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Table of Contents

 

 

 

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 April 1, 2011

 

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

 

03-0542659

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

701 San Marco Boulevard

 

 

Jacksonville, Florida

 

32207

(Address of principal executive offices)

 

(Zip code)

 

(904) 421-1400

(Registrant’s 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

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

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 issuer’s classes of common stock, as of the latest practicable date. As of May 6, 2011, there were 33,356,761 shares of the registrant’s common stock outstanding (excluding 168,702 shares held in treasury), par value $0.01.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

ITEM

 

 

PAGE

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

1.

Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of April 1, 2011 and December 31, 2010

 

1

 

Condensed Consolidated Statements of Earnings for the Three Months Ended April 1, 2011 and March 26, 2010

 

2

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2011 and March 26, 2010

 

3

 

Notes to Condensed Consolidated Financial Statements

 

4

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

3.

Quantitative and Qualitative Disclosures about Market Risk

 

24

4.

Controls and Procedures

 

25

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

1.

Legal Proceedings

 

26

1A.

Risk Factors

 

26

2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

3.

Defaults Upon Senior Securities

 

26

4.

(Removed and Reserved)

 

26

5.

Other Information

 

26

6.

Exhibits

 

27

 

 

 

SIGNATURES

 

28

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

INTERLINE BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF APRIL 1, 2011 AND DECEMBER 31, 2010

(in thousands, except share and per share data)

 

 

 

April 1,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

74,307

 

$

86,981

 

Short-term investments

 

 

100

 

Accounts receivable - trade (net of allowance for doubtful accounts of $9,189 and $9,088)

 

132,383

 

122,619

 

Inventory

 

209,567

 

203,269

 

Prepaid expenses and other current assets

 

17,857

 

28,816

 

Income taxes receivable

 

1,000

 

2,086

 

Deferred income taxes

 

17,599

 

17,381

 

Total current assets

 

452,713

 

461,252

 

 

 

 

 

 

 

Property and equipment, net

 

56,380

 

54,546

 

Goodwill

 

344,017

 

341,168

 

Other intangible assets, net

 

140,247

 

141,562

 

Other assets

 

9,444

 

9,081

 

Total assets

 

$

1,002,801

 

$

1,007,609

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

94,553

 

$

96,878

 

Accrued expenses and other current liabilities

 

39,329

 

45,181

 

Accrued interest

 

8,042

 

2,852

 

Income taxes payable

 

734

 

819

 

Current portion of long-term debt

 

 

13,358

 

Current portion of capital leases

 

607

 

607

 

Total current liabilities

 

143,265

 

159,695

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

Deferred income taxes

 

46,583

 

44,045

 

Long-term debt, net of current portion

 

300,000

 

300,000

 

Capital leases, net of current portion

 

719

 

906

 

Other liabilities

 

7,188

 

6,731

 

Total liabilities

 

497,755

 

511,377

 

Commitments and contingencies

 

 

 

 

 

Senior preferred stock; $0.01 par value, 20,000,000 authorized; none outstanding as of April 1, 2011 and December 31, 2010

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common stock; $0.01 par value, 100,000,000 authorized; 33,525,463 issued and 33,356,761 outstanding as of April 1, 2011 and 33,336,373 issued and 33,214,073 outstanding as of December 31, 2010

 

335

 

333

 

Additional paid-in capital

 

595,758

 

593,031

 

Accumulated deficit

 

(89,941

)

(96,824

)

Accumulated other comprehensive income

 

2,097

 

1,865

 

Treasury stock, at cost, 168,702 shares as of April 1, 2011 and 122,300 as of December 31, 2010

 

(3,203

)

(2,173

)

Total stockholders’ equity

 

505,046

 

496,232

 

Total liabilities and stockholders’ equity

 

$

1,002,801

 

$

1,007,609

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1



Table of Contents

 

INTERLINE BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

THREE MONTHS ENDED APRIL 1, 2011 AND MARCH 26, 2010

(in thousands, except share and per share data)

 

 

 

April 1,

 

March 26,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net sales

 

$

297,417

 

$

245,218

 

Cost of sales

 

186,476

 

150,071

 

Gross profit

 

110,941

 

95,147

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

Selling, general and administrative expenses

 

88,087

 

77,229

 

Depreciation and amortization

 

5,752

 

4,751

 

Total operating expenses

 

93,839

 

81,980

 

Operating income

 

17,102

 

13,167

 

 

 

 

 

 

 

Interest expense

 

(6,096

)

(4,353

)

Interest and other income

 

407

 

424

 

Income before income taxes

 

11,413

 

9,238

 

Income taxes

 

4,530

 

3,668

 

Net income

 

$

6,883

 

$

5,570

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

Basic

 

$

0.21

 

$

0.17

 

Diluted

 

$

0.20

 

$

0.17

 

 

 

 

 

 

 

Weighted-Average Shares Outstanding:

 

 

 

 

 

Basic

 

33,356,472

 

32,674,154

 

Diluted

 

34,158,121

 

33,370,605

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2



Table of Contents

 

INTERLINE BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED APRIL 1, 2011 AND MARCH 26, 2010

(in thousands)

 

 

 

April 1,

 

March 26,

 

 

 

2011

 

2010

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

6,883

 

$

5,570

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,752

 

4,903

 

Amortization of debt issuance costs

 

337

 

255

 

Amortization of discount on 81/8% senior subordinated notes

 

 

37

 

Share-based compensation

 

1,265

 

774

 

Excess tax benefits from share-based compensation

 

(853

)

(515

)

Deferred income taxes

 

2,229

 

124

 

Provision for doubtful accounts

 

1,094

 

1,456

 

Loss on disposal of property and equipment

 

63

 

17

 

 

 

 

 

 

 

Changes in assets and liabilities which provided (used) cash, net of business acquired:

 

 

 

 

 

Accounts receivable - trade

 

(6,851

)

(981

)

Inventory

 

(1,446

)

(3,311

)

Prepaid expenses and other current assets

 

10,966

 

182

 

Other assets

 

(281

)

249

 

Accounts payable

 

(4,854

)

3,337

 

Accrued expenses and other current liabilities

 

(8,192

)

329

 

Accrued interest

 

5,188

 

3,049

 

Income taxes

 

1,863

 

603

 

Other liabilities

 

335

 

(12

)

Net cash provided by operating activities

 

13,498

 

16,066

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchase of property and equipment, net

 

(5,427

)

(3,733

)

Purchase of short-term investments

 

 

(1,342

)

Proceeds from sales and maturities of short-term investments

 

100

 

1,379

 

Purchase of businesses, net of cash acquired

 

(9,496

)

 

Net cash used in investing activities

 

(14,823

)

(3,696

)

Cash Flows from Financing Activities:

 

 

 

 

 

Increase (decrease) in purchase card payable, net

 

1,707

 

(1,025

)

Repayment of term debt

 

 

(90

)

Repayment of 81/8% senior subordinated notes

 

(13,358

)

 

Payment of debt issuance costs

 

(34

)

 

Payments on capital lease obligations

 

(188

)

(64

)

Proceeds from stock options exercised

 

611

 

5,200

 

Excess tax benefits from share-based compensation

 

853

 

515

 

Treasury stock acquired to satisfy minimum tax withholding requirements

 

(1,030

)

(36

)

Net cash (used in) provided by financing activities

 

(11,439

)

4,500

 

Effect of exchange rate changes on cash and cash equivalents

 

90

 

60

 

Net (decrease) increase in cash and cash equivalents

 

(12,674

)

16,930

 

Cash and cash equivalents at beginning of period

 

86,981

 

99,223

 

Cash and cash equivalents at end of period

 

$

74,307

 

$

116,153

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

252

 

$

945

 

Income taxes, net of refunds

 

$

630

 

$

3,072

 

 

 

 

 

 

 

Schedule of Non-Cash Investing and Financing Activities:

 

 

 

 

 

Property acquired through lease incentives

 

$

475

 

$

610

 

Contingent consideration associated with purchase of business

 

$

250

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

INTERLINE BRANDS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED APRIL 1, 2011 AND MARCH 26, 2010

 

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 sanitation (“JanSan”) supplies and other MRO products. Interline’s highly diverse customer base consists of multi-family housing, educational, lodging, government and healthcare facilities, professional contractors and specialty distributors.

 

The Company markets and sells its products primarily through fourteen distinct and targeted brands. The Company utilizes a variety of sales channels, including a direct sales force, telesales representatives, a direct marketing program consisting of catalogs and promotional flyers, 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, Canada and Puerto Rico, 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.

 

The Company is the holding company of the Interline group of businesses, including its principal operating subsidiary, Interline Brands, Inc., a New Jersey corporation (“Interline New Jersey”).

 

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 Company’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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.

 

4



Table of Contents

 

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

quoted prices in active markets for identical assets or liabilities;

Level 2

quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

Level 3

unobservable inputs, such as discounted cash flow models or valuations.

 

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

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 Company had no short-term investments as of April 1, 2011. As of December 31, 2010, the Company’s short-term investments, which were classified as available-for-sale, were 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 December 31, 2010, both the carrying amount and fair value of the Company’s short-term investments were $0.1 million. The fair value of the pre-refunded municipal bonds was estimated using Level 1 inputs and was determined by quoted market prices as they are publicly traded.

 

The following table shows the carrying amount and the fair value of the Company’s senior subordinated notes as of April 1, 2011 and December 31, 2010 (in thousands):

 

 

 

April 1, 2011

 

December 31, 2010

 

Description

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Senior subordinated notes (1)

 

$

300,000

 

$

307,125

 

$

300,000

 

$

304,500

 

 

 

$

300,000

 

$

307,125

 

$

300,000

 

$

304,500

 

 


(1)          Fair value estimated using Level 1 inputs. The fair value of the Company’s senior subordinated notes is determined by quoted market prices as they are publicly traded.

 

5



Table of Contents

 

Segment Information

 

The Company has one operating segment and, therefore, one reportable segment, the distribution of MRO products. The Company’s revenues and assets outside the United States are not significant. The Company’s net sales by product category were as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

April 1,

 

March 26,

 

Product Category (1)

 

2011

 

2010

 

Janitorial and sanitation

 

$

107,974

 

$

68,556

 

Plumbing

 

70,669

 

66,314

 

Hardware, tools and fixtures

 

31,999

 

29,235

 

Heating, ventilation and air conditioning

 

23,894

 

20,526

 

Electrical and lighting

 

17,734

 

16,649

 

Security and safety

 

15,457

 

14,776

 

Appliances and parts

 

15,226

 

14,279

 

Other

 

14,464

 

14,883

 

Total

 

$

297,417

 

$

245,218

 

 


(1)          During 2010, the Company implemented a new product information management system. In conjunction with this implementation, the Company went through a robust product identification process and, as a result, realigned stock keeping units within product categories. Therefore, the prior period in this table has been recast to be consistent with current year presentation.

 

2.                                      ACQUISITIONS

 

On January 28, 2011, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of Northern Colorado Paper, Inc. (“NCP”) for $9.5 million in cash and an earn-out of up to $0.3 million in cash over two years. Given the recent acquisition date, the Company has not completed the allocation of the purchase price. NCP, which is headquartered in Greeley, Colorado, is a regional distributor of JanSan supplies, primarily servicing institutional facilities in the healthcare, education and food service industries. This acquisition represents an expansion of the Company’s offering of JanSan products in the western United States.

 

On October 29, 2010, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of CleanSource, Inc. (“CleanSource”) for $54.6 million in cash and an earn-out of up to $5.5 million in cash over two years. CleanSource, which is headquartered in San Jose, California, is a large regional distributor of 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 Company’s offering of JanSan products to the West Coast of the United States.

 

As of April 1, 2011, the fair value of the earn-outs associated with the acquisitions of CleanSource and NCP was $4.0 million and $0.3 million, respectively. Since the dates of acquisition, there have been no changes in the range of outcomes assumed when valuing these contingent liabilities.

 

3.                                      ACCOUNTS RECEIVABLE

 

The Company’s 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 Company’s customers were to deteriorate, increases in its allowance for doubtful accounts may be needed.

 

6



Table of Contents

 

The activity in the allowance for doubtful accounts consisted of the following (in thousands):

 

Balance at
December 31,
2010

 

Charged to
Expense

 

Deductions

 

Balance at
April 1,
2011

 

$

9,088

 

$

1,094

 

$

(993

)

$

9,189

 

 

4.                                      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 Company’s overall operating cost structure. The following table summarizes the changes to related accruals, which are included in accrued expenses and other current liabilities, during the three months ended April 1, 2011 (in thousands):

 

 

 

Facility
Closing and
Other Costs

 

Balance at December 31, 2010

 

$

475

 

Payments

 

(107

)

Balance at April 1, 2011

 

$

368

 

 

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 Company’s business combinations, which are included in accrued expenses and other current liabilities (in thousands):

 

 

 

Employee
Severance and
Relocation

 

Facility
Closing and
Other Costs

 

Total

 

Balance at December 31, 2010

 

$

44

 

$

917

 

$

961

 

Payments

 

 

(101

)

(101

)

Balance at April 1, 2011

 

$

44

 

$

816

 

$

860

 

 

5.                                      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.

 

7



Table of Contents

 

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

 

 

 

April 1,

 

March 26,

 

 

 

2011

 

2010

 

Weighted average shares outstanding - basic

 

33,356,472

 

32,674,154

 

Dilutive shares resulting from:

 

 

 

 

 

Stock options

 

488,863

 

357,515

 

Restricted stock

 

 

899

 

Restricted share units

 

312,786

 

338,037

 

Weighted average shares outstanding - diluted

 

34,158,121

 

33,370,605

 

 

During the three months ended April 1, 2011 and March 26, 2010, stock options to purchase 1,237,757 shares and 1,871,606  shares of common stock, respectively, were excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive.

 

6.                                      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 months ended April 1, 2011 and March 26, 2010 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

April 1,

 

March 26,

 

 

 

2011

 

2010

 

Net income

 

$

6,883

 

$

5,570

 

Other comprehensive income (loss):

 

 

 

 

 

Amortization of unrecognized gain on employee benefits

 

4

 

4

 

Foreign currency translation

 

228

 

143

 

Unrealized loss on short-term investments

 

 

(1

)

Total comprehensive income

 

$

7,115

 

$

5,716

 

 

7.                                      SHARE-BASED COMPENSATION

 

During the three months ended April 1, 2011 and March 26, 2010, share-based compensation expense was $1.3 million and $0.8 million, respectively. As of April 1, 2011, there was $12.4 million of total unrecognized share-based compensation expense related to unvested share-based payment awards. The expense is expected to be recognized over a weighted-average period of 2.8 years.

 

During the three months ended April 1, 2011 and March 26, 2010, the Company granted 345,291 and 255,737 stock options, respectively, with a weighted-average grant date fair value of $8.40 and $7.10, 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 Company’s 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.

 

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Table of Contents

 

The Black-Scholes weighted-average assumptions were as follows:

 

 

 

Three Months Ended

 

 

 

April 1,

 

March 26,

 

 

 

2011

 

2010

 

Expected volatility

 

41.0

%

41.6

%

Expected dividends

 

0.0

%

0.0

%

Risk-free interest rate

 

2.1

%

2.4

%

Expected life (in years)

 

5.0

 

5.0

 

 

Stock options exercised during the three months ended April 1, 2011 and March 26, 2010 were 38,198 and 347,548, respectively, with an intrinsic value of $0.2 million and $1.3 million, respectively.

 

A summary status of restricted stock, restricted share units and deferred stock units as of April 1, 2011 and changes during the three 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 31, 2010

 

8,050

 

$

23.84

 

659,576

 

$

12.06

 

93,134

 

$

19.27

 

Granted

 

 

 

132,520

 

21.64

 

580

 

20.46

 

Vested

 

 

 

(150,892

)

8.10

 

 

 

Forfeited

 

 

 

(4,875

)

7.89

 

 

 

Outstanding at April 1, 2011

 

8,050

 

$

23.84

 

636,329

 

$

15.02

 

93,714

 

$

19.28

 

 

No restricted stock awards vested during the three months ended April 1, 2011. Restricted stock awards vested during the three months ended March 26, 2010 were 2,300 with a fair value of less than $0.1 million.

 

Restricted share units vested during the three months ended April 1, 2011 and March 26, 2010 were 150,892 and 9,149, respectively, with a fair value of $3.3 million and $0.1 million, respectively.

 

8.                                      CONTINGENCIES

 

Contingent Liabilities

 

As of April 1, 2011 and December 31, 2010, the Company was contingently liable for outstanding letters of credit aggregating to $7.6 million and $8.9 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 Company’s results of operations or financial position.

 

9.                                      GUARANTOR SUBSIDIARIES

 

The 7.00% senior subordinated notes of Interline New Jersey (the “Subsidiary Issuer”) are, and the 81/8% senior subordinated notes were, fully and unconditionally guaranteed, jointly and severally, on an unsecured senior subordinated basis by Interline Brands, Inc. (the “Parent Company”) and all of Interline New Jersey’s 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

 

9



Table of Contents

 

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 Parent Company conducts virtually all of its business operations through the Subsidiary Issuer. Accordingly, the Parent Company’s only material sources of cash are dividends and distributions with respect to its ownership interests in the Subsidiary Issuer that are derived from the earnings and cash flow generated by the Subsidiary Issuer. Through April 1, 2011, 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 Company’s 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.

 

10



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF APRIL 1, 2011

(in thousands)

 

 

 

Parent

 

 

 

 

 

 

 

 

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Consolidating

 

 

 

 

 

(Guarantor)

 

Issuer

 

Subsidiaries

 

Adjustments

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

74,280

 

$

27

 

$

 

$

74,307

 

Accounts receivable - trade

 

 

132,383

 

 

 

132,383

 

Inventory

 

 

209,567

 

 

 

209,567

 

Intercompany receivable

 

 

 

188,354

 

(188,354

)

 

Other current assets

 

 

36,453

 

3

 

 

36,456

 

Total current assets

 

 

452,683

 

188,384

 

(188,354

)

452,713

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

56,380

 

 

 

56,380

 

Goodwill

 

 

344,017

 

 

 

344,017

 

Other intangible assets, net

 

 

140,247

 

 

 

140,247

 

Investment in subsidiaries

 

505,046

 

192,965

 

 

(698,011

)

 

Other assets

 

 

2,752

 

6,692

 

 

9,444

 

Total assets

 

$

505,046

 

$

1,189,044

 

$

195,076

 

$

(886,365

)

$

1,002,801

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

94,553

 

$

 

$

 

$

94,553

 

Accrued expenses and other current liabilities

 

 

45,994

 

2,111

 

 

48,105

 

Intercompany payable

 

 

188,354

 

 

(188,354

)

 

Current portion of long-term debt and capital leases

 

 

607

 

 

 

607

 

Total current liabilities

 

 

329,508

 

2,111

 

(188,354

)

143,265

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases, net of current portion

 

 

300,719

 

 

 

300,719

 

Other liabilities

 

 

53,771

 

 

 

53,771

 

Total liabilities

 

 

683,998

 

2,111

 

(188,354

)

497,755

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior preferred stock

 

 

901,416

 

 

(901,416

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

505,046

 

(396,370

)

192,965

 

203,405

 

505,046

 

Total liabilities and stockholders’ equity

 

$

505,046

 

$

1,189,044

 

$

195,076

 

$

(886,365

)

$

1,002,801

 

 

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Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

AS OF DECEMBER 31, 2010

(in thousands)

 

 

 

Parent

 

 

 

 

 

 

 

 

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Consolidating

 

 

 

 

 

(Guarantor)

 

Issuer

 

Subsidiaries

 

Adjustments

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

86,919

 

$

62

 

$

 

$

86,981

 

Short-term investments

 

 

100

 

 

 

100

 

Accounts receivable - trade, net

 

 

122,619

 

 

 

122,619

 

Inventory

 

 

203,269

 

 

 

203,269

 

Intercompany receivable

 

 

 

144,759

 

(144,759

)

 

Other current assets

 

 

48,278

 

5

 

 

48,283

 

Total current assets

 

 

461,185

 

144,826

 

(144,759

)

461,252

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

54,546

 

 

 

54,546

 

Goodwill

 

 

341,168

 

 

 

341,168

 

Other intangible assets, net

 

 

141,562

 

 

 

141,562

 

Investment in subsidiaries

 

496,232

 

149,446

 

 

(645,678

)

 

Other assets

 

 

2,542

 

6,539

 

 

9,081

 

Total assets

 

$

496,232

 

$

1,150,449

 

$

151,365

 

$

(790,437

)

$

1,007,609

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

96,878

 

$

 

$

 

$

96,878

 

Accrued expenses and other current liabilities

 

 

46,933

 

1,919

 

 

48,852

 

Intercompany payable

 

 

144,759

 

 

(144,759

)

 

Current portion of long-term debt and capital leases

 

 

13,965

 

 

 

13,965

 

Total current liabilities

 

 

302,535

 

1,919

 

(144,759

)

159,695

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases, net of current portion

 

 

300,906

 

 

 

300,906

 

Other liabilities

 

 

50,776

 

 

 

50,776

 

Total liabilities

 

 

654,217

 

1,919

 

(144,759

)

511,377

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior preferred stock

 

 

871,014

 

 

(871,014

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

496,232

 

(374,782

)

149,446

 

225,336

 

496,232

 

Total liabilities and stockholders’ equity

 

$

496,232

 

$

1,150,449

 

$

151,365

 

$

(790,437

)

$

1,007,609

 

 

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Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED APRIL 1, 2011

(in thousands)

 

 

 

Parent

 

 

 

 

 

 

 

 

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Consolidating

 

 

 

 

 

(Guarantor)

 

Issuer

 

Subsidiaries(1)

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

297,417

 

$

 

$

 

$

297,417

 

Cost of sales

 

 

186,476

 

 

 

186,476

 

Gross profit

 

 

110,941

 

 

 

110,941

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

92,817

 

12

 

(4,742

)

88,087

 

Depreciation and amortization

 

 

5,752

 

 

 

5,752

 

Other operating income

 

 

 

(4,742

)

4,742

 

 

Equity earnings of subsidiaries

 

(6,883

)

(3,624

)

 

10,507

 

 

Total operating expenses

 

(6,883

)

94,945

 

(4,730

)

10,507

 

93,839

 

Operating income

 

6,883

 

15,996

 

4,730

 

(10,507

)

17,102

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other (expense) income, net

 

 

(6,402

)

713

 

 

(5,689

)

Income before income taxes

 

6,883

 

9,594

 

5,443

 

(10,507

)

11,413

 

Income taxes

 

 

2,711

 

1,819

 

 

4,530

 

Net income

 

6,883

 

6,883

 

3,624

 

(10,507

)

6,883

 

Preferred stock dividends

 

 

(30,402

)

 

30,402

 

 

Net income (loss) attributable to common stockholders

 

$

6,883

 

$

(23,519

)

$

3,624

 

$

19,895

 

$

6,883

 

 


(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.

 

13



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 26, 2010

(in thousands)

 

 

 

Parent

 

 

 

 

 

 

 

 

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Consolidating

 

 

 

 

 

(Guarantor)

 

Issuer

 

Subsidiaries(1)

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

245,218

 

$

 

$

 

$

245,218

 

Cost of sales

 

 

150,071

 

 

 

150,071

 

Gross profit

 

 

95,147

 

 

 

95,147

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

77,223

 

6

 

 

77,229

 

Depreciation and amortization

 

 

4,751

 

 

 

4,751

 

Equity earnings of subsidiaries

 

(9,238

)

(2,648

)

 

11,886

 

 

Total operating expenses

 

(9,238

)

79,326

 

6

 

11,886

 

81,980

 

Operating income

 

9,238

 

15,821

 

(6

)

(11,886

)

13,167

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other (expense) income, net

 

 

(4,638

)

4,403

 

(3,694

)

(3,929

)

Income before income taxes

 

9,238

 

11,183

 

4,397

 

(15,580

)

9,238

 

Income taxes

 

3,668

 

2,253

 

1,415

 

(3,668

)

3,668

 

Net income

 

5,570

 

8,930

 

2,982

 

(11,912

)

5,570

 

Preferred stock dividends

 

 

(26,435

)

 

26,435

 

 

Net income (loss) attributable to common stockholders

 

$

5,570

 

$

(17,505

)

$

2,982

 

$

14,523

 

$

5,570

 

 


(1)          The Subsidiary Issuer does not allocate integration expenses, corporate overhead or other expenses for shared services to the Guarantor Subsidiaries; therefore, the results for the Guarantor Subsidiaries do not reflect any such allocation.

 

14



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)

FOR THE THREE MONTHS ENDED APRIL 1, 2011

(in thousands)

 

 

 

Parent

 

 

 

 

 

 

 

 

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Consolidating

 

 

 

 

 

(Guarantor)

 

Issuer

 

Subsidiaries

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

 

$

12,972

 

$

526

 

$

 

$

13,498

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

(5,427

)

 

 

(5,427

)

Proceeds from sales and maturities of short-term investments

 

 

100

 

 

 

100

 

Purchase of businesses, net of cash acquired

 

 

(9,496

)

 

 

(9,496

)

Other

 

 

561

 

 

(561

)

 

Net cash used in investing activities

 

 

(14,262

)

 

(561

)

(14,823

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Increase in purchase card payable, net

 

 

1,707

 

 

 

1,707

 

Repayment of debt and capital lease obligations

 

 

(13,546

)

 

 

(13,546

)

Proceeds from stock options exercised

 

 

611

 

 

 

611

 

Other

 

 

(211

)

(561

)

561

 

(211

)

Net cash used in financing activities

 

 

(11,439

)

(561

)

561

 

(11,439

)

Effect of exchange rate changes on cash and cash equivalents

 

 

90

 

 

 

90

 

Net decrease cash and cash equivalents

 

 

(12,639

)

(35

)

 

(12,674

)

Cash and cash equivalents at beginning of period

 

 

86,919

 

62

 

 

86,981

 

Cash and cash equivalents at end of period

 

$

 

$

74,280

 

$

27

 

$

 

$

74,307

 

 

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Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 26, 2010

(in thousands)

 

 

 

Parent

 

 

 

 

 

 

 

 

 

 

 

Company

 

Subsidiary

 

Guarantor

 

Consolidating

 

 

 

 

 

(Guarantor)

 

Issuer

 

Subsidiaries

 

Adjustments

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

 

$

16,268

 

$

(202

)

$

 

$

16,066

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

(3,733

)

 

 

(3,733

)

Purchase of short-term investments

 

 

(1,342

)

 

 

(1,342

)

Proceeds from sales and maturities of short-term investments

 

 

1,379

 

 

 

1,379

 

Other

 

 

(203

)

 

203

 

 

Net cash used in investing activities

 

 

(3,899

)

 

203

 

(3,696

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Decrease in purchase card payable, net

 

 

(1,025

)

 

 

(1,025

)

Repayment of debt and capital lease obligations

 

 

(154

)

 

 

(154

)

Proceeds from stock options exercised

 

 

5,200

 

 

 

5,200

 

Other

 

 

479

 

203

 

(203

)

479

 

Net cash provided by financing activities

 

 

4,500

 

203

 

(203

)

4,500

 

Effect of exchange rate changes on cash and cash equivalents

 

 

60

 

 

 

60

 

Net increase in cash and cash equivalents

 

 

16,929

 

1

 

 

16,930

 

Cash and cash equivalents at beginning of period

 

 

99,170

 

53

 

 

99,223

 

Cash and cash equivalents at end of period

 

$

 

$

116,099

 

$

54

 

$

 

$

116,153

 

 

16



 

ITEM 2. Management’s 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 Management’s 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,

·                  product cost and price fluctuations due to inflation and currency exchange rates,

·                  fluctuations in the cost of commodity-based products and raw materials, such as copper, and fuel prices,

·                  governmental and educational budget constraints,

·                  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,

·                  failure to realize expected benefits from acquisitions,

·                  failure to identify, acquire and successfully integrate acquisition candidates,

·                  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,

·                  the highly competitive nature of the maintenance, repair and operations distribution industry,

·                  material facilities and systems disruptions and shutdowns,

·                  our ability to purchase products from suppliers on favorable terms,

·                  the length of our supply chains,

·                  work stoppages or other business interruptions at transportation centers or shipping ports,

·                  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

 

17



 

·                  the other factors described under “Part I. Item 1A—Risk 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: janitorial and sanitation (“JanSan”); plumbing; heating, ventilation and air conditioning (“HVAC”); hardware, tools and fixtures; electrical and lighting; appliances and parts; security and safety; 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 fourteen distinct and targeted brands, each of which is recognized in the markets they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The Wilmar®, AmSan®, CleanSource®, Sexauer®, Maintenance USA®, NCP® 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 650 field sales representatives, approximately 350 inside sales and customer service representatives, a direct marketing program consisting of catalogs and promotional flyers, brand-specific websites and a national accounts sales program.

 

We deliver our products through our network of 57 distribution centers and 26 professional contractor showrooms located throughout the United States, Canada and Puerto Rico, 43 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 customer’s service requirements. While we market our products under a variety of brands, 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.

 

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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 months ended April 1, 2011 and March 26, 2010:

 

 

 

% of Net Sales

 

% Increase

 

 

 

Three Months Ended

 

(Decrease)

 

 

 

April 1,

 

March 26,

 

2011

 

 

 

2011

 

2010

 

vs. 2010 (1)

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

21.3

%

Cost of sales

 

62.7

 

61.2

 

24.3

 

Gross profit

 

37.3

 

38.8

 

16.6

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

29.6

 

31.5

 

14.1

 

Depreciation and amortization

 

1.9

 

1.9

 

21.1

 

Total operating expense

 

31.6

 

33.4

 

14.5

 

Operating income

 

5.8

 

5.4

 

29.9

 

 

 

 

 

 

 

 

 

Interest expense

 

(2.0

)

(1.8

)

40.0

 

Interest income and other income

 

0.1

 

0.2

 

(4.0

)

Income before income taxes

 

3.8

 

3.8

 

23.5

 

Income tax provision

 

(1.5

)

(1.5

)

23.5

 

Net income

 

2.3

%

2.3

%

23.6

%

 


(1)          Percent increase (decrease) represents the actual change as a percent of the prior year’s result.

 

Overview. During the three months ended April 1, 2011, our net sales increased 21.3%. We believe this increase primarily reflected the impact of our recent acquisitions, as well as modest economic improvements across our end-markets. Sales to customers in our facilities maintenance end-markets, which make up 75% of our total sales and include residential multi-family housing and institutional MRO customers, increased 26.4% in total as a result of our CleanSource and NCP acquisitions, and 5.1% on an organic sales basis during the first quarter of 2011 compared to the first quarter of 2010. Sales to our professional contractor and specialty distributor customers, which represent 14% and 11% of our total sales, respectively, increased 9.1% and 6.3%, respectively. Although we are starting to see some signs of stabilization, demand from these customers continues to be impacted by the general economic conditions, particularly as it relates to 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 2011 will be less severe than we experienced during 2009 and 2010. We expect sales to our customers to increase modestly during the remainder of 2011 as limited and uneven economic improvements occur across our end-markets.

 

Our net income as a percentage of sales was flat at 2.3% in the first quarter when compared to the comparable prior year period.

 

We remain focused on expense control 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, in enhancements to our information technology solutions and in qualified sales and support personnel.

 

Three Months Ended April 1, 2011 Compared to Three Months Ended March 26, 2010

 

Net Sales. Our net sales increased by $52.2 million, or 21.3%, to $297.4 million in the three months ended April 1, 2011 from $245.2 million in the three months ended March 26, 2010. The increase in sales resulted from sales of $37.6 million from our recently acquired brands, CleanSource and NCP, as well as $14.6 million from increases in comparable sales to our facilities maintenance, professional contractor and specialty distributor customers of 5.1%, 9.1% and 6.3%, respectively, and one additional shipping day when compared to prior year.

 

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Gross Profit. Gross profit increased by $15.8 million, or 16.6%, to $110.9 million in the three months ended April 1, 2011 from $95.1 million in the three months ended March 26, 2010. Our gross profit margin decreased 150 basis points to 37.3% for the three months ended April 1, 2011 compared to 38.8% for the three months ended March 26, 2010. The lower gross margins related to our CleanSource and NCP acquisitions accounted for 100 basis points of the decrease in gross profit margin, while the remaining decline was primarily attributable to a shift in sales mix across various product categories.

 

Selling, General and Administrative Expenses. SG&A expenses increased by $10.9 million, or 14.1%, to $88.1 million in the three months ended April 1, 2011 from $77.2 million in the three months ended March 26, 2010. As a percent of sales, SG&A decreased to 29.6% for the three months ended April 1, 2011 compared to 31.5 % for the three months ended March 26, 2010. The decrease in SG&A expenses as a percentage of sales was primarily due to lower salary and wages expense, lower distribution consolidation expenses, lower bad debt expense and lower occupancy related expenses as well as the impact from our CleanSource and NCP acquisitions, as they have lower SG&A expenses as a percentage of sales, offset in part by higher delivery and fuel expenses, and higher variable compensation expenses.

 

Depreciation and Amortization. Depreciation and amortization expense increased by $1.0 million to $5.8 million in the three months ended April 1, 2011 from $4.8 million in the three months ended March 26, 2010. As a percentage of sales, depreciation and amortization was flat at 1.9% when compared to the three months ended March 26, 2010. The increase in depreciation and amortization expense was primarily due to our CleanSource and NCP acquisitions, as well as higher depreciation resulting from higher capital spending over the last three years associated with enhancements to our information technology infrastructure and distribution center consolidation and integration efforts.

 

Operating Income. As a result of the foregoing, operating income increased by $3.9 million, or 29.9%, to $17.1 million in the three months ended April 1, 2011 from $13.2 million in the three months ended March 26, 2010. As a percent of sales, operating income increased to 5.8% in the three months ended April 1, 2011 compared to 5.4% in the three months ended March 26, 2010.

 

Interest Expense. Interest expense increased by $1.7 million in the three months ended April 1, 2011 to $6.1 million from $4.4 million in the three months ended March 26, 2010. This increase was primarily due to a higher weighted average interest rate as our ratio of fixed versus floating rate debt increased from the series of refinancing transactions completed on November 16, 2010.

 

Interest and Other Income. Interest and other income remained flat at $0.4 million in the three months ended April 1, 2011 when compared to the three months ended March 26, 2010.

 

Provision for Income Taxes. The effective tax rate was 39.7% for the three months ended April 1, 2011 and March 26, 2010.

 

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.

 

On November 16, 2010, Interline New Jersey completed a series of refinancing transactions: (1) an offering of $300.0 million of 7.00% senior subordinated notes due 2018 (the “7.00% Notes”) and (2) entering into a $225.0 million asset-based revolving credit facility (the “ABL Facility”). The proceeds from the 7.00% Notes were used to redeem $137.3 million of the 81/8% senior subordinated notes due 2014 (the “81/8% Notes”) and to repay the indebtedness under the prior credit facility of Interline New Jersey. The remaining $13.4 million of the 81/8% Notes were redeemed on January 3, 2011. The 81/8% Notes were redeemed at an average price of 104.256% of par. The loss associated with this transaction was recorded in a prior period. As a result of these refinancing transactions, Interline New Jersey extended the maturities of its fixed rate debt, and interest expense will be higher when compared to 2010.

 

The 7.00% Notes were priced at 100% of their principal amount of $300.0 million. The 7.00% Notes mature on November 15, 2018 and interest is payable on May 15 and November 15 of each year, beginning on May 15, 2011. Debt issuance costs capitalized in connection with the 7.00% Notes were $6.9 million.

 

The 7.00% Notes are generally unsecured, senior subordinated obligations of Interline New Jersey that rank equal to all of Interline New Jersey’s existing and future senior subordinated indebtedness, junior to all of Interline New Jersey’s existing and future senior indebtedness, including indebtedness under the ABL Facility, and senior to any of Interline New Jersey’s existing and future obligations that are, by their terms, expressly subordinated in right of payment to the 7.00% Notes. The 7.00% Notes are unconditionally guaranteed, jointly and severally, on an unsecured senior subordinated basis by the Company and Interline New

 

20



 

Jersey’s existing and future domestic subsidiaries that guarantee the ABL Facility (collectively the “Guarantors”). The Guarantors have issued guarantees (each a “Guarantee” and collectively, the “Guarantees”) of Interline New Jersey’s obligations under the 7.00% Notes and the Indenture on an unsecured senior subordinated basis. Each Guarantee ranks equal in right of payment with all of the Guarantors’ existing and future senior subordinated indebtedness, junior to all of the Guarantors’ existing and future senior indebtedness, including guarantees of the ABL Facility, and senior to all of the Guarantors’ existing and future obligations that are, by their terms, expressly subordinated in right of payment to the Guarantees. The 7.00% Notes are not guaranteed by any of Interline New Jersey’s foreign subsidiaries.

 

The debt instruments of Interline New Jersey, primarily the ABL Facility and the indenture governing the terms of the 7.00% Notes, contain significant restrictions on the payment of dividends and distributions to the Company by Interline New Jersey. The ABL facility allows Interline New Jersey to pay dividends, make distributions to the Company or repurchase its shares from the Company in an aggregate amount not to exceed $25.0 million during any 12-month period, so long as there is no default and Interline New Jersey meets certain availability requirements. Only if these conditions are met and, in addition, Interline New Jersey’s fixed charge coverage ratio is at least 1.20 to 1.00, is there no cap on Interline New Jersey’s ability to pay dividends and repurchase its shares. 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. The indenture for the 7.00% Notes generally restricts the ability of Interline New Jersey to pay distributions to the Company and to make advances to, or investments in, the Company to an amount 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 the Company 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 $15.0 million per year; (2) allowing certain tax payments; and (3) allowing other distributions in an aggregate amount not to exceed the greater of $85.0 million and 8.5% of the total assets of Interline New Jersey and its restricted subsidiaries, provided there is no default. For a further description of the ABL Facility, see “Credit Facility” below.

 

As of April 1, 2011, we had $300.0 million of the 7.00% Notes outstanding and $178.3 million of availability under our ABL Facility, net of $7.6 million in letters of credit.

 

Financial Condition

 

Working capital increased by $7.9 million to $309.4 million as of April 1, 2011 from $301.6 million as of December 31, 2010. The increase in working capital was primarily funded by cash flows from operations.

 

Cash Flow

 

Operating Activities. Net cash provided by operating activities was $13.5 million in the three months ended April 1, 2011 compared to net cash provided by operating activities of $16.1 million in the three months ended March 26, 2010.

 

Net cash provided by operating activities of $13.5 million in the three months ended April 1, 2011 primarily consisted of net income of $6.9 million, adjustments for non-cash items of $9.9 million and cash used in working capital items of $3.3 million. Adjustments for non-cash items primarily consisted of $5.8 million in depreciation and amortization of property, equipment and intangible assets, $2.2 million in deferred income taxes, $1.3 million in share-based compensation, $1.1 million in bad debt expense,  and $0.3 million in amortization of debt issuance costs, partially offset by $0.9 million in excess tax benefits from share-based compensation. The cash used in working capital items consisted of $8.2 million of decreased accrued expenses and other current liabilities primarily due to lower accrued compensation resulting from the timing of payments, $6.9 million from increased trade receivables, net of changes in our allowance for doubtful accounts, resulting from the timing of collections, $4.9 million from decreased trade payables balances as a result of the timing of purchases and related payments, and $1.4 million from increased inventory levels primarily in preparation for normal seasonal demands in our business. These items were partially offset by $11.0 million from decreased prepaid expenses and other current assets primarily as a result of higher collections of rebates from vendors, $5.2 million from timing of interest payments and $1.9 million from the increase in current income taxes resulting from an increase in income before taxes.

 

Net cash provided by operating activities of $16.1 million in the three months ended March 26, 2010 primarily consisted of net income of $5.6 million, adjustments for non-cash items of $7.1 million and cash provided by working capital items of $3.2 million. Adjustments for non-cash items primarily consisted of $4.9 million in depreciation and amortization of property, equipment and intangible assets, $1.5 million in bad debt expense and $0.8 million in share-based compensation. The cash provided by working capital items primarily consisted of $3.3 million from increased trade payables balances as a result of the timing of purchases and

 

21



 

related payments, $3.0 million from timing of interest payments and $0.6 million from the increase in income taxes resulting from an increase in income before taxes. These items were partially offset by $3.3 million from increased inventory levels as a result of the stocking of our new distribution center in Chicago, Illinois, and $1.0 million from increased trade receivables, net of changes in our allowance for doubtful accounts, resulting from the timing of collections.

 

Investing Activities. Net cash used in investing activities was $14.8 million in the three months ended April 1, 2011 compared to net cash used in investing activities of $3.7 million in the three months ended March 26, 2010.

 

Net cash used in investing activities in the three months ended April 1, 2011 was primarily attributable to $9.5 million in costs related to purchases of businesses and $5.4 million of capital expenditures made in the ordinary course of business.

 

Net cash used in investing activities in the three months ended March 26, 2010 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 $3.7 million.

 

Financing Activities. Net cash used in financing activities totaled $11.4 million in the three months ended April 1, 2011 compared to net cash provided by financing activities of $4.5 million in the three months ended March 26, 2010.

 

Net cash used in financing activities in the three months ended April 1, 2011 was attributable to the redemption of the remaining $13.4 million of our 81/8% Notes and payment of $0.2 million on capital lease obligations, partially offset by a $1.7 million net increase in purchase card payable and $0.4 million of proceeds from stock options exercised and excess tax benefits from share-based compensation, net of treasury stock acquired to satisfy minimum statutory tax withholding requirements resulting from the vesting or exercising of equity awards.

 

Net cash provided by financing activities in the three months ended March 26, 2010 was attributable to proceeds received from stock options exercised and related excess tax benefits of $5.7 million, partially offset by a $1.0 million net decrease in purchase card payable.

 

Capital Expenditures

 

Capital expenditures were $5.4 million in the three months ended April 1, 2011 compared to $3.7 million in the three months ended March 26, 2010. Capital expenditures as a percentage of sales were 1.8% in the three months ended April 1, 2011 compared to 1.5% in the three months ended March 26, 2010. 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 and enhancements to our information technology systems. In addition, during the three months ended April 1, 2011 and March 26, 2010, we acquired leasehold improvements through non-cash lease incentives of $0.5 million and $0.6 million, respectively.

 

Credit Facility

 

The ABL Facility provides for revolving credit financing of up to $225.0 million subject to borrowing base availability, with a maturity of five years, including sub-facilities for letters of credit, not exceeding $40.0 million, and swingline loans. In addition, the ABL Facility provides that the revolving commitments may be increased to $325.0 million, subject to certain terms and conditions. The ABL Facility has a 5-year term and any borrowings outstanding will be due and payable in full on November 15, 2015. Debt issuance costs capitalized in connection with the ABL Facility were $3.5 million.

 

The borrowing base at any time equals the sum (subject to certain eligibility requirements, reserves and other adjustments) of:

 

·                                          85% of eligible trade receivables; and

·                                          the lesser of (x) 65% of eligible inventory, valued at the lower of cost or market, and (y) 85% of the net orderly liquidation value of eligible inventory.

 

The ABL Facility includes borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as swingline loans.  All borrowings under the ABL Facility will be subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties.

 

Borrowings under the ABL Facility bear interest at a rate per annum equal to, at Interline New Jersey’s option, either adjusted LIBOR or at an alternate base rate, in each case plus an applicable margin. As of April 1, 2011, the applicable margin was equal to

 

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2.50% per annum for loans bearing interest by reference to the adjusted LIBOR and 1.50% per annum for loans bearing interest by reference to the alternate base rate. The applicable margin is adjusted quarterly by reference to a grid based on average availability under the ABL Facility. The applicable margin for the upcoming quarter is expected to be 2.25% per annum for loans bearing interest by reference to the adjusted LIBOR and 1.25% per annum for loans bearing interest by reference to the alternate base rate.

 

In addition, Interline New Jersey is required to pay each lender a commitment fee at a rate equal to 0.50% per annum, in respect of any unused commitments if the average utilization under the ABL Facility during the preceding calendar quarter is 50% or higher, and equal to 0.625% if the average utilization under the ABL Facility during the preceding calendar quarter is less than 50%.

 

During any period after the occurrence and continuance of an event of default (and continuing for a certain period of time thereafter), or after availability under the ABL Facility is less than the greater of (i) $35.0 million and (ii) 17.5% of the total revolving commitments at such time (and continuing for a certain period of time thereafter), the ABL Facility, subject to exceptions, requires mandatory prepayments, but not permanent reductions of commitments, and subject to a right of reinvestment, in amounts equal to 100% of the net cash proceeds from permitted non-ordinary-course asset sales and casualty and condemnation events, as well as from any equity issuance or incurrence of debt not otherwise permitted under the ABL Facility. In addition, Interline New Jersey is required to pay down loans under the ABL Facility if the total amount of outstanding obligations thereunder exceeds the lesser of the aggregate amount of the revolving commitments thereunder and the applicable borrowing base. Interline New Jersey may prepay loans and permanently reduce commitments under the ABL Facility at any time in certain minimum principal amounts, without premium or penalty (except LIBOR breakage costs, if applicable).

 

Borrowings under the ABL Facility are guaranteed by the Company and Interline New Jersey’s existing and future domestic subsidiaries (collectively the “Guarantors”) and are secured by first priority liens on substantially all of the assets of Interline New Jersey and the Guarantors.

 

The ABL Facility requires that if excess availability is less than the greater of (a) 12.5% of the commitments and (b) $28.1 million, Interline New Jersey must comply with a minimum fixed charge coverage ratio test of 1.00:1.00 and certain other covenants. In addition, the ABL Facility includes negative covenants that, subject to significant exceptions, limit Interline New Jersey’s ability and the ability of the Guarantors to, among other things, incur debt, incur liens and engage in sale leaseback transactions, make investments and loans, pay dividends, engage in mergers, acquisitions and asset sales, prepay certain indebtedness, amend the terms of certain material agreements, enter into agreements limiting subsidiary distributions, engage in certain transactions with affiliates and alter the business that Interline New Jersey conducts.

 

The ABL Facility contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the ABL Facility to be in full force and effect and changes of control. If such an event of default occurs, the lenders under the ABL Facility would be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor.

 

We are currently in compliance with all covenants contained within the ABL Facility.

 

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 availability under our ABL Facility to be our primary source of funds in the future. Letters of credit, which are issued under our ABL Facility, are used to support payment obligations incurred for our general corporate purposes.

 

As of April 1, 2011, we had $178.3 million of availability under our ABL Facility, net of $7.6 million in letters of credit. We believe that cash and cash equivalents on hand, cash flow from operations and available borrowing capacity under our ABL Facility will be adequate to finance our ongoing operational cash flow needs and debt service obligations in the foreseeable future.

 

Contractual Obligations

 

Our contractual obligations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC. There have been no material changes to our contractual obligations since December 31, 2010.

 

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Table of Contents

 

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 31, 2010 filed with the SEC. During the three months ended April 1, 2011, 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

 

The fair market value of our 7.00% Notes is subject to interest rate risk. As of April 1, 2011, the estimated fair market value of our 7.00% Notes was approximately $307.1 million, or 102.4% 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 April 1, 2011.

 

A substantial portion of our products is sourced from suppliers in China. The value of the Chinese Yuan has increased relative to the U.S. dollar since July 2005, when it was allowed to fluctuate against a basket of foreign currencies. Most experts believe that the value of the Yuan will continue to increase relative to the U.S. dollar over the next few years. Such appreciation would most likely result in an increase in the cost of products that are sourced from suppliers in China.

 

In addition, many of our suppliers price their products in currencies other than the U.S. dollar or incur costs of production in non-U.S. currencies. Accordingly, depreciation of the U.S. dollar against foreign currencies could increase the price we pay for these products.

 

Derivative Financial Instruments

 

As of April 1, 2011, 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 market risks. Based on such evaluations, we may enter into new derivative financial instruments to manage our exposures. Our derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of corporate risk-management policies.

 

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Table of Contents

 

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 April 1, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of April 1, 2011, 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 SEC’s 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 April 1, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

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.

 

ITEM 1A. Risk Factors

 

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 31, 2010 in Part I. Item 1A. Risk Factors. See also “Part I. Item 2—Forward 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 31, 2010.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Equity Securities

 

None.

 

Purchases of Equity Securities by the Issuer

 

Period

 

Total
Number of
Shares
Purchased

 

Average Price
Paid per
Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

 

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs

 

January 2011

 

 

 

 

 

 

 

 

 

(January 1 – January 28)

 

 

 

 

 

February 2011

 

 

 

 

 

 

 

 

 

(January 29 – February 25)

 

46,322

 

$

22.20

 

 

 

March 2011

 

 

 

 

 

 

 

 

 

(February 26 – April 1)

 

80

 

21.91

 

 

 

Total

 

46,402

 

$

22.20

 

 

 

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

ITEM 4. (Removed and Reserved)

 

ITEM 5. Other Information

 

None.

 

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ITEM 6. Exhibits

 

The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:

 

12.1

 

Computation of earnings to fixed charges and earnings to combined fixed charges and preferred dividends of Interline Brands, Inc. (furnished herewith).

31.1

 

Certification of the Chief Executive Officer of Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

31.2

 

Certification of the Chief Financial Officer of Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

INTERLINE BRANDS, INC.

 

 

Registrant

 

 

 

 

 

 

Date: May 9, 2011

By:

/S/ JOHN A. EBNER

 

 

John A. Ebner

 

 

Chief Financial Officer

 

 

(Duly Authorized Signatory and Principal Financial Officer)

 

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