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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview This Management's Discussion and Analysis of Financial Condition and Results of Operations is combined for two registrants: HD Supply Holdings, Inc. and HD Supply, Inc. Unless the context indicates otherwise, any reference in this discussion and analysis to "Holdings" refers to HD Supply Holdings, Inc., any reference to "HDS" refers to HD Supply, Inc., the indirect wholly-owned subsidiary of Holdings, and any references to "HD Supply," the "Company," "we," "us" and "our" refer to Holdings together with its direct and indirect subsidiaries, including HDS. HD Supply is one of the largest industrial distributors in North America. We believe we have leading positions in the 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 48 U.S. states and seven 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 Construction & Industrial - 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), fusible piping solutions 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. Construction & Industrial - White Cap. Construction & Industrial distributes specialized hardware, tools and engineered materials to non-residential and residential contractors. Products include tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, rebar, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipe, geo-synthetics, erosion and sediment control equipment and other engineered materials used broadly across all types of non-residential and residential construction. 33 -------------------------------------------------------------------------------- Table of Contents In addition to the reportable segments, our consolidated financial results include ''Corporate & Other.'' Corporate & Other is comprised of the following operating segments: Hardware Solutions, Interior Solutions, Home Improvement Solutions and HD Supply Canada. Hardware Solutions (previously known as 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 Home Depot and other hardware stores. Interior Solutions (previously known as Creative Touch Interiors) 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. Home Improvement Solutions (previously known as 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 six 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. Discontinued operations In January 2014, the Company approved the disposal of Litemor, a specialty lighting distributor within the Company's HD Supply Canada business. During the first quarter of fiscal 2014, the Company initiated the disposal process of Litemor through liquidation and branch sales, resulting in a pre-tax loss on disposal of $14 million, which includes cash and non-cash charges. The Company expects to finalize the Litemor disposal in the second quarter of fiscal 2014 and record an additional pre-tax loss on disposal of between $5 million and $10 million. In accordance with Accounting Standards Codification ("ASC") 205-20, Discontinued Operations, the results of Litemor's operations and the loss on disposal of the business are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and loss on the disposal of business, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). Prior period presented have been revised to reflect this presentation. For additional detail related to the results of operations of the discontinued operations, see "Note 2, Discontinued Operations," in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q. Secondary Public Offering As part of a secondary offering (the "Secondary Offering") in May 2014, certain of Holdings' stockholders, including the Equity Sponsors, sold, in the aggregate, 34,500,000 shares of Holdings' common stock (including the exercise of the underwriters' overallotment option). As a consequence of the Secondary Offering, Holdings no longer qualifies as a "controlled company" within the meaning of the corporate governance rules of NASDAQ. As a result, Holdings may continue to rely on exemptions from certain corporate governance requirements only during a one year transition period following the Secondary Offering. Seasonality In a typical year, our operating results are impacted by seasonality. Historically, sales of our products have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these periods. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects. Fiscal Year HD Supply's fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal years ending February 1, 2015 ("fiscal 2014") and February 2, 2014 ("fiscal 2013") both include 52 weeks. The three months ended May 4, 2014 ("first quarter 2014") and May 5, 2013 ("first quarter 2013") both included 13 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 34 -------------------------------------------------------------------------------- Table of Contents 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. 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. 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 35 -------------------------------------------------------------------------------- Table of Contents 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 quarterly report on Form 10-Q. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA. These covenants are important to the Company as failure to comply with certain covenants would result in a default under our Senior Credit Facilities. The material covenants in our Senior Credit Facilities are discussed in our in our annual report on Form 10-K, as amended, for the fiscal year ended February 2, 2014. 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: † Adjusted EBITDA and Adjusted net income (loss) do not reflect changes in, or cash requirements for, our working capital needs; † Adjusted EBITDA does not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; † Adjusted EBITDA does not reflect our income tax expenses or the cash requirements to pay our taxes; † Adjusted EBITDA and Adjusted net income (loss) do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and † although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. The following table presents a reconciliation of Net income (loss), the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented (amounts in millions): Three Months Ended May 4, 2014 May 5, 2013 Net income (loss) $ (12 ) $ (131 ) Less income (loss) from discontinued operations, net of tax (11 ) (1 ) Income (loss) from continuing operations $ (1 ) $ (130 ) Provision from income taxes 1 43 Interest expense 116 147 Depreciation and amortization (i) 63 60 Stock-based compensation 5 3 Restructuring (ii) 3 - Loss on extinguishment & modification of debt (iii) 2 41 Costs related to the secondary public offering (iv) 1 - Management fee & related expenses paid to Equity Sponsors (v) - 1 Adjusted EBITDA $ 190 $ 165 -------------------------------------------------------------------------------- (i) Depreciation and amortization includes amounts recorded within Cost of sales in the Consolidated Statements of Operations. 36 -------------------------------------------------------------------------------- Table of Contents (ii) Represents the costs incurred for workforce reductions and branch closure or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location. See "Note 9, Branch Closure and Consolidation Activities" in the Notes to the Consolidated Financial Statements included within Item 1 of this quarterly report on Form 10-Q. (iii) 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. (iv) Represents the costs expensed in connection with Holdings' secondary public offering. All of the shares of common stock sold in the secondary public offering were sold by certain of the Company's stockholders. The Company did not receive any of the proceeds from the sale of the shares. See "Note 1, Nature of Business and Basis of Presentation - Public Offerings" in the Notes to the Consolidated Financial Statements included within Item 1 of this quarterly report on Form 10-Q. (v) The Company was previously party to 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. 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 (amounts in millions): Three Months Ended May 4, 2014 May 5, 2013 Net income (loss) $ (12 ) $ (131 ) Less income (loss) from discontinued operations, net of tax (11 ) (1 ) Income (loss) from continuing operations (1 ) (130 ) Plus: Provision for income taxes 1 43 Less: Cash income taxes (1 ) (2 ) Plus: Amortization of acquisition-related intangible assets (other than software) 34 34 Plus: Restructuring (i) 3 - Plus: Loss on extinguishment & modification of debt (ii) 2 41 Plus: Costs related to the secondary public offering (iii) 1 - Adjusted net income (loss) $ 39 $ (14 ) -------------------------------------------------------------------------------- (i) Represents the costs incurred for workforce reductions and branch closure or consolidations. These costs include occupancy costs, severance, and other costs incurred to exit a location. See "Note 9, Branch Closure and Consolidation Activities" in the Notes to the Consolidated Financial Statements included within Item 1 of this quarterly report on Form 10-Q. (ii) 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. (iii) Represents the costs expensed in connection with Holdings' secondary public offering. See "Note 1 Nature of Business and Basis of Presentation- Public Offerings," in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q. 37 -------------------------------------------------------------------------------- Table of Contents Consolidated results of operations Dollars in millions Percentage % of Net Sales Basis Point Three Months Ended Increase Three Months Ended Increase May 4, 2014 May 5, 2013 (Decrease) May 4, 2014 May 5, 2013 (Decrease) Net Sales $ 2,161 $ 2,048 5.5 % 100.0 % 100.0 % - Gross Profit 631 593 6.4 29.2 29.0 20 Operating expenses: Selling, general and administrative 447 433 3.2 20.7 21.1 (40 ) Depreciation and amortization 62 59 5.1 2.9 2.9 - Restructuring 3 - - 0.1 - 10 Total operating expenses 512 492 4.1 23.7 24.0 (30 ) Operating Income 119 101 17.8 5.5 4.9 60 Interest expense 116 147 (21.1 ) 5.4 7.2 (180 ) Loss on extinguishment & modification of debt 2 41 * 0.1 2.0 (190 ) Other (income) expense, net 1 - * - - - Income (Loss) from Continuing Operations Before Income Taxes - (87 ) (100.0 ) - (4.2 ) 420 Provision for income taxes 1 43 (98.0 ) - 2.1 (210 ) Income (Loss) from Continuing Operations (1 ) (130 ) (99.2 ) - (6.3 ) 630 Income (loss) from discontinued operations, net of tax (11 ) (1 ) * (0.5 ) - (50 ) Net Income (Loss) $ (12 ) $ (131 ) (90.8 ) (0.6 ) (6.4 ) 580 Non-GAAP financial data: Adjusted EBITDA $ 190 $ 165 15.2 % 8.8 8.1 70 Adjusted net income (loss) $ 39 $ (14 ) * 1.8 (0.7 ) 250 -------------------------------------------------------------------------------- * Not meaningful Highlights Net sales in first quarter 2014 increased $113 million, or 5.5%, compared to first quarter 2013. Our Facilities Maintenance, Construction & Industrial and Waterworks businesses realized increases in Net sales despite the continuation of harsh winter weather into first quarter 2014. Operating income in first quarter 2014 increased $18 million, or 17.8%, as compared to first quarter 2013. Our growth initiatives, cost control efforts and the leverage of fixed costs, resulted in an increase to Adjusted EBITDA of $25 million, or 15.2%, in first quarter 2014 as compared to first quarter 2013. As of May 4, 2014, our liquidity was $909 million. See "Liquidity and Capital Resources - External Financing" for further information. During first quarter 2014, we continued restructuring activities initiated in fourth quarter 2013, resulting in a restructuring charge of $3 million for the consolidation of six Construction & Industrial branches into three branches and additional workforce reductions of approximately 10 employees. During the second quarter of fiscal 2014, management expects to finalize the restructuring activities under this plan and record additional restructuring charges of approximately $2 million. In addition, during the first quarter of fiscal 2014, we initiated the disposal process of Litemor through liquidation and branch sales, resulting in a pre-tax loss on disposal of $14 million. See "Discontinued operations" for further information. Net sales Net sales in first quarter 2014 increased $113 million, or 5.5%, compared to first quarter 2013. Our Facilities Maintenance, Construction & Industrial and Waterworks businesses experienced an increase in Net sales in first quarter 2014 as compared to first quarter 2013. Power Solutions' Net sales declined slightly by $1 million. The Net sales increases were primarily due to growth initiatives at each of our businesses, including Power Solutions, and, to a lesser extent, increases in market volume. These increases were partially offset by the negative impact of severe winter weather that continued into first quarter 2014 and unfavorable Canadian exchange rate changes negatively impacting Net sales by $7 million, primarily at Power Solutions. 38 -------------------------------------------------------------------------------- Table of Contents Gross profit Gross profit increased $38 million, or 6.4%, during first quarter 2014 as compared to first quarter 2013. Each of our reportable segments experienced an increase in Gross profit primarily due to sales growth from initiatives and market volume. Gross profit as a percentage of Net sales ("gross margin") increased approximately 20 basis points to 29.2% in first quarter 2014 as compared to 29.0% in first quarter 2013. The improvement in gross margin was driven primarily by our category management initiatives and mix of products and services. Operating expenses Operating expenses increased $20 million, or 4.1%, during first quarter 2014 as compared to first quarter 2013. Selling, general and administrative expenses increased $14 million, or 3.2%, in first quarter 2014 as compared to first quarter 2013. The increase was primarily a result of increases in variable expenses due to higher sales volume and investments in growth initiatives. Depreciation and amortization expense increased $3 million, or 5.1%, in first quarter 2014 as compared to first quarter 2013. The increase was primarily as a result of new location expansions and investments in technology. Operating expenses as a percentage of Net sales decreased approximately 30 basis points to 23.7% in first quarter 2014 as compared to first quarter 2013, driven by a reduction in Selling, general and administrative expenses as a percentage of Net sales, which decreased 40 basis points to 20.7% in first quarter 2014 as compared to first quarter 2013. This improvement was primarily due to our cost control efforts, including the restructuring actions initiated during the fourth quarter of fiscal 2013, and the leverage of fixed costs through sales volume increases. Operating income (loss) Operating income increased $18 million, or 17.8%, during first quarter 2014 as compared to first quarter 2013. The improvement was primarily due to higher Net sales and Gross profit partially offset by higher operating expenses. Operating income as a percentage of Net sales increased approximately 60 basis points in first quarter 2014 as compared to first quarter 2013. The improvement was primarily driven by a reduction in Selling, general and administrative expenses as a percentage of Net sales and improvements in gross margins. Interest expense Interest expense decreased $31 million, or 21.1%, during first quarter 2014 as compared to first quarter 2013. The decrease was due to a lower average outstanding balance, and to a lesser extent, a lower average interest rate. The lower average outstanding balance was primarily due to the repayment of debt with the net proceeds from the initial public offering in the second quarter of fiscal 2013. Loss on extinguishment & modification of debt During first quarter 2014 and first quarter 2013, our debt refinancing and redemption activities resulted in charges of $2 million and $41 million, respectively. These charges were recorded in accordance with ASC 470-50, Debt-Modifications and Extinguishments. On February 6, 2014, HDS amended its Term Loan Facility, as defined below, to reduce the applicable margin for borrowings by 25 basis points and reduce the LIBOR floor from 1.25% to 1.00%. The amendment also added a new soft call provision applicable to optional prepayment of term loans and extended the maturity of the term loans by approximately nine months, to June 28, 2018. 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. 39 -------------------------------------------------------------------------------- Table of Contents In first quarter 2013, we redeemed all of the remaining $889 million outstanding of HDS's 13.5% Senior Subordinated Notes due 2015 (the "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 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. In addition, during first quarter 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 in accordance with ASC 470-50, 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 in accordance with ASC 470-50. As a result, HDS incurred approximately $1 million in financing fees that were expensed. For additional information, see "Liquidity and Capital Resources - External Financing" below and "Note 4, Debt," in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q. Other (income) expense, net In connection with Holdings' secondary public offering, we incurred approximately $1 million in related fees and expenses. For additional information, see "Note 1, Nature of Business and Basis of Presentation," in the Notes to the Consolidated Financial Statements within Item 1 of this quarterly report on Form 10-Q. Provision (benefit) for income taxes The provision (benefit) for income taxes during the period is calculated by applying an estimated annual tax rate for the full fiscal year to pre-tax income for the reported period plus or minus unusual or infrequent discrete items occurring within the period. The Company's income tax provision (benefit) recorded in interim periods can move from an income tax provision to income tax benefit (and vice versa) in situations in which the Company is experiencing changes between interim pre-tax income to pre-tax loss (and vice versa). The provision for income taxes from continuing operations in first quarter 2014 was $1 million compared to $43 million in first quarter 2013. The first quarter 2014 $1 million provision was driven by the impact of discrete items recorded during the period. The effective rate for continuing operations for first quarter 2013 was a provision of 49.5%, reflecting the impact of increasing the U.S. valuation allowance, increasing the deferred tax liability for U.S. goodwill amortization for tax purposes, and the accrual of income taxes for foreign and certain state jurisdictions. We regularly assess the realization of our net deferred tax assets and the need for any valuation allowance. This assessment requires management to make judgments about the benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. Adjusted EBITDA Adjusted EBITDA increased $25 million, or 15.2%, in first quarter 2014 as compared to first quarter 2013. The increase in Adjusted EBITDA in first quarter 2014 was driven by Facilities Maintenance, Construction & Industrial and Waterworks. The increase in Adjusted EBITDA in first quarter 2014 was primarily due to the increases in Net sales and Gross profit. Adjusted EBITDA as a percentage of Net sales increased approximately 70 basis points to 8.8% in first quarter 2014 as compared to first quarter 2013, primarily due to a reduction in Selling, general and administrative expenses as a percentage of Net sales and gross margin improvements. Adjusted net income (loss) Adjusted net income (loss) increased $53 million in first quarter 2014 to $39 million as compared to a loss of $14 million in first quarter 2013. The increase in Adjusted net income was attributable to the sales growth, improving gross margins and lower interest expense. 40 -------------------------------------------------------------------------------- Table of Contents Results of operations by reportable segment Facilities Maintenance Three Months Ended Increase Dollars in millions May 4, 2014 May 5, 2013 (Decrease) Net sales $ 604 $ 561 7.7 % Operating income $ 77 $ 69 11.6 % % of Net sales 12.7 % 12.3 % 40 bps Depreciation and amortization 32 31 3.2 % Adjusted EBITDA $ 109 $ 100 9.0 % % of Net sales 18.0 % 17.8 % 20 bps Net Sales Net sales increased $43 million, or 7.7%, in first quarter 2014 as compared to first quarter 2013. Growth initiatives contributed approximately $31 million of the year-over-year increase in first quarter 2014. These growth initiatives consist of investments in sales personnel, products and technology, aligned with our customers' multifamily, hospitality, and healthcare industries. Net sales in first quarter 2014 were also positively impacted by favorable market conditions in the multifamily and hospitality industries. Adjusted EBITDA Adjusted EBITDA increased $9 million, or 9.0%, in first quarter 2014 as compared to first quarter 2013. The increase in first quarter 2014 was primarily due to volume increases and operating leverage through productivity. 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 20 basis points in first quarter 2014 as compared to first quarter 2013. The increase was driven primarily by a decline in Selling, general and administrative expenses as a percentage of Net sales, partially offset by a decline in gross margins. Selling, general and administrative expenses as a percentage of Net sales declined approximately 60 basis points in first quarter 2014 as compared to first quarter 2013 due to the leverage of fixed costs through sales volumes and cost control efforts. Waterworks Three Months Ended Increase Dollars in millions May 4, 2014 May 5, 2013 (Decrease) Net sales $ 551 $ 523 5.4 % Operating income $ 38 $ 35 8.6 % % of Net sales 6.9 % 6.7 % 20 bps Depreciation and amortization 3 3 - Adjusted EBITDA $ 41 $ 38 7.9 % % of Net sales 7.4 % 7.3 % 10 bps Net Sales Net sales increased $28 million, or 5.4%, in first quarter 2014 as compared to first quarter 2013. Growth initiatives, including fusible piping solutions, storm drainage, treatment plant initiatives, and new locations ("greenfields"), contributed approximately $21 million of the year-over-year increase in first quarter 2014. Net sales in first quarter 41 -------------------------------------------------------------------------------- Table of Contents 2014 were also positively impacted by higher sales volume due to slight end-market improvements, partially offset by the unfavorable weather impacts at the beginning of first quarter 2014. Adjusted EBITDA Adjusted EBITDA increased $3 million, or 7.9%, in first quarter 2014 as compared to first quarter 2013. The increase was due to growth initiatives, partially offset by increased Selling, general and administrative expense, primarily personnel, related to growth initiative investments and variable costs due to the increased volume. Adjusted EBITDA as a percentage of Net sales increased approximately 10 basis points in first quarter 2014 as compared to first quarter 2013. The improvement was due to an approximately 10 basis point reduction in Selling, general and administrative expense as a percentage of Net sales. Power Solutions Three Months Ended Increase Dollars in millions May 4, 2014 May 5, 2013 (Decrease) Net sales $ 461 $ 462 (0.2 )% Operating income $ 12 $ 12 - % of Net sales 2.6 % 2.6 % - Depreciation and amortization 6 6 - Adjusted EBITDA $ 18 $ 18 - % of Net sales 3.9 % 3.9 % - Net Sales Net sales in first quarter 2014 decreased $1 million, or 0.2% as compared to first quarter 2013. An unfavorable foreign exchange rate impact on the Power Solutions Canadian business resulted in a $5 million reduction to Net sales in first quarter 2014 as compared to first quarter 2013. Excluding the exchange rate impact, Net sales increased $4 million, or 1%, in first quarter 2014. The increase was due to construction and industrial projects, partially offset by the impact of unfavorable weather in the beginning of first quarter 2014. Adjusted EBITDA Adjusted EBITDA in first quarter 2014 was comparable to first quarter 2013. Adjusted EBITDA was negatively impacted by the foreign exchange rate impact and the unfavorable weather in first quarter 2014. Adjusted EBITDA as a percentage of Net sales was flat in first quarter 2014 as compared to first quarter 2013. Construction & Industrial - White Cap Three Months Ended Increase Dollars in millions May 4, 2014 May 5, 2013 (Decrease) Net sales $ 344 $ 310 11.0 % Operating income $ 11 $ 5 * % of Net sales 3.2 % 1.6 % 160 bps Depreciation and amortization 9 9 - Restructuring 2 - * Adjusted EBITDA $ 22 $ 14 57.1 % % of Net sales 6.4 % 4.5 % 190 bps -------------------------------------------------------------------------------- * Not meaningful 42 -------------------------------------------------------------------------------- Table of Contents Net Sales Net sales increased $34 million, or 11.0%, in first quarter 2014 as compared to first quarter 2013. Growth initiatives contributed approximately $20 million of the year-over-year increase in first quarter 2014, driven by our greenfields, Managed Sales Approach (''MSA'') and direct marketing initiatives. MSA is a structured approach to drive revenue at a regional level through analysis, tools and sales management. In addition, Construction & Industrial Net sales were positively impacted by improvements in both non-residential construction and the residential housing market. Adjusted EBITDA Adjusted EBITDA increased $8 million, or 57.1%, in first quarter 2014 as compared to first quarter 2013. The increase in Adjusted EBITDA was primarily driven by growth initiatives and market volume. 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 190 basis points in first quarter 2014 as compared to first quarter 2013. This improvement was driven by a decrease in Selling, general and administrative expenses as a percentage of Net sales of approximately 220 basis points due to the leverage of fixed costs through sales volume and cost control efforts. Liquidity and capital resources Sources and uses of cash Our sources of funds, primarily from operations, cash on-hand, and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet all current obligations on a timely basis. We believe that these sources of funds will be sufficient to meet the operating needs of our business for at least the next twelve months. During the first quarter of fiscal 2014, the Company's generation of cash was primarily driven by cash receipts from operations, net debt borrowings, and proceeds from stock option exercises, partially offset by the payment of interest on debt and capital expenditures. As of May 4, 2014, our combined liquidity of approximately $909 million was comprised of $173 million in cash and cash equivalents and $736 million of additional available borrowings (excluding $77 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): Three Months Ended Increase Amounts in millions May 4, 2014 May 5, 2013 (Decrease) Operating activities $ (119 ) $ (557 ) $ 438 Investing activities (28 ) 905 (933 ) Financing activities 204 (401 ) 605 Working capital Working capital, excluding cash and cash equivalents, was $1,273 million as of May 4, 2014, increasing $162 million as compared to $1,111 million as of May 5, 2013. The increase was primarily driven by an increase in Receivables and Inventory reflecting higher sales volumes. 43 -------------------------------------------------------------------------------- Table of Contents Operating activities Cash flow from operating activities in the first quarter of fiscal 2014 was a use of $119 million compared with $557 million in the first quarter of fiscal 2013. The use of cash in the first quarter of 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. The first quarter of fiscal 2014 included a payment of $1 million of original issue discount related to the extinguishment of a portion of the Term Loans. Additionally, cash interest paid in the first quarter of fiscal 2014 unrelated to extinguishments was $206 million, compared to $260 million in the first quarter of fiscal 2013. Excluding the cash interest payments, including PIK interest and original issue discounts paid, in both periods, cash flow from operating activities increased approximately $20 million in the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013. Investing activities During the first quarter of fiscal 2014, cash used in investing activities was $28 million, due to capital expenditures. During the first quarter of fiscal 2013, cash provided by investing activities was $905 million, primarily driven by 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 $32 million of capital expenditures. Financing activities During the first quarter of fiscal 2014, cash provided by financing activities was $204 million, primarily due to net debt borrowings of $188 million and $20 million of proceeds from employee stock option exercises, partially offset by payments for debt issuance and modification costs. During the first quarter of fiscal 2013, cash used in financing activities was $401 million, due to net debt payments of $369 million, including an aggregate $30 million in contractually required premiums paid to extinguish the 2007 Senior Subordinated Notes prior to maturity, and payments of $32 million for debt issuance and modification costs. External Financing As of May 4, 2014, we had an aggregate principal amount of $5.7 billion of outstanding debt, net of unamortized discounts of $18 million and including unamortized premiums of $17 million, and $813 million of additional available borrowings under our Senior ABL Facility (after giving effect to the borrowing base limitations and approximately $56 million in letters of credit issued and including $77 million of borrowings available on qualifying cash balances). From time to time, depending on market conditions and other factors, the Company may seek to repay, redeem, repurchase or otherwise acquire or refinance a portion or all of our indebtedness. We may make such repurchases in privately negotiated transactions or otherwise. 44 -------------------------------------------------------------------------------- Table of Contents HDS's long-term debt as of May 4, 2014 and February 2, 2014 consisted of the following (dollars in millions): May 4, 2014 February 2, 2014 Outstanding Interest Rate Outstanding Interest Rate Principal %(1) Principal %(1) Senior ABL Facility due 2018 $ 550 1.65 $ 360 1.66 Term Loans due 2018, net of unamortized discount of $18 million and $19 million 965 4.00 966 4.50 First Priority Notes due 2019, including unamortized premium of $17 million and $18 million 1,267 8.125 1,268 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 Total long-term debt $ 5,732 $ 5,544 Less current installments (10 ) (10 ) Long-term debt, excluding current installments $ 5,722 $ 5,534 -------------------------------------------------------------------------------- (1) Represents the stated rate of interest, without including the effect of discounts or premiums. On February 6, 2014, HDS amended its Term Loan Facility, as defined below, 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 re-pricing 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, as defined below, 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 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 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. Senior Credit Facilities Asset Based Lending Facility HDS's Senior Asset Based Lending Facility ("Senior ABL Facility") provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1,500 million (subject to availability under a borrowing base). Extensions of credit under the Senior ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. A portion of the Senior ABL Facility is available for letters of credit and swingline loans. As of May 4, 2014, HDS has $813 million of additional available borrowings under the Senior ABL Facility (after giving effect to the borrowing base limitations and 45 -------------------------------------------------------------------------------- Table of Contents approximately $56 million in letters of credit issued and including $77 million of borrowings available on qualifying cash balances). The Senior ABL Facility also permits HDS to add one or more incremental term loan facilities to be included in the Senior ABL Facility or one or more revolving credit facility commitments to be included in the Senior ABL Facility. The Senior ABL Facility will mature on June 28, 2018 (or the maturity date under HDS's Term Loan Facility, if earlier). Senior Secured Term Loan Facility HDS's Senior Term Facility consists of a senior secured Term Loan Facility (the ''Term Loan Facility,'' the term loans thereunder, the ''Term Loans'') providing for Term Loans in an original aggregate principal amount of $1,000 million. The Term Loan Facility will mature on June 28, 2018 (the ''Term Loan Maturity Date''). The Term Loans amortize in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount of the Term Loan Facility with the balance payable on the Term Loan Maturity Date. Secured Notes 8 1/8% Senior Secured First Priority Notes due 2019 HDS's 8 1/8% Senior Secured First Priority Notes due 2019 (the ''First Priority Notes''), bear interest at a rate of 8 1/8% per annum and will mature on April 15, 2019. Interest is paid semi-annually in arrears on April 15th and October 15th of each year. 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 indenture governing the First Priority Notes 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 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's 11% Senior Secured Second Priority Notes due 2020 (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. 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 indenture governing the Second Priority Notes 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. 46 -------------------------------------------------------------------------------- Table of Contents 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. 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 indenture governing the First Priority Notes) and Excluded Subsidiary Securities (as defined in the indenture governing the First Priority Notes) (the "Cash Flow Priority 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. The indentures governing the First Priority Notes, the Second Priority Notes and the applicable collateral documents provide that any capital stock and other securities of any of HDS' subsidiaries will be excluded from the collateral to the extent the pledge of such capital stock or other securities to secure the First Priority Notes and Second Priority Notes would cause such subsidiary to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time). Unsecured Notes 11.5% Senior Unsecured Notes due 2020 HDS's 11.5% Senior Unsecured Notes due 2020 (the ''October 2012 Senior Unsecured Notes'') bear interest at 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. 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 indenture governing the 11.5% Senior Notes 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 % 47 -------------------------------------------------------------------------------- Table of Contents 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's 7.5% Senior Unsecured Notes due 2020 (the ''February 2013 Senior Unsecured Notes'') bear interest at 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. 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 indenture governing the February 2013 Senior Notes 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. Debt covenants HDS's outstanding debt agreements contain various restrictive covenants including, but not limited to, limitations on additional indebtedness and dividend payments and stipulations regarding the use of proceeds from asset dispositions. As of May 4, 2014, HDS is in compliance with all such covenants that were in effect on such date. Critical accounting policies Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these consolidated financial statements. The Company's critical accounting policies have not changed from those reported in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K, as amended, for the fiscal year ended February 2, 2014. Recent accounting pronouncements Presentation of an unrecognized tax benefit - In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 48 -------------------------------------------------------------------------------- Table of Contents 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. The Company adopted ASU 2013-11 on February 3, 2014. The adoption did not have a material impact on the Company's financial position or results of operations. Discontinued operations - In April 2014, the FASB issued ASU No. 2014-08, "Reporting discontinued operations and disclosure of disposals of components of an entity" ("ASU 2014-08"). The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The impact on the Company of adopting ASU 2014-08 will depend on the nature and size of future disposals, if any, of a component of the Company after the effective date. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the Company's financial position or results of operations. Revenue recognition - In May 2014, the FASB issued ASU No. 2014-09, "Revenue from contracts with customers" ("ASU 2014-09"). The amended guidance outlines a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." Entities have the option of using either a full retrospective or modified approach to adopt the guidance. ASU 2014-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016 (early adoption is not permitted). The Company is currently evaluating the impact of adopting ASU 2014-09. 49 -------------------------------------------------------------------------------- Table of Contents |