Attached files
file | filename |
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EX-31.1 - EX-31.1 - INTERLINE BRANDS, INC./DE | a10-17370_1ex31d1.htm |
EX-12.1 - EX-12.1 - INTERLINE BRANDS, INC./DE | a10-17370_1ex12d1.htm |
EX-32.2 - EX-32.2 - INTERLINE BRANDS, INC./DE | a10-17370_1ex32d2.htm |
EX-31.2 - EX-31.2 - INTERLINE BRANDS, INC./DE | a10-17370_1ex31d2.htm |
EX-32.1 - EX-32.1 - INTERLINE BRANDS, INC./DE | a10-17370_1ex32d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 2010
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.) |
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701 San Marco Boulevard |
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Jacksonville, Florida |
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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 29, 2010, there were 33,081,390 shares of the registrants common stock outstanding (excluding 122,300 shares held in treasury), par value $0.01.
ITEM |
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PAGE |
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Condensed Consolidated Balance Sheets |
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1 |
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2 |
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3 |
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4 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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19 |
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26 |
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27 |
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28 |
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28 |
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28 |
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28 |
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28 |
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29 |
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30 |
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 24, 2010 AND DECEMBER 25, 2009
(in thousands, except share and per share data)
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September 24, |
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December 25, |
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2010 |
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2009 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
104,304 |
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$ |
99,223 |
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Short-term investments |
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469 |
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1,479 |
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Accounts receivable - trade (net of allowance for doubtful accounts of $10,070 and $12,975) |
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132,908 |
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120,004 |
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Inventory |
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207,240 |
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173,422 |
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Prepaid expenses and other current assets |
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24,223 |
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18,552 |
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Deferred income taxes |
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17,123 |
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16,459 |
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Total current assets |
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486,267 |
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429,139 |
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Property and equipment, net |
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51,445 |
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46,804 |
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Goodwill |
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319,151 |
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319,006 |
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Other intangible assets, net |
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119,707 |
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124,835 |
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Other assets |
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9,150 |
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9,054 |
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Total assets |
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$ |
985,720 |
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$ |
928,838 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
95,225 |
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$ |
85,982 |
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Accrued expenses and other current liabilities |
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49,398 |
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41,715 |
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Accrued interest |
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3,658 |
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1,050 |
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Income taxes payable |
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897 |
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1,285 |
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Current portion of long-term debt |
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1,590 |
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Capital lease - current |
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28 |
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222 |
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Total current liabilities |
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149,206 |
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131,844 |
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Long-Term Liabilities: |
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Deferred income taxes |
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42,261 |
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40,369 |
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Long-term debt and capital lease, net of current portion |
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304,202 |
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304,092 |
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Other liabilities |
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790 |
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798 |
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Total liabilities |
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496,459 |
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477,103 |
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Commitments and contingencies |
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Senior preferred stock; $0.01 par value, 20,000,000 authorized; none outstanding as of September 24, 2010 and December 25, 2009 |
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Stockholders Equity: |
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Common stock; $0.01 par value, 100,000,000 authorized; 33,143,690 issued and 33,021,390 outstanding as of September 24, 2010 and 32,640,957 issued and 32,524,251 outstanding as of December 25, 2009 |
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331 |
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326 |
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Additional paid-in capital |
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588,027 |
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576,747 |
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Accumulated deficit |
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(98,572 |
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(124,745 |
) |
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Accumulated other comprehensive income |
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1,648 |
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1,483 |
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Treasury stock, at cost, 122,300 shares as of September 24, 2010 and 116,706 as of December 25, 2009 |
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(2,173 |
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(2,076 |
) |
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Total stockholders equity |
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489,261 |
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451,735 |
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Total liabilities and stockholders equity |
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$ |
985,720 |
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$ |
928,838 |
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See accompanying notes to condensed consolidated financial statements.
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 24, 2010 AND SEPTEMBER 25, 2009
(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 24, |
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September 25, |
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September 24, |
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September 25, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
276,821 |
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$ |
277,948 |
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$ |
792,193 |
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$ |
804,661 |
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Cost of sales |
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171,991 |
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175,726 |
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490,649 |
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507,528 |
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Gross profit |
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104,830 |
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102,222 |
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301,544 |
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297,133 |
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Operating Expenses: |
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Selling, general and administrative expenses |
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76,987 |
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76,191 |
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231,686 |
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239,009 |
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Depreciation and amortization |
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4,981 |
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4,535 |
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14,667 |
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13,561 |
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Total operating expenses |
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81,968 |
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80,726 |
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246,353 |
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252,570 |
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Operating income |
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22,862 |
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21,496 |
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55,191 |
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44,563 |
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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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(4,373 |
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(4,577 |
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(13,092 |
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(14,673 |
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Interest and other income |
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541 |
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554 |
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1,266 |
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1,284 |
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Income before income taxes |
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19,030 |
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17,225 |
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43,365 |
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32,469 |
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Income taxes |
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7,518 |
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6,794 |
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17,192 |
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12,694 |
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Net income |
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$ |
11,512 |
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$ |
10,431 |
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$ |
26,173 |
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$ |
19,775 |
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Earnings Per Share: |
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Basic |
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$ |
0.35 |
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$ |
0.32 |
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$ |
0.79 |
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$ |
0.61 |
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Diluted |
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$ |
0.34 |
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$ |
0.32 |
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$ |
0.78 |
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$ |
0.60 |
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Weighted-Average Shares Outstanding: |
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Basic |
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33,084,756 |
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32,511,597 |
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32,931,814 |
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32,493,797 |
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Diluted |
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33,796,615 |
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33,070,041 |
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33,685,652 |
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32,826,466 |
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See accompanying notes to condensed consolidated financial statements.
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 24, 2010 AND SEPTEMBER 25, 2009
(in thousands)
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September 24, |
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September 25, |
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2010 |
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2009 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
26,173 |
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$ |
19,775 |
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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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14,970 |
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14,169 |
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Amortization of debt issuance costs |
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775 |
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829 |
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Amortization of discount on 81/8% senior subordinated notes |
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115 |
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108 |
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Gain on extinguishment of debt, net of discount |
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(1,295 |
) |
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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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3,299 |
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3,075 |
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Excess tax benefits from share-based compensation |
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(775 |
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(1 |
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Deferred income taxes |
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1,270 |
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6,113 |
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Provision for doubtful accounts |
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3,629 |
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7,330 |
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Loss on disposal of property and equipment |
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129 |
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13 |
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Changes in assets and liabilities which provided (used) cash, net of business acquired: |
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Accounts receivable - trade |
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(16,499 |
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(8,959 |
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Inventory |
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(33,756 |
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26,720 |
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Prepaid expenses and other current assets |
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(5,670 |
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4,478 |
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Other assets |
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(97 |
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774 |
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Accounts payable |
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9,235 |
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16,061 |
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Accrued expenses and other current liabilities |
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6,691 |
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8,751 |
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Accrued interest |
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2,609 |
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2,394 |
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Income taxes |
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345 |
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1,321 |
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Other liabilities |
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6 |
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(145 |
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Net cash provided by operating activities |
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12,449 |
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102,183 |
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Cash Flows from Investing Activities: |
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Purchase of property and equipment, net |
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(12,937 |
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(9,078 |
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Purchase of short-term investments |
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(3,002 |
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(1,830 |
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Proceeds from sales and maturities of short-term investments |
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4,012 |
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203 |
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Purchase of businesses, net of cash acquired |
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(145 |
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(381 |
) |
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Net cash used in investing activities |
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(12,072 |
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(11,086 |
) |
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Cash Flows from Financing Activities: |
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(Decrease) Increase in purchase card payable, net |
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(1,463 |
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492 |
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Repayment of term debt |
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(1,590 |
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(56,488 |
) |
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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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(198 |
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(177 |
) |
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Proceeds from stock options exercised |
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7,211 |
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17 |
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Excess tax benefits from share-based compensation |
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775 |
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1 |
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Treasury stock acquired to satisfy minimum tax withholding requirements |
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(97 |
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(34 |
) |
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Net cash provided by (used in) financing activities |
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4,638 |
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(90,346 |
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Effect of exchange rate changes on cash and cash equivalents |
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66 |
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216 |
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Net increase in cash and cash equivalents |
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5,081 |
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967 |
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Cash and cash equivalents at beginning of period |
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99,223 |
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62,724 |
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Cash and cash equivalents at end of period |
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$ |
104,304 |
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$ |
63,691 |
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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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$ |
9,410 |
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$ |
11,278 |
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Income taxes, net of refunds |
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$ |
15,644 |
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$ |
5,371 |
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Schedule of Non-Cash Investing and Financing Activities: |
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Property acquired through lease incentives |
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$ |
2,445 |
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$ |
3,009 |
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Adjustments to liabilities assumed and goodwill on businesses acquired |
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$ |
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$ |
732 |
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See accompanying notes to condensed consolidated financial statements.
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 24, 2010 AND SEPTEMBER 25, 2009
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 distribution centers and professional contractor showrooms located throughout the United States and Canada, 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 approximately 98% of the U.S. population and same-day delivery service to most major metropolitan markets in the U.S.
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 (US GAAP) 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 25, 2009 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 US GAAP 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 and income taxes, lower of cost or market and obsolescence reserves for inventory, reserves for self-insurance programs and valuation of goodwill and other intangible assets. Actual results could differ from those estimates.
The Company evaluated subsequent events through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.
Fair Value of Financial Instruments
The Company 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. Disclosure about how fair value is determined for assets and liabilities is based on a hierarchy established from the significant levels of inputs as follows:
Level 1 |
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quoted prices in active markets for identical assets or liabilities; |
Level 2 |
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quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
Level 3 |
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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.
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 24, 2010, all of the Companys pre-refunded municipal bonds have contractual maturities of less than one year. The following table shows the original cost and fair value of the Companys short-term investments as of September 24, 2010 and December 25, 2009 (in thousands):
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September 24, 2010 |
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December 25, 2009 |
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Description |
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Original |
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Fair |
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Original |
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Fair |
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Pre-refunded municipal bonds (1) |
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$ |
469 |
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$ |
469 |
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$ |
1,478 |
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$ |
1,479 |
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(1) Fair value estimated using Level 1 inputs. 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 carrying amount and the fair value of term debt and the 81/8% senior subordinated notes as of September 24, 2010 and December 25, 2009 (in thousands):
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September 24, 2010 |
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December 25, 2009 |
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Description |
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Carrying |
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Fair |
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Carrying |
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Fair |
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Term debt (1) |
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$ |
154,225 |
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$ |
148,431 |
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$ |
154,225 |
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$ |
145,771 |
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81/8% senior subordinated notes, net of unamortized discount (2) |
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149,977 |
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154,071 |
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149,863 |
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151,434 |
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$ |
304,202 |
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$ |
302,502 |
|
$ |
304,088 |
|
$ |
297,205 |
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(1) Fair value estimated using Level 2 inputs. The fair value of term loans is estimated using a discounted cash flow analysis based on borrowing rates available to companies with similar credit ratings for loans with similar terms and maturity.
(2) Fair value estimated using Level 1 inputs. The fair value of the 81/8% senior subordinated notes is determined by quoted market prices as they are publicly traded.
Segment Information
The Company has one operating segment and, therefore, one reportable segment, the distribution of MRO products.
The Companys net sales for the three and nine months ended September 24, 2010 and September 25, 2009 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 24, |
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September 25, |
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September 24, |
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September 25, |
|
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Product Category |
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2010 |
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2009 |
|
2010 |
|
2009 |
|
||||
Janitorial and sanitary |
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$ |
78,520 |
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$ |
80,546 |
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$ |
226,629 |
|
$ |
229,105 |
|
Plumbing |
|
70,581 |
|
71,379 |
|
212,152 |
|
218,418 |
|
||||
Heating, ventilation and air conditioning |
|
33,874 |
|
33,891 |
|
87,121 |
|
86,139 |
|
||||
Electrical and lighting |
|
20,658 |
|
22,811 |
|
60,800 |
|
66,232 |
|
||||
Appliances and parts |
|
18,255 |
|
17,954 |
|
48,829 |
|
49,030 |
|
||||
Security |
|
12,987 |
|
13,449 |
|
37,546 |
|
39,502 |
|
||||
Hardware and tools |
|
12,474 |
|
12,885 |
|
35,623 |
|
37,140 |
|
||||
Other |
|
29,472 |
|
25,033 |
|
83,493 |
|
79,095 |
|
||||
Total |
|
$ |
276,821 |
|
$ |
277,948 |
|
$ |
792,193 |
|
$ |
804,661 |
|
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(1) |
|
Balance at |
|
||||
$ |
12,975 |
|
$ |
3,629 |
|
$ |
(6,534 |
) |
$ |
10,070 |
|
(1) Accounts receivable written-off as uncollectible, net of recoveries. The majority of the accounts written-off had been fully reserved for in prior periods.
3. RESTRUCTURING AND ACQUISITION ACCRUALS
Restructuring Accruals
Since 2008, the Company has undertaken certain significant changes in its cost structure. These operational initiatives focus on reducing the Companys overall operating cost structure. The following table summarizes the changes to accruals, which are included in accrued expenses and other current liabilities, during the nine months ended September 24, 2010 (in thousands):
|
|
Employee |
|
Facility |
|
Total |
|
|||
Balance at December 25, 2009 |
|
$ |
177 |
|
$ |
1,324 |
|
$ |
1,501 |
|
Payments |
|
(72 |
) |
(675 |
) |
(747 |
) |
|||
Adjustments(1) |
|
|
|
(69 |
) |
(69 |
) |
|||
Balance at September 24, 2010 |
|
$ |
105 |
|
$ |
580 |
|
$ |
685 |
|
(1) Adjustments reflect a change in estimate of remaining liabilities for facility closing and other costs.
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 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 25, 2009 |
|
$ |
55 |
|
$ |
1,340 |
|
$ |
1,395 |
|
Payments |
|
(11 |
) |
(39 |
) |
(50 |
) |
|||
Balance at September 24, 2010 |
|
$ |
44 |
|
$ |
1,301 |
|
$ |
1,345 |
|
4. 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. The impact of participating securities on the calculation is insignificant.
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.
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 24, |
|
September 25, |
|
September 24, |
|
September 25, |
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Weighted average shares outstanding - basic |
|
33,084,756 |
|
32,511,597 |
|
32,931,814 |
|
32,493,797 |
|
Dilutive shares resulting from: |
|
|
|
|
|
|
|
|
|
Stock options |
|
315,464 |
|
256,724 |
|
371,721 |
|
115,929 |
|
Restricted stock |
|
437 |
|
594 |
|
813 |
|
205 |
|
Restricted share units |
|
395,958 |
|
301,126 |
|
381,304 |
|
216,535 |
|
Weighted average shares outstanding - diluted |
|
33,796,615 |
|
33,070,041 |
|
33,685,652 |
|
32,826,466 |
|
During the three months ended September 24, 2010 and September 25, 2009, stock options to purchase 1,849,705 shares and 1,848,540 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 24, 2010 and September 25, 2009, stock options to purchase 1,910,550 shares and 2,998,537 shares of common stock, respectively, were excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive.
5. COMPREHENSIVE INCOME
Comprehensive income refers to revenues, expenses, gains and losses that are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders equity, net of tax. The components of comprehensive income for the three and nine months ended September 24, 2010 and September 25, 2009 are as follows (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 24, |
|
September 25, |
|
September 24, |
|
September 25, |
|
||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
Net income |
|
$ |
11,512 |
|
$ |
10,431 |
|
$ |
26,173 |
|
$ |
19,775 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
||||
Amortization of unrecognized gain on employee benefits |
|
5 |
|
3 |
|
13 |
|
9 |
|
||||
Foreign currency translation |
|
68 |
|
305 |
|
152 |
|
545 |
|
||||
Total comprehensive income |
|
$ |
11,585 |
|
$ |
10,739 |
|
$ |
26,338 |
|
$ |
20,329 |
|
6. SHARE-BASED COMPENSATION
During the three months ended September 24, 2010 and September 25, 2009, share-based compensation expense was $1.3 million and $1.1 million, respectively. During the nine months ended September 24, 2010 and September 25, 2009, share-based compensation expense was $3.3 million and $3.1 million, respectively. As of September 24, 2010, there was $8.8 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 1.9 years.
The Company did not grant stock options during the three months ended September 24, 2010 and September 25, 2009. During the nine months ended September 24, 2010 and September 25, 2009, the Company granted 292,473 and 503,026 stock options, respectively, with a weighted-average grant date fair value of $7.21 and $3.46, 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.
The Black-Scholes weighted-average assumptions were as follows:
|
|
Nine Months Ended |
|
||
|
|
September 24, |
|
September 25, |
|
|
|
2010 |
|
2009 |
|
Expected volatility |
|
41.5 |
% |
43.0 |
% |
Expected dividends |
|
0.0 |
% |
0.0 |
% |
Risk-free interest rate |
|
2.4 |
% |
2.1 |
% |
Expected life (in years) |
|
5.0 |
|
5.0 |
|
Stock options exercised during the three months ended September 24, 2010 and September 25, 2009 were 15,924 and 1,150, respectively, with an intrinsic value of $0.1 million and less than $0.1 million, respectively. Stock options exercised during the nine months ended September 24, 2010 and September 25, 2009 were 481,573 and 1,150, respectively, with an intrinsic value of $2.1 million and less than $0.1 million, respectively.
A summary status of restricted stock, restricted share units and deferred stock units as of September 24, 2010 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 25, 2009 |
|
10,350 |
|
$ |
23.49 |
|
452,376 |
|
$ |
8.69 |
|
68,310 |
|
$ |
18.66 |
|
Granted |
|
|
|
|
|
172,421 |
|
17.99 |
|
24,824 |
|
20.95 |
|
|||
Vested |
|
(2,300 |
) |
22.27 |
|
(19,548 |
) |
21.92 |
|
|
|
|
|
|||
Forfeited |
|
|
|
|
|
(17,773 |
) |
7.89 |
|
|
|
|
|
|||
Outstanding at September 24, 2010 |
|
8,050 |
|
$ |
23.84 |
|
587,476 |
|
$ |
11.07 |
|
93,134 |
|
$ |
19.27 |
|
Restricted stock awards vested during the nine months ended September 24, 2010 and September 25, 2009 were 2,300 and 2,550, respectively, with a fair value of less than $0.1 million in each period.
Restricted share units vested during the nine months ended September 24, 2010 and September 25, 2009 were 19,548 and 9,500, respectively, with a fair value of $0.3 million and $0.1 million, respectively.
7. CONTINGENCIES
Contingent Liabilities
As of September 24, 2010 and December 25, 2009, the Company was contingently liable for unused letters of credit aggregating $8.6 million and $9.5 million, respectively.
Legal Proceedings
The Company is involved in various legal proceedings in the ordinary course of its business that are not anticipated to have a material adverse effect on the Companys results of operations or financial position.
8. 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. and Glenwood Acquisition LLC (collectively the Guarantor Subsidiaries).
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 24, 2010, 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.
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 24, 2010
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
104,222 |
|
$ |
82 |
|
$ |
|
|
$ |
104,304 |
|
Short-term investments |
|
|
|
469 |
|
|
|
|
|
469 |
|
|||||
Accounts receivable - trade |
|
|
|
132,908 |
|
|
|
|
|
132,908 |
|
|||||
Inventory |
|
|
|
207,240 |
|
|
|
|
|
207,240 |
|
|||||
Intercompany receivable |
|
|
|
|
|
141,710 |
|
(141,710 |
) |
|
|
|||||
Other current assets |
|
|
|
41,345 |
|
1 |
|
|
|
41,346 |
|
|||||
Total current assets |
|
|
|
486,184 |
|
141,793 |
|
(141,710 |
) |
486,267 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Property and equipment, net |
|
|
|
51,445 |
|
|
|
|
|
51,445 |
|
|||||
Goodwill |
|
|
|
319,151 |
|
|
|
|
|
319,151 |
|
|||||
Other intangible assets, net |
|
|
|
119,707 |
|
|
|
|
|
119,707 |
|
|||||
Investment in subsidiaries |
|
489,261 |
|
146,842 |
|
|
|
(636,103 |
) |
|
|
|||||
Other assets |
|
|
|
2,280 |
|
6,870 |
|
|
|
9,150 |
|
|||||
Total assets |
|
$ |
489,261 |
|
$ |
1,125,609 |
|
$ |
148,663 |
|
$ |
(777,813 |
) |
$ |
985,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Accounts payable |
|
$ |
|
|
$ |
95,225 |
|
$ |
|
|
$ |
|
|
$ |
95,225 |
|
Accrued expenses and other current liabilities |
|
|
|
52,132 |
|
1,821 |
|
|
|
53,953 |
|
|||||
Intercompany payable |
|
|
|
141,710 |
|
|
|
(141,710 |
) |
|
|
|||||
Current portion of long-term debt and capital lease |
|
|
|
28 |
|
|
|
|
|
28 |
|
|||||
Total current liabilities |
|
|
|
289,095 |
|
1,821 |
|
(141,710 |
) |
149,206 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt and capital lease, net of current portion |
|
|
|
304,202 |
|
|
|
|
|
304,202 |
|
|||||
Other liabilities |
|
|
|
43,051 |
|
|
|
|
|
43,051 |
|
|||||
Total liabilities |
|
|
|
636,348 |
|
1,821 |
|
(141,710 |
) |
496,459 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Senior preferred stock |
|
|
|
839,460 |
|
|
|
(839,460 |
) |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stockholders equity (deficit) |
|
489,261 |
|
(350,199 |
) |
146,842 |
|
203,357 |
|
489,261 |
|
|||||
Total liabilities and stockholders equity |
|
$ |
489,261 |
|
$ |
1,125,609 |
|
$ |
148,663 |
|
$ |
(777,813 |
) |
$ |
985,720 |
|
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 25, 2009
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
98,487 |
|
$ |
736 |
|
$ |
|
|
$ |
99,223 |
|
Short-term investments |
|
|
|
1,479 |
|
|
|
|
|
1,479 |
|
|||||
Accounts receivable - trade |
|
|
|
117,361 |
|
2,644 |
|
(1 |
) |
120,004 |
|
|||||
Inventory |
|
|
|
171,063 |
|
2,359 |
|
|
|
173,422 |
|
|||||
Intercompany receivable |
|
|
|
|
|
130,370 |
|
(130,370 |
) |
|
|
|||||
Other current assets |
|
|
|
34,826 |
|
185 |
|
|
|
35,011 |
|
|||||
Total current assets |
|
|
|
423,216 |
|
136,294 |
|
(130,371 |
) |
429,139 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Property and equipment, net |
|
|
|
46,619 |
|
185 |
|
|
|
46,804 |
|
|||||
Goodwill |
|
|
|
312,252 |
|
6,754 |
|
|
|
319,006 |
|
|||||
Other intangible assets, net |
|
|
|
122,457 |
|
2,378 |
|
|
|
124,835 |
|
|||||
Investment in subsidiaries |
|
451,735 |
|
150,593 |
|
|
|
(602,328 |
) |
|
|
|||||
Other assets |
|
|
|
2,285 |
|
6,769 |
|
|
|
9,054 |
|
|||||
Total assets |
|
$ |
451,735 |
|
$ |
1,057,422 |
|
$ |
152,380 |
|
$ |
(732,699 |
) |
$ |
928,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Accounts payable |
|
$ |
|
|
$ |
85,983 |
|
$ |
|
|
$ |
(1 |
) |
$ |
85,982 |
|
Accrued expenses and other current liabilities |
|
|
|
42,308 |
|
1,742 |
|
|
|
44,050 |
|
|||||
Intercompany payable |
|
|
|
130,370 |
|
|
|
(130,370 |
) |
|
|
|||||
Current portion of long-term debt and capital lease |
|
|
|
1,812 |
|
|
|
|
|
1,812 |
|
|||||
Total current liabilities |
|
|
|
260,473 |
|
1,742 |
|
(130,371 |
) |
131,844 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt and capital lease, net of current portion |
|
|
|
304,092 |
|
|
|
|
|
304,092 |
|
|||||
Other liabilities |
|
|
|
41,122 |
|
45 |
|
|
|
41,167 |
|
|||||
Total liabilities |
|
|
|
605,687 |
|
1,787 |
|
(130,371 |
) |
477,103 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Senior preferred stock |
|
|
|
757,355 |
|
|
|
(757,355 |
) |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stockholders equity (deficit) |
|
451,735 |
|
(305,620 |
) |
150,593 |
|
155,027 |
|
451,735 |
|
|||||
Total liabilities and stockholders equity |
|
$ |
451,735 |
|
$ |
1,057,422 |
|
$ |
152,380 |
|
$ |
(732,699 |
) |
$ |
928,838 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 24, 2010
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries(1) |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
|
|
$ |
276,821 |
|
$ |
|
|
$ |
|
|
$ |
276,821 |
|
Cost of sales |
|
|
|
171,991 |
|
|
|
|
|
171,991 |
|
|||||
Gross profit |
|
|
|
104,830 |
|
|
|
|
|
104,830 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative expenses |
|
|
|
81,088 |
|
7 |
|
(4,108 |
) |
76,987 |
|
|||||
Depreciation and amortization |
|
|
|
4,981 |
|
|
|
|
|
4,981 |
|
|||||
Other operating income |
|
|
|
|
|
(4,108 |
) |
4,108 |
|
|
|
|||||
Equity earnings of subsidiaries |
|
(11,512 |
) |
(3,436 |
) |
|
|
14,948 |
|
|
|
|||||
Total operating expenses |
|
(11,512 |
) |
82,633 |
|
(4,101 |
) |
14,948 |
|
81,968 |
|
|||||
Operating income |
|
11,512 |
|
22,197 |
|
4,101 |
|
(14,948 |
) |
22,862 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest and other (expense) income, net |
|
|
|
(4,683 |
) |
851 |
|
|
|
(3,832 |
) |
|||||
Income before income taxes |
|
11,512 |
|
17,514 |
|
4,952 |
|
(14,948 |
) |
19,030 |
|
|||||
Income taxes |
|
|
|
6,002 |
|
1,516 |
|
|
|
7,518 |
|
|||||
Net income |
|
11,512 |
|
11,512 |
|
3,436 |
|
(14,948 |
) |
11,512 |
|
|||||
Preferred stock dividends |
|
|
|
(28,313 |
) |
|
|
28,313 |
|
|
|
|||||
Net income (loss) attributable to common stockholders |
|
$ |
11,512 |
|
$ |
(16,801 |
) |
$ |
3,436 |
|
$ |
13,365 |
|
$ |
11,512 |
|
(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.
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.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2010
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries(1) |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
|
|
$ |
792,193 |
|
$ |
|
|
$ |
|
|
$ |
792,193 |
|
Cost of sales |
|
|
|
490,649 |
|
|
|
|
|
490,649 |
|
|||||
Gross profit |
|
|
|
301,544 |
|
|
|
|
|
301,544 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative expenses |
|
|
|
243,520 |
|
21 |
|
(11,855 |
) |
231,686 |
|
|||||
Depreciation and amortization |
|
|
|
14,667 |
|
|
|
|
|
14,667 |
|
|||||
Other operating income |
|
|
|
|
|
(11,855 |
) |
11,855 |
|
|
|
|||||
Equity earnings of subsidiaries |
|
(26,173 |
) |
(9,560 |
) |
|
|
35,733 |
|
|
|
|||||
Total operating expenses |
|
(26,173 |
) |
248,627 |
|
(11,834 |
) |
35,733 |
|
246,353 |
|
|||||
Operating income |
|
26,173 |
|
52,917 |
|
11,834 |
|
(35,733 |
) |
55,191 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest and other (expense) income, net |
|
|
|
(14,100 |
) |
2,274 |
|
|
|
(11,826 |
) |
|||||
Income before income taxes |
|
26,173 |
|
38,817 |
|
14,108 |
|
(35,733 |
) |
43,365 |
|
|||||
Income taxes |
|
|
|
12,644 |
|
4,548 |
|
|
|
17,192 |
|
|||||
Net income |
|
26,173 |
|
26,173 |
|
9,560 |
|
(35,733 |
) |
26,173 |
|
|||||
Preferred stock dividends |
|
|
|
(82,105 |
) |
|
|
82,105 |
|
|
|
|||||
Net income (loss) attributable to common stockholders |
|
$ |
26,173 |
|
$ |
(55,932 |
) |
$ |
9,560 |
|
$ |
46,372 |
|
$ |
26,173 |
|
(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.
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.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2010
(in thousands)
|
|
Parent |
|
|
|
|
|
|
|
|
|
|||||
|
|
Company |
|
Subsidiary |
|
Guarantor |
|
Consolidating |
|
|
|
|||||
|
|
(Guarantor) |
|
Issuer |
|
Subsidiaries |
|
Adjustments |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
|
$ |
|
|
$ |
12,602 |
|
$ |
(153 |
) |
$ |
|
|
$ |
12,449 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchase of property and equipment, net |
|
|
|
(12,937 |
) |
|
|
|
|
(12,937 |
) |
|||||
Purchase of short-term investments |
|
|
|
(3,002 |
) |
|
|
|
|
(3,002 |
) |
|||||
Proceeds from sales and maturities of short-term investments |
|
|
|
4,012 |
|
|
|
|
|
4,012 |
|
|||||
Purchase of businesses, net of cash acquired |
|
|
|
(145 |
) |
|
|
|
|
(145 |
) |
|||||
Other |
|
|
|
(182 |
) |
|
|
182 |
|
|
|
|||||
Net cash used in investing activities |
|
|
|
(12,254 |
) |
|
|
182 |
|
(12,072 |
) |
|||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Increase in purchase card payable, net |
|
|
|
(1,463 |
) |
|
|
|
|
(1,463 |
) |
|||||
Repayment of debt and capital lease obligations |
|
|
|
(1,788 |
) |
|
|
|
|
(1,788 |
) |
|||||
Proceeds from stock options exercised |
|
|
|
7,211 |
|
|
|
|
|
7,211 |
|
|||||
Other |
|
|
|
678 |
|
182 |
|
(182 |
) |
678 |
|
|||||
Net cash provided by financing activities |
|
|
|
4,638 |
|
182 |
|
(182 |
) |
4,638 |
|
|||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
66 |
|
|
|
|
|
66 |
|
|||||
Net increase in cash and cash equivalents |
|
|
|
5,052 |
|
29 |
|
|
|
5,081 |
|
|||||
Cash and cash equivalents at beginning of period |
|
|
|
99,170 |
|
53 |
|
|
|
99,223 |
|
|||||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
104,222 |
|
$ |
82 |
|
$ |
|
|
$ |
104,304 |
|
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 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 (decrease) 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 |
|
9. SUBSEQUENT EVENT
On October 29, 2010, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of CleanSource, Inc. (CleanSource). The aggregate purchase price of $60.1 million is comprised of $54.6 million in cash and an earn-out of up to $5.5 million in cash over two years. The Company has not completed the allocation of the purchase price. CleanSource, which is headquartered in San Jose, California, is a large regional distributor of janitorial and sanitation (JanSan) supplies. CleanSource offers over 4,000 products and primarily serves institutional facilities in the healthcare and education markets, as well as building services contractors. This acquisition represents a geographical expansion of the Companys JanSan offering to the west coast of the United States.
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, including, without limitation, certain statements in Results of Operations, Liquidity and Capital Resources and Item 3. Quantitative and Qualitative Disclosures About Market Risk. 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,
· currency exchange rates,
· changes to tariffs between the countries in which we operate,
· labor and benefit costs,
· weather conditions,
· the loss of significant customers,
· consumer spending and debt levels,
· apartment vacancy rates and effective rents,
· adverse changes in trends in the home improvement and remodeling and home building markets,
· product cost and price fluctuations due to market conditions,
· the highly competitive nature of the maintenance, repair and operations distribution industry,
· material facilities and systems disruptions and shutdowns,
· governmental and educational budgets,
· failure to realize expected benefits from acquisitions,
· our ability to purchase products from suppliers on favorable terms,
· failure to locate, acquire and successfully integrate acquisition candidates,
· 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,
· our ability to accurately predict market trends,
· dependence on key employees,
· healthcare costs,
· our inability to protect trademarks,
· adverse publicity and litigation,
· our level of debt,
· interest rate fluctuations,
· our customers ability to pay us,
· future cash flows,
· changes in consumer preferences, 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.
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: appliances; cabinetry; electrical; floor coverings; gas; hardware; hearth and chimney; heating, ventilation and air conditioning (HVAC); janitorial and sanitary; lighting; paint and sundries; plumbing; pool; security; shop and office supplies; tools and equipment; window coverings; and other miscellaneous products. Our products are primarily used for the repair, maintenance, remodeling, refurbishment and construction of properties and non-industrial facilities.
Our highly 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 quality products at competitive prices with reliable same-day or next-day delivery. The Wilmar®, AmSan®, Sexauer®, Maintenance USA® and Trayco® brands generally serve our facilities maintenance customers; the Barnett®, Copperfield®, U.S. Lock® and SunStar® brands generally serve our professional contractor customers; and the Hardware Express®, LeranSM and AF LightingSM 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 approximately 575 field sales representatives, approximately 325 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 55 distribution centers, 23 professional contractor showrooms located throughout the United States and Canada, 35 vendor-managed inventory locations at large customer locations and a dedicated fleet of trucks. Our broad distribution network enables us to provide reliable, next-day delivery service to approximately 98% of the U.S. population and same-day delivery service to most major metropolitan markets in the U.S.
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.
Recent Developments
On October 29, 2010, we acquired substantially all of the assets and a portion of the liabilities of CleanSource, Inc. (CleanSource). The aggregate purchase price of $60.1 million is comprised of $54.6 million in cash and an earn-out of up to $5.5 million in cash over two years. We have not completed the allocation of the purchase price. CleanSource, which is headquartered in San Jose, California, is a large regional distributor of janitorial and sanitation (JanSan) supplies. CleanSource offers over 4,000 products and primarily serves institutional facilities in the healthcare and education markets, as well as building services contractors. This acquisition represents a geographical expansion of our JanSan offering to the west coast of the United States.
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 24, 2010 and September 25, 2009:
|
|
% of Net Sales |
|
% Increase |
|
% of Net Sales |
|
% Increase |
|
||||
|
|
Three Months Ended |
|
(Decrease) |
|
Nine Months Ended |
|
(Decrease) |
|
||||
|
|
September 24, |
|
September 25, |
|
2010 |
|
September 24, |
|
September 25, |
|
2010 |
|
|
|
2010 |
|
2009 |
|
vs. 2009 (1) |
|
2010 |
|
2009 |
|
vs. 2009 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
(0.4 |
)% |
100.0 |
% |
100.0 |
% |
(1.5 |
)% |
Cost of sales |
|
62.1 |
|
63.2 |
|
(2.1 |
) |
61.9 |
|
63.1 |
|
(3.3 |
) |
Gross profit |
|
37.9 |
|
36.8 |
|
2.6 |
|
38.1 |
|
36.9 |
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
27.8 |
|
27.4 |
|
1.0 |
|
29.2 |
|
29.7 |
|
(3.1 |
) |
Depreciation and amortization |
|
1.8 |
|
1.6 |
|
9.8 |
|
1.9 |
|
1.7 |
|
8.2 |
|
Total operating expense |
|
29.6 |
|
29.0 |
|
1.5 |
|
31.1 |
|
31.4 |
|
(2.5 |
) |
Operating income |
|
8.3 |
|
7.7 |
|
6.4 |
|
7.0 |
|
5.5 |
|
23.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on extinguishment of debt, net |
|
|
|
(0.1 |
) |
100.0 |
|
|
|
0.2 |
|
(100.0 |
) |
Interest expense |
|
(1.6 |
) |
(1.6 |
) |
(4.5 |
) |
(1.7 |
) |
(1.8 |
) |
(10.8 |
) |
Interest income and other income |
|
0.2 |
|
0.2 |
|
(2.3 |
) |
0.2 |
|
0.2 |
|
(1.4 |
) |
Income before income taxes |
|
6.9 |
|
6.2 |
|
10.5 |
|
5.5 |
|
4.0 |
|
33.6 |
|
Income tax provision |
|
(2.7 |
) |
(2.4 |
) |
10.7 |
|
(2.2 |
) |
(1.6 |
) |
35.4 |
|
Net income |
|
4.2 |
% |
3.8 |
% |
10.4 |
% |
3.3 |
% |
2.5 |
% |
32.4 |
% |
(1) Percent increase (decrease) represents the actual change as a percent of the prior years result.
Overview. During the three months ended September 24, 2010, our net sales decreased 0.4%. We believe this decrease is associated with the general economic downturn and credit crisis. Sales to customers in our facilities maintenance end-markets, which make up 74% of our total sales and include residential multi-family housing and institutional MRO customers, declined 1.5% during the third quarter of 2010 compared to the third quarter of 2009. Sales to our professional contractor and specialty distributor customers, which represent 15% and 11% of our total sales, respectively, increased 0.1% and 4.1%, respectively. Although we are starting to see some signs of stabilization, demand from these customers continues to be negatively impacted by recessionary declines in residential new construction and renovations activity. We expect continued variability within our end-markets; however, we believe the impact on sales related to the market weakness during 2010 will be less severe than we experienced during 2009. We expect sales to our facilities maintenance, professional contractor and specialty distributor end-markets to remain relatively flat during the remainder of 2010 as the general economic downturn and credit crisis is expected to continue specifically with respect to the housing market.
Net income as a percentage of sales was 4.2% in the third quarter compared to 3.8% in the comparable prior year period. The increase in net income as a percent of sales is primarily a result of higher gross profit margins and lower compensation-related expenses, offset in part by higher facility consolidation costs and higher depreciation and amortization expense.
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, our plans include continued investments in the consolidation of our distribution network and in information technology solutions to optimize customer service.
Three Months Ended September 24, 2010 Compared to Three Months Ended September 25, 2009
Net Sales. Our net sales decreased by $1.1 million, or 0.4%, to $276.8 million in the three months ended September 24, 2010 from $277.9 million in the three months ended September 25, 2009. The decrease in sales resulted from the net impact of a 1.5% decrease in sales to our facilities maintenance customers offset by an increase in sales to our professional contractor and specialty distributor customers of 0.1% and 4.1%, respectively.
Gross Profit. Gross profit increased by $2.6 million, or 2.6%, to $104.8 million in the three months ended September 24, 2010 from $102.2 million in the three months ended September 25, 2009. Our gross profit margin increased 110 basis points to 37.9% for the three months ended September 24, 2010 compared to 36.8% for the three months ended September 25, 2009. The increase in gross margin is primarily due to continued improvement in selling margins from the optimization of product pricing as well as higher supplier rebates.
Selling, General and Administrative Expenses. SG&A expenses increased by $0.8 million, or 1.0%, to $77.0 million in the three months ended September 24, 2010 from $76.2 million in the three months ended September 25, 2009. As a percent of sales, SG&A increased to 27.8% for the three months ended September 24, 2010 compared to 27.4% for the three months ended September 25, 2009. The increase in SG&A expenses is primarily due to costs incurred related to our distribution consolidation efforts partly offset by decreases in occupancy-related expenses resulting from previous consolidations of distribution centers and closings of underperforming professional contractor showrooms, and lower compensation-related expenses.
Depreciation and Amortization. Depreciation and amortization expense increased by $0.4 million to $5.0 million in the three months ended September 24, 2010 from $4.5 million in the three months ended September 25, 2009. As a percentage of sales, depreciation and amortization was 1.8% or 20 basis points higher than the 1.6% in the comparable prior year period. This increase was due to higher depreciation resulting from our higher capital spending over the last three years associated with our information technology infrastructure and distribution center consolidation and integration efforts.
Operating Income. As a result of the foregoing, operating income increased by $1.4 million, or 6.4%, to $22.9 million in the three months ended September 24, 2010 from $21.5 million in the three months ended September 25, 2009. As a percent of sales, operating income increased to 8.3% in the three months ended September 24, 2010 compared to 7.7% in the three months ended September 25, 2009.
Loss on Extinguishment of Debt. We did not extinguish debt in the three months ended September 24, 2010. 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 prepayment, we recorded a loss on extinguishment of debt of $0.2 million associated with the write-off of deferred financing costs.
Interest Expense. Interest expense decreased by $0.2 million in the three months ended September 24, 2010 to $4.4 million from $4.6 million in the three months ended September 25, 2009. This decrease was primarily due to lower debt balances outstanding compared to last year associated with the repayments of our term debt and the repurchase of our 81/8% senior subordinated notes and lower interest rates.
Interest and Other Income. Interest and other income decreased less than $0.1 million to $0.5 million in the three months ended September 24, 2010 compared to $0.6 million in the three months ended September 25, 2009. The decrease was primarily attributable to lower interest income earned from our short-term investments resulting from a lower interest-rate environment.
Provision for Income Taxes. The effective tax rate for the three months ended September 24, 2010 was 39.5% compared to 39.4% for the three months ended September 25, 2009. The increase in the effective tax rate was primarily due to the write-off of deferred tax assets associated with share-based compensation arising from stock options that were forfeited due to employee terminations as well as lower tax exempt interest income, partially offset by a decrease in nondeductible expenditures.
Nine Months Ended September 24, 2010 Compared to Nine Months Ended September 25, 2009
Net Sales. Our net sales decreased by $12.5 million, or 1.5%, to $792.2 million in the nine months ended September 24, 2010 from $804.7 million in the nine months ended September 25, 2009. The decline in sales resulted from the net decline in sales to our facilities maintenance and professional contractor customers of 1.7% and 2.6%, respectively. Sales to our specialty distributor customers were flat.
Gross Profit. Gross profit increased by $4.4 million, or 1.5%, to $301.5 million in the nine months ended September 24, 2010 from $297.1 million in the nine months ended September 25, 2009. Our gross profit margin increased 120 basis points to 38.1% for the nine months ended September 24, 2010 compared to 36.9% for the nine months ended September 25, 2009. The increase in gross margin is primarily due to continued improvement in selling margins from the optimization of product pricing as well as higher supplier rebates.
Selling, General and Administrative Expenses. SG&A expenses decreased by $7.3 million, or 3.1%, to $231.7 million in the nine months ended September 24, 2010 from $239.0 million in the nine months ended September 25, 2009. As a percent of sales, SG&A decreased to 29.2% for the nine months ended September 24, 2010 compared to 29.7% for the nine months ended September
25, 2009. The decrease in SG&A expenses is primarily due to $3.7 million of lower bad debt expense as well as decreases in occupancy and personnel-related expenses resulting from previous closings of underperforming professional contractor showrooms, consolidations of distribution centers and headcount reductions, and lower costs incurred directly related to our distribution consolidation efforts.
Depreciation and Amortization. Depreciation and amortization expense increased by $1.1 million to $14.7 million in the nine months ended September 24, 2010 from $13.6 million in the nine months ended September 25, 2009. As a percentage of sales, depreciation and amortization was 1.9% or 20 basis points higher than the 1.7% in the comparable prior year period. This increase was due to higher depreciation resulting from our higher capital spending over the last three years associated with our information technology infrastructure and distribution center consolidation and integration efforts.
Operating Income. As a result of the foregoing, operating income increased by $10.6 million, or 23.8%, to $55.2 million in the nine months ended September 24, 2010 from $44.6 million in the nine months ended September 25, 2009. As a percent of sales, operating income increased to 7.0% in the nine months ended September 24, 2010 compared to 5.5% in the nine months ended September 25, 2009.
Gain on Extinguishment of Debt. We did not extinguish debt in the nine months ended September 24, 2010. 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 prepayment, 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.
Interest Expense. Interest expense decreased by $1.6 million in the nine months ended September 24, 2010 to $13.1 million from $14.7 million in the nine months ended September 25, 2009. This decrease was primarily due to lower debt balances outstanding compared to last year associated with the repayments of our term debt and the repurchase of our 81/8% senior subordinated notes and lower interest rates.
Interest and Other Income. Interest and other income decreased less than $0.1 million to $1.3 million in the nine months ended September 24, 2010 compared to $1.3 million in the nine months ended September 25, 2009.
Provision for Income Taxes. The effective tax rate for the nine months ended September 24, 2010 was 39.6% compared to 39.1% for the nine months ended September 25, 2009. The increase in the effective tax rate was primarily due to the write-off of deferred tax assets associated with share-based compensation arising from stock options that were forfeited due to employee terminations and the decrease in the benefit recognized associated with unrecognized tax benefits. During the nine months ended September 25, 2009, we obtained resolution related to an uncertain state tax position and we adjusted the accrual previously established, of which $0.1 million favorably impacted our effective tax rate.
Liquidity and Capital Resources
Overview
We are a holding company whose only asset is the stock in Interline New Jersey. 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 24, 2010, the 81/8% senior subordinated notes had an estimated fair market value of $154.1 million, or 102.3% 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 to exceed $40.0 million is available in the form of letters of credit. As of September 24, 2010, Interline New Jersey had $8.6 million of letters of credit issued under the revolving loan facility and $154.2 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 increased by $39.8 million to $337.1 million as of September 24, 2010 from $297.3 million as of December 25, 2009. The increase in working capital was primarily funded by cash flows from operations.
Cash Flow
Operating Activities. Net cash provided by operating activities was $12.4 million in the nine months ended September 24, 2010 compared to net cash provided by operating activities of $102.2 million in the nine months ended September 25, 2009.
Net cash provided by operating activities of $12.4 million in the nine months ended September 24, 2010 primarily consisted of net income of $26.2 million, adjustments for non-cash items of $23.4 million and cash used in working capital items of $37.0 million. Adjustments for non-cash items primarily consisted of $15.0 million in depreciation and amortization of property, equipment and intangible assets, $3.6 million in bad debt expense, $2.5 million in share-based compensation net of excess tax benefits, $1.3 million in deferred income taxes and $0.8 million in amortization of debt issuance costs. The cash used in working capital items consisted of $33.8 million from increased inventory levels primarily as a result of seasonal inventory demands and the stocking of our new distribution centers in Chicago, Illinois, Philadelphia, Pennsylvania, and Jacksonville, Florida, $16.5 million from increased trade receivables, net of changes in our allowance for doubtful accounts, resulting from the timing of collections and $5.7 million from increased prepaid expenses and other current assets primarily as a result of higher rebates receivable from vendors. These items were offset by $9.2 million from increased trade payables balances as a result of the timing of purchases and related payments, $6.7 million of increased accrued expenses and other current liabilities primarily due to increased lease liabilities associated with our new distribution centers and higher accrued compensation and related benefits at period-end resulting from the timing of payments, $2.6 million from timing of interest payments and $0.3 million from the increase in income taxes payable resulting from an increase in income before taxes.
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 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.
Investing Activities. Net cash used in investing activities was $12.1 million in the nine months ended September 24, 2010 compared to net cash used in investing activities of $11.1 million in the nine months ended September 25, 2009.
Net cash used in investing activities in the nine months ended September 24, 2010 was primarily attributable to $12.9 million of capital expenditures associated with our distribution center consolidation projects and our information technology infrastructure, as
well as those made in the ordinary course of business, offset by net proceeds from sales and maturities of short-term investments of $1.0 million.
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.
Financing Activities. Net cash provided by financing activities totaled $4.6 million in the nine months ended September 24, 2010 compared to net cash used in financing activities of $90.3 million in the nine months ended September 25, 2009.
Net cash provided by financing activities in the nine months ended September 24, 2010 was attributable to proceeds received from stock options exercised and related excess tax benefits of $8.0 million, partially offset by a $1.8 million repayment of term debt and capital lease obligations and a $1.5 million net decrease in purchase card payable.
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.
Capital Expenditures
Capital expenditures were $12.9 million in the nine months ended September 24, 2010 compared to $9.1 million in the nine months ended September 25, 2009. Capital expenditures as a percentage of sales were 1.6% in the nine months ended September 24, 2010 compared to 1.1% in the nine months ended September 25, 2009. The increase in capital expenditures was driven primarily by the continued consolidation of our distribution center network, including the investments in larger, more efficient distribution centers. In addition, during the nine months ended September 24, 2010 and September 25, 2009, we acquired leasehold improvements through non-cash lease incentives of $2.4 million and $3.0 million, respectively.
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 24, 2010, the weighted average interest rate in effect with respect to the term loan and the delayed draw facility was 2.01% 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 3.5x. Interline New Jersey and the Company were in compliance with all covenants at September 24, 2010.
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 24, 2010, we had $55.2 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. As of September 24, 2010, we had $104.8 million of total cash on hand and permitted investments (including $25.0 million in cash that, for the covenant compliance ratio, is netted against debt). On October 29, 2010, we used $54.6 million of our cash on hand to acquire substantially all of the assets and a portion of the liabilities of CleanSource.
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 25, 2009 filed with the SEC. There have been no material changes to our contractual obligations since December 25, 2009.
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 25, 2009 filed with the SEC. During the three months ended September 24, 2010, there were no significant changes to any of our critical accounting policies.
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.
Interest Rate Risk
Our variable rate term debt is sensitive to changes in the general level of interest rates. As of September 24, 2010, the weighted average interest rate in effect with respect to our $154.2 million variable rate term debt was 2.01% 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 24, 2010, 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 24, 2010.
The fair market value of our fixed rate debt is subject to interest rate risk. As of September 24, 2010, the fair market value of our $150.7 million 81/8% senior subordinated notes was approximately $154.1 million, or 102.3% of par.
Foreign Currency Exchange Risk
The majority of our purchases from foreign-based suppliers is from China and other countries in Asia and is transacted in U.S. dollars. Accordingly, our exposure to risk from foreign currency exchange rates was not material as of September 24, 2010.
Derivative Financial Instruments
As of September 24, 2010, we did not have any interest rate 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.
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 24, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 24, 2010, 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 24, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 25, 2009 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 25, 2009.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. (Removed and Reserved)
None.
The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:
12.1 |
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Computation of earnings to fixed charges and earnings to combined fixed charges and preferred dividends of Interline Brands, Inc. (furnished herewith). |
31.1 |
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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 |
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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 |
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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 |
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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). |
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.
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INTERLINE BRANDS, INC. |
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Registrant |
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Date: November 1, 2010 |
By: |
/S/ JOHN A. EBNER |
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John A. Ebner |
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Chief Financial Officer |
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(Duly Authorized Signatory and Principal Financial Officer) |