million during fiscal
2018 as compared to fiscal 2017, primarily due to higher sales volume, including
the acquisition of A.H. Harris, partially offset by the increase in Operating
expenses.

Operating income as a percentage of Net sales increased approximately 10 basis
points to 12.0% in fiscal 2018 as compared to fiscal 2017. The leverage of fixed
costs through sales volume increases was partially offset by the decline in
gross margin and increased investments in growth initiatives.

Interest expense



Interest expense decreased $36 million, or 21.7%, during fiscal 2018 as compared
to fiscal 2017. The decrease was due to a lower outstanding balance as a result
of using proceeds from the sale of a business to reduce indebtedness, partially
offset by an increase in non-cash amortization of deferred financing costs and,
to a lesser extent, an increase in variable interest rates.

Loss on extinguishment and modification of debt

During fiscal 2018, our debt refinancing and redemption activities resulted in charges of $69 million recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.

On October 22, 2018, HDS amended its Term Loan Facility, incurring a modification and extinguishment charge of $5 million, which includes financing fees and other costs of $3 million and the write-off of $2 million of unamortized discount and deferred financing costs.

On October 11, 2018, HDS used the net proceeds from the issuance of the October 2018 Senior Unsecured Notes, together with available cash and borrowings on the Senior ABL Facility, to redeem all of the outstanding $1,000 million aggregate principal of the April 2016 Senior Unsecured Notes, incurring a $64 million loss on extinguishment of debt, which includes a $56 million make-whole premium and the write-off of $8 million of unamortized deferred financing costs.

During fiscal 2017, our debt refinancing and redemption activities resulted in charges of $84 million recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.



On December 28, 2017, HDS reduced its borrowing capacity under the Senior ABL
Facility by $500 million, incurring a $3 million loss on extinguishment of debt
for the write-off of unamortized deferred financing costs.

On September 1, 2017, HDS redeemed all of the outstanding $1,250 million
aggregate principal amount of its 5.25% Senior Secured First Priority Notes (the
"December 2014 First Priority Notes"), incurring a $73 million loss on
extinguishment of debt, which includes a $62 million make-whole premium and the
write-off of $11 million of unamortized deferred financing costs.

On August 31, 2017, HDS amended its Term Loan Facility, incurring a modification
and extinguishment charge of $3 million, which includes financing fees and other
costs of $1 million and the write-off of $2 million of unamortized original
issue discount and unamortized deferred financing costs.

On August 25, 2017, HDS amended its April 2016 Senior Unsecured Notes. As a result, the Company incurred a modification charge of $3 million for financing fees.

On April 18, 2017, HDS used cash and available borrowings under its Senior ABL Facility, to repay $100 million of its aggregate principal of approximately $842 million tranche of Term Loans (the "Term B-1



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Loans") incurring a $2 million loss on extinguishment of debt, which included write-offs of unamortized original issue discount and unamortized deferred financing costs.

On April 5, 2017, HDS amended its Senior ABL Facility, incurring a $1 million loss on extinguishment of debt for the write-offs of unamortized deferred financing costs.

See "Liquidity, capital resources and financial condition - External financing" for further information.

Provision (benefit) for income taxes



The provision for income taxes from continuing operations in fiscal 2018 was
$135 million compared to $193 million in fiscal 2017. The effective rate for
continuing operations for fiscal 2018 was 25.7% which was primarily impacted by
the geographical mix of where income was generated. The effective rate for
continuing operations for fiscal 2017 was an expense of 53.6% which was
primarily impacted by the enactment of the Tax Cuts and Jobs Act of 2017, excess
tax benefits related to shareholder based compensation, and the geographical mix
of where income was generated.

As of the end of fiscal 2018, the minimum amount of future taxable income that
needs to be generated to realize the deferred tax assets is approximately
$321 million for U.S. federal tax purposes and $1,364 million for U.S. state tax
purposes. The current level of pre-tax earnings under GAAP is sufficient to
generate the minimum amount of future taxable income to realize our U.S. federal
and the majority of our state tax deferred assets prior to their expiration. As
of the end of fiscal 2018 and fiscal 2017, the Company's remaining valuation
allowance on its U.S. deferred tax assets was approximately $7 million.

As of February 3, 2019, the Company has approximately $112 million of tax-effected federal and state NOL carryforwards that can be used to offset cash income taxes due on future earnings.

Adjusted EBITDA



Adjusted EBITDA increased $140 million, or 19.2%, in fiscal 2018 as compared to
fiscal 2017. Both of our reportable segments generated an increase in Adjusted
EBITDA in fiscal 2018 as compared to fiscal 2017.

The increase in Adjusted EBITDA was primarily due to the increase in sales
volume, partially offset by the increase in Operating expenses. Adjusted EBITDA
as a percentage of Net sales increased approximately 10 basis points to 14.4% in
fiscal 2018 as compared to fiscal 2017, primarily due to the leverage of fixed
costs through sales volume increases, partially offset by increased investments
in growth initiatives and decline in gross margin.

Adjusted net income



Adjusted net income increased $172 million, or 38.5%, in fiscal 2018 as compared
to fiscal 2017. The increase in Adjusted net income was attributable to growth
in operations and lower interest expense.

Results of operations by reportable segment



Facilities Maintenance




                                               Fiscal Year                  Increase (Decrease)
                                      2019       2018       2017      2019 vs. 2018     2018 vs. 2017
                                          (Dollars in millions)
Net sales                            $ 3,130    $ 3,089    $ 2,847              1.3 %             8.5 %
Operating income                     $   474    $   478    $   434            (0.8) %            10.1 %
% of Net sales                          15.1 %     15.5 %     15.2 %           (40) bps            30 bps
Depreciation and amortization             54         48         45         

   12.5 %             6.7 %
Other                                     18         20         20           (10.0) %               -
Adjusted EBITDA                      $   546    $   546    $   499                -               9.4 %
% of Net sales                          17.4 %     17.7 %     17.5 %           (30) bps            20 bps


* not meaningful


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Fiscal 2019 compared to fiscal 2018

Net Sales



Net sales increased $41 million, or 1.3%, in fiscal 2019 as compared to fiscal
2018. The 53rd week in fiscal 2018 contributed approximately $53 million in Net
sales. On a 52-week basis, Net sales increased $94 million, or 3.1%, in fiscal
2019 as compared to fiscal 2018.

The increase in Net sales was driven by growth in the multi-family and
institutional industries and growth initiatives, partially offset by the impacts
of a slow HVAC season and disruptions during the second quarter at our Atlanta
distribution center unfavorably impacting our service capabilities in the
Southeast U.S. We have since fully restored our service capabilities. The growth
initiatives consist of investments in personnel, products, and technology
aligned with our selling channels, such as our sales force, e-commerce site and
mobile applications, and our enabling functions, such as supply chain and data
analytics.

Adjusted EBITDA

Adjusted EBITDA was flat in fiscal 2019 as compared to fiscal 2018. The 53rd week in fiscal 2018 contributed approximately $10 million in Adjusted EBITDA.



On a 52-week basis, Adjusted EBITDA increased as a result of the higher sales
volume, but was negatively impacted by an increase in Selling, general, and
administrative expenses. The increase in Selling, general, and administrative
expense was primarily related to facility expansions and inflation on lease
renewals and freight. This was partially offset by a decrease in personnel costs
as a result of lower incentive compensation, partially offset by inflation in
other employee benefits.

Adjusted EBITDA as a percentage of Net sales decreased approximately 30 basis
points in fiscal 2019 as compared to fiscal 2018. The decrease was driven by a
decline in gross margin of approximately 30 basis points, increased facilities
and equipment costs as a percentage of Net sales, and increased variable cost
rates, offset by a reduction in personnel costs as a percentage of Net sales.

Fiscal 2018 compared to fiscal 2017

Net Sales



Net sales increased $242 million, or 8.5%, in fiscal 2018 as compared to fiscal
2017. Excluding the impact of the 53rd week in fiscal 2018, Net sales increased
$189 million, or 6.6%, as compared to fiscal 2017.

The increase in Net sales was primarily due to market growth in the multifamily
and hospitality industries and growth initiatives. Facilities Maintenance is
beginning to see the sales benefits from the accelerated investments in our
sales force, selling tools and analytics that began in mid-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 and data
analytics.

Adjusted EBITDA

Adjusted EBITDA increased $47 million, or 9.4%, in fiscal 2018 as compared to fiscal 2017.

The increase in Adjusted EBITDA was primarily due to increased sales volume as a result of the accelerated investments, partially offset by the cost of such investments and incentive compensation.



Adjusted EBITDA as a percentage of Net sales increased approximately 20 basis
points in fiscal 2018 as compared to fiscal 2017. The increase was primarily
driven by an improvement in gross margin of approximately 40 basis points,
partially offset by an increase in Selling, general and administrative expenses
as a percentage of Net sales as a result of investments in growth initiatives
including personnel and license fees for new technologies.

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Construction & Industrial


                                                 Fiscal Year                        Increase (Decrease)
                                       2019            2018         2017      2019 vs. 2018     2018 vs. 2017
                                       (Dollars in millions)
Net sales                           $     3,019     $     2,961    $ 2,279              2.0 %            29.9 %
Operating income                    $       249     $       246    $   174              1.2 %            41.4 %
% of Net sales                              8.2 %           8.3 %      7.6 %           (10) bps            70 bps
Depreciation and amortization                59              58         45 

            1.7 %            28.9 %
Other                                        19              21         13            (9.5) %            61.5 %
Adjusted EBITDA                     $       327     $       325    $   232              0.6 %            40.1 %
% of Net sales                             10.8 %          11.0 %     10.2 %           (20) bps            80 bps


* not meaningful

Fiscal 2019 compared to fiscal 2018

Net Sales



Net sales increased $58 million, or 2.0%, in fiscal 2019 as compared to fiscal
2018. On an organic basis, sales growth was 1.1% in fiscal 2019 as compared to
fiscal 2018. The 53rd week in fiscal 2018 contributed approximately $51 million
in organic Net sales. On a 52-week basis, organic Net sales increased $85
million, or 2.9%, in fiscal 2019 as compared to fiscal 2018.

Growth initiatives contributed to the increase in Net sales in fiscal 2019
driven by our 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 were positively impacted by end-market improvement in the non-residential
market.

Adjusted EBITDA

Adjusted EBITDA increased $2 million, or 0.6%, in fiscal 2019 as compared to
fiscal 2018. The 53rd week in fiscal 2018 contributed approximately $3 million
in Adjusted EBITDA.

The increase in Adjusted EBITDA in fiscal 2019 as compared to fiscal 2018 was
primarily driven by increased sales volume, partially offset by increased
Selling, general and administrative costs related to inflation on lease renewals
and increased personnel expenses.

Adjusted EBITDA as a percentage of Net sales decreased approximately 20 basis
points in fiscal 2019 as compared to fiscal 2018. The decrease was driven by an
approximately 10 basis points decrease in gross margin and an increase in
Selling, general and administrative expenses as percentage of Net sales.
Selling, general and administrative expenses as a percentage of Net sales
increased primarily due to inflation on real estate and equipment lease renewals
and employee benefit costs.

Fiscal 2018 compared to fiscal 2017

Net Sales



Net sales increased $682 million, or 29.9%, in fiscal 2018 as compared to fiscal
2017. On an organic basis, excluding the sales of recently acquired A.H. Harris,
and excluding the impact of a net change in selling days due to the 53rd week
and change in holiday timing during the fourth quarter of fiscal 2018, Net sales
increased $282 million, or 12.4%, as compared to fiscal 2017.

Growth initiatives contributed to the increase in Net sales in fiscal 2018 driven by our MSA, new locations, and direct marketing initiatives. MSA is a structured approach to drive revenue at a regional level through



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analysis, tools and sales management. In addition, Net sales were positively impacted by end-market improvement in the non-residential housing market.

Adjusted EBITDA

Adjusted EBITDA increased $93 million, or 40.1%, in fiscal 2018 as compared to fiscal 2017.



The increase in Adjusted EBITDA in fiscal 2018 as compared to fiscal 2017 was
primarily driven by the acquisition of A.H. Harris, growth initiatives and
market volume. The increase was partially offset by increased Selling, general
and administrative costs related to variable expenses and the hiring of
additional associates to support the expanding business and future growth.

Adjusted EBITDA as a percentage of Net sales increased approximately 80 basis
points in fiscal 2018 as compared to fiscal 2017. The increase was driven by a
decrease in Selling, general and administrative expenses as percentage of Net
sales due to the leverage of fixed costs through sales volume increases,
partially offset by a decline in gross margins of approximately 50 basis point.
The acquisition of A.H. Harris negatively impacted gross margin by approximately
30 basis points in fiscal 2018 as compared to fiscal 2017. In addition, rebar
gross margins declined in fiscal 2018 due to an increase in steel costs driven
by tariffs and duties. We increased our pricing of rebar to recover the increase
in rebar costs, but not enough to maintain our gross margin rate, negatively
affecting our overall margin rate by approximately 20 basis points in fiscal
2018 as compared to fiscal 2017.

Liquidity, capital resources and financial condition

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 fiscal 2019, the Company's use of cash was primarily driven by net repayments of debt, purchase of treasury shares, and capital expenditures. These uses were substantially offset by cash provided by operations.



As of February 2, 2020, our combined liquidity of approximately $628 million was
comprised of $34 million in cash and cash equivalents and $594 million of
additional available borrowings (excluding $4 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:




                                     Fiscal 2019      Fiscal 2018      

Fiscal 2017


                                                  Amounts in millions
Net cash provided by (used for):
Operating activities                $         677    $         584    $         502
Investing activities                        (112)            (477)            2,329
Financing activities                        (569)            (627)          (2,348)

Free cash flow:
Operating activities                $         677    $         584    $         502
Less: Capital expenditures                  (106)            (115)             (94)
Free cash flow                      $         571    $         469    $         408




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Working capital

Working capital, excluding cash and cash equivalents, was $815 million as of
February 2, 2020, increasing $13 million as compared to $802 million as of
February 3, 2019. Working capital increased as a result of business growth that
resulted in increases in Receivables and Inventory, offset by increases in
Accounts Payable. The change in working capital also included an increase of
$110 million for the Current portion of lease liabilities due to the adoption of
ASC 842, Leases, on the first day of fiscal 2019 offset by a decrease of $87
million in Other current liabilities for the payment of the corporate
headquarters financing liability. Additionally, working capital increased as a
result of a decline in Accrued compensation and benefits due to timing of
payments.

Operating activities



During fiscal 2019 cash provided by operating activities was $677 million
compared to $584 million in fiscal 2018. Cash interest paid in fiscal 2019 was
$105 million, compared to $121 million in fiscal 2018. Cash flows from operating
activities included payments of $4 million of original issue discounts related
to the extinguishment of a portion of the Term Loans in fiscal 2018. Excluding
the cash interest payments in both periods and original issue discounts paid,
cash flows from operating activities for continuing operations increased
approximately $73 million in fiscal 2019 as compared to fiscal 2018. The
increase in operating cash flows excluding interest and original issue discount
is primarily attributable to growth in earnings and efficiency in use of working
capital, partially offset by cash tax payments.

During fiscal 2018 cash provided by operating activities was $584 million
compared to $502 million in fiscal 2017. Cash interest paid in fiscal 2018 was
$121 million, compared to $159 million in fiscal 2017. Cash flows from operating
activities included payments of $4 million and $6 million of original issue
discounts related to the extinguishment of a portion of the Term Loans in fiscal
2018 and fiscal 2017, respectively. Cash flows provided by operating activities
for discontinued operations were zero and $27 million in fiscal 2018 and fiscal
2017, respectively. Excluding the cash interest payments in both periods and
original issue discounts paid, cash flows from operating activities for
continuing operations increased approximately $69 million in fiscal 2018 as
compared to fiscal 2017. The increase in operating cash flows excluding
interest, original issue discount, and discontinued operations is primarily
attributable to growth in earnings of continuing operations, partially offset by
investments in working capital for business growth.

Investing activities

During fiscal 2019, cash used by investing activities was $112 million, primarily comprised of $106 million of capital expenditures.

During fiscal 2018, cash used by investing activities was $477 million, comprised of $362 million for the acquisition of A.H. Harris and $115 million of capital expenditures.



During fiscal 2017, cash provided by investing activities was $2,329 million,
primarily comprised of $2,421 of cash proceeds from the sales of businesses,
partially offset by $94 million of capital expenditures.

Financing activities

During fiscal 2019, cash used in financing activities was $569 million, primarily due to purchases of treasury shares of $385 million, net debt repayments of $98 million, the payment of the corporate headquarters financing liability of $88 million, and tax withholdings on stock-based awards of $6 million, partially offset by net proceeds from employee stock-based awards activities of $9 million.



During fiscal 2018, cash used in financing activities was $627 million,
primarily due to net debt repayments of $19 million including premiums to redeem
debt prior to maturity, purchases of treasury shares of $596 million, and
payments of debt issuance costs of $19 million, partially offset by net proceeds
from employee stock-based awards activities of $6 million.

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During fiscal 2017, cash used in financing activities was $2,348 million,
primarily due to net debt repayments of $1,783 million, including premiums to
redeem debt prior to maturity, purchase of treasury shares of $584 million, and
payments for debt issuance costs of $26 million; partially offset by net
proceeds from employee stock-based awards activities of $41 million.

External financing



As of February 2, 2020, HDS had an aggregate principal amount of $2,067 million
of outstanding debt, net of unamortized original issue discounts and unamortized
deferred financing costs of $3 million and $18 million, respectively, and an
additional $598 million of available borrowings under its Senior ABL Facility
(after giving effect to the borrowing base limitations and approximately $24
million in letters of credit issued and including $4 million of borrowings
available on qualifying cash balances). We may from time to time repurchase or
otherwise retire or extend our debt and/or take other steps to reduce our debt
or otherwise improve our financial position. These actions may include open
market debt repurchases, negotiated repurchases, other retirements of
outstanding debt, and/or opportunistic refinancing of debt. The amount of debt
that may be repurchased or otherwise retired or refinanced, if any, will depend
on market conditions, trading levels of our debt, our cash position, compliance
with debt covenants and other considerations. Our affiliates may also purchase
our debt from time to time, through open market purchases or other transactions.
In such cases, our debt may not be retired, in which case we would continue to
pay interest in accordance with the terms of the debt, and we would continue to
reflect the debt as outstanding in our consolidated statements of financial
position.

For additional information, see "Note 6, Debt," in the Notes to the Consolidated Financial Statements within "Part II. Item 8. Financial Statements and Supplementary Data."

Commodity and interest rate risk

Commodity risk


We are aware of the potentially unfavorable effects inflationary pressures may
create through higher asset replacement costs and related depreciation, higher
interest rates and higher material costs. In addition, our operating performance
is affected by price fluctuations in the commodity-based products that we
purchase and sell, which contain commodities such as steel and refrigerants. We
are also exposed to fluctuations in petroleum costs as we deliver a substantial
portion of the products we sell by truck. We seek to minimize the effects of
inflation and changing prices through economies of scale in purchasing and
inventory management, resulting in cost reductions and productivity
improvements, as well as price increases to maintain reasonable gross margins.

As discussed above, our results of operations were impacted by fluctuating commodity prices based on our ability or inability to pass increases in the costs of certain commodity-based products to our customers through price increases. Such commodity price fluctuations have from time to time produced volatility in our financial performance and could do so in the future.

Interest rate risk related to debt



We are subject to interest rate risk associated with our debt. While changes in
interest rates impact the fair value of the fixed-rate debt, there is no impact
to earnings and cash flow. Alternatively, while changes in interest rates do not
affect the fair value of our variable-rate debt, they do affect future earnings
and cash flows.

HDS's Senior ABL Facility and Term Loan Facility bear variable interest rates.

The Senior ABL Facility bears interest (i) in the case of U.S. dollar

denominated loans, either at LIBOR or the Prime Rate, at the option of the

Company, plus applicable borrowing margins and (ii) in the case of Canadian

? dollar denominated loans, either at the BA Rate or the Canadian Prime Rate, at

the option of the Company, plus applicable borrowing margins. The borrowing

margins are defined by a pricing grid, as included in the ABL Facility

agreement, based on average excess availability for the previous quarter.




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The Term B-5 Loans bear interest at the applicable margin for borrowings of

? 1.75% for LIBOR borrowings and 0.75% for base rate borrowings, with a LIBOR

floor of zero.


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

After giving effect to our interest rate swap agreement, a 1% increase in
interest rates on our variable-rate debt would increase our annual forecasted
interest expense by approximately $6 million based on our outstanding borrowings
as of February 2, 2020. See "Part 1. Item 1A. Risk Factors - Risks Relating to
Our Indebtedness - Increases in interest rates would increase the cost of
servicing our debt and could reduce our profitability."

Off-balance sheet arrangements

Prior to our adoption of ASC 842, Leases, in fiscal 2019, our operating leases were not reflected in Consolidated Balance Sheets.

Contractual obligations



The following table discloses aggregate information about our contractual
obligations as of February 2, 2020 and the periods in which payments are due
(amounts in millions):


                                                                         Payments due by period
                                                         Fiscal        Fiscal           Fiscal        Fiscal years
                                              Total       2020       2021 - 2022      2023 - 2024      after 2024
Long-term debt                               $ 2,067    $     11    $         282    $       1,024    $         750
Interest on long-term debt(i)                    471          97              185              120               69
Operating leases                                 588         132              225              129              102
Purchase obligations(ii)                         224         217                7                -                -

Total contractual cash obligations           $ 3,350    $    457    $      

699 $ 1,273 $ 921

The interest rates for the Senior ABL Facility and Term Loans are calculated (i) based on the rates as of February 2, 2020. Total future interest on long-term

debt includes the effect of the interest rate swap agreement.

Purchase obligations include various commitments with vendors to purchase (ii) goods and services, primarily inventory. These purchase obligations are

generally cancelable, but the Company has no intent to cancel. The Company

has IT service contracts payable through fiscal 2024.

Recent accounting pronouncements



See "Note 1, Nature of Business and Summary of Significant Accounting Policies,"
in the Notes to the Consolidated Financial Statements within "Part II. Item 8.
Financial Statements and Supplementary Data."

Our critical accounting policies include:

Revenue recognition



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

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

Allowance for doubtful accounts



We evaluate the collectability of accounts receivable based on numerous factors,
including past transaction history with customers, their credit worthiness and
an assessment of our lien and bond rights. Initially, we estimate an allowance
for doubtful accounts as a percentage of aged receivables. This estimate is
periodically adjusted when we become aware of a specific customer's inability to
meet its financial obligations (e.g., bankruptcy filing) or as a result of
changes in our historical collection patterns. While we have a large customer
base that is geographically dispersed, a slowdown in the markets in which we
operate may result in higher than expected uncollectible accounts, and, as a
result, the need to revise estimates for bad debts. To the extent historical
credit experience is not indicative of future performance or other assumptions
used by management do not prevail, the allowance for doubtful accounts could
differ significantly, resulting in either higher or lower future provisions

for
doubtful accounts.

Inventories

Inventories consist primarily of finished goods and are carried at the lower of
cost or net realizable value. The cost of substantially all of our inventories
is determined by the moving or weighted average cost method. We evaluate our
inventory value at the end of each quarter to ensure that it is carried at the
lower of cost or net realizable value. This evaluation includes an analysis of
historical physical inventory results, a review of potential excess and obsolete
inventories based on inventory aging and anticipated future demand.
Periodically, each location's perpetual inventory records are adjusted to
reflect any declines in net realizable value below inventory carrying cost. To
the extent historical physical inventory results are not indicative of future
results and if future events impact, either favorably or unfavorably, the
saleability of our products or our relationship with certain key vendors, our
inventory reserves could differ significantly, resulting in either higher or
lower future inventory provisions.

Consideration received from vendors



We enter into agreements with many of our vendors providing for inventory
purchase rebates ("vendor rebates") upon achievement of specified volume
purchasing levels. We accrue the receipt of vendor rebates as part of our cost
of sales for products sold based on progress towards earning the vendor rebates,
taking into consideration cumulative purchases of inventory to date and
projected purchases through the end of the year. An estimate of vendor rebates
is included in the carrying value of inventory at each period end for vendor
rebates to be received on products not yet sold. While we believe we will
continue to receive consideration from vendors in fiscal 2020 and thereafter,
there can be no assurance that vendors will continue to provide comparable
amounts of vendor rebates in the future.

Impairment of long-lived assets



Long-lived assets, including property and equipment, are reviewed for possible
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. To analyze recoverability, we project
undiscounted future cash flows over the remaining life of the asset. If these
projected cash flows are less than the carrying amount, an impairment loss is
recognized based on the fair value of the asset less any costs of disposition.
Our judgment regarding the existence of impairment indicators are based on
market and operational performance. Future events could cause us to conclude
that impairment indicators exist and that assets are impaired. Evaluating the
impairment also requires us to estimate future operating results and cash flows
that require judgment by management. If different estimates were used, the
amount and timing of asset impairments could be affected.

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Business Combinations, Goodwill, and Other Intangible Assets



We allocate the purchase price paid for business acquisitions to identifiable
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase price paid over the fair
values of these identifiable assets and liabilities is allocated to goodwill.
The allocation of the purchase price paid requires management to make
significant estimates and assumptions, especially with respect to intangible
assets. These estimates can include, but are not limited to, timing and amounts
of future expected cash flows of acquired customers and trade names from a
market participant perspective, estimated revenue growth rates, estimates of
useful lives, and discount rates. Management's estimates of fair value are based
upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable and, as a result, actual results may differ from estimates.
During the measurement period, which is up to one year from the acquisition
date, we may record adjustments to the assets acquired and liabilities assumed,
with the corresponding offset to goodwill. Upon the conclusion of the
measurement period, any subsequent adjustments are recorded to earnings.

We periodically assess the carrying value of goodwill by reviewing the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis. We assess the recoverability of goodwill in the fourth quarter of each fiscal year.



We also use judgment in assessing whether we need to test goodwill more
frequently for impairment than annually given factors such as unexpected adverse
economic conditions, competition, product changes and other events. If the
carrying amount of a reporting unit that contains goodwill exceeds fair value, a
possible impairment would be indicated.

We assess each reporting unit qualitatively to determine if it is more likely
than not that the fair value of one, or more, of our reporting units is less
than its book value. If based on the qualitative analysis, we conclude that it
is more likely than not that the fair value of one, or more, of our reporting
units fair values is less than its book value, we determine the fair value of
the reporting unit, or units, for further testing using a quantitative method.

Quantitatively, we determine the fair value of a reporting unit using a discounted cash flow ("DCF") analysis and a market comparable method, with each method being equally weighted in the calculation.



Determining fair value requires the exercise of significant judgment, including
judgment about appropriate discount rates, the amount and timing of expected
future cash flows, as well as relevant comparable company earnings multiples for
the market comparable approach. The cash flows employed in the DCF analyses are
based on the Company's most recent long-range forecast and, for years beyond the
forecast, the Company's estimates, which are based on estimated exit multiples
times the final forecasted year earnings before interest, taxes, depreciation
and amortization. The discount rates used in the DCF analyses are intended to
reflect the risks inherent in the future cash flows of the respective reporting
units. For the market comparable approach, the Company evaluated comparable
company public trading values, using earnings multiples and sales multiples that
are used to value the reporting units.

There was no indication of impairment in any of the Company's reporting units in the fiscal 2019, fiscal 2018 or fiscal 2017 annual tests.



The Company's DCF model is based on our expectation of future market conditions
for each of the reporting units, as well as discount rates that would be used by
market participants in an arms-length transaction. Future events could cause the
Company to conclude that market conditions have declined or discount rates have
increased to the extent that the Company's goodwill could be further impaired.
It is not possible at this time to determine if any such future impairment
charge would result.

Income Taxes



Income taxes are determined under the asset and liability method as required by
ASC 740, Income Taxes. Income tax expense or benefit is based on pre-tax
financial accounting income. Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between the tax

bases
of assets and

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liabilities and their reported amounts. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled.

At February 2, 2020, the Company's U.S. operations continued to have cumulative
consolidated pre-tax income for the most recent three-year period. Management
concluded that as a consequence of the Company's three-year cumulative
consolidated pre-tax income, generating taxable income in fiscal 2017, 2018, and
2019, the Company's long NOL carryforward periods, a significant reduction in
the Company's recent interest expense, and the Company's business plan for
fiscal 2020 and beyond showing continued profitability, that it is more likely
than not that substantially all of the Company's U.S. deferred tax assets will
be realized. As a result, the Company concluded that no additional valuation
allowance on its U.S. Federal and state deferred tax assets was necessary.

The Company follows the GAAP guidance for uncertain tax positions within
ASC 740, Income Taxes. ASC 740 provides guidance related to the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. The standard prescribes the minimum recognition threshold
that a tax position is required to meet before being recognized in the financial
statements. ASC 740 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. Initial
recognition, derecognition and measurement is based on management's judgment
given the facts, circumstances and information available at the reporting date.
We reevaluate uncertain tax positions on a quarterly basis. This evaluation is
based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, effectively settled issues under audit, and
new audit activity. Such a change in recognition or measurement could result in
the recognition of a tax benefit or an additional charge to the tax provision.

For the Global Intangible Low-Tax Income ("GILTI") provisions of the Tax Cuts
and Jobs Act of 2017, the Company has elected GILTI as a period cost if and

when
incurred.

Self-insurance

We have a high deductible insurance program for most losses related to general
liability, product liability, environmental liability, automobile liability,
workers' compensation, and we are self-insured for medical claims, while
maintaining per employee stop loss coverage, and certain legal claims. 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. To the extent the projected future development of the
losses resulting from environmental, workers' compensation, automobile, general
and product liability claims incurred as of February 2, 2020 differs from the
actual development of such losses in future periods, our insurance reserves
could differ significantly, resulting in either higher or lower future insurance
expense.

Management estimates

Management believes the assumptions and other considerations used to estimate
amounts reflected in our consolidated financial statements are appropriate.
However, if actual experience differs from the assumptions and other
considerations used in estimating amounts reflected in our consolidated
financial statements, the resulting changes could have a material adverse effect
on our consolidated results of operations, and in certain situations, could have
a material adverse effect on our financial condition.

Stock-Based Compensation


Our stock option expense is estimated at the grant date based on an award's fair
value as calculated by the Black-Scholes option-pricing model and is recognized
as an expense over the requisite service period. The Black-Scholes model
requires various highly judgmental assumptions including expected volatility and
option life. If any of the assumptions used in the Black-Scholes model change
significantly, stock-based compensation

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expense may differ materially in the future from that recorded in the current
period. In addition, we estimate an expected forfeiture rate on all of our
stock-based compensation awards and only recognize expense for those awards
expected to vest. We estimate the forfeiture rate based on historical
experience. To the extent our actual forfeiture rate is different from our
estimate, stock-based compensation expense is adjusted accordingly. See
"Note 12-Stock Based Compensation and Employee Benefit Plans" in the Notes to
the Consolidated Financial Statements within "Part II. Item 8. Financial
Statements and Supplementary Data."

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