10-K 1 ibi-fy14x10k.htm FORM 10-K IBI - FY14 - 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the fiscal year ended
December 26, 2014
 
 
 
 
 
 
 
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)

Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: NONE

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference of Part III of this Form 10-K or any amendment to this Form 10-K.     ý




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

Effective September 7, 2012, the Company became privately-held. There is no established public trading of the registrant’s common stock and therefore, an aggregate market value of the registrant's common stock is not determinable.

As of February 20, 2015, there were 1,499,053 shares of the registrant’s common stock issued and outstanding, par value $0.01.



INTERLINE BRANDS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FOR THE FISCAL YEAR ENDED DECEMBER 26, 2014

ITEM
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Unless otherwise indicated, references in this document to "we," "us," "our" and the "Company" refer to Interline Brands, Inc., a Delaware corporation incorporated in 2004, and its consolidated subsidiaries, and "Interline New Jersey" refers to Interline Brands, Inc., a New Jersey corporation incorporated in 1978, through which we conduct our business.

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, the impact of the Merger, as defined in Part I. Item 1 below, and amounts that may be paid for resolution of legal matters. 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” and “Liquidity and Capital Resources” in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Part II. Item 7A. 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:

our level of indebtedness;
future cash flows;
the highly competitive nature of the maintenance, repair and operations distribution industry;
general market conditions;
the impact of the current rebranding initiative;
the impact of potential future impairment charges;
apartment vacancy rates and effective rents;
governmental and educational budget constraints;
work stoppages or other business interruptions at transportation centers or shipping ports;
health care costs;
our ability to accurately predict market trends;
fluctuations in the cost of commodity-based products and raw materials (such as copper) and fuel prices;
adverse publicity;
labor and benefit costs;
the loss of significant customers;
adverse changes in trends in the home improvement, remodeling and home building markets;
product cost and price fluctuations due to inflation and currency exchange rates;
inability to identify, acquire and successfully integrate acquisition candidates;
our ability to purchase products from suppliers on favorable terms;
the impact of the resolution of current or future legal claims;
our customers' ability to pay us;
inability to realize expected benefits from acquisitions;
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;
disruptions in information technology systems;



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Forward-Looking Statements (continued)

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.

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.


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PART I
 
ITEM 1. Business

Our Company

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; heating, ventilation and air conditioning ("HVAC"); hardware, tools and fixtures; 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, commercial, multi-family 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 currently market and sell our products primarily through thirteen distinct and targeted brands, each of which is recognized in the facilities maintenance market they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The AmSan®, JanPak® , 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®, 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. During the second quarter of 2014, management made a strategic marketing decision to simplify our brand structure for our institutional customer base during 2015. This rebranding initiative is designed to consolidate our institutional brands under a single national brand name and increase brand awareness as a market leading institutional business.

We reach our markets using a variety of sales channels, including a field sales force of approximately 1,160 associates, which includes sales management and related associates, approximately 470 inside sales and customer service and support associates, 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 67 distribution centers and 21 professional contractor showrooms located throughout the United States, Canada, and Puerto Rico, 72 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 United States ("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 with same-day or next-day delivery 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, market expertise and service capabilities 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.

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. The Merger was unanimously approved by Interline's Board of Directors and a majority of Interline's stockholders holding the outstanding shares of the common stock. Please refer to Note 3. Transactions to our audited consolidated financial statements included in this annual report for further

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information about the Merger Agreement. 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.

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 the OpCo Notes due 2018 (the "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.

Acquisitions

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 represented an expansion of the Company's offering of JanSan products in the Southeastern, Mid-Atlantic, and South Central United States.

On January 28, 2011, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of Northern Colorado Paper, Inc. (“NCP”) for $9.5 million in cash and an earn-out of up to $0.3 million in cash over two years. NCP, which is headquartered in Greeley, Colorado, is a regional distributor of JanSan supplies, primarily serving institutional facilities in the health care, education and food service industries. This acquisition represented an expansion of the Company's offering of JanSan products in the western United States.

On October 29, 2010, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of CleanSource, Inc. (“CleanSource”) for $54.6 million in cash and an earn-out of up to $5.5 million in cash over two years. CleanSource, which is headquartered in San Jose, California, is a large regional distributor of JanSan supplies. CleanSource primarily serves health care and educational facilities, as well as building services contractors. This acquisition represented a geographical expansion of the Company's offering of JanSan products to the western United States.

Financing Transactions

Fiscal Year 2014

On March 17, 2014, Interline New Jersey completed the following financing transactions:

entered into a first lien term loan under which Interline New Jersey incurred a term loan in an aggregate principal amount of $350.0 million (the "Term Loan Facility"); and
amended the asset-based senior secured revolving credit facility, dated as of September 7, 2012 (the “ABL Facility”), by entering into the First Amendment to Credit Agreement to permit the incurrence of the Term Loan Facility and make other changes in connection with the refinancing (the “First ABL Facility Amendment”).

The proceeds from the Term Loan Facility were used to finance the redemption of Interline New Jersey's $300.0 million OpCo Notes, the repayment of a portion of amounts outstanding under the ABL Facility and the payment of related fees, costs and expenses. In connection with the redemption of the OpCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $4.3 million during the year ended December 26, 2014. The loss was comprised of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt issuance costs of $3.5 million.
    

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On April 8, 2014, Interline New Jersey further amended the ABL Facility by entering into the Second Amendment to the Credit Agreement to amend certain pricing terms applicable to the ABL Facility and extend the maturity date to April 8, 2019, at which date the principal amount outstanding under the ABL Facility will be due and payable in full (the “Second ABL Facility Amendment”).
    
On December 10, 2014 Interline New Jersey further amended the ABL Facility to increase the aggregate commitments from $275.0 million to $325.0 million (the "Increase Agreement"). Except for this commitment increase, no other material terms were modified by the Increase Agreement.

Subsequent to December 26, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes (as defined below).

Fiscal Year 2012

In connection with the Merger in 2012, the Company entered into the following financing transactions:

the ABL Facility, with an aggregate principal amount of up to $275.0 million;
the issuance of $365.0 million aggregate principal amount of senior notes (the "HoldCo Notes"); and
the modification of the OpCo Notes.

Simultaneously with the closing of the Merger, the following occurred: the funding of the new ABL Facility, the release of the net proceeds of the $365.0 million HoldCo Notes from escrow, the termination of the Company's previous $225.0 million asset-based revolving credit facility, and the modification of the OpCo Notes.

See “Management's Discussion and Analysis of Financial Condition and Results of Operations—Financing Transactions,” “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”, and Note 10. Debt to our audited consolidated financial statements included in this annual report for further information regarding our outstanding indebtedness.

Rebranding Initiative
During the second quarter of fiscal year 2014, Company management made a strategic marketing decision to rebrand certain trademark assets under one new national brand name within our institutional customer end-market. We believe the rebranding initiative will provide positive outcomes as it relates to national scope and capabilities, brand recognition and market share. The rebranding is not expected to have a significant impact on operations or the quality of our product offerings.

As a result of the rebranding initiative, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets due to a change in the expected useful life of the intangible assets. The impairment charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. Prior to the impairment analysis, the associated trademarks had a carrying value of $71.1 million, and after the impairment charge, the associated trademarks had a remaining carrying value of $3.6 million which was amortized over an estimated definite life of six months.

Strategy

Our objective is to become the leading supplier of MRO products to the facilities maintenance end-market, which is comprised of our institutional, multi-family housing and residential facilities customers. In pursuing this objective, we plan to increase our net sales, earnings and return on invested capital by capitalizing on our size and scale, sales force, supply chain programs, information technology and logistics platforms to successfully execute our organic growth, operating efficiency and strategic acquisition initiatives.

Organic Growth Initiatives. We seek to satisfy and solve key customer supply chain needs, which enables us to further penetrate the markets we serve, and to expand into new product and geographic areas by adding sales professionals, and utilizing and increasing our already successful new product and marketing strategies, including: growing web-based sales capabilities; targeting new customer acquisitions; expanding our national accounts program; increasing customer use of our supply chain management services; continuing to develop proprietary products under our exclusive brands; and selectively adding new products and new categories to our various brand offerings.


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Increased Operating Efficiencies. We will continue to focus on enhancing our operating efficiency, which will increase profitability, improve our cash conversion cycle and increase our return on capital.

Acquisitions. We will continue to maintain a disciplined acquisition strategy of adding new customers and/or product offerings in markets we currently serve and pursuing acquisitions of established brands in new or existing markets in an effort to further leverage our operating infrastructure.

Industry and Market Overview

The MRO distribution industry in the U.S. and Canada is approximately $525 billion in size according to MRO market analyses by Modern Distribution Management ("MDM"), a trade company specializing in wholesale distribution, and Industrial Marketing Information, Inc. ("IMI"), a market research company specializing in quantification of the industrial business-to-business markets. The MRO distribution industry encompasses the supply of a wide range of products, including plumbing and electrical supplies, hand-tools, janitorial supplies, safety equipment and many other categories. Customers served by the MRO distribution industry include heavy industrial manufacturers that use MRO supplies for the repair and overhaul of production equipment and machinery; owners and managers of facilities such as apartment complexes, office buildings, schools, hotels and hospitals that use MRO supplies largely for maintenance, repair and refurbishment; and professional contractors.

Within the MRO distribution industry, we focus on serving customers in the facilities maintenance end-market. Our customers are primarily engaged in the repair, maintenance, remodeling, refurbishment and, to a lesser extent, construction of non-industrial and residential facilities.

Our Brands

We currently market and sell our products primarily through thirteen 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 Wilmar®, AmSan®, JanPak® , CleanSource®, Sexauer®, Maintenance USA® and Trayco® brands generally serve our multi-family housing and institutional facilities customers; the Barnett®, Copperfield®, U.S. Lock®, Hardware Express®, LeranSM and AF Lighting® brands generally serve our residential facilities customers. Our brands provide a broad product offering as well as services beyond the product such as developing customer-focused solutions based on each customer’s unique facility, providing better results and total value. We have brands that provide complementary services to our customers including inventory and supply chain management and technical assistance. We believe that our brand-based business model effectively allows us to offer a deep product offering to very targeted customers in our facilities maintenance end-market. We have core competencies in our sales channels, including national accounts sales professionals, field sales representatives, outbound and inside sales and customer service representatives, direct marketing via catalogs and flyers, professional contractor showrooms, vendor-managed inventory locations, and internet-based sales and service capabilities. This allows us to effectively compete for a broad range of customers across our industry by offering our customers the service and delivery platform they prefer and often require.

Institutional, Multi-Family and Residential Facilities Maintenance Brands

We serve our institutional and multi-family housing facilities customers primarily through our Wilmar, AmSan, JanPak, CleanSource, Sexauer, Maintenance USA and Trayco brands. These customers buy our products for the maintenance, repair and remodeling of many types of facilities, and often need to obtain products with minimal delay. In many cases, our institutional and multi-family housing facilities customers also look to us for support services such as inventory management, national accounts, procurement technology, technical advice and assistance, drop ship products and equipment servicing and training. Our residential facilities maintenance customers are comprised of professional contractor customers that are primarily served by our Barnett, Hardware Express, Copperfield, U.S. Lock, Leran, and AF Lighting brands. Residential facilities customers generally purchase our products for specific job assignments and/or to resell the product to end-customers to be used in many types of facilities.

Wilmar. Our Wilmar brand markets and sells maintenance products to our multi-family housing customers. Through its master catalog, Wilmar is able to act as a one-stop shopping resource for multi-family housing maintenance managers by offering one of the industry’s most extensive selections of standard and specialty plumbing, hardware, electrical, janitorial and related products. Wilmar provides same-day or next-day delivery in local markets on our own trucks served by our distribution centers, and ships by parcel delivery services or other carriers to other areas. The Wilmar brand sells primarily through field sales representatives, as well as through its website, direct marketing and inside sales. We also have a successful national accounts program at Wilmar where national account managers market to senior officers at real estate investment trusts and other property management companies. Through this program, we assist large multi-location customers in reducing total supply chain costs.


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AmSan. Our AmSan brand markets and sells a comprehensive range of facilities maintenance products to institutional facilities, such as schools and universities, health care sites, lodging and government facilities and building services contractors. We sell our products primarily through field sales representatives supported by a full line catalog and a robust e-commerce platform, which includes national brand product offerings as well as our exclusive brand product lines such as Renown and Appeal. AmSan provides same-day or next-day delivery in local markets on our own trucks served by our distribution centers and ships by parcel delivery services or other carriers to other areas. In addition, AmSan provides customers with reliable technical support, equipment repair services, and customized training programs, all of which make AmSan an important supplier to our customers.
    
JanPak. Our JanPak brand markets and sells a comprehensive range of cleaning and packaging solutions to building services contractors, property management, health care, education and manufacturing customers. These solutions are sold through a team of field sales professionals with subject matter and market segment expertise to address the most critical needs facing these customers. In addition, JanPak provides a number of after sales service and support capabilities, like technical training, equipment service and repair, and certification platforms, to meet the unique and on-going needs of our customers. Customers are served through a dedicated customer support team, a robust e-commerce platform, and a fleet of delivery vehicles and local distribution centers which provide same-day or next-day delivery.

CleanSource. Our CleanSource brand markets and sells a comprehensive range of facilities maintenance products to institutional facilities, such as schools, health care sites, lodging and government facilities and building services contractors. CleanSource sells products primarily through field sales representatives supported by a catalog and a robust e-commerce platform, which include national brand product offerings as well as our exclusive brand product lines Renown and Appeal. CleanSource field sales representatives are trained and experienced in developing customer-focused solutions based on a careful analysis of each customer’s unique facility, providing better results and total value.

Sexauer. Our Sexauer brand markets and sells specialty plumbing and facility maintenance products to institutional customers, including education, lodging, health care and other facilities maintenance customers. The Sexauer brand sells primarily through field sales representatives. We believe that the catalog of Sexauer products is well known in the industry as a comprehensive source of specialty plumbing and facility maintenance products. In addition to a broad product portfolio, Sexauer offers customers an extensive selection of service and procurement solutions, through its catalog and website, drawing upon our product and supply management expertise.

Maintenance USA. Our Maintenance USA brand markets and sells a broad portfolio of MRO products to facilities, including multi-family housing, lodging and institutional customers. Maintenance USA sells our products primarily through inside sales and direct marketing supplemented by its website, representing a low-cost supply alternative to property managers and customers requiring a reduced level of support services.

Trayco. Our Trayco brand markets and sells an extensive inventory of specialty plumbing items as well as a wide array of other facilities maintenance products. Trayco specializes in hard-to-find items and provides access to hundreds of manufacturers. Trayco sells its products through the use of a catalog and field sales personnel, supplemented by its website.

Barnett. Our Barnett brand markets and sells a broad range of MRO products to professional contractors, including plumbing, electrical, building and HVAC contractors, typically for repair, remodeling and maintenance applications. The Barnett brand also sells its products to specialty distributors, which are generally smaller and carry fewer products than Barnett. The brand sells its products through a catalog, supplemented by its website, direct marketing, inside sales and field sales representatives in select markets throughout the United States. Customers can also receive technical support and assistance in selecting products by calling our customer service centers. In addition to next-day delivery, Barnett also offers customers the convenience of a network of local professional contractor showrooms, or Pro Centers, as well as a suite of inventory related solutions such as on-site vendor-managed inventory, pre-positioned inventory and consigned inventory capabilities.

Hardware Express. Our Hardware Express brand markets and sells our full range of products to resellers of all types, primarily retail hardware stores, small distributors and online retailers. Hardware Express sells primarily through a catalog, supplemented by its website, direct marketing, inside sales and national accounts.

Copperfield. Our Copperfield brand markets and sells specialty ventilation and chimney maintenance products to chimney professionals and hearth retailers, through its website, direct marketing, outbound and inside sales and field sales representatives. Copperfield offers brand name and exclusive brand repair and replacement items including chimney replacement and relining products, specialty ventilation components, hearth products, gas and electrical appliances and an assortment of gas and solid fuel burning appliances.
    

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U.S. Lock. Our U.S. Lock brand markets and sells a broad range of security hardware products, from individual lock-sets to computerized master-key systems. U.S. Lock sells a number of brand name products from leading security hardware manufacturers, as well as a number of exclusive brand security hardware products. U.S. Lock sells primarily to locksmiths nationwide through a catalog and a team of highly technical inside sales account managers supplemented by its website.
    
Leran. Our Leran brand markets and sells an extensive line of propane, plumbing, HVAC, electrical and hardware products including copper tubing and brass fittings as well as appliances and water heaters to professional contractors. Leran sells its products through the use of a catalog supplemented by inside sales personnel and its website.

AF Lighting. Our AF Lighting brand markets and sells residential lighting and electrical products to electrical contractors, electrical distributors, lighting showrooms and mass merchants through direct marketing, outbound and inside sales and a network of manufacturer’s representatives, supplemented by its website.

Our Products

Our products are primarily used for the repair, maintenance, remodeling and refurbishment of residential and non-industrial facilities. We stock approximately 100,000 standard and specialty MRO products in a number of categories, including: JanSan; plumbing; hardware, tools and fixtures; HVAC; electrical and lighting; appliances and parts; security and safety; and other miscellaneous products. We offer a broad range of brand name and exclusive brand products. We believe we benefit from stable, non-discretionary and recurring end-market demand, which is largely characterized by products that are either consumable or have regular replacement cycles.

Product Categories

The approximate percentages of our net sales for the fiscal year ended December 26, 2014 by principal product category were as follows:
Product Category
 
Percent of Net Sales
JanSan
 
45
%
Plumbing
 
18
%
Hardware, tools and fixtures
 
9
%
HVAC
 
8
%
Electrical and lighting
 
5
%
Appliances and parts
 
6
%
Security and safety
 
4
%
Other
 
5
%
Total
 
100
%

The following is a discussion of our principal product categories:

Janitorial and Sanitation. Our comprehensive selection of JanSan products includes cleaning chemicals, trash can liners, paper towels, bath tissue, brooms, mops, and other products. We offer a number of products from leading JanSan manufacturers, such as Kimberly-Clark, Georgia-Pacific, 3M, GOJO and Rubbermaid. We also offer exclusive brand JanSan products under our Renown and Appeal brands.

Plumbing. We sell a broad range of plumbing products, from individual faucet parts to complete bathroom renovation kits. In addition, we sell both brand name and exclusive brand products. For example, we sell brand name products from manufacturers including Kohler, Moen and Delta. We also sell exclusive brand plumbing products under various proprietary trademarks, including Premier faucets and water heaters, DuraPro tubular products and ProPlus retail plumbing accessories.

Hardware, Tools and Fixtures. We sell a variety of hardware products, tools and fixtures, including hinges, power tools and mini blinds, and a limited selection of cabinetry, doors and windows. Our brand name products include DeWalt, Channellock, Milwaukee Tool and Sunco. Our exclusive brands of hardware products include Yukon, Legend, Anvil Mark and Designer's Touch.


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Heating, Ventilation and Air Conditioning. We offer a variety of HVAC products, including condensing units, thermostats, fans and motors under both name brand and exclusive brand names. We offer brand name products from leading HVAC manufacturers including Goodman, Trane and Honeywell, as well as exclusive brand products such as Garrison. We also offer specialty ventilation and chimney maintenance products through our Copperfield brand.

Electrical and Lighting. Our comprehensive selection of electrical and lighting products ranges from electrical wire and breakers to light fixtures and light bulbs. We offer brand name products from leading electrical supply manufacturers, including Eaton, Sylvania and Leviton, as well as a number of exclusive brand electrical products, such as Monument and Bala.

Appliances and Parts. Our comprehensive range of appliances and parts includes stoves, washer/dryer components, garbage disposers, refrigerators and range hoods. We sell a number of brand name products of leading appliance manufacturers, including General Electric. We also sell a number of high-quality replacement parts from a number of different suppliers.

Security and Safety. We sell a broad range of security hardware products, from individual lock-sets to computerized master-key systems. We sell a number of brand name products of leading security hardware manufacturers, including Kwikset and Schlage. We also sell a number of exclusive brand security hardware products, such as U.S. Lock hardware, Legend locks and Rx master keyways. We sell a variety of safety products, ranging from safety detection devices, such as smoke detectors, to personal protection items, including gloves and masks.

Exclusive Brand Products

Our size and reputation have enabled us to develop and market various lines of exclusive brand products, which we believe offer our customers high-quality, low-cost alternatives to the brand name products we sell. Third-party manufacturers, primarily in Asia and the United States, using our proprietary branding and packaging design, manufacture our exclusive brand products. Our sales force, catalogs, brand-specific websites and promotional flyers emphasize the comparative value of our exclusive brand products. Since our exclusive brand products are typically less expensive for us to purchase from suppliers, we are able to improve our profit margin with the sale of these products while offering lower prices to our customers. In addition, we have found that we develop strong relationships with our exclusive brand customers and generate increased repeat business, as exclusive brand customers generally return to us for future service and replacement parts on previously purchased products.

New Product Offerings

We regularly monitor and evaluate our product offerings, both to assess the sales performance of our existing products and to discontinue products that fail to meet specified sales criteria. We also create new product offerings in response to customer requirements by adjusting our product portfolio within existing product lines as well as by establishing new product line categories. These categories can either be new to Interline or new to a brand. For example, as we enhance our brand-specific websites, we are able to make available products not yet offered in our catalogs. Through these efforts, we are able to sell more products to existing customers as well as address our customers’ changing product needs and thereby retain and attract customers. Further, by introducing new product lines, we provide our customers with additional opportunities for cost savings and a one-stop shopping outlet with broad product offerings. We believe that introducing new products in existing product lines and creating new product lines are both strategies that enable us to increase penetration of existing customer accounts, as well as attract new customers to our brands.

Sales and Marketing

We market our products through a variety of sales channels. The majority of sales to our facilities maintenance customers are made through field sales and inside sales representatives, which are supported by a direct marketing program consisting of catalogs, promotional and instructional mailings. We also serve our customers with brand-specific websites, a national accounts sales program, and other supply chain programs, such as vendor managed inventory.

As MRO customers grow in size, their supply chains often become increasingly complex and difficult to manage. In many cases, customers have a limited view into or control over their product spend, inventory shrinkage, and indirect MRO personnel costs. To meet these needs, we offer a range of sophisticated supply chain management solutions designed to solve the unique problems of each of our customers. By offering customers services beyond fulfillment such as product standardization, vendor consolidation, inventory management, product training, and electronic invoicing, we provide a suite of services that can be utilized either individually or as a group based upon the customer’s size and supply chain complexity. Our customers rely upon us as a supply chain partner rather than a vendor, and in turn realize significant benefits by reducing overall product cost, improving inventory management, and lowering their indirect MRO spend. As supply chain partners, we seek to become our customers’ single source for MRO supplies and knowledge.


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Our marketing strategy involves targeting our marketing channels and efforts to specific customer groups. As a result of our long-standing relationships with customers, we have been able to assemble a database of customer purchasing information, such as purchasing trends, product and pricing preferences, and support service requirements. In addition, we are able to track information such as customer retention and reactivation as well as new account acquisitions. We are also able to track the success of a particular marketing effort by analyzing the purchases of the customers targeted by that effort. Our information technology allows us to use this data to develop more effective sales and marketing programs. For example, our understanding of the preferences of our large, multi-family housing customers led to our development of a national accounts program through which field sales representatives focus on developing contacts with national accounts. We will continue to leverage our customer knowledge and shared brand information technology to develop successful print and website-based sales and marketing strategies.

Field Sales Representatives

Our direct sales force markets and sells to all levels of the customer’s organization, including senior property management executives, local and regional property managers, on-site maintenance managers, and owners and managers of professional plumbing, electrical and HVAC contractors. Our direct sales force marketing efforts are designed to establish and solidify customer relationships through frequent contact, while emphasizing our broad product selection, e-commerce capabilities, reliable delivery of our products, high level of customer service and competitive pricing.
    
We maintain one of the largest direct sales forces in our industry, with approximately 1,160 sales force associates covering markets throughout the United States, Canada and Central America. We have found that we obtain a greater percentage of our customers’ overall spending on MRO products in markets serviced by local sales representatives, particularly in regions where these representatives are supported by a nearby distribution center that enables same-day or next-day delivery of our products.

Our field sales representatives are expected not only to generate orders, but also to act as problem-solving customer service representatives. Our field sales representatives are trained and qualified to assist customers in shop organization, special orders, part identification and complaint resolution. We compensate the majority of our field sales representatives based on a commission program or on a combination of salary and bonus program. We will continue to seek additional opportunities where we can leverage the strength of our field sales force to generate additional sales from our customers.

Inside Sales

Our inside sales operation has been designed to make ordering our products as convenient and efficient as possible. We divide our inside sales staff into outbound and inbound groups. Our outbound sales representatives are responsible for maintaining relationships with existing customers and prospecting for new customers. These representatives are assigned individual accounts in specified territories and have frequent contact with existing and prospective customers in order to make inside sales presentations, notify customers of current promotions and encourage additional purchases. Our inbound sales representatives are trained to process orders quickly from existing customers, provide technical support and expedite and process new customer applications, as well as handle all other customer service requests. We offer our customers nationwide toll-free telephone numbers and brand-specific inside sales representatives who are familiar with a particular brand’s markets, products and customers. Our call centers are staffed by approximately 470 inside sales, customer service and technical support personnel, who utilize our proprietary, on-line order processing system. This sophisticated software provides the inside sales staff with detailed customer profiles and information about products, pricing, promotions and competition.

Catalogs and Direct Mail Marketing

Our catalogs and direct mail marketing promotional flyers are key marketing tools that allow us to communicate our product offerings to both existing and potential customers. We create catalogs for most of our brands and mail or deliver them generally on an annual or semi-annual basis to our existing customers. We often supplement these catalog mailings by sending our customers promotional flyers. Most of our branded catalogs have been distributed for over three decades and we believe that these catalog titles have achieved a high degree of recognition among our customers.

In targeting potential direct marketing customers, we sometimes make our initial contact through promotional flyers, rather than by sending a complete catalog. We obtain mailing lists of prospective customers from outside marketing information services and other sources. We are able to gauge the effectiveness of our promotional flyer mailings through the use of proprietary database analysis methods, as well as through our inside sales operations. Once customers begin to place orders with us, we typically send an initial catalog and include the customer on our periodic mailing list for updated catalogs and promotional materials. We believe that this approach is a cost-effective way for us to contact large numbers of potential customers and to determine which customers should be targeted for continuous marketing.


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We produce the design and layout for our catalogs and promotional mailings using a sophisticated catalog content database and software system. Our catalogs are indexed and illustrated to provide simplified pricing information and to highlight new product offerings. Our promotional mailings introduce new product offerings, sale-promotion items and other periodic offerings. Illustrations, photographs and copy are shared among brand catalogs and mailings or customized for a specific brand, allowing for fast and efficient production of multi-branded media. In addition, we frequently build custom catalogs designed specifically for the needs of our larger customers.

E-commerce

Our websites play a significant role in meeting the needs of our customers. Whether the customer shops online, references a catalog, uses a virtual catalog, or prefers to interact directly with a representative, our brand websites are an information resource for our customers. Through our user-friendly search engine, customers can access detailed product information, see customer-specific pricing, view real-time product availability, and see how the product will be shipped to their location. Customers can view their entire order history, regardless if placed on the web or through other channels. We offer an extended product assortment online over and above what is in the published catalog.

We offer our customers a variety of online methods for supply chain spending controls. Customized and shared favorites lists assist our customers for ease of placing orders. Additionally, usage reports are available online. Where budgetary considerations are a concern, customers can control spending through a workflow-enabled budget management and approval tool. The flexible budget management tool tracks our customers' spending and generates invoices to the customers' general ledger codes. We also offer product standardization and customized product assortments. Each method allows the customer the ability to tailor their online shopping experience to their business needs. We handle a variety of customers' unique needs, such as consignment, multi-family and single owner operator requirements, all operating on one single web platform. Our field sales force plays a significant role in educating our customers on how to utilize and leverage our e-commerce platform. Our field sales force can assist our customers with registering on the site, setting up favorites lists, and helping customers place their first orders.

Operations and Logistics

Distribution Network

We have a network strategically located to serve the largest metropolitan areas throughout the United States and Canada comprised of 67 distribution centers and 21 professional contractor showrooms. We also maintain a dedicated fleet of trucks to assist in the local delivery of products. The geographic scope of our distribution network and the efficiency of our information technology enable 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 distribution centers are central to our operations and range in size from approximately 6,000 square feet to approximately 384,000 square feet. Our distribution centers are typically maintained under operating leases in commercial or industrial centers, and primarily consist of warehouse and shipping facilities. We have professional contractor showrooms in certain existing distribution centers and in freestanding locations, which allow customers to obtain products from a fixed location without ordering in advance.

Inbound Logistics

Our Regional Replenishment Centers ("RRCs") in Jacksonville, Florida; Philadelphia, Pennsylvania; Nashville, Tennessee; and San Bernardino, California are distribution centers that receive the majority of our supplier shipments, efficiently re-distribute products to our other distribution centers and also deliver directly to customers in their local delivery area. Some over-sized or seasonal products are directly shipped to distribution centers other than the RRCs by our suppliers. Our use of RRCs has significantly reduced distribution center replenishment lead times while simultaneously improving our customer fill rates.

Outbound Logistics

Once an order is entered into our computer system, the order is usually picked and processed in the distribution center nearest to the customer. For customers located within the local delivery radius of a distribution center, our own trucks or third-party carriers will deliver the products directly to the customer the next business day (or same day, if needed). For customers located outside the local delivery radius of a distribution center, we deliver products via parcel delivery companies, such as UPS. Large orders, or orders that cannot be delivered via parcel delivery, are delivered by common carriers. In addition, portions of our sales are delivered direct from the supplier through our drop ship process.



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Suppliers and Purchasing

Our suppliers play an important role in our success. We work closely with our supplier base to ensure product merchandising and costs are managed effectively. Wherever possible, we seek to develop long-standing relationships with our suppliers. We also manage sourcing risk by developing multiple sources of competitive product supply for many key products. Due to our high volume of purchases, we are able to obtain purchase terms we believe to be more favorable than those available to most local suppliers of MRO products.

We buy our products from approximately 2,600 suppliers located in the United States and throughout the world. A majority of our purchases are primarily from domestic supplier partners with the remainder from foreign-based suppliers located primarily throughout Asia and South America. No individual supplier represented more than 6.1% of our total purchases during the fiscal year ended December 26, 2014.

With regard to inventory, our customer-centric strategy balances the need for high fill rates with the aggressive management of inventory levels. Our goals are to continue to increase our inventory efficiency over the long term as we grow, further optimize our distribution network, manage stock keeping unit complexity and leverage our common information technology and logistics platforms. We also balance inventory efficiency with global sourcing opportunities, which have longer supply lead times than domestic relationships.

In addition to our inventory management team, our purchasing process is managed through an inventory management system which forecasts demand based on customer ordering patterns. This system monitors our inventory and alerts our purchasing managers of items approaching low levels of stock. We balance ordering and carrying costs in an effort to minimize total inventory costs. Demand forecasting is automated and is primarily based on historical sales, taking into account seasonally adjusted demand and supply lead times, which in turn are key inputs into setting safety stock levels.

Information Technology

We operate a customer service and inventory management system that allows us to manage customer relationships and to administer and distribute thousands of products. Our systems encompass all major business functions for each of our brands and enable us to receive and process orders, manage inventory, verify credit and payment history, generate customer invoices, receive payments and manage our proprietary customer information. We have consistently invested in our information technology, and we will continue to do so, as we believe that the efficiency and flexibility of our information technology are critical to the success of our business.

We constantly seek new ways to generate additional efficiencies, such as by utilizing e-commerce. For most of our brands, our customers can browse brand-specific product offerings online and use the internet to send electronic purchase orders to our order entry system. Additionally, we integrate with industry-leading business-to-business portals that allow customers to receive real-time inventory visibility and order product. Our customers can integrate these systems into their own purchase order systems, thereby making the supply chain operate more seamlessly. In addition, we offer our customers the option of receiving invoices electronically. For customers that place frequent orders and have the ability to receive electronic invoices, this program can dramatically reduce ordering costs by eliminating invoice handling, and by automating the matching and payment process. We believe that by offering services like electronic purchasing and invoicing, which remove transaction costs from the supply chain, we help our customers realize significant cost savings.

Competition

The MRO product distribution industry is highly competitive. Competition in our industry is primarily based upon product line breadth, product availability, technology, service capabilities and price. We face significant competition from national and regional distributors, such as HD Supply, Grainger, and Ferguson. These competitors market their products through the use of direct sales forces as well as direct marketing, websites and catalogs. In addition, we face competition from traditional channels of distribution such as retail outlets, small wholesalers and large warehouse stores, including Home Depot and Lowe’s. We also compete with buying groups formed by smaller distributors, internet-based procurement service companies, auction businesses and trade exchanges.

    

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We expect that competition in our industry will continue to be strong in the future. The MRO product distribution industry continues to consolidate as traditional MRO product distributors attempt to achieve economies of scale and increase efficiency. Furthermore, MRO product customers are continuing to seek low cost alternatives to replace traditional methods of purchasing and sources of supply. We believe that the current trend is for customers to reduce the number of suppliers and rely on lower cost alternatives such as direct marketing and/or integrated supply arrangements, which will contribute to competition in our industry.

Environmental and Health and Safety Matters

Some of the products we handle and sell, such as cleaning chemicals, are considered hazardous materials. Accordingly, we are subject to certain federal, state and local environmental laws and regulations, including those governing the transportation, management and disposal of, and exposure to, hazardous materials and the cleanup of contaminated sites. While we could incur costs as a result of liabilities under, or violations of, such environmental laws and regulations or arising out of the presence of hazardous materials in the environment, including the discovery of any such materials resulting from historical operations at our sites, we do not believe that we are subject to any such costs that are material. We are also subject to various health and safety requirements, including the Occupational, Safety and Health Act, as well as other federal, state and local laws and regulations. We believe we are in compliance in all material respects with all environmental laws and regulations and health and safety requirements applicable to our facilities and operations.

Trademarks and Other Intellectual Property

We have registered and nonregistered trade names, trademarks and service marks covering the principal brand names and product lines under which our products are marketed, including AF Lighting®, AmSan®, Appeal®, Barnett®, CleanSource®, Copperfield®, Hardware Express®, JanPak®, LeranSM, Maintenance USA®, Premier®, ProPlus®, Renown®, Renovations Plus®, Sexauer®, Trayco®, U.S. Lock®, and Wilmar®. We also own several patents for products manufactured and marketed by us, primarily under our Copperfield® brand. We believe that our trademarks and other intellectual property rights are important to our success and our competitive position. Accordingly, our policy is to pursue and maintain registration of our trade names, trademarks and other intellectual property whenever appropriate and to oppose vigorously any infringement or dilution of our trade names, trademarks or other intellectual property.

Employees

As of December 26, 2014, we had approximately 4,300 employees. We believe that our employee relations are satisfactory.

Available Information

Our internet address is www.interlinebrands.com. The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered a part of this report. We make available, free of charge, through our internet site, via a hyperlink to the 10KWizard.com web site, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendments to those reports filed or furnished pursuant to the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").


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ITEM 1A. Risk Factors

In addition to other information included in this Annual Report on Form 10-K, the following risk factors should be read carefully in connection with evaluating the Company and its business and this Annual Report on Form 10-K. The realization of events pertaining to any of these risks could have a material adverse effect on our business, financial condition, or results of operations. Furthermore, additional risks not presently known to management or that management currently believes to be immaterial may also adversely affect the business.

Certain statements in “Risk Factors” are forward-looking statements. See “Forward-Looking Statements” described on page 1 of this Annual Report on Form 10-K for additional information.
    
Risks Relating to Our Business

General economic conditions may adversely impact our industry and customers resulting in adverse effects on the Company’s operating results.

Financial markets in the United States, Europe and Asia experienced substantial disruption from prior recessions, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. A slow and extended recovery or a downturn, worsening or broadening of adverse conditions in the worldwide and domestic economies could negatively affect purchases of our products, and create or exacerbate credit issues, cash flow issues and other financial issues for us and for our suppliers and customers. Depending upon their severity and duration, these conditions could have a material adverse impact on our business, liquidity, financial condition and results of operations.

Current and future economic conditions and other factors, including consumer confidence, interest rates, unemployment trends, government regulations, and liquidity in capital markets can impact consumer spending and demand for our products. Such economic developments may affect our business in a number of ways. Reduced demand may drive us and our competitors to offer products at promotional prices, which would have a negative impact on our profitability. Also, credit availability may adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations which could result in a decrease in, or cancellation of, orders for our products. If demand for our products slows down or decreases, we will not be able to improve our revenues and we may run the risk of failing to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness. Reduced revenues as a result of decreased demand may also hinder our ability to improve our performance in connection with our long-term strategy.

We operate in a highly competitive industry, which may have a material adverse effect on our business, financial condition, and results of operations.

The MRO product distribution industry is highly competitive. We face significant competition from national and regional distributors that market their products through the use of direct sales forces as well as direct marketing, websites and catalogs. In addition, we face competition from traditional channels of distribution such as retail outlets, small wholesalers and large warehouse stores and from buying groups formed by smaller distributors, internet-based procurement service companies, auction businesses and trade exchanges. We expect that new competitors may develop over time as internet-based enterprises become more established and reliable and refine their service capabilities.

Competition in our industry is primarily based upon product line breadth, product availability, technology, service capabilities and price. To the extent that existing or future competitors seek to gain or retain market share by reducing price or by increasing support service offerings, we may be required to lower our prices or to make additional expenditures for support services, thereby reducing our profitability.

In addition, the MRO product distribution industry is undergoing changes driven by ongoing industry consolidation and increased customer demands. Traditional MRO product distributors are consolidating operations and acquiring or merging with other MRO product distributors to achieve greater economies of scale capabilities and increase efficiency. This consolidation trend could cause the industry to become more competitive and may adversely affect our operating margins and growth prospects. Furthermore, an inability on our part to successfully compete within our target markets could result in lost customers and a corresponding decline in sales, which may have a material adverse effect on our business, financial condition, and results of operations.


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Adverse changes in industry trends and economic factors specific to the principal markets in which we serve may negatively impact our net sales growth and operating margins.

We currently market and sell our products across certain facilities maintenance end-markets, including institutional facilities, multi-family housing facilities, and residential facilities. The demand for our products and services depends to some degree on the capital spending levels of end-users within these markets. The strength of these markets depends on many factors, generally outside of the Company’s control, including general economic conditions, government spending, credit availability and stability of the housing markets, including new residential construction and home improvement activity levels. The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics, consumer preferences, expectations and needs, and unexpected weather conditions. Adverse changes in industry trends as well as weaknesses in the industries in which our customers operate may negatively impact the rate of growth of our net sales and operating margins.

We are exposed to additional risks as a result of our foreign operations and global product sourcing.

Our foreign operations expose us to certain risks associated with global economic conditions, political instability, regulatory changes, cultural and legal differences, and currency exchange rate fluctuations. Risks inherent in international operations also include, among others, potential adverse tax consequences, greater credit risk exposure and risks associated with enhanced logistics complexity. Adverse changes to any of these factors may negatively impact our profitability and results of operations.

Because the functional currency related to most of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange rate risks arising from transactions in the normal course of business. Our primary currency exposure risks are with the Canadian dollar and the Chinese Yuan. Fluctuations in the relative strength of foreign economies and volatility in their related currencies could impact our foreign sales and the ability to procure products overseas.

In addition, China’s turnover tax system consists of value-added tax ("VAT"), consumption tax and business tax. Export sales are exempted under VAT rules and an exporter who incurs input VAT on the manufacture of goods can claim a tax rebate from Chinese tax authorities. Currently, our Chinese suppliers benefit from the tax rebates that China provides them to export their products. If these tax rebates are reduced or eliminated, some of our Chinese-sourced products could become more expensive for us, thereby reducing our profitability.

Fluctuations in the availability or price of raw materials, products, and fuel resources could significantly reduce our revenues and profitability.

As a distributor of manufactured products, our profitability is related to the prices we pay to the suppliers from which we purchase our products and to the cost of transporting the products to us and our customers. The price that our suppliers charge us for our products is dependent in part upon the availability and cost of the raw materials used to produce those products. Such raw materials are often subject to price fluctuations, frequently due to factors beyond our control, including changes in supply and demand, U.S. and global economic conditions, labor costs, competition and government regulations. Increases in the cost of raw materials, such as copper, oil, stainless steel, aluminum, zinc, plastic and polyvinyl chloride ("PVC") and other commodities and raw materials have occurred in the past and adversely impacted our operating results. In addition, transportation prices are significantly dependent on fuel prices, which generally change due to factors beyond our control, such as changes in worldwide demand, disruptions in supply, changes in the political climate in the Middle East and other regions and changes in government regulations, including existing and pending legislation and regulations relating to climate change. For example, efforts to combat climate change through reduction of greenhouse gases may result in higher fuel costs through taxation or other means.

Fluctuations in raw materials and fuel prices may increase our costs and significantly reduce our revenues and profitability. We deliver a significant volume of products to our customers by truck. Our operating margin may be adversely affected if we are unable to obtain the fuel we require or offset the anticipated impact of higher fuel prices through other means. The nature and extent of such an impact is difficult to predict, quantify and measure. To the extent the costs of products increase or decrease, the prices we charge for our products may correspondingly increase or decrease, potentially affecting our revenues and profitability.


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Loss of supplier agreements, delivery sources or product supplies could decrease our revenues and profitability.

Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply from manufacturers or other suppliers. While in many instances we have agreements, including supply chain agreements, with our suppliers, these agreements are generally terminable by either party with limited notice and for any reason. In general, our products are obtainable from various sources and in sufficient quantities; however, the loss of several supplier agreements, or a substantial decrease in the availability of products from our suppliers, could have a short-term material impact on our business.

During the year ended December 26, 2014, we sourced products from approximately 2,600 key suppliers located in various countries around the world. Our two largest suppliers accounted for approximately 6.1% and 5.7% of our total purchases, respectively. No other individual supplier represented more than 5% of our total purchases. Loss of a key supplier could disrupt our supply chain for several months or longer, and loss of key suppliers from an individual country could result in disruptions extending beyond several months. Short and long-term disruptions in our supply chain would result in higher inventory levels as we replace similar products, a higher cost of product and ultimately a decrease in our revenues and profitability. Although we are not substantially dependent on any individual supplier, a disruption in the timely availability of our product by our key suppliers could result in a decrease in our revenues and profitability.

A change in supplier rebates could adversely affect our income and gross margins.

The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If market conditions change, suppliers may adversely change the terms of some or all of these programs. Although these changes would not affect the recorded costs of products already purchased, they may lower our gross margins on products we sell or income we realize in future periods. Further, if we fail to meet specified volume thresholds for certain suppliers, we may not receive the most favorable rebates available, which could increase our expected costs and decrease our gross margins.

In some cases, we are dependent on long supply chains, which may subject us to interruptions in the supply of many of the products that we distribute.

A significant portion of the products that we distribute are imported from foreign countries, including China. Thus, we are dependent on long supply chains for the successful delivery of many of our products. The length and complexity of these supply chains make them vulnerable to numerous risks, many of which are beyond our control, which could cause significant interruptions or delays in delivery of our products, or markedly increase our inventory requirements. Factors such as shortages of raw materials, labor disputes, currency fluctuations, changes in tariff or import policies, natural or man-made disasters, severe weather, security procedures, terrorist attacks or other threats or armed hostilities may disrupt these supply chains. In addition to these factors, loading container cargo in certain ports can be disrupted or delayed by congestion in port terminal facilities, inadequate equipment to load, dock and offload container vessels or energy-related tie-ups. In any such case, our product shipments will be delayed. We expect more of our name brand and exclusive brand products will be imported in the future, which will further increase these risks. A significant interruption in our supply chains caused by any of the above factors could result in increased costs or delivery delays which in turn would result in a decrease in our revenues and profitability.

The nature of our business exposes us to potential product quality and liability claims as well as other legal proceedings, which could have a material adverse effect on our business, financial conditions and operating results.

We rely on manufacturers and other suppliers to provide us with the products we sell and distribute. As we do not have direct control over the quality of the products manufactured or supplied by such third-parties, we are exposed to risks related to the quality of the products we distribute. It is possible that inventory from a manufacturer or supplier could be sold to our customers and later be alleged to have quality problems or to have caused personal injury or property damage, subjecting us to potential claims from customers or third parties. We have been subject to such claims in the past, which have been resolved without material financial impact. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant time periods, regardless of the ultimate outcome, and could result in settlement payments and adjustments not covered by or in excess of insurance. In addition, we may not be able to obtain insurance on terms acceptable to us or at all. An unsuccessful product liability defense could be very costly and could result in a decline in revenues and profitability. In addition, uncertainties with respect to foreign legal systems may adversely affect us in resolving claims arising from our exclusive brand products manufactured outside of the United States. Finally, even if we are successful in defending any claim relating to the products we distribute, claims of this nature could negatively impact customer confidence in our products and our company which may adversely impact our revenues and profitability.

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We also operate a large fleet of trucks and other vehicles and therefore face the risk of automobile accidents. While we currently maintain insurance coverage to address a portion of these types of liabilities, we cannot make assurances that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any such insurance will provide adequate coverage against potential claims.

We are involved from time to time in a number of legal proceedings, including government inquiries and investigations, as well as product liability, employment, tort, intellectual property, commercial, and other litigation. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies. Furthermore, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources from other matters.

Disruptions in our distribution centers could significantly lower our revenues and profitability.

Our distribution centers are essential to the efficient operation of our national distribution network. Any serious disruption to these distribution centers due to man-made or natural disasters including, among others, fire, earthquake, severe weather, acts of terrorism or any other cause, could damage a significant portion of our inventory and could materially impair our ability to distribute products to our customers. Moreover, we could incur significantly higher costs and longer lead times associated with delivering our products to our customers during the time that it takes for us to reopen or replace these centers. As a result, any such disruptions could significantly lower our revenues and profitability.

Work stoppages and other disruptions at transportation centers or shipping ports may adversely affect our ability to obtain inventory and make deliveries to our customers.

Our ability to rapidly process customer orders is an integral component of our overall business strategy. Interruptions at our company-operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, security procedures, acts of terrorism or other events, could affect our ability to maintain core products in inventory, deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our results of operations.

We may not be able to facilitate our growth strategy by identifying or completing transactions with attractive acquisition candidates, which could impede our revenues and profitability.

Our acquisitions have contributed significantly to our growth. An important element of our growth strategy is to continue to seek additional businesses to acquire in order to add new customers and products within our existing markets or expand our product offerings into new or existing markets in an effort to further leverage our operating infrastructure. There can be no assurance that we will be able to identify attractive acquisition candidates or complete the acquisition of any identified candidates at favorable prices and upon advantageous terms and conditions. Furthermore, we believe that our industry is currently undergoing increased consolidation, thereby limiting the number of acquisition candidates, escalating competition for attractive acquisition candidates, and/or increasing the overall costs of making acquisitions. Difficulties we may face in identifying or completing acquisitions may result in the incurrence of debt and contingent liabilities, an increase in general operating expenses and significant charges related to integration costs, the occurrence of which could impede our revenue growth and profitability. In addition, we may not be able to obtain the financing necessary to complete acquisitions on terms favorable to us, or at all.

We may not be able to effectively integrate acquired businesses, which could have an adverse effect on our business, financial condition, results of operations and cash flows.

Acquisitions involve significant risks and uncertainties including, among others:

the assumption of liabilities and exposure to unforeseen liabilities of acquired companies;
uncertainties as to the future performance of the acquired business;
the potential loss of key employees, customers or suppliers;
difficulties integrating acquired personnel and other corporate cultures into our business;
difficulties associated with information technology conversions;
difficulties in achieving targeted synergies; and
the diversion of management attention and resources from existing operations.


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We may not be able to fully integrate the operations of JanPak and CleanSource, or any future acquired businesses with our own in an efficient and cost-effective manner or without significant disruption to our existing or acquired operations. Failure to integrate future acquired businesses effectively or to manage other consequences of our acquisitions, including increased indebtedness, could impede our ability to remain competitive and, ultimately, impact our financial condition, results of operations and cash flows.

An impairment of the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and results of operations.

As of December 26, 2014, goodwill and other intangible assets represented approximately 56.9% of our total assets. The recoverability of goodwill and indefinite-lived intangibles is tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may be impaired. A significant amount of judgment is involved in determining if an indication of impairment exists. Factors may include, among others: a significant decline in our expected future cash flows; a significant adverse change in legal factors or the business climate; unanticipated competition; slower growth rates; or a significant adverse change in the extent or manner in which the asset is being used. Any adverse change in these factors could have a material impact on the recoverability of these assets, which could negatively affect our financial condition and consolidated results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Goodwill, Intangibles and Other Long-Lived Assets" for additional information related to the recoverability and impairment tests performed for these assets.

We cannot accurately predict the amount and timing of any impairment of assets or whether indefinite-lived intangibles will convert to definite-lived and corresponding amortization will be recorded. Should the value of goodwill or other intangible assets become impaired, or should we determine that certain intangible assets have definite lives, there could be an adverse effect on our financial condition and consolidated results of operations.

We may be subject to disruptions in our information technology systems including data and security breaches which could adversely impact operations.

Our operations are dependent upon information technology that encompasses all of our major business functions. We rely upon these information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis and to coordinate our sales and marketing activities across all of our brands. As part of our business, we collect, process and retain sensitive and confidential personal information about our customers, employees and suppliers. Furthermore, information technology plays a key role in our ability to achieve operating and financial efficiencies. Despite the implementation of network security measures that we have in place, our facilities and systems, and those of our third-party service providers with which we do business, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of our confidential information or confidential information of our customers, employees, or suppliers, whether by us or by our third-party service providers with which we do business, could disrupt our business, expose us to risks of litigation and liability, result in a loss of assets or cause reputational damage. Any substantial disruption of our information technology for a prolonged time period could impair our ability to process orders, maintain proper levels of inventories, manage customer billings and collections, prepare and present accurate financial statements and related information, identify business opportunities and otherwise manage our business.

Information technology systems maintenance, enhancements, and compliance with regulatory requirements require substantial ongoing capital expenditures and could involve execution and operational risk to our business.

Information technology plays an increasingly important role in the distribution industry and is central in maintaining a competitive advantage. We have long recognized the importance of technology and have consistently invested in information technology to differentiate ourselves from our competitors and make us even more relevant to customers. The pace of this investment is expected to continue, and most likely increase, as we continue to improve our business through the deployment of new technology. Future technology enhancements - which may be required to achieve our long-term growth plans - are continually planned in many areas of our business. These enhancements may require substantial capital expenditures, and the implementation of any new technology carries execution and operational risk. Failure to secure and implement sufficient new technologies to deliver business process solutions may adversely impact our business and operations. Furthermore, there can be no assurance that the implementation of such initiatives will provide the intended benefits. In addition, the regulatory environment related to information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.

18



Our ability to both maintain our existing customer base and to attract new customers is dependent in many cases upon our ability to deliver products and fulfill orders in a timely and cost-effective manner.

To ensure timely delivery of our products to our customers, we frequently rely on third parties, including carriers such as UPS and other national shippers as well as various local and regional trucking contractors and logistics consulting and management companies. Outsourcing this activity generates a number of risks, including decreased control over the delivery process and service timeliness and quality. Any sustained inability of these third parties to deliver our products to our customers could result in the loss of customers or require us to seek alternative delivery sources, which may result in significantly increased expenses and delivery delays. Furthermore, the need to identify and qualify substitute service providers or increase our internal capacity could result in unforeseen operational problems and additional costs. If demand for our products increases, we may be unable to secure sufficient additional capacity from our current suppliers, or others, on commercially reasonable terms, if at all. An inability to effectively manage our third-party service providers, fulfill customer orders and meet customer demands could result in lost sales and damage to our reputation, which could negatively affect our business and results of operations.

The loss of any of our significant customers could significantly reduce our revenues and profitability.

Our 10 largest customers generated approximately $133.1 million, or approximately 8%, of our sales in the fiscal year ended December 26, 2014, and our largest customer accounted for approximately 1% of our sales during the same period. There can be no assurance that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at historic levels. The loss of one or more of our significant customers or deterioration in our relations with any of them could significantly reduce our revenues and profitability.

Our allowance for doubtful accounts may prove inadequate to cover actual losses.

A significant portion of our net sales are facilitated through the extension of credit; therefore, our business depends on the creditworthiness of our customers. We maintain allowances for doubtful accounts for estimated losses on trade receivables resulting from the inability to collect outstanding amounts due from our customers. We continuously review the adequacy of our allowance for doubtful accounts with consideration given to economic conditions and trends, the financial condition of our customers, and credit quality indicators, including the age of accounts receivable as well as historical collection and charge-off experience.

The current economic environment is dynamic and the creditworthiness of our customers can change significantly within very short periods of time. Our allowance may not keep pace with changes in the creditworthiness of our customers which is generally dependent upon economic and industry trends specific to the markets in which they operate. We cannot be certain that our allowance for doubtful accounts will be adequate over time to cover losses in our accounts receivable because of adverse changes in the economy or events adversely affecting specific customers, industries or markets.

Any significant or unforeseen changes to our credit exposure, including a material decrease in the credit quality of our customers, could adversely affect our financial condition and results of operations.

The departure of existing senior management and key personnel or a decline in our ability to attract and retain skilled employees or qualified sales professionals could hinder our growth and materially affect our financial condition and results of operations.

Our success depends in part on our ability to attract, hire, train and retain qualified managerial, operational, sales, marketing and support personnel. We face significant competition for these types of personnel in our industry. As a result, we may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully which could adversely affect our revenues and profitability. In addition, key personnel may leave us and compete against us. Our success also depends, to a significant extent, on the continued service of our senior management team. The loss of any member of our senior management team or other qualified employees could impair our ability to execute our business plan and growth strategy, cause us to lose customers and reduce our net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event, our financial condition and results of operations could be adversely affected.


19



Our ability to compete effectively may be adversely affected if we are unable to protect our intellectual property rights, particularly trademarks and service marks.

We believe that our trademarks (including both trademarks and service marks) are important to the success of our business and our competitive position within the markets we serve. For instance, we market and sell products primarily through thirteen distinct and targeted brands/service marks: Wilmar®, Barnett®, AmSan®, JanPak®, CleanSource®, Sexauer®, Hardware Express®, Copperfield®, Maintenance USA®, U.S. Lock®, LeranSM, Trayco®, and AF Lighting®. We also sell various private label products under registered tradenames, including Premier™, Pro Plus™, and Renown™.

Accordingly, we devote resources to the establishment and protection of our trademarks and our exclusive brand products. However, the actions we have taken may prove inadequate to prevent imitation and/or infringement of our trademarks by others or to prevent others from claiming violations of their trademarks and proprietary rights by us. Our rights in our trademarks may be subject to change based on the rights of others whose actual or constructive use of such trademark (or a confusingly similar mark) commenced before the date our rights vested. Future actions by third parties may diminish the strength of our trademarks or limit our ability to use our trademarks, thereby undermining our competitive position.

The interests of our equity sponsors may differ from the interests of the Company or other company stakeholders.

As a result of the Merger, the Company’s common stock became privately-held and substantially owned by certain private equity investment funds affiliated with GS Capital Partners VI Fund, L.P. and its related entities (“GS Capital Partners”) and P2 Capital Partners, LLC and its related entities (“P2 Capital Partners”). These private equity investment funds have the power, subject to certain exceptions, to direct the Company’s affairs and policies and to elect a majority of the members of our Board of Directors. Through such representation on our Board of Directors, they are able to substantially influence the appointment of management and entry into extraordinary transactions, including mergers and sales of assets.

The interests of GS Capital Partners and P2 Capital Partners could conflict with the interests of the note holders or our creditors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of GS Capital Partners and P2 Capital Partners as equity holders might conflict with the interests of the note holders or creditors. GS Capital Partners and P2 Capital Partners may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, despite the potential for increased risks for the note holders or creditors. In addition, GS Capital Partners and P2 Capital Partners or their respective affiliates may in the future own businesses that directly or indirectly compete with us, our suppliers, or our customers.

Our costs of doing business could increase as a result of changes in U.S. federal, state or local regulations.
 
Our operations are principally affected by various statutes, regulations and laws in which we operate. We are subject to various laws applicable to businesses generally, including laws affecting products, the environment, health and safety, transportation, labor and employment practices, competition, immigration and other matters Changes in U.S. federal, state or local regulations governing the sale of some of our products could increase our costs of doing business. In addition, changes to U.S. federal, state and local tax regulations could increase our costs of doing business. We cannot provide assurance that we will not incur material costs or liabilities in connection with regulatory requirements.

We cannot predict whether future developments in law and regulations concerning us will affect our business, financial condition and results of operations in a negative manner. Similarly, we cannot assess whether we will be successful in meeting future demands of regulatory agencies in a manner which will not materially adversely affected our business, financial condition or results of operations.

20



Risks Relating to Our Indebtedness

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations.
    
As of December 26, 2014, our total indebtedness was $796.9 million comprised of $365.0 million in outstanding HoldCo Notes, a $346.6 million Term Loan Facility, and $74.0 million outstanding on the ABL Facility. Other components of our total indebtedness included outstanding letters of credit in the amount of $11.3 million and capital lease obligations of $0.01 million. As of the same date, cash and cash equivalents were $6.1 million and there was $209.7 million in availability under the ABL Facility. Our substantial indebtedness could have important consequences to our financial health including, but not limited to:

increased vulnerability to general adverse economic and industry conditions or a downturn in our business;
limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
a competitive disadvantage compared to our competitors that are not as highly leveraged;
difficulties related to satisfying our obligations with respect to the HoldCo Notes, Term Loan Facility, ABL Facility, and our other indebtedness;
reduced availability of cash flows to fund working capital, capital expenditures and general corporate purposes as a result of debt service requirements;
limited capacity to borrow additional funds, if needed; and
an event of default if we fail to satisfy our obligations under the HoldCo Notes, Term Loan Facility, the ABL Facility, or our other indebtedness or if we fail to comply with the financial other restrictive covenants contained in the indenture and agreements governing the ABL Facility, Term Loan Facility and other debt; such event of default could result in all of our debt becoming immediately due and payable and could permit certain of our lenders to foreclose on assets securing our indebtedness.

If our cash flow and capital resources are insufficient to fund our debt service obligations, including timely payment of principal and interest on our outstanding indebtedness, we may be required to reduce or delay capital expenditures, sell assets, seek to obtain additional capital or refinance all or part of our existing debt. There can be no assurance that we will be able to successfully complete any of these transactions or do so on favorable terms. Any of the above listed factors could have a material adverse effect on our business, financial condition and results of operations.

The agreements and indenture governing our debt include restrictive and financial covenants that may limit our operational flexibility.

The indenture governing the HoldCo Notes and the agreements governing the ABL Facility and Term Loan Facility, each contain covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest. These include restrictive covenants that limit, among other things, our ability to:

incur certain liens;
incur any additional indebtedness;
consolidate, merge, or sell assets or enter into other business combination transactions;
make certain restricted payments, such as paying dividends, making distributions on, redeeming or repurchasing stock;
make certain investments, including acquisitions and capital expenditures;
amend the terms of certain subordinated indebtedness;
enter into transactions with affiliates;
enter into sale leaseback transactions;
use proceeds from sale of assets;
limit the payment of dividends by our subsidiaries;
prepay, redeem or repurchase certain indebtedness; and
change our business.

In addition, the ABL Facility requires the Company and its restricted subsidiaries, on a consolidated basis, to maintain a fixed charge coverage ratio (defined as the ratio of EBITDA, as defined in the credit agreement, to the sum of cash interest, principal payments on indebtedness and accrued income taxes, dividends or distributions and repurchases, redemptions or retirement of the equity interest of the Company) of at least 1.00:1.00 when the excess availability is less than or equal to the greater of: (i) 10% of the total commitments under the ABL Facility; and (ii) $25.0 million.



21


See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - ABL Credit Facility” “- Term Loan Facility” and “- HoldCo Notes” and Note 10. Debt for additional information related to the Company’s outstanding debt.

Despite our current indebtedness levels, we may incur substantial additional indebtedness.

We may incur substantial additional indebtedness in the future to finance acquisitions, investments, or for other purposes, subject to the restrictions contained in the documents governing our current outstanding indebtedness. For example, based on year-end inventory and trade accounts receivable balances as of December 26, 2014 we were able to incur up to a maximum of $209.7 million in additional indebtedness under the ABL Facility. Although the ABL Facility, the indenture and our other debt agreements contain some limitations on our ability to incur indebtedness, we may still incur substantial indebtedness to refinance existing indebtedness or for other purposes. If new debt is added to our current indebtedness levels, the substantial leverage risks that we now face could intensify.

Major disruptions and volatility in the capital and credit markets may impact our ability to secure sufficient financing on favorable terms.

The availability of financing is dependent on numerous factors, some of which are beyond our control, including, but not limited to, general economic conditions and the volatility of the capital and credit markets. We may not able to obtain additional financing on favorable terms, or at all, which could have a material adverse effect on our business, including the ability to make acquisitions and execute our growth strategies. Furthermore, if our operating results, cash flow or capital resources prove inadequate, or if interest rates increase significantly, we could face substantial liquidity problems, which may impede our ability to seek additional capital in a timely manner or refinance our existing debt on favorable terms. If we are unable to service our debt, we could be forced to reduce or delay planned capital expenditures, sell assets, restructure or refinance our debt or seek additional equity capital. There can be no assurance that any of these actions will be sufficient to allow us to service our debt obligations or that such actions will not result in an adverse impact on our business. In addition, the terms of the ABL Facility, Term Loan Facility and the indenture governing the HoldCo Notes and any future indebtedness may limit our ability to take certain of these actions thereby adversely impacting our results of operations and financial condition.

ITEM 1B. Unresolved Staff Comments

None.


22


ITEM 2. Properties

We operate from 177 locations throughout the United States, Canada and Puerto Rico consisting of 67 distribution centers, 21 free-standing professional contractor showrooms, 72 vendor-managed inventory locations, twelve administrative and support facilities and five cross-dock facilities.

We lease 100 properties. The majority of these leases are for varying term lengths up to twelve years. We own a call center located in Jacksonville, Florida and distribution centers in Long Island, New York, and Bluefield, West Virginia, all of which have attached administrative and support facilities. We also own distribution centers in Bristol, Tennessee, and Piedmont, South Carolina. None of the owned properties are subject to any mortgages; however, our call center in Jacksonville, Florida is subject to a development agreement with the City of Jacksonville. Our 72 vendor-managed inventory locations are customer-specific locations whereby we assist those customers with their MRO inventory management process.

We believe that our properties are in good operating condition and adequately serve our current business operations.

The ranges in size of the locations we operate are as follows (not including vendor-managed inventory locations and cross-dock facilities):
            
 
Size
 
(in square feet)
Distribution centers
6,000


384,000

Professional contractor showrooms
2,600


33,700

Administrative and support facilities
3,200


72,900



23


The following table sets forth the states, territories and provinces in which we operate (not including vendor-managed inventory locations and cross-dock facilities):

Location
 
Distribution Centers
 
Professional Contractor Showrooms
 
Administrative and Support Locations
U.S. State
 
 
 
 
 
 
Alabama
 
2

 

 
1

Arizona
 
1

 

 

California
 
5

 
2

 

Colorado
 
3

 
1

 

Florida
 
5

 
6

 
2

Georgia
 
3

 

 
1

Illinois
 
3

 

 

Indiana
 
1

 

 

Iowa
 

 
1

 
2

Kansas
 
1

 

 

Kentucky
 
1

 

 

Louisiana
 
1

 

 

Massachusetts
 
1

 
1

 

Michigan
 
1

 

 

Minnesota
 
1

 

 

Missouri
 

 
1

 

Montana
 

 
2

 

Nebraska
 
1

 

 
1

Nevada
 
1

 
1

 

New Jersey
 
1

 

 
1

New York
 
1

 

 
1

North Carolina
 
3

 

 
1

Ohio
 
2

 
2

 

Oklahoma
 
2

 

 
1

Oregon
 
1

 
1

 
1

Pennsylvania
 
2

 

 

South Carolina
 
4

 

 

Tennessee
 
2

 
1

 

Texas
 
9

 
1

 

Utah
 

 
1

 

Virginia
 
1

 

 

Washington
 
4

 

 

West Virginia
 
2

 

 

Subtotal
 
65

 
21

 
12

U.S. Territory
 
 
 
 
 
 
Puerto Rico
 
1

 

 

Subtotal
 
1

 

 

Canadian Province
 
 
 
 
 
 
Ontario
 
1

 

 

Subtotal
 
1

 

 

Total
 
67

 
21

 
12


24


ITEM 3. Legal Proceedings

In May 2011, we were named as a defendant in the case of Craftwood Lumber Company v. Interline Brands, Inc. ("Craftwood Matter"), 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 Court"). The complaint alleges that we sent 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 (“Junk Fax Act”). 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 us during the four-year statute of limitations period. In its amended complaint filed in the United States District Court, the plaintiff seeks preliminary and permanent injunctive relief enjoining the Company from violating the Junk Fax Act, as well as statutory damages for each fax transmission found to be in violation of the Junk Fax Act. On November 17, 2014, we filed a joint notice of settlement with the
Court advising them of the settlement of the Craftwood Matter. Under the terms of the settlement agreement we agreed to total settlement consideration of $40.0 million, representing an after tax payment of $24.3 million. The settlement has been preliminarily approved by the Court and is awaiting final approval.

As part of this matter, a pre-tax charge of $20.5 million was recorded in the third quarter of 2013 and an additional $19.5 million pre-tax charge was recorded in the fourth quarter of 2014 and is included in selling, general and administrative expenses in the statements of operations for the fiscal years ended December 27, 2013 and December 26, 2014, respectively. Please refer to Note 15. Commitments and Contingencies to our audited consolidated financial statements included in Item 8 of this annual report for additional information.

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 statements.

Because the outcome of litigation is inherently uncertain, we may not prevail in these proceedings and we cannot estimate our ultimate exposure in such proceedings if we do not prevail. Accordingly, any rulings against us in the above proceedings could have a material adverse effect on our financial performance and liquidity.

ITEM 4. Mine Safety Disclosures

None.



PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

From December 16, 2004 through September 7, 2012, our common stock was publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “IBI”. Subsequent to the Merger transaction, our outstanding common stock became privately-held, and therefore there is no established public trading market.

Holders

As of February 20, 2015, there were approximately 102 holders of record of our outstanding common stock.

Dividends

We have never declared dividends on our common stock. Our ability to declare and pay dividends on our common stock is subject to the requirements of Delaware law. In addition, we are a parent company with no business operations of our own. Accordingly, our sources of cash are dividends and distributions with respect to our ownership interest in Interline New Jersey that are derived from the earnings and cash flow generated by our businesses. Our ability to pay dividends to stockholders and the ability of Interline New Jersey to pay dividends to us is restricted under the ABL Facility, the HoldCo Notes, and the Term Loan Facility. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" for a more detailed description of our debt instruments.

Unregistered Sales of Equity Securities

During the period from September 28, 2014 through December 26, 2014, the Company sold 20,095 shares of unregistered equity securities. The sale of the Company's common stock was not subject to any underwriting discount or commission. The common stock was privately offered and sold to employees of the Company, pursuant to Rule 506 of Regulation D, and the sales were exempt from registration under the Securities Act of 1933. The transactions did not involve any public offering and were sold to a limited group of persons. Each recipient either received adequate information about the Company or had access, through employment or other relationships, to such information, and the Company determined that each recipient had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company. For more information see “Item 8. Financial Statements and Supplementary Data - Consolidated Statements of Stockholders’ Equity” and “- Note 12. Stockholder’s Equity” and “-Note 13. Share-Based Compensation.”  

Purchases of Equity Securities by the Issuer

During the period from September 28, 2014 through December 26, 2014, the Company repurchased 1,861 shares representing shares tendered in satisfaction of the exercise price and tax withholding obligations related to the non-cash exercise of stock options during the period. For more information see “Item 8. Financial Statements and Supplementary Data - Consolidated Statements of Stockholders’ Equity” and “- Note 12. Stockholder’s Equity”. 


26


ITEM 6. Selected Financial Data

The table below presents our selected historical consolidated financial data (in thousands) for fiscal periods 2014, 2013, 2012, 2011 and 2010. The information presented below should be read in conjunction with Item 7. “Management's Discussion and Analysis of Financial Conditions and Results of Operations” and the consolidated financial statements included elsewhere in this report.

 
Successor
 
 
Predecessor
 
Fiscal Year Ended
 
For the period September 8, 2012 through December 28, 2012 (1)(3)
 
 
For the period December 31, 2011 through September 7, 2012 (2)(3)
 
Fiscal Year Ended
 
December 26, 2014
 
December 27, 2013
 
 
 
 
December 30, 2011 (3)
 
December 31, 2010 (3)(4)
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,676,221

 
$
1,598,055

 
$
404,593

 
 
$
917,752

 
$
1,249,484

 
$
1,086,989

Cost of sales
1,094,578

 
1,045,084

 
256,349

 
 
584,033

 
787,017

 
672,745

Gross profit
581,643

 
552,971

 
148,244

 
 
333,719

 
462,467

 
414,244

Operating expenses(5)
529,729

 
508,651

 
168,011

 
 
292,165

 
378,493

 
339,060

Operating income (loss)
51,914

 
44,320

 
(19,767
)
 
 
41,554

 
83,974

 
75,184

Impairment of other intangible assets
(67,500
)
 

 

 
 

 

 

Loss on extinguishment
   of debt, net
(4,257
)
 

 

 
 
(2,214
)
 

 
(11,486
)
Interest and other expense, net
(58,195
)
 
(61,507
)
 
(19,180
)
 
 
(15,132
)
 
(22,463
)
 
(16,948
)
(Loss) income before income
  taxes
(78,038
)
 
(17,187
)
 
(38,947
)
 
 
24,208

 
61,511

 
46,750

Income tax (benefit) provision
(30,966
)
 
(10,847
)
 
(10,503
)
 
 
11,384

 
23,837

 
18,829

Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
$
37,674

 
$
27,921

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
$
33,940

 
$
20,931

 
$
3,908

 
 
$
25,118

 
$
72,417

 
$
60,760

Investing activities
(17,437
)
 
(18,738
)
 
(913,965
)
 
 
(15,244
)
 
(28,966
)
 
(71,131
)
Financing activities
(16,213
)
 
(11,612
)
 
819,583

 
 
660

 
(33,715
)
 
(2,016
)
Capital expenditures
17,437

 
18,738

 
5,748

 
 
11,966

 
19,371

 
17,729

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of end of period):
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
6,064

 
$
6,102

 
$
15,801

 
 
N/A

 
$
95,673

 
$
86,981

Total assets
1,460,622

 
1,517,733

 
1,523,233

 
 
N/A

 
1,036,458

 
1,007,609

Total debt(6)
785,609

 
798,588

 
814,741

 
 
N/A

 
301,395

 
314,871

Stockholders' equity
316,517

 
356,853

 
357,470

 
 
N/A

 
514,445

 
496,232

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
53,814

 
$
50,038

 
$
12,837

 
 
$
17,707

 
$
23,739

 
$
20,612

Adjusted EBITDA(7)
141,802

 
134,144

 
37,610

 
 
84,132

 
117,158

 
107,094

____________________
(1)
As a result of the Merger, we applied the acquisition method of accounting, which established a new accounting basis as of September 8, 2012. The financial results for the period September 8, 2012 through December 28, 2012 represent the 16-week Successor Period subsequent to the Merger.    

27


(2)
As a result of the Merger, we applied the acquisition method of accounting, which established a new accounting basis as of September 8, 2012. The financial results for the period December 31, 2011 through September 7, 2012 represent the 36-week Predecessor Period prior to the Merger.    

(3)
We acquired JanPak in December 2012, NCP in January 2011, and CleanSource in October 2010. Their results have been included in the financial statements since each respective acquisition date.

(4)
Fiscal year ended December 31, 2010 was a 53-week year. All other years presented were 52-week years, with the exception of 2012, which is presented as Successor and Predecessor Periods.

(5)
Included in operating expenses were Merger related costs of $0.1 million for the fiscal year ended December 26, 2014, $1.4 million for the fiscal year ended December 27, 2013, $39.6 million for the period September 8, 2012 through December 28, 2012 (Successor Period), and $19.0 million for the period December 31, 2011 through September 7, 2012 (Predecessor Period). There were no Merger related costs in 2011, nor 2010.

(6)
Total debt represents the amount of our short-term debt and long-term debt and short and long-term capital leases.

(7)
We present EBITDA, as shown below, and Adjusted EBITDA herein because we believe it to be relevant and useful information to our investors since it is consistently used by our management to evaluate the operating performance of our business and to compare our operating performance with that of our competitors. Management also uses EBITDA and Adjusted EBITDA for planning purposes, including the preparation of annual operating budgets, and to determine appropriate levels of operating and capital investments. We utilize EBITDA and Adjusted EBITDA as a useful alternative to net (loss) income as an indicator of our operating performance compared to the Company's plan. However, EBITDA and Adjusted EBITDA are not measures of financial performance under accounting principles generally accepted in the United States of America (“US GAAP”). Accordingly, EBITDA and Adjusted EBITDA should not be used in isolation or as substitutes for other measures of financial performance reported in accordance with US GAAP, such as gross margin, operating income, net income, cash flows from operating, investing and financing activities or other income or cash flow statement data prepared in accordance with US GAAP.

EBITDA is defined as net (loss) income adjusted to:
exclude interest expense, net of interest income;
exclude (benefit) provision for income taxes; and
exclude depreciation and amortization.

Adjusted EBITDA is defined as EBITDA adjusted to:
exclude Merger related expenses associated with the acquisition of the Company by affiliates of GS Capital Partners and P2 Capital Partners;
exclude share-based compensation, which is comprised of non-cash compensation expense arising from the grant of equity incentive awards;
exclude impairment of other intangible assets, which is comprised of excess carrying value over fair value for certain trademark assets determined to have a definite life during 2014;
exclude loss on extinguishment of debt, net, which is comprised of net losses associated with specific significant financing transactions, such as writing off the deferred financing costs associated with refinancing previous credit facilities and indentures as well as tender premiums and transaction costs associated with refinancing previous indentures;
exclude distribution center consolidations and restructuring costs, which are comprised of facility closing costs, such as lease termination charges, property and equipment write-offs and headcount reductions, incurred as part of the rationalization of our distribution network, as well as employee separation costs, such as severance charges, incurred as part of a restructuring;
exclude acquisition-related costs, which includes our direct acquisition-related expenses, including legal, accounting and other professional fees and expenses arising from acquisitions, as well as severance charges and stay bonuses, offset by the fair market value adjustments to earn-outs;
exclude litigation related costs associated with the class action lawsuit filed by Craftwood Lumber Company in 2011 and other nonrecurring litigation related costs; and
exclude the non-cash impact on rent expense associated with the effect of straight-line rent expense on leases.

We believe EBITDA and Adjusted EBITDA allow management and investors to evaluate our operating performance without regard to the adjustments described above which can vary from company to company depending upon the acquisition history, capital intensity, financing options and the method by which its assets were acquired. While adjusting for these items limits the usefulness of these non-GAAP measures as performance measures because they do not reflect all the related expenses we incurred, we believe adjusting for these items and monitoring our performance with and without them helps management and investors more meaningfully evaluate and compare the results of our operations from period to period and to those of other

28


companies. Actual results could differ materially from those presented. We believe these items for which we are adjusting are not indicative of our core operating results. These items impacted net income over the periods presented, which makes direct comparisons between years less meaningful and more difficult without adjusting for them. While we believe that some of the items excluded in the calculation of EBITDA and Adjusted EBITDA are not indicative of our core operating results, these items did impact our income statement during the relevant periods, and management therefore utilizes EBITDA and Adjusted EBITDA as operating performance measures in conjunction with other measures of financial performance under US GAAP such as net income.
    
The reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable US GAAP financial measure, which is net (loss) income, is as follows (in thousands):

 
Successor
 
 
Predecessor
 
Fiscal Year Ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
Fiscal Year Ended
 
December 26, 2014
 
December 27, 2013
 
 
 
 
December 30, 2011
 
December 31, 2010
EBITDA
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
$
37,674

 
$
27,921

Interest expense, net
59,099

 
63,042

 
19,758

 
 
16,613

 
24,327

 
18,572

(Benefit) provision for income taxes
(30,966
)
 
(10,847
)
 
(10,503
)
 
 
11,384

 
23,837

 
18,829

Depreciation and amortization
53,814

 
50,038

 
12,837

 
 
17,707

 
23,739

 
20,612

EBITDA
34,875

 
95,893

 
(6,352
)
 
 
58,528

 
109,577

 
85,934

 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
Impairment of other intangible assets
67,500

 

 

 
 

 

 

Loss on extinguishment of debt, net
4,257

 

 

 
 
2,214

 

 
11,486

Merger related expenses
102

 
1,377

 
39,641

 
 
19,049

 

 

Share-based compensation
3,720

 
5,330

 
2,945

 
 
3,922

 
5,935

 
4,533

Distribution center consolidations and restructuring costs
7,459

 
8,307

 
484

 
 
323

 
1,354

 
4,676

Acquisition-related costs, net
1,496

 
372

 
610

 
 
96

 
292

 
465

Litigation-related costs
21,604

 
21,841

 

 
 

 

 

Impact of straight-line rent expense
789

 
1,024

 
282

 
 

 

 

Adjusted EBITDA
$
141,802

 
$
134,144

 
$
37,610

 
 
$
84,132

 
$
117,158

 
$
107,094




29


ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with “Selected Financial Data” and our consolidated financial statements included elsewhere in this report. Some of the statements in the following discussion are forward‑looking statements. See “Forward‑Looking Statements” described on page 1 of this annual report. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including the risks described elsewhere in this report under Item 1A. Risk Factors.

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 currently market and sell our products primarily through thirteen distinct and targeted brands, each of which is recognized in the facilities maintenance market they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The AmSan®, JanPak® , 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®, 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. During the second quarter of 2014, management made a strategic marketing decision to simplify our brand structure for our institutional customer base during 2015. This rebranding initiative is designed to consolidate our institutional brands under a single national brand name and increase brand awareness as a market leading institutional platform.

We reach our markets using a variety of sales channels, including a field sales force of approximately 1,160 associates, which includes sales management and related associates, approximately 470 inside sales and customer service and support associates, 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 67 distribution centers and 21 professional contractor showrooms located throughout the United States, Canada, and Puerto Rico, 72 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.

Merger Transaction
    
On September 7, 2012, pursuant to an Agreement and Plan of Merger dated as of May 29, 2012, Isabelle Holding Company Inc., a Delaware corporation, and Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent, merged with and into the Company, 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. Under the

30


Merger Agreement, stockholders of the Company received $25.50 in cash for each share of Company common stock. Please refer to Note 3. Transactions to our audited consolidated financial statements included in this annual report for further information about the Merger Agreement. 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.

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 and the period subsequent to the Merger.

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 due 2018 (the "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.

Acquisitions

On December 11, 2012, Interline New Jersey acquired all of the outstanding stock of 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.

Financing Transactions

On March 17, 2014, Interline New Jersey completed the following financing transactions:

entered into a first lien term loan under which Interline New Jersey incurred a term loan in an aggregate principal amount of $350.0 million (the "Term Loan Facility"); and
amended the asset-based senior secured revolving credit facility, dated as of September 7, 2012 (the “ABL Facility”), by entering into the First Amendment to Credit Agreement to permit the incurrence of the Term Loan Facility and make other changes in connection with the refinancing (the “First ABL Facility Amendment”).

The proceeds from the Term Loan Facility were used to finance the redemption of Interline New Jersey's $300.0 million OpCo Notes, the repayment of a portion of amounts outstanding under the ABL Facility and the payment of related fees, costs and expenses. In connection with the redemption of the OpCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $4.3 million during the year ended December 26, 2014. The loss was comprised of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt issuance costs of $3.5 million.

    On April 8, 2014, Interline New Jersey further amended the ABL Facility by entering into the Second Amendment to the Credit Agreement to amend certain pricing terms applicable to the ABL Facility and extend the maturity date to April 8, 2019, at which date the principal amount outstanding under the ABL Facility will be due and payable in full (the “Second ABL Facility Amendment”).
    
On December 10, 2014 Interline New Jersey further amended the ABL Facility to increase the aggregate commitments from $275.0 million to $325.0 million (the "Increase Agreement"). Except for this commitment increase, no other material terms were modified by the Increase Agreement.

Subsequent to December 26, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes.


31


Fiscal Year 2012

In connection with the Merger in 2012, the Company entered into the following financing transactions:

the ABL Facility, with an aggregate principal amount of up to $275.0 million;
the issuance of $365.0 million aggregate principal amount of senior notes (the "HoldCo Notes"); and
the modification of the OpCo Notes.

Simultaneously with the closing of the Merger, the following occurred: the funding of the new ABL Facility, the release of the net proceeds of the $365.0 million HoldCo Notes from escrow, the termination of the Company's previous $225.0 million asset-based revolving credit facility, and the modification of the OpCo Notes. See “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”, and Note 10. Debt included in Part II. Item 8 of this annual report for further information regarding our outstanding indebtedness.

As a result of the Merger, acquisitions and refinancing transactions described above, our historical financial results or results of operations may not be indicative of our financial results or results of operations in the future.

Purchases of Equity Securities by the Issuer

On August 15, 2011, the Company announced that its Board of Directors had authorized the repurchase of up to an aggregate amount of $25.0 million of the Company's common stock. As of December 30, 2011, the Company had repurchased 1,783,822 shares of common stock pursuant to the Authorization at an aggregate cost of $25.0 million, or an average cost of $14.01 per share, through open market transactions, thereby completing the amount of shares that may be purchased under the Authorization.

In connection with the Merger transaction, each share of common stock of Interline was canceled on September 7, 2012, and converted automatically into a right to receive $25.50 in cash, without interest.

During the fiscal year ended December 26, 2014 the Company repurchased 2,276 shares representing shares tendered in satisfaction of the exercise price and tax withholding obligations related to the non-cash exercise of stock options during the period.


32


Results of Operations

Comparison of the operating results for the fiscal year ended December 26, 2014 to the fiscal year ended December 27, 2013

The following table presents information derived from the consolidated statements of operations for the fiscal years ended December 26, 2014 and December 27, 2013 expressed as a percentage of net sales.
 
 
% of Net Sales
 
 
For the fiscal year ended
 
 
 
 
December 26, 2014
 
December 27, 2013
 
% Increase (Decrease) (1)
Net sales
 
100.0
 %
 
100.0
 %
 
4.9
 %
Cost of sales
 
65.3

 
65.4

 
4.7

Gross profit
 
34.7

 
34.6

 
5.2

 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
Selling, general and administrative expenses
 
28.4

 
28.6

 
4.1

Depreciation and amortization
 
3.2

 
3.1

 
7.5

Merger related expenses
 

 
0.1

 
(92.6
)
Total operating expenses
 
31.6

 
31.8

 
4.1

Operating income
 
3.1

 
2.8

 
17.1

 
 
 
 
 
 
 
Impairment of other intangible assets
 
(4.0
)
 

 
100.0

Loss on extinguishment of debt, net
 
(0.3
)
 

 
100.0

Interest expense
 
(3.5
)
 
(3.9
)
 
(6.2
)
Interest and other income
 
0.1

 
0.1

 
(37.8
)
Income before income taxes
 
(4.7
)
 
(1.1
)
 
354.1

Income tax benefit
 
(1.8
)
 
(0.7
)
 
185.5

Net loss
 
(2.8
)%
 
(0.4
)%
 
642.5
 %
____________________
(1)
Percent increase (decrease) represents the actual change as a percentage of the prior year’s result.

The following discussion refers to the term 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 defined as sales for a period of time excluding any sales from acquisitions made subsequent to the beginning of the prior year period divided by the number of shipping days in that period. For a reconciliation of average organic daily sales growth to US GAAP-based financial measures, see “Reconciliation of Average Organic Daily Sales to Net Sales” table below.

Net Sales and Gross Profit
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014

 
December 27, 2013

 
 
 
 
 
 
Net sales
 
$
1,676,221

 
$
1,598,055

Cost of sales
 
1,094,578

 
1,045,084

 
Gross profit
 
$
581,643

 
$
552,971


Net Sales. Net sales increased by $78.2 million, or 4.9%, for the fiscal year ended December 26, 2014 compared to the fiscal year ended December 27, 2013. The increase in sales was primarily attributable to sales of $44.0 million from net increases in sales to our institutional facilities customers, plus $30.5 million from net increases in sales to our multi-family housing facilities customers, and $6.2 million from net increases in sales to our residential facilities customers.

During the fiscal year ended December 26, 2014, our sales increased 4.9% on an average daily sales basis, primarily reflecting the impact of continued economic improvements across our facilities maintenance end-market, combined with our continued investments in our sales forces and our information technology. Sales to our institutional facilities customers, which

33


comprised 50% of our total sales, increased 5.6%. Sales to our multi-family housing facilities customers, which comprised 30% of our total sales, increased 6.4%. Sales to our residential facilities customers, which comprised 19.9% of our total sales, increased 1.9%. 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. We expect these trends to continue into 2015 as we continue our investments in our sales force and other key areas of our business.

Gross Profit. Gross profit increased by $28.7 million, or 5.2%, in the fiscal year ended December 26, 2014 compared to the fiscal year ended December 27, 2013. Our gross profit margin increased 10 basis points to 34.7% for the fiscal year ended December 26, 2014 compared to 34.6% for the fiscal year ended December 27, 2013. The increase in gross profit margin was primarily related to our investment in sales force development, including selling tools which provide for a greater level of visibility throughout the selling process, as well as a continued focus on controlling our product costs.
    
Operating Expenses
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014

 
December 27, 2013

 
 
 
 
 
 
Selling, general and administrative expenses
 
$
475,813

 
$
457,236

Depreciation and amortization
 
53,814

 
50,038

Merger related expenses
 
102

 
1,377

 
Total operating expenses
 
$
529,729

 
$
508,651


Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased by $18.6 million, or 4.1%, in the fiscal year ended December 26, 2014 compared to fiscal year ended December 27, 2013. As a percentage of net sales, SG&A decreased 20 basis points to 28.4% for the fiscal year ended December 26, 2014 compared to 28.6% for the fiscal year ended December 27, 2013. The decrease in SG&A expenses as a percentage of sales was primarily due to reduced legal expense and settlement costs as well as reduced stock compensation expense in fiscal year 2014 compared to fiscal year 2013.

Depreciation and Amortization. Depreciation and amortization expense increased by $3.8 million, or 7.5%, in the fiscal year ended December 26, 2014 compared to the fiscal year ended December 27, 2013. The increase was primarily driven by the additional amortization of trademark assets that were determined to have a definite life during the second quarter of 2014. As a percentage of net sales, depreciation and amortization expense was 3.2% and 3.1% for the fiscal year ended December 26, 2014 and fiscal year ended December 27, 2013, respectively.

Merger related expenses. Merger related expenses incurred during the fiscal year ended December 26, 2014 of $0.1 million are comprised transaction related compensation incurred as a result of the Merger. Merger related expenses incurred in the fiscal year ended December 27, 2013 of $1.4 million are comprised of professional fees of $0.4 million, transaction related compensation of $0.8 million, and other costs of $0.2 million, all incurred as a direct result of the Merger.

Operating Income

 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014
 
December 27, 2013
 
 
 
 
 
 
Operating income
 
$
51,914

 
$
44,320

    
Operating income. As a result of the foregoing, operating income increased by $7.6 million, or 17.1%, in the fiscal year ended December 26, 2014 as compared to the fiscal year ended December 27, 2013.

Operating income as a percentage of net sales was 3.1% in the fiscal year ended 2014 compared to 2.8% in the comparable prior year period. The increase in operating income as a percentage of sales is primarily a result of higher gross margins, lower Merger related expenses, and lower SG&A expenses as a percentage of sales.



34


Other Income (Expense)
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014
 
December 27, 2013
 
 
 
 
 
 
Impairment of other intangible assets
 
$
(67,500
)
 
$

Loss on extinguishment of debt, net
 
(4,257
)
 

Interest expense
 
(59,178
)
 
(63,087
)
Interest and other income
 
983

 
1,580

 
(Loss) income before income taxes
 
$
(78,038
)
 
$
(17,187
)

Impairment of other intangible assets. During the fiscal year ended December 26, 2014, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets. These impairments were primarily due to a strategic marketing decision to phase out certain brand names which resulted in a change in the expected useful life of the intangible assets. The impairment charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. There was no impairment charge that occurred during the prior fiscal year.

Loss on extinguishment of debt. In connection with the redemption of the OpCo Notes and the related financing transactions, we recorded a loss on extinguishment of debt, net of $4.3 million which consisted of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million and the write-off of the unamortized deferred debt financing costs of $3.5 million. There was no extinguishment of debt that occurred during the prior fiscal year.

Interest Expense. Interest expense decreased $3.9 million, or 6.2%, in the fiscal year ended December 26, 2014 compared to fiscal year ended December 27, 2013. The decrease in interest expense is directly attributable interest expense savings realized as a result of the financing transactions that occurred in the first quarter of 2014. Refer to the "Liquidity and Capital Resources" section below for additional discussion regarding the current year refinancing transactions.


Income Tax Benefit and Net Loss
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014
 
December 27, 2013
 
 
 
 
 
 
Income tax benefit
 
$
(30,966
)
 
$
(10,847
)
 
Net loss
 
$
(47,072
)
 
$
(6,340
)

Income tax benefit. Income taxes changed by $20.1 million, to a benefit of $31.0 million in the fiscal year ended December 26, 2014 as compared to a benefit of $10.8 million in fiscal year ended December 27, 2013. The increase in income tax benefit is related to the increase in current year book loss, primarily related to the impairment charges.

The effective tax rate for the fiscal years ended December 26, 2014, and December 27, 2013, was 39.7%, and 63.1%, respectively. The change in the effective tax rate is primarily caused by the true-up of state apportionment rates to the returns for each legal entity in 2013.
    
Net loss. As a result of the foregoing, net loss increased by $40.7 million in the fiscal year ended December 26, 2014 as compared to the fiscal year ended December 27, 2013. As a percentage of net sales, net loss was 2.8% for the fiscal year ended December 26, 2014 compared to 0.4% for the same period in the prior year.

35


Comparison of the operating results for the fiscal year ended December 27, 2013 to the combined results of fiscal year ended December 28, 2012

The following table presents information derived from the consolidated statements of operations expressed as a percentage of net sales in accordance with US GAAP. US GAAP requires that we separately present our results for the period from September 8, 2012 through December 28, 2012 ("Successor Period") and for the December 31, 2011 through September 7, 2012 ("Predecessor Period"). Management believes reviewing our operating results for the fiscal years ended December 27, 2013 and December 28, 2012 by combining the results of the Predecessor and Successor periods is more useful in identifying trends in, or reaching conclusions regarding, our overall operating performance and performs reviews at that level. Accordingly, the table below presents the non-GAAP combined results for the fiscal year December 28, 2012, which we also use to compute the percentage change as compared to the prior year, as we believe this presentation provides a more meaningful basis for comparison of our results. The combined operating results may not reflect the actual results we would have achieved had the Merger closed prior to September 7, 2012, and may not be predictive of our future results of operations.

 
% of Net Sales
 
Successor
 
 
Predecessor
 
Combined
 
 % Increase (Decrease)
2013 vs. Combined 2012
(1)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the combined fiscal year ended December 28, 2012
 
Net sales
100.0
 %
 
100.0
 %
 
 
100.0
 %
 
100.0
 %
 
 %
Cost of sales
65.4

 
63.4

 
 
63.6

 
63.6

 
1.8

Gross profit
34.6

 
36.6

 
 
36.4

 
36.4

 
(1.8
)
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
28.6

 
28.6

 
 
27.8

 
28.1

 
0.5

Depreciation and amortization
3.1

 
3.2

 
 
1.9

 
2.3

 
0.8

Merger related expenses
0.1

 
9.8

 
 
2.1

 
4.4

 
(4.3
)
 Total operating expenses
31.8

 
41.5

 
 
31.8

 
34.8

 
(3.0
)
Operating (loss) income
2.8

 
(4.9
)
 
 
4.5

 
1.6

 
1.2

 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt, net

 

 
 
(0.2
)
 
(0.2
)
 
0.2

Interest expense
(3.9
)
 
(4.9
)
 
 
(1.8
)
 
(2.8
)
 
(1.1
)
Interest and other income
0.1

 
0.1

 
 
0.2

 
0.2

 
(0.1
)
(Loss) income before income taxes
(1.1
)
 
(9.6
)
 
 
2.6

 
(1.1
)
 

Income tax (benefit) provision
(0.7
)
 
(2.6
)
 
 
1.2

 
0.1

 
(0.8
)
Net (loss) income
(0.4
)%
 
(7.0
)%
 
 
1.4
 %
 
(1.2
)%
 
0.8
 %
____________________
(1)
Percent increase (decrease) represents the actual change as a percentage of the prior year’s result.




36


Net Sales and Gross Profit
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,598,055

 
$
404,593

 
 
$
917,752

 
$
1,322,345

Cost of sales
 
1,045,084

 
256,349

 
 
584,033

 
840,382

 
Gross profit
 
$
552,971

 
$
148,244

 
 
$
333,719

 
$
481,963

 
Net Sales. Net sales increased by $275.7 million, or 20.9%, in the fiscal year ended December 27, 2013 compared to the combined fiscal year ended December 28, 2012. The increase in sales was primarily attributable to sales of $252.5 million from net increases in sales to our institutional facilities customers, including $234.1 million from acquisitions, plus $20.7 million from net increases in sales to our multi-family housing facilities customers, and $5.3 million from net increases in sales to our residential facilities customers. On an organic basis, our sales increased 3.1%, and on an average organic daily sales basis, our sales increased 3.5%. On an uncombined basis, net sales increased by $1,193.5 million and $680.3 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases were directly attributable to the comparison of 252 selling days in the current year Successor Period to 76 and 177 selling days in the prior year Successor and Predecessor Periods, respectively.

Gross Profit. Gross profit increased by $71.0 million, or 14.7%, to $553.0 million in the fiscal year ended December 27, 2013 from $482.0 million in the combined fiscal year ended December 28, 2012. Our gross profit margin decreased 180 basis points to 34.6% for the fiscal year ended December 27, 2013 compared to 36.4% for the combined fiscal year ended December 28, 2012. This decrease in gross profit margin was related to our acquisitions, which accounted for the majority of the decrease in gross profit margins. On an uncombined basis, gross profit increased by $404.7 million and $219.3 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 252 selling days in the current year Successor Period to 76 and 177 selling days in the prior year Successor and Predecessor Periods, respectively.

Operating Expenses
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
457,236

 
$
115,533

 
 
$
255,409

 
$
370,942

Depreciation and amortization
 
50,038

 
12,837

 
 
17,707

 
30,544

Merger related expenses
 
1,377

 
39,641

 
 
19,049

 
58,690

 
Total operating expenses
 
$
508,651

 
$
168,011

 
 
$
292,165

 
$
460,176


Selling, General and Administrative Expenses. SG&A expenses increased by $86.3 million, or 23.3%, to $457.2 million in the fiscal year ended December 27, 2013 from $370.9 million in the combined fiscal year ended December 28, 2012. As a percentage of net sales, SG&A increased 50 basis points to 28.6% for the fiscal year ended December 27, 2013 compared to 28.1% for the combined fiscal year ended December 28, 2012. The increase in SG&A expenses as a percentage of sales was primarily due to higher litigation related costs, higher distribution center consolidation costs, and higher wages and fringe benefit costs, offset in part by the favorable impact from acquisitions. On an uncombined basis, SG&A increased by $341.7 million and $201.8 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 260 expense days in the current year Successor Period to 80 and 180 expense days in the prior year Successor and Predecessor Periods, respectively.

37


Depreciation and Amortization. Depreciation and amortization expense increased by $19.5 million, or 63.8%, to $50.0 million in fiscal year ended December 27, 2013 from $30.5 million in the combined fiscal year ended December 28, 2012. As a percentage of net sales, depreciation and amortization were 3.1% and 2.3% for the fiscal year ended December 27, 2013 and combined fiscal year ended December 28, 2012, respectively. The increase in depreciation expense was due to higher capital spending associated with our information technology infrastructure and distribution center consolidation and integration efforts that occurred during the last four years, combined with the impact of depreciation expense on the acquired JanPak assets. The increase in amortization expense is primarily driven by the incremental amortization of the fair value adjustments for the definite-lived intangible asset values recorded as a result of the Merger as well as the JanPak acquisition. On an uncombined basis, depreciation and amortization increased by $37.2 million and $32.3 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 260 expense days in the current year Successor Period to 80 and 180 expense days in the prior year Successor and Predecessor Periods, respectively, combined with the increase in amortization on the definite-lived intangibles identified in connection with the Merger transaction, as well as the depreciation and amortization expense associated with the definite-lived tangible and intangible assets acquired with the JanPak acquisition.

Merger related expenses. Merger related expenses incurred in the fiscal year ended December 27, 2013 of $1.4 million are comprised of professional fees of $0.4 million, transaction related compensation of $0.8 million, and other costs of $0.2 million, all incurred as a direct result of the Merger. Merger related expenses incurred in the combined fiscal year ended December 28, 2012 of $58.7 million are comprised of professional fees of $22.4 million, share-based compensation of $18.3 million, fees paid to our sponsors of $10.0 million, transaction related compensation of $6.8 million, and other costs of $1.2 million, all incurred as a direct result of the Merger.

Operating Income

 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
44,320

 
$
(19,767
)
 
 
$
41,554

 
$
21,787


Operating income. As a result of the foregoing, operating income increased by $22.5 million, or 103.4%, to $44.3 million in fiscal year ended December 27, 2013 from $21.8 million in the combined fiscal year ended December 28, 2012. Operating income as a percentage of net sales was 2.8% in the fiscal year ended 2013 compared to 1.6% in the comparable combined prior year period. Excluding expenses associated with the litigation related charge and the Merger, operating income was 4.2% of sales in the fiscal year ended 2013. The increase in operating income as a percentage of sales is primarily a result of lower Merger related expenses, lower selling, general and administrative ("SG&A") expenses as a percentage of sales, net of litigation related costs, offset in part by lower gross profit margins related to changes in customer and product mix, and to a lesser extent, some product cost pressure as compared to the prior year, and higher depreciation and amortization expense, which was predominately driven by the Merger.

38


Other Income (Expense)
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt, net
 
$

 
$

 
 
$
(2,214
)
 
$
(2,214
)
Interest expense
 
(63,087
)
 
(19,773
)
 
 
(16,631
)
 
(36,404
)
Interest and other income
 
1,580

 
593

 
 
1,499

 
2,092

 
(Loss) income before income taxes
 
$
(17,187
)
 
$
(38,947
)
 
 
$
24,208

 
$
(14,739
)

Loss on extinguishment of debt. In connection with the termination of the previous asset-based revolving facility, $2.2 million of unamortized deferred debt financing costs were written off during the third quarter of 2012, in the Predecessor Period. There was no extinguishment of debt that occurred during the fiscal year ended December 27, 2013 .

Interest Expense. Interest expense increased $26.7 million, or 73.3%, to $63.1 million in fiscal year ended December 27, 2013 from $36.4 million in the combined fiscal year ended December 28, 2012. The increase in interest expense is directly attributable to the borrowings made under the ABL Facility and the issuance of the HoldCo Notes to finance the Merger transactions, and the incremental interest associated with the modification of the OpCo Notes as more fully discussed in "Liquidity and Capital Resources" below. On an uncombined basis, interest expense increased by $43.3 million and $46.5 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 260 expense days in the current year Successor Period to 80 and 180 expense days in the prior year Successor and Predecessor Periods, respectively, combined with the increase in interest expense as a result of the financing transactions discussed above.

Income Tax (Benefit) Provision and Net (Loss) Income
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
(Benefit) provision for income taxes
 
$
(10,847
)
 
$
(10,503
)
 
 
$
11,384

 
$
881

 
Net (loss) income
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
$
(15,620
)

Income tax (benefit) provision. Income taxes changed by $11.7 million, to a benefit of $10.8 million in the fiscal year ended December 27, 2013 as compared to a provision of $0.9 million in the combined fiscal year ended December 28, 2012. The effective tax rate for the fiscal year ended December 27, 2013, and for the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, was 63.1%, 27.0%, and 47.0%, respectively. The change in the effective tax rate is primarily caused by the non-deductibility of certain Merger related expenses incurred in 2012 and true-up of state apportionment rates to the returns for each legal entity.


39


Reconciliation of Average Organic Daily Sales to Net Sales

Average organic daily sales are 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. The computation of average organic daily sales for each fiscal year shown below is as follows (dollar amounts in thousands):

 
 
Successor
 
 
 
Successor
 
Combined (1)
 
 
 
 
December 26, 2014
 
December 27, 2013
 
% Variance
 
December 27, 2013
 
December 28, 2012
 
% Variance
Net sales
 
$
1,676,221

 
$
1,598,055

 
4.9
%
 
$
1,598,055

 
$
1,322,345

 
20.9
%
Less acquisitions
 

 

 
 
 
(234,118
)
 

 
 
Organic sales
 
$
1,676,221

 
$
1,598,055

 
4.9
%
 
$
1,363,937

 
$
1,322,345

 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Daily sales:
 
 
 
 
 
 
 
 
 
 
 
 
  Ship days
 
252

 
252

 
 
 
252
 
253
 
 
  Average daily sales(2)
 
$
6,652

 
$
6,341

 
4.9
%
 
$
6,341

 
$
5,227

 
21.3
%
  Average organic daily sales(3)
 
$
6,652

 
$
6,341

 
4.9
%
 
$
5,412

 
$
5,227

 
3.5
%
____________________
(1)
The computation of average daily sales is performed using combined Predecessor and Successor net sales, as we believe that there was no impact to net sales as a result of the Merger and we also believe that it is more useful in identifying trends in, or reaching conclusions regarding, our overall operating performance.

(2)
Average daily sales are defined as sales for a period of time divided by the number of shipping days in that period of time.

(3)
Average organic daily sales are defined as sales for a period of time excluding any sales from acquisitions made subsequent to the beginning of the prior year period divided by the number of shipping days in that period.

Average daily sales and average organic daily sales are presented herein because we believe it to be relevant and useful information to our investors since it is used by our management to evaluate the operating performance of our business, as adjusted to exclude the impact of acquisitions, and compare our organic operating performance with that of our competitors. However, average daily sales and average organic daily sales are not measures of financial performance under U.S. GAAP and it should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with U.S. GAAP, such as net sales. Management utilizes average daily sales and average organic daily sales as an operating performance measure in conjunction with U.S. GAAP measures such as net sales.

Seasonality

We experience some seasonal fluctuations as sales of our products typically increase in the second and third fiscal quarters of the year due to increased apartment turnover and related maintenance and repairs in the multi-family residential housing sector during these periods. Typically, November, December and January sales are lower across most of our brands because customers may defer purchases at year-end as their budget limits are met and because of the winter holiday season between Thanksgiving Day and New Year's Day. Our Copperfield brand customarily experiences approximately two-thirds of its sales between July and December. As such, our first quarter sales and earnings typically tend to be lower than the remaining three quarters of the year. In addition, our working capital requirements in the second half of the year tend to be lower.


40