Attached files
file | filename |
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EX-32.2 - EX-32.2 - INTERLINE BRANDS, INC./DE | a09-30919_1ex32d2.htm |
EX-31.2 - EX-31.2 - INTERLINE BRANDS, INC./DE | a09-30919_1ex31d2.htm |
EX-32.1 - EX-32.1 - INTERLINE BRANDS, INC./DE | a09-30919_1ex32d1.htm |
EX-31.1 - EX-31.1 - INTERLINE BRANDS, INC./DE | a09-30919_1ex31d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 25, 2009
or
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-32380
INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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03-0542659 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
701
San Marco Boulevard |
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32207 |
(Address of principal executive offices) |
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(Zip code) |
(904) 421-1400
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. As of October 30, 2009, there were 32,459,000 shares of the registrants common stock outstanding (excluding 115,463 shares held in treasury), par value $0.01.
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Condensed Consolidated Balance Sheets as of September 25, 2009 and December 26, 2008 |
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1 |
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2 |
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3 |
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4 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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30 |
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33 |
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 25, 2009 AND DECEMBER 26, 2008
(in thousands, except share and per share data)
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September 25, |
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December 26, |
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2009 |
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2008 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
63,691 |
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$ |
62,724 |
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Short-term investments |
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1,623 |
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Accounts receivable - trade (net of allowance for doubtful accounts of $13,070 and $12,140) |
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141,290 |
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139,522 |
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Inventory |
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184,707 |
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211,200 |
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Prepaid income taxes |
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129 |
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1,452 |
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Prepaid expenses and other current assets |
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18,414 |
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22,884 |
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Deferred income taxes |
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16,001 |
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19,010 |
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Total current assets |
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425,855 |
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456,792 |
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Property and equipment, net |
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48,461 |
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46,033 |
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Goodwill |
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318,229 |
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317,117 |
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Other intangible assets, net |
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126,598 |
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132,787 |
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Other assets |
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8,673 |
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10,119 |
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Total assets |
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$ |
927,816 |
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$ |
962,848 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
84,356 |
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$ |
68,255 |
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Accrued expenses and other current liabilities |
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44,867 |
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31,394 |
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Accrued interest |
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3,466 |
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1,072 |
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Current portion of long-term debt |
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1,638 |
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1,625 |
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Capital lease - current |
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260 |
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239 |
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Total current liabilities |
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134,587 |
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102,585 |
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Long-Term Liabilities: |
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Deferred income taxes |
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39,854 |
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37,210 |
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Long-term debt, net of current portion |
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309,051 |
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401,765 |
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Capital lease - long-term |
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28 |
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226 |
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Other liabilities |
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835 |
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989 |
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Total liabilities |
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484,355 |
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542,775 |
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Commitments and contingencies |
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Senior preferred stock; $0.01 par value, 20,000,000 shares authorized; no shares outstanding as of September 25, 2009 and December 26, 2008 |
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Shareholders Equity: |
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Common stock; $0.01 par value, 100,000,000 authorized; 32,574,463 issued and 32,459,156 outstanding as of September 25, 2009 and 32,561,360 issued and 32,449,946 outstanding as of December 26, 2008 |
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326 |
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326 |
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Additional paid-in capital |
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574,996 |
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571,868 |
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Accumulated deficit |
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(131,058 |
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(150,833 |
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Accumulated other comprehensive income |
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1,249 |
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695 |
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Treasury stock, at cost, 115,307 shares as of September 25, 2009 and 111,414 shares as of December 26, 2008 |
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(2,052 |
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(1,983 |
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Total shareholders equity |
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443,461 |
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420,073 |
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Total liabilities and shareholders equity |
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$ |
927,816 |
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$ |
962,848 |
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See accompanying notes to condensed consolidated financial statements.
1
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 25, 2009 AND SEPTEMBER 26, 2008
(in thousands, except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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September 25, |
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September 26, |
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September 25, |
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September 26, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net sales |
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$ |
277,948 |
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$ |
317,504 |
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$ |
804,661 |
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$ |
918,079 |
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Cost of sales |
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175,726 |
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196,568 |
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507,528 |
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571,293 |
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Gross profit |
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102,222 |
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120,936 |
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297,133 |
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346,786 |
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Operating Expenses: |
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Selling, general and administrative expenses |
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76,191 |
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87,828 |
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239,009 |
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261,426 |
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Depreciation and amortization |
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4,535 |
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4,319 |
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13,561 |
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12,300 |
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Total operating expense |
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80,726 |
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92,147 |
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252,570 |
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273,726 |
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Operating income |
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21,496 |
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28,789 |
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44,563 |
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73,060 |
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(Loss) Gain on extinguishment of debt, net |
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(248 |
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1,295 |
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Interest expense |
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(4,577 |
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(7,054 |
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(14,673 |
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(21,800 |
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Interest and other income |
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554 |
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710 |
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1,284 |
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2,113 |
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Income before income taxes |
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17,225 |
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22,445 |
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32,469 |
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53,373 |
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Income tax provision |
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6,794 |
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8,709 |
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12,694 |
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19,788 |
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Net income |
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$ |
10,431 |
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$ |
13,736 |
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$ |
19,775 |
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$ |
33,585 |
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Earnings Per Share: |
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Basic |
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$ |
0.32 |
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$ |
0.42 |
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$ |
0.61 |
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$ |
1.04 |
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Diluted |
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$ |
0.32 |
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$ |
0.42 |
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$ |
0.60 |
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$ |
1.03 |
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Weighted-Average Shares Outstanding: |
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Basic |
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32,511,597 |
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32,412,280 |
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32,493,797 |
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32,387,865 |
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Diluted |
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33,070,041 |
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32,553,518 |
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32,826,466 |
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32,618,370 |
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See accompanying notes to condensed consolidated financial statements.
2
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 25, 2009 AND SEPTEMBER 26, 2008
(in thousands)
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Nine Months Ended |
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September 25, |
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September 26, |
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2009 |
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2008 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
19,775 |
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$ |
33,585 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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14,169 |
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12,695 |
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Gain on extinguishment of debt, net of original issue discount |
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(2,165 |
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Write-off of debt issuance costs |
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870 |
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Amortization of debt issuance costs |
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829 |
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852 |
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Amortization of discount on 81/8% senior subordinated notes |
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108 |
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109 |
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Write-off of deferred acquisition costs |
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672 |
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Share-based compensation |
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3,075 |
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2,994 |
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Excess tax benefits from share-based compensation |
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(1 |
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(140 |
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Deferred income taxes |
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6,113 |
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(667 |
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Provision for doubtful accounts |
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7,330 |
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3,571 |
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Loss on disposal of property and equipment |
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13 |
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79 |
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Changes in assets and liabilities which provided (used) cash: |
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Accounts receivable - trade |
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(8,959 |
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(16,230 |
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Inventory |
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26,720 |
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(38,971 |
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Prepaid expenses and other current assets |
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4,478 |
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1,703 |
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Other assets |
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774 |
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615 |
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Accounts payable |
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16,061 |
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8,428 |
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Accrued expenses and other current liabilities |
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8,751 |
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2,159 |
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Accrued interest |
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2,394 |
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4,144 |
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Income taxes |
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1,321 |
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513 |
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Other liabilities |
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(145 |
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(1,394 |
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Net cash provided by operating activities |
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102,183 |
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14,045 |
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Cash Flows from Investing Activities: |
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Purchase of property and equipment, net |
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(9,078 |
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(18,712 |
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Purchase of short-term investments |
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(1,830 |
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(35,531 |
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Proceeds from sales and maturities of short-term investments |
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203 |
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82,121 |
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Purchase of businesses, net of cash acquired |
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(381 |
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(10,330 |
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Net cash (used in) provided by investing activities |
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(11,086 |
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17,548 |
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Cash Flows from Financing Activities: |
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Increase in purchase card payable, net |
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492 |
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2,324 |
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Repayment of term debt |
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(56,488 |
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(2,489 |
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Repayment of 81/8% senior subordinated notes |
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(34,157 |
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Payments on capital lease obligations |
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(177 |
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(164 |
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Proceeds from stock options exercised |
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17 |
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611 |
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Excess tax benefits from share-based compensation |
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1 |
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140 |
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Treasury stock acquired to satisfy minimum statutory tax withholding requirements |
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(34 |
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(808 |
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Net cash used in financing activities |
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(90,346 |
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(386 |
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Effect of exchange rate changes on cash and cash equivalents |
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216 |
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(70 |
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Net increase in cash and cash equivalents |
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967 |
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31,137 |
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Cash and cash equivalents at beginning of period |
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62,724 |
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4,975 |
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Cash and cash equivalents at end of period |
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$ |
63,691 |
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$ |
36,112 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid during the period for: |
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Interest |
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$ |
11,278 |
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$ |
16,823 |
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Income taxes, net of refunds |
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$ |
5,371 |
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$ |
21,124 |
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Schedule of Non-Cash Investing Activities: |
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Property acquired through lease incentives |
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$ |
3,009 |
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$ |
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Adjustments to liabilities assumed and goodwill on businesses acquired |
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$ |
732 |
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$ |
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See accompanying notes to condensed consolidated financial statements.
3
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 25, 2009 AND SEPTEMBER 26, 2008
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business
Interline Brands, Inc., a Delaware corporation, and its subsidiaries (Interline or the Company) is a direct marketer and specialty distributor of maintenance, repair and operations (MRO) products. The Company sells plumbing, electrical, hardware, security, heating, ventilation and air conditioning (HVAC), janitorial and sanitary supplies and other MRO products. Interlines highly diverse customer base consists of multi-family housing, educational, lodging, government and health care facilities, professional contractors and specialty distributors.
The Company markets and sells its products primarily through twelve distinct and targeted brands. The Company utilizes a variety of sales channels, including a direct sales force, telesales representatives, a direct marketing program, brand-specific websites and a national accounts sales program. The Company delivers its products through its network of regional distribution centers and professional contractor showrooms located throughout the United States and Canada, two national distribution centers, vendor managed inventory locations at large professional contractor customer locations and its dedicated fleet of trucks. Through its broad distribution network, the Company is able to provide next-day delivery service to at least 98% of the U.S. population and same-day delivery service to most major metropolitan markets.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Interline have been prepared in accordance with accounting principles generally accepted in the United States of America and instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements included in the Companys Annual Report on Form 10-K have been condensed or omitted. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K for the fiscal year ended December 26, 2008 filed with the SEC.
All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented have been recorded. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation reserves for accounts receivable, inventory and income taxes, reserves for self-insurance programs and valuation of goodwill and other intangible assets. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company, in accordance with accounting principles generally accepted in the United States (US GAAP) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. US GAAP requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
Level 1 |
quoted prices in active markets for identical assets or liabilities; |
Level 2 |
quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
Level 3 |
unobservable inputs, such as discounted cash flow models or valuations. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
4
The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate the carrying amount because of the short maturities of these items.
The Companys short-term investments, which are classified as available-for-sale, are comprised of pre-refunded municipal bonds. Pre-refunded municipal bonds are bonds that are refinanced by the issuer and remain outstanding in the marketplace until a specific call date or maturity date is reached. Pre-refunded municipal bonds are secured by U.S. Treasury securities placed in an irrevocable escrow account. As of September 25, 2009, all of the Companys pre-refunded municipal bonds have contractual maturities of less than one year. The fair value of the pre-refunded municipal bonds is determined by quoted market prices as they are publicly traded. The following table shows the fair value of the Companys short-term investments as of September 25, 2009 (in thousands):
Description |
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Cost |
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Fair Value |
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Pre-refunded municipal bonds |
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$ |
1,623 |
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$ |
1,623 |
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$ |
1,623 |
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$ |
1,623 |
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The fair value of term debt approximates the carrying amount because it bears interest at variable rates. The fair value of the 81/8% senior subordinated notes is determined by quoted market prices as they are publicly traded.
Subsequent Events
The Company evaluated events and transactions that occurred during the period from September 25, 2009, the date of the balance sheet, through November 2, 2009, the date the unaudited interim condensed financial statements were issued, for potential recognition or disclosure in the accompanying unaudited interim condensed consolidated financial statements and did not identify any that should be recognized or disclosed.
Segment Information
The Company has one operating segment and one reportable segment, the distribution of MRO products.
The Companys net sales for the three and nine months ended September 25, 2009 and September 26, 2008 by product category were as follows (in thousands):
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Three Months Ended |
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Nine Months Ended |
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September 25, |
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September 26, |
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September 25, |
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September 26, |
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Product Category |
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2009 |
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2008 |
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2009 |
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2008 |
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Janitorial and sanitary |
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$ |
80,546 |
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$ |
80,328 |
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$ |
229,105 |
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$ |
225,423 |
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Plumbing |
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71,379 |
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86,361 |
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218,418 |
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263,508 |
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Heating, ventilation and air conditioning |
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33,891 |
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36,830 |
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86,139 |
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96,638 |
|
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Electrical and lighting |
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22,811 |
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28,575 |
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66,232 |
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86,453 |
|
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Appliances and parts |
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17,954 |
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18,733 |
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49,030 |
|
52,721 |
|
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Security |
|
13,449 |
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15,876 |
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39,502 |
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47,350 |
|
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Hardware and tools |
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12,885 |
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13,970 |
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37,140 |
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40,996 |
|
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Other |
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25,033 |
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36,831 |
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79,095 |
|
104,990 |
|
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Total |
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$ |
277,948 |
|
$ |
317,504 |
|
$ |
804,661 |
|
$ |
918,079 |
|
Recently Adopted Accounting Standards
Effective December 27, 2008, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820-10-65, Fair Value Measurements and Disclosures: Transition related to FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (formerly FASB Staff Position 157-2, Effective Date of FASB Statement No. 157). ASC 820-10-65 amends prior guidance to defer the effective date of fair value measurements and disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of ASC 820-10-65 did not have any impact on the Companys financial position, results of operations and cash flows.
Effective December 27, 2008, the Company adopted ASC 805-10, Business Combinations (formerly FASB Statement No. 141 (revised 2007), Business Combinations). ASC 805-10 replaces prior guidance on business combinations and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. ASC 805-10 also establishes disclosure requirements that enable users to evaluate the nature and financial effects of the business combination. As a result of the adoption of, and in accordance with ASC 805-10, the Company expensed $0.7 million in deferred acquisition costs during the three months ended March 27, 2009, which are included as part of selling, general and administrative expense.
5
Effective December 27, 2008, the Company adopted ASC 810-10-65, Consolidation: Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (formerly FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51). ASC 810-10-65 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. ASC 810-10-65 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810-10-65 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but affects only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The adoption of ASC 810-10-65 did not have any impact on the Companys financial position, results of operations and cash flows.
Effective December 27, 2008, the Company adopted ASC 815-10-65, Derivatives and Hedging: Transition and Effective Date Related to FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (formerly FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities). ASC 815-10-65 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial position, financial performance and cash flows. The adoption of ASC 815-10-65 did not have any impact on the Companys financial position, results of operations and cash flows.
In April 2009, the FASB issued ASC 825-10-65, Financial Instruments: Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (formerly FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments). ASC 825-10-65 extends the disclosure requirements regarding the fair value of financial instruments to interim financial statements of publicly traded companies. The Company adopted the provisions of ASC 825-10-65 for the interim period ended June 26, 2009. The adoption of ASC 825-10-65 did not have any impact on the Companys financial position, results of operations and cash flows.
In May 2009, the FASB issued ASC 855-10, Subsequent Events (formerly FASB Statement No. 165, Subsequent Events). ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855-10 sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855-10 also requires disclosure of the date through which an entity has evaluated subsequent events. The Company adopted the provisions of ASC 855-10 for the interim period ended June 26, 2009. The adoption of ASC 855-10 did not have any impact on the Companys financial position, results of operations and cash flows.
In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Standards (formerly FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162). ASC105-10 establishes the FASB Accounting Standards Codification (the Codification) as the single source of US GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. After the Codification launch on July 1, 2009, only one level of authoritative US GAAP exists, other than guidance issued by the SEC. All other accounting literature excluded from the Codification is considered non-authoritative. While not intended to change US GAAP, the Codification significantly changes the way in which the accounting literature is organized. It is structured by accounting topic to help accountants and auditors more quickly identify the guidance that applies to a specific accounting issue. The Company adopted the provisions of ASC 105-10 for the interim period ended September 25, 2009. The adoption of the provisions of ASC 105-10 did not have a material impact on the Companys financial position, results of operations or cash flows. However, because the Codification completely replaces existing standards, it affects the way US GAAP is referenced by the Company in its financial statements and accounting policies.
Accounting Standards Not Yet Adopted
In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. FAS 167 is effective for periods beginning after November 15, 2009. The provisions of FAS 167 will not have any impact on the Companys financial position, results or operations or cash flows.
6
2. ACCOUNTS RECEIVABLE
The Companys trade receivables are exposed to credit risk. The majority of the markets served by the Company are comprised of numerous individual accounts. The Company monitors the creditworthiness of its customers on an ongoing basis and provides a reserve for estimated bad debt losses. If the financial condition of the Companys customers were to deteriorate, increases in its allowance for doubtful accounts may be needed.
The activity in the allowance for doubtful accounts consisted of the following (in thousands):
Balance at |
|
Charged to |
|
Deductions(2) |
|
Balance at |
|
||||
$ |
12,140 |
|
$ |
7,330 |
|
$ |
(6,400 |
) |
$ |
13,070 |
|
(1) Provision for doubtful accounts includes $3.0 million associated with a customer seeking Chapter 11 bankruptcy protection in March 2009.
(2) Accounts receivable written-off as uncollectible, net of recoveries.
3. DEBT
During the three months ended March 27, 2009, the Company repurchased $36.4 million of its 81/8% senior subordinated notes at an average of 93.8% of par, or $34.2 million. In connection with the repurchase of the 81/8% senior subordinated notes, the Company recorded a gain on extinguishment of debt of $1.8 million net of $0.1 million and $0.4 million in original issue discount and deferred financing costs written-off, respectively. As of September 25, 2009, the fair market value of the $150.7 million of 81/8% senior subordinated notes was approximately $147.3 million, or 97.75% of par.
During the three and nine months ended September 25, 2009, the Company repaid $30.0 million and $55.2 million, respectively, of its term loan ahead of schedule. In connection with these payments, the Company recorded a loss on extinguishment of debt of $0.2 million and $0.5 million, respectively, associated with the write-off of deferred financing costs. As a result of these repayments of term debt, the Company is not required to make another principal payment until the debt matures in 2013.
4. SHAREHOLDER RIGHTS PLAN
On March 22, 2009, the Board of Directors of Interline adopted a shareholder rights plan and authorized and declared a dividend distribution of one preferred stock purchase right (a Right) for each outstanding share of the Companys common stock. The Rights are not exercisable unless an entity becomes, or launches a tender offer to become, the beneficial owner of 15% or more of the Companys outstanding common stock (including derivative positions), subject to certain exceptions. The distribution was paid on April 2, 2009 to shareholders of record as of the close of business on April 2, 2009. Each Right, if and when it becomes exercisable, entitles the holder to buy 1/1000 of a share of our preferred stock, designated as Series A Junior Preferred Stock, par value $0.01 per share, at a price of $30.00 per 1/1000 of a share subject to adjustment (the Exercise Price). If any person or group becomes the beneficial owner of 15% or more of the Companys common stock at any time after the date of the plan (with certain limited exceptions), then each Right not owned by such person or group will entitle its holder to purchase, at the Exercise Price, shares of the Companys common stock or, in certain circumstances, common stock of the acquiring person, having a market value of twice the Exercise Price. The Rights will expire at the close of business on March 22, 2012, unless earlier redeemed or exchanged by the Company. The description and terms of the Rights are set forth in a rights agreement between the Company and Mellon Investor Services LLC, as the Rights Agent.
7
5. RESTRUCTURING AND ACQUISITION ACCRUALS
Restructuring Accruals
During the three months ended September 26, 2008, the Company began undertaking certain significant changes in its cost structure. These operational initiatives focus on reducing the Companys overall operating cost structure. The Company took the following specific actions during the nine months ended September 25, 2009:
· reduced its workforce; and
· closed and consolidated certain facilities.
The restructuring charges related to these various initiatives, which are included as part of selling, general and administrative expenses, were $4.6 million during the nine months ended September 25, 2009. The following table summarizes the changes to accruals related to the Companys restructuring, which are included in accrued expenses and other current liabilities (in thousands):
|
|
Employee |
|
Facility |
|
Total |
|
|||
Balance at December 26, 2008 |
|
$ |
330 |
|
$ |
844 |
|
$ |
1,174 |
|
Provisions |
|
1,065 |
|
3,576 |
|
4,641 |
|
|||
Payments |
|
(1,129 |
) |
(2,181 |
) |
(3,310 |
) |
|||
Asset write-offs |
|
|
|
(636 |
) |
(636 |
) |
|||
Balance at September 25, 2009 |
|
$ |
266 |
|
$ |
1,603 |
|
$ |
1,869 |
|
Employee separation costs include severance pay and other related benefits associated with the termination of selling, administrative and warehouse personnel. Facility closing and other costs include lease tails, property and equipment disposals and other shut-down expenses associated with distribution center and professional contractor showroom consolidations.
Acquisition Accruals
The following table summarizes the changes to accruals assumed in connection with the Companys business combinations, which are included in accrued expenses and other current liabilities (in thousands):
|
|
Employee |
|
Facility |
|
Total |
|
|||
Balance at December 26, 2008 |
|
$ |
95 |
|
$ |
1,982 |
|
$ |
2,077 |
|
Payments |
|
|
|
(625 |
) |
(625 |
) |
|||
Additions to reserve |
|
|
|
1,176 |
|
1,176 |
|
|||
Balance at September 25, 2009 |
|
$ |
95 |
|
$ |
2,533 |
|
$ |
2,628 |
|
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock and participating securities outstanding during the period. Participating securities are unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid), such as deferred stock units.
Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock and participating securities outstanding during the period as adjusted for the potential dilutive effect of stock options and non-vested shares of restricted stock and restricted share units using the treasury stock method.
8
The following summarizes the shares of common stock used to calculate earnings per share including the potentially dilutive impact of stock options, restricted stock and restricted share units, calculated using the treasury stock method, as included in the calculation of diluted weighted-average shares:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
|
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Weighted average shares outstanding - basic |
|
32,511,597 |
|
32,412,280 |
|
32,493,797 |
|
32,387,865 |
|
Dilutive shares resulting from: |
|
|
|
|
|
|
|
|
|
Stock options |
|
256,724 |
|
46,038 |
|
115,929 |
|
136,512 |
|
Restricted stock |
|
594 |
|
1,214 |
|
205 |
|
2,782 |
|
Restricted share units |
|
301,126 |
|
93,986 |
|
216,535 |
|
91,211 |
|
Weighted average shares outstanding - diluted |
|
33,070,041 |
|
32,553,518 |
|
32,826,466 |
|
32,618,370 |
|
During the three months ended September 25, 2009 and September 26, 2008, stock options to purchase 1,848,540 shares and 1,837,313 shares of common stock, respectively, were excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive. During the nine months ended September 25, 2009 and September 26, 2008, stock options to purchase 2,998,537 shares and 1,823,099 shares of common stock, respectively, were excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive.
7. COMPREHENSIVE INCOME
Comprehensive income refers to revenues, expenses, gains and losses that under US GAAP are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders equity, net of tax. The components of comprehensive income for the three and nine months ended September 25, 2009 and September 26, 2008 are as follows (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
|
||||
|
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
Net income |
|
$ |
10,431 |
|
$ |
13,736 |
|
$ |
19,775 |
|
$ |
33,585 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
||||
|
Amortization of unrecognized gain on employee benefits |
|
3 |
|
3 |
|
9 |
|
9 |
|
||||
|
Foreign currency translation |
|
305 |
|
(116 |
) |
545 |
|
(275 |
) |
||||
|
Total comprehensive income |
|
$ |
10,739 |
|
$ |
13,623 |
|
$ |
20,329 |
|
$ |
33,319 |
|
8. SHARE-BASED COMPENSATION
During the three months ended September 25, 2009 and September 26, 2008, share-based compensation expense was $1.1 million and $0.6 million, respectively. During the nine months ended September 25, 2009 and September 26, 2008, share-based compensation expense was $3.1 million and $3.0 million, respectively. As of September 25, 2009, there was $7.4 million of total unrecognized share-based compensation expense related to unvested share-based payment awards. The expense is expected to be recognized over a weighted-average period of 2.5 years.
During the three months ended September 25, 2009 and September 26, 2008, the Company did not grant any stock options. During the nine months ended September 25, 2009 and September 26, 2008, the Company granted 503,026 and 451,274 stock options, respectively, with a weighted-average grant date fair value of $3.46 and $6.65, respectively. The fair values of stock options were estimated using the Black-Scholes option-pricing model. Expected volatility is based on historical performance of the Companys stock. The Company also considers historical data to estimate the timing and amount of stock option exercises and forfeitures. The expected life represents the period of time that stock options are expected to remain outstanding and is based on the contractual term of the stock options and expected exercise behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the date of grant.
9
The Black-Scholes weighted-average assumptions were as follows:
|
|
Nine Months Ended |
|
||
|
|
September 25, |
|
September 26, |
|
|
|
2009 |
|
2008 |
|
Expected volatility |
|
43.0 |
% |
33.6 |
% |
Expected dividends |
|
0.0 |
% |
0.0 |
% |
Risk-free interest rate |
|
2.1 |
% |
2.9 |
% |
Expected life (in years) |
|
5.0 |
|
5.0 |
|
Stock options exercised during the three months ended September 25, 2009 were 1,150 with an intrinsic value of less than $0.1 million. There were no stock options exercised during the three months ended September 26, 2008. Stock options exercised during the nine months ended September 25, 2009 and September 26, 2008 were 1,150 and 38,595, respectively, with an intrinsic value of less than $0.1 million and $0.1 million, respectively.
A summary status of restricted stock, restricted share units and deferred stock units as of September 25, 2009 and changes during the nine months then ended is presented below:
|
|
Restricted Stock |
|
Restricted Share Units |
|
Deferred Stock Units |
|
|||||||||
|
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|||
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|||
|
|
|
|
Grant Date |
|
|
|
Grant Date |
|
|
|
Grant Date |
|
|||
|
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
|
|||
Outstanding at December 26, 2008 |
|
19,200 |
|
$ |
23.69 |
|
254,256 |
|
$ |
17.82 |
|
42,060 |
|
$ |
21.08 |
|
Granted |
|
|
|
|
|
385,495 |
|
7.94 |
|
26,250 |
|
14.77 |
|
|||
Vested |
|
(2,550 |
) |
22.92 |
|
(9,500 |
) |
23.55 |
|
|
|
|
|
|||
Forfeited |
|
(1,550 |
) |
22.92 |
|
(17,744 |
) |
12.77 |
|
|
|
|
|
|||
Outstanding at September 25, 2009 |
|
15,100 |
|
$ |
23.90 |
|
612,507 |
|
$ |
11.66 |
|
68,310 |
|
$ |
18.66 |
|
Restricted stock vested during the nine months ended September 25, 2009 and September 26, 2008 were 2,550 and 57,082, respectively, with a fair value of less than $0.1 million and $1.1 million, respectively. Restricted share units vested during the nine months ended September 25, 2009 and September 26, 2008 were 9,500 and 93,376, respectively, with a fair value of $0.1 million and $1.8 million, respectively.
9. INCOME TAXES
During the nine months ended September 25, 2009, the Company reduced the liability for unrecognized tax benefits related to certain state income tax matters as a result of favorable resolutions. Of the $0.2 million reduction, substantially all was related to gross unrecognized tax benefits and less than $0.1 million was related to interest and penalties. Of these amounts, $0.1 million reduced the Companys effective tax rate.
A reconciliation of the gross beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
Balance at December 26, 2008 |
|
$ |
320 |
|
Additions for tax positions taken during prior years |
|
13 |
|
|
Settlements with taxing authorities |
|
(176 |
) |
|
Balance at September 25, 2009 |
|
$ |
157 |
|
10. GUARANTOR SUBSIDIARIES
In June 2006, Interline New Jersey, the Companys principal operating subsidiary, (Interline New Jersey or the Subsidiary Issuer) issued $200.0 million of 81/8% senior subordinated notes due 2014 and entered into a $330.0 million bank credit facility. The 81/8% senior subordinated notes and the bank credit facility are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by the Company (the Parent Company) and all of Interline New Jerseys 100% owned domestic subsidiaries: Wilmar Holdings, Inc., Wilmar Financial, Inc., Glenwood Acquisition LLC and Eagle Maintenance Supply, Inc. (collectively the Guarantor Subsidiaries). Effective December 26, 2008, AmSan LLC was merged into Interline New Jersey.
10
The guarantees by the Parent Company and the Guarantor Subsidiaries are senior to any of their existing and future subordinated obligations, equal in right of payment with any of their existing and future senior subordinated indebtedness and subordinated to any of their existing and future senior indebtedness.
The Parent Company is a holding company whose only asset is the stock of its subsidiaries. The Company conducts virtually all of its business operations through Interline New Jersey. Accordingly, the Companys only material sources of cash are dividends and distributions with respect to its ownership interests in Interline New Jersey that are derived from the earnings and cash flow generated by Interline New Jersey. Through September 25, 2009, no dividends have been paid.
The following tables set forth, on a condensed consolidating basis, the balance sheets, statements of operations and statements of cash flows for the Parent Company, Subsidiary Issuer and Guarantor Subsidiaries for all financial statement periods presented in the Companys condensed consolidated financial statements. The non-guarantor subsidiaries are minor and are included in the condensed financial data of the Subsidiary Issuer. The Subsidiary Issuer does not allocate integration expenses, corporate overhead or other expenses for shared services to the Guarantor Subsidiaries; therefore, the following tables do not reflect any such allocation.
11
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 25, 2009
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
63,459 |
|
$ |
232 |
|
$ |
|
|
$ |
63,691 |
|
Short-term investments |
|
|
|
1,623 |
|
|
|
|
|
1,623 |
|
|||||
Accounts receivable - trade |
|
|
|
137,653 |
|
3,637 |
|
|
|
141,290 |
|
|||||
Inventory |
|
|
|
182,606 |
|
2,101 |
|
|
|
184,707 |
|
|||||
Intercompany receivable |
|
|
|
|
|
129,089 |
|
(129,089 |
) |
|
|
|||||
Other current assets |
|
|
|
32,284 |
|
190 |
|
2,070 |
|
34,544 |
|
|||||
Total current assets |
|
|
|
417,625 |
|
135,249 |
|
(127,019 |
) |
425,855 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Property and equipment, net |
|
|
|
48,293 |
|
168 |
|
|
|
48,461 |
|
|||||
Goodwill |
|
|
|
312,952 |
|
5,277 |
|
|
|
318,229 |
|
|||||
Other intangible assets, net |
|
|
|
124,099 |
|
2,499 |
|
|
|
126,598 |
|
|||||
Investment in subsidiaries |
|
443,461 |
|
147,532 |
|
|
|
(590,993 |
) |
|
|
|||||
Other assets |
|
|
|
2,175 |
|
6,516 |
|
(18 |
) |
8,673 |
|
|||||
Total assets |
|
$ |
443,461 |
|
$ |
1,052,676 |
|
$ |
149,709 |
|
$ |
(718,030 |
) |
$ |
927,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Accounts payable |
|
$ |
|
|
$ |
84,356 |
|
$ |
|
|
$ |
|
|
$ |
84,356 |
|
Accrued expenses and other current liabilities |
|
|
|
44,086 |
|
2,177 |
|
2,070 |
|
48,333 |
|
|||||
Intercompany payable |
|
|
|
129,089 |
|
|
|
(129,089 |
) |
|
|
|||||
Debt and capital lease - short-term |
|
|
|
1,898 |
|
|
|
|
|
1,898 |
|
|||||
Total current liabilities |
|
|
|
259,429 |
|
2,177 |
|
(127,019 |
) |
134,587 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Term debt and capital lease - long-term |
|
|
|
309,079 |
|
|
|
|
|
309,079 |
|
|||||
Other liabilities |
|
|
|
40,707 |
|
|
|
(18 |
) |
40,689 |
|
|||||
Total liabilities |
|
|
|
609,215 |
|
2,177 |
|
(127,037 |
) |
484,355 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Senior preferred stock |
|
|
|
731,812 |
|
|
|
(731,812 |
) |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Shareholders equity (deficit) |
|
443,461 |
|
(288,351 |
) |
147,532 |
|
140,819 |
|
443,461 |
|
|||||
Total liabilities and shareholders equity |
|
$ |
443,461 |
|
$ |
1,052,676 |
|
$ |
149,709 |
|
$ |
(718,030 |
) |
$ |
927,816 |
|
12
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 26, 2008
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
61,741 |
|
$ |
983 |
|
$ |
|
|
$ |
62,724 |
|
Accounts receivable - trade |
|
|
|
110,964 |
|
28,558 |
|
|
|
139,522 |
|
|||||
Inventory |
|
|
|
188,622 |
|
22,578 |
|
|
|
211,200 |
|
|||||
Intercompany receivable |
|
|
|
|
|
123,615 |
|
(123,615 |
) |
|
|
|||||
Other current assets |
|
|
|
40,448 |
|
2,898 |
|
|
|
43,346 |
|
|||||
Total current assets |
|
|
|
401,775 |
|
178,632 |
|
(123,615 |
) |
456,792 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Property and equipment, net |
|
|
|
42,730 |
|
3,303 |
|
|
|
46,033 |
|
|||||
Goodwill |
|
|
|
246,657 |
|
70,460 |
|
|
|
317,117 |
|
|||||
Other intangible assets, net |
|
|
|
90,035 |
|
42,752 |
|
|
|
132,787 |
|
|||||
Investment in subsidiaries |
|
420,073 |
|
294,476 |
|
|
|
(714,549 |
) |
|
|
|||||
Other assets |
|
|
|
1,839 |
|
8,280 |
|
|
|
10,119 |
|
|||||
Total assets |
|
$ |
420,073 |
|
$ |
1,077,512 |
|
$ |
303,427 |
|
$ |
(838,164 |
) |
$ |
962,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Accounts payable |
|
$ |
|
|
$ |
68,552 |
|
$ |
|
|
$ |
(297 |
) |
$ |
68,255 |
|
Accrued expenses and other current liabilities |
|
|
|
26,506 |
|
5,960 |
|
|
|
32,466 |
|
|||||
Intercompany payable |
|
|
|
123,615 |
|
|
|
(123,615 |
) |
|
|
|||||
Debt and capital lease - short-term |
|
|
|
1,859 |
|
5 |
|
|
|
1,864 |
|
|||||
Total current liabilities |
|
|
|
220,532 |
|
5,965 |
|
(123,912 |
) |
102,585 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Term debt and capital lease - long-term |
|
|
|
399,707 |
|
2,284 |
|
|
|
401,991 |
|
|||||
Other liabilities |
|
|
|
37,497 |
|
702 |
|
|
|
38,199 |
|
|||||
Total liabilities |
|
|
|
657,736 |
|
8,951 |
|
(123,912 |
) |
542,775 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Senior preferred stock |
|
|
|
660,236 |
|
|
|
(660,236 |
) |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Shareholders equity (deficit) |
|
420,073 |
|
(240,460 |
) |
294,476 |
|
(54,016 |
) |
420,073 |
|
|||||
Total liabilities and shareholders equity |
|
$ |
420,073 |
|
$ |
1,077,512 |
|
$ |
303,427 |
|
$ |
(838,164 |
) |
$ |
962,848 |
|
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 25, 2009
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries(1) |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
|
|
$ |
272,251 |
|
$ |
5,697 |
|
$ |
|
|
$ |
277,948 |
|
Cost of sales |
|
|
|
172,189 |
|
3,537 |
|
|
|
175,726 |
|
|||||
Gross profit |
|
|
|
100,062 |
|
2,160 |
|
|
|
102,222 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative expenses |
|
|
|
74,893 |
|
1,298 |
|
|
|
76,191 |
|
|||||
Depreciation and amortization |
|
|
|
4,378 |
|
157 |
|
|
|
4,535 |
|
|||||
Equity earnings of subsidiaries |
|
(17,225 |
) |
(3,237 |
) |
|
|
20,462 |
|
|
|
|||||
Total operating expense |
|
(17,225 |
) |
76,034 |
|
1,455 |
|
20,462 |
|
80,726 |
|
|||||
Operating income |
|
17,225 |
|
24,028 |
|
705 |
|
(20,462 |
) |
21,496 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss on extinguishment of debt, net |
|
|
|
(248 |
) |
|
|
|
|
(248 |
) |
|||||
Interest and other (expense) income, net |
|
|
|
(4,912 |
) |
5,015 |
|
(4,126 |
) |
(4,023 |
) |
|||||
Income before income taxes |
|
17,225 |
|
18,868 |
|
5,720 |
|
(24,588 |
) |
17,225 |
|
|||||
Income tax provision |
|
6,794 |
|
4,735 |
|
2,059 |
|
(6,794 |
) |
6,794 |
|
|||||
Net income |
|
10,431 |
|
14,133 |
|
3,661 |
|
(17,794 |
) |
10,431 |
|
|||||
Preferred stock dividends |
|
|
|
(24,682 |
) |
|
|
24,682 |
|
|
|
|||||
Net income (loss) attributable to common shareholders |
|
$ |
10,431 |
|
$ |
(10,549 |
) |
$ |
3,661 |
|
$ |
6,888 |
|
$ |
10,431 |
|
(1) The Subsidiary Issuer does not allocate integration expenses, corporate overhead or other expenses for shared services to the Guarantor Subsidiaries; therefore, the results for the Guarantor Subsidiaries do not reflect any such allocation.
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 26, 2008
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries(1) |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
|
|
$ |
242,807 |
|
$ |
74,697 |
|
$ |
|
|
$ |
317,504 |
|
Cost of sales |
|
|
|
149,412 |
|
47,156 |
|
|
|
196,568 |
|
|||||
Gross profit |
|
|
|
93,395 |
|
27,541 |
|
|
|
120,936 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative expenses |
|
|
|
73,055 |
|
14,773 |
|
|
|
87,828 |
|
|||||
Depreciation and amortization |
|
|
|
3,642 |
|
677 |
|
|
|
4,319 |
|
|||||
Equity earnings of subsidiaries |
|
(22,445 |
) |
(9,168 |
) |
|
|
31,613 |
|
|
|
|||||
Total operating expense |
|
(22,445 |
) |
67,529 |
|
15,450 |
|
31,613 |
|
92,147 |
|
|||||
Operating income |
|
22,445 |
|
25,866 |
|
12,091 |
|
(31,613 |
) |
28,789 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest and other (expense) income, net |
|
|
|
(5,252 |
) |
(533 |
) |
(559 |
) |
(6,344 |
) |
|||||
Income before income taxes |
|
22,445 |
|
20,614 |
|
11,558 |
|
(32,172 |
) |
22,445 |
|
|||||
Income tax provision |
|
8,709 |
|
4,601 |
|
4,108 |
|
(8,709 |
) |
8,709 |
|
|||||
Net income |
|
13,736 |
|
16,013 |
|
7,450 |
|
(23,463 |
) |
13,736 |
|
|||||
Preferred stock dividends |
|
|
|
(21,516 |
) |
|
|
21,516 |
|
|
|
|||||
Net income (loss) attributable to common shareholders |
|
$ |
13,736 |
|
$ |
(5,503 |
) |
$ |
7,450 |
|
$ |
(1,947 |
) |
$ |
13,736 |
|
(1) The Subsidiary Issuer does not allocate integration expenses, corporate overhead or other expenses for shared services to the Guarantor Subsidiaries; therefore, the results for the Guarantor Subsidiaries do not reflect any such allocation.
15
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2009
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries(1) |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
|
|
$ |
790,707 |
|
$ |
13,954 |
|
$ |
|
|
$ |
804,661 |
|
Cost of sales |
|
|
|
498,686 |
|
8,842 |
|
|
|
507,528 |
|
|||||
Gross profit |
|
|
|
292,021 |
|
5,112 |
|
|
|
297,133 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative expenses |
|
|
|
235,363 |
|
3,646 |
|
|
|
239,009 |
|
|||||
Depreciation and amortization |
|
|
|
13,075 |
|
486 |
|
|
|
13,561 |
|
|||||
Equity earnings of subsidiaries |
|
(32,469 |
) |
(9,241 |
) |
|
|
41,710 |
|
|
|
|||||
Total operating expense |
|
(32,469 |
) |
239,197 |
|
4,132 |
|
41,710 |
|
252,570 |
|
|||||
Operating income |
|
32,469 |
|
52,824 |
|
980 |
|
(41,710 |
) |
44,563 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Gain on extinguishment of debt, net |
|
|
|
1,295 |
|
|
|
|
|
1,295 |
|
|||||
Interest and other (expense) income, net |
|
|
|
(16,046 |
) |
14,691 |
|
(12,034 |
) |
(13,389 |
) |
|||||
Income before income taxes |
|
32,469 |
|
38,073 |
|
15,671 |
|
(53,744 |
) |
32,469 |
|
|||||
Income tax provision |
|
12,694 |
|
7,317 |
|
5,377 |
|
(12,694 |
) |
12,694 |
|
|||||
Net income |
|
19,775 |
|
30,756 |
|
10,294 |
|
(41,050 |
) |
19,775 |
|
|||||
Preferred stock dividends |
|
|
|
(71,576 |
) |
|
|
71,576 |
|
|
|
|||||
Net income (loss) attributable to common shareholders |
|
$ |
19,775 |
|
$ |
(40,820 |
) |
$ |
10,294 |
|
$ |
30,526 |
|
$ |
19,775 |
|
(1) The Subsidiary Issuer does not allocate integration expenses, corporate overhead or other expenses for shared services to the Guarantor Subsidiaries; therefore, the results for the Guarantor Subsidiaries do not reflect any such allocation.
16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 2008
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries(1) |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
|
|
$ |
707,703 |
|
$ |
210,376 |
|
$ |
|
|
$ |
918,079 |
|
Cost of sales |
|
|
|
439,266 |
|
132,027 |
|
|
|
571,293 |
|
|||||
Gross profit |
|
|
|
268,437 |
|
78,349 |
|
|
|
346,786 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative expenses |
|
|
|
217,668 |
|
43,758 |
|
|
|
261,426 |
|
|||||
Depreciation and amortization |
|
|
|
10,295 |
|
2,005 |
|
|
|
12,300 |
|
|||||
Equity earnings of subsidiaries |
|
(53,373 |
) |
(18,128 |
) |
|
|
71,501 |
|
|
|
|||||
Total operating expense |
|
(53,373 |
) |
209,835 |
|
45,763 |
|
71,501 |
|
273,726 |
|
|||||
Operating income |
|
53,373 |
|
58,602 |
|
32,586 |
|
(71,501 |
) |
73,060 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest and other (expense) income, net |
|
|
|
(16,262 |
) |
(2,236 |
) |
(1,189 |
) |
(19,687 |
) |
|||||
Income before income taxes |
|
53,373 |
|
42,340 |
|
30,350 |
|
(72,690 |
) |
53,373 |
|
|||||
Income tax provision |
|
19,788 |
|
8,755 |
|
11,033 |
|
(19,788 |
) |
19,788 |
|
|||||
Net income |
|
33,585 |
|
33,585 |
|
19,317 |
|
(52,902 |
) |
33,585 |
|
|||||
Preferred stock dividends |
|
|
|
(62,397 |
) |
|
|
62,397 |
|
|
|
|||||
Net income (loss) attributable to common shareholders |
|
$ |
33,585 |
|
$ |
(28,812 |
) |
$ |
19,317 |
|
$ |
9,495 |
|
$ |
33,585 |
|
(1) The Subsidiary Issuer does not allocate integration expenses, corporate overhead or other expenses for shared services to the Guarantor Subsidiaries; therefore, the results for the Guarantor Subsidiaries do not reflect any such allocation.
17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2009
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
|
$ |
|
|
$ |
105,297 |
|
$ |
(3,114 |
) |
$ |
|
|
$ |
102,183 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchase of property and equipment, net |
|
|
|
(8,991 |
) |
(87 |
) |
|
|
(9,078 |
) |
|||||
Purchase of short-term investments |
|
|
|
(1,830 |
) |
|
|
|
|
(1,830 |
) |
|||||
Proceeds from sales and maturities of short-term investments |
|
|
|
203 |
|
|
|
|
|
203 |
|
|||||
Purchase of businesses, net of cash acquired |
|
|
|
(381 |
) |
|
|
|
|
(381 |
) |
|||||
Other |
|
|
|
(3,002 |
) |
|
|
3,002 |
|
|
|
|||||
Net cash (used in) provided by investing activities |
|
|
|
(14,001 |
) |
(87 |
) |
3,002 |
|
(11,086 |
) |
|||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Increase in purchase card payable, net |
|
|
|
492 |
|
|
|
|
|
492 |
|
|||||
Repayment of debt and capital lease obligations |
|
|
|
(56,665 |
) |
|
|
|
|
(56,665 |
) |
|||||
Repayment of 81/8% senior subordinated notes |
|
|
|
(34,157 |
) |
|
|
|
|
(34,157 |
) |
|||||
Other |
|
|
|
(16 |
) |
3,002 |
|
(3,002 |
) |
(16 |
) |
|||||
Net cash (used in) provided by financing activities |
|
|
|
(90,346 |
) |
3,002 |
|
(3,002 |
) |
(90,346 |
) |
|||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
216 |
|
|
|
|
|
216 |
|
|||||
Net increase in cash and cash equivalents |
|
|
|
1,166 |
|
(199 |
) |
|
|
967 |
|
|||||
Cash and cash equivalents at beginning of period |
|
|
|
62,293 |
|
431 |
|
|
|
62,724 |
|
|||||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
63,459 |
|
$ |
232 |
|
$ |
|
|
$ |
63,691 |
|
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 2008
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
|
$ |
|
|
$ |
32,239 |
|
$ |
(18,194 |
) |
$ |
|
|
$ |
14,045 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchase of property and equipment, net |
|
|
|
(17,506 |
) |
(1,206 |
) |
|
|
(18,712 |
) |
|||||
Purchase of short-term investments |
|
|
|
(35,531 |
) |
|
|
|
|
(35,531 |
) |
|||||
Proceeds from sales and maturities of short-term investments |
|
|
|
82,121 |
|
|
|
|
|
82,121 |
|
|||||
Purchase of businesses, net of cash acquired |
|
|
|
(10,306 |
) |
(24 |
) |
|
|
(10,330 |
) |
|||||
Other |
|
|
|
(19,708 |
) |
|
|
19,708 |
|
|
|
|||||
Net cash provided by (used in) investing activities |
|
|
|
(930 |
) |
(1,230 |
) |
19,708 |
|
17,548 |
|
|||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Increase in purchase card payable, net |
|
|
|
2,324 |
|
|
|
|
|
2,324 |
|
|||||
Repayment of debt and capital lease obligations |
|
|
|
(2,650 |
) |
(3 |
) |
|
|
(2,653 |
) |
|||||
Other |
|
|
|
(57 |
) |
19,708 |
|
(19,708 |
) |
(57 |
) |
|||||
Net cash (used in) provided by financing activities |
|
|
|
(383 |
) |
19,705 |
|
(19,708 |
) |
(386 |
) |
|||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
(70 |
) |
|
|
|
|
(70 |
) |
|||||
Net increase in cash and cash equivalents |
|
|
|
30,856 |
|
281 |
|
|
|
31,137 |
|
|||||
Cash and cash equivalents at beginning of period |
|
|
|
7,564 |
|
18 |
|
(2,607 |
) |
4,975 |
|
|||||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
38,420 |
|
$ |
299 |
|
$ |
(2,607 |
) |
$ |
36,112 |
|
19
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
References to us and we are to the Company. You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes included in this quarterly report, and our audited consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as may, believe, expect, anticipate, intend, plan, estimate or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. These factors include:
· economic slowdowns,
· general market conditions,
· credit market contractions,
· the loss of significant customers,
· product cost and price fluctuations due to market conditions,
· consumer spending and debt levels,
· adverse changes in trends in the home improvement and remodeling and home building markets,
· the highly competitive nature of the maintenance, repair and operations distribution industry,
· material facilities and systems disruptions and shutdowns,
· failure to realize expected benefits from acquisitions,
· our ability to purchase products from suppliers on favorable terms,
· the length of our supply chains,
· work stoppages or other business interruptions at transportation centers or shipping ports,
· fluctuations in the cost of commodity-based products, raw materials and fuel prices,
· currency exchange rates,
· our ability to accurately predict market trends,
· failure to locate, acquire and successfully integrate acquisition candidates,
· dependence on key employees,
· our inability to protect trademarks,
· adverse publicity and litigation,
· our level of debt,
· interest rate fluctuations,
· future cash flows,
· changes in consumer preferences,
· labor and benefit costs,
· weather conditions, and
· the other factors described under Part I. Item 1ARisk Factors in our Annual Report on Form 10-K filed with the SEC.
You should keep in mind that any forward-looking statement made by us in this report, or elsewhere, speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this report or elsewhere might not occur. Notwithstanding the foregoing, all information contained in this report is materially accurate as of the date of this report.
20
Overview
We are a leading national distributor and direct marketer of maintenance, repair and operations (MRO) products. We have one operating segment, the distribution of MRO products. We stock approximately 100,000 MRO products in the following categories: plumbing, janitorial and sanitary, electrical, lighting, hardware, security, heating, ventilation and air conditioning and other miscellaneous products. Our products are primarily used for the repair, maintenance, remodeling and refurbishment of properties and non-industrial facilities. We are able to realize high margins by focusing on repair, maintenance, remodeling and refurbishment customers, who generally make smaller, more frequent purchases and require high levels of service. Our diverse customer base includes facilities maintenance customers, which consist of multi-family housing facilities, educational institutions, lodging and health care facilities, government properties and building service contractors; professional contractors who are primarily involved in the repair, remodeling and construction of residential and non-industrial facilities; and specialty distributors, including plumbing and hardware retailers. Our customers range in size from individual contractors and independent hardware stores to apartment management companies and national purchasing groups.
We market and sell our products primarily through twelve distinct and targeted brands, each of which is nationally recognized in the markets we serve for providing premium products at competitive prices with reliable same-day and/or next-day delivery. Our Wilmar, AmSan, Sexauer, Maintenance USA and Trayco brands generally serve our facilities maintenance customers; our Barnett, Copperfield, U.S. Lock, Sun Star and Leran brands generally serve our professional contractor customers; and our Hardware Express and AF Lighting brands generally serve our specialty distributors customers. Our multi-brand operating model, which we believe is unique in the industry, allows us to use a single platform to deliver tailored products and services to meet the individual needs of each respective customer group served. We reach our markets using a variety of sales channels, including a sales force of over 600 field sales representatives and over 350 inside sales and customer service representatives, a direct marketing program of approximately five million pieces annually, brand-specific websites and a national accounts sales program. We deliver our products through our network of two national distribution centers (NDCs), 59 regional distribution centers, 21 professional contractor showrooms located throughout the United States and Canada, 27 vendor-managed inventory locations at large customer locations and a dedicated fleet of trucks. Our broad distribution network allows us the ability to provide reliable, next-day delivery service to at least 98% of the U.S. population and same-day delivery service to most major metropolitan markets.
Our information technology and logistics platform supports our major business functions, allowing us to market and sell our products at varying price points depending on the customers service requirements. While we market our products under a variety of branded catalogs, generally our brands draw from the same inventory within common distribution centers and share associated employee and transportation costs. In addition, we have centralized marketing, purchasing and catalog production operations to support our brands. We believe that our information technology and logistics platform also benefits our customers by allowing us to offer a broad product selection at highly competitive prices while maintaining the unique customer appeal of each of our targeted brands. Overall, our common operating platform has enabled us to improve customer service, maintain lower operating costs, efficiently manage working capital and support our growth initiatives.
21
Results of Operations
The following table presents information derived from the condensed consolidated statements of earnings expressed as a percentage of revenues for the three and nine months ended September 25, 2009 and September 26, 2008:
|
|
% of Net Sales |
|
% Increase |
|
% of Net Sales |
|
% Increase |
|
||||
|
|
Three Months Ended |
|
(Decrease) |
|
Nine Months Ended |
|
(Decrease) |
|
||||
|
|
September 25, |
|
September 26, |
|
2009 |
|
September 25, |
|
September 26, |
|
2009 |
|
|
|
2009 |
|
2008 |
|
vs. 2008 (1) |
|
2009 |
|
2008 |
|
vs. 2008 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
(12.5 |
)% |
100.0 |
% |
100.0 |
% |
(12.4 |
)% |
Cost of sales |
|
63.2 |
|
61.9 |
|
(10.6 |
) |
63.1 |
|
62.2 |
|
(11.2 |
) |
Gross profit |
|
36.8 |
|
38.1 |
|
(15.5 |
) |
36.9 |
|
37.8 |
|
(14.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
27.4 |
|
27.7 |
|
(13.2 |
) |
29.7 |
|
28.5 |
|
(8.6 |
) |
Depreciation and amortization |
|
1.6 |
|
1.4 |
|
5.0 |
|
1.7 |
|
1.3 |
|
10.3 |
|
Total operating expense |
|
29.0 |
|
29.0 |
|
(12.4 |
) |
31.4 |
|
29.8 |
|
(7.7 |
) |
Operating income |
|
7.7 |
|
9.1 |
|
(25.3 |
) |
5.5 |
|
8.0 |
|
(39.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on extinguishment of debt, net |
|
(0.1 |
) |
|
|
(100.0 |
) |
0.2 |
|
|
|
100.0 |
|
Interest expense |
|
(1.6 |
) |
(2.2 |
) |
(35.1 |
) |
(1.8 |
) |
(2.4 |
) |
(32.7 |
) |
Interest income and other income |
|
0.2 |
|
0.2 |
|
(22.0 |
) |
0.2 |
|
0.2 |
|
(39.2 |
) |
Income before income taxes |
|
6.2 |
|
7.1 |
|
(23.3 |
) |
4.0 |
|
5.8 |
|
(39.2 |
) |
Income tax provision |
|
(2.4 |
) |
(2.7 |
) |
(22.0 |
) |
(1.6 |
) |
(2.2 |
) |
(35.9 |
) |
Net income |
|
3.8 |
% |
4.3 |
% |
(24.1 |
)% |
2.5 |
% |
3.7 |
% |
(41.1 |
)% |
(1) Percent increase (decrease) represents the actual change as a percent of the prior years result.
Overview. During the three months ended September 25, 2009, our net sales declined 12.5%. We believe this decline is associated with the widely reported and prolonged general economic downturn. Demand from customers in our facilities maintenance end-markets, which make up 75% of our total sales and includes residential multi-family housing and institutional MRO customers, declined 6.2% during the third quarter of 2009 compared to the third quarter of 2008. Demand from our professional contractor and specialty distributor customers, which represent 15% and 10% of our total sales, respectively, declined 28.5% and 24.0%, respectively. Demand from these customers continues to be negatively impacted by recessionary declines in residential new construction and renovations activity.
Net income as a percentage of sales was 3.8% in the third quarter compared to 4.3% in the comparable prior year period. The decline in net income as a percent of sales is primarily a result of lower sales and lower gross margins. These declines were offset in part by lower interest expense associated with $105.8 million in lower debt balances compared to last year and a lower interest rate environment as well as the cost savings derived from operational initiatives such as cost containment and closings of underperforming professional contractor centers and the consolidation of certain distribution centers.
We are continuing to focus on keeping our operating costs low in the near term while continuing to invest in our operating platform for the long term. Accordingly, in addition to the operational initiatives such as headcount reductions, the closing of underperforming professional contractor showrooms and the consolidation of distribution centers, most of which have been completed, our plans include continued investments in the consolidation of our distribution network and in information technology solutions to optimize customer service.
22
Three Months Ended September 25, 2009 Compared to Three Months Ended September 26, 2008
Net Sales. Our net sales decreased by $39.6 million, or 12.5%, to $277.9 million in the three months ended September 25, 2009 from $317.5 million in the three months ended September 26, 2008. The decline in sales resulted from the net impact of a 6.2% decrease in sales to our facilities maintenance customers and a continued decline in sales to our professional contractor and specialty distributor customers of 28.5% and 24.0%, respectively. We expect sales to our facilities maintenance, professional contractor and specialty distributor end-markets to remain weak during the remainder of 2009 as the general economic downturn and credit crisis is expected to continue to affect our customers and demand in our end-markets.
Gross Profit. Gross profit decreased by $18.7 million, or 15.5%, to $102.2 million in the three months ended September 25, 2009 from $120.9 million in the three months ended September 26, 2008 as a direct result of the decrease in sales. Our gross profit margin decreased 130 basis points to 36.8% for the three months ended September 25, 2009 compared to 38.1% for the three months ended September 26, 2008. The decrease in gross margin is primarily due to heightened competition associated with the decrease in sales demand, a shift in sales mix across various product categories and costs associated with our NDC operations on a lower sales base.
Selling, General and Administrative Expenses. SG&A expenses decreased by $11.6 million, or 13.2%, to $76.2 million in the three months ended September 25, 2009 from $87.8 million in the three months ended September 26, 2008. As a percent of sales, SG&A decreased to 27.4% for the three months ended September 25, 2009 compared to 27.7% for the three months ended September 26, 2008. The decrease in SG&A expenses is primarily due to cost savings derived from the reduction in workforce during September of 2008 and the first quarter of 2009, the closing of underperforming professional contractor centers and the consolidation of certain distribution centers during the last six months of 2008 and the first nine months of 2009 and various efforts aimed at controlling costs. Accordingly, SG&A expenses for the three months ended September 26, 2008, included $2.1 million of costs associated with severance costs related to a reduction in workforce and closing of underperforming professional contractor centers as well as project expenses associated with the consolidation of certain distribution centers into our Auburn, Massachusetts, and Richmond, Virginia, locations.
Depreciation and Amortization. Depreciation and amortization expense increased by $0.2 million to $4.5 million in the three months ended September 25, 2009 from $4.3 million in the three months ended September 26, 2008. As a percentage of sales, depreciation and amortization was 1.6% or 20 basis points higher than the 1.4% in the comparable prior year period. These increases were due to higher depreciation resulting from our higher capital spending during 2008 and 2009 associated with our information systems infrastructure and distribution center consolidation and integration efforts and our Eagle Maintenance Supply, Inc. acquisition in the third quarter of 2008.
Operating Income. As a result of the foregoing, operating income decreased by $7.3 million, or 25.3%, to $21.5 million in the three months ended September 25, 2009 from $28.8 million in the three months ended September 26, 2008. As a percent of sales, operating income decreased to 7.7% in the three months ended September 25, 2009 compared to 9.1% in the three months ended September 26, 2008.
Loss on Extinguishment of Debt. Loss on extinguishment of debt was $0.2 million in the three months ended September 25, 2009. During the three months ended September 25, 2009, we repaid $30.0 million of our term loan ahead of schedule. In connection with the term loan payment, we recorded a loss on extinguishment of debt of $0.2 million associated with the write-off of deferred financing costs. We did not extinguish debt in the three months ended September 26, 2008.
Interest Expense. Interest expense decreased by $2.5 million in the three months ended September 25, 2009 to $4.6 million from $7.1 million in the three months ended September 26, 2008. This decrease was primarily due to $105.8 million in lower debt balances outstanding compared to last year associated with the repayments of our term loan and the repurchase of our 81/8% senior subordinated notes and lower interest rates.
Interest and Other Income. Interest and other income decreased $0.2 million to $0.6 million in the three months ended September 25, 2009 compared to $0.7 million in the three months ended September 26, 2008. The decrease was primarily attributable to lower interest income earned resulting from lower interest rates and lower short-term investment balances.
Provision for Income Taxes. The effective tax rate for the three months ended September 25, 2009 was 39.4% compared to 38.8% for the three months ended September 26, 2008. The increase in the effective tax rate was primarily due to an increase in state taxes and a relative increase of non-deductible expenses as a percent of taxable income.
23
Nine Months Ended September 25, 2009 Compared to Nine Months Ended September 26, 2008
Net Sales. Our net sales decreased by $113.4 million, or 12.4%, to $804.7 million in the nine months ended September 25, 2009 from $918.1 million in the nine months ended September 26, 2008. The decline in sales resulted from the net impact of a 7.0% decrease in sales to our facilities maintenance customers and a continued decline in sales to our professional contractor and specialty distributor customers of 26.9% and 19.7%, respectively. We expect sales to our facilities maintenance, professional contractor and specialty distributor end-markets to remain weak during the remainder of 2009 as the general economic downturn and credit crisis is expected to continue to affect our customers and demand in our end-markets.
Gross Profit. Gross profit decreased by $49.7 million, or 14.3%, to $297.1 million in the nine months ended September 25, 2009 from $346.8 million in the nine months ended September 26, 2008 as a direct result of the decrease in sales. Our gross profit margin decreased 90 basis points to 36.9% for the nine months ended September 25, 2009 compared to 37.8% for the nine months ended September 26, 2008. The decrease in gross margin is primarily due to heightened competition associated with the decrease in sales demand, a shift in sales mix across various product categories and higher costs associated with opening our new NDC on the west coast.
Selling, General and Administrative Expenses. SG&A expenses decreased by $22.4 million, or 8.6%, to $239.0 million in the nine months ended September 25, 2009 from $261.4 million in the nine months ended September 26, 2008. As a percent of sales, SG&A increased to 29.7% for the nine months ended September 25, 2009 compared to 28.5% for the nine months ended September 26, 2008. The increase in SG&A expenses as a percent of sales is primarily due to $3.8 million in increased bad debt expense primarily associated with a customer seeking Chapter 11 bankruptcy protection in March, $4.6 million in severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions, consolidation of certain distribution centers and closing of underperforming professional contractor centers and the write-off of $0.7 million in deferred acquisition costs due to the adoption of a new accounting standard on business combinations. We have increased our accounts receivable reserve to adjust for higher levels of risk in our portfolio stemming from an unprecedented market environment. These costs were partially offset by the cost savings derived from the reduction in workforce in the fourth quarter of 2008 and the first quarter of 2009, the closing of underperforming professional contractor centers and the consolidation of certain distribution centers during the last nine months of 2008 and the first nine months of 2009 and various efforts aimed at controlling costs. Accordingly, SG&A expenses for the three months ended September 26, 2008, included $2.1 million of costs associated with severance costs related to a reduction in workforce and closing of underperforming professional contractor centers as well as project expenses associated with the consolidation of certain distribution centers into our Auburn, Massachusetts, and Richmond, Virginia, locations.
Depreciation and Amortization. Depreciation and amortization expense increased by $1.3 million to $13.6 million in the nine months ended September 25, 2009 from $12.3 million in the nine months ended September 26, 2008. As a percentage of sales, depreciation and amortization was 1.7% or 40 basis points higher than the 1.3% in the comparable prior year period. These increases were due to higher depreciation resulting from higher capital spending during 2008 associated with our information systems infrastructure and distribution center consolidation and integration efforts and our Eagle Maintenance Supply, Inc. acquisition in the third quarter of 2008.
Operating Income. As a result of the foregoing, operating income decreased by $28.5 million, or 39.0%, to $44.6 million in the nine months ended September 25, 2009 from $73.1 million in the nine months ended September 26, 2008. As a percent of sales, operating income decreased to 5.5% in the nine months ended September 25, 2009 compared to 8.0% in the nine months ended September 26, 2008.
Gain on Extinguishment of Debt. Gain on extinguishment of debt was $1.3 million in the nine months ended September 25, 2009. During the nine months ended September 25, 2009, we repurchased $36.4 million of our 81/8% senior subordinated notes at an average of 93.8% of par, or $34.2 million. In addition, we repaid $55.2 million of our term loan ahead of schedule. In connection with the repurchase of our 81/8% senior subordinated notes and the term loan payment, we recorded a gain on extinguishment of debt of $1.3 million net of $0.1 million and $0.9 million in original issue discount and deferred financing costs written-off, respectively. We did not extinguish debt in the nine months ended September 26, 2008.
Interest Expense. Interest expense decreased by $7.1 million in the nine months ended September 25, 2009 to $14.7 million from $21.8 million in the nine months ended September 26, 2008. This decrease was primarily due to $105.8 million in lower debt balances outstanding compared to last year associated with the repayment of our term loan and the repurchase of our 81/8% senior subordinated notes and lower interest rates.
Interest and Other Income. Interest and other income decreased $0.8 million to $1.3 million in the nine months ended September 25, 2009 compared to $2.1 million in the nine months ended September 26, 2008. The decrease was primarily attributable to lower interest income earned resulting from lower interest rates and lower short-term investment balances.
24
Provision for Income Taxes. The effective tax rate for the nine months ended September 25, 2009 was 39.1% compared to 37.1% for the nine months ended September 26, 2008. The increase in the effective tax rate was primarily due to the decrease in a liability associated with previously unrecognized tax benefits partially offset by an increase in state taxes. During the nine months ended September 25, 2009 and September 26, 2008, we obtained resolution related to uncertain state tax positions and accordingly we adjusted the accrual previously established. As such, we made the appropriate adjustments, of which $0.1 million and $0.8 million favorably impacted our effective tax rate for the nine months ended September 25, 2009 and September 26, 2008, respectively.
Liquidity and Capital Resources
Overview
We are a holding company whose only asset is the stock of our subsidiaries. We conduct virtually all of our business operations through Interline New Jersey. Accordingly, our only material sources of cash are dividends and distributions with respect to our ownership interests in Interline New Jersey that are derived from the earnings and cash flow generated by Interline New Jersey.
We have outstanding $150.7 million of 81/8% senior subordinated notes due 2014 and we have a $330.0 million bank credit facility. The 81/8% senior subordinated notes mature on June 15, 2014 and interest is payable on June 15 and December 15 of each year. As of September 25, 2009, the 81/8% senior subordinated notes had an estimated fair market value of $147.3 million, or 97.75% of par. The bank credit facility consists of a $230.0 million 7-year term loan and a $100.0 million 6-year revolving credit facility of which a portion not exceeding $40.0 million is available in the form of letters of credit. As of September 25, 2009, Interline New Jersey had $8.5 million of letters of credit issued under the revolving loan facility and $159.2 million of aggregate principal outstanding under the term loan facility.
The debt instruments of Interline New Jersey, primarily the credit facility entered into on June 23, 2006 and the indenture governing the terms of the 81/8% senior subordinated notes, contain significant restrictions on the payment of dividends and distributions to us by Interline New Jersey. Interline New Jerseys credit facility allows it to pay dividends, make distributions to us or make investments in us in an aggregate amount not to exceed $2.0 million during any fiscal year, so long as Interline New Jersey is not in default or would be in default as a result of such payments. In addition, ordinary course distributions for overhead (up to $3.0 million annually) and taxes are permitted, as are annual payments of up to $7.5 million in respect of our stock option or other benefit plans for management or employees and (provided Interline New Jersey is not in default) aggregate payments of up to $40.0 million depending on the pro forma net leverage ratio as of the last day of the previous quarter. In addition, the indenture for the 81/8% senior subordinated notes generally restricts the ability of Interline New Jersey to pay distributions to us and to make advances to, or investments in, us to an amount generally equal to 50% of the net income of Interline New Jersey, plus an amount equal to the net proceeds from certain equity issuances, subject to compliance with a leverage ratio and no default having occurred and continuing. The indenture also contains certain permitted exceptions including (1) allowing us to pay our franchise taxes and other fees required to maintain our corporate existence, to pay for general corporate and overhead expenses and to pay expenses incurred in connection with certain financing, acquisition or disposition transactions, in an aggregate amount not to exceed $10.0 million per year; (2) allowing certain tax payments; and (3) allowing certain permitted distributions up to $75 million. For further description of the credit facility, see Credit Facility below.
Financial Condition
Working capital decreased by $62.9 million to $291.3 million as of September 25, 2009 from $354.2 million as of December 26, 2008. The decrease in working capital generated cash flows from operating activities which was used to fund day-to-day operations and pay down debt.
Cash Flow
Operating Activities. Net cash provided by operating activities was $102.2 million in the nine months ended September 25, 2009 compared to net cash provided by operating activities of $14.0 million in the nine months ended September 26, 2008.
Net cash provided by operating activities of $102.2 million in the nine months ended September 25, 2009 primarily consisted of net income of $19.8 million, adjustments for non-cash items of $31.0 million and cash provided by working capital items of $50.8 million. Adjustments for non-cash items primarily consisted of $14.2 million in depreciation and amortization of property, equipment and intangible assets, $7.3 million in bad debt expense, $6.1 million in deferred income taxes, $3.1 million in share-based compensation, $0.8 million in amortization of debt issuance costs and the write-off of $0.7 million in deferred acquisition costs due to the adoption of a new accounting standard on business combinations offset by $1.3 million in net gain from the repurchase of $36.4 million of our 81/8% senior subordinated notes and the repayment of $55.2 million of our term debt. The cash provided by working capital items primarily consisted of $26.7 million from decreased inventory levels as a result of decreased purchases associated with
25
lower demand, $16.1 million from increased trade payables balances as a result of the timing of purchases and related payments, $8.8 million from accrued expenses arising from the timing of the payment of certain expenses primarily from severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions, consolidation of certain distribution centers and closing of underperforming professional contractor centers as well as higher accrued compensation and related benefits at period-end, $4.5 million from decreased prepaid expenses and other current assets primarily from the collection of rebates from vendors, $1.3 million from the increase in income taxes and $2.4 million from timing of interest payments. These items were partially offset by $9.0 million in higher trade receivables resulting from increased sales activity during the three months ended September 25, 2009 compared to the three months ended December 26, 2008.
Net cash provided by operating activities of $14.0 million in the nine months ended September 26, 2008 primarily consisted of net income of $33.6 million and adjustments for non-cash items of $19.5 million offset by cash used in working capital items of $38.3 million. Adjustments for non-cash items primarily consisted of $12.7 million in depreciation and amortization of property, equipment and intangible assets, $3.0 million in share-based compensation, $3.6 million in bad debt expense and $0.9 million in amortization of debt issuance costs offset by $0.7 million in deferred income taxes. The cash used in working capital items primarily consisted of $39.0 million increased inventory levels to stock $12.7 million of inventory in our west coast NDC in Salt Lake City, Utah, $7.0 million to support our growing janitorial and sanitary product group and $2.9 million in other new MRO product offerings, and $16.2 million in higher trade receivables resulting from increased sales activity during the three months ended September 26, 2008 compared to the three months ended December 28, 2007. These items were partially offset by $8.4 million from increased trade payables balances as a result of increased inventory levels and the timing of purchases and related payments, $4.1 million from timing of interest payments, $2.2 million from increased accrued expenses and other current liabilities primarily from higher accrued compensation and related benefits at period-end, $1.7 million from decreased prepaid expenses and other current assets primarily from the collection of rebates from vendors and $0.5 million from the increase in income taxes.
Investing Activities. Net cash used in investing activities was $11.1 million in the nine months ended September 25, 2009 compared to net cash provided by investing activities of $17.5 million in the nine months ended September 26, 2008.
Net cash used in investing activities in the nine months ended September 25, 2009 was primarily attributable to capital expenditures associated with our distribution center consolidation projects as well as those made in the ordinary course of business of $9.1 million, net purchases of short-term investments of $1.6 million and $0.4 million in costs related to purchases of businesses, net of cash acquired.
Net cash provided by investing activities in the nine months ended September 26, 2008 was attributable to net proceeds from sales and maturities of short-term investments of $46.6 million offset by capital expenditures made in the ordinary course of business of $18.7 million and $10.3 million in costs related to purchases of businesses, net of cash acquired.
Financing Activities. Net cash used in financing activities totaled $90.3 million in the nine months ended September 25, 2009 compared to net cash used in financing activities of $0.4 million in the nine months ended September 26, 2008.
Net cash used in financing activities in the nine months ended September 25, 2009 was attributable to our debt reduction of $90.8 million primarily comprised of our repurchase of $36.4 million of our 81/8% senior subordinated notes at an average of 93.8% of par, or $34.2 million and our repayment of $56.7 million of borrowings on our term debt and capital lease obligations offset by the net increase in purchase card payable of $0.5 million.
Net cash used in financing activities in the nine months ended September 26, 2008 was attributable to our repayment of $2.7 million of borrowings on our term debt and capital lease obligations and $0.8 million in treasury stock acquired via payments to satisfy minimum statutory tax withholding requirements offset by the net increase in purchase card payable of $2.3 million and $0.8 million of proceeds from stock options exercised and excess tax benefits from share-based compensation.
Capital Expenditures
Capital expenditures were $9.1 million in the nine months ended September 25, 2009 compared to $18.7 million in the nine months ended September 26, 2008. In addition, during the nine months ended September 25, 2009, we acquired $3.0 million of property through lease incentives. Capital expenditures as a percentage of sales were 1.1% in the nine months ended September 25, 2009 compared to 2.0% in the nine months ended September 26, 2008. The decrease in capital expenditures is the result of the higher than normal levels of capital expenditures incurred during the nine months ended September 26, 2008 to upgrade our telecommunications network, the expansion of our distribution center network, the purchase of warehouse equipment and investments in our information technology systems necessary for the integration of our AmSan acquisition.
26
Credit Facility
Borrowings under the term loan and the delayed draw facility bear interest, at Interline New Jerseys option, at either LIBOR plus 1.75% or at the alternate base rate, which is the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.50%, plus 0.75%. Borrowings under the revolving credit facility bear interest, at Interline New Jerseys option, at either LIBOR plus 1.75% or at the alternate base rate plus 0.50%. As of September 25, 2009, the weighted average interest rate in effect with respect to the term loan and the delayed draw facility was 2.03% for the LIBOR option and 4.00% for the alternate base rate option. Outstanding letters of credit under the revolving credit facility are subject to a per annum fee equal to the applicable margin under the revolving credit facility. The interest rate spread is subject to a pricing grid that is based on the ratio of net total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the credit facility. The term loan and the delayed draw facility mature on June 23, 2013 and the revolving loan facility matures on June 23, 2012. In accordance with the terms of our credit facility, amounts under the term loan and the delayed draw facility are due and payable in quarterly installments equal to 1.0% of the original principal amount on an annual basis through June 23, 2013, with the balance payable in one final installment at the maturity date. As a result of our repayments of borrowings on our term debt, we are not required to make another principal payment until the debt matures in 2013.
The bank credit facility, which is secured by substantially all of the assets of Interline New Jersey and is guaranteed by us and by the domestic subsidiaries of Interline New Jersey, contains affirmative, negative and financial covenants that limit Interline New Jerseys ability to incur additional indebtedness, pay dividends on its common stock or redeem, repurchase or retire its common stock or subordinated indebtedness, make certain investments, sell assets, and consolidate, merge or transfer assets, and that require Interline New Jersey to maintain certain financial ratios as of the last day of each fiscal quarter, including a minimum ratio based on an adjusted consolidated EBITDA, as defined by the credit facility, to consolidated cash interest expense and a maximum ratio of net total indebtedness to an adjusted consolidated EBITDA, as defined by the credit facility. The maximum ratio of net total indebtedness to adjusted consolidated EBITDA, as defined by the credit facility, was 3.5 times. Interline New Jersey and the Company were in compliance with all covenants at September 25, 2009.
In connection with the bank credit facility, Interline New Jersey is required to pay administrative fees, commitment fees, letter of credit issuance and administration fees and certain expenses and to provide certain indemnities, all of which are customary for financings of this type. The bank credit facility also allows for certain incremental term loans and incremental commitments under the revolving credit facility which are available to Interline New Jersey to repay indebtedness and make acquisitions if certain conditions, including various financial ratios are met.
Liquidity
Historically, our capital requirements have been for debt service obligations, working capital requirements, including inventory, accounts receivable and accounts payable, acquisitions, the expansion and maintenance of our distribution network and upgrades of our information systems. We expect this to continue in the foreseeable future. Historically, we have funded these requirements through cash flow generated from operating activities and funds borrowed under our credit facility. We expect our cash on hand, cash flow from operations and loan availability under our credit facility to be our primary source of funds in the future. Letters of credit, which are issued under the revolving credit facility, are used to support payment obligations incurred for our general corporate purposes.
As of September 25, 2009, we had $31.8 million of availability under Interline New Jerseys $100.0 million revolving credit facility after the limitation under the bank credit facilitys ratio of net total indebtedness to adjusted consolidated EBITDA, as defined by the credit facility. Prior to December 26, 2008, one of the financial institutions that support our revolving credit facility failed, effectively limiting the size of the revolver commitment to $83.0 million. In the fourth quarter of 2009, that institutions commitment was assigned to another lender. As a result, our current revolver commitment is again $100.0 million. As of September 25, 2009, we had $65.3 million of total cash on hand and permitted investments (including $25.0 million to be netted against debt for purposes of covenant compliance).
We believe that cash and cash equivalents, cash flow from operations and available borrowing capacity under our credit facility will be adequate to finance our ongoing operational cash flow needs and debt service obligations for the next twelve months.
Contractual Obligations
Our contractual obligations are disclosed in our Annual Report on Form 10-K for the year ended December 26, 2008 filed with the SEC. Except for the repurchase of $36.4 million of our 81/8% senior subordinated notes and repayment of $55.2 million of our term debt as discussed above and in Note 3 to our unaudited condensed consolidated financial statements, there have been no material changes to our contractual obligations since December 26, 2008.
27
The following table sets forth our contractual obligations with respect to our 81/8% senior subordinated notes and term debt as of September 25, 2009 (in thousands):
|
|
|
|
Less than |
|
2 - 3 |
|
4 - 5 |
|
After 5 |
|
|||||
|
|
Total |
|
1 year |
|
years |
|
years |
|
years |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
81/8% senior subordinated notes |
|
$ |
150,681 |
|
$ |
|
|
$ |
|
|
$ |
150,681 |
|
$ |
|
|
Term debt |
|
160,863 |
|
1,638 |
|
|
|
159,225 |
|
|
|
|||||
|
|
$ |
311,544 |
|
$ |
1,638 |
|
$ |
|
|
$ |
309,906 |
|
$ |
|
|
Critical Accounting Policies
In preparing the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make certain estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, including the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. On an ongoing basis, management evaluates these estimates and assumptions. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable at the time the estimates and assumptions are made. Actual results may differ from these estimates and assumptions under different circumstances or conditions.
Our critical accounting policies are included in our Annual Report on Form 10-K for the year ended December 26, 2008 filed with the SEC. During the three months ended September 25, 2009, there were no significant changes to any of our critical accounting policies.
Recently Adopted Accounting Standards
Effective December 27, 2008, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820-10-65, Fair Value Measurements and Disclosures: Transition related to FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (formerly FASB Staff Position 157-2, Effective Date of FASB Statement No. 157). ASC 820-10-65 amends prior guidance to defer the effective date of fair value measurements and disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of ASC 820-10-65 did not have any impact on our financial position, results of operations and cash flows.
Effective December 27, 2008, we adopted ASC 805-10, Business Combinations (formerly FASB Statement No. 141 (revised 2007), Business Combinations). ASC 805-10 replaces prior guidance on business combinations and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. ASC 805-10 also establishes disclosure requirements that enable users to evaluate the nature and financial effects of the business combination. As a result of the adoption of, and in accordance with ASC 805-10, we expensed $0.7 million in deferred acquisition costs during the three months ended March 27, 2009, which are included as part of selling, general and administrative expense.
Effective December 27, 2008, we adopted ASC 810-10-65, Consolidation: Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (formerly FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51). ASC 810-10-65 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. ASC 810-10-65 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810-10-65 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but affects only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The adoption of ASC 810-10-65 did not have any impact on our financial position, results of operations and cash flows.
Effective December 27, 2008, we adopted ASC 815-10-65, Derivatives and Hedging: Transition and Effective Date Related to FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (formerly FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133). ASC 815-10-65 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financial position, financial
28
performance and cash flows. The adoption of ASC 815-10-65 did not have any impact on our financial position, results of operations and cash flows.
In April 2009, the FASB issued ASC 825-10-65, Financial Instruments: Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (formerly FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments). ASC 825-10-65 extends the disclosure requirements regarding the fair value of financial instruments to interim financial statements of publicly traded companies. We adopted the provisions of ASC 825-10-65 for the interim period ended June 26, 2009. The adoption of ASC 825-10-65 did not have any impact on our financial position, results of operations and cash flows.
In May 2009, the FASB issued ASC 855-10, Subsequent Events (formerly FASB Statement No. 165, Subsequent Events). ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855-10 sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855-10 also requires disclosure of the date through which an entity has evaluated subsequent events. We adopted the provisions of ASC 855-10 for the interim period ended June 26, 2009. The adoption of ASC 855-10 did not have any impact on our financial position, results of operations and cash flows.
In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Standards (formerly FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162). ASC 105-10 establishes the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental accounting principles generally accepted in the United States (US GAAP). The Codification is effective for interim and annual periods ending after September 15, 2009. After the Codification launch on July 1, 2009 only one level of authoritative US GAAP exists, other than guidance issued by the SEC. All other accounting literature excluded from the Codification is considered non-authoritative. While not intended to change US GAAP, the Codification significantly changes the way in which the accounting literature is organized. It is structured by accounting topic to help accountants and auditors more quickly identify the guidance that applies to a specific accounting issue. We adopted the provisions of ASC 105-10 for the interim period ended September 25, 2009. The adoption of the provisions of ASC 105-10 did not have a material impact on our financial position, results of operations or cash flows. However, because the Codification completely replaces existing standards, it affects the way US GAAP is referenced by us in our financial statements and accounting policies.
Accounting Standards Not Yet Adopted
In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. FAS 167 is effective for periods beginning after November 15, 2009. The provisions of FAS 167 will not have any impact on our financial position, results or operations or cash flows.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
We are aware of the potentially unfavorable effects inflationary pressures may create through higher product and material costs, higher asset replacement costs and related depreciation and higher interest rates. In addition, our operating performance is affected by price fluctuations in copper, oil, stainless steel, aluminum, zinc, plastic and PVC and other commodities and raw materials. We seek to minimize the effects of inflation and changing prices through economies of purchasing and inventory management resulting in cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins. However, such commodity price fluctuations have from time to time created cyclicality in our financial performance, and could continue to do so in the future. In addition, our use of priced catalogs may not allow us to offset such cost increases quickly, resulting in a decrease in gross margins and profit.
29
Interest Rate Risk
Our variable rate term debt is sensitive to changes in the general level of interest rates. As of September 25, 2009, the weighted average interest rate in effect with respect to our $159.2 million variable rate term debt was 2.03% for the LIBOR option and 4.00% for the alternate base rate option. While our variable rate term debt obligations expose us to the risk of rising interest rates, we do not believe that the potential exposure is material to our overall financial performance or results of operations. Based on the outstanding variable rate term debt as of September 25, 2009, a 1.0% annual increase or decrease in current market interest rates would have the effect of causing a $1.2 million pre-tax change to our statement of operations for the nine months ended September 25, 2009.
The fair market value of our fixed rate debt is subject to interest rate risk. As of September 25, 2009, the fair market value of our $150.7 million 81/8% senior subordinated notes was approximately $147.3 million, or 97.75% of par.
Foreign Currency Exchange Risk
The majority of our purchases from foreign-based suppliers are from China and other countries in Asia and are transacted in U.S. dollars. Accordingly, our exposure to risk from foreign currency exchange rates was not material as of September 25, 2009.
Derivative Financial Instruments
As of September 25, 2009, we did not have any interest rate swap exchange agreements, or swaps. Historically, we entered into derivative financial instruments from time to time, including interest rate exchange agreements, or swaps, to manage our exposure to fluctuations in interest rates on our debt. Under our former swap agreements, we paid a fixed rate on the notional amount to our banks and the banks paid us a variable rate on the notional amount equal to a base LIBOR rate.
We periodically evaluate the costs and benefits of any changes in our interest rate risk. Based on such evaluation, we may enter into new interest rate swaps to manage our interest rate exposure. Our derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of corporate risk-management policies.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 25, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 25, 2009, our disclosure controls and procedures were effective to (1) ensure that material information disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 25, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
30
We are involved in various legal proceedings that have arisen in the ordinary course of our business and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material effect upon our consolidated financial position, results of operations or liquidity.
For information regarding factors that could affect our financial position, results of operations and cash flows, see the risk factors discussion provided in our Annual Report on Form 10-K for the year ended December 26, 2008 in Part I. Item 1A. Risk Factors. See also Part I. Item 2Forward Looking Statements above.
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 26, 2008.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer
The following table summarizes repurchases of our stock during the three months ended September 25, 2009, comprising entirely of (i) shares sold to us to satisfy employee tax withholding obligations that arose upon the vesting of restricted share units and restricted stock awards; and (ii) shares of unvested forfeited restricted stock awards returned to us:
Period |
|
Total |
|
Average
Price |
|
Total
Number of |
|
Maximum
Number of |
|
|
July 2009 |
|
|
|
|
|
|
|
|
|
|
(June 27 July 24) |
|
1,598 |
|
$ |
13.05 |
|
|
|
|
|
August 2009 |
|
|
|
|
|
|
|
|
|
|
(July 25 August 21) |
|
|
|
|
|
|
|
|
|
|
September 2009 |
|
|
|
|
|
|
|
|
|
|
(August 22 September 25) |
|
2,295 |
|
21.29 |
|
|
|
|
|
|
Total |
|
3,893 |
|
$ |
17.91 |
|
|
|
|
|
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
None.
31
The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:
31.1 |
|
Certification of the Chief Executive Officer of Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
31.2 |
|
Certification of the Chief Financial Officer of Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
32.1 |
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
32.2 |
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
32
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
INTERLINE BRANDS, INC. |
|
|
Registrant |
|
|
|
|
|
|
Date: November 2, 2009 |
By: |
/S/ THOMAS J. TOSSAVAINEN |
|
|
Thomas J. Tossavainen |
|
|
Chief Financial Officer |
|
|
(Duly Authorized Signatory, Principal Financial and Accounting Officer) |
33