UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 29, 2012
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from_____________to_____________
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Commission File Number: 001-32380
INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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03-0542659
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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701 San Marco Boulevard
Jacksonville, Florida
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32207
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(Address of principal executive offices)
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(Zip code)
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(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
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No
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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
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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.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if smaller reporting company)
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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
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No
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of
August 3, 2012
, there were
31,931,376
shares of the registrant’s common stock outstanding (excluding
2,037,252
shares held in treasury), par value
$0.01
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
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INTERLINE BRANDS, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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AS OF JUNE 29, 2012 AND DECEMBER 30, 2011
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(in thousands, except share and per share data)
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June 29,
2012
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December 30,
2011
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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97,582
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$
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97,099
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Accounts receivable - trade (net of allowance for doubtful accounts of $4,742 and $6,457)
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148,252
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128,383
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Inventories
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223,475
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221,225
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Prepaid expenses and other current assets
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22,513
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26,285
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Income taxes receivable
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2,437
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1,123
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Deferred income taxes
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15,253
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16,738
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Total current assets
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509,512
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490,853
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Property and equipment, net
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56,073
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57,728
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Goodwill
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344,478
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344,478
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Other intangible assets, net
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130,433
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134,377
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Other assets
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9,251
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9,022
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Total assets
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$
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1,049,747
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$
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1,036,458
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities:
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Accounts payable
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$
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101,667
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$
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109,438
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Accrued expenses and other current liabilities
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51,038
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51,864
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Accrued interest
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2,973
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2,933
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Income taxes payable
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1,818
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—
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Current portion of capital leases
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584
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669
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Total current liabilities
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158,080
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164,904
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Long-Term Liabilities:
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Deferred income taxes
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51,916
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51,776
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Long-term debt, net of current portion
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300,000
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300,000
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Capital leases, net of current portion
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457
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726
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Other liabilities
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4,069
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4,607
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Total liabilities
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514,522
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522,013
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Commitments and contingencies (see Note 5)
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Senior preferred stock; $0.01 par value, 20,000,000 authorized;
none outstanding as of June 29, 2012 and December 30, 2011
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—
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—
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Stockholders' Equity:
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Common stock; $0.01 par value, 100,000,000 authorized; 33,967,800 issued
and 31,930,637 outstanding as of June 29, 2012, and 33,558,842 issued
and 31,596,615 outstanding as of December 30, 2011
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340
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335
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Additional paid-in capital
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605,672
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599,923
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Accumulated deficit
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(42,664
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)
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(59,150
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)
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Accumulated other comprehensive income
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1,676
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1,688
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Treasury stock, at cost, 2,037,163 as of June 29, 2012,
and 1,962,227 as of December 30, 2011
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(29,799
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)
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(28,351
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)
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Total stockholders' equity
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535,225
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514,445
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Total liabilities and stockholders' equity
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$
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1,049,747
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$
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1,036,458
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See accompanying notes to unaudited consolidated financial statements.
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INTERLINE BRANDS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
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THREE AND SIX MONTHS ENDED JUNE 29, 2012 AND JULY 1, 2011
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(in thousands, except share and per share data)
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Three Months Ended
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Six Months Ended
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June 29,
2012
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July 1,
2011
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June 29,
2012
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July 1,
2011
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Net sales
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$
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334,821
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$
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317,679
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$
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648,403
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$
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615,096
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Cost of sales
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213,768
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201,545
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411,739
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388,021
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Gross profit
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121,053
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116,134
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236,664
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227,075
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Operating Expenses:
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Selling, general and administrative expenses
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94,157
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88,252
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185,674
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176,339
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Depreciation and amortization
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6,351
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5,853
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12,659
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11,605
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Total operating expenses
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100,508
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94,105
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198,333
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187,944
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Operating income
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20,545
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22,029
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38,331
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39,131
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Interest expense
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(6,056
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)
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(6,093
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)
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(12,102
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(12,189
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)
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Interest and other income
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420
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382
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1,012
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789
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Income before income taxes
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14,909
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16,318
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27,241
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27,731
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Provision for income taxes
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5,888
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6,462
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10,755
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10,992
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Net income
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$
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9,021
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$
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9,856
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$
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16,486
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$
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16,739
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Earnings Per Share:
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Basic
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$
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0.28
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$
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0.29
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$
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0.52
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$
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0.50
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Diluted
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$
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0.28
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$
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0.29
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$
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0.51
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$
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0.49
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Weighted-Average Shares Outstanding:
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Basic
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31,993,530
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33,451,011
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31,900,510
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33,404,735
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Diluted
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32,711,649
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34,119,482
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32,559,220
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34,139,992
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See accompanying notes to unaudited consolidated financial statements.
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INTERLINE BRANDS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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THREE AND SIX MONTHS ENDED JUNE 29, 2012 AND JULY 1, 2011
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(in thousands)
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Three Months Ended
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Six Months Ended
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June 29,
2012
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July 1,
2011
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June 29,
2012
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July 1,
2011
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Net income
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$
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9,021
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$
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9,856
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$
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16,486
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$
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16,739
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Other comprehensive income, net of tax:
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Foreign currency translation adjustments
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(159
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—
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(12
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228
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Amortization of unrecognized (loss) gain on
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employee benefits
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—
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(3
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—
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1
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Other comprehensive (loss) income
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(159
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(3
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(12
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229
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Comprehensive income
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$
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8,862
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$
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9,853
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$
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16,474
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$
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16,968
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See accompanying notes to unaudited consolidated financial statements.
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INTERLINE BRANDS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED JUNE 29, 2012 AND JULY 1, 2011
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(in thousands)
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June 29,
2012
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July 1,
2011
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Cash Flows from Operating Activities:
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Net income
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$
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16,486
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$
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16,739
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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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12,659
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11,605
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Amortization of deferred lease incentive obligation
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(401
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)
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(395
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)
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Amortization of debt issuance costs
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701
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677
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Share-based compensation
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2,668
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2,831
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Excess tax benefits from share-based compensation
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(1,082
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)
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(860
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)
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Deferred income taxes
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1,625
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4,252
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Provision for doubtful accounts
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594
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1,772
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(Gain) loss on disposal of property and equipment
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(91
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)
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75
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Other
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(227
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(82
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)
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Changes in assets and liabilities which provided (used) cash, net of businesses acquired:
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Accounts receivable - trade
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(20,464
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)
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(22,216
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)
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Inventories
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(2,253
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)
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(4,777
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)
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Prepaid expenses and other current assets
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3,772
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7,123
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Other assets
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(23
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)
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8
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Accounts payable
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(7,765
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)
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8,680
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Accrued expenses and other current liabilities
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848
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(1,829
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)
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Accrued interest
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45
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365
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Income taxes
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1,418
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3,989
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Other liabilities
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(14
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)
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10
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Net cash provided by operating activities
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8,496
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27,967
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Cash Flows from Investing Activities:
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Purchases of property and equipment, net
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(7,670
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(10,543
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)
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Proceeds from sales and maturities of short-term investments
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—
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100
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Purchase of businesses, net of cash acquired
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—
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(9,496
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Net cash used in investing activities
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(7,670
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(19,939
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)
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Cash Flows from Financing Activities:
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(Decrease) increase in purchase card payable, net
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(1,781
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)
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969
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Repayment of 8 1/8% senior subordinated notes
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—
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(13,358
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)
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Payment of debt issuance costs
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(1
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)
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(34
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)
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Payments on capital lease obligations
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(354
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)
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(337
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)
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Proceeds from stock options exercised
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2,170
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626
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Excess tax benefits from share-based compensation
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1,082
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860
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Purchases of treasury stock
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(1,448
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)
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(1,030
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)
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Net cash used in financing activities
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(332
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)
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(12,304
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)
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Effect of exchange rate changes on cash and cash equivalents
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(11
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)
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88
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Net increase (decrease) in cash and cash equivalents
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483
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(4,188
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)
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Cash and cash equivalents at beginning of period
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97,099
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86,981
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Cash and cash equivalents at end of period
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$
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97,582
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$
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82,793
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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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$
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11,277
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$
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11,081
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Income taxes, net of refunds
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$
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7,681
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$
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3,238
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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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$
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—
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$
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475
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Adjustments to liabilities assumed and goodwill on business acquired
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$
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—
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$
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163
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Contingent consideration associated with purchase of business
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$
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—
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$
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250
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See accompanying notes to unaudited consolidated financial statements.
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INTERLINE BRANDS, INC. AND SUBSIDIARIES
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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THREE AND SIX MONTHS ENDED JUNE 29, 2012 AND JULY 1, 2011
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1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Interline Brands, Inc., a Delaware corporation, and its subsidiaries (“Interline” or the “Company”) is a leading national distributor and direct marketer of broad-line 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 health care 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 and third-party carriers. 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.
Interline Brands, Inc. 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 consolidated financial statements include the accounts of Interline Brands, Inc. and all of its wholly-owned subsidiaries. These statements 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 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 30, 2011
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 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 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.
On May 29, 2012, the Company announced that it had entered into an Agreement and Plan of Merger (as it may be amended, the “Merger Agreement”), by and among Isabelle Holding Company Inc., a Delaware corporation (“Parent”, which corporation may be converted into a Delaware limited liability company prior to the closing of the Merger (as defined herein)), Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and the Company, providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent is an affiliate of GS Capital Partners VI L.P. and, at the closing of the transactions contemplated by the Merger Agreement, certain interests of Parent will be owned by one or more investment funds managed by P2 Capital Partners, LLC and certain members of Company management. Under the Merger Agreement, stockholders of the Company will receive
$25.50
in cash for each share of Company common stock. The Merger was unanimously approved by Interline's Board of Directors. The Merger is subject to the approval of Interline's stockholders as of July 26, 2012 (the "Record Date") holding a majority of the outstanding shares
of the common stock entitled to vote on the matter at a special meeting that will be held on August 29, 2012. See Note 7. Transactions for further information about the Merger Agreement.
All amounts discussed in these Notes to the Consolidated Financial Statements do not include the impact of the Merger. The Merger will be accounted for as a business combination and will result in a new basis for accounting as of the Merger date.
Fair Value of Financial Instruments
Fair value is defined 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:
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Level 1
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quoted prices in active markets for identical assets or liabilities;
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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
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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 fair value of the Company’s senior subordinated notes is determined by quoted market prices, which are Level 1 inputs. The carrying amount and fair value of the non-current portion of the Company’s senior subordinated notes as of
June 29, 2012
and
December 30, 2011
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2012
|
|
December 30, 2011
|
Description
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
Senior subordinated notes
|
$
|
300,000
|
|
|
$
|
312,000
|
|
|
$
|
300,000
|
|
|
$
|
310,500
|
|
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
|
|
Six Months Ended
|
Product Category (1)
|
|
June 29,
2012
|
|
July 1,
2011
|
|
June 29,
2012
|
|
July 1,
2011
|
JanSan
|
|
$
|
123,889
|
|
|
$
|
117,871
|
|
|
$
|
240,440
|
|
|
$
|
226,437
|
|
Plumbing
|
|
70,626
|
|
|
67,675
|
|
|
141,909
|
|
|
138,561
|
|
Hardware, tools and fixtures
|
|
31,561
|
|
|
29,730
|
|
|
60,261
|
|
|
59,810
|
|
HVAC
|
|
34,709
|
|
|
34,381
|
|
|
60,542
|
|
|
57,225
|
|
Electrical and lighting
|
|
20,593
|
|
|
18,545
|
|
|
40,617
|
|
|
36,518
|
|
Appliances and parts
|
|
19,043
|
|
|
16,532
|
|
|
36,645
|
|
|
31,810
|
|
Security and safety
|
|
15,934
|
|
|
15,246
|
|
|
32,376
|
|
|
30,697
|
|
Other
|
|
18,466
|
|
|
17,699
|
|
|
35,613
|
|
|
34,038
|
|
Total
|
|
$
|
334,821
|
|
|
$
|
317,679
|
|
|
$
|
648,403
|
|
|
$
|
615,096
|
|
__________
|
|
(1)
|
The Company continues to refine its robust product identification process and, as a result, stock keeping units are realigned within product categories. Therefore, the prior periods in this table have been recast to be consistent with current presentation.
|
Recently Adopted Accounting Guidance
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
(“ASU 2011-04”). The amendments in ASU 2011-04 provide clarification of certain fair value concepts such as principal market determination; valuation premise and highest and best use; measuring fair value of instruments with offsetting market or counterparty credit risks; blockage factor and other premiums and discounts; and liabilities and instruments classified in shareholders' equity. In addition, the pronouncement provides guidance for new disclosures such as transfers between Level 1 and Level 2 of the fair value hierarchy; Level 3 fair value measurements; an entity's use of an asset when it is different from its highest and best use; and fair value hierarchy disclosures for financial instruments not measured at fair value but disclosed. Effective December 31, 2011, the Company adopted the fair value measurement and disclosure requirements. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(“ASU 2011-05”), as amended by ASU No. 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
(“ASU 2011-12”). This pronouncement brings consistency to the way reporting entities disclose comprehensive income in their consolidated financial statements and related notes. ASU 2011-05, as amended by ASU 2011-12, no longer permits disclosure of comprehensive income in either the statement of shareholders' equity or in a note to the consolidated financial statements. Instead, reporting entities have two options for presenting comprehensive income. The first option presents comprehensive income in a single statement, which includes two components: net income and other comprehensive income. The second option allows the presentation of comprehensive income in two separate but consecutive statements: one for net income and the other for other comprehensive income. Effective December 31, 2011, the Company adopted new disclosure requirements for comprehensive income, including the required retrospective application. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,
Intangibles - Goodwill and Other
(Topic 350)
(“ASU 2011-08”). The amendments in ASU 2011-08 are intended to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Effective December 31, 2011, the Company adopted the provisions of this guidance. Because this guidance only enhances the steps performed to determine whether a potential impairment exists (but should not impact the resulting conclusion), the adoption did not have an impact on the Company's consolidated financial statements.
2. 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, none of which is individually significant. 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.
The activity in the allowance for doubtful accounts consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2011
|
|
Charged to Expense
|
|
Deductions
|
|
Balance at June 29, 2012
|
$
|
6,457
|
|
|
$
|
594
|
|
|
$
|
(2,309
|
)
|
|
$
|
4,742
|
|
3. 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
|
|
Six Months Ended
|
|
June 29,
2012
|
|
July 1,
2011
|
|
June 29,
2012
|
|
July 1,
2011
|
Weighted average shares outstanding - basic
|
31,993,530
|
|
|
33,451,011
|
|
|
31,900,510
|
|
|
33,404,735
|
|
Dilutive shares resulting from:
|
|
|
|
|
|
|
|
Stock options
|
537,090
|
|
|
364,289
|
|
|
448,120
|
|
|
426,579
|
|
Restricted stock
|
—
|
|
|
—
|
|
|
270
|
|
|
—
|
|
Restricted share units
|
181,029
|
|
|
304,182
|
|
|
210,320
|
|
|
308,678
|
|
Weighted average shares outstanding - diluted
|
32,711,649
|
|
|
34,119,482
|
|
|
32,559,220
|
|
|
34,139,992
|
|
During the
three months ended
June 29, 2012
and
July 1, 2011
, stock options to purchase
994,588
shares and
1,924,586
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
six months ended
June 29, 2012
and
July 1, 2011
, stock options to purchase
1,446,567
shares and
2,441,061
shares of common stock, respectively, were excluded from the computations of diluted weighted-average shares outstanding because their effect would be anti-dilutive.
4. SHARE-BASED COMPENSATION
During the
three months ended
June 29, 2012
and
July 1, 2011
, share-based compensation expense was
$1.5 million
and
$1.6 million
, respectively. During the
six months ended
June 29, 2012
and
July 1, 2011
, share-based compensation expense was
$2.7 million
and
$2.8 million
, respectively. As of
June 29, 2012
, there was
$11.9 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
2.3
years.
During the
three months ended
June 29, 2012
and
July 1, 2011
, the Company granted
34,328
and
32,368
stock options, respectively, with a weighted-average grant date fair value of
$7.14
and
$7.57
, respectively. During the
six months ended
June 29, 2012
and
July 1, 2011
, the Company granted
241,489
and
377,659
stock options, respectively, with a weighted-average grant date fair value of
$7.84
and
$8.33
, 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.
The Black-Scholes weighted-average assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2012
|
|
July 1,
2011
|
|
June 29,
2012
|
|
July 1,
2011
|
Expected volatility
|
43.5
|
%
|
|
40.9
|
%
|
|
43.5
|
%
|
|
41.0
|
%
|
Expected dividends
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Risk-free interest rate
|
0.8
|
%
|
|
1.8
|
%
|
|
0.9
|
%
|
|
2.1
|
%
|
Expected life (in years)
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
During the
three months ended
June 29, 2012
and
July 1, 2011
, there were
78,610
and
1,889
stock options exercised, respectively, with an intrinsic value of
$0.6 million
and less than
$0.1 million
, respectively. During the
six months ended
June 29, 2012
and
July 1, 2011
, there were
155,369
and
40,087
stock options exercised with an intrinsic value of
$1.4 million
and
$0.2 million
, respectively.
A summary status of restricted stock, restricted share units, and deferred stock units as of
June 29, 2012
and changes during the
six months then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Share Units
|
|
Deferred Stock Units
|
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
Outstanding at December 30, 2011
|
2,300
|
|
|
$
|
22.27
|
|
|
630,269
|
|
|
$
|
14.69
|
|
|
124,019
|
|
|
$
|
19.05
|
|
Granted
|
—
|
|
|
—
|
|
|
195,342
|
|
|
20.60
|
|
|
25,616
|
|
|
18.61
|
|
Vested
|
(2,300
|
)
|
|
22.27
|
|
|
(242,986
|
)
|
|
10.99
|
|
|
(10,603
|
)
|
|
19.10
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(7,941
|
)
|
|
20.59
|
|
|
—
|
|
|
—
|
|
Outstanding at June 29, 2012
|
—
|
|
|
$
|
—
|
|
|
574,684
|
|
|
$
|
18.18
|
|
|
139,032
|
|
|
$
|
18.97
|
|
During the
three months ended
June 29, 2012
and
July 1, 2011
,
no
restricted stock awards vested. During the
three months ended
June 29, 2012
and
July 1, 2011
,
1,250
restricted share units vested with a fair value of less than
$0.1 million
and
no
restricted share units vested, respectively. During the
three months ended
June 29, 2012
and
July 1, 2011
,
10,603
deferred stock units vested with a fair value of
$0.5 million
and
no
deferred stock units vested, respectively.
During the
six months ended
June 29, 2012
and
July 1, 2011
,
2,300
restricted stock awards vested, with a fair value of less than
$0.1 million
and
no
restricted stock awards vested, respectively. During the
six months ended
June 29, 2012
and
July 1, 2011
,
242,986
restricted share units vested with a fair value of
$4.7 million
and
150,892
restricted share units vested with a fair value of
$3.3 million
, respectively. During the
six months ended
June 29, 2012
and
July 1, 2011
,
10,603
deferred stock units vested with a fair value of
$0.5 million
and
no
deferred stock units vested, respectively.
5. COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
As of
June 29, 2012
and
December 30, 2011
, the Company was contingently liable for outstanding letters of credit aggregating to
$7.2 million
and
$8.3 million
, respectively.
Legal Proceedings
The Company has been named as a defendant in an action filed before the Nineteenth Judicial Circuit Court of Lake County, Illinois, which was subsequently removed to the United States District Court for the Northern District of Illinois. The complaint alleges that the Company sent thousands of unsolicited fax advertisements to businesses nationwide in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (“TCPA”). At the time of filing the complaint, the plaintiff also filed a motion asking the Court to certify a class of plaintiffs comprised of businesses who allegedly received unsolicited fax advertisements from the Company. Other reported TCPA claims have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. Accordingly, the Company cannot reasonably estimate the amount of loss, if any, arising from this matter. The Company is vigorously contesting class action certification and liability, and will continue to evaluate its defenses based upon its internal review and investigation of prior events, new information, and future circumstances.
On June 13, 2012, a purported stockholder class action complaint, Diane P. Cohen v. Interline Brands, Inc., et al., was filed in the Delaware Court of Chancery against the Company, each member of the Company's Board of Directors, GS Capital Partners VI L.P., P2 Capital Partners, LLC, Parent and Merger Sub. The complaint generally alleges that the Company's directors breached their fiduciary duties to the stockholders by agreeing to sell the Company at a price that is unfair and inadequate and by agreeing to certain preclusive deal protection devices in the Merger Agreement. The complaint further alleges that the Company, GS Capital Partners VI L.P., P2 Capital Partners, LLC, Parent and Merger Sub aided and abetted in the directors' breach of their fiduciary duties. The complaint seeks injunctive relief, rescission of the Merger Agreement and an award for the costs of the action. The Company intends to deny these allegations and to vigorously defend itself and its directors.
On June 29, 2012, Ms. Cohen filed an amended complaint in the Court of Chancery. In addition to the claims asserted in the original complaint, plaintiff alleges in the amended complaint that certain aspects of the Preliminary Proxy Statement filed on June 20, 2012 are misleading and incomplete. The Company and its directors firmly believe that plaintiff's allegations are without merit. The
Company and its directors have been, and intend to continue, defending themselves vigorously against all of the claims asserted in this action.
The Company is involved in various other legal proceedings in the ordinary course of its business that are not anticipated to have a material effect on the Company’s results of operations, financial position, or cash flows.
6.
GUARANTOR SUBSIDIARIES
The
7.00%
senior subordinated notes of Interline New Jersey (the “Subsidiary Issuer”), issued in November 2010, are, and the
8
1
/
8
% senior subordinated notes, fully redeemed in January 2011, 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 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
June 29, 2012
, dividends totaling
$1.4 million
have been paid to the Parent Company from the Subsidiary Issuer for the purpose of funding share repurchases to satisfy minimum tax withholding requirements on share-based compensation.
The following tables set forth, on a condensed consolidating basis, the balance sheets, statements of earnings and comprehensive income, and statements of cash flows for the Parent Company, Subsidiary Issuer and Guarantor Subsidiaries for all financial statement periods presented in the Company’s 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 Parent Company or the Guarantor Subsidiaries; therefore, the following tables do not reflect any such allocation.
|
|
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
|
AS OF JUNE 29, 2012
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
97,511
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
97,582
|
|
Accounts receivable - trade, net
|
—
|
|
|
148,252
|
|
|
—
|
|
|
—
|
|
|
148,252
|
|
Inventories
|
—
|
|
|
223,475
|
|
|
—
|
|
|
—
|
|
|
223,475
|
|
Intercompany receivable
|
—
|
|
|
—
|
|
|
165,752
|
|
|
(165,752
|
)
|
|
—
|
|
Other current assets
|
—
|
|
|
40,104
|
|
|
99
|
|
|
—
|
|
|
40,203
|
|
Total current assets
|
—
|
|
|
509,342
|
|
|
165,922
|
|
|
(165,752
|
)
|
|
490,509
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
—
|
|
|
56,073
|
|
|
—
|
|
|
—
|
|
|
56,073
|
|
Goodwill
|
—
|
|
|
344,478
|
|
|
—
|
|
|
—
|
|
|
344,478
|
|
Other intangible assets, net
|
—
|
|
|
130,433
|
|
|
—
|
|
|
—
|
|
|
130,433
|
|
Investment in subsidiaries
|
535,225
|
|
|
170,411
|
|
|
—
|
|
|
(705,636
|
)
|
|
—
|
|
Other assets
|
—
|
|
|
2,290
|
|
|
6,961
|
|
|
—
|
|
|
9,251
|
|
Total assets
|
$
|
535,225
|
|
|
$
|
1,213,027
|
|
|
$
|
172,883
|
|
|
$
|
(871,388
|
)
|
|
$
|
1,049,747
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
101,667
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,667
|
|
Accrued expenses and other current liabilities
|
—
|
|
|
53,357
|
|
|
2,472
|
|
|
—
|
|
|
55,829
|
|
Intercompany payable
|
—
|
|
|
165,752
|
|
|
—
|
|
|
(165,752
|
)
|
|
—
|
|
Current portion of capital leases
|
—
|
|
|
584
|
|
|
—
|
|
|
—
|
|
|
584
|
|
Total current liabilities
|
—
|
|
|
321,360
|
|
|
2,472
|
|
|
(165,752
|
)
|
|
158,080
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases, net of current portion
|
—
|
|
|
300,457
|
|
|
—
|
|
|
—
|
|
|
300,457
|
|
Other liabilities
|
—
|
|
|
55,985
|
|
|
—
|
|
|
—
|
|
|
55,985
|
|
Total liabilities
|
—
|
|
|
677,802
|
|
|
2,472
|
|
|
(165,752
|
)
|
|
514,522
|
|
|
|
|
|
|
|
|
|
|
|
Senior preferred stock
|
—
|
|
|
1,070,104
|
|
|
—
|
|
|
(1,070,104
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
535,225
|
|
|
(534,879
|
)
|
|
170,411
|
|
|
364,468
|
|
|
535,225
|
|
Total liabilities and stockholders' equity
|
$
|
535,225
|
|
|
$
|
1,213,027
|
|
|
$
|
172,883
|
|
|
$
|
(871,388
|
)
|
|
$
|
1,049,747
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
|
AS OF DECEMBER 30, 2011
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
97,061
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
97,099
|
|
Accounts receivable - trade, net
|
—
|
|
|
128,383
|
|
|
—
|
|
|
—
|
|
|
128,383
|
|
Inventories
|
—
|
|
|
221,225
|
|
|
—
|
|
|
—
|
|
|
221,225
|
|
Intercompany receivable
|
—
|
|
|
—
|
|
|
158,003
|
|
|
(158,003
|
)
|
|
—
|
|
Other current assets
|
—
|
|
|
45,764
|
|
|
5
|
|
|
(1,623
|
)
|
|
44,146
|
|
Total current assets
|
—
|
|
|
492,433
|
|
|
158,046
|
|
|
(159,626
|
)
|
|
490,853
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
—
|
|
|
57,728
|
|
|
—
|
|
|
—
|
|
|
57,728
|
|
Goodwill
|
—
|
|
|
344,478
|
|
|
—
|
|
|
—
|
|
|
344,478
|
|
Other intangible assets, net
|
—
|
|
|
134,377
|
|
|
—
|
|
|
—
|
|
|
134,377
|
|
Investment in subsidiaries
|
514,445
|
|
|
163,147
|
|
|
—
|
|
|
(677,592
|
)
|
|
—
|
|
Other assets
|
—
|
|
|
2,298
|
|
|
6,724
|
|
|
—
|
|
|
9,022
|
|
Total assets
|
$
|
514,445
|
|
|
$
|
1,194,461
|
|
|
$
|
164,770
|
|
|
$
|
(837,218
|
)
|
|
$
|
1,036,458
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
109,438
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109,438
|
|
Accrued expenses and other current liabilities
|
—
|
|
|
54,797
|
|
|
1,623
|
|
|
(1,623
|
)
|
|
54,797
|
|
Intercompany payable
|
—
|
|
|
158,003
|
|
|
—
|
|
|
(158,003
|
)
|
|
—
|
|
Current portion of capital leases
|
—
|
|
|
669
|
|
|
—
|
|
|
—
|
|
|
669
|
|
Total current liabilities
|
—
|
|
|
322,907
|
|
|
1,623
|
|
|
(159,626
|
)
|
|
164,904
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases, net of current portion
|
—
|
|
|
300,726
|
|
|
—
|
|
|
—
|
|
|
300,726
|
|
Other liabilities
|
—
|
|
|
56,383
|
|
|
—
|
|
|
—
|
|
|
56,383
|
|
Total liabilities
|
—
|
|
|
680,016
|
|
|
1,623
|
|
|
(159,626
|
)
|
|
522,013
|
|
|
|
|
|
|
|
|
|
|
|
Senior preferred stock
|
—
|
|
|
999,139
|
|
|
—
|
|
|
(999,139
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
514,445
|
|
|
(484,694
|
)
|
|
163,147
|
|
|
321,547
|
|
|
514,445
|
|
Total liabilities and stockholders' equity
|
$
|
514,445
|
|
|
$
|
1,194,461
|
|
|
$
|
164,770
|
|
|
$
|
(837,218
|
)
|
|
$
|
1,036,458
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)
|
FOR THE THREE MONTHS ENDED JUNE 29, 2012
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries (1)
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
334,821
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
334,821
|
|
Cost of sales
|
—
|
|
|
213,768
|
|
|
—
|
|
|
—
|
|
|
213,768
|
|
Gross profit
|
—
|
|
|
121,053
|
|
|
—
|
|
|
—
|
|
|
121,053
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
99,169
|
|
|
7
|
|
|
(5,019
|
)
|
|
94,157
|
|
Depreciation and amortization
|
—
|
|
|
6,351
|
|
|
—
|
|
|
—
|
|
|
6,351
|
|
Other operating income
|
—
|
|
|
—
|
|
|
(5,019
|
)
|
|
5,019
|
|
|
—
|
|
Operating income
|
—
|
|
|
15,533
|
|
|
5,012
|
|
|
—
|
|
|
20,545
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings of subsidiaries
|
(9,021
|
)
|
|
(3,680
|
)
|
|
—
|
|
|
12,701
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other (expense) income, net
|
—
|
|
|
(6,460
|
)
|
|
824
|
|
|
—
|
|
|
(5,636
|
)
|
Income before income taxes
|
9,021
|
|
|
12,753
|
|
|
5,836
|
|
|
(12,701
|
)
|
|
14,909
|
|
Provision for income taxes
|
—
|
|
|
3,732
|
|
|
2,156
|
|
|
—
|
|
|
5,888
|
|
Net income
|
9,021
|
|
|
9,021
|
|
|
3,680
|
|
|
(12,701
|
)
|
|
9,021
|
|
Preferred stock dividends
|
—
|
|
|
(36,091
|
)
|
|
—
|
|
|
36,091
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
9,021
|
|
|
(27,070
|
)
|
|
3,680
|
|
|
23,390
|
|
|
9,021
|
|
Other comprehensive loss
|
—
|
|
|
(159
|
)
|
|
—
|
|
|
—
|
|
|
(159
|
)
|
Comprehensive income (loss)
|
$
|
9,021
|
|
|
$
|
(27,229
|
)
|
|
$
|
3,680
|
|
|
$
|
23,390
|
|
|
$
|
8,862
|
|
___________
|
|
(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 EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)
|
FOR THE THREE MONTHS ENDED JULY 1, 2011
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries (1)
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
317,679
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
317,679
|
|
Cost of sales
|
—
|
|
|
201,545
|
|
|
—
|
|
|
—
|
|
|
201,545
|
|
Gross profit
|
—
|
|
|
116,134
|
|
|
—
|
|
|
—
|
|
|
116,134
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
93,011
|
|
|
4
|
|
|
(4,763
|
)
|
|
88,252
|
|
Depreciation and amortization
|
—
|
|
|
5,853
|
|
|
—
|
|
|
—
|
|
|
5,853
|
|
Other operating income
|
—
|
|
|
—
|
|
|
(4,763
|
)
|
|
4,763
|
|
|
—
|
|
Operating income
|
—
|
|
|
17,270
|
|
|
4,759
|
|
|
—
|
|
|
22,029
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings of subsidiaries
|
(9,856
|
)
|
|
(3,584
|
)
|
|
—
|
|
|
13,440
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other (expense) income, net
|
—
|
|
|
(6,455
|
)
|
|
744
|
|
|
—
|
|
|
(5,711
|
)
|
Income before income taxes
|
9,856
|
|
|
14,399
|
|
|
5,503
|
|
|
(13,440
|
)
|
|
16,318
|
|
Provision for income taxes
|
—
|
|
|
4,543
|
|
|
1,919
|
|
|
—
|
|
|
6,462
|
|
Net income
|
9,856
|
|
|
9,856
|
|
|
3,584
|
|
|
(13,440
|
)
|
|
9,856
|
|
Preferred stock dividends
|
—
|
|
|
(31,463
|
)
|
|
—
|
|
|
31,463
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
9,856
|
|
|
(21,607
|
)
|
|
3,584
|
|
|
18,023
|
|
|
9,856
|
|
Other comprehensive loss
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Comprehensive income (loss)
|
$
|
9,856
|
|
|
$
|
(21,610
|
)
|
|
$
|
3,584
|
|
|
$
|
18,023
|
|
|
$
|
9,853
|
|
___________
|
|
(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 EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)
|
FOR THE SIX MONTHS ENDED JUNE 29, 2012
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries (1)
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
648,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
648,403
|
|
Cost of sales
|
—
|
|
|
411,739
|
|
|
—
|
|
|
—
|
|
|
411,739
|
|
Gross profit
|
—
|
|
|
236,664
|
|
|
—
|
|
|
—
|
|
|
236,664
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
195,384
|
|
|
8
|
|
|
(9,718
|
)
|
|
185,674
|
|
Depreciation and amortization
|
—
|
|
|
12,659
|
|
|
—
|
|
|
—
|
|
|
12,659
|
|
Other operating income
|
—
|
|
|
—
|
|
|
(9,718
|
)
|
|
9,718
|
|
|
—
|
|
Operating income
|
—
|
|
|
28,621
|
|
|
9,710
|
|
|
—
|
|
|
38,331
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings of subsidiaries
|
(16,486
|
)
|
|
(7,266
|
)
|
|
—
|
|
|
23,752
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other (expense) income, net
|
—
|
|
|
(12,818
|
)
|
|
1,728
|
|
|
—
|
|
|
(11,090
|
)
|
Income before income taxes
|
16,486
|
|
|
23,069
|
|
|
11,438
|
|
|
(23,752
|
)
|
|
27,241
|
|
Provision for income taxes
|
—
|
|
|
6,583
|
|
|
4,172
|
|
|
—
|
|
|
10,755
|
|
Net income
|
16,486
|
|
|
16,486
|
|
|
7,266
|
|
|
(23,752
|
)
|
|
16,486
|
|
Preferred stock dividends
|
—
|
|
|
(70,965
|
)
|
|
—
|
|
|
70,965
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
16,486
|
|
|
(54,479
|
)
|
|
7,266
|
|
|
47,213
|
|
|
16,486
|
|
Other comprehensive loss
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
Comprehensive income (loss)
|
$
|
16,486
|
|
|
$
|
(54,491
|
)
|
|
$
|
7,266
|
|
|
$
|
47,213
|
|
|
$
|
16,474
|
|
___________
|
|
(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 EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)
|
FOR THE SIX MONTHS ENDED JULY 1, 2011
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries (1)
|
|
Consolidating
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
615,096
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
615,096
|
|
Cost of sales
|
—
|
|
|
388,021
|
|
|
—
|
|
|
—
|
|
|
388,021
|
|
Gross profit
|
—
|
|
|
227,075
|
|
|
—
|
|
|
—
|
|
|
227,075
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
—
|
|
|
185,828
|
|
|
16
|
|
|
(9,505
|
)
|
|
176,339
|
|
Depreciation and amortization
|
—
|
|
|
11,605
|
|
|
—
|
|
|
—
|
|
|
11,605
|
|
Other operating income
|
—
|
|
|
—
|
|
|
(9,505
|
)
|
|
9,505
|
|
|
—
|
|
Operating income
|
—
|
|
|
29,642
|
|
|
9,489
|
|
|
—
|
|
|
39,131
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings of subsidiaries
|
(16,739
|
)
|
|
(7,208
|
)
|
|
—
|
|
|
23,947
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other (expense) income, net
|
—
|
|
|
(12,857
|
)
|
|
1,457
|
|
|
—
|
|
|
(11,400
|
)
|
Income before income taxes
|
16,739
|
|
|
23,993
|
|
|
10,946
|
|
|
(23,947
|
)
|
|
27,731
|
|
Provision for income taxes
|
—
|
|
|
7,254
|
|
|
3,738
|
|
|
—
|
|
|
10,992
|
|
Net income
|
16,739
|
|
|
16,739
|
|
|
7,208
|
|
|
(23,947
|
)
|
|
16,739
|
|
Preferred stock dividends
|
—
|
|
|
(61,865
|
)
|
|
—
|
|
|
61,865
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
16,739
|
|
|
(45,126
|
)
|
|
7,208
|
|
|
37,918
|
|
|
16,739
|
|
Other comprehensive income
|
—
|
|
|
229
|
|
|
—
|
|
|
—
|
|
|
229
|
|
Comprehensive income (loss)
|
$
|
16,739
|
|
|
$
|
(44,897
|
)
|
|
$
|
7,208
|
|
|
$
|
37,918
|
|
|
$
|
16,968
|
|
___________
|
|
(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 FLOWS (UNAUDITED)
|
FOR THE SIX MONTHS ENDED JUNE 29, 2012
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
Net cash provided by operating activities
|
$
|
—
|
|
|
$
|
714
|
|
|
$
|
7,782
|
|
|
$
|
—
|
|
|
$
|
8,496
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
—
|
|
|
(7,670
|
)
|
|
—
|
|
|
—
|
|
|
(7,670
|
)
|
Dividends received from subsidiary issuer
|
1,439
|
|
|
—
|
|
|
—
|
|
|
(1,439
|
)
|
|
—
|
|
Other
|
—
|
|
|
7,749
|
|
|
—
|
|
|
(7,749
|
)
|
|
—
|
|
Net cash provided by (used in) investing activities
|
1,439
|
|
|
79
|
|
|
—
|
|
|
(9,188
|
)
|
|
(7,670
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Decrease in purchase card payable, net
|
—
|
|
|
(1,781
|
)
|
|
—
|
|
|
—
|
|
|
(1,781
|
)
|
Payments on capital lease obligations
|
—
|
|
|
(354
|
)
|
|
—
|
|
|
—
|
|
|
(354
|
)
|
Purchases of treasury stock
|
(1,439
|
)
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(1,448
|
)
|
Dividends paid to parent company
|
—
|
|
|
(1,439
|
)
|
|
—
|
|
|
1,439
|
|
|
—
|
|
Other
|
—
|
|
|
3,251
|
|
|
(7,749
|
)
|
|
7,749
|
|
|
3,251
|
|
Net cash used in financing activities
|
(1,439
|
)
|
|
(332
|
)
|
|
(7,749
|
)
|
|
9,188
|
|
|
(332
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
Net increase in cash and cash equivalents
|
—
|
|
|
450
|
|
|
33
|
|
|
—
|
|
|
483
|
|
Cash and cash equivalents at beginning of period
|
—
|
|
|
97,061
|
|
|
38
|
|
|
—
|
|
|
97,099
|
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
|
$
|
97,511
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
97,582
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
|
FOR THE SIX MONTHS ENDED JULY 1, 2011
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
Company
(Guarantor)
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
Net cash provided by operating activities
|
$
|
—
|
|
|
$
|
27,418
|
|
|
$
|
549
|
|
|
$
|
—
|
|
|
$
|
27,967
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
—
|
|
|
(10,543
|
)
|
|
—
|
|
|
—
|
|
|
(10,543
|
)
|
Proceeds from sales and maturities of short-term investments
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
100
|
|
Purchase of businesses, net of cash acquired
|
—
|
|
|
(9,496
|
)
|
|
—
|
|
|
—
|
|
|
(9,496
|
)
|
Other
|
—
|
|
|
581
|
|
|
—
|
|
|
(581
|
)
|
|
—
|
|
Net cash used in investing activities
|
—
|
|
|
(19,358
|
)
|
|
—
|
|
|
(581
|
)
|
|
(19,939
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Increase in purchase card payable, net
|
—
|
|
|
969
|
|
|
—
|
|
|
—
|
|
|
969
|
|
Repayment of debt and capital lease obligations
|
—
|
|
|
(13,695
|
)
|
|
—
|
|
|
—
|
|
|
(13,695
|
)
|
Proceeds from stock options exercised
|
—
|
|
|
626
|
|
|
—
|
|
|
—
|
|
|
626
|
|
Other
|
—
|
|
|
(204
|
)
|
|
(581
|
)
|
|
581
|
|
|
(204
|
)
|
Net cash used in financing activities
|
—
|
|
|
(12,304
|
)
|
|
(581
|
)
|
|
581
|
|
|
(12,304
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
88
|
|
Net decrease in cash and cash equivalents
|
—
|
|
|
(4,156
|
)
|
|
(32
|
)
|
|
—
|
|
|
(4,188
|
)
|
Cash and cash equivalents at beginning of period
|
—
|
|
|
86,919
|
|
|
62
|
|
|
—
|
|
|
86,981
|
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
|
$
|
82,763
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
82,793
|
|
7. TRANSACTIONS
The Merger and Merger Agreement
On May 29, 2012, the Company entered into a Merger Agreement with Parent and Merger Sub, pursuant to which, at the closing of the Merger, Merger Sub will be merged with and into Interline, with Interline as the surviving entity.
At the effective time of the Merger, each share of common stock of Interline (other than shares owned by Interline, Parent, or Merger Sub, or by any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law (collectively, the "Excluded Stockholders")), will be canceled and will be converted automatically into a right to receive
$25.50
in cash (the "Merger Consideration"), without interest. In addition, at the effective time of the Merger, each outstanding option to purchase shares of common stock of Interline will be accelerated and fully vested, if not previously vested, and will be canceled (unless otherwise agreed to by the holder thereof and Parent) and converted into the right to receive cash consideration in an amount equal to the product of the total number of shares previously subject to the option and the excess, if any, of the Merger Consideration over the exercise price per share of the option. Shares of restricted stock and restricted share units will also be accelerated, fully vested and then canceled (unless otherwise agreed to by the holder thereof and Parent) and converted into the right to receive cash consideration in an amount equal to the Merger Consideration in respect of each share underlying the canceled restricted stock or restricted share unit. Additionally, the Company's Chief Executive Officer has agreed to reinvest
$6.7 million
in Parent at the time of the Merger, and it is anticipated that other members of the Company's senior management will reinvest between
30%
and
50%
of their after-tax proceeds from the Merger attributable to each component of their existing equity, on terms to be agreed upon between management and Parent, a portion of which, in each case, may be satisfied through an exchange of shares and/or options (which in the case of options will be based on the intrinsic value of the exchanged options on the date of closing of the Merger) in the Company for shares and/or options in Parent.
It is expected that a portion of the cash funding needed to complete the Merger will be obtained through a distribution from Interline New Jersey to the Company from cash on hand and borrowings under the New ABL Facility. As of June 29, 2012, Interline was in compliance with the terms and conditions of the indenture governing the Existing Notes.
Closing Conditions
The consummation of the Merger is subject to customary conditions set forth in the Merger Agreement. These conditions include the adoption of the Merger Agreement by stockholders holding a majority of the outstanding shares of Interline common stock (the "Stockholder Approval"), the expiration or termination of the regulatory waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the absence of any law or order enjoining or prohibiting the Merger. Moreover, the completion of the Merger is subject to the satisfaction or waiver of certain other conditions, including without limitation: (w) the absence of a material adverse effect on the Company, (x) the delivery of a certificate of the Chief Financial Officer of the Company to Parent certifying that the unrestricted cash as of the closing date of the Company and its domestic subsidiaries available to be lawfully dividended to the Company by its subsidiaries in compliance with the indenture governing the Existing Notes (less the principal amount drawn under the Company's existing ABL credit facility as of the closing date) is not less than
$50.0 million
, (y) the Company's Parent's and Merger Sub's performance in all material respects of their agreements and covenants in the Merger Agreement (subject to certain exceptions) and (z) the accuracy of the representations and warranties of the Company (subject in certain cases to specified materiality, knowledge and other qualifications), and the accuracy of the representation and warranty with regard to the ability as of May 29, 2012 of Interline New Jersey to make restricted payments in compliance with the indenture governing the Existing Notes in an amount of not less than
$200.0 million
. As of June 29, 2012, the requirements under the Hart-Scott-Rodino act have been satisfied. Certain closing conditions are outside of the Company's control, and it cannot be assured when they will be satisfied, if at all.
Termination
The Merger Agreement contains certain termination rights for Interline and Parent. The Merger Agreement provides that, upon termination under specified circumstances, Interline would be required to pay Parent and certain of its affiliates a termination fee in an aggregate amount equal to
$29.9 million
and reimburse Parent for certain of its out-of-pocket expenses up to a maximum of
$5.0 million
. The Merger Agreement also provides that Parent will be required to pay the Company a reverse termination fee equal to
$51.3 million
upon termination under certain specified circumstances, and a reverse termination fee of
$68.4 million
in the event of termination under such circumstances if Parent has committed a willful and material breach of any of its representations, warranties, covenants or agreements under the Merger Agreement, other than a willful and material breach arising solely by reason of Parent and Merger Sub failing to consummate the merger if the debt financing is not available. In addition, subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by November 29, 2012 (the "Termination Date").
Closing
While there can be no certainty that the closing conditions described above will be satisfied in advance of the Termination Date or whether, even if all the conditions are satisfied, the Merger will be ultimately consummated, the Company currently believes that the Merger will be consummated early to mid September 2012. However, it cannot be assured that the Merger will be consummated within that time frame or at all.
A copy of the Merger Agreement is publicly available as an exhibit to the Company's current report on Form 8-K, filed with the SEC on May 29, 2012. The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is publicly available.
The Related Financing Transactions
In connection with the Merger, the Company anticipates entering into the following Financing Transactions:
|
|
•
|
a new senior secured asset-based revolving credit facility totaling
$250.0 million
(the "New ABL Facility"); and
|
|
|
•
|
the issuance of
$365.0 million
aggregate principal amount of Senior Notes.
|
The closing of the New ABL Facility is expected to occur simultaneously with the closing of the Merger and the release of the net proceeds of the Senior Notes from escrow as described below.
The Consent Solicitation
In connection with the Merger, on June 21, 2012, Interline New Jersey commenced the Consent Solicitation regarding certain amendments to the indenture governing the Existing Notes (the "Bond Amendments"). The Bond Amendments will permit the Merger to occur without triggering a "Change of Control" under the indenture governing the Existing Notes. As consideration for that amendment, and in addition to an aggregate consent payment of
$1.5 million
to be paid by Parent, Interline New Jersey agreed to certain additional amendments that will apply from and including the closing date of the Merger. These additional amendments include, among other items, increasing the interest rate on the Existing Notes from
7.00%
to
7.50%
per annum, increasing the redemption price of the Existing Notes for certain periods, making the Existing Notes rank equal in right of payment to all future incurrences of senior indebtedness (including the New ABL Facility) and replacing the restriction on the incurrence of secured indebtedness contained in the anti-layering covenant with a covenant restricting Interline New Jersey and its restricted subsidiaries from incurring liens, other than permitted liens, without equally and ratably securing the Existing Notes.
On June 27, 2012, Interline New Jersey received the requisite consents to the Bond Amendments and, as a result, a supplemental indenture reflecting the Bond Amendments was executed and became effective. Interline New Jersey received consents to the Bond Amendments from holders of
$296.3 million
aggregate principal amount of the Existing Notes (representing
98.8%
of the principal amount outstanding) as of the expiration date of the Consent Solicitation. If the Merger is not consummated on or prior to the Termination Date, the Bond Amendments shall no longer be part of the indenture governing the Existing Notes and shall cease to be of further effect. The Consent Solicitation was made only by and pursuant to the terms of the Consent Solicitation Statement dated June 21, 2012 and the related Consent Letter.
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 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 most recent 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, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (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:
|
|
•
|
general market conditions,
|
|
|
•
|
product cost and price fluctuations due to inflation and currency exchange rates,
|
|
|
•
|
the highly competitive nature of the maintenance, repair and operations distribution industry,
|
|
|
•
|
adverse changes in trends in the home improvement and remodeling and home building markets,
|
|
|
•
|
apartment vacancy rates and effective rents,
|
|
|
•
|
governmental and educational budget constraints,
|
|
|
•
|
our ability to accurately predict market trends,
|
|
|
•
|
the loss of significant customers,
|
|
|
•
|
labor and benefit costs,
|
|
|
•
|
failure to identify, acquire and successfully integrate acquisition candidates,
|
|
|
•
|
our ability to purchase products from suppliers on favorable terms,
|
|
|
•
|
fluctuations in the cost of commodity-based products and raw materials (such as copper) and fuel prices,
|
|
|
•
|
our customers' ability to pay us,
|
|
|
•
|
credit market contractions,
|
|
|
•
|
failure to realize expected benefits from acquisitions,
|
|
|
•
|
consumer spending and debt levels,
|
|
|
•
|
material facilities and systems disruptions and shutdowns,
|
|
|
•
|
the length of our supply chains,
|
|
|
•
|
work stoppages or other business interruptions at transportation centers or shipping ports,
|
|
|
•
|
dependence on key employees,
|
|
|
•
|
changes to tariffs between the countries in which we operate,
|
|
|
•
|
our ability to protect trademarks,
|
|
|
•
|
adverse publicity and litigation,
|
|
|
•
|
interest rate fluctuations,
|
|
|
•
|
changes in governmental regulations related to our product offerings,
|
|
|
•
|
changes in consumer preferences, and
|
|
|
•
|
other factors described under “Part I. Item 1A-Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC.
|
Any forward-looking statements made by us in this report, or elsewhere, speak only as of the date on which we make them. 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, any forward-looking statements 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 broad-line 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; hardware, tools and fixtures; heating, ventilation and air conditioning (“HVAC”); electrical and lighting; appliances and parts; security and safety; and other miscellaneous maintenance products. Our products are primarily used for the repair, maintenance, remodeling, and refurbishment of residential 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
®
, NCP
®
, 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
®
, Leran
SM
and AF Lighting
®
brands generally serve our specialty distributors customers. Our multi-brand operating model, which we believe is unique in the industry, allows us to use a single platform to deliver tailored products and services to meet the individual needs of each respective customer group served. We reach our markets using a variety of sales channels, including a sales force of approximately
665
field sales representatives, approximately
355
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
55
distribution centers and
23
professional contractor showrooms located throughout the United States, Canada, and Puerto Rico,
54
vendor-managed inventory locations at large customer locations and a dedicated fleet of trucks and third party carriers. 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 platforms support 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 platforms also benefit 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, we believe that our common operating platforms have enabled us to improve customer service, maintain lower operating costs, efficiently manage working capital and support our growth initiatives.
Recent Developments
On May 29, 2012, the Company announced that it had entered into an Agreement and Plan of Merger (as it may be amended, the “Merger Agreement”), by and among Isabelle Holding Company Inc., a Delaware corporation (“Parent”, which corporation may be converted into a Delaware limited liability company prior to the closing of the Merger (as defined herein)), Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and the Company, providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent is an affiliate of GS Capital Partners VI L.P. and, at the closing of the transactions contemplated by the Merger Agreement, certain interests of Parent will be owned by one or more investment funds managed by P2 Capital Partners, LLC and certain members of Company management. Under the Merger Agreement, stockholders of the Company will receive $25.50 in cash for each share of Company common stock. The Merger was unanimously approved by Interline's Board of Directors. The Merger is subject to the approval of Interline's stockholders as of July 26, 2012 (the "Record Date") holding a majority of the outstanding shares of the common stock entitled to vote on the matter at a special meeting that will be held on August 29, 2012. See Note 7. Transactions
included in Part I. Item 1 of this quarterly report for further information about the Merger Agreement.
Results of Operations
The following table presents information derived from the consolidated statements of earnings expressed as a percentage of net sales for the
three and six
months ended
June 29, 2012
and
July 1, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net Sales
|
|
% Increase
(Decrease)
2012
vs. 2011 (1)
|
|
% of Net Sales
|
|
% Increase
(Decrease)
2012
vs. 2011 (1)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 29, 2012
|
|
July 1, 2011
|
|
|
June 29, 2012
|
|
July 1, 2011
|
|
Net sales
|
100.0
|
%
|
|
100.0
|
%
|
|
5.4
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
5.4
|
%
|
Cost of sales
|
63.8
|
|
|
63.4
|
|
|
6.1
|
|
|
63.5
|
|
|
63.1
|
|
|
6.1
|
|
Gross profit
|
36.2
|
|
|
36.6
|
|
|
4.2
|
|
|
36.5
|
|
|
36.9
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
28.1
|
|
|
27.8
|
|
|
6.7
|
|
|
28.6
|
|
|
28.7
|
|
|
5.3
|
|
Depreciation and amortization
|
1.9
|
|
|
1.8
|
|
|
8.5
|
|
|
2.0
|
|
|
1.9
|
|
|
9.1
|
|
Total operating expenses
|
30.0
|
|
|
29.6
|
|
|
6.8
|
|
|
30.6
|
|
|
30.6
|
|
|
5.5
|
|
Operating income
|
6.1
|
|
|
6.9
|
|
|
(6.7
|
)
|
|
5.9
|
|
|
6.4
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(1.8
|
)
|
|
(1.9
|
)
|
|
(0.6
|
)
|
|
(1.9
|
)
|
|
(2.0
|
)
|
|
(0.7
|
)
|
Interest and other income
|
0.1
|
|
|
0.1
|
|
|
9.9
|
|
|
0.2
|
|
|
0.1
|
|
|
28.3
|
|
Income before income taxes
|
4.5
|
|
|
5.1
|
|
|
(8.6
|
)
|
|
4.2
|
|
|
4.5
|
|
|
(1.8
|
)
|
Provision for income taxes
|
1.8
|
|
|
2.0
|
|
|
(8.9
|
)
|
|
1.7
|
|
|
1.8
|
|
|
(2.2
|
)
|
Net income
|
2.7
|
%
|
|
3.1
|
%
|
|
(8.5
|
)%
|
|
2.5
|
%
|
|
2.7
|
%
|
|
(1.5
|
)%
|
___________
|
|
(1)
|
Percent increase (decrease) represents the actual change as a percentage of the prior year’s result.
|
Overview.
During the
three months ended
June 29, 2012
, our sales increased
5.4%
, primarily reflecting the impact of continued economic improvements across our facilities maintenance and professional contractor end-markets, combined with our continued investments in our information technology, distribution network, and our sales force, which improved our competitive position and enhanced our market capabilities. Sales to customers in our facilities maintenance end-market, which made up
78%
of our total sales and include residential multi-family housing and institutional customers, increased
7.2%
in total, mainly as a result of improved economic conditions in these end-markets during the second quarter of 2012 compared to the second quarter of 2011. Sales to our professional contractor customers, which represented
13%
of our total sales, increased
2.4%
in total. Sales to our specialty distributor customers, which represented
9%
of our total sales, decreased
3.7%
in total. We believe we are starting to more fully realize the benefits of our efforts to strengthen our business, improve our competitive position, and enhance our market capabilities. As market conditions continue to strengthen, we expect better growth in 2012 compared to 2011.
Operating income as a percentage of net sales was
6.1%
in the
second
quarter of
2012
compared to
6.9%
in the comparable prior year period. The decrease in operating income as a percentage of sales is primarily a result of lower gross profit margins
related to changes in customer and product mix as well as supplier cost pressures as compared to the prior year, higher selling, general and administrative ("SG&A") expenses as a percentage of sales, mainly driven by costs incurred associated with the Merger Agreement, and higher depreciation and amortization expense.
Net income as a percentage of net sales was
2.7%
in the
second
quarter of
2012
compared to
3.1%
in the comparable prior year period as a result of
the decrease in operating income as a percentage of sales, offset slightly by lower interest expense and lower income tax expense.
Three Months Ended
June 29, 2012
Compared to
Three Months Ended
July 1, 2011
Net Sales.
Net sales increased by
$17.1 million
, or
5.4%
, to
$334.8 million
in the
three months ended
June 29, 2012
from
$317.7 million
in the
three months ended
July 1, 2011
. The increase in sales is primarily attributable to sales of
$18.6 million
from net
increases in comparable sales to our facilities maintenance and professional contractor customers, partially offset by a comparable sales decrease to our specialty distributor customers of
$1.1 million
.
Gross Profit.
Gross profit increased by
$4.9 million
, or
4.2%
, to
$121.1 million
in the
three months ended
June 29, 2012
from
$116.1 million
in the
three months ended
July 1, 2011
. Our gross profit margin decreased
40
basis points to
36.2%
for the
three months ended
June 29, 2012
compared to
36.6%
for the
three months ended
July 1, 2011
. This decrease in gross profit margin was related to changes in customer and product mix as well as supplier cost pressures as compared to the prior year.
Selling, General and Administrative Expenses.
SG&A expenses increased by
$5.9 million
, or
6.7%
, to
$94.2 million
in the
three months ended
June 29, 2012
from
$88.3 million
in the
three months ended
July 1, 2011
. As a percentage of net sales, SG&A increased
30
basis points to
28.1%
for the
three months ended
June 29, 2012
compared to
27.8%
for the
three months ended
July 1, 2011
. The increase in SG&A expenses as a percentage of sales is primarily due to costs incurred in connection with the Merger Agreement, higher labor costs as a result of the investments in sales force made during the latter part of the prior year, higher at risk compensation, and higher health care costs, offset in part by lower distribution center consolidation costs, lower delivery costs, the impact from our lower bad debt expense, and lower occupancy costs.
Depreciation and Amortization.
Depreciation and amortization expense increased by
$0.5 million
, or
8.5%
, to
$6.4 million
in the
three months ended
June 29, 2012
from
$5.9 million
in the
three months ended
July 1, 2011
. As a percentage of net sales, depreciation and amortization was
1.9%
and
1.8%
for the
three months ended
June 29, 2012
and
July 1, 2011
, respectively. The increase in depreciation and amortization expense was due to higher depreciation resulting from our capital spending associated with our information technology infrastructure and distribution center consolidation and integration efforts that occurred during the last three years.
Operating Income.
As a result of the foregoing, operating income decreased by
$1.5 million
, or
6.7%
, to
$20.5 million
in the
three months ended
June 29, 2012
from
$22.0 million
in the
three months ended
July 1, 2011
. As a percentage of net sales, operating income decreased to
6.1%
in the
three months ended
June 29, 2012
compared to
6.9%
in the
three months ended
July 1, 2011
.
Six Months Ended
June 29, 2012
Compared to
Six Months Ended
July 1, 2011
Net Sales.
Net sales increased by
$33.3 million
, or
5.4%
, to
$648.4 million
in the
six months ended
June 29, 2012
from
$615.1 million
in the
six months ended
July 1, 2011
. The increase in sales is primarily attributable to sales of
$33.5 million
from net increases in comparable sales to our facilities maintenance and professional contractor customers, as well as
$3.5 million
associated with the NCP acquisition, partially offset by a comparable sales decrease to our specialty distributor customers of
$2.9 million
.
Gross Profit.
Gross profit increased by
$9.6 million
, or
4.2%
, to
$236.7 million
in the
six months ended
June 29, 2012
from
$227.1 million
in the
six months ended
July 1, 2011
. Our gross profit margin decreased
40
basis points to
36.5%
for the
six months ended
June 29, 2012
compared to
36.9%
for the
six months ended
July 1, 2011
. This decrease in gross profit margin was related to changes in customer and product mix as well as supplier cost pressures as compared to the prior year, combined with the impact from the NCP acquisition that occurred during the first quarter of the prior year.
Selling, General and Administrative Expenses.
SG&A expenses increased by
$9.3 million
, or
5.3%
, to
$185.7 million
in the
six months ended
June 29, 2012
from
$176.3 million
in the
six months ended
July 1, 2011
. As a percentage of net sales, SG&A decreased
10
basis points to
28.6%
for the
six months ended
June 29, 2012
compared to
28.7%
for the
six months ended
July 1, 2011
. The decrease in SG&A expenses as a percentage of sales is primarily due to the impact from our lower bad debt expense, lower delivery costs, lower distribution center consolidation costs, lower occupancy costs, and the incremental impact from the NCP acquisition, offset in part by costs incurred in connection with the Merger Agreement, higher labor costs as a result of the investments in sales force made during the latter part of the prior year, higher at risk compensation, and higher health care costs.
Depreciation and Amortization.
Depreciation and amortization expense increased by
$1.1 million
, or
9.1%
, to
$12.7 million
in the
six months ended
June 29, 2012
from
$11.6 million
in the
six months ended
July 1, 2011
. As a percentage of net sales, depreciation and amortization was
2.0%
and
1.9%
for the
six months ended
June 29, 2012
and
July 1, 2011
, respectively. The increase in depreciation and amortization expense was due to higher depreciation resulting from our capital spending associated with our information technology infrastructure and distribution center consolidation and integration efforts that occurred during the last three years.
Operating Income.
As a result of the foregoing, operating income decreased by
$0.8 million
, or
2.0%
, to
$38.3 million
in the
six months ended
June 29, 2012
from
$39.1 million
in the
six months ended
July 1, 2011
. As a percentage of net sales, operating
income decreased to
5.9%
in the
six months ended
June 29, 2012
compared to
6.4%
in the
six months ended
July 1, 2011
.
Liquidity and Capital Resources
Overview
We are a holding company whose only asset is the stock of 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 8
1
/
8
% senior subordinated notes due 2014 (the “8
1
/
8
% Notes”) and to repay the indebtedness under the prior credit facility of Interline New Jersey. The remaining $13.4 million of the 8
1
/
8
% Notes were redeemed on January 3, 2011. The 8
1
/
8
% Notes were redeemed at an average price of 104.256% of par.
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. 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 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. 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. See Note 7. Transactions in Part I. Item 1. of this quarterly report for further information about the Consent Solicitation and the Bond Amendments.
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 or make distributions to the Company for the purpose of funding a repurchase, redemption, or retirement of the Company’s equity or declare or pay a dividend to the Company’s shareholders 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, then there is no cap on Interline New Jersey’s ability to pay dividends or make distributions to fund a share repurchase by the Company. 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
June 29, 2012
, we had
$300.0 million
of the 7.00% Notes outstanding and
$212.8 million
of availability under our ABL Facility, net of
$7.2 million
in letters of credit.
Financial Condition
Working capital increased by
$25.5 million
to
$351.4 million
as of
June 29, 2012
from
$325.9 million
as of
December 30, 2011
. The increase in working capital was primarily funded by cash flows from operations.
Cash Flow
Operating Activities.
Net cash provided by operating activities was
$8.5 million
in the
six
months ended
June 29, 2012
compared to net cash provided by operating activities of
$28.0 million
in the
six
months ended
July 1, 2011
.
Net cash provided by operating activities of
$8.5 million
during the
six
months ended
June 29, 2012
primarily consisted of net income of
$16.5 million
, adjustments for non-cash items of
$16.4 million
and cash used by working capital items of
$24.4 million
. Adjustments for non-cash items primarily consisted of
$12.7 million
in depreciation and amortization of property, equipment and intangible assets,
$2.7 million
in share-based compensation,
$1.6 million
in deferred income taxes,
$0.7 million
in amortization of debt issuance costs, and
$0.6 million
in provision for doubtful accounts. These amounts were partially offset by
$1.1 million
in excess tax benefits from share-based compensation, and
$0.7 million
of other items. The cash used by working capital items primarily consisted of
$20.5 million
from increased trade receivables, net of changes in provision for doubtful accounts, resulting from increased sales in the current year as compared to the prior year,
$7.8 million
from decreased trade payables balances as a result of the timing of purchases and related payments, and
$2.3 million
from increased inventory levels primarily in preparation for normal seasonal demands in our business. The use of cash was partially offset by
$3.8 million
in decreased prepaid expenses and other current assets primarily as a result of higher collections of rebates from vendors,
$1.4 million
from changes in income taxes, and
$0.8 million
from increased accrued expenses and other current liabilities as a result of costs associated with the Merger, timing of sales tax payments, offset in part by lower payroll and incentive compensation accruals as compared to prior year-end due to timing of payments.
Net cash provided by operating activities of
$28.0 million
in the
six
months ended
July 1, 2011
primarily consisted of net income of
$16.7 million
, adjustments for non-cash items of
$19.9 million
and cash used in working capital items of
$8.7 million
. Adjustments for non-cash items primarily consisted of
$11.6 million
in depreciation and amortization of property, equipment and intangible assets,
$4.3 million
in deferred income taxes,
$2.8 million
in share-based compensation,
$1.8 million
in bad debt expense, and
$0.7 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
$22.2 million
from increased trade receivables, net of changes in our allowance for doubtful accounts, resulting from the timing of collections,
$4.8 million
from increased inventory levels primarily in preparation for normal seasonal demands in our business, and
$1.8 million
of decreased accrued expenses and other current liabilities primarily due to lower accrued compensation resulting from the timing of payments. These items were partially offset by
$8.7 million
from increased trade payables balances as a result of the timing of purchases and related payments,
$7.1 million
from decreased prepaid expenses and other current assets primarily as a result of higher collections of rebates from vendors,
$4.0 million
from the increase in current income taxes resulting from an increase in income before taxes, and
$0.4 million
from timing of interest payments.
Investing Activities.
Net cash used in investing activities was
$7.7 million
during the
six
months ended
June 29, 2012
compared to net cash used in investing activities of
$19.9 million
in the
six
months ended
July 1, 2011
.
Net cash used in investing activities during the
six
months ended
June 29, 2012
was attributable to
$7.7 million
of capital expenditures made in the ordinary course of business.
Net cash used in investing activities in the
six
months ended
July 1, 2011
was primarily attributable to
$10.5 million
of capital expenditures made in the ordinary course of business and
$9.5 million
in costs related to purchases of businesses.
Financing Activities.
Net cash used in financing activities totaled
$0.3 million
in the
six
months ended
June 29, 2012
compared to net cash used in financing activities of
$12.3 million
in the
six
months ended
July 1, 2011
.
Net cash used in financing activities in the
six
months ended
June 29, 2012
was attributable to
$1.8 million
net decrease in purchase card payable,
$1.4 million
in treasury stock acquired to satisfy minimum statutory tax withholding requirements resulting from the vesting or exercising of equity awards, and
$0.4 million
of payments on capital lease obligations, partially offset by
$3.3 million
of proceeds from stock options exercised and excess tax benefits from share-based compensation.
Net cash used in financing activities in the
six
months ended
July 1, 2011
was attributable to the redemption of the remaining
$13.4 million
of our 8
1
/
8
% Notes and
$0.3 million
of payments on capital lease obligations, partially offset by a
$1.0 million
net
increase in purchase card payable and
$0.5 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.
Capital Expenditures
Capital expenditures were
$7.7 million
in the
six
months ended
June 29, 2012
compared to
$10.5 million
in the
six
months ended
July 1, 2011
. Capital expenditures as a percentage of net sales were
1.2%
and
1.7%
for the
six
months ended
June 29, 2012
and
July 1, 2011
, respectively. The decrease in capital expenditures was driven primarily by the current year reduction in spending on the continued consolidation of our distribution center network including the investments in larger more efficient distribution centers and enhancements to our information technology systems as compared to the prior year. There were no leasehold improvements acquired through non-cash lease incentives during the
six
months ended
June 29, 2012
. During the
six
months ended
July 1, 2011
, we acquired leasehold improvements through non-cash lease incentives of
$0.5 million
.
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 for borrowings on same-day notice, referred to as 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.
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.
|
All borrowings under the ABL Facility are 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
June 29, 2012
, the applicable margin was equal to
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. 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 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
June 29, 2012
, we had
$212.8 million
of availability under our ABL Facility, net of
$7.2 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 30, 2011
filed with the SEC. There have been no material changes to our contractual obligations since
December 30, 2011
.
Critical Accounting Policies
In preparing the unaudited consolidated financial statements in conformity with US GAAP, we are 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, we evaluate these estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable at the time we make the estimates and assumptions. 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 30, 2011
filed with the SEC. During the
six
months ended
June 29, 2012
, 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
June 29, 2012
, the estimated fair market value of our 7.00% Notes was
$312.0 million
or
104.0%
of par.
Foreign Currency Exchange Risk
The majority of our purchases from foreign-based suppliers are from China and other countries in Asia and are transacted in U.S. dollars. Accordingly, our risk to foreign currency exchange rates was not material as of
June 29, 2012
.
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. A substantial portion of our products is sourced from suppliers in China and 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 a move would most likely result in an increase in the cost of products that are sourced from suppliers in China.
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
June 29, 2012
. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
June 29, 2012
, our disclosure controls and procedures were effective to ensure that: (1) 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) 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 occurred during the quarter ended
June 29, 2012
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We have been named as a defendant in an action filed before the Nineteenth Judicial Circuit Court of Lake County, Illinois, which was subsequently removed to the United States District Court for the Northern District of Illinois. The complaint alleges that we sent thousands of unsolicited fax advertisements to businesses nationwide in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (“TCPA”). At the time of filing the complaint, the plaintiff also filed a motion asking the Court to certify a class of plaintiffs comprised of businesses who allegedly received unsolicited fax advertisements from us. Other reported TCPA claims have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. Accordingly, we cannot reasonably estimate the amount of loss, if any, arising from this matter. We are vigorously contesting class action certification and liability, and will continue to evaluate our defenses based upon our internal review and investigation of prior events, new information, and future circumstances.
On June 13, 2012, a purported stockholder class action complaint, Diane P. Cohen v. Interline Brands, Inc., et al., was filed in the Delaware Court of Chancery against the Company, each member of the Company's Board of Directors, GS Capital Partners VI L.P., P2 Capital Partners, LLC, Parent and Merger Sub. The complaint generally alleges that we breached our fiduciary duties to the stockholders by agreeing to sell the Company at a price that is unfair and inadequate and by agreeing to certain preclusive deal protection devices in the Merger Agreement. The complaint further alleges that the Company, GS Capital Partners VI L.P., P2 Capital Partners, LLC, Parent and Merger Sub aided and abetted in the directors' breach of their fiduciary duties. The complaint seeks injunctive relief, rescission of the Merger Agreement and an award for the costs of the action. We intend to deny these allegations and to vigorously defend ourselves and our directors.
On June 29, 2012, Ms. Cohen filed an amended complaint in the Court of Chancery. In addition to the claims asserted in the original complaint, plaintiff alleges in the amended complaint that certain aspects of the Preliminary Proxy Statement filed on June 20, 2012 are misleading and incomplete. We firmly believe that plaintiff's allegations are without merit. We have been, and intend to continue, defending ourselves vigorously against all of the claims asserted in this action.
We are involved in various other 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 30, 2011
in Part I. Item 1A. Risk Factors. See also “Part I. Item 2—Forward-Looking Statements” above.
In addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended
December 30, 2011
, there are risks and uncertainties associated with the Merger Agreement and the Merger. For example:
|
|
•
|
the Merger may not be consummated or may not be consummated as currently anticipated;
|
|
|
•
|
there can be no assurance that Parent will obtain the necessary financing contemplated in connection with the Merger (or other financing) or that the financing will be sufficient to complete the Merger and transactions contemplated thereby;
|
|
|
•
|
there can be no assurance that approval of our stockholders will be obtained;
|
|
|
•
|
there can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the termination of the Merger;
|
|
|
•
|
if the proposed Merger is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the Merger will be consummated;
|
|
|
•
|
failure of the Merger to close, or a delay in its closing, may have a negative impact on our ability to pursue alternative strategic transactions or our ability to implement alternative business plans;
|
|
|
•
|
under certain circumstances, if the Merger Agreement is terminated, we will be required to pay a termination fee;
|
|
|
•
|
pending the closing of the Merger, the Merger Agreement restricts us from engaging in certain actions without Parent's approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the Merger;
|
|
|
•
|
any delay in completing, or the failure to complete, the Merger could have a negative impact on our business, stock price, and our relationships with customers or suppliers; and,
|
|
|
•
|
the attention of our management may be directed to transaction-related considerations and may be diverted from the day-to-day operations of our business and pursuit of our strategic initiatives.
|
In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable by us regardless of whether or not the Merger is consummated.
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 (1)
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Repurchase Authorization
|
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Authorization
|
April 2012
|
|
|
|
|
|
|
|
|
(March 31, 2012 - April 27, 2012)
|
|
179
|
|
|
$
|
21.51
|
|
|
—
|
|
|
—
|
|
May 2012
|
|
|
|
|
|
|
|
|
(April 28, 2012 - May 25, 2012)
|
|
266
|
|
|
$
|
17.64
|
|
|
—
|
|
|
—
|
|
June 2012
|
|
|
|
|
|
|
|
|
(May 26, 2012 - June 29, 2012)
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
445
|
|
|
$
|
19.20
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
__________
|
|
(1)
|
Comprised entirely of shares purchased to satisfy minimum tax withholding obligations on vesting of restricted share units and restricted stock awards.
|
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
None.
ITEM 5. Other Information
In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of comprehensive income in the financial statements. Entities are required to present total comprehensive income either in a single, continuous statement of net income and comprehensive income or in two separate, but consecutive, statements for net income and comprehensive income. We adopted this standard as of December 31, 2011, and we present net income and other comprehensive income in two separate statements in our annual financial statements. The table below reflects the retrospective application of this guidance for each of the three years ended December 30, 2011, December 31, 2010, and December 25, 2009. The retrospective application did not have a material impact on our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERLINE BRANDS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
YEARS ENDED DECEMBER 30, 2011, DECEMBER 31, 2010, AND DECEMBER 25, 2009
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37,674
|
|
|
$
|
27,921
|
|
|
$
|
26,088
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(172
|
)
|
|
367
|
|
|
776
|
|
Amortization of unrecognized (loss) gain on employee benefits
|
|
(5
|
)
|
|
16
|
|
|
11
|
|
Unrealized (loss) gain on short-term investments
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
Other comprehensive (loss) income
|
|
(177
|
)
|
|
382
|
|
|
788
|
|
Comprehensive income
|
|
$
|
37,497
|
|
|
$
|
28,303
|
|
|
$
|
26,876
|
|
|
|
|
|
|
|
|
The following will be added to the Condensed Consolidated Statements of Earnings included in the financial statements of Guarantor Subsidiaries Note to our annual financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERLINE BRANDS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
YEARS ENDED DECEMBER 30, 2011, DECEMBER 31, 2010, AND DECEMBER 25, 2009
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Subsidiary
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
(Guarantor)
|
|
Issuer
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
2011:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
|
|
$
|
37,674
|
|
|
$
|
(90,451
|
)
|
|
$
|
14,923
|
|
|
$
|
75,528
|
|
|
$
|
37,674
|
|
common stockholders
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
—
|
|
|
(177
|
)
|
|
—
|
|
|
—
|
|
|
(177
|
)
|
Comprehensive income (loss)
|
|
$
|
37,674
|
|
|
$
|
(90,628
|
)
|
|
$
|
14,923
|
|
|
$
|
75,528
|
|
|
$
|
37,497
|
|
|
|
|
|
|
|
|
|
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
|
|
$
|
27,921
|
|
|
$
|
(85,738
|
)
|
|
$
|
12,868
|
|
|
$
|
72,870
|
|
|
$
|
27,921
|
|
common stockholders
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
—
|
|
|
382
|
|
|
—
|
|
|
—
|
|
|
382
|
|
Comprehensive income (loss)
|
|
$
|
27,921
|
|
|
$
|
(85,356
|
)
|
|
$
|
12,868
|
|
|
$
|
72,870
|
|
|
$
|
28,303
|
|
|
|
|
|
|
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
|
|
$
|
26,088
|
|
|
$
|
(56,545
|
)
|
|
$
|
13,775
|
|
|
$
|
42,770
|
|
|
$
|
26,088
|
|
common stockholders
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
—
|
|
|
788
|
|
|
—
|
|
|
—
|
|
|
788
|
|
Comprehensive income (loss)
|
|
$
|
26,088
|
|
|
$
|
(55,757
|
)
|
|
$
|
13,775
|
|
|
$
|
42,770
|
|
|
$
|
26,876
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. Exhibits
The following exhibits are being filed as part of this Quarterly Report on Form 10-Q:
|
|
|
|
2.1
|
|
Agreement and Plan of Merger among Isabelle Holding Company Inc., Isabelle Acquisition Sub Inc., and Interline Brands, Inc., dated as of May 29, 2012 (incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K filed on May 29, 2012).
|
4.1
|
|
Second Supplemental Indenture among Interline Brands, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, as Trustee, dated as of June 19, 2012 (incorporated by reference to Exhibit 4.1 of Current Report on Form 8-K filed on June 29, 2012).
|
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).
|
101.INS
|
*
|
XBRL Instance Document
|
101.SCH
|
*
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
*
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):
|
|
1
|
Consolidated Balance Sheets as of
June 29, 2012
and
December 30, 2011
;
|
|
|
2
|
Consolidated Statements of Earnings for the
three and six
months ended
June 29, 2012
and
July 1, 2011
;
|
|
|
3
|
Consolidated Statements of Comprehensive Income for the
three and six
months ended
June 29, 2012
and
July 1, 2011
;
|
|
|
4
|
Consolidated Statements of Cash Flows for the
six
months ended
June 29, 2012
and
July 1, 2011
; and
|
|
|
5
|
Notes to the Consolidated Financial Statements.
|
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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: August 6, 2012
|
By:
|
/S/ JOHN A. EBNER
|
|
|
John A. Ebner
|
|
|
Chief Financial Officer
|
|
|
(Duly Authorized Signatory and Principal Financial Officer)
|
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