10-Q 1 ibi-03292013xq1.htm 10-Q IBI-03.29.2013-Q1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 29, 2013
 
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from_____________to_____________

Commission File Number: 001-32380

INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
03-0542659
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
701 San Marco Boulevard
Jacksonville, Florida
 
32207
(Address of principal executive offices)
 
(Zip Code)
    
(904) 421-1400
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
 
 
 
 
 
 
 
Non-accelerated filer ý (Do not check if smaller reporting company)
 
Smaller reporting company o
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 3, 2013, there were 1,477,406 shares of the registrant’s common stock issued and outstanding, par value $0.01.



INTERLINE BRANDS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS - FORM 10-Q


ITEM
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
 
ITEM 1. Financial Statements.

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)
 
Successor
 
March 29,
2013
 
December 28,
2012
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
9,994

 
$
17,505

Accounts receivable - trade (net of allowance for doubtful accounts of $1,072 and $528)
163,180

 
157,537

Inventories
259,253

 
250,583

Prepaid expenses and other current assets
31,292

 
33,142

Income taxes receivable
16,066

 
16,643

Deferred income taxes
17,237

 
17,149

Total current assets
497,022

 
492,559

Property and equipment, net
60,792

 
61,747

Goodwill
500,253

 
500,253

Other intangible assets, net
469,047

 
476,888

Other assets
9,929

 
9,586

Total assets
$
1,537,043

 
$
1,541,033

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
117,434

 
$
113,603

Accrued expenses and other current liabilities
41,001

 
49,378

Accrued interest
16,299

 
18,230

Current portion of capital leases
430

 
521

Total current liabilities
175,164

 
181,732

Long-Term Liabilities:
 
 
 
Deferred income taxes
177,957

 
182,164

Long-term debt, net of current portion
820,726

 
813,994

Capital leases, net of current portion
161

 
226

Other liabilities
5,215

 
5,447

Total liabilities
1,179,223

 
1,183,563

Commitments and contingencies (see Note 6)


 


Stockholders' Equity:
 
 
 
Common stock; $0.01 par value, 2,500,000 authorized; 1,477,406 issued and outstanding as of
   March 29, 2013, and 1,474,465 issued and outstanding as of December 28, 2012
15

 
15

Additional paid-in capital
387,916

 
385,932

Accumulated deficit
(29,924
)
 
(28,444
)
Accumulated other comprehensive loss
(187
)
 
(33
)
Total stockholders' equity
357,820

 
357,470

Total liabilities and stockholders' equity
$
1,537,043

 
$
1,541,033

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

3


INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
 
 
Successor
 
 
Predecessor
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
Net sales
$
380,753

 
 
$
313,582

Cost of sales
249,057

 
 
197,971

Gross profit
131,696

 
 
115,611

 
 
 
 
 
Operating Expenses:
 
 
 
 
Selling, general and administrative expenses
109,180

 
 
91,517

Depreciation and amortization
12,358

 
 
6,308

Merger related expenses
783

 
 

Total operating expenses
122,321

 
 
97,825

Operating income
9,375

 
 
17,786

 
 
 
 
 
Interest expense
(15,824
)
 
 
(6,046
)
Interest and other income
530

 
 
592

(Loss) income before income taxes
(5,919
)
 
 
12,332

Income tax (benefit) provision
(4,439
)
 
 
4,867

Net (loss) income
$
(1,480
)
 
 
$
7,465

 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.


4




INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)

 
Successor
 
 
Predecessor
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
Net (loss) income
$
(1,480
)
 
 
$
7,465

Other comprehensive (loss) income, net of tax:
 
 
 
 
    Foreign currency translation adjustments
(154
)
 
 
147

Comprehensive (loss) income
$
(1,634
)
 
 
$
7,612

 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.


5

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
 Cash Flows from Operating Activities:
 
 
 
 
Net (loss) income
$
(1,480
)
 
 
$
7,465

Adjustments to reconcile net (loss) income to net cash
   used in operating activities:
 
 
 
 
 Depreciation and amortization
12,358

 
 
6,308

 Amortization of deferred lease incentive obligation
(212
)
 
 
(200
)
 Amortization of deferred debt financing costs
923

 
 
349

 Amortization of OpCo Notes fair value adjustment
(768
)
 
 

 Share-based compensation
1,234

 
 
1,169

 Excess tax benefits from share-based compensation

 
 
(713
)
 Deferred income taxes
(4,295
)
 
 
1,972

 Provision for doubtful accounts
632

 
 
231

 Gain on disposal of property and equipment

 
 
(36
)
 Other
(359
)
 
 
(315
)
 
 
 
 
 
Changes in operating assets and liabilities:
 
 
 
 
 Accounts receivable - trade
(6,306
)
 
 
(8,571
)
 Inventories
(8,724
)
 
 
(6,595
)
 Prepaid expenses and other current assets
1,849

 
 
5,246

 Other assets
16

 
 
(53
)
 Accounts payable
4,126

 
 
(12,512
)
 Accrued expenses and other current liabilities
(8,351
)
 
 
(2,807
)
 Accrued interest
(1,931
)
 
 
5,271

 Income taxes
576

 
 
(3,447
)
 Other liabilities
(21
)
 
 
(20
)
 Net cash used in operating activities
(10,733
)
 
 
(7,258
)
 Cash Flows from Investing Activities:
 
 
 
 
 Purchases of property and equipment, net
(4,538
)
 
 
(3,321
)
 Net cash used in investing activities
(4,538
)
 
 
(3,321
)
 Cash Flows from Financing Activities:
 
 
 
 
 Decrease in purchase card payable, net
(206
)
 
 
(2,128
)
 Proceeds from ABL Facility
54,000

 
 

 Payments on ABL Facility
(46,500
)
 
 

 Payment of debt financing costs
(50
)
 
 

 Payments on capital lease obligations
(156
)
 
 
(183
)
 Proceeds from issuance of common stock
750

 
 

 Proceeds from stock options exercised

 
 
857

 Excess tax benefits from share-based compensation

 
 
713

 Purchases of treasury stock

 
 
(1,439
)
 Net cash provided by (used in) financing activities
7,838

 
 
(2,180
)
 Effect of exchange rate changes on cash and cash equivalents
(78
)
 
 
57

 Net decrease in cash and cash equivalents
(7,511
)
 
 
(12,702
)
 Cash and cash equivalents at beginning of period
17,505

 
 
97,099

 Cash and cash equivalents at end of period
$
9,994

 
 
$
84,397

 
 
 
 
 

6

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
(in thousands)

 
 
 
 
 
 
Successor
 
 
Predecessor
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
 Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 Cash paid during the period for:
 
 
 
 
 Interest
$
17,569

 
 
$
391

 Income tax (refunds) payments, net
$
(720
)
 
 
$
6,362

 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

7


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)


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 into the facilities maintenance end-market. The Company sells janitorial and sanitation (“JanSan”) supplies, plumbing, hardware, heating, ventilation and air conditioning (“HVAC”), electrical, appliances, security, and other MRO products. Interline’s diverse customer base of over 100,000 customers consists of institutions, such as educational, lodging, health care, and government facilities; multi-family housing, such as apartment complexes; and residential, such as professional contractors, and plumbing and hardware retailers. Interline's customers range in size from individual contractors and independent hardware stores to apartment management companies and national purchasing groups.

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 and institutional 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

On September 7, 2012 (the "Merger Date"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 29, 2012, Isabelle Holding Company Inc., a Delaware corporation (“Parent”), and Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Immediately following the effective time of the Merger, Parent was merged with and into the Company, with the Company surviving (the "Second Merger"). Under the Merger Agreement, stockholders of the Company received $25.50 in cash for each share of Company common stock. Simultaneously with the closing of the Merger, the following occurred: the funding of the new senior secured asset-based revolving credit facility (the "ABL Facility"), the modification of the $300.0 million senior subordinated notes due 2018 (the “OpCo Notes”), the release of the net proceeds of the $365.0 million aggregate principal amount of senior notes from escrow (the "HoldCo Notes"), and the termination of the Company's previous asset-based revolving credit facility. Prior to the Merger Date, the Company operated as a public company with its common stock traded on the New York Stock Exchange. As a result of the Merger, Interline's common stock became privately-held.

The Merger has been accounted for in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for business combinations and accordingly, the Company's assets and liabilities were recorded using their fair values as of September 7, 2012.

Although the Company continued as the same legal entity after the Merger, since the financial statements are not comparable as a result of acquisition accounting, the accompanying consolidated financial statements are presented for two periods: the period prior to the Merger ("Predecessor") and the period subsequent to the Merger ("Successor").

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 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 28, 2012 filed with the SEC.

8


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)


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, purchase accounting adjustments, and valuation of goodwill and other intangible assets. Actual results could differ from those estimates.

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:

Level 1
quoted prices in active markets for identical assets or liabilities;
Level 2
quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3
unobservable inputs, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate the carrying amount because of the short maturities of these items.

The fair value of the Company’s ABL Facility, OpCo Notes, and HoldCo Notes is determined by quoted market prices and other inputs that are observable for these liabilities, which are Level 2 inputs. The carrying amount and fair value of the ABL Facility, OpCo Notes, and HoldCo Notes as of March 29, 2013 and December 28, 2012 were as follows (in thousands):

 
 
Successor
 
 
March 29, 2013
 
 
December 28, 2012
Description
 
Carrying Amount
 
Fair Value
 
 
Carrying Amount
 
Fair
Value
ABL Facility
 
$
135,000

 
$
135,106

 
 
$
127,500

 
$
127,636

OpCo Notes
 
$
320,726

 
$
325,500

 
 
$
321,494

 
$
322,500

HoldCo Notes
 
$
365,000

 
$
404,238

 
 
$
365,000

 
$
394,200



9


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

Segment Information

The Company has one operating segment and, therefore, one reportable segment, the distribution of MRO products into the facilities maintenance end-market. 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):

 
 
Successor
 
 
Predecessor
Product Category(1)
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
JanSan
 
$
179,209

 
 
$
113,674

Plumbing
 
71,463

 
 
70,974

Hardware, tools and fixtures
 
30,023

 
 
28,864

HVAC
 
24,969

 
 
25,849

Electrical and lighting
 
20,399

 
 
20,035

Appliances and parts
 
17,790

 
 
17,672

Security and safety
 
16,781

 
 
16,347

Other
 
20,119

 
 
20,167

Total
 
$
380,753

 
 
$
313,582

     ____________________
(1)
The Company continually refines its product classification groupings and, as a result, stock keeping units are periodically realigned within product categories. Therefore, the prior period in this table has been recast to be consistent with current presentation.

Recently Issued Accounting Guidance

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-04, Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ("ASU 2013-04"). The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing US GAAP. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement amount its co-obligors, plus any additional amount the entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligations as well as other information about those obligations. The amendments in ASU 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and should be retrospectively applied to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU's scope that exist at the beginning of an entity's fiscal year of adoption. An entity may elect to use hindsight for the comparative periods, and should disclose that fact. Early adoption is permitted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). The amendments contained within this guidance clarify the applicable guidance for the release of the cumulative translation adjustment under current US GAAP when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The amendments in ASU 2013-05 are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter, with early adoption permitted. The amendments

10


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

should be applied prospectively to derecognition events occurring after the effective date, and prior periods should not be adjusted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

Recently Adopted Accounting Guidance
    
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350) ("ASU 2012-02"). The objective of the amendments in this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. Effective December 29, 2012, the Company adopted the impairment testing guidance, which did not have a material impact on the Company's consolidated financial statements.

In August 2012, the FASB issued ASU No. 2012-03, Technical Amendments and Corrections to SEC Sections ("ASU 2012-03"). This ASU amends (1) various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No.114, (2) the SEC's Final Rule, Technical Amendments to Commission Rules and Forms Related to the FASB's Accounting Standards Codification, Release Nos. 33-9250, 34-65052, and IC-29748 August 8, 2011, and (3) Corrections Related to FASB ASU 2010-22, Accounting for Various Topics. The objectives of these amendments are to update expired accounting standard references and reference the International Financial Reporting Standards (IFRS) as an appropriate framework of standards and compliance for certain disclosure requirements. Effective December 29, 2012, the Company adopted the amendments, which did not have a material impact on the Company's consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). The objective of this ASU is to improve the reporting of reclassifications out of accumulated other comprehensive income ("AOCI") by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under US GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of AOCI by component. Effective December 29, 2012, the Company adopted the amendments, which did not have a material 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):
Successor
Balance at December 28, 2012
 
Charged to Expense
 
Deductions
 
Balance at
March 29, 2013
$
528

 
$
632

 
$
(88
)
 
$
1,072



11


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

3. MERGER

The Merger resulted in a significant change in ownership and was accounted for using the acquisition method under Accounting Standards Codification Topic 805, Business Combinations. Under the acquisition method, the preliminary purchase price was allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill.

The preliminary purchase price allocation is summarized in the following table (in thousands):

Total sources
 
$
1,204,428

 
 
 
Plus:
 
 
Rollover of equity and stock options
 
30,661

Accelerated share-based compensation
 
13,533

 

44,194

Less:
 
 
Rollover of OpCo Notes and capital lease obligations
 
(300,940
)
Merger related costs and financing fees
 
(60,707
)
Net cash used to fund transaction
 
(90,538
)
 
 
(452,185
)
Equals purchase price consideration to be allocated
 
$
796,437

 
 
 
Fair value of tangible assets and liabilities acquired:
 
 
Cash and cash equivalents
 
$
17,064

Accounts receivable - trade
 
157,690

Inventories
 
212,712

Prepaid expenses and other current assets
 
50,301

Property and equipment
 
57,289

Other long-term assets
 
35,863

Deferred income tax assets
 
15,094

Accounts payable
 
(97,095
)
Other short-term liabilities
 
(61,225
)
OpCo Notes
 
(322,500
)
Other long-term liabilities
 
(4,437
)
Deferred tax liabilities
 
(173,033
)
Total net tangible assets and liabilities
 
(112,277
)
 
 
 
Fair value of identifiable intangible assets acquired:
 
 
Customer relationships
 
253,500

Trademarks
 
171,900

Goodwill
 
483,314

Total identified intangible assets acquired
 
908,714

Total purchase price
 
$
796,437


The preliminary allocation of purchase price to intangible assets as of September 7, 2012 was determined based primarily upon assumptions related to future cash flows, discount and royalty rates, and customer attrition rates. As the estimates and

12


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

assumptions used to determine the preliminary fair values involve a complex series of judgments about future events and uncertainties, these values are not yet finalized, but will be no later than one year from the date of the Merger transaction. In accordance with purchase accounting guidance, changes to the purchase price allocation are adjusted retrospectively to the consolidated financial results.

The values above include a revision to correctly present deferred taxes as of the Merger Date. The impact of this change has been deemed immaterial to the consolidated financial position, results of operations, and cash flows. The December 28, 2012 balances included in the consolidated balance sheets have been revised to include the effect of the adjustment.

4. ACQUISITION

On December 11, 2012, Interline New Jersey acquired all of the outstanding stock of JanPak, Inc. ("JanPak") for $82.5 million in cash, subject to working capital and other closing adjustments. JanPak, which is headquartered in Davidson, North Carolina, is a large regional distributor of janitorial and sanitation supplies and packaging products, primarily serving property management and building service contractors as well as manufacturing, health care and educational facilities through 16 distribution centers across the Southeast and South Central United States. This acquisition represents an expansion of the Company's offering of JanSan products in the Southeastern, Mid-Atlantic, and South Central United States.

In accordance with the purchase method of accounting, the acquired net assets were recorded at preliminary fair value at the date of acquisition. As the estimates and assumptions used to determine the preliminary fair values involve a complex series of judgments about future events and uncertainties, these values are not yet finalized, but will be no later than one year from the date of the transaction.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the JanPak acquisition at the date of acquisition (in thousands):

Accounts receivable
 
$
24,815

Inventories
 
21,492

Other current assets
 
4,620

Property and equipment
 
4,822

Goodwill
 
16,939

Intangible assets
 
32,600

Other assets
 
37

Total assets acquired
 
105,325

Current liabilities
 
9,456

Other liabilities
 
13,369

Total liabilities assumed
 
22,825

Net assets acquired
 
$
82,500


In accordance with purchase accounting guidance, changes to the purchase price allocation are adjusted retrospectively to the consolidated financial results. The values above include measurement period adjustments recorded in the first quarter of 2013 to primarily revise the fair value of the acquired inventories and other receivables. The December 28, 2012 balances included in the consolidated balance sheets have been revised to include the effect of the measurement period adjustments.


13


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

5. SHARE-BASED COMPENSATION

Total compensation cost recognized in the consolidated statements of operations for the Company's stock-based awards were as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
Share-based compensation expense
$
1,234

 
 
$
1,169


As of March 29, 2013, there was $14.2 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 4.1 years.    

During the three months ended March 29, 2013, the Company granted 4,512 time-based option awards with a weighted-average grant date fair value of $123.70 and 591 performance-based stock option awards, with a weighted-average grant date fair value of $121.44, under the Interline Brands, Inc. 2012 Option Plan (the "2012 Plan"). During the three months ended March 30, 2012, the Company granted 207,161 stock options, with a weighted-average grant date fair value of $7.96, under the 2004 Equity Incentive Plan (the "2004 Plan").

See Note 14 of the 2012 Annual Report on Form 10-K for a description of the 2004 and 2012 Plans. The fair values of stock options were estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes weighted-average assumptions were as follows:

 
 
Successor
 
 
Predecessor
 
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
 
 
Time-Based Awards
 
Performance-Based Awards
 
 
Time-Based Awards
Stock price
 
$
255.00

 
$
255.00

 
 
N/A

Expected volatility
 
48.6
%
 
49.4
%
 
 
43.5
%
Expected dividends
 
0.0
%
 
0.0
%
 
 
0.0
%
Risk-free interest rate
 
1.2
%
 
1.1
%
 
 
0.9
%
Expected life (in years)
 
6.5

 
6.1

 
 
5.0


    

14


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

A summary of stock options activity under the 2012 Plan for the three months ended March 29, 2013 is presented below:
 
Successor

Shares
 
Weighted- Average Exercise Price
 
Weighted- Average Remaining Contractual Term
 
Aggregate Intrinsic Value(1)
 
 
 
 
 
(in years)
 
(in thousands)
Outstanding at December 28, 2012
198,753

 
$
219.72

 
 
 
 
Granted
5,103

 
$
255.00

 
 
 
 
Forfeited
1,266

 
$
255.00

 
 
 
 
Outstanding at March 29, 2013
202,590

 
$
220.38

 
7.8
 
$
7,013

Vested or expected to vest at March 29, 2013
201,033

 
$
220.12

 
7.8
 
$
7,013

Exercisable at March 29, 2013
65,079

 
$
147.24

 
4.1
 
$
7,013

____________________
(1)
The aggregate intrinsic value represents the amount by which the fair value of the underlying stock at period end exceeds the stock option exercise price.

During the three months ended March 29, 2013, there were no stock options exercised. During the three months ended March 30, 2012, there were 76,759 stock options exercised with an intrinsic value of $0.7 million.

6. COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

As of March 29, 2013 and December 28, 2012, the Company was contingently liable for outstanding letters of credit aggregating to $9.4 million and $8.9 million, respectively.

Legal Proceedings

On May 10, 2011, the Company was named as a defendant in the case of Craftwood Lumber Company, an Illinois corporation, individually and on behalf of all others similarly situated v. Interline Brands, Inc., a Delaware corporation, and Interline Brands, Inc. a New Jersey corporation, filed before the Nineteenth Judicial Circuit Court of Lake County, Illinois, and 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 initial complaint in state court, 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. The plaintiff is seeking preliminary and permanent injunctive relief enjoining the Company from violating the TCPA, as well as statutory damages of $500 (or $1,500 if such violations are found to have been willful) for each fax transmission found to be in violation of the TCPA. 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, advice from external legal counsel and investigation of prior events, new information, and future circumstances.

The Company is involved in various other legal proceedings in the ordinary course of its 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 the Company’s consolidated financial statements.


15


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

Because the outcome of litigation is inherently uncertain, the Company may not prevail in these proceedings and the ultimate exposure cannot be estimated if the Company were not to prevail. Accordingly, any rulings against the Company could have a material adverse effect on the consolidated financial statements.

7. GUARANTOR SUBSIDIARIES

The OpCo Notes of Interline New Jersey (the “Subsidiary Issuer”), issued in November 2010, are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis by Interline Brands, Inc. (the “Parent Company”) and the majority of Interline New Jersey’s 100% owned domestic subsidiaries, subject to certain exceptions (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 senior subordinated indebtedness, subordinated to any of their senior indebtedness outstanding prior to the Merger and equal in right of payment to any senior indebtedness outstanding as of the Merger Date and any future senior indebtedness.

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. For the three months ended March 29, 2013, dividends totaling $15.0 million have been paid to the Parent Company from the Subsidiary Issuer for the purpose of funding interest payments on the HoldCo Notes.

Effective July 2, 2012, all of the preferred stock between the Parent and the Subsidiary Issuer was canceled and retired.

The following tables set forth, on a condensed consolidating basis, the balance sheets, statements of operations and comprehensive (loss) 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.

The condensed consolidating financial statements presented below for the three months ended March 29, 2013 and the year ended December 28, 2012 (the Successor periods) reflects the historical accounting basis for the Subsidiary Issuer and for the Guarantor Subsidiaries, with the exception of JanPak, which was recorded at fair value at the date of acquisition. Certain purchase accounting adjustments resulting from the Merger are reflected in the consolidating adjustments column.

16


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 29, 2013
SUCCESSOR
(in thousands)
 
Parent
Company
(Guarantor)
 
 Subsidiary
Issuer
 
 Guarantor
Subsidiaries
 
 Consolidating
Adjustments
 
 Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 Cash and cash equivalents
$
1,034

 
$
8,006

 
$
954

 
$

 
$
9,994

 Accounts receivable - trade, net

 
137,490

 
25,690

 

 
163,180

 Inventories

 
235,284

 
23,969

 

 
259,253

 Intercompany receivable
18,344

 

 
4,859

 
(23,203
)
 

 Other current assets
41,557

 
43,931

 
3,830

 
(24,723
)
 
64,595

 Total current assets
60,935

 
424,711

 
59,302

 
(47,926
)
 
497,022

 
 
 
 
 
 
 
 
 
 
 Property and equipment, net

 
56,270

 
4,522

 

 
60,792

 Goodwill

 
346,025

 
16,939

 
137,289

 
500,253

 Other intangible assets, net
15,627

 
132,784

 
32,496

 
288,140

 
469,047

 Investment in subsidiaries
790,531

 
101,389

 

 
(891,920
)
 

 Other assets

 
2,248

 
7,681

 

 
9,929

 Total assets
$
867,093

 
$
1,063,427

 
$
120,940

 
$
(514,417
)
 
$
1,537,043

 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 Accounts payable
$

 
$
104,479

 
$
12,955

 
$

 
$
117,434

 Accrued expenses and other current liabilities
27,002

 
51,826

 
6,455

 
(27,983
)
 
57,300

 Intercompany payable

 
23,203

 

 
(23,203
)
 

 Current portion of capital leases

 
430

 

 

 
430

 Total current liabilities
27,002

 
179,938

 
19,410

 
(51,186
)
 
175,164

 
 
 
 
 
 
 
 
 
 
 Long-Term Liabilities:
 
 
 
 
 
 
 
 
 
 Long-term debt and capital leases, net of current portion
365,000

 
435,161

 

 
20,726

 
820,887

 Other liabilities
117,271

 
68,112

 
141

 
(2,352
)
 
183,172

 Total liabilities
509,273

 
683,211

 
19,551

 
(32,812
)
 
1,179,223

 
 
 
 
 
 
 
 
 
 
 Stockholders' equity
357,820

 
380,216

 
101,389

 
(481,605
)
 
357,820

 Total liabilities and stockholders' equity
$
867,093

 
$
1,063,427

 
$
120,940

 
$
(514,417
)
 
$
1,537,043





17


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 2012
SUCCESSOR
(in thousands)
 
Parent
Company
(Guarantor)
 
 Subsidiary
Issuer
 
 Guarantor
Subsidiaries
 
 Consolidating
Adjustments
 
 Consolidated
 ASSETS
 
 
 
 
 
 
 
 
 
 Current Assets:
 
 
 
 
 
 
 
 
 
 Cash and cash equivalents
$
1,455

 
$
13,803

 
$
2,247

 
$

 
$
17,505

 Accounts receivable - trade, net

 
134,269

 
23,268

 

 
157,537

 Inventories

 
225,829

 
24,754

 

 
250,583

 Intercompany receivable
18,384

 
4,878

 

 
(23,262
)
 

 Other current assets
38,104

 
24,297

 
4,703

 
(170
)
 
66,934

 Total current assets
57,943

 
403,076

 
54,972

 
(23,432
)
 
492,559

 
 
 
 
 
 
 
 
 
 
 Property and equipment, net

 
56,926

 
4,821

 

 
61,747

 Goodwill

 
346,025

 
16,939

 
137,289

 
500,253

 Other intangible assets, net
16,070

 
135,038

 
32,600

 
293,180

 
476,888

 Investment in subsidiaries
803,267

 
99,321

 

 
(902,588
)
 

 Other assets

 
2,174

 
7,412

 

 
9,586

 Total assets
$
877,280

 
$
1,042,560

 
$
116,744

 
$
(495,551
)
 
$
1,541,033

 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 Current Liabilities:
 
 
 
 
 
 
 
 
 
 Accounts payable
$

 
$
106,051

 
$
7,552

 
$

 
$
113,603

 Accrued expenses and other current liabilities
33,999

 
32,408

 
4,852

 
(3,651
)
 
67,608

 Intercompany payable

 
18,384

 
4,878

 
(23,262
)
 

 Current portion of capital leases

 
521

 

 

 
521

 Total current liabilities
33,999

 
157,364

 
17,282

 
(26,913
)
 
181,732

 
 
 
 
 
 
 
 
 
 
 Long-Term Liabilities:
 
 
 
 
 
 
 
 
 
 Long-term debt and capital leases, net of current portion
365,000

 
427,726

 

 
21,494

 
814,220

 Other liabilities
120,811

 
69,011

 
141

 
(2,352
)
 
187,611

 Total liabilities
519,810

 
654,101

 
17,423

 
(7,771
)
 
1,183,563

 
 
 
 
 
 
 
 
 
 
 Stockholders' equity
357,470

 
388,459

 
99,321

 
(487,780
)
 
357,470

 Total liabilities and stockholders' equity
$
877,280

 
$
1,042,560

 
$
116,744

 
$
(495,551
)
 
$
1,541,033


18


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 29, 2013
SUCCESSOR
(in thousands)
 
Parent
Company
(Guarantor)
 
 Subsidiary
Issuer
 
 Guarantor
Subsidiaries
(1)
 
 Consolidating
Adjustments
 
 Consolidated
 Net sales
$

 
$
321,294

 
$
59,459

 
$

 
$
380,753

 Cost of sales

 
204,067

 
44,990

 

 
249,057

     Gross profit

 
117,227

 
14,469

 

 
131,696

 
 
 
 
 
 
 
 
 
 
 Operating Expenses:
 
 
 
 
 
 
 
 
 
 Selling, general and administrative expenses
30

 
101,446

 
7,482

 
222

 
109,180

 Depreciation and amortization

 
6,719

 
425

 
5,214

 
12,358

 Merger related expenses
10

 
773

 

 

 
783

 Operating (loss) income
(40
)
 
8,289

 
6,562

 
(5,436
)
 
9,375

 
 
 
 
 
 
 
 
 
 
 Equity earnings of subsidiaries
(1,184
)
 
(4,771
)
 

 
5,955

 

 
 
 
 
 
 
 
 
 
 
 Interest and other (expense) income, net
(9,617
)
 
(7,470
)
 
850

 
943

 
(15,294
)
 (Loss) income before income taxes
(8,473
)
 
5,590

 
7,412

 
(10,448
)
 
(5,919
)
 Income tax (benefit) provision
(6,993
)
 
(87
)
 
2,641

 

 
(4,439
)
 Net (loss) income
(1,480
)
 
5,677

 
4,771

 
(10,448
)
 
(1,480
)
 Other comprehensive loss
(154
)
 
(154
)
 

 
154

 
(154
)
 Comprehensive (loss) income
$
(1,634
)
 
$
5,523

 
$
4,771

 
$
(10,294
)
 
$
(1,634
)
____________________
(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.



19


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 30, 2012
PREDECESSOR
(in thousands)
 
Parent
Company
(Guarantor)
 
 Subsidiary
Issuer
 
 Guarantor
Subsidiaries
(1)
 
 Consolidating
Adjustments
 
 Consolidated
 Net sales
$

 
$
313,582

 
$

 
$

 
$
313,582

 Cost of sales

 
197,971

 

 

 
197,971

 Gross profit

 
115,611

 

 

 
115,611

 
 
 
 
 
 
 
 
 
 
 Operating Expenses:
 
 
 
 
 
 
 
 
 
 Selling, general and administrative expenses

 
96,215

 
1

 
(4,699
)
 
91,517

 Depreciation and amortization

 
6,308

 

 

 
6,308

 Other operating income

 

 
(4,699
)
 
4,699

 

 Operating income

 
13,088

 
4,698

 

 
17,786

 
 
 
 
 
 
 
 
 
 
 Equity earnings of subsidiaries
(7,465
)
 
(3,586
)
 

 
11,051

 

 
 
 
 
 
 
 
 
 
 
 Interest and other (expense) income, net

 
(6,358
)
 
904

 

 
(5,454
)
 Income before income taxes
7,465

 
10,316

 
5,602

 
(11,051
)
 
12,332

Income tax provision

 
2,851

 
2,016

 

 
4,867

 Net income
7,465

 
7,465

 
3,586

 
(11,051
)
 
7,465

 Preferred stock dividends

 
(34,874
)
 

 
34,874

 

 Net income (loss) attributable to common stockholders
7,465

 
(27,409
)
 
3,586

 
23,823

 
7,465

Other comprehensive income

 
147

 

 

 
147

Comprehensive income (loss)
$
7,465

 
$
(27,262
)
 
$
3,586

 
$
23,823

 
$
7,612

____________________
(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.


20


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 29, 2013
SUCCESSOR
(in thousands)
 
Parent
Company
(Guarantor)
 
 Subsidiary
Issuer
 
 Guarantor
Subsidiaries
 
 Consolidating
Adjustments
 
 Consolidated
 Net cash (used in) provided by operating activities
$
(16,161
)
 
$
(7,620
)
 
$
13,048

 
$

 
$
(10,733
)
 Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
 Purchases of property and equipment, net

 
(4,380
)
 
(158
)
 

 
(4,538
)
 Dividends received from subsidiary issuer
15,000

 

 

 
(15,000
)
 

 Net cash provided by (used in) investing activities
15,000

 
(4,380
)
 
(158
)
 
(15,000
)
 
(4,538
)
 Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
 Decrease in purchase card payable, net

 
(206
)
 

 

 
(206
)
 Proceeds from ABL Facility

 
54,000

 

 

 
54,000

 Payments on ABL Facility

 
(46,500
)
 

 

 
(46,500
)
 Payment of debt financing costs
(50
)
 

 

 

 
(50
)
 Payments on capital lease obligations

 
(156
)
 

 

 
(156
)
 Proceeds from issuance of common stock
750

 

 

 

 
750

 Dividends paid to parent company

 
(15,000
)
 

 
15,000

 

 Intercompany activity
40

 
14,143

 
(14,183
)
 

 

 Net cash provided by (used in) financing activities
740

 
6,281

 
(14,183
)
 
15,000

 
7,838

 Effect of exchange rate changes on cash and cash equivalents

 
(78
)
 

 

 
(78
)
 Net decrease in cash and cash equivalents
(421
)
 
(5,797
)
 
(1,293
)
 

 
(7,511
)
 Cash and cash equivalents at beginning of period
1,455

 
13,803

 
2,247

 

 
17,505

 Cash and cash equivalents at end of period
$
1,034

 
$
8,006

 
$
954

 
$

 
$
9,994





















21


INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED MARCH 29, 2013 (SUCCESSOR) AND MARCH 30, 2012 (PREDECESSOR)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 30, 2012
PREDECESSOR
(in thousands)
 
Parent
Company
(Guarantor)

 Subsidiary
Issuer

 Guarantor
Subsidiaries

 Consolidating
Adjustments

 Consolidated
 Net cash (used in) provided by operating activities
$

 
$
(10,869
)
 
$
3,611

 
$

 
$
(7,258
)
 Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
 Purchases of property and equipment, net

 
(3,321
)
 

 

 
(3,321
)
 Dividends received from subsidiary issuer
1,439

 

 

 
(1,439
)
 

 Other

 
3,617

 

 
(3,617
)
 

 Net cash provided by investing activities
1,439

 
296

 

 
(5,056
)
 
(3,321
)
 Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
 Decrease in purchase card payable, net

 
(2,128
)
 

 

 
(2,128
)
 Payments on capital lease obligations

 
(183
)
 

 

 
(183
)
 Purchases of treasury stock
(1,439
)
 

 

 

 
(1,439
)
 Dividends paid to parent company

 
(1,439
)
 

 
1,439

 

 Other

 
1,570

 
(3,617
)
 
3,617

 
1,570

 Net cash used in financing activities
(1,439
)
 
(2,180
)
 
(3,617
)
 
5,056

 
(2,180
)
 Effect of exchange rate changes on cash and cash equivalents

 
57

 

 

 
57

 Net decrease in cash and cash equivalents

 
(12,696
)
 
(6
)
 

 
(12,702
)
 Cash and cash equivalents at beginning of period

 
97,061

 
38

 

 
97,099

 Cash and cash equivalents at end of period
$

 
$
84,365

 
$
32

 
$

 
$
84,397


22


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 and the impact of the Merger, as defined in "Recent Developments" below. 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,
our level of debt,
future cash flows,
the highly competitive nature of the maintenance, repair and operations distribution industry,
apartment vacancy rates and effective rents,
governmental and educational budget constraints,
work stoppages or other business interruptions at transportation centers or shipping ports,
our ability to accurately predict market trends,
adverse publicity and litigation,
the loss of significant customers,
adverse changes in trends in the home improvement and remodeling and home building markets,
health care costs,
product cost and price fluctuations due to inflation and currency exchange rates,
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,
failure to realize expected benefits from acquisitions or the Merger,
consumer spending and debt levels,
interest rate fluctuations,
weather conditions and catastrophic weather events,
material facilities and systems disruptions and shutdowns,
the length of our supply chains,
dependence on key employees,
credit market contractions,
changes to tariffs between the countries in which we operate,
our ability to protect trademarks,
changes in governmental regulations related to our product offerings, and
changes in consumer preferences.


23


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.

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 into the facilities maintenance end-market. 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 non-industrial and residential facilities.

Our diverse facilities maintenance customer base includes institutions, such as educational, lodging, health care, and government facilities; multi-family housing, such as apartment complexes; and residential, such as professional contractors, and 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 facilities maintenance markets they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The AmSan®, JanPakSM , CleanSource®, Sexauer®, and Trayco® brands generally serve our institutional facilities customers;
the Wilmar® and Maintenance USA® brands generally serve our multi-family housing facilities customers; and the Barnett®, Copperfield®, U.S. Lock®, SunStar®, Hardware Express®, LeranSM and AF Lighting® brands generally serve our residential facilities 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 800 field sales representatives, approximately 400 inside sales and customer service representatives, a direct marketing program consisting of catalogs and promotional flyers, brand‑specific websites, a national accounts sales program, and other supply chain programs, such as vendor managed inventory.

We deliver our products through our network of 70 distribution centers and 21 professional contractor showrooms located throughout the United States, Canada, and Puerto Rico, 62 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

Merger Transaction
On September 7, 2012 (the "Merger Date"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 29, 2012, Isabelle Holding Company Inc., a Delaware corporation (“Parent”), and Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Immediately following the effective time of the Merger, Parent was merged with and into the Company, with the Company surviving (the "Second Merger"). Under the Merger Agreement, stockholders of the Company received $25.50 in cash for each share of Company common stock. Simultaneously with the closing of the Merger, the following occurred: the funding of the new senior secured asset-based revolving credit facility (the "ABL Facility"), the modification of the $300.0 million senior subordinated notes due 2018 (the “OpCo Notes”), the release of the net proceeds of the $365.0 million aggregate principal amount of senior notes from escrow (the "HoldCo Notes"), and the termination of the Company's previous asset-based revolving credit facility. Prior to the Merger Date, the Company operated as a public company with its common stock traded on the New York Stock Exchange. As a result of the Merger, Interline's common stock became privately-held.

24



Our primary business activities remain unchanged after the Merger. As a result of the Merger, we applied the acquisition method of accounting and established a new accounting basis on September 8, 2012. Although the Company continued as the same legal entity after the Merger, since the financial statements are not comparable as a result of acquisition accounting, the results of operations and related cash flows are presented for two periods: the period prior to the Merger ("Predecessor") and the period subsequent to the Merger ("Successor").

In connection with the Merger, we incurred significant indebtedness and became more leveraged. In addition, the purchase price paid in connection with the Merger has been allocated to recognize the acquired assets and liabilities at fair value. The purchase accounting adjustments have been recorded to: (i) establish intangible assets for our trademarks and customer relationships, and (ii) revalue our OpCo Notes to fair value. Subsequent to the Merger, interest expense and non-cash amortization charges have significantly increased. As a result, our Successor financial statements subsequent to the Merger are not comparable to our Predecessor financial statements.

Acquisition

On December 11, 2012, Interline New Jersey acquired all of the outstanding stock of JanPak, Inc. ("JanPak") for $82.5 million in cash, subject to working capital and other closing adjustments. JanPak, which is headquartered in Davidson, North Carolina, is a large regional distributor of janitorial and sanitation supplies and packaging products, primarily serving property management and building service contractors as well as manufacturing, health care and educational facilities through 16 distribution centers across the Southeast and South Central United States. This acquisition represents an expansion of the Company's offering of JanSan products in the Southeastern, Mid-Atlantic, and South Central United States.

Results of Operations

The following table presents information derived from the consolidated statements of operations expressed as a percentage of net sales for the three months ended March 29, 2013 (Successor) and March 30, 2012 (Predecessor):

 
% of Net Sales
 
 % Increase
(Decrease)
2013
vs.
   2012(1)
 
Successor
 
 
Predecessor
 
 
For the Three Months Ended March 29, 2013
 
 
For the Three Months Ended March 30, 2012
 
Net sales
100.0
 %
 
 
100.0
 %
 
21.4
 %
Cost of sales
65.4

 
 
63.1

 
25.8

Gross profit
34.6

 
 
36.9

 
13.9

 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
Selling, general and
administrative expenses
28.7

 
 
29.2

 
19.3

Depreciation and amortization
3.2

 
 
2.0

 
95.9

Merger related expenses
0.2

 
 

 
NM

 Total operating expenses
32.1

 
 
31.2

 
25.0

Operating income
2.5

 
 
5.7

 
(47.3
)
 
 
 
 
 
 
 
Interest expense
(4.2
)
 
 
(1.9
)
 
161.7

Interest and other income
0.1

 
 
0.2

 
(10.5
)
(Loss) income before income taxes
(1.6
)
 
 
3.9

 
(148.0
)
Income tax (benefit) provision
(1.2
)
 
 
1.6

 
(191.2
)
Net (loss) income
(0.4
)%
 
 
2.4
 %
 
(119.8
)%
____________________
(1)
Percent increase (decrease) represents the actual change as a percentage of the prior year’s result.
NM - Not Meaningful

The following discussion refers to the terms average daily sales and average organic daily sales. Average daily sales are defined as sales for a period of time divided by the number of shipping days in that period of time. Average organic daily sales are

25


defined as sales for a period of time divided by the number of shipping days in that period of time excluding any sales from acquisitions made subsequent to the beginning of the prior year period.

    Overview. During the three months ended March 29, 2013, our sales increased 21.4% in total and 23.3% on an average daily sales basis versus the prior year period, primarily reflecting the impact from the JanPak acquisition, continued economic improvements across our facilities maintenance end-market, combined with our continued investments in our sales forces and our information technology. There were 64 shipping days in the first quarter of 2013 compared to 65 shipping days in the first quarter of 2012. On an organic basis our sales increased 1.9%, and on an average organic daily sales basis our sales increased by 3.5%. Sales to our institutional facilities customers, which comprised 52% of our total sales, increased 50.3% in total, primarily from the JanPak acquisition, 3.4% on an average organic sales basis, and increased 5.0% on an average organic daily sales basis. Sales to our multi-family housing facilities customers, which comprised 28% of our total sales, increased 1.9% in total and increased 3.4% on an average daily sales basis. Sales to our residential facilities customers, which comprised 20% of our total sales, decreased 0.2% in total and increased 1.4% on an average daily sales basis. We believe we are continuing to more fully realize the benefits of our efforts to strengthen our business, improve our competitive position, and enhance our market capabilities. We expect these trends to continue throughout 2013 as we continue our investments in our sales force and other key areas of our business.

Operating income as a percentage of net sales was 2.5% in the three months ended March 29, 2013 compared to 5.7% in the comparable prior year period. The decrease in operating income as a percentage of sales was primarily a result of higher depreciation and amortization expense, which was predominantly driven by the purchase accounting impact of the Merger, higher distribution consolidation costs, the impact from the JanPak acquisition, Merger related expenses, lower gross profit margins related to changes in customer and product mix as compared to the prior year, and the impact from one less shipping day on our selling, general and administrative ("SG&A") expenses as a percentage of sales.

Net loss as a percentage of net sales was 0.4% in the three months ended March 29, 2013 compared to net income as a percent of sales of 2.4% in the comparable prior year period as a result of the above impacts to operating income combined with increased interest expense as a result of the financing transactions associated with the Merger.

Three Months Ended March 29, 2013 (Successor) Compared to Three Months Ended March 30, 2012 (Predecessor)

Net Sales. Net sales increased by $67.2 million, or 21.4%, to $380.8 million in the three months ended March 29, 2013 from $313.6 million in the three months ended March 30, 2012. The increase in sales was primarily attributable to sales of $66.1 million from net increases in sales to our institutional facilities customers, including $61.3 million from acquisitions, plus $1.9 million from net increases in sales to our multi-family housing facilities customers, partially offset by a decrease in sales to our residential facilities customers of $0.1 million. On an organic basis, our sales increased 1.9%, and on an average organic daily sales basis, our sales increased 3.5%.

Gross Profit. Gross profit increased by $16.1 million, or 13.9%, to $131.7 million in the three months ended March 29, 2013 from $115.6 million in the three months ended March 30, 2012. Our gross profit margin decreased 230 basis points to 34.6% for the three months ended March 29, 2013 compared to 36.9% for the three months ended March 30, 2012. This decrease in gross profit margin was related to our acquisition, which accounted for 190 basis points of the decrease in gross profit margins, while the remaining decline was primarily attributable to changes in customer and product mix as compared to the prior year.

Selling, General and Administrative Expenses. SG&A expenses increased by $17.7 million, or 19.3%, to $109.2 million in the three months ended March 29, 2013 from $91.5 million in the three months ended March 30, 2012. As a percentage of net sales, SG&A expenses decreased 50 basis points to 28.7% for the three months ended March 29, 2013 compared to 29.2% for the three months ended March 30, 2012. The decrease in SG&A expenses as a percentage of sales was primarily due to the favorable impact from the JanPak acquisition and lower payroll and fringe benefit costs as a percentage of sales, offset in part by higher distribution center consolidation costs and overall higher SG&A expenses as a percentage of sales, primarily driven by one less shipping day in the first quarter of 2013 as compared to the prior year period.

Depreciation and Amortization. Depreciation and amortization expense increased by $6.1 million, or 95.9%, to $12.4 million in the three months ended March 29, 2013 from $6.3 million in the three months ended March 30, 2012. As a percentage of net sales, depreciation and amortization was 3.2% and 2.0% for the three months ended March 29, 2013 and March 30, 2012, respectively. The increase in depreciation expense was due to the depreciation of the acquired JanPak fixed assets, combined with higher capital spending associated with our information technology infrastructure and distribution center consolidation and integration efforts that occurred during the last three years. The increase in amortization expense was primarily driven by the incremental amortization of the

26


fair value adjustments for the definite-lived intangible asset values recorded as a result of the Merger, as well as the amortization expense associated with the definite-lived intangible assets recorded in connection with the JanPak acquisition.

Merger related expenses. Merger related expenses incurred in the three months ended March 29, 2013 of $0.8 million were comprised of transaction related compensation of $0.6 million, professional fees of $0.1 million, and other costs of $0.2 million, all incurred as a direct result of the Merger.

Operating income. As a result of the foregoing, operating income decreased by $8.4 million, or 47.3%, to $9.4 million in the three months ended March 29, 2013 from $17.8 million in the three months ended March 30, 2012.

Interest Expense. Interest expense increased $9.8 million, or 161.7%, to $15.8 million in the three months ended March 29, 2013 from $6.0 million in the three months ended March 30, 2012. The increase in interest expense was directly attributable to the issuance of the HoldCo Notes to finance the Merger, the borrowings made under the ABL Facility, and the increment