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HD SUPPLY, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
[March 25, 2014]

HD SUPPLY, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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 three distinct market sectors in which we specialize: Maintenance, Repair & Operations; Infrastructure & Power; and Specialty Construction. We serve these markets with an integrated go-to-market strategy. We operate through approximately 650 locations across 47 U.S. states and 7 Canadian provinces. We have more than 15,000 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 over one million SKUs of quality, name-brand and proprietary-brand products as well as value-add services supporting the entire lifecycle of a project from infrastructure and construction to maintenance, repair and operations.

Description of segments We operate our Company through four reportable segments: Facilities Maintenance, Waterworks, Power Solutions and White Cap.

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

Waterworks. Waterworks distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in the water and wastewater industries for residential and non-residential uses. Waterworks serves non-residential, residential, water systems, sewage systems and other markets. Products include pipes, fittings, valves, hydrants and meters for use in the construction, maintenance and repair of water and wastewater systems as well as fire-protection systems. Waterworks has complemented its core products through additional offerings, including smart meters (AMR/AMI), HDPE pipes and specific engineered treatment plant products and services.

Power Solutions. Power Solutions distributes electrical transmission and distribution products, power plant MRO supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation and distribution industries. Power Solutions serves utilities and electrical markets. Products include conductors such as wire and cable, transformers, overhead transmission and distribution hardware, switches, protective devices and underground distribution, connectors used in the construction or maintenance and repair of electricity transmission and substation distribution infrastructure, and electrical wire and cable, switchgear, supplies, lighting and conduit used in non-residential and residential construction.

White Cap. White Cap distributes specialized hardware, tools and engineered materials to non-residential and residential contractors. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, rebar, ladders, safety and fall arrest equipment, 47-------------------------------------------------------------------------------- Table of Contents 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.

In addition to the reportable segments, our consolidated financial results include "Corporate & Other." Corporate & Other is comprised of the following operating segments: Crown Bolt, Creative Touch Interiors ("CTI"), Repair & Remodel and HD Supply Canada. Crown Bolt is a retail distribution operator providing program and packaging solutions, sourcing, distribution, and in-store service, fasteners, builders' hardware, rope and chain and plumbing accessories, primarily serving The Home Depot, Inc. ("Home Depot") and other hardware stores.

CTI offers turnkey supply and installation services for multiple interior finish options, including flooring, cabinets, countertops, and window coverings, along with comprehensive design center services for non-residential, residential and senior living projects. Repair & Remodel 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. HD Supply Canada is an industrial distributor that primarily focuses on servicing fasteners/industrial supplies markets operating across seven Canadian provinces. Corporate & Other also includes costs related to our centralized support functions, which are comprised of finance, information technology, human resources, legal, supply chain and other support services, and removes inter-segment transactions.

Acquisitions We enter into strategic acquisitions 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.

On December 3, 2012, we purchased substantially all of the assets of Water Products of Oklahoma, Inc., Arkansas Water Products, LLC, and Municipal Water Works Supply, LP (collectively "Water Products") for approximately $48 million, net of fiscal 2013 settlements. These businesses distribute water, sewer, gas and related products, such as pipes, valves, fittings, hydrants, pumps and meters, and offer maintenance products and repair services primarily to municipalities and contractors. The businesses are operated as part of the Waterworks segment.

On June 29, 2012, we purchased Peachtree Business Products LLC ("Peachtree") for approximately $196 million. Headquartered in Marietta, Georgia, Peachtree specializes in customizable business and property marketing supplies, serving residential and commercial property managers, medical facilities, schools and universities, churches and funeral homes. Peachtree is operated as part of the Facilities Maintenance segment.

On May 2, 2011, we purchased substantially all of the assets of Rexford Albany Municipal Supply Company, Inc. ("RAMSCO") for approximately $21 million.

RAMSCO specializes in distributing water, sanitary and storm sewer materials primarily to municipalities and contractors through four locations in upstate New York. These locations are operated as part of the Waterworks segment.

Discontinued operations In January 2014, the Company approved the disposal of Litemor, a specialty lighting distributor within our HD Supply Canada business. The Company expects to record a loss on disposal of approximately $10 million to $25 million in fiscal 2014, which includes cash and non-cash charges.

On March 26, 2012, the Company sold all of the issued and outstanding equity interests in its Industrial Pipes, Valves and Fittings ("IPVF") business to Shale-Inland Holdings, LLC. The Company 48-------------------------------------------------------------------------------- Table of Contents received cash proceeds of approximately $477 million, net of $5 million of transaction costs. As a result of the sale, the Company recorded a $12 million pre-tax gain in fiscal 2012.

On September 9, 2011, the Company sold all of the issued and outstanding equity interests in its Plumbing/HVAC business to Hajoca Corporation. The Company received cash proceeds of approximately $116 million, net of $8 million remaining in escrow and $4 million of transaction costs. As a result of the sale, the Company recorded a $7 million pre-tax gain in fiscal 2011. During fiscal 2012, the Company paid an additional $1 million in transaction costs and received $4 million from escrow. During fiscal 2013, the Company received the remaining $4 million from escrow.

On February 28, 2011, HD Supply Canada sold substantially all of the assets of SESCO/QUESCO, an electrical products division of HD Supply Canada, to Sonepar Canada, and received proceeds of approximately $11 million, less $1 million remaining in escrow. As a result of the sale, the Company recorded a $2 million pre-tax gain in fiscal 2011. During fiscal 2012, the Company received $1 million from escrow.

In accordance with ASC 205-20, Discontinued Operations, the results of the Litemor, IPVF, SESCO/QUESCO, and Plumbing/HVAC operations and the gain on sale of the businesses are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on the sale of business, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). All Consolidated Statements of Operations and Comprehensive Income (Loss) 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 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. Fiscal year ending February 2, 2014 ("fiscal 2013") included 52 weeks, fiscal year ended February 3, 2013 ("fiscal 2012") included 53 weeks, and fiscal year ended January 29, 2012 ("fiscal 2011") included 52 weeks.

Key business metrics Net sales We earn our Net sales primarily from the sale of construction, infrastructure, maintenance 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 persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable and collectability is reasonably assured. Net sales in certain business units, particularly Waterworks and Power Solutions, 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.

49-------------------------------------------------------------------------------- Table of Contents We ship products to customers predominantly by internal fleet and to a lesser extent by third-party carriers. Net sales are recognized from product sales when title to the products is passed to the customer, which generally occurs at the point of destination for products shipped by internal fleet and at the point of shipping for products shipped by third-party carriers.

We include shipping and handling fees billed to customers in Net sales.

Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through Cost of sales as inventories are sold. Shipping and handling costs associated with outbound freight are included in Selling, general and administrative expenses.

Gross profit Gross profit primarily represents the difference between the product cost from our suppliers (net of earned rebates and discounts) including the cost of inbound freight and the sale price to our customers. The cost of outbound freight (including internal transfers), 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, restructuring charges, and goodwill and other intangible asset impairments.

Adjusted EBITDA and Adjusted net income (loss) We present Adjusted EBITDA because it is a primary measure used by management to evaluate operating performance. We believe the presentation of Adjusted EBITDA enhances investors' overall understanding of the financial performance of our business. Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States of America ("GAAP") and does not purport to be an alternative to Net income (loss) as a measure of operating performance. We believe Adjusted EBITDA is helpful in highlighting operating trends, because it 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. In addition, we present Adjusted net income (loss) to measure our overall profitability as we believe it is an important measure of our performance. Adjusted net income (loss) is not a recognized term under GAAP and does not purport to be an alternative to Net income (loss) as a measure of operating performance. Adjusted net income (loss) is defined as Net income (loss) less Income (loss) from discontinued operations, net of tax, further adjusted for certain non-cash, non-recurring or unusual items, net of tax. We further believe that Adjusted EBITDA and Adjusted net income (loss) 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 (loss) 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 (loss) may not be comparable to other similarly titled measures of other companies.

50-------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA is based on "Consolidated EBITDA," a measure which is defined in HDS's Senior Term Facility and Senior ABL Facility 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 and 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 $150 million and 10% of the aggregate commitments.

Adjusted EBITDA is defined as Net income (loss) less Income (loss) from discontinued operations, net of tax, plus (i) Interest expense and Interest income, net, (ii) Provision (benefit) for income taxes, (iii) Depreciation and amortization and further adjusted to exclude non-cash items and certain other adjustments to Consolidated Net Income permitted in calculating Consolidated EBITDA under our Senior Term Facility and our Senior ABL Facility. 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 Senior Term 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 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 "Item 7. Management's Discussion and Analysis of Financial Conditiona and Results of Operations-Liquidity and Capital Resources-External Financing." Adjusted EBITDA and Adjusted net income (loss) have limitations as analytical tools and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are: º • º Adjusted EBITDA and Adjusted net income (loss) do not reflect changes in, or cash requirements for, our working capital needs; º • º Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; º • º Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; º • º Adjusted EBITDA and Adjusted net income (loss) do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and º • º 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.

51 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of Net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented: Fiscal year ended February 2, February 3, January 29, January 30, January 31, 2014 2013 2012 2011 2010 Net income (loss) $ (218 ) $ (1,179 ) $ (543 ) $ (619 ) $ (514 ) Less income (loss) from discontinued operations, net of tax (9 ) 18 19 (5 ) (33 ) Income (loss) from continuing operations (209 ) (1,197 ) (562 ) (614 ) (481 ) Interest expense, net 528 658 639 623 602 Provision (benefit) for income taxes 62 4 79 28 (198 ) Depreciation and amortization(i) 245 339 328 343 364 Loss (gain) on extinguishment & modification of debt(ii) 87 709 - 5 (200 ) Goodwill & other intangible asset impairment(iii) - 152 - - 219 Restructuring charges(iv) 12 - - 8 21 Stock-based compensation 16 16 20 17 18 Management fee & related expenses paid to Equity Sponsors(v) 2 5 5 5 5 Costs related to initial public offering(vi) 20 - - - - Other(vii) 1 (1 ) (1 ) (5 ) (8 ) Adjusted EBITDA $ 764 $ 685 $ 508 $ 410 $ 342 -------------------------------------------------------------------------------- º (i) º Depreciation and amortization includes amounts recorded within Cost of sales in the Consolidated Statements of Operations.

º (ii) º 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 deferred financing costs and other assets or liabilities associated with such debt. Also includes the costs of debt modification.

º (iii) º Represents the non-cash impairment charge of goodwill and an intangible asset recognized during fiscal 2012 and fiscal 2009 in accordance with Accounting Standards Codification 350, Intangibles-Goodwill and Other.

º (iv) º Represents the costs incurred for employee reductions and branch closures or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location. In addition, the fiscal 2013 charges include $3 million of inventory liquidation charges recorded within Cost of sales in the Consolidated Statement of Operations.

º (v) º The Company entered into consulting agreements with the Equity Sponsors whereby the Company paid the Equity Sponsors a $5 million annual aggregate management fee and related expenses. These consulting agreements were terminated in conjunction with Holdings' initial public offering in the second quarter of fiscal 2013.

º (vi) º Represents the costs expensed in connection with Holdings' initial public offering, including approximately $18 million paid to the Equity Sponsors for termination of the consulting agreements.

º (vii) º Represents the gains and losses associated with the changes in fair value of interest rate swap contracts not accounted for under hedge accounting and other non-operating income and expense, net.

52-------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of Net income (loss), the most directly comparable financial measure under GAAP, to Adjusted net income (loss) for the periods presented: Fiscal year ended February 2, February 3, January 29, January 30, January 31, 2014 2013 2012 2011 2010 Net income (loss) $ (218 ) $ (1,179 ) $ (543 ) $ (619 ) $ (514 ) Less income (loss) from discontinued operations, net of tax (9 ) 18 19 (5 ) (33 ) Income (loss) from continuing operations (209 ) (1,197 ) (562 ) (614 ) (481 ) Plus: Provision (benefit) for income taxes 62 4 79 28 (198 ) Less: Cash income taxes (8 ) (1 ) (5 ) (4 ) (7 ) Plus: Amortization of acquisition-related intangible assets (other than software) 135 243 244 244 243 Plus: Loss (gain) on extinguishment & modification of debt(i) 87 709 - 5 (200 ) Goodwill & other intangible asset impairment(ii) - 113 - - 219 Restructuring charges(iii) 12 - - 8 21 Costs related to initial public offering(iv) 20 - - - - Adjusted Net Income (Loss) $ 99 $ (129 ) $ (244 ) $ (333 ) $ (403 ) -------------------------------------------------------------------------------- º (i) º 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 deferred financing costs and other assets or liabilities associated with such debt. Also includes the costs of debt modifications.

º (ii) º Represents the non-cash impairment charge of goodwill and an intangible asset recognized during fiscal 2012 and fiscal 2009 in accordance with Accounting Standards Codification 350, Intangibles-Goodwill and Other.

º (iii) º Represents the costs incurred for employee reductions and branch closures or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location. In addition, the fiscal 2013 charges include $3 million of inventory liquidation charges recorded within Cost of sales in the Consolidated Statement of Operations.

º (iv) º Represents the costs expensed in connection with Holdings' initial public offering, including approximately $18 million paid to the Equity Sponsors for termination of the consulting agreements.

53-------------------------------------------------------------------------------- Table of Contents Consolidated results of operations Percentage Increase (Decrease) Fiscal Year 2013 2012 Dollars in millions 2013 2012 2011 vs. 2012 vs. 2011 Net sales $ 8,487 $ 7,943 $ 6,933 6.8 14.6 Gross profit 2,472 2,299 1,991 7.5 15.5 Operating expenses: Selling, general & administrative 1,733 1,637 1,510 5.9 8.4 Depreciation & amortization 242 336 326 (28.0 ) 3.1 Restructuring 9 - - * - Goodwill & other intangible asset impairment(a) - 152 - * * Total operating expenses 1,984 2,125 1,836 (6.6 ) 15.7 Operating income (loss) 488 174 155 * 12.3 Interest expense 528 658 639 (19.8 ) 3.0 Loss on extinguishment & modification of debt 87 709 - (87.7 ) * Other (income) expense, net 20 - (1 ) * * Income (loss) from continuing operations before provision (benefit) for income taxes (147 ) (1,193 ) (483 ) (87.7 ) * Provision (benefit) for income taxes 62 4 79 * (95.0 ) Income (loss) from continuing operations (209 ) (1,197 ) (562 ) (82.5 ) * Income (loss) from discontinued operations, net of tax (9 ) 18 19 * (5.3 ) Net Income (Loss) $ (218 ) $ (1,179 ) $ (543 ) (81.5 ) * Non-GAAP Financial Data: Adjusted EBITDA $ 764 $ 685 $ 508 11.5 34.8 Adjusted net income (loss) $ 99 $ (129 ) $ (244 ) * (47.1 ) -------------------------------------------------------------------------------- º * º not meaningful; º (a) º See "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 5, Goodwill and Intangible Assets." % of Net sales Basis Point Increase (Decrease) Fiscal Year 2013 2012 2013 2012 2011 vs. 2012 vs. 2011 Net sales 100.0 % 100.0 % 100.0 % - - Gross profit 29.1 28.9 28.7 20 20 Operating expenses: Selling, general & administrative 20.4 20.6 21.8 (20 ) (120 ) Depreciation & amortization 2.9 4.2 4.7 (130 ) (50 ) Restructuring 0.1 - - 10 - Goodwill & other intangible asset impairment(a) - 1.9 - (190 ) 190 Total operating expenses 23.4 26.7 26.5 (330 ) 20 Operating income (loss) 5.7 2.2 2.2 350 - Interest expense 6.2 8.3 9.2 (210 ) (90 ) Loss on extinguishment & modification of debt 1.0 8.9 - (790 ) * Other (income) expense, net 0.2 - - 20 - Income (loss) from continuing operations before provision (benefit) for income taxes (1.7 ) (15.0 ) (7.0 ) * (800 ) Provision (benefit) for income taxes 0.8 0.1 1.1 70 (100 ) Income (loss) from continuing operations (2.5 ) (15.1 ) (8.1 ) * (700 ) Income (loss) from discontinued operations, net of tax (0.1 ) 0.3 0.3 (40 ) - Net Income (Loss) (2.6 ) (14.8 ) (7.8 ) * (700 ) Non-GAAP Financial Data: Adjusted EBITDA 9.0 8.6 7.3 40 130 Adjusted net income (loss) 1.2 (1.6 ) (3.5 ) 280 190 -------------------------------------------------------------------------------- º * º Not meaningful 54 -------------------------------------------------------------------------------- Table of Contents Fiscal 2013 compared to fiscal 2012 Highlights Net sales in fiscal 2013 increased $544 million, or 6.8%, compared to fiscal 2012. There are several unusual items that impact the comparability of the results of fiscal 2013 and fiscal 2012.

Fiscal 2012 includes: º • º 53rd week of operations: $147 million in Net sales, $41 million in Gross profit, $14 million in Operating income, and $14 million in Adjusted EBITDA º • º Crown Bolt and Home Depot amended agreement: $41 million in Net sales, Gross profit, Operating income and Adjusted EBITDA º • º Goodwill and other intangible asset impairment: $152 million Operating loss Fiscal 2013 includes: º • º Restructuring charges: $3 million in Cost of sales, $9 million in Operating expenses, $12 million Operating loss Under our fiscal calendar, fiscal 2012 included 53 weeks of operations as compared to 52 weeks of operations in fiscal 2013. In addition, during the fourth quarter of fiscal 2012, we amended the strategic purchasing agreement between our Crown Bolt business and Home Depot (the "Amended Agreement"). The new 7-year exclusive agreement through January 2020 reduced pricing levels and eliminated the minimum purchase guarantee from the original agreement. As a result, fiscal 2013 includes a reduction of $41 million in Net sales, Gross profit, Operating income and Adjusted EBITDA. The $41 million impact included $19 million related to the minimum purchase guarantee and $22 million related to the pricing changes.

Excluding the impact of the 53rd week in fiscal 2012 and the impact of the Amended Agreement, Net sales increased $732 million, or 9.4%. Each of our four reportable segments realized increases in Net sales despite unfavorable weather conditions, continued sluggishness in non-residential construction and increased uncertainty in municipal and infrastructure end-markets.

During the fourth quarter of fiscal 2013, management evaluated our cost structure and identified opportunities to reduce costs across its businesses, primarily through a workforce reduction of approximately 150 employees in our Power Solutions business, global support center and, to a lesser extent, our other businesses. As a result, we recorded a restructuring charge of $12 million, which included $9 million for employee-related charges, primarily severance, and $3 million for inventory liquidation related to discontinued products at Power Solutions. The inventory liquidation charges were recorded to Cost of sales and all other restructuring charges were recorded to operating expenses within the Consolidated Statement of Operations and Comprehensive Income (Loss). During fiscal 2014, we expect to record restructuring charges of approximately $3 million to $5 million for additional restructuring activities under this plan, including the consolidation of six White Cap branches into three branches. We expect the costs of these restructuring actions will be recovered through cost savings in less than one year.

Operating income increased $314 million, or 180%, during fiscal 2013 as compared to fiscal 2012. Excluding the unusual items noted above, Operating income increased $229 million, or 85%, during fiscal 2013 as compared to fiscal 2012. Our growth initiatives and investments in the business resulted in an increase to Adjusted EBITDA of $79 million, or 11.5%, in fiscal 2013 as compared to fiscal 2012. Excluding the 53rd week and the impact of the Amended Agreement, Adjusted EBITDA increased $134 million, or 21.3% in fiscal 2013 as compared to fiscal 2012. This growth was driven by our sales initiatives, continued focus on margin expansion and cost control, and geographic and product line 55-------------------------------------------------------------------------------- Table of Contents expansions through acquisitions and greenfields. As of February 2, 2014, our liquidity was $994 million. See "Liquidity and Capital Resources-External Financing" for further information.

Net sales Net sales increased $544 million, or 6.8% to $8,487 million during fiscal 2013 as compared to fiscal 2012. On a 52-week basis and excluding the impact of the Amended Agreement, Net sales increased $732 million, or 9.4%, as compared to fiscal 2012.

Each of our reportable segments reported an increase in Net sales during fiscal 2013 as compared to fiscal 2012. The Net sales increases were primarily due to growth initiatives at each of our businesses and, to a lesser extent, increases in market volume and recent acquisitions, partially offset by unfavorable weather conditions, particularly the severe winter weather experienced during the fourth quarter of fiscal 2013. Organic sales growth on a 52-week basis was 7.5% for fiscal 2013 as compared to fiscal 2012 and 8.1% excluding the impact of the Amended Agreement. Our fiscal 2012 acquisitions provided $105 million of non-organic sales growth in fiscal 2013.

Gross profit Gross profit increased $173 million, or 7.5%, to $2,472 million during fiscal 2013 as compared to fiscal 2012. On a 52-week basis and excluding the impact of the Amended Agreement, Gross profit increased $255 million, or 11.5% as compared to fiscal 2012.

The increase in Gross profit, driven by our Facilities Maintenance, Waterworks, and White Cap businesses, was primarily due to sales growth from initiatives, market volume and product mix. Fiscal 2013 Gross profit was negatively affected by a $3 million inventory liquidation charge recorded under our restructuring plan.

Gross profit as a percentage of Net sales ("gross margin") increased approximately 20 basis points to 29.1% in fiscal 2013 as compared to 28.9% in fiscal 2012. Excluding the impact of the Amended Agreement, gross margin improved approximately 50 basis points. The improvement in gross margin in fiscal 2013 was driven by our Facilities Maintenance, Waterworks and White Cap businesses.

Operating expenses Operating expenses decreased $141 million, or 6.6%, to $1,984 million during fiscal 2013 as compared to fiscal 2012, primarily due to the goodwill and other intangible asset impairment in fiscal 2012. On a 52-week basis, excluding the goodwill and other intangible asset impairment and the restructuring charge, Operating expenses increased $29 million, or 1.5%, during fiscal 2013 as compared to fiscal 2012.

Selling, general and administrative expenses increased $96 million, or 5.9%, in fiscal 2013 compared to fiscal 2012. On a 52-week basis, Selling, general and administrative expenses increased $123 million, or 7.6%, in fiscal 2013 as compared to fiscal 2012. The increase was primarily as a result of increases in variable expenses due to higher sales volume and investments in growth initiatives. Depreciation and amortization expense decreased $94 million, or 28%, in fiscal 2013 as compared to fiscal 2012. The decrease was primarily as a result of certain acquisition-related intangible assets, recorded in 2007 when HD Supply separated from Home Depot, becoming fully amortized during fiscal 2012.

Operating expenses as a percentage of Net sales decreased approximately 330 basis points to 23.4% in fiscal 2013 as compared to fiscal 2012, primarily due to the fiscal 2012 impairment charge. Excluding the impairment charge, Operating expenses as a percentage of Net sales decreased 140 basis points. The decrease was due to the lower Depreciation and amortization expense. Selling, general and administrative expenses as a percentage of Net sales decreased approximately 20 basis points to 20.4% in fiscal 2013 as compared to fiscal 2012. This was due to the leverage of fixed costs through sales volume increases and favorable claims experience on self-insured liabilities.

56-------------------------------------------------------------------------------- Table of Contents Operating income (loss) Operating income increased $314 million, or 180%, during fiscal 2013 as compared to fiscal 2012. On a 52-week basis, excluding the goodwill and other intangible asset impairment, restructuring charges, and the impact of the Amended Agreement, Operating income increased $229 million, or 84.5%, during fiscal 2013 as compared to fiscal 2012. The improvement was due to higher Net sales and Gross profit and the reduction in Depreciation and amortization expense.

Operating income as a percentage of Net sales increased approximately 350 basis points in fiscal 2013 as compared to fiscal 2012. On a 52-week basis, excluding the goodwill and other intangible asset impairment, restructuring charges and the impact of the Amended Agreement, Operating income as a percentage of Net sales increased approximately 240 basis points in fiscal 2013 as compared to fiscal 2012. The improvement was driven by the reduction in Depreciation and amortization expense, and to a lesser extent a reduction in Selling, general and administrative expenses as a percentage of Net sales, and improvements in gross margins.

Interest expense Interest expense decreased $130 million, or 19.8%, during fiscal 2013 as compared to fiscal 2012. The decrease in fiscal 2013 was due to a lower average interest rate on our outstanding indebtedness, partially offset by a higher average outstanding balance in fiscal 2013.

Loss on extinguishment & modification of debt During fiscal 2013, our debt refinancing and redemption activities resulted in charges of $87 million recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.

In the second quarter of fiscal 2013, we redeemed all $950 million outstanding aggregate principal amount of HDS's January 2013 Senior Subordinated Notes at a redemption price equal to 103% of the principal amount thereof. As a result, HDS incurred a $44 million loss on extinguishment of debt, which includes a $29 million premium payment to redeem the January 2013 Senior Subordinated Notes and approximately $15 million to write off the unamortized deferred debt cost.

Also in the second quarter of fiscal 2013, we amended HDS's Senior ABL Facility to, among other changes, lower the borrowing margin by 25 basis points and extend the maturity date of the Senior ABL Facility to June 28, 2018 (or the maturity date under HDS's Term Loan Facility, if earlier). In connection with the amendment, HDS recognized an approximately $3 million loss on extinguishment of debt for the write-off of a pro-rata portion of the unamortized deferred debt costs for the portion of the amendment considered an extinguishment.

In the first quarter of fiscal 2013, we redeemed all of the remaining $889 million outstanding of HDS's 2007 Senior Subordinated Notes at redemption price of 103.375% of the principal amount thereof. As a result, HDS incurred a $34 million loss on extinguishment of debt, which includes a $30 million premium payment to redeem the 2007 Senior Subordinated Notes and approximately $4 million to write off the unamortized deferred debt cost.

In addition, during the first quarter of fiscal 2013, we amended HDS's Term Loan Facility to lower the borrowing margin by 275 basis points and replace the hard call provision applicable to optional prepayment of Term Loans thereunder with a soft call option. A portion of the amendment was considered an extinguishment, resulting in a $5 million loss on extinguishment of debt, which included approximately $2 million of fees, $2 million to write off the pro-rata portion of unamortized original issue discount, and $1 million to write off the pro-rata portion of unamortized deferred debt cost. A significant portion of the amendment of HDS's Term Loan Facility was considered a modification. As a result, HDS incurred approximately $1 million in financing fees that were expensed.

57-------------------------------------------------------------------------------- Table of Contents During fiscal 2012, our debt refinancing and redemption activities resulted in charges of $709 million recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.

In connection with the refinancing of the senior portion of our debt structure in the first quarter of fiscal 2012, HDS recorded a charge of $220 million, which consisted of $150 million for the premium paid to the holders of the 12.0% Senior Notes, as contractually required, upon early extinguishment, $46 million of unamortized deferred debt costs and $24 million to write off the remaining unamortized asset associated with Home Depot's guarantee that was terminated in the April 2012 Refinancing Transactions.

In connection with the partial redemption of our 2007 Senior Subordinated Notes in the fourth quarter of fiscal 2012, HDS recorded a charge of $37 million, which consisted of a $31 million premium payment to redeem the 2007 Senior Subordinated Notes and $5 million to write-off the pro-rata portion of the unamortized deferred debt costs.

In connection with the repurchase of HDS's April 2012 Senior Unsecured Notes in the fourth quarter of fiscal 2012, HDS recorded a charge of $452 million, which consisted of a $422 million make-whole premium payment, a $28 million write-off unamortized original issue discount, and $2 million write-off of unamortized deferred debt costs.

For additional information on our debt-related activity, see "Liquidity, capital resources and financial condition-External financing" within this section of this annual report on Form 10-K.

Other (income) expense, net In connection with our initial public offering, we incurred approximately $20 million in related fees and expenses, including an aggregate fee of approximately $18 million paid to the Equity Sponsors to terminate our consulting agreements with them. For additional information on this transaction, see "Note 4, Related Parties," in the Notes to the Consolidated Financial Statements within Part II Item 8 of this annual report on Form 10-K.

Provision (benefit) for income taxes The provision for income taxes from continuing operations in fiscal 2013 was $62 million compared to $4 million in fiscal 2012. The effective rate for continuing operations for fiscal 2013 was an expense of 42.2%, reflecting the impact of a $113 million increase in the U.S. valuation allowance on deferred tax assets driven by the uncertainty regarding our ability to utilize the NOL for fiscal 2013. The U.S. valuation allowance for fiscal 2013 includes an increase of $45 million related to deferred tax liabilities generated by indefinite life intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences.

The effective rate for continuing operations for fiscal 2012 was an expense of 0.3%, reflecting the impact of a $442 million increase in the U.S. valuation allowance on deferred tax assets driven by the uncertainty regarding our ability to utilize the NOL for fiscal 2012. The U.S. valuation allowance for fiscal 2012 includes an increase of $44 million related to deferred tax liabilities generated by indefinite life intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences. The fiscal 2012 effective tax rate was also impacted by a reduction in deferred tax liabilities of $39 million related to the goodwill impairment for book purposes. The fiscal 2012 goodwill impairment created a deferred tax asset which reduced the fiscal 2012 tax expense by decreasing the deferred tax liability associated with indefinite life intangibles which prior to the impairment could not serve as a source of taxable income.

58 -------------------------------------------------------------------------------- Table of Contents In addition, the tax expense for fiscal 2012 was also reduced by an adjustment to the Company's valuation allowance as a result of the acquisition of additional deferred tax liabilities in conjunction with the Peachtree acquisition. The Company recorded a $6 million reduction in income tax expense associated with an adjustment to the Company's valuation allowance as a result of the Peachtree acquisition. The impact to the Company's income tax rate of acquiring Peachtree's net deferred tax liability is recorded in the Company's financial statements outside of Peachtree's purchase accounting. Peachtree's net deferred tax liability of $6 million recorded in purchase accounting is available to the Company as a source of future taxable income to support the realization of the Company's deferred tax assets which results in lowering the Company's valuation allowance and income tax expense by such amount.

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 as to the recoverability of the deferred tax assets and if it is determined that it is "more likely than not" that the benefits will not be realized, valuation allowances are recognized. In evaluating whether it is "more likely than not" that the Company would recover these deferred tax assets, future taxable income, the reversal of existing temporary differences, and tax planning strategies are considered.

Adjusted EBITDA Adjusted EBITDA increased $79 million, or 11.5%, in fiscal 2013 as compared to fiscal 2012. On a 52-week basis and excluding the impact of the Amended Agreement, Adjusted EBITDA increased $134 million, or 21.3%. The increase in Adjusted EBITDA in fiscal 2013 was driven by Facilities Maintenance, Waterworks, and White Cap. The increase in Adjusted EBITDA in fiscal 2013 was primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 40 basis points to 9.0% in fiscal 2013 as compared to fiscal 2012. Excluding the impact of the Amended Agreement, Adjusted EBITDA as a percentage of Net sales increased approximately 90 basis points.

Fiscal 2012 compared to fiscal 2011 Highlights Net sales in fiscal 2012 increased $1,010 million, or 14.6%, compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $863 million, or 12.4%, as compared to fiscal 2011. All of our business units realized increases in Net sales, led by Facilities Maintenance, Waterworks, Power Solutions and White Cap. Operating income increased $19 million, or 12.3%, during fiscal 2012 as compared to fiscal 2011, negatively impacted by the goodwill and other intangible asset impairment and positively impacted by the 53rd week in fiscal 2012. Excluding the impairment and the 53rd week, Operating income increased $157 million, or 101%, during fiscal 2012 as compared to fiscal 2011. Adjusted EBITDA increased by $177 million, or 34.8%, in fiscal 2012 as compared to fiscal 2011. In addition, on a 52-week basis, Adjusted EBITDA grew $163 million, or 32.1%, in fiscal 2012 as compared to fiscal 2011. This growth was driven by our sales initiatives, continued focus on margin expansion and cost control, geographic and product line expansions through acquisitions and greenfields, and improvements in the markets we serve.

During fiscal 2012, Crown Bolt and Home Depot agreed to an amendment and five-year extension of the strategic purchase agreement, which eliminated the minimum purchase requirement beginning with fiscal 2013, but retains Crown Bolt as the exclusive supplier of products purchased by Home Depot from Crown Bolt through January 31, 2020. During fiscal 2012, we refinanced all of our outstanding indebtedness, extending our closest principal maturity from 2015 to 2017 and lowered our future cash interest payments. In addition, we maintained strong liquidity with $981 million available as of February 3, 2013.

59-------------------------------------------------------------------------------- Table of Contents Net sales Net sales increased $1,010 million, or 14.6%, to $7,943 million during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $863 million, or 12.4%, as compared to fiscal 2011.

For the full year and on a 52-week basis, each of our business units experienced an increase in Net sales during fiscal 2012 as compared to fiscal 2011. The Net sales increases were primarily due to sales initiatives at each of our business units and, to a lesser extent, increases in market volume and acquisitions. Organic sales growth on a 52-week basis was 11.6% for fiscal 2012 as compared to fiscal 2011.

Gross profit Gross profit increased $308 million, or 15.5%, to $2,299 million during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Gross profit increased $267 million, or 13.4%, as compared to fiscal 2011.

An increase in gross profit in fiscal 2012 was experienced across all of our business units, driven by Facilities Maintenance, Waterworks, Power Solutions and White Cap.

Gross profit as a percentage of Net sales ("gross margin") increased approximately 20 basis points to 28.9% in fiscal 2012 from 28.7% in fiscal 2011.

The improvement was driven by Facilities Maintenance and White Cap.

Operating expenses Operating expenses increased $289 million, or 15.7%, to $2,125 million during fiscal 2012 as compared to fiscal 2011. Excluding the $152 million goodwill and other intangible asset impairment, operating expenses increased $137 million, or 7.5%, during fiscal 2012 as compared to fiscal 2011.

Selling, general and administrative expenses increased $127 million, or 8.4%, in fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week, Selling, general and administrative expenses increased $100 million, or 6.6%, in fiscal 2012 as compared to fiscal 2011. This was primarily a result of an increase in variable expenses due to higher sales volumes and investment in sales initiatives. Depreciation and amortization expense increased by $10 million, or 3.1%, in fiscal 2012 as compared to fiscal 2011. The increase was due to investment in property and equipment.

Operating expenses as a percentage of Net sales increased approximately 20 basis points to 26.7%in fiscal 2012 as compared to fiscal 2011, primarily due to the goodwill and other intangible asset impairment charge. Excluding the impairment charge, Operating expenses as a percentage of Net sales decreased approximately 170 basis points to 24.8% in fiscal 2012 as compared to fiscal 2011. The improvement reflects the leverage of fixed costs through sales volume increases primarily at White Cap and Waterworks, and, to a lesser extent, Facilities Maintenance.

Operating income (loss) Operating income increased $19 million, or 12.3%, during fiscal 2012 as compared to fiscal 2011, negatively impacted by the goodwill and other intangible asset impairment and positively impacted by the 53rd week in fiscal 2012. Excluding the impairment and the 53rd week, Operating income increased $157 million, or 101%, during fiscal 2012 as compared to fiscal 2011. The improvement was due to the increase in Net sales and Gross profit and control over the growth in Operating expenses.

Operating income as a percentage of Net sales remained flat in fiscal 2012 as compared to fiscal 2011. Excluding the impairment charge, Operating income as a percentage of Net sales increased 60-------------------------------------------------------------------------------- Table of Contents approximately 190 basis points to 4.1% in fiscal 2012 as compared to fiscal 2011, driven by Facilities Maintenance, Waterworks, Power Solutions and White Cap.

Interest expense Interest expense increased $19 million, or 3.0%, during fiscal 2012 as compared to fiscal 2011. The increase was primarily due to the additional interest expense paid as a result of the shortened call period on the early extinguishment of the 12.0% Senior Notes and an increase in outstanding borrowings, partially offset by lower amortization of deferred debt costs, only one fiscal quarter of amortization of the intangible asset value assigned to the THD Guarantee in fiscal 2012, and a reduction in effective interest rates from our refinancing activity.

Loss on extinguishment of debt During fiscal 2012, our debt refinancing and redemption activities resulted in charges of $709 million recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments.

In connection with the refinancing of the senior portion of our debt structure in the first quarter of fiscal 2012, HDS recorded a charge of $220 million, which consisted of $150 million for the premium paid to the holders of the 12.0% Senior Notes, as contractually required, upon early extinguishment, $46 million of unamortized deferred debt costs and $24 million to write off the remaining unamortized asset associated with the THD Guarantee that was terminated in the April 2012 Refinancing Transactions.

In connection with the partial redemption of our 2007 Senior Subordinated Notes in the fourth quarter of fiscal 2012, HDS recorded a charge of $37 million, which consisted of a $31 million premium payment to redeem the 2007 Senior Subordinated Notes and $5 million to write-off the pro-rata portion of the unamortized deferred debt costs.

In connection with the repurchase of HDS's April 2012 Senior Unsecured Notes in the fourth quarter of fiscal 2012, HDS recorded a charge of $452 million, which consisted of a $422 million make-whole premium payment, a $28 million write-off unamortized original issue discount, and $2 million write-off of unamortized deferred debt costs.

For additional information on our debt-related activity in fiscal 2012, see "Liquidity, capital resources and financial condition-External financing" within this section of this annual report on Form 10-K.

Provision (benefit) for income taxes The provision for income taxes from continuing operations in fiscal 2012 was $4 million compared to $79 million in fiscal 2011. The effective rate for continuing operations for fiscal 2012 was an expense of 0.3%, reflecting the impact of a $442 million increase in the U.S. valuation allowance on deferred tax assets driven by the uncertainty regarding our ability to utilize the NOL for fiscal 2012. The U.S. valuation allowance for fiscal 2012 includes an increase of $44 million related to deferred tax liabilities generated by indefinite life intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences. The fiscal 2012 effective tax rate was also impacted by a reduction in deferred tax liabilities of $39 million related to the goodwill impairment for book purposes. The fiscal 2012 goodwill impairment created a deferred tax asset which reduced the fiscal 2012 tax expense by decreasing the deferred tax liability associated with indefinite life intangibles which prior to the impairment could not serve as a source of taxable income.

In addition, the tax expense for fiscal 2012 was also reduced by an adjustment to the Company's valuation allowance as a result of the acquisition of additional deferred tax liabilities in conjunction 61-------------------------------------------------------------------------------- Table of Contents with the Peachtree acquisition. The Company recorded a $6 million reduction in income tax expense associated with an adjustment to the Company's valuation allowance as a result of the Peachtree acquisition. The impact to the Company's income tax rate of acquiring Peachtree's net deferred tax liability is recorded in the Company's financial statements outside of Peachtree's purchase accounting. Peachtree's net deferred tax liability of $6 million recorded in purchase accounting is available to the Company as a source of future taxable income to support the realization of the Company's deferred tax assets which results in lowering the Company's valuation allowance and income tax expense by such amount.

The effective rate for continuing operations for fiscal 2011 was an expense of 16.4%, reflecting the impact of a $259 million increase in the U.S. valuation allowance on deferred tax assets driven by the uncertainty regarding our ability to utilize the NOL for fiscal 2011. The U.S. valuation allowance for fiscal 2011 includes an increase of $58 million related to deferred tax liabilities generated by indefinite lived intangibles. The deferred tax liability associated with indefinite life intangibles is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing differences.

Adjusted EBITDA Adjusted EBITDA increased $177 million, or 34.8%, in fiscal 2012 as compared to fiscal 2011. On a 52-week basis, Adjusted EBITDA increased $163 million, or 32.1%, as compared to fiscal 2011.

The increase in Adjusted EBITDA in fiscal 2012 is primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 130 basis points to 8.6% in fiscal 2012 as compared to fiscal 2011, primarily due to the leverage of fixed costs through sales volume increases and efforts to control variable expenses.

Results of operations by reportable segment Facilities Maintenance Fiscal Year Increase (Decrease) 2013 vs. 2012 vs.

2013 2012 2011 2012 2011 (Dollars in millions) Net sales $ 2,331 $ 2,182 $ 1,870 6.8 % 16.7 % Operating income (loss) $ 307 $ 271 $ 213 13.3 % 27.2 % % of Net sales 13.2 % 12.4 % 11.4 % 80 bps 100 bps Depreciation and amortization 126 118 105 6.8 % 12.4 % Restructuring 1 - - * - Adjusted EBITDA $ 434 $ 389 $ 318 11.6 % 22.3 % % of Net sales 18.6 % 17.8 % 17.0 % 80 bps 80 bps -------------------------------------------------------------------------------- º * º not meaningful Fiscal 2013 compared to fiscal 2012 Net Sales Net sales increased $149 million, or 6.8%, during fiscal 2013 as compared to fiscal 2012. Excluding the impact of the 53rd week in fiscal 2012, Net Sales increased $190 million, or 8.9%, as compared to fiscal 2012.

For fiscal 2013, growth initiatives contributed approximately $125 million of the year-over-year increase. These growth initiatives consist of investments in sales personnel, products and technology, aligned with our customers' multifamily, hospitality, and healthcare industries. The acquisition of Peachtree in June 2012 contributed approximately $30 million of non-organic Net sales. Organic sales growth on a 52-week basis was 7.5% in fiscal 2013 as compared to fiscal 2012. Net sales in fiscal 2013 were negatively impacted by unusually cooler weather in the summer months of 2013, negatively impacting HVAC-related sales.

62-------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA Adjusted EBITDA increased $45 million, or 11.6%, in fiscal 2013 as compared to fiscal 2012. On a 52-week basis, Adjusted EBITDA increased $53 million, or 13.9%, in fiscal 2013 as compared to fiscal 2012.

The increase in fiscal 2013 was due to growth initiatives and the Peachtree acquisition. The increase was partially offset by increased Selling, general and administrative expense related to the hiring of additional associates to support the expanding business and drive future growth, and by other variable expenses driven by the volume increase.

Adjusted EBITDA as a percentage of Net sales increased approximately 80 basis points in fiscal 2013 as compared to fiscal 2012. The improvement in fiscal 2013 included gross margin expansions of approximately 70 basis points and a slight decline in Selling, general and administrative expenses as a percentage of Net sales. Gross margins were favorably impacted by purchase discounts and rebates achieved as a result of higher purchasing volumes.

Selling, general and administrative expenses as a percentage of Net sales were favorably impacted by the leverage of fixed costs through sales volume increases, partially offset by the impact of the investment in sales force additions.

Fiscal 2012 compared to fiscal 2011 Net sales Net sales increased $312 million, or 16.7%, during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $271 million, or 14.5%, as compared to fiscal 2011.

The Net sales growth was primarily due to new initiatives in the multifamily, hospitality, and healthcare markets. Net sales were also positively impacted by improving market conditions in the multifamily and hospitality markets and the Peachtree acquisition in June 2012. Organic sales growth on a 52-week basis was 12.4% in fiscal 2012 as compared to fiscal 2011.

Adjusted EBITDA Adjusted EBITDA increased $71 million, or 22.3%, during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Adjusted EBITDA increased $63 million, or 19.8%, as compared to fiscal 2011.

The increase was due to sales volume, new sales initiatives, and the Peachtree acquisition. This increase was partially offset by increased Selling, general and administrative expense related to the hiring of additional associates to support the expanding business and drive future growth.

Adjusted EBITDA as a percentage of Net sales increased approximately 80 basis points to 17.8% in fiscal 2012 as compared to fiscal 2011. The increase was primarily due to expansion of gross margins and the leverage of fixed costs through sales volume increases, partially offset by the investment in sales force additions.

63-------------------------------------------------------------------------------- Table of Contents Waterworks Increase (Decrease) Fiscal Year 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Net sales $ 2,227 $ 2,028 $ 1,772 9.8 % 14.4 % Operating income (loss) $ 159 $ 31 $ 12 * * % of Net sales 7.1 % 1.5 % 0.7 % * 80 bps Depreciation and amortization 14 106 100 (86.8 )% 6.0 % Adjusted EBITDA $ 173 $ 137 $ 112 26.3 % 22.3 % % of Net sales 7.8 % 6.8 % 6.3 % 100 bps 50 bps -------------------------------------------------------------------------------- º * º not meaningful Fiscal 2013 compared to fiscal 2012 Net Sales Net sales increased $199 million, or 9.8%, in fiscal 2013 as compared to fiscal 2012. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $235 million, or 11.8%, in fiscal 2013 as compared to fiscal 2012.

Growth initiatives, including fusible plastics, storm drainage, treatment plant initiatives, and new locations excluding acquisitions ("greenfields"), contributed approximately $170 million of the year-over-year increase for fiscal 2013. Net sales in fiscal 2013 were negatively affected by decreases in prices due to commodity price deflation, primarily polyvinyl chloride ("PVC") and ductile iron products, and unfavorable weather conditions in the fourth quarter.

The December 2012 acquisition of Water Products contributed Net sales of approximately $75 million in fiscal 2013. Organic sales growth on a 52-week basis was 8.1% in fiscal 2013 as compared to fiscal 2012. Adjusted EBITDA Adjusted EBITDA increased $36 million, or 26.3%, in fiscal 2013 as compared to fiscal 2012. On a 52-week basis, Adjusted EBITDA increased $38 million, or 28.1%, in fiscal 2013 as compared to fiscal 2012.

The increase was due to growth initiatives and, to a lesser extent, the Water Products acquisition, partially offset by increased Selling, general and administrative expense, primarily personnel and variable costs due to the increased volume.

Adjusted EBITDA as a percentage of Net sales increased approximately 100 basis points in fiscal 2013 as compared to fiscal 2012. The improvement in fiscal 2013 was due to the expansion of gross margins by approximately 70 basis points and a slight decline in Selling, general and administrative expense as a percentage of Net sales. Gross margins improvements were primarily driven by product mix, higher purchase discounts and rebates achieved as a result of higher purchasing volumes, and the Water Products acquisition. The decrease in Selling, general and administrative expense as a percentage of Net sales in fiscal 2013 was primarily due to the leverage of fixed costs through sales volume increases.

Fiscal 2012 compared to fiscal 2011 Net sales Net sales increased $256 million, or 14.4%, in fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $220 million, or 12.4%, as compared to fiscal 2011.

64-------------------------------------------------------------------------------- Table of Contents The Net sales increase was primarily due to sales initiatives, increases in prices due to commodity price inflation, primarily PVC and ductile iron products, and improvement in the residential housing market. In addition, Net sales were positively impacted by the fiscal 2012 acquisition of Water Products and the fiscal 2011 acquisition of RAMSCO. Organic sales growth on a 52-week basis was 11.2% in fiscal 2012 as compared to fiscal 2011.

Adjusted EBITDA Adjusted EBITDA increased $25 million, or 22.3%, during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Adjusted EBITDA increased $23 million, or 20.5%, as compared to fiscal 2011.

The increase was due to volume increases and new sales initiatives, partially offset by increased Selling, general and administrative expense, primarily personnel costs due to the increased volume.

Adjusted EBITDA as a percentage of Net sales increased approximately 50 basis points in fiscal 2012 as compared to fiscal 2011. The increase was driven primarily by the leverage of fixed costs through sales volume increases, efforts to control variable expenses and product mix. In addition, fiscal 2012 was negatively impacted by gross margin compression from fluctuating commodity prices.

Power Solutions Increase (Decrease) Fiscal Year 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Net sales $ 1,843 $ 1,787 $ 1,625 3.1 % 10.0 % Operating income (loss) $ 45 $ 47 $ 25 (4.3 )% 88.0 % % of Net sales 2.4 % 2.6 % 1.5 % (20) bps 110 bps Depreciation and amortization 25 25 25 - - Restructuring 6 - - * - Adjusted EBITDA $ 76 $ 72 $ 50 5.6 % 44.0 % % of Net sales 4.1 % 4.0 % 3.1 % 10 bps 90 bps -------------------------------------------------------------------------------- º * º not meaningful Fiscal 2013 compared to fiscal 2012 Net Sales Net sales increased $56 million, or 3.1%, in fiscal 2013 as compared to fiscal 2012. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $92 million, or 5.3%, in fiscal 2013 as compared to fiscal 2012.

The increase in Net sales in fiscal 2013 as compared to fiscal 2012 was attributable to increasing sales volume with our utilities customers, primarily driven by increases in transmission projects and product and service expansion.

Adjusted EBITDA Adjusted EBITDA increased $4 million, or 5.6%, in fiscal 2013 as compared to fiscal 2012. On a 52-week basis, Adjusted EBITDA increased $6 million, or 8.6%, in fiscal 2013 as compared to fiscal 2012.

65-------------------------------------------------------------------------------- Table of Contents The increase in Adjusted EBITDA in fiscal 2013 as compared to fiscal 2012 was primarily due to volume increases in Net sales, partially offset by an increase in Selling, general and administrative expenses.

Adjusted EBITDA as a percentage of Net sales increased approximately 10 basis points in fiscal 2013 as compared to fiscal 2012. The increase was due to a slight decline in Selling, general and administrative costs as a percentage of Net sales.

Fiscal 2012 compared to fiscal 2011 Net sales Net sales increased $162 million, or 10.0%, in fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $127 million, or 7.8%, as compared to fiscal 2011.

The Net sales increase was driven by increasing sales volume with large investor-owned utilities and other sales initiatives.

Adjusted EBITDA Adjusted EBITDA increased $22 million, or 44.0%, during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Adjusted EBITDA increased $20 million, or 40.0%, as compared to fiscal 2011.

The Adjusted EBITDA increase was driven by increasing sales and leverage of fixed costs through sales volume increases. Adjusted EBITDA as a percentage of Net sales increased approximately 90 basis points in fiscal 2012 as compared to fiscal 2011. The increase was driven primarily by the leverage of fixed costs through sales volume increases and efforts to control variable expenses, partially offset by product mix.

White Cap Increase (Decrease) Fiscal Year 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 (Dollars in millions) Net sales $ 1,293 $ 1,178 $ 981 9.8 % 20.1 % Operating income (loss) $ 42 $ 24 $ (16 ) 75.0 % * % of Net sales 3.2 % 2.0 % (1.6 )% 120 bps 360 bps Depreciation and amortization 36 32 33 12.5 (3.0 )% Restructuring 1 - - * - Adjusted EBITDA $ 79 $ 56 $ 17 41.1 % * % of Net sales 6.1 % 4.8 % 1.7 % 130 bps 310 bps -------------------------------------------------------------------------------- º * º not meaningful Fiscal 2013 compared to fiscal 2012 Net Sales Net sales increased $115 million, or 9.8%, in fiscal 2013 as compared to fiscal 2012. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $136 million, or 11.8%, in fiscal 2013 as compared to fiscal 2012.

66-------------------------------------------------------------------------------- Table of Contents Growth initiatives contributed approximately $100 million of the year-over-year increase in fiscal 2013, driven by our Managed Sales Approach ("MSA"), category management and direct marketing initiatives, as well as growth from new geographic markets. MSA is a structured approach to drive revenue at a regional level through analysis, tools and sales management. In addition, although White Cap sales are primarily influenced by non-residential construction, Net sales were positively impacted by the improvement in the residential housing market.

Adjusted EBITDA Adjusted EBITDA increased $23 million, or 41.1%, in fiscal 2013 as compared to fiscal 2012. On a 52-week basis, Adjusted EBITDA increased $24 million, or 43.6%, in fiscal 2013 as compared to fiscal 2012.

The increase in Adjusted EBITDA was primarily driven by growth initiatives, market volume, and product mix. This increase was partially offset by increased Selling, general and administrative expense related to the hiring of additional associates to support the expanding business and drive future growth.

Adjusted EBITDA as a percentage of Net sales increased approximately 130 basis points in fiscal 2013 as compared to fiscal 2012. The increase was primarily due to gross margin improvements of approximately 140 basis points in fiscal 2013, driven by higher purchase discounts and rebates achieved as a result of higher purchasing volumes and product mix. This improvement was partially offset by a slight increase in Selling, general and administrative expenses as a percentage of Net sales due to the impact of the investment in sales force additions and greenfields to support continued growth in our business.

Fiscal 2012 compared to fiscal 2011 Net sales increased $197 million, or 20.1%, during fiscal 2012 as compared to fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Net sales increased $176 million, or 17.9%, as compared to fiscal 2011.

The increase was primarily due to sales initiatives, and, to a lesser extent, improvements in the residential housing market.

Adjusted EBITDA Adjusted EBITDA increased $39 million to $56 million during fiscal 2012 as compared to $17 million in fiscal 2011. Excluding the impact of the 53rd week in fiscal 2012, Adjusted EBITDA increased $38 million as compared to fiscal 2011.

The increase in Adjusted EBITDA was primarily driven by sales initiatives, product mix, and sourcing initiatives.

Adjusted EBITDA as a percentage of Net sales increased approximately 310 basis points to 4.8% in fiscal 2012 as compared to fiscal 2011, primarily due to improved gross margins and the leverage of fixed costs through sales volume increases. Gross margins were favorably impacted by purchase discounts and rebates achieved as a result of higher purchasing volumes.

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.

67-------------------------------------------------------------------------------- Table of Contents On July 2, 2013, Holdings completed an initial public offering of its common stock, resulting in net proceeds of approximately $1,039 million, net of underwriters' discounts and commissions and offering expenses of approximately $16 million (including the payment to the Equity Sponsors of an aggregate transaction fee of approximately $11 million). The net proceeds from the initial public offering were used to (1) redeem all $950 million of HDS's outstanding January 2013 Senior Subordinated Notes, including the payment of a $29 million premium to redeem the notes and $29 million of accrued interest through the redemption date, and (2) pay related fees and expenses, including the payment to the Equity Sponsors of an aggregate fee to terminate the consulting agreements of approximately $18 million. The remaining net proceeds were used for general corporate purposes.

During fiscal 2013, the Company's use of cash was primarily driven by the payment of interest on debt and net debt repayments, substantially offset by the net proceeds of the initial public offering and the receipt of cash from the sale of short-term investments of cash restricted for the extinguishment of the 2007 Senior Subordinated Notes. This net use of cash was partially offset by cash receipts from operations.

As of February 2, 2014, our combined liquidity of approximately $994 million was comprised of $115 million in cash and cash equivalents and $879 million of additional available borrowings (excluding $59 million of borrowings on available cash balances) under our Senior ABL Facility, based on qualifying inventory and receivables.

Information about the Company's cash flows, by category, is presented in the Consolidated Statements of Cash Flows and is summarized as follows: Net cash provided by (used for): Fiscal 2013 Fiscal 2012 Fiscal 2011 Amounts in millions Operating activities $ (367 ) $ (681 ) $ (165 ) Investing activities 820 (800 ) (6 ) Financing activities (474 ) 1,511 (10 ) Working capital Working capital, excluding cash and cash equivalents, was $1,095 million as of February 2, 2014, increasing $116 million as compared to $979 million as of February 3, 2013. The increase was primarily driven by an increase in Receivables and Inventory reflecting higher sales volumes and a decrease in Accounts Payable and accrued interest, partially offset by a decrease in deferred tax assets.

Operating activities Cash flow from operating activities in the fiscal 2013 was a use of $367 million compared with cash used by operating activities of $681 million in fiscal 2012. The use of cash in fiscal 2013 was driven by the payment of $364 million of original issue discounts and PIK interest related to the extinguishment of the 2007 Senior Subordinated Notes and a portion of the Term Loans. Additionally, cash interest paid in fiscal 2013 unrelated to extinguishments was $527 million, compared to $621 million in fiscal 2012.

Excluding the cash interest payments, including PIK interest and original issue discounts paid, in both periods, cash flow from operating activities increased $82 million in fiscal 2013 as compared to fiscal 2012. The increase was primarily due to an increase in sales volumes, partially offset by an increase in working capital to support the increasing sales volumes.

Cash flow from operating activities in fiscal 2012 was a use of $681 million compared with a use of $165 million in fiscal 2011. The use of cash in fiscal 2012 was driven by the payment of $502 million of original issue discounts and PIK interest related to the extinguishment of all of the April 2012 Senior 68-------------------------------------------------------------------------------- Table of Contents Unsecured Notes and $930 million of the 2007 Senior Subordinated Notes.

Additionally, cash interest paid in fiscal 2012 unrelated to extinguishments was $621 million compared to $356 million in fiscal 2011. Excluding the cash interest payments in both periods, cash flow from operating activities increased $251 million in fiscal 2012 as compared to fiscal 2011. The increase was primarily due to an increase in sales volumes, partially offset by an increase in working capital, excluding the impact of dispositions, to support the increasing sales volumes.

Investing activities During fiscal 2013, cash provided by investing activities was $820 million, primarily due to the proceeds of $936 million from the sale of short-term investments of cash restricted for the extinguishment of the 2007 Senior Subordinated Notes, partially offset by $131 million of capital expenditures.

During fiscal 2012, cash used in investing activities was $800 million, primarily driven by the net investment of $936 million of cash proceeds from debt issuances, $248 million payments for business acquisitions and $115 million in capital expenditures. These payments were partially offset by $481 million of net proceeds from the sale of businesses.

During fiscal 2011, cash used in investing activities was $6 million, primarily driven by $115 million of capital expenditures and the $21 million acquisition of RAMSCO, partially offset by $128 million of proceeds from the sale of businesses.

Financing activities During fiscal 2013, cash used in financing activities was $474 million, primarily due to net debt payments of $1,485 million, including an aggregate $59 million in contractually required premiums paid to extinguish the 2007 Senior Subordinated Notes and January 2013 Senior Subordinated Notes prior to maturity, and payments of $34 million for debt issuance and modification costs.

This was substantially offset by $1,039 million in net proceeds from the initial public offering of our common stock.

During fiscal 2012, cash provided by financing activities was $1,511 million, due to net debt borrowings of $1,641 million, which includes the financing of $603 million of contractually required premiums paid to extinguish the 12.0% Senior Notes, the 2007 Senior Subordinated Notes, and the April 2012 Senior Unsecured Notes prior to maturity, offset by payments of $132 million for debt issuance costs.

During fiscal 2011, cash used in financing activities was $10 million, due entirely to net debt repayments.

External financing As of February 2, 2014, HDS had an aggregate principal amount of $5.5 billion of outstanding debt, net of unamortized discounts of $19 million and including unamortized premiums of $18 million, and an additional $938 million of available borrowings under its Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $56 million in letters of credit issued and including $59 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 69-------------------------------------------------------------------------------- Table of Contents 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.

On February 6, 2014, HDS amended its Term Loan Facility to reduce the applicable margin for borrowings from 3.25% for LIBOR borrowings and 2.25% for base rate borrowings to 3.00% for LIBOR borrowings and 2.00% for base rate borrowings, and reduced the LIBOR floor to 1.00%. The amendment also added a new soft call provision applicable to optional prepayment of term loans. The soft call requires a premium equal to 1.00% of the aggregate principal amount of term loans being prepaid if, on or prior to August 6, 2014, HDS enters into certain repricing transactions. In addition, the amendment provided that HDS may withhold up to $150 million from repayments otherwise required to be made with the proceeds of asset sales and use such proceeds to repay any debt, including debt that is junior to the term loans. The amendment also extended the maturity of the term loans by approximately nine months, to June 28, 2018. Pursuant to the credit agreement governing HDS's Senior ABL Facility, the maturity date of the ABL Facility is the earlier of June 28, 2018 and the maturity date of the Term Loan Facility. The amendment therefore effectively extended the maturity date of the Senior ABL Facility to June 28, 2018.

In connection with the amendment, HDS paid approximately $1 million in original issue discounts, which will be amortized into interest expense over the remaining term of the amended facility in accordance with ASC 470-50. A portion of the amendment was considered an extinguishment, resulting in a $1 million loss on extinguishment of debt for the write-off of pro-rata portions of the unamortized original issue discount and the unamortized deferred debt cost. The portion of the amendment considered a modification resulted in a charge of approximately $1 million.

Affiliates of certain of the Equity Sponsors owned approximately $37 million of the Term Loans as of the date of the amendment. In the amendment process, this ownership was reduced to $30 million.

On August 1, 2013, HDS redeemed all $950 million outstanding aggregate principal amount of its 10.5% Senior Subordinated Notes due 2021 (the "January 2013 Senior Subordinated Notes") at a redemption price equal to 103% of the principal amount thereof and paid accrued and unpaid interest thereon through the redemption date. As a result, in the second quarter of fiscal 2013 and in accordance with ASC 470-50, Debt-Modifications and Extinguishments, HDS incurred a $44 million loss on extinguishment, which included a $29 million premium payment to redeem the January 2013 Senior Subordinated Notes and approximately $15 million to write off the unamortized deferred debt cost.

On June 28, 2013, HDS amended its Senior ABL Facility (as defined below) to (i) reduce the applicable margin for borrowings under the Senior ABL Facility by 0.25%; (ii) reduce the commitment fee applicable thereunder by 0.125%; (iii) extend the maturity date of the Senior ABL Facility to June 28, 2018 (or the maturity date under HDS's Term Loan Facility, if earlier); (iv) make certain changes to the borrowing base and (v) reduce the sublimit available for letters of credit under the Senior ABL Facility from $400 million to $250 million. In connection with the amendment, HDS paid approximately $2 million in financing fees which will be amortized into interest expense over the remaining term of the amended facility in accordance with ASC 470-50. A portion of the amendment was considered an extinguishment, resulting in an approximately $3 million loss on extinguishment of debt for the write-off of the pro-rata portion of unamortized deferred debt costs.

On February 15, 2013, HDS amended its Term Loan Facility (as defined below) to lower the borrowing margin by 275 basis points. The Term Loans (as defined below) are subject to an interest rate equal to LIBOR (subject to a floor of 1.25%) plus a borrowing margin of 3.25% or Prime plus a borrowing margin of 2.25% at HDS's election. The amendment also replaced the hard call provision applicable to optional prepayment of Term Loans thereunder with a soft call option, which expired on August 15, 2013. In connection with the amendment, HDS paid approximately $30 million in financing fees, of which approximately $27 million will be amortized into interest expense over the remaining 70-------------------------------------------------------------------------------- Table of Contents term of the amended facility in accordance with ASC 470-50. A portion of the amendment was considered an extinguishment, resulting in a $5 million loss on extinguishment of debt, which included approximately $2 million of fees, $2 million to write off the pro-rata portion of unamortized original issue discount, and $1 million to write off the pro-rata portion of unamortized deferred debt cost. The portion of the amendment considered a modification resulted in a charge of $1 million.

On February 8, 2013, HDS redeemed its remaining $889 million outstanding aggregate principal amount of its 13.5% Senior Subordinated Notes due 2015 (the "2007 Senior Subordinated Notes") at a redemption price equal to 103.375% of the principal amount thereof and paid accrued and unpaid interest thereon through the redemption date. As a result, in the first quarter of fiscal 2013, HDS incurred a $34 million loss on extinguishment of debt, which included a $30 million premium payment to redeem the 2007 Senior Subordinated Notes and approximately $4 million to write off the unamortized deferred debt cost.

On February 1, 2013, HDS issued $1,275 million aggregate principal amount of 7.5% Senior Unsecured Notes due 2020 (the "February 2013 Senior Unsecured Notes") at par. As a result of the issuance, HDS incurred $21 million in debt issuance costs, of which $19 million was paid as of February 3, 2013. The net proceeds from the February 2013 Senior Unsecured Notes issuance were used to repurchase all of HDS's outstanding April 2012 Senior Unsecured Notes (as defined below and issued to the Equity Sponsors), plus a $422 million make-whole premium calculated in accordance with the April 2012 Senior Unsecured Notes Indenture, plus $37 million of un-capitalized PIK interest thereon through February 1, 2013. Also on February 1, 2013, the trustee for the April 2012 Senior Unsecured Notes cancelled all of the outstanding April 2012 Senior Unsecured Notes. As a result of these transactions, HDS incurred a $452 million loss on extinguishment, which included the make-whole premium, a $28 million write-off of unamortized original issue discount, and $2 million write-off of unamortized deferred debt costs.

On January 16, 2013, HDS issued $950 million aggregate principal amount of the January 2013 Senior Subordinated Notes at par. As a result of the issuance, the Company incurred $16 million in debt issuance costs, of which $15 million was paid as of February 3, 2013. The Company committed to use the net proceeds from the January 2013 Senior Subordinated Notes issuance to redeem all of its remaining $889 million outstanding 2007 Senior Subordinated Notes, subject to the required thirty-day notification period. As of February 3, 2013, the Company held $936 million in cash equivalents classified as Cash equivalents restricted for debt redemption in the Consolidated Balance Sheet for the redemption of $889 million of the 2007 Senior Subordinated Notes on February 8, 2013. The $936 million was used to redeem the 2007 Senior Subordinated Notes on February 8, 2013, as noted above.

On October 15, 2012, HDS issued $1,000 million aggregate principal amount of 11.5% Senior Unsecured Notes due 2020 (the "October 2012 Senior Unsecured Notes") at par. As a result of the issuance, HDS incurred and paid $17 million in debt issuance costs. On November 8, 2012, HDS used the net proceeds from the October 2012 Senior Unsecured Notes issuance to redeem $930 million of its outstanding 2007 Senior Subordinated Notes at a redemption price equal to 103.375% of the principal amount thereof and to pay $23 million of accrued interest. As a result, HDS incurred a $37 million loss on extinguishment, which included a $31 million premium payment to redeem the 2007 Senior Subordinated Notes prior to maturity and $5 million to write-off the pro-rata portion of unamortized deferred debt costs.

71-------------------------------------------------------------------------------- Table of Contents Refinancing Transactions and Additional Notes On April 12, 2012, HDS consummated the following transactions (the "Refinancing Transactions") in connection with the refinancing of the senior portion of its debt structure: º • º the issuance of $950 million of its 81/8% Senior Secured First Priority Notes due 2019 (the "April 2012 First Priority Notes" and collectively with the Additional Notes (as defined below), the "First Priority Notes"); º • º the issuance of $675 million of its 11% Senior Secured Second Priority Notes due 2020 (the "Second Priority Notes"); º • º the issuance of approximately $757 million of 14.875% Senior Notes due 2020 (the "April 2012 Senior Unsecured Notes"); º • º entry into a new senior term facility (the "Term Loan Facility") maturing in 2017 and providing for term loans in an aggregate principal amount of $1,000 million; and º • º entry into a new senior asset based lending facility (the "ABL Facility") maturing in 2017 and providing for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under the borrowing base).

The proceeds of the First Priority Notes, the Second Priority Notes, the April 2012 Senior Unsecured Notes, the Term Loan Facility and the ABL Facility were used to (i) repay all amounts outstanding under HDS's then existing Senior Secured Credit Facility (the "2007 Senior Secured Credit Facility"), (ii) repay all amounts outstanding under HDS's then existing ABL Credit Facility (the "2007 ABL Credit Facility"), (iii) repurchase all of HDS's remaining outstanding 12.0% Senior Notes due 2014 (the "12.0% Senior Notes") and (iv) pay related fees and expenses.

Affiliates of certain of the Equity Sponsors owned an aggregate principal amount of approximately $484 million of the 12.0% Senior Notes which they exchanged in a non-cash transaction for their investment in the April 2012 Senior Unsecured Notes.

On August 2, 2012, HDS issued $300 million additional aggregate principal amount of its 81/8% First Priority Notes due 2019 (the "Additional Notes") at a premium of 107.5%. At closing, HDS received approximately $317 million, net of transaction fees. The Additional Notes were issued under the indenture pursuant to which HDS previously issued $950 million aggregate principal amount of 81/8% First Priority Notes due 2019, all of which remains outstanding. The net proceeds from the sale of the Additional Notes were applied to reduce outstanding borrowings under HDS's ABL Facility.

As a result of the Refinancing Transactions and the issuance of the Additional Notes, HDS incurred $80 million in debt issuance costs and recorded a $220 million loss on extinguishment, which included a $150 million premium payment to redeem the 12.0% Senior Notes, $46 million to write-off the pro-rata portion of the unamortized deferred debt costs, and $24 million to write-off the remaining unamortized Other asset associated with Home Depot's guarantee of HDS's payment obligations for principal and interest of term loans under the 2007 Senior Secured Credit Facility that was terminated in the Refinancing Transactions.

Unamortized deferred debt costs In accordance with ASC 470, Debt, HDS determined that all of the redemption of 12.0% Senior Notes was an extinguishment as either the original note holders were unknown or the refinancing was considered a "substantial" change. As a result of the extinguishment, HDS wrote-off approximately $24 million in unamortized deferred financing charges associated with the 12.0% Senior Notes.

Similarly, under ASC 470, approximately $834 million of the 2007 ABL Credit Facility and approximately $1,169 million of the 2007 Senior Secured Credit Facility were deemed extinguishments, 72-------------------------------------------------------------------------------- Table of Contents with the remaining portions considered modifications. As a result of the extinguishment, HDS wrote-off approximately $22 million of $42 million in unamortized deferred financing charges associated with these credit agreements.

HDS's long-term debt as of February 2, 2014 and February 3, 2013 consisted of the following (dollars in millions): February 2, 2014 February 3, 2013 Outstanding Interest Outstanding Interest Principal Rate %(1) Principal Rate %(1) Senior ABL Facility due 2017 $ 360 1.66 $ 300 1.96 Term Loans due 2017, net of unamortized discount of $19 million and $26 million 966 4.50 969 7.25 First Priority Notes due 2019, including unamortized premium of $18 million and $21 million 1,268 8.125 1,271 8.125 Second Priority Notes due 2020 675 11.00 675 11.00 October 2012 Senior Unsecured Notes due 2020 1,000 11.50 1,000 11.50 February 2013 Senior Unsecured Notes due 2020 1,275 7.50 1,275 7.50 January 2013 Senior Subordinated Notes due 2021 - - 950 10.50 2007 Senior Subordinated Notes due 2015 - - 889 13.50 Total long-term debt $ 5,544 $ 7,329 Less current installments (10 ) (899 ) Long-term debt, excluding current installments $ 5,534 $ 6,430 -------------------------------------------------------------------------------- º (1) º Represents the stated rate of interest, without including the effect of discounts or premiums.

Senior Credit Facilities Asset Based Lending Facility The ABL Facility provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under a borrowing base). Extensions of credit under the ABL Facility will be limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. As of February 2, 2014, HDS had $938 million of available borrowings under the ABL Facility (after giving effect to the borrowing base limitations and approximately $56 million in letters of credit issued and including $59 million of borrowings available on qualifying cash balances).

A portion of the ABL Facility is available for letters of credit and swingline loans. The ABL Facility also includes a sub-facility for loans and letters of credit in Canadian dollars. The ABL Facility also permits HDS to add one or more incremental term loans, revolving or letter of credit facilities to be included in the ABL Facility up to an aggregate maximum amount of $1,900 million for the total commitments under the ABL Facility (including all incremental commitments).

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

73-------------------------------------------------------------------------------- Table of Contents The ABL Facility will mature on June 28, 2018 (or the maturity date of HDS's Term Loan Facility, if earlier); unless the individual applicable lenders agree to extend the maturity of their respective loans under the ABL Facility upon HDS's request and without the consent of any other applicable lender.

The ABL Facility is senior secured indebtedness of HDS and ranks equal in right of payment with all of HDS's existing and future senior indebtedness and senior in right of payment to all of HDS's existing and future subordinated indebtedness.

The ABL Facility is guaranteed, on a senior secured basis, by the Subsidiary Guarantors. These guarantees are subject to release under customary circumstances as stipulated in the agreement.

The ABL Facility is secured by a first-priority security interest in the ABL Priority Collateral, subject to permitted liens.

Prepayments The ABL Facility may be prepaid at HDS's option at any time without premium or penalty and will be subject to mandatory prepayment if the outstanding ABL Facility exceeds either the aggregate commitments with respect thereto or the current borrowing base, in an amount equal to such excess. Mandatory prepayments do not result in a permanent reduction of the lenders' commitments under the ABL Facility.

Guarantees HDS, and at HDS's option, certain of HDS's subsidiaries, including HD Supply Canada, Inc., a Canadian subsidiary (the "Canadian Borrower"), are the borrowers under the ABL Facility. The Subsidiary Guarantors guarantee HDS's payment obligations under the ABL Facility (and, in the case of Canadian obligations, each direct and indirect wholly-owned Canadian subsidiary, subject to certain exceptions, in each case to the extent otherwise permitted by applicable law, regulation and contractual provision (the "Canadian Guarantors") guarantee the Canadian Borrower's payment obligations under the ABL Facility).

HDS's obligations under the ABL Facility and the guarantees thereof, are secured in favor of the U.S. ABL collateral agent, by (i) all of the capital stock of HDS, all capital stock of all domestic subsidiaries directly owned by HDS and the Subsidiary Guarantors and 65% of the capital stock of any foreign subsidiary held directly by HDS or any Subsidiary Guarantor (it being understood that a foreign subsidiary holding company will be deemed a foreign subsidiary) and (ii) substantially all other tangible and intangible assets owned by HDS and each Subsidiary Guarantor, in each case to the extent permitted by applicable law and subject to certain exceptions and subject to the priority of liens between the Term Loan Facility, the First Priority Notes, the Second Priority Notes and the ABL Facility.

The Canadian obligations under the ABL Facility are also secured by liens on substantially all assets of the Canadian Borrower and the Canadian Guarantors, subject to certain exceptions.

Covenants The ABL Facility contains a number of covenants that, among other things, limit or restrict HDS's ability and, in certain cases, HDS's subsidiaries to make acquisitions, mergers, consolidations, dividends, and to prepay certain indebtedness (including the First Priority Notes, the Second Priority Notes, the October 2012 Senior Unsecured Notes, and the February 2013 Senior Unsecured Notes), in each case to the extent any such transaction would reduce availability under the ABL Facility below a specified amount.

74-------------------------------------------------------------------------------- Table of Contents In addition, if HDS's specified excess availability (including an amount by which HDS's borrowing base exceeds the existing commitments) under the ABL Facility falls below the greater of $150 million and 10% of the aggregate commitments (a "Liquidity Event"), HDS will be required to maintain a Fixed Charge Coverage Ratio of at least 1.0:1.0, as defined in the ABL Facility.

The ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements. HDS is in compliance with all such covenants.

Senior Secured Term Loan Facility The Term Loan Facility consists of a senior secured Term Loan Facility (the "Term Loan Facility"; the term loan thereunder, the "Term Loan") providing for a Term Loan in an original aggregate principal amount of $1,000 million (net of $30 million of original issue discount). The Term Loan Facility also permits the Company to add one or more incremental term loans, revolving or letter of credit facilities of up to $250 million plus a certain amount depending on a secured first lien leverage ratio test included in the Term Loan Facility. The Term Loan bears interest at LIBOR (subject to a floor of 1.25%) plus a borrowing margin of 3.25% or Prime plus a borrowing margin of 2.25% at HDS's election, payable at the end of each calendar quarter with respect to Prime rate draws or at the maturity of each LIBOR draw (unless a draw is for a six-, nine-, or twelve-month period, then interest shall be paid quarterly). The Term Loan amortizes in nominal quarterly installments equal to 0.25% of the original aggregate principal amount of the Term Loan and matures on October 12, 2017; provided that the individual applicable lenders may agree to extend the maturity of their respective Term Loans upon HDS's request and without the consent of any other applicable lender. See Note 17, Subsequent Event, for information on the amendment of the Term Loan Facility.

The Term Loan Facility is senior secured indebtedness of HDS and ranks equal in right of payment with all of HDS's existing and future senior indebtedness and senior in right of payment to all of HDS's existing and future subordinated indebtedness.

The Term Loan Facility is guaranteed, on a senior secured basis, by the Subsidiary Guarantors. These guarantees are subject to release under customary circumstances. The guarantee of each Subsidiary Guarantor is a senior secured obligation of that Subsidiary Guarantor and ranks equal in right of payment with all existing and future senior indebtedness of that Subsidiary Guarantor and senior in right of payment to all existing and future subordinated indebtedness of such Subsidiary Guarantor.

Collateral The Term Loan Facility and the related guarantees are secured by a first-priority security interest in the Cash Flow Priority Collateral, subject to permitted liens. In addition, the Term Loan Facility and the related guarantees are secured by a second-priority security interest in the ABL Priority Collateral, subject to permitted liens.

Prepayment The Term Loan Facility contains a soft call provision applicable to the optional prepayment of Term Loans. The soft call requires a premium equal to 1.00% of the aggregate principal amount of Term Loans being prepaid if, on or prior to August 6, 2014, HDS enters into certain repricing transactions. After August 6, 2014, the Term Loans may be prepaid at any time without premium or penalty. Under certain circumstances and subject to certain exceptions, the Term Loan Facility will be subject to mandatory prepayment in an amount equal to: º • º 100% of the net proceeds (other than those that are used to purchase certain assets or to repay certain other indebtedness) of certain asset sales and certain insurance recovery events; and 75 -------------------------------------------------------------------------------- Table of Contents º • º 50% of annual excess cash flow for any fiscal year, such percentage to decrease to 0% depending on the attainment of certain secured leverage ratio targets.

The February 2014 amendment of the Term Loan Facility provided that HDS may withhold up to $150 million from repayments otherwise required to be made with the proceeds of asset sales and use such proceeds to repay any debt, including debt that is junior to the Term Loans.

In addition, upon the incurrence of certain events constituting a Change of Control (as defined in the credit agreement governing the Term Loan Facility (the "Term Loan Credit Agreement")), HDS must offer to prepay the Term Loans (unless otherwise repaid) at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repayment date.

Guarantee HDS is the borrower under the Term Loan Facility. The Subsidiary Guarantors guarantee HDS's payment obligations under the Term Loan Facility.

HDS's obligations under the Term Loan Facility and the guarantees thereof are secured in favor of the collateral agent by (i) all of the capital stock of HDS, all capital stock of all domestic subsidiaries directly owned by HDS and the Subsidiary Guarantors and 65% of the capital stock of any foreign subsidiary owned directly by HDS or any Subsidiary Guarantors (it being understood that a foreign subsidiary holding company will be deemed a foreign subsidiary) and (ii) substantially all other tangible and intangible assets owned by HDS and each Subsidiary Guarantor, in each case to the extent permitted by applicable law and subject to certain exceptions and subject to the priority of liens between the Term Loan Facility, the First Priority Notes, the Second Priority Notes and the ABL Facility.

Covenants The Term Loan Facility contains a number of covenants that, among other things, limit the ability of HDS and its restricted subsidiaries, as described in the Term Loan Credit Agreement, to: incur more indebtedness; pay dividends, redeem stock or make other distributions; make investments; create restrictions on the ability of HDS's restricted subsidiaries to pay dividends to HDS or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with HDS's affiliates; and prepay or amend the terms of certain indebtedness.

The Term Loan Facility also contains certain affirmative covenants, including financial and other reporting requirements. HDS is in compliance with all such covenants.

Events of Default under the ABL Facility and Term Loan Facility The ABL Facility and Term Loan Facility also provide for customary events of default, including non-payment of principal, interest or fees, violation of covenants, material inaccuracy of representations or warranties, specified cross default and cross acceleration to other material indebtedness, certain bankruptcy events, certain ERISA events, material invalidity of guarantees or security interest, material judgments and changes of control.

81/8% Senior Secured First Priority Notes due 2019 HDS issued $950 million of First Priority Notes under an Indenture, dated, and amended, as of April 12, 2012 (the "First Priority Indenture") among HDS, certain subsidiaries of HDS, as guarantors (the "Subsidiary Guarantors"), the Trustee, and the Note Collateral Agent. On August 2, 2012, HDS issued $300 million additional aggregate principal amount of its First Priority Notes (the "Additional Notes") at a premium of 107.5%. The First Priority Notes bear interest at a rate of 81/8% per annum 76-------------------------------------------------------------------------------- Table of Contents and will mature on April 15, 2019. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

The First Priority Notes are senior secured indebtedness of HDS and rank equal in right of payment with all of its existing and future senior indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness.

The First Priority Notes are guaranteed, on a senior secured basis, by each of HDS's Wholly Owned Domestic Subsidiaries (as defined in the First Priority Indenture), other than an Excluded Subsidiary (as defined in the First Priority Indenture), and by each of HDS's other Domestic Subsidiaries (as defined in the First Priority Indenture) that is a borrower under the ABL Facility or that guarantees payment of indebtedness of HDS under any Credit Facility or Capital Markets Securities (as defined in the First Priority Indenture). These guarantees are subject to release under customary circumstances as stipulated in the First Priority Indenture.

Collateral The First Priority Notes and the related guarantees are secured by a first-priority security interest in substantially all of the tangible and intangible assets of HDS and the Subsidiary Guarantors (other than the ABL Priority Collateral, in which the First Priority Notes and the related guarantees have a second priority security interest), including pledges of all Capital Stock of HDS's Restricted Subsidiaries directly owned by HDS and the Subsidiary Guarantors (but only up to 65% of each series of Capital Stock of each direct Foreign Subsidiary owned by HDS or any Subsidiary Guarantor), subject to certain thresholds, exceptions and permitted liens, and excluding any Excluded Assets (as defined in the First Priority Indenture) and Excluded Subsidiary Securities (as defined in the First Priority Indenture) (the "Cash Flow Priority Collateral").

In addition, the First Priority Notes and the related guarantees are secured by a second-priority security interest in substantially all of HDS's and the Subsidiary Guarantors' present and future assets which secure HDS's obligations under the ABL Facility on a first priority basis, including accounts receivable, inventory and other related assets and all proceeds thereof, subject to permitted liens. Such assets are referred to as the "ABL Priority Collateral." (The Cash Flow Priority Collateral and the ABL Priority Collateral together are referred to herein as the "Collateral.") Redemption HDS may redeem the First Priority Notes, in whole or in part, at any time (1) prior to April 15, 2015, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the First Priority Indenture and (2) on and after April 15, 2015, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on April 15 of the year set forth below.

Year Percentage 2015 106.094 % 2016 104.063 % 2017 102.031 % 2018 and thereafter 100.000 % In addition, at any time prior to April 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the First Priority Notes with the proceeds of certain equity offerings at a redemption price of 108.125% of the principal amount in respect of the First Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the First 77-------------------------------------------------------------------------------- Table of Contents Priority Notes are redeemed, an aggregate principal amount of First Priority Notes equal to at least 50% of the original aggregate principal amount of First Priority Notes must remain outstanding immediately after each such redemption of First Priority Notes.

11% Senior Secured Second Priority Notes due 2020 HDS issued $675 million aggregate principal amount of Second Priority Notes under an Indenture, dated, and amended, as of April 12, 2012 (the "Second Priority Indenture"), among HDS, the Subsidiary Guarantors, the Trustee, and the Note Collateral Agent. The Second Priority Notes bear interest at a rate of 11% per annum and will mature on April 15, 2020. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

The Second Priority Notes are senior secured indebtedness of HDS and rank equal in right of payment with all of HDS's existing and future senior indebtedness and senior in right of payment to all of HDS's existing and future subordinated indebtedness.

The Second Priority Notes are guaranteed, on a senior secured basis, by each of HDS's Wholly Owned Domestic Subsidiaries (as defined in the Second Priority Indenture), other than an Excluded Subsidiary (as defined in the Second Priority Indenture), and by each of HDS's other Domestic Subsidiaries (as defined in the Second Priority Indenture) that is a borrower under the ABL Facility or that guarantees payment of indebtedness of HDS under any Credit Facility or Capital Markets Securities (as defined in the Second Priority Indenture). These guarantees are subject to release under customary circumstances as stipulated in the Second Priority Indenture.

Collateral The Second Priority Notes and the related guarantees are secured by a second-priority security interest in the Cash Flow Priority Collateral, subject to permitted liens. In addition, the Second Priority Notes and the related guarantees are secured by a third-priority security interest in the ABL Priority Collateral, subject to permitted liens.

Redemption HDS may redeem the Second Priority Notes, in whole or in part, at any time (1) prior to April 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the Second Priority Indenture and (2) on and after April 15, 2016, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on April 15 of the year set forth below.

Year Percentage 2016 105.500 % 2017 102.750 % 2018 and thereafter 100.000 % In addition, at any time prior to April 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the Second Priority Notes with the proceeds of certain equity offerings at a redemption price of 111.000% of the principal amount in respect of the Second Priority Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the Second Priority Notes are redeemed, an aggregate principal amount of Second Priority Notes equal to at least 50% of the original aggregate principal amount of Second Priority Notes must remain outstanding immediately after each such redemption of Second Priority Notes.

78 -------------------------------------------------------------------------------- Table of Contents 11.5% Senior Unsecured Notes due 2020 HDS issued $1,000 million aggregate principal amount of 11.5% Senior Notes under an Indenture, dated, and amended, as of October 15, 2012 ("October 2012 Senior Notes Indenture") among the Company, certain subsidiaries of the Company as guarantors (the "Subsidiary Guarantors") and the Trustee. The October 2012 Senior Unsecured Notes bear interest at a rate of 11.5% per annum and will mature on July 15, 2020. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

The October 2012 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS's existing and future senior indebtedness, senior in right of payment to all of HDS's existing and future subordinated indebtedness, and effectively subordinated to all of HDS's existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, the First Priority Notes and the Second Priority Notes, to the extent of the value of the collateral securing such indebtedness.

The October 2012 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS's direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the ABL Facility or that guarantees HDS's obligations under any credit facility or capital markets securities. These guarantees are subject to release under customary circumstances as stipulated in the October 2012 Senior Notes Indenture.

Redemption HDS may redeem the October 2012 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the 11.5% Senior Notes Indenture and (2) on and after October 15, 2016, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

Year Percentage 2016 105.750 % 2017 102.875 % 2018 and thereafter 100.000 % In addition, at any time prior to October 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the October 2012 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 111.50% of the principal amount in respect of the October 2012 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the October 2012 Senior Unsecured Notes are redeemed, an aggregate principal amount of the October 2012 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of the October 2012 Senior Unsecured Notes must remain outstanding immediately after each such redemption of the October 2012 Senior Unsecured Notes.

7.5% Senior Unsecured Notes due 2020 HDS issued $1,275 million aggregate principal amount of 7.5% Senior Notes under an Indenture, dated, and amended, as of February 1, 2013 ("February 2013 Senior Notes Indenture") among HDS, certain subsidiaries of HDS as guarantors (the "Subsidiary Guarantors") and the Trustee. The February 2013 Senior Unsecured Notes bear interest at a rate of 7.5% per annum and will mature on July 15, 2020. Interest is paid semi-annually in arrears on April 15th and October 15th of each year.

79-------------------------------------------------------------------------------- Table of Contents The February 2013 Senior Unsecured Notes are unsecured senior indebtedness of HDS and rank equal in right of payment with all of HDS's existing and future senior indebtedness, senior in right of payment to all of HDS's existing and future subordinated indebtedness, and effectively subordinated to all of HDS's existing and future secured indebtedness, including, without limitation, indebtedness under the Senior Credit Facilities, the First Priority Notes and the Second Priority Notes, to the extent of the value of the collateral securing such indebtedness.

The February 2013 Senior Unsecured Notes are guaranteed, on a senior unsecured basis, by each of HDS's direct and indirect domestic existing and future subsidiaries that is a wholly owned domestic subsidiary (other than certain excluded subsidiaries), and by each other domestic subsidiary that is a borrower under the ABL Facility or that guarantees HDS's obligations under any credit facility or capital markets securities. These guarantees are subject to release under customary circumstances as stipulated in the February 2013 Senior Notes Indenture.

Redemption HDS may redeem the February 2013 Senior Unsecured Notes, in whole or in part, at any time (1) prior to October 15, 2016, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the February 2013 Senior Notes Indenture and (2) on and after October 15, 2016, at the applicable redemption price set forth below (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to the relevant redemption date, if redeemed during the 12-month period commencing on October 15 of the year set forth below.

Year Percentage 2016 103.750 % 2017 101.875 % 2018 and thereafter 100.000 % In addition, at any time prior to October 15, 2015, HDS may redeem up to 35% of the aggregate principal amount of the February 2013 Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 107.50% of the principal amount in respect of the February 2013 Senior Unsecured Notes being redeemed, plus accrued and unpaid interest to the redemption date, provided, however, that if the February 2013 Senior Unsecured Notes are redeemed, an aggregate principal amount of the February 2013 Senior Unsecured Notes equal to at least 50% of the original aggregate principal amount of the February 2013 Senior Unsecured Notes must remain outstanding immediately after each such redemption of the February 2013 Senior Unsecured Notes.

14.875% Senior Unsecured Notes due 2020 HDS issued approximately $757 million aggregate principal amount (net of $30 million of original issue discount) of 14.875% Senior Unsecured Notes under an Indenture, dated as of April 12, 2012 (the "April 2012 Senior Unsecured Notes Indenture"), among HDS, the Subsidiary Guarantors and Wilmington Trust, National Association, as Trustee to investment funds associated with Bain Capital Partners, LLC, Carlyle Investment Management, LLC and Clayton, Dubilier & Rice, LLC, the Equity Sponsors. The April 2012 Senior Unsecured Notes bore interest at a rate of 14.875% per annum and were scheduled to mature on October 12, 2020. Interest was to be paid semi-annually in arrears on each April 12th and October 12th through maturity, commencing on October 12, 2012, except that the first eleven payment periods through October 2017 were to be paid in kind ("PIK") and therefore increase the balance of the outstanding indebtedness rather than paid in cash. On October 12, 2012, HDS made a PIK payment of $56 million, increasing the outstanding principal balance to approximately $813 million.

80-------------------------------------------------------------------------------- Table of Contents HDS was permitted to redeem the April 2012 Senior Unsecured Notes, in whole or in part, at any time prior to April 12, 2015, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium set forth in the 14.875% Senior Notes Indenture. On February 1, 2013, HDS repurchased the April 2012 Senior Unsecured Notes in accordance with the redemption provisions of the April 2012 Senior Unsecured Notes Indenture.

10.5% Senior Subordinated Notes due 2021 HDS issued $950 million aggregate principal amount of 10.5% Senior Subordinated Notes due 2021 ("January 2013 Senior Subordinated Notes") under an Indenture, dated as of January 16, 2013 ("January 2013 Senior Subordinated Notes Indenture") among HDS, certain subsidiaries of HDS as guarantors (the "Subsidiary Guarantors") and the Trustee. The January 2013 Senior Subordinated Notes bore interest at a rate of 10.5% per annum and were scheduled to mature on January 15, 2021. Interest was to be paid semi-annually in arrears on April 15th and October 15th of each year.

HDS was permitted to redeem up to 100% of the aggregate principal amount the January 2013 Senior Subordinated Notes at any time on or before July 31, 2014 with funds in an equal aggregate amount not exceeding the aggregate proceeds of certain qualified public equity offerings at a redemption price (expressed as a percentage of principal amount) of 103% if such redemption occurred on or prior to January 31, 2014, plus accrued and unpaid interest, if any, to the redemption date; provided, however, that if less than 100% of the January 2013 Senior Subordinated Notes are to be redeemed in any qualified public offering redemption, at least 33.33% of the original aggregate principal amount of January 2013 Senior Subordinated Notes must remain outstanding immediately after giving effect to such qualified public offering redemption. On August 1, 2013, HDS redeemed all $950 million outstanding aggregate principal amount of its January 2013 Senior Subordinated Notes in accordance with the redemption provisions of the January 2013 Senior Subordinated Notes Indenture.

First Priority Notes and Second Priority Notes (collectively the "Priority Notes"), October 2012 Senior Unsecured Notes and February 2013 Senior Unsecured Notes (collectively the "Senior Notes") Offer to Repurchase In the event of certain events that constitute a Change of Control (as defined in the First Priority Indenture and Second Priority Indenture, collectively the "Priority Indentures," and the October 2012 Senior Unsecured Notes Indenture and the February 2013 Senior Unsecured Notes Indenture, collectively the "Senior Indentures"), HDS must offer to repurchase all of the Priority Notes and Senior Notes (unless otherwise redeemed) at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date. If HDS sells assets under certain circumstances, HDS must use the proceeds to make an offer to purchase the Priority Notes and Senior Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

Covenants The Priority Indentures and Senior Indentures contain covenants that, among other things, limit the ability of HDS and its restricted subsidiaries to: incur more indebtedness; pay dividends, redeem stock or make other distributions; make investments; create restrictions on the ability of HDS's restricted subsidiaries to pay dividends to HDS or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; and enter into certain transactions with HDS's affiliates. Most of these covenants will cease to apply for so long as the Priority Notes and Senior Notes have investment grade ratings from both Moody's Investment Services, Inc. and Standard & Poor's. HDS is in compliance with all such covenants.

81-------------------------------------------------------------------------------- Table of Contents Events of Default The Priority Indentures and Senior Indentures also provide for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and other monetary obligations on all the then outstanding Priority Notes and Senior Notes to be due and payable immediately.

The Priority Indentures and Senior Indentures also provide for specified cross default and cross acceleration to other material indebtedness.

Registration Rights Agreements On February 5, 2013, HDS executed the offer to exchange outstanding First Priority Notes with registered First Priority Notes, outstanding Second Priority Notes with registered Second Priority Notes, outstanding October 2012 Senior Notes with registered October 2012 Senior Notes and outstanding January 2013 Senior Subordinated Notes with registered January 2013 Senior Subordinated Notes. The exchange offers closed in the first quarter of fiscal 2013 with substantially all of the notes held by eligible participants in the exchange offers tendered.

On October 18, 2013, HDS executed the offer to exchange outstanding February 2013 Senior Unsecured Notes with registered February 2013 Senior Unsecured Notes. The exchange offer closed in the fourth quarter of fiscal 2013 with substantially all of the notes held by eligible participants in the exchange offer tendered.

13.5% Senior Subordinated Notes due 2015 On August 30, 2007, HDS issued $1,300 million aggregate principal amount of Senior Subordinated Notes due 2015 bearing interest at a rate of 13.5% (the "2007 Senior Subordinated Notes"). Interest payments were due each March 1st and September 1st through maturity except that the first eight payment periods through September 2011 were paid in kind ("PIK") and therefore increased the balance of the outstanding indebtedness rather than paid in cash.

On May 15, 2012, HDS repurchased $1 million aggregate principal of its 2007 Senior Subordinated Notes at a price of 97% plus accrued interest. On November 8, 2012, HDS redeemed $930 million aggregate principal of its outstanding 2007 Senior Subordinated Notes at a price of 103.375% plus accrued interest. On February 8, 2013, HDS redeemed the remaining $889 million aggregate principal of its outstanding 2007 Senior Subordinated Notes at a price of 103.375% plus accrued interest.

Interest rate swaps We maintained interest rate swap agreements to exchange fixed and variable rate interest payment obligations without the exchange of the underlying principal amounts. At execution, our swaps committed us to pay fixed interest and receive variable interest, effectively converting $400 million of floating-rate debt to fixed rate debt. Swaps with a combined $200 million notional value matured on January 31, 2010. The remaining swaps with a combined $200 million notional value matured on January 31, 2011, the first day of fiscal 2011.

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, copper, aluminum, PVC, petroleum and other commodities. 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 82-------------------------------------------------------------------------------- Table of Contents changing prices through economies of 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 favorably or negatively impacted by fluctuating commodity prices based on our ability or inability to pass increases in the prices of certain commodity based products to our customers. 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.

º • º 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.

º • º Subsequent to the modification on February 6, 2014, the Term Loan Facility bears interest at LIBOR (subject to a floor of 1.00%) plus a borrowing margin of 3.00% or Prime plus a borrowing margin of 2.00% at the Company's election.

A 1% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $13 million (based on our borrowings as of February 2, 2014 and excluding the effect of the interest rate floor on our Term Loan Facility).

Off-balance sheet arrangements In accordance with generally accepted accounting principles in the United States of America, operating leases for a portion of our real estate and other assets are not reflected in our Consolidated Balance Sheets.

83-------------------------------------------------------------------------------- Table of Contents Contractual obligations The following table discloses aggregate information about our contractual obligations as of February 2, 2014 and the periods in which payments are due (amounts in millions): Payments due by period Fiscal Fiscal Fiscal Fiscal years Total 2014 2015 - 2016 2017 - 2018 after 2018 Long-term debt $ 5,545 $ 10 $ 20 $ 1,315 $ 4,200 Interest on long-term debt(1) 2,693 438 872 853 530 Operating leases 561 134 211 125 91 Purchase obligations(2) 691 691 - - - Total contractual cash obligations(3) $ 9,490 $ 1,273 $ 1,103 $ 2,293 $ 4,821 -------------------------------------------------------------------------------- º (1) º The interest on long-term debt includes the effect of the amendment to HDS's Term Loan Facility on February 6, 2014 that reduced the applicable borrowing margins on the outstanding Term Loans. The interest rates for the ABL Facility are calculated based on the rates as of February 2, 2014. The interest on long-term debt includes payments for agent administration fees.

º (2) º Purchase obligations include various commitments with vendors to purchase goods and services, primarily inventory. These purchase obligations are generally cancelable, but the Company has no intent to cancel.

º (3) º The contractual obligations table excludes $222 million of unrecognized tax benefits due to uncertainty regarding the timing of future cash payments, if any, related to the liabilities recorded in accordance with the GAAP guidance for uncertain tax positions.

Recent accounting pronouncements Comprehensive income: reclassifications-In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"), to supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05, which were deferred indefinitely under ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" ("ASU 2011-12"), issued in December 2011. The amendments in ASU 2013-02 require an entity to provide additional information about significant reclassifications out of accumulated other comprehensive income by the respective line items of net income. The Company adopted the provisions of ASU 2013-02 on February 4, 2013. The adoption of ASU 2013-02 did not have an impact on the Company's financial position or results of operations.

Release of cumulative translation adjustment-In March 2013, the FASB issued ASU No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05"), which resolves diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The amendments in ASU 2013-05 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 will not have a material impact on the Company's financial position or results of operations.

84-------------------------------------------------------------------------------- Table of Contents Presentation of an unrecognized tax benefit-In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"), which resolves diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain situations, as defined in ASU 2013-11. The amendments in ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-11 is not expected to have a material impact on the Company's financial position or results of operations.

Critical accounting policies Our critical accounting policies include: Revenue recognition We recognize revenue when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured. We ship products to customers predominantly by internal fleet and to a lesser extent by third-party carriers. Revenues, net of sales tax and allowances for returns and discounts, are recognized from product sales when title to the products is passed to the customer, which generally occurs at the point of destination for products shipped by internal fleet and at the point of shipping for products shipped by third-party carriers.

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 therefore, 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 market. 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 market. 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 branch'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.

85-------------------------------------------------------------------------------- Table of Contents 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 unearned 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 2013 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.

Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions.

Accounting Standards Codification 350, Intangibles-Goodwill and Other, requires entities to 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, as defined by ASC 350. We assess the recoverability of goodwill in the third 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.

In accordance with ASU 2011-08, during fiscal 2013, we determined that it was not more likely than not that the fair value of Facilities Maintenance and White Cap was less than the carrying value for each business unit. Based on this assessment, we determined that it was not necessary to perform the two-step goodwill impairment test for these two reporting units. We bypassed this qualitative analysis for the remaining four reporting units and proceeded with the first step of the two-step goodwill impairment test.

We determine the fair value of a reporting unit using a 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 ranging from seven and a half to eight 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 86-------------------------------------------------------------------------------- Table of Contents the future cash flows of the respective reporting units and range from 12.0% to 13.5%. 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 during the fiscal 2013, the fiscal 2012 or the fiscal 2011 annual testing and accordingly, the second step of the goodwill impairment analysis was not performed.

During the fourth quarter of fiscal 2012, Crown Bolt reached an agreement to amend and extend its strategic purchasing agreement with Home Depot. While the amendment extends the agreement five years through fiscal 2019, retaining Crown Bolt as the exclusive supplier of certain products to Home Depot, it eliminated the minimum purchase guarantee and adjusted future pricing. These changes resulted in a reduction of expected future cash proceeds from Home Depot. HD Supply, therefore, considered this amendment a triggering event and, as such, the Company performed an additional goodwill impairment analysis for Crown Bolt.

As a result of the analysis, the Company recorded a $150 million non-cash goodwill impairment in the fourth quarter of fiscal 2012. At the time of our fiscal 2013 annual testing, the fair value of the Crown Bolt reporting unit exceeded its carrying value by approximately 14%.

The Company's DCF model is based on HD Supply's 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 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 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. This measurement is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, are not "more likely than not" to be realized. The Company recorded a valuation allowance related to its U.S. continuing operations of $113 million, $442 million, and $259 million in fiscal 2013, fiscal 2012, and fiscal 2011, as it believes it is "more likely than not" all of the U.S. deferred income tax assets will not be realized. In addition, the Company recorded an $3 million valuation allowance increase, $8 million valuation allowance reduction, and a $7 million valuation allowance reduction related to its U.S. discontinued operations for fiscal 2013, fiscal 2012, and fiscal 2011, respectively.

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.

If these judgments are not accurate then future income tax expense or benefit could be different.

87 -------------------------------------------------------------------------------- Table of Contents 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 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, 2014 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-based compensation 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 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 changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we estimate the expected forfeiture rate and only recognize expense for those shares 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 9-Stock Based Compensation and Employee Benefit Plans" in the Notes to the Consolidated Financial Statements within Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K.

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