OREANDA-NEWS. HD Supply Holdings, Inc. (NASDAQ:HDS), one of the largest industrial distributors in North America, today reported Net sales of $2.0 billion for the second quarter of fiscal 2016 ended July 31, 2016, an increase of $79 million, or 4.1 percent, as compared to the second quarter of fiscal 2015.  The company believes its sales performance represents growth of approximately 100 basis points in excess of its market growth estimate.

“We delivered solid growth, operating leverage and cash conversion in the quarter while simultaneously investing in long-term productivity and growth,” stated Joe DeAngelo, Chairman and CEO of HD Supply. “We intend to continuously invest to ensure our customer experience is exceptional and to extend and evolve our leading market positions.”

Gross profit increased $32 million, or 4.9 percent, to $680 million for the second quarter of fiscal 2016 as compared to $648 million for the second quarter of fiscal 2015. Gross profit was 33.7 percent of Net sales for the second quarter of fiscal 2016, up approximately 20 basis points from 33.5 percent of Net sales for the second quarter of fiscal 2015.

Operating income increased $14 million, or 6.3 percent, to $237 million for the second quarter of fiscal 2016 as compared to $223 million for the second quarter of fiscal 2015. Operating income as a percentage of Net sales was 11.8 percent for the second quarter of fiscal 2016, up approximately 30 basis points from 11.5 percent for the second quarter of fiscal 2015.

Income from Continuing Operations declined $2 million to $102 million for the second quarter of fiscal 2016 as compared to $104 million for the second quarter of fiscal 2015, reflecting the normalization of the company’s effective tax rate following the reversal of the deferred tax asset valuation allowance in the fourth quarter of fiscal 2015. Income from Continuing Operations per diluted share decreased $0.01 to $0.51 for the second quarter of fiscal 2016, as compared to $0.52 for the second quarter of fiscal 2015.  

Net Income declined $11 million to $98 million for the second quarter of fiscal 2016 as compared to $109 million for the second quarter of fiscal 2015. Net Income per diluted share decreased $0.05 to $0.49 for the second quarter of fiscal 2016, as compared to $0.54 for the second quarter of fiscal 2015. 

Adjusted EBITDA increased $16 million, or 6.2 percent, to $273 million for the second quarter of fiscal 2016 as compared to $257 million for the second quarter of fiscal 2015. Adjusted EBITDA as a percentage of Net sales was 13.5 percent for the second quarter of fiscal 2016, up approximately 20 basis points from 13.3 percent for the second quarter of fiscal 2015.

Adjusted net income increased $57 million to $171 million for the second quarter of fiscal 2016 as compared to $114 million for the second quarter of fiscal 2015.  Adjusted net income per diluted share was $0.85 for the second quarter of fiscal 2016, as compared to $0.56 for the second quarter of fiscal 2015. 

As of July 31, 2016, HD Supply’s combined liquidity of approximately $1,513 million was comprised of $313 million in cash and cash equivalents and $1,200 million of additional available borrowings under HD Supply, Inc.’s senior asset-backed lending facility, based on qualifying inventory and receivables.

For the second quarter of fiscal 2016, the ratio of Net debt1 to Adjusted EBITDA was 4.4 times.

Business Unit Performance

Facilities Maintenance

Net sales increased $8 million, or 1.1 percent, to $741 million for the second quarter of fiscal 2016, as compared to $733 million for the second quarter of fiscal 2015.  Adjusted EBITDA decreased $5 million, or (3.2) percent, to $151 million for the second quarter of fiscal 2016 as compared to $156 million for the second quarter of fiscal 2015.  Adjusted EBITDA as a percentage of Net sales was 20.4 percent for the second quarter of fiscal 2016, down approximately 90 basis points from 21.3 percent for the second quarter of fiscal 2015.  

Waterworks

Net sales increased $31 million, or 4.4 percent, to $733 million for the second quarter of fiscal 2016, as compared to $702 million for the second quarter of fiscal 2015.  Adjusted EBITDA increased $4 million, or 6.1 percent, to $70 million for the second quarter of fiscal 2016 as compared to $66 million for the second quarter of fiscal 2015.  Adjusted EBITDA as a percentage of Net sales was 9.5 percent for the second quarter of fiscal 2016, up approximately 10 basis points from 9.4 percent for the second quarter of fiscal 2015.   

Construction & Industrial – White Cap

Net sales increased $34 million, or 7.5 percent, to $489 million for the second quarter of fiscal 2016, as compared to $455 million for the second quarter of fiscal 2015.  Adjusted EBITDA increased $15 million, or 33.3 percent, to $60 million for the second quarter of fiscal 2016 as compared to $45 million for the second quarter of fiscal 2015.  Adjusted EBITDA as a percentage of Net sales was 12.3 percent for the second quarter of fiscal 2016, up approximately 240 basis points from 9.9 percent for the second quarter of fiscal 2015.

Second-Quarter Monthly Sales Performance

Net sales for May, June and July of fiscal 2016 were $609 million, $622 million and $785 million, respectively.  There were 20 selling days in May, 19 selling days in June and 24 selling days in July.  Average year-over-year daily sales growth for May, June and July of fiscal 2016 was 3.6 percent, 6.2 percent and 3.0 percent, respectively.

Sale of Interior Solutions

On May 31, 2016 we sold our Interior Solutions business unit, formerly known as Creative Touch Interiors.  In accordance with Accounting Standards Codification 205-20, “Discontinued Operations,” the results of Interior Solutions are classified as discontinued operations for all periods presented.

Preliminary August Sales Results

Preliminary Net sales in August were approximately $639 million, which represents year-over-year average daily sales growth of approximately 2 percent.  Preliminary August year-over-year average daily sales growth by business was Waterworks approximately 2 percent, Construction & Industrial approximately 6 percent and Facilities Maintenance flat.  There were 20 selling days in both August 2016 and August 2015. 

Third-Quarter 2016 Outlook

For our third-quarter 2016, we anticipate revenue to be in the range of $1,985 million and $2,035 million, Adjusted EBITDA2 in the range of $258 million and $268 million and Adjusted Net Income per diluted share2 in the range of $0.77 and $0.82.  Our Adjusted Net Income per diluted share range assumes a fully diluted weighted average share count of approximately 202 million.  At the mid-point of the ranges, our third-quarter sales and Adjusted EBITDA translate into approximately +4 percent growth and flat, respectively, versus prior year.

Based on year-to-date progress and the current third quarter outlook, we now estimate that we will achieve between flat and 300 basis points of sales growth in excess of market for the fiscal year 2016.  This equates to approximately 3 to 6 percent annual year over year sales growth. Additionally, based on year-to-date progress and the current third quarter outlook, we estimate that we will achieve an operating leverage range for the fiscal year 2016 of between 1.0 and 1.5 times.  We continue to believe that 300 basis points of growth in excess of market growth and 1.5 to 2.0 times operating leverage in 2017 and beyond is the appropriate target.

Fiscal 2016 Second-Quarter Conference Call

As previously announced, HD Supply will hold a conference call on Wednesday, September 7th, 2016 at 8:00 a.m. (Eastern Time) to discuss its second-quarter fiscal 2016 results.  The conference call and presentation materials can be accessed via webcast by logging on from the Investor Relations section of the company's Web site at hdsupply.com. The online replay will remain available for a limited time following the call.

Non-GAAP Financial Measures

HD Supply supplements its reporting of net income (loss) with non-GAAP measurements, including Adjusted EBITDA, Adjusted net income (loss), Adjusted net income (loss) per share and Net Debt. This supplemental information should not be considered in isolation or as a substitute for the GAAP measurements.  Additional information regarding Adjusted EBITDA, Adjusted net income (loss) and Adjusted net income (loss) per share referred to in this press release is included below under “Reconciliation of Non-GAAP Measures.”

About HD Supply

HD Supply is one of the largest industrial distributors in North America. The company provides a broad range of products and value-add services to approximately 500,000 customers with leadership positions in maintenance, repair and operations, infrastructure and specialty construction sectors. Through approximately 500 locations across 48 states and six Canadian provinces, the company's approximately 13,000 associates provide localized, customer-driven services including jobsite delivery, will call or direct-ship options, diversified logistics and innovative solutions that contribute to its customers' success.

1 Net Debt: Total of Long Term debt and Current installments of long-term debt, less cash and cash equivalents.

2 No reconciliation of the forecasted range for Adjusted EBITDA to Net income and Adjusted net income per diluted share to Net income per diluted share for the third quarter of fiscal 2016 is included in this press release because we are unable to quantify certain amounts that would be required to be included in the GAAP measure without unreasonable efforts. In addition, the company believes such reconciliations would imply a degree of precision that would be confusing or misleading to investors.

Forward-Looking Statements and Preliminary Results

This press release includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are based on management’s beliefs and assumptions and information currently available to management and are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that the forward-looking information presented in this press release is not a guarantee of future results, and that actual results may differ materially from those made in or suggested by the forward-looking information contained in this press release. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “plan,” “seek,” “comfortable with,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. A number of important factors could cause actual events to differ materially from those contained in or implied by the forward-looking statements, including those “Risk factors” in our annual report on Form 10-K, for the fiscal year ended January 31, 2016, filed on March 18, 2016 and those described from time to time in our, and HD Supply, Inc.’s, other filings with the U.S. Securities and Exchange Commission, which can be found at the SEC’s website www.sec.gov. Any forward-looking information presented herein is made only as of the date of this press release, and we do not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Estimates for Net sales are preliminary estimates and are subject to risks and uncertainties, including, among others, changes in connection with quarter-end adjustments. Any variation between HD Supply’s actual results and the preliminary financial data set forth above may be material.

HD SUPPLY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Amounts in millions, except share and per share data, Unaudited

  Three Months Ended   Six Months Ended
  July 31, 2016   August 2, 2015   July 31, 2016   August 2, 2015
Net Sales $ 2,016     $ 1,937     $ 3,797     $ 3,597  
Cost of sales   1,336       1,289       2,508       2,390  
Gross Profit   680       648       1,289       1,207  
Operating expenses:                              
Selling, general and administrative   414       397       815       773  
Depreciation and amortization   24       28       47       55  
Restructuring   5       —       12       —  
Total operating expenses   443       425       874       828  
Operating Income   237       223       415       379  
Interest expense   69       106       154       212  
Loss on extinguishment of debt   —       —       115       —  
Other (income) expense, net   —       1       —       1  
Income from Continuing Operations Before Provision (Benefit) for Income Taxes   168       116       146       166  
Provision (benefit) for income taxes   66       12       58       (172 )
Income from Continuing Operations   102       104       88       338  
Income (loss) from discontinued operations, net of tax   (4 )     5       (4 )     13  
Net Income $ 98     $ 109     $ 84     $ 351  
Other comprehensive income (loss) — foreign currency translation adjustment   (2 )     (7 )     2       (2 )
Total Comprehensive Income $ 96     $ 102     $ 86     $ 349  
                               
Weighted Average Common Shares Outstanding (thousands)              
Basic   199,250       196,893       199,029       196,120  
Diluted   201,978       201,809       201,615       201,221  
                               
Basic Earnings Per Share(1):                              
Income from Continuing Operations $    0.51     $ 0.53     $     0.44     $ 1.72  
Income (Loss) from Discontinued Operations $ (0.02 )   $ 0.03     $   (0.02 )   $ 0.07  
Net Income $   0.49     $ 0.55     $   0.42     $ 1.79  
Diluted Earnings Per Share(1):                              
Income  from Continuing Operations $    0.51     $ 0.52     $     0.44     $ 1.68  
Income (Loss) from Discontinued Operations $ (0.02 )   $ 0.03     $   (0.02 )   $ 0.06  
Net Income $   0.49     $ 0.54     $   0.42     $ 1.74  
  (1 ) May not foot due to rounding.

      

HD SUPPLY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in millions, except per share data, Unaudited

  July 31,
2016
   January 31,
2016
ASSETS              
Current assets:              
Cash and cash equivalents $ 313     $ 269  
Receivables, less allowance for doubtful accounts of $13 and $13   1,101       872  
Inventories   887       770  
Current assets of discontinued operations   —       43  
Other current assets   42       29  
Total current assets   2,343       1,983  
Property and equipment, net   306       310  
Goodwill   2,869       2,869  
Intangible assets, net   119       127  
Deferred tax asset   633       685  
Non-current assets of discontinued operations   —       20  
Other assets   19       22  
Total assets $ 6,289     $ 6,016  
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:    
Accounts payable $ 721     $ 490  
Accrued compensation and benefits   117       142  
Current installments of long-term debt   9       9  
Current liabilities of discontinued operations   —       30  
Other current liabilities   200       200  
Total current liabilities   1,047       871  
Long-term debt, excluding current installments   4,299       4,302  
Non-current liabilities of discontinued operations   —       1  
Other liabilities   102       98  
Total liabilities   5,448       5,272  
Stockholders’ equity:              
Common stock, par value $0.01; 1 billion shares authorized; 200.9 million and 200.1 million shares issued and outstanding at July 31, 2016 and January 31, 2016, respectively   2       2  
Paid-in capital   3,934       3,909  
Accumulated deficit   (3,076 )     (3,150 )
Accumulated other comprehensive loss   (14 )     (16 )
Treasury stock, at cost, 0.13 million and 0.06 million shares at July 31, 2016 and January 31, 2016, respectively   (5 )     (1 )
Total stockholders’ equity   841       744  
Total liabilities and stockholders’ equity $ 6,289     $ 6,016  

HD SUPPLY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in millions, Unaudited

  Six Months Ended
  July 31,
2016
   August 2,
2015
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income $ 84     $ 351  
Reconciliation of net income to net cash provided by (used in) operating activities:              
Depreciation and amortization   51       72  
Provision for uncollectibles   3       4  
Non-cash interest expense   9       —  
Loss on extinguishment of debt   115       —  
Stock?based compensation expense   11       10  
Deferred income taxes   52       19  
(Gain) Loss on sale of a business   3       —  
Other   —       (1 )
Changes in assets and liabilities, net of the effects of acquisitions & dispositions:    
(Increase) decrease in receivables   (232 )     (252 )
(Increase) decrease in inventories   (118 )     (153 )
(Increase) decrease in other current assets   (9 )     (2 )
Increase (decrease) in accounts payable and accrued liabilities   196       217  
Increase (decrease) in other long-term liabilities   (1 )     (181 )
Net cash provided by (used in) operating activities   164       98  
CASH FLOWS FROM INVESTING ACTIVITIES:              
Capital expenditures   (32 )     (43 )
Proceeds from sales of property and equipment   1       1  
Proceeds from sale of a business   37       —  
Net cash provided by (used in) investing activities   6       (42 )
CASH FLOWS FROM FINANCING ACTIVITIES:              
Proceeds from issuance of common stock under employee benefit plans   14       41  
Purchase of treasury shares   (14 )     (31 )
Borrowings of long-term debt   1,000       —  
Repayments of long-term debt   (1,110 )     (16 )
Borrowings on long-term revolver debt   —       562  
Repayments on long-term revolver debt   —       (526 )
Debt issuance and modification costs   (15 )     —  
Other financing activities   (2 )     (1 )
Net cash provided by (used in) financing activities   (127 )     29  
Effect of exchange rates on cash and cash equivalents   1       (1 )
Increase (decrease) in cash and cash equivalents $ (44 )   $ 84  
Cash and cash equivalents at beginning of period   269       85  
Cash and cash equivalents at end of period $ 313     $ 169  

HD SUPPLY HOLDINGS, INC.
SEGMENT REPORTING
Amounts in millions, Unaudited

  Facilities
Maintenance
   Waterworks
   Construction &
Industrial –
White Cap
   Corporate &
Other
   Total
Continuing
Operations
Three Months Ended July 31, 2016                                      
Net sales $ 741     $ 733     $ 489     $ 53     $ 2,016  
Adjusted EBITDA   151       70       60       (8 )     273  
Depreciation(1) & Software Amortization   7       3       7       5       22  
Other Intangible Amortization   2       —       —       1       3  
Three Months Ended August 2, 2015          
Net sales $ 733     $ 702     $ 455     $ 47     $ 1,937  
Adjusted EBITDA   156       66       45       (10 )     257  
Depreciation(1) & Software Amortization   11       3       7       5       26  
Other Intangible Amortization   2       —       —       1       3  
 

Six Months Ended July 31, 2016

          
Net sales $ 1,418     $ 1,338     $ 936     $ 105     $ 3,797  
Adjusted EBITDA   285       118       103       (18 )     488  
Depreciation(1) & Software Amortization   15       5       14       9       43  
Other Intangible Amortization   3       1       —       3       7  
Six Months Ended August 2, 2015          
Net sales $ 1,368     $ 1,272     $ 862     $ 95     $ 3,597  
Adjusted EBITDA   278       111       79       (22 )     446  
Depreciation(1) & Software Amortization   23       5       13       9       50  
Other Intangible Amortization   3       1       —       3       7  
  (1 ) Depreciation includes amounts recorded within Cost of sales in the Consolidated Statements of Operations.