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MarketScreener Homepage  >  Equities  >  Nasdaq  >  HD Supply Holdings, Inc.    HDS

HD SUPPLY HOLDINGS, INC.

(HDS)
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HD Supply : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND HD SUPPLY RESULTS OF OPERATIONS

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09/09/2020 | 07:05am EDT

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



Overview



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



HD Supply is one of the largest industrial distributors in North America. We
believe we have leading positions in the two distinct market sectors in which we
specialize: Maintenance, Repair & Operations ("MRO") and Specialty Construction.
Through approximately 270 branches and 44 distribution centers, in the U.S. and
Canada, we serve these markets with an integrated go-to-market strategy. We have
more than 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 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.



Impact of COVID-19 on Our Business

The COVID-19 pandemic has resulted, and is likely to continue to result, in
significant economic disruption and has and will likely continue to adversely
affect our business. As of the date of this filing, significant uncertainty
exists concerning the magnitude of the impact and duration of the COVID-19
pandemic and the magnitude of the impact of the pandemic on our sales,
operations, and supply chain and our customers, suppliers, vendors, and business
partners.



HD Supply was deemed an essential business in all areas in which we operate. As
a result, we continue to service our customers. However, our customers have been
impacted by various factors related to the pandemic, including the response of
governmental and other regulatory authorities to the pandemic, such as
"shelter-in-place," "stay-at-home" orders, mandatory quarantine orders, travel
restrictions, and restrictions on landlord remedies. These factors resulted in a
slowing of our sales to the affected customers. Many of Facilities Maintenance's
hospitality customer locations were closed or operating at a meaningfully
diminished capacity, which negatively impacted sales beginning in the last half
of the first quarter and may negatively impact sales until the response to the
COVID-19 pandemic moderates. Similarly, our Construction & Industrial facilities
continue to operate, but we initially restricted public access to our branches
and showrooms, and instead serviced our customers through customer pickup areas
in the front of our locations, as well as continued job-site deliveries and
direct deliveries. Many of the markets in which we operate have begun to ease
restrictions that were in place earlier in the year, subject to change depending
on the scope and nature of the continuing pandemic.



With respect to liquidity, we are continuously evaluating our cash positions and
have taken actions to reduce costs and spending across our organization. This
includes reducing hiring activities, adjusting pay programs, negotiating rent
payment deferrals at our leased facilities, and limiting discretionary spending.
We have also reduced anticipated spending on certain capital investment projects
and chose to not repurchase any shares under the March 2020 authorized share
repurchase program, instead focusing on enhancing our liquidity position.  In
addition, we may choose and currently have the ability to access available
credit facilities and have capacity to do so. See "Liquidity and capital
resources - External Financing" of this Item 2 of this quarterly report on
Form
10-Q for further information.



We will continue to actively monitor the situation and may take further actions
that alter our business operations as may be required by federal, state or local
authorities or that we determine are in the best interests of our employees,
customers, suppliers, and shareholders. Alternatively, we may reverse some of
the actions previously taken as we deem appropriate, including repurchasing
shares under the March 2020 authorized share repurchase program.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND HD SUPPLY RESULTS OF 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, the Company's consolidated financial
results include Corporate. Corporate incurs costs related to the Company's
centralized support functions, which are comprised of finance, information
technology, human resources, legal, supply chain and other support services. All
Corporate overhead costs are allocated to the reportable segments. Eliminations
include the adjustments necessary to eliminate intercompany transactions.



Discontinued Operations


On August 10, 2020, the Company entered into a definitive agreement to sell its
Construction & Industrial business to an affiliate of Clayton, Dubilier & Rice.
The purchase price of $2.9 billion is payable in cash at closing and may be
adjusted for certain purchase price adjustments, as defined in the Transaction
Agreement. The Company expects to receive approximately $2.5 billion of net
proceeds after taxes and transaction costs. The transaction is expected to close
in the third quarter of fiscal 2020 subject to customary regulatory approvals.
In accordance with ASC 205-20, "Discontinued Operations," the Company will
reflect the Construction & Industrial business as a discontinued operation in
its financial statements beginning in the third quarter of fiscal 2020. For
additional information, see "Note 14 - Subsequent Event," in the Notes to
Consolidated Financial Statements within Item 1 of this quarterly report on
Form
10-Q.



Acquisitions


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




Seasonality



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



Fiscal Year



HD Supply's fiscal year is a 52- or 53-week period ending on the Sunday nearest
to January 31.  The fiscal years ending January 31, 2021 ("fiscal 2020") and
February 2, 2020 ("fiscal 2019") both include 52 weeks. The three months ended
August 2, 2020 ("second

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

quarter 2020") and August 4, 2019 ("second quarter 2019") both include 13 weeks. The six months ended August 2, 2020 and August 4, 2019 both include 26 weeks.


Key business metrics



Net sales


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



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




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



Gross profit



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



Operating expenses



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

Adjusted EBITDA, Adjusted net income, and Free cash flow

Adjusted EBITDA, Adjusted net income, and Free cash flow 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 or, in the
case of Free cash flow, operating activities  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, Adjusted net income, and Free cash flow 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. We believe that
Free cash flow provides investors a better understanding of the Company's
liquidity position.



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





Adjusted EBITDA is based on ''Consolidated EBITDA,'' a measure which is defined
in our Senior Credit Facilities and used in calculating financial ratios in
several material debt covenants. Borrowings under these facilities are a key
source of liquidity and our ability to borrow under these facilities depends
upon, among other things, our compliance with such financial ratio covenants. In
particular, both facilities contain restrictive covenants that can restrict our
activities if we do not maintain financial ratios calculated based on
Consolidated EBITDA. Our Senior ABL Facility requires us to maintain a minimum
fixed charge coverage ratio of 1:1 if our specified excess availability
(including an amount by which our borrowing base exceeds the outstanding
amounts) under the Senior ABL Facility falls below the greater of $100 million
and 10% of the lesser of (A) the Borrowing Base and (B) the Total Facility
Commitment (both as defined in the Senior ABL Facility agreement). Adjusted
EBITDA is defined as Net income (loss) less Income from discontinued operations,
net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision
for income taxes, (iii) Depreciation and amortization and further adjusted to
exclude loss on extinguishment of debt, non-cash items and certain other
adjustments to Consolidated Net Income, including costs associated with capital
structure enhancements permitted in calculating Consolidated EBITDA under our
Senior Credit Facilities. We believe that presenting Adjusted EBITDA is
appropriate to provide additional information to investors about how the
covenants in those agreements operate and about certain non-cash and other
items. The Term Loan Facility and Senior ABL Facility permit us to make certain
additional adjustments to Consolidated Net Income in calculating Consolidated
EBITDA, such as projected net cost savings, which are not reflected in the
Adjusted EBITDA data presented in this quarterly report on Form 10-Q. We may in
the future reflect such permitted adjustments in our calculations of Adjusted
EBITDA. These covenants are important to the Company as failure to comply with
certain covenants would result in a default under our Senior Credit Facilities.
The material covenants in our Senior Credit Facilities are discussed in our
annual report on Form 10-K for the fiscal year ended February 2, 2020.



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.
Effective with second quarter 2020 reporting, we modified the definition of
Adjusted net income to remove the exclusions of the tax provision and
amortization of acquisition-related intangible assets (other than software) and
addition of cash tax payments. We believe this revised presentation is more
useful since we have exhausted our federal net operating loss carryforwards and
become a regular taxpayer. All periods presented have been revised to reflect
the modified definition. Free cash flow is defined as operating activities
less
capital expenditures.



We believe that Adjusted EBITDA, Adjusted net income, and Free cash flow are
frequently used by securities analysts, investors and other interested parties
in their evaluation of companies, many of which present an Adjusted EBITDA,
Adjusted net income, and Free cash flow 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,
Adjusted net income , and Free cash flow 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, Adjusted net income , and Free cash flow 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, the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented (amounts in millions):





                                                     Three Months Ended                        Six Months Ended
                                            August 2, 2020        August 4, 2019     August 2, 2020        August 4, 2019
Net income                                 $            131      $            135    $           203      $            242
Interest expense, net                                    24                    28                 49                    56
Provision for income taxes                               43                    48                 67                    83
Depreciation and amortization(1)                         30                    27                 59                    54
Restructuring and separation charges(2)                   4                     -                 10                   (2)
Stock-based compensation                                  5                     5                 12                    12
Acquisition and integration costs(3)                      -                
    -                  -                     1
Other                                                     1                     1                  1                     1
Adjusted EBITDA                            $            238      $            244    $           401      $            447

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

in the Consolidated Statements of Operations.

Represents the costs related to separation activities and personnel changes,

primarily severance and other employee-related costs, and costs related to (2) deferring certain projects during the separation preparations. For the six

months ended August 4, 2019, the Company recognized a favorable termination

of the lease for its former corporate headquarters.

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

    acquisitions, including A.H. Harris Construction Supplies.




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


                                                           Three Months Ended                        Six Months Ended
                                                  August 2, 2020        August 4, 2019     August 2, 2020        August 4, 2019
Net income                                       $            131      $            135    $           203      $            242
Plus: Restructuring and separation charges(1)                   4                     -                 10                   (2)
Plus: Acquisition and integration costs(2)                      -                     -                  -                     1
Plus: Tax benefit for adjustments(3)                          (1)          
          -                (2)                     -
Adjusted Net Income                              $            134      $            135    $           211      $            241

Represents the costs related to separation activities and personnel changes,

primarily severance and other employee-related costs, and costs related to (1) deferring certain projects during the separation preparations. For the six

months ended August 4, 2019, the Company recognized a favorable termination

of the lease for its former corporate headquarters.

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

acquisitions, including A.H. Harris Construction Supplies.

Adjustments to Net income have been tax effected at the Company's combined (3) annual federal and state statutory tax rates of 25.8% for the three and six

    months ended August 2, 2020 and 25.7% for the three and six months ended
    August 4, 2019.


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

Consolidated results of operations



Dollars in millions




                                                                                   Percentage                                          Percentage
                                                    Three Months Ended              Increase              Six Months Ended              Increase
                                             August 2,2020       August 4,2019     (Decrease)     August 2,2020      August 4,2019     (Decrease)
Net sales                                   $         1,552     $         1,624         (4.4) %  $         2,947    $         3,117         (5.5) %
Gross Profit                                            596                 633         (5.8)              1,146              1,218         (5.9)
Operating expenses:
Selling, general, and administrative                    366                
396         (7.6)                762                788         (3.3)
Depreciation and amortization                            28                  26           7.7                 55                 51           7.8
Restructuring and separation                              4                   -             *                 10                (2)             *
Total operating expenses                                398                 422         (5.7)                827                837         (1.2)
Operating Income                                        198                 211         (6.2)                319                381        (16.3)
Interest expense                                         24                  28        (14.3)                 49                 56        (12.5)
Income Before Provision for Income Taxes                174                
183         (4.9)                270                325        (16.9)
Provision for income taxes                               43                  48        (10.4)                 67                 83        (19.3)
Net Income                                  $           131     $           135         (3.0)    $           203    $           242        (16.1)
Non-GAAP financial data:
Adjusted EBITDA                             $           238     $           244         (2.5)    $           401    $           447        (10.3)
Adjusted net income                         $           134     $           135         (0.7)    $           211    $           241        (12.4)


* Not meaningful




                                                  % of Net Sales                              % of Net Sales
                                                Three Months Ended       Basis Point         Six Months Ended        Basis Point
                                             August 2,     August 4,      Increase       August 2,     August 4,       Increase
                                                2020          2019        (Decrease)        2020          2019        (Decrease)
Net sales                                         100.0 %       100.0 %             -         100.0 %       100.0 %            -
Gross Profit                                       38.4          39.0            (60)          38.9          39.1           (20)
Operating expenses:
Selling, general, and administrative               23.5          24.4      
     (90)          25.9          25.4             50
Depreciation and amortization                       1.8           1.6              20           1.9           1.6             30
Restructuring and separation                        0.3             -              30           0.3         (0.1)             40
Total operating expenses                           25.6          26.0            (40)          28.1          26.9            120
Operating Income                                   12.8          13.0            (20)          10.8          12.2          (140)
Interest expense                                    1.6           1.7            (10)           1.6           1.8           (20)
Income Before Provision for Income Taxes           11.2          11.3      
     (10)           9.2          10.4          (120)
Provision for income taxes                          2.8           3.0            (20)           2.3           2.6           (30)
Net Income                                          8.4           8.3              10           6.9           7.8           (90)
Non-GAAP financial data:
Adjusted EBITDA                                    15.3          15.0              30          13.6          14.3           (70)
Adjusted net income                                 8.6           8.3              30           7.2           7.7           (50)




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




Highlights



Second quarter 2020 results were negatively impacted by the response of
governmental and other regulatory authorities, including "shelter-in-place" and
"stay-at-home" orders to the COVID-19 pandemic put into place during the three
months ended May 3, 2020 ("first quarter 2020"). While HD Supply was deemed an
essential business in all areas in which we operate, the impact to our customers
by the various factors related to the pandemic resulted in a slowing of our
sales. These economic impacts generally began in mid-March 2020, which is the
middle of our first quarter 2020. During second quarter 2020, many of the
markets in which we operate began easing responses and restrictions that were in
place at the beginning of the period.



Net sales in second quarter 2020 decreased $72 million, or 4.4%, as compared to
second quarter 2019. Operating income in second quarter 2020 decreased $13
million, or 6.2%, as compared to second quarter 2019. Net income in second
quarter 2020 decreased $4 million, or 3.0%, to $131 million as compared to
second quarter 2019. Adjusted EBITDA in second quarter 2020 decreased $6
million, or 2.5%, as compared to second quarter 2019. Adjusted net income in
second quarter 2020 decreased $1 million, or 0.7%, as compared to second quarter
2019. As of August 2, 2020, our total liquidity was $995 million, an increase of
$367 million since the end of fiscal 2019. See "Liquidity and capital resources
- External Financing" of this Item 2 of this quarterly report on Form 10-Q
for
further information.



Net sales



Net sales in second quarter 2020 decreased $72 million, or 4.4%, compared to
second quarter 2019 and $170 million, or 5.5%, in the first six months of fiscal
2020 as compared to the same period in fiscal 2019.



Both of our reportable segments experienced a decrease in Net sales in second
quarter 2020 and in the first six months of fiscal 2020 as compared to the same
periods in fiscal 2019. The Net sales decreases were primarily due to a decrease
in volume related to the response by governmental and other regulatory
authorities to the COVID-19 pandemic during first quarter 2020 with moderate
improvement in sales volume as the markets in which we operate began easing
restrictions during second quarter 2020. Average year-over-year daily sales
changes for the fiscal 2020 months of February, March, April, May, June, and
July were an increase of 8.8%, an increase of 0.5%, a decrease of 22.6%, a
decrease of 7.3%, a decrease of 4.8%, and a decrease of 2.0%, respectively.
There were 20 selling days in February, 20 selling days in March, 25 selling
days in April, 19 selling days in May, 20 selling days in June, and 24 selling
days in July in both  fiscal 2020 and fiscal 2019.



Gross profit


Gross profit decreased $37 million, or 5.8%, during second quarter 2020 as compared to second quarter 2019 and $72 million, or 5.9%, during the first six months of fiscal 2020 as compared to the same period in fiscal 2019.




Gross profit as a percentage of Net sales ("gross margin") decreased
approximately 60 basis points to 38.4% in second quarter 2020 as compared to
39.0% in second quarter 2019 and approximately 20 basis points to 38.9% in the
first six months of fiscal 2020 as compared to 39.1% in the same period in
fiscal 2019. Facilities Maintenance experienced a decline in gross profit in
both periods while Construction & Industrial experienced a slight increase
in
gross profit in both periods.



Operating expenses


Operating expenses decreased $24 million, or 5.7%, during second quarter 2020 as compared to second quarter 2019 and $10 million, or 1.2%, in the first six months of fiscal 2020 as compared to the same period in fiscal 2019.



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Selling, general, and administrative expenses decreased in both periods of
fiscal 2020 as compared to the same periods in fiscal 2019 primarily due to
decreases in variable costs including personnel, travel and other controllable
costs. During the first six months of fiscal 2020, these decreases were
partially offset by an increase in insurance claims, fixed facility and
equipment costs, and charges for expected credit losses. Depreciation and
amortization expense increased in both periods due to investments in facilities
and technology during fiscal 2019. Restructuring and separation expenses in
second quarter 2020 and the first six months of fiscal 2020 were primarily due
to professional fees incurred to execute the separation of the Company's planned
separation of its Facilities Maintenance and Construction & Industrial
businesses, and, to a lesser extent, severance and other employee-related costs
and the costs of deferring certain projects during the separation preparations.
Restructuring and separation expenses in the first six months of fiscal 2019
included the reversal of $2 million of restructuring expenses incurred in fiscal
2018. The reversal resulted from the favorable termination of the lease
associated with the Company's former corporate headquarters, which was exited in
fiscal 2018.


Operating expenses as a percentage of Net sales decreased approximately 40 basis
points to 25.6% in second quarter 2020 as compared to second quarter 2019 and
increased approximately 120 basis points to 28.1% in the first six months of
fiscal 2020 as compared to the same period in fiscal 2019. Selling, general, and
administrative expenses as a percentage of Net sales, decreased approximately 90
basis points to 23.5% in second quarter 2020 as compared to second quarter 2019.
The decrease in second quarter 2020 as compared to second quarter 2019 was
primarily due to the decrease in personnel costs, including travel and other
controllable costs, partially offset by an increase in fixed facility and
equipment costs as a percentage of Net sales. Selling, general, and
administrative expenses as a percentage of Net sales increased approximately 50
basis points to 25.9% in the first six months of fiscal 2020 as compared to the
same period in fiscal 2019. The increase was primarily a result of the decline
in net sales at both of our reportable segments. Beginning in mid-March 2020,
the economic impact of the response to the COVID-19 pandemic was swift and
significant. As a result, the initial reduction in Net sales outpaced our
efforts to reduce fixed costs. Restructuring and separation expenses as a
percentage of Net sales increased approximately 30 basis points in second
quarter 2020 as compared to second quarter 2019 and 40 basis points in the first
six months of fiscal 2020 as compared to the same period in fiscal 2019.



Operating income


Operating income decreased $13 million, or 6.2%, during second quarter 2020 as
compared to second quarter 2019 and $62 million, or 16.3%, during the first six
months of fiscal 2020 as compared to the same period in fiscal 2019. The
decrease in both periods was due to the decline in gross profit as a result of
the decrease in Net sales, partially offset by the decrease in operating
expenses.



Operating income as a percentage of Net sales decreased approximately 20 basis
points to 12.8% during second quarter 2020 as compared to second quarter 2019
and approximately 140 basis points to 10.8% during the first six months of
fiscal 2020 as compared to the same period in fiscal 2019. The decrease in
second quarter 2020 as compared to second quarter 2019 was due to the decline in
gross margins, partially offset by the decline in operating expenses as a
percentage of Net sales. The decrease in the first six months of fiscal 2020 as
compared to the same period in fiscal 2019 periods was primarily due to the
increase in operating expenses as a percentage of Net sales, and to a lesser
extent, the decline in gross margins.



Interest expense


Interest expense decreased $4 million, or 14.3%, during second quarter 2020 as
compared to second quarter 2019 and $7 million, or 12.5% during the first six
months of fiscal 2020 as compared to the same period in fiscal 2019.  The
decrease in both periods was primarily due to declining interest rates and
a
reduction in indebtedness.



Provision for income taxes


The provision for income taxes during the period is calculated by applying an
estimated annual tax rate for the full fiscal year to pre-tax income for the
reported period plus or minus unusual or infrequent discrete items occurring
within the period. The provision for income taxes in second quarter 2020 was $43
million compared to $48 million in second quarter 2019. The provision for income
taxes for the first six months of fiscal 2020 was $67 million as compared to $83
million in the first six months of fiscal 2019.



The effective rate for second quarter 2020 and the first six months of fiscal
2020 was 24.7% and 24.8%, respectively. The effective rate for second quarter
2019 and the first six months of fiscal 2019 was 26.2% and 25.5%, respectively.

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") was signed into law. The CARES Act contains significant business
tax provisions, including modifications to the rules limiting the deductibility
of net operating losses ("NOLs"), expensing of qualified improvement property
and business interest in Internal Revenue Code Sections 172(a) and 163(j),
respectively. The effects of the new legislation are recognized upon enactment.
The Company did not recognize any significant impact to income tax expense for
second quarter 2020 or the first six months of fiscal 2020 related to the CARES
Act.


We regularly assess the realization of our net deferred tax assets and the need
for any valuation allowance.  This assessment requires management to make
judgments about the benefits that could be realized from future taxable income,
as well as other positive and negative factors influencing the realization of
deferred tax assets. As of August 2, 2020, and February 2, 2020, the Company's
valuation allowance on its U.S. deferred tax assets was approximately $6
million.



Adjusted EBITDA



Adjusted EBITDA decreased $6 million, or 2.5%, in second quarter 2020 as
compared to second quarter 2019 and $46 million, or 10.3%, in the first six
months of fiscal 2020 as compared the same period in fiscal 2019. The decrease
in Adjusted EBITDA in second quarter 2020 was driven by a $17 million decrease
at Facilities Maintenance, partially offset by an $11 million increase at
Construction & Industrial. The decrease in the first six months of fiscal 2020
was driven by a $53 million decrease at Facilities Maintenance,  partially
offset by a $7 million increase at Construction & Industrial.



Adjusted EBITDA as a percentage of Net sales increased approximately 30 basis
points to 15.3% in second quarter 2020 as compared to second quarter 2019 and
decreased approximately 70 basis points to 13.6% in the first six months of
fiscal 2020 as compared to the same period in fiscal 2019. The increase in
second quarter 2020 as compared to second quarter 2019 was due to the decrease
in operating expenses as a percentage of Net sales, partially offset by the
decline in gross margin. The decrease in the first six months of fiscal 2020 as
compared to fiscal 2019 was due to the decline in Net sales and the increase in
operating expenses as a percentage of Net sales.



Adjusted net income


Adjusted net income decreased $1 million, or  0.7%, in second quarter 2020 as
compared to second quarter 2019 and $30 million, or 12.4% in the first six
months of fiscal 2020 as compared to fiscal 2019. The decrease in Adjusted net
income in both periods was attributable to the decline in operating income,
partially offset by lower interest expense and a decrease in the income tax
provision.



Results of operations by reportable segment




Facilities Maintenance




                                            Three Months Ended                            Six Months Ended
                                  August 2,      August 4,      Increase       August 2,      August 4,      Increase
Dollars in millions                 2020           2019        (Decrease)        2020           2019        (Decrease)
Net sales                        $       761$       830         (8.3) %   $     1,443$     1,602         (9.9) %
Operating income                 $       112$       133        (15.8) %   $       189$       252        (25.0) %
% of Net sales                          14.7 %         16.0 %       (130) bps        13.1 %         15.7 %       (260) bps
Depreciation and amortization             15             13          15.4 %
           30             25          20.0 %
Other                                      5              3          66.7 %            11              6          83.3 %
Adjusted EBITDA                  $       132$       149        (11.4) %   $       230$       283        (18.7) %
% of Net sales                          17.3 %         18.0 %        (70) bps        15.9 %         17.7 %       (180) bps




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




Net Sales



Net sales decreased $69 million, or 8.3%, in second quarter 2020 as compared to
second quarter 2019 and $159 million, or 9.9%, in the first six months of fiscal
2020 as compared to the same period in fiscal 2019. The decrease in Net sales in
both periods was primarily due to declines in the hospitality and multifamily
industries related to the response by governmental and other regulatory
authorities to the COVID-19 pandemic. As the markets in which we operate have
begun easing these restrictions during second quarter 2020, we have generated
improving sales volume. Facilities Maintenance average year-over-year daily
sales changes for the fiscal 2020 months of February, March, April, May, June,
and July were an increase of 4.1%, a decrease of 0.4%, a decrease of 31.9%, a
decrease of 13.4%, a decrease of 9.0%, and a decrease of 4.4%, respectively.



For Facilities Maintenance, the most prominent impact of the decline in Net
sales was in the hospitality industry, which historically represents
approximately 18% of sales. The decline in travel due to the COVID-19 pandemic
resulted in the closing of many hotels, with the remaining open hotels
experiencing a significant reduction in occupancy. In second quarter 2020 and
the first six months of fiscal 2020, hospitality sales decreased approximately
34.6% and 33.7% as compared to the same periods in fiscal 2019.



Many of our multifamily customers limited their purchases to emergency repair
and maintenance items in order to preserve cash and to keep maintenance
professionals from entering tenant units unnecessarily in an attempt to maintain
social distancing. Multifamily customers may also be affected by the steps taken
by state and local governments to minimize the impact of the COVID-19 pandemic
on tenants, including placing moratoriums on evictions and prohibiting late fees
for up to three months. Finally, multifamily customers are seeing fewer unit
turns as tenants are less likely to move their residence during the pandemic.
Fewer turns reduce both maintenance and improvement expenditures. Sales to
multifamily customers historically account for approximately 60% of Facilities
Maintenance's sales. In second quarter 2020 and the first six months of fiscal
2020, our multifamily sales decreased approximately 4.1% and 6.1%, as compared
to the same periods in fiscal 2019.



Adjusted EBITDA


Adjusted EBITDA decreased $17 million, or 11.4%, in second quarter 2020 as
compared to second quarter 2019 and $53 million, or 18.7%, during the first six
months of fiscal 2020 as compared to the same period in fiscal 2019. The
decrease in Adjusted EBITDA in both periods was primarily due to the reduction
in Net sales. Selling, general, and administrative expenses decreased
approximately $22 million and $24 million in second quarter 2020 as compared to
second quarter 2019 and in the first six months of fiscal 2020 as compared to
the same period in fiscal 2019, respectively. The decrease in both periods was
primarily due to a reduction in variable expenses, including freight costs,
variable compensation, overtime pay, travel expenses and other controllable
costs. In the first six months of fiscal 2020, these decreases were partially
offset by increased insurance claims, fixed facility and equipment costs, and an
approximately $4 million charge for expected credit losses.



Adjusted EBITDA as a percentage of Net sales decreased approximately 70 basis
points in second quarter 2020 as compared to second quarter 2019 and
approximately 180 basis points in the first six months of fiscal 2020 as
compared to the same period in fiscal 2019. The decrease in second quarter 2020
was primarily due to a decrease in gross margin of approximately 120 basis
points, partially offset by a reduction in Selling, general, and administrative
expenses as a percentage of Net sales. The decrease in the first six months of
fiscal 2020 was driven by an increase in Selling, general, and administrative
expenses as a percentage of Net sales and a decrease in gross margin of
approximately 50 basis points. The decline in gross margins resulted from an
increase in sales of lower-margin safety products, appliances, HVAC and
janitorial products. We expect gross margin to fluctuate as our customers within
different industries recover from the impacts of the COVID-19 pandemic at
different rates and with new product requirements.



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




Construction & Industrial




                                            Three Months Ended                            Six Months Ended
                                  August 2,      August 4,      Increase       August 2,      August 4,      Increase
Dollars in millions                 2020           2019        (Decrease)        2020           2019        (Decrease)
Net sales                        $       793$       795         (0.3) %   $     1,506$     1,516         (0.7) %
Operating income                 $        86$        78          10.3 %   $       130$       129           0.8 %
% of Net sales                          10.8 %          9.8 %         100 bps         8.6 %          8.5 %          10 bps
Depreciation and amortization             15             14           7.1 %
           29             29             -
Other                                      5              3          66.7 %            12              6         100.0 %
Adjusted EBITDA                  $       106$        95          11.6 %   $       171$       164           4.3 %
% of Net sales                          13.4 %         11.9 %         150 bps        11.4 %         10.8 %          60 bps




Net Sales


Net sales decreased $2 million, or 0.3%, in second quarter 2020 as compared to
second quarter 2019 and $10 million, or 0.7%, in the first six months of fiscal
2020 as compared to the same period in fiscal 2019. The decrease in Net sales in
both periods was primarily due to varying state and local government
restrictions on construction-related activities to address the COVID-19
pandemic. These restrictions, which were generally introduced in the middle of
March 2020, resulted in an uneven impact on Net sales across the markets we
serve. As the markets in which we operate eased restrictions during second
quarter 2020, our sales volume improved. Average year-over-year daily sales
changes for the fiscal 2020 months of February, March, April, May, June, and
July were an increase of 14.2%, an increase of 1.4%, a decrease of 13.0%, a
decrease of 1.4%, a decrease of 0.4%, and an increase of 0.5%, respectively.



Adjusted EBITDA


Adjusted EBITDA increased $11 million, or 11.6%, in second quarter 2020 as
compared to second quarter 2019 and $7 million, or 4.3% in the first six months
of fiscal 2020 as compared to the same period in fiscal 2019. The increase in
both periods was primarily due to a reduction in Selling, general, and
administrative expenses, and, to a lesser extent, improvements in gross margins.
The decrease in Selling, general, and administrative expenses in both periods
was primarily due to reductions in overtime pay, travel, and other controllable
expenses in response to the COVID-19 pandemic. These decreases were partially
offset by increased fixed costs related to new branches recently opened.



Adjusted EBITDA as a percentage of Net sales increased approximately 150 basis
points in second quarter 2020 as compared to second quarter 2019 and
approximately 60 basis points in the first six months of fiscal 2020 as compared
to the same period in fiscal 2019. The increase in second quarter 2020 as
compared to second quarter 2019 was driven by a decrease in Selling, general,
and administrative expenses as a percentage of Net sales and an increase in
gross margin of approximately 30 basis points in second quarter 2020. The
increase in the first six months of fiscal 2020 as compared to the same period
in fiscal 2019 was driven by an increase in gross margin of approximately 50
basis points and a decrease in Selling, general, and administrative expenses as
a percentage of Net sales. The increase in gross margin in both periods was
primarily due to improved rebar gross margin rates, and an increase in safety
product sales which are generally higher gross margin products.



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, based
on our current business plan, that these sources of funds will be sufficient to
meet the operating needs of our business for at least the next twelve months. We
are continuously evaluating our cash positions and have taken prudent actions to
reduce costs and spending across our organization. This includes reducing hiring
activities, adjusting pay programs, negotiating rent payment deferrals at our
leased facilities, and limiting discretionary spending. We have also reduced
anticipated spending on certain capital investment projects. In addition, we
chose not to repurchase any shares under the March 2020 authorized share
repurchase program, instead focusing on enhancing our liquidity position. We may
elect to repurchase shares under this program during the second half of fiscal
2020.

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

On August 10, 2020, the Company entered into a definitive agreement to sell its
Construction & Industrial business to an affiliate of Clayton, Dubilier & Rice.
The purchase price of $2.9 billion is payable in cash at closing and may be
adjusted for certain purchase price adjustments, as defined in the Transaction
Agreement. The Company anticipates using the estimated net proceeds of $2.5
billion after tax and transaction costs, to repay debt, finance acquisitions,
invest in Facilities Maintenance and return cash to the shareholders, likely
through share repurchases.



The CARES Act allows employers to defer the payment of the employer share of
Federal Insurance Contributions Act ("FICA") taxes for the period from March 27,
2020 and ending December 31, 2020.  During the first six months of fiscal 2020,
the Company deferred FICA payments of $14 million under the CARES Act and will
continue to defer FICA payments through December 31, 2020. The deferred amount
will be payable as follows: (1) 50% of the deferred amount will be due December
31, 2021 and (2) Remaining 50% of the deferred amount will be due December
31,
2022.


During the first six months of fiscal 2020, our cash inflow was primarily driven by cash provided by operations, partially offset by net debt repayments and capital expenditures.

As of August 2, 2020, our combined liquidity of approximately $995 million was comprised of $71 million in cash and cash equivalents and $924 million of additional available borrowings (excluding $86 million of borrowings on available cash balances) under our Senior ABL Facility, based on qualifying inventory and receivables. Our August 2, 2020 combined liquidity increased approximately $367 million as compared to our fiscal 2019 year-end combined liquidity of $628 million.

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

Amounts in millions                                       Six Months Ended
Net cash provided by (used for):     August 2, 2020      August 4, 2019    
 Increase (Decrease)
Operating activities                $            339    $            286    $                  53
Investing activities                            (33)                (49)                       16
Financing activities                           (269)               (234)                     (35)

Free cash flow:
Operating activities                $            339    $            286    $                  53
Less: Capital expenditures                      (33)                (54)                       21
Free cash flow                      $            306    $            232    $                  74




Working capital



Working capital, excluding cash and cash equivalents, was $755 million as of
August 2, 2020, decreasing $109 million as compared to $864 million as of August
4, 2019. The change in working capital was primarily driven by declines in
Accounts receivable and Inventory due to declining sales and deliberate controls
over working capital spending as a result of the COVID-19 pandemic.



Operating activities



During the first six months of fiscal 2020, cash provided by operating
activities was $339 million compared to $286 million in the first six months of
fiscal 2019. Cash interest paid in the first six months of fiscal 2020 was $47
million, compared to $53 million in the first six months of fiscal 2019. Cash
income taxes paid in the first six months of fiscal 2020 was $36 million,
compared to $10 million in the first six months of fiscal 2019. The increase in
operating cash flows excluding interest and income tax payments is primarily
attributable to efficiency in the use of working capital.



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





Investing activities



During the first six months of fiscal 2020, cash used by investing activities
was $33 million, comprised entirely of capital expenditures.  During the first
six months of fiscal 2019, cash used by investing activities was $49 million,
primarily comprised of capital expenditures.



Financing activities



During the first six months of fiscal 2020, cash used in financing activities
was $269 million, primarily due to net debt repayments of $265 million, tax
withholdings on stock-based awards of $4 million, and purchases of treasury
shares of $3 million, partially offset by proceeds from employee stock option
exercises of $3 million.



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



External financing



As of August 2, 2020, we had an aggregate principal amount of $1,783 million of
outstanding indebtedness, net of unamortized discounts and unamortized deferred
financing costs of $2 million and $16 million, respectively, and $976 million of
additional available borrowings under our Senior ABL Facility (after giving
effect to the borrowing base limitations and approximately $24 million in
letters of credit issued and including $86 million of borrowings available on
qualifying cash balances).  From time to time, depending on market conditions
and other factors, we may seek to repay, redeem, repurchase or otherwise acquire
or refinance all or a portion of our indebtedness. We may make such repurchases
in privately negotiated transactions or otherwise.



For additional information, see "Note 2 - Debt," in the Notes to Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q.



Critical accounting policies


Our consolidated financial statements have been prepared in accordance with
GAAP. Preparation of these statements requires management to make judgments and
estimates. Some accounting policies have a significant impact on amounts
reported in these consolidated financial statements. The Company's critical
accounting policies have not changed from those reported in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
annual report on Form 10-K for the fiscal year ended February 2, 2020, with the
exception of the Company's adoption of Accounting Standard Update ("ASU")
2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments" ("ASU 2016-13") on February 3, 2020 (the
first day of fiscal 2020). Pursuant to the implementation of ASU 2016-13, the
Company establishes an allowance for credit losses using estimations of loss
rates based upon historical loss experience and adjusted for factors that are
relevant to determining the expected collectability of trade receivables. These
estimations and factors require assumptions and judgments regarding matters that
are inherently uncertain, including the impact that the COVID-19 pandemic may
have on the liquidity, credit, and solvency status of our customers or their
industries. For further discussion on the Company's allowances for credit
losses, see "Note 8 - Supplemental Balance Sheet and Cash Flow Information" in
the Notes to Consolidated Financial Statements within Item 1 of this quarterly
report on Form 10-Q.


Recent accounting pronouncements

See "Note 13 - 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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  Table of Contents

  HD SUPPLY

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Financials (USD)
Sales 2021 4 191 M - -
Net income 2021 352 M - -
Net cash 2021 458 M - -
P/E ratio 2021 18,3x
Yield 2021 -
Capitalization 6 504 M 6 504 M -
EV / Sales 2021 1,44x
EV / Sales 2022 2,17x
Nbr of Employees 11 000
Free-Float 77,9%
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Spread / Lowest Target -7,73%
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NameTitle
Joseph J. DeAngelo Chairman & Chief Executive Officer
Bradley Paulsen President
Evan J. Levitt CFO, Chief Administrative Officer & Senior VP
Charles W. Peffer Independent Director
Patrick R. McNamee Independent Director
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