ATLANTA — HD Supply Holdings, Inc. reported Net sales of $1.4 billion for the second quarter of fiscal 2017 ended July 30, 2017, an increase of $69 million, or 5.4 percent, as compared to the second quarter of fiscal 2016. 

"In our second quarter of 2017, we stepped up our execution to improve performance. We met our revised Net Sales and Adjusted EBITDA targets for the second quarter and recommitted to our full year guidance. Following the sale of our Waterworks business, we have achieved our targeted capital structure of 2.0x to 3.0x financial leverage and are committed to delivering profitable growth in excess of market,” stated Joe DeAngelo, Chairman, President & CEO of HD Supply. 

Gross profit increased $26 million, or 5.1 percent, to $539 million for the second quarter of fiscal 2017 as compared to $513 million for the second quarter of fiscal 2016. Gross profit was 39.9 percent of Net sales for the second quarter of fiscal 2017, down approximately 10 basis points from 40.0 percent of Net sales for second quarter of fiscal 2016.

Operating income increased $9 million, or 5.3 percent, to $180 million for the second quarter of fiscal 2017 as compared to $171 million for the second quarter of fiscal 2016. Operating income as a percentage of Net sales was 13.3 percent for the second quarter of fiscal 2017, flat as compared to the second quarter of fiscal 2016.

Net income increased $344 million to $442 million for the second quarter of fiscal 2017 as compared to $98 million for the second quarter of fiscal 2016. The increase in Net income was primarily due to a $323 million tax benefit within Discontinued Operations to record a deferred tax asset recognizing the outside basis difference in the Waterworks business. Net income per diluted share increased $1.73 to $2.22 for the second quarter of fiscal 2017, as compared to $0.49 for the second quarter of fiscal 2016.

Adjusted EBITDA increased $5 million, or 2.5 percent, to $208 million for the second quarter of fiscal 2017 as compared to $203 million for the second quarter of fiscal 2016. Adjusted EBITDA as a percentage of Net sales was 15.4 percent for the second quarter of fiscal 2017, decreasing approximately 40 basis points from 15.8 percent for the second quarter of fiscal 2016.

Adjusted net income increased $23 million, or 22.1 percent, to $127 million for the second quarter of fiscal 2017 as compared to $104 million for the second quarter of fiscal 2016. Adjusted net income per diluted share was $0.64 for the second quarter of fiscal 2017, as compared to $0.51 for the second quarter of fiscal 2016. 

As of July 30, 2017, HD Supply’s combined liquidity of approximately $590 million was comprised of $67 million in cash and cash equivalents and $523 million of additional available borrowings under HD Supply (HDS), Inc.’s (“HDS”) senior asset-backed lending facility, based on qualifying inventory and receivables. 

Business Unit Performance

Facilities Maintenance

Net sales increased $28 million, or 3.8 percent, to $769 million for the second quarter of fiscal 2017, as compared to $741 million for the second quarter of fiscal 2016. Adjusted EBITDA increased $5 million, or 3.3 percent, to $156 million for the second quarter of fiscal 2017 as compared to $151 million for the second quarter of fiscal 2016. Adjusted EBITDA as a percentage of Net sales was 20.3 percent for the second quarter of fiscal 2017, decreasing approximately 10 basis points from 20.4 percent for the second quarter of fiscal 2016. 

Construction & Industrial

Net sales increased $40 million, or 7.4 percent, to $584 million for the second quarter of fiscal 2017, as compared to $544 million for the second quarter of fiscal 2016. Adjusted EBITDA increased $1 million, or 1.5 percent, to $69 million for the second quarter of fiscal 2017 as compared to $68 million for the second quarter of fiscal 2016. Adjusted EBITDA as a percentage of Net sales was 11.8 percent for the second quarter of fiscal 2017, down approximately 70 basis points from 12.5 percent for the second quarter of fiscal 2016.

Second-Quarter Monthly Sales Performance

Net sales for May, June and July of fiscal 2017 were $412 million, $408 million and $532 million, respectively. There were 20 selling days in May, 19 selling days in June and 24 selling days in July. Average year-over-year daily sales growth for May, June and July of fiscal 2017 was 6.9 percent, 3.4 percent and 5.6 percent, respectively.

Preliminary August Sales Results

Preliminary Net sales in August were approximately $435 million, which represents year-over-year average daily sales growth of approximately 6.7 percent. Preliminary August year-over-year average daily sales growth for Facilities Maintenance was approximately 4.3 percent and for Construction & Industrial was approximately 9.8 percent. There were 20 selling days in both August 2017 and August 2016. 

Subsequent Completion of the Sale of Waterworks

On August 1, 2017, the Company completed the sale of its Waterworks business for gross cash proceeds of $2,500 million, subject to a post-closing working capital adjustment. The Company expects to pay approximately $40 million of transaction costs and recognize a pre-tax gain of approximately $925 million. In connection with the pending sale, the Company recorded a $323 million net deferred tax asset and corresponding tax benefit in discontinued operations during the second quarter of fiscal 2017 in order to recognize the outside basis difference in the Waterworks investment. The Company expects to recognize tax expense of approximately $520 million in discontinued operations in third quarter fiscal 2017 related to the sale of the Waterworks business. This includes an expense of $323 million related to utilizing the deferred tax asset associated with the outside basis difference in the Waterworks subsidiary recorded as an income tax benefit in the second quarter in discontinued operations. The Company estimates that it will utilize approximately $280 million of tax-effected federal and state net operating loss carryforwards as a result of the sale of the Waterworks business.

The full report can be downloaded here.