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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 26, 2004
OR
[_] 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 333-106801
INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2232386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 WEST BAY STREET, JACKSONVILLE, FLORIDA 32204
(Address of principal executive offices) (Zip Code)
(904) 421-1400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of the close of business on May 10, 2004, there were 5,373,660
shares outstanding of the registrant's common stock, no par value.
TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of March 26, 2004
and December 26, 2003.....................................1
Unaudited Consolidated Statements of Operations
for the Three Months Ended March 26, 2004 and March 28, 2003.......2
Unaudited Consolidated Statement of Stockholders'
Equity (Deficiency) for the Three Months Ended March 26, 2004......3
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 26, 2004 and March 28, 2003.......4
Notes to Unaudited Consolidated Financial
Statements.........................................................5
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations............................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........20
Item 4. Controls and Procedures..............................................21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................22
Item 6. Exhibits and Reports on Form 8-K.....................................22
SIGNATURES....................................................................23
ii
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF MARCH 26, 2004 AND DECEMBER 26, 2003
(In thousands, except share and per share data)
MARCH 26, DECEMBER 26,
2004 2003
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,143 $ 1,612
Cash - restricted 1,000 1,000
Accounts receivable - trade (net of allowance
for doubtful accounts of $6,410 and $6,316) 92,092 83,684
Accounts receivable - other 8,521 12,932
Inventory 118,484 119,301
Prepaid expenses and other current assets 3,659 4,260
Deferred income taxes 10,382 10,318
--------- ---------
Total current assets 248,281 233,107
PROPERTY AND EQUIPMENT, net 30,049 30,605
GOODWILL 202,227 202,227
OTHER INTANGIBLE ASSETS, net 89,366 90,632
OTHER ASSETS 8,860 8,711
--------- ---------
TOTAL ASSETS $ 578,783 $ 565,282
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ 7,000
Accounts payable 49,673 43,180
Accrued expenses and other current liabilities 19,514 19,623
Accrued interest payable 11,279 5,803
Accrued merger expenses 4,651 4,739
Income taxes payable 1,138 --
--------- ---------
Total current liabilities 93,255 80,345
DEFERRED INCOME TAXES 22,746 22,543
INTEREST RATE SWAPS 11,691 12,793
LONG-TERM DEBT, NET OF CURRENT PORTION 332,775 334,525
--------- ---------
TOTAL LIABILITIES 460,467 450,206
--------- ---------
COMMITMENTS AND CONTINGENCIES
SENIOR PREFERRED STOCK, $0.01 par value,
27,000,000 shares authorized; 23,600,014 shares
issued and outstanding; at liquidation value 392,873 379,612
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares
authorized; 5,373,660 and 5,334,546 shares
issued and outstanding 1,994 1,994
Accumulated deficit (275,558) (265,548)
Stockholder loans (1,533) (1,545)
Accumulated other comprehensive income 540 563
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (274,557) (264,536)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 578,783 $ 565,282
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
1
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 26, 2004 AND MARCH 28, 2003 (In thousands,
except per share data)
THREE MONTHS ENDED
MARCH 26, 2004 MARCH 28, 2003
-------------- --------------
NET SALES $ 172,604 $ 154,864
COST OF SALES 106,881 95,705
--------- ---------
Gross profit 65,723 59,159
--------- ---------
OPERATING EXPENSES :
Selling, general and administrative expenses 48,257 41,549
Depreciation and amortization 2,983 2,878
Special costs and expenses -- 211
--------- ---------
Total operating expense 51,240 44,638
--------- ---------
OPERATING INCOME 14,483 14,521
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS 1,104 721
INTEREST EXPENSE (10,194) (9,640)
INTEREST INCOME 8 37
OTHER INCOME 136 --
--------- ---------
Income before income taxes 5,537 5,639
PROVISION FOR INCOME TAXES 2,286 2,143
--------- ---------
NET INCOME 3,251 3,496
PREFERRED STOCK DIVIDENDS (13,261) (11,561)
--------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (10,010) $ (8,065)
========= =========
LOSS PER COMMON SHARE - BASIC $ (1.86) $ (1.50)
========= =========
LOSS PER COMMON SHARE - DILUTED $ (1.86) $ (1.50)
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
INTERLINE BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
THREE MONTHS ENDED MARCH 26, 2004
(In thousands, except share data)
RETAINED ACCUMULATED
EARNINGS OTHER TOTAL
COMMON STOCK STOCKHOLDER (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT LOANS DEFICIT) INCOME (LOSS) (DEFICIT) EQUITY
--------- --------- ----------- ------------ --------------- ------------------
BALANCE, DECEMBER 26, 2003 5,334,546 $ 1,994 $ (1,545) $(265,548) $ 563 $ (264,536)
Preferred Stock dividends -- -- -- (13,261) -- (13,261)
Interest on shareholder notes -- -- 12 -- -- 12
Issuance of restricted stock 39,114 -- -- -- -- --
Comprehensive income:
Net income -- -- -- 3,251 -- --
Foreign currency translation -- -- -- -- (23) --
Total comprehensive income -- -- -- -- -- 3,228
--------- --------- --------- --------- -------------- ------------------
BALANCE, MARCH 26, 2004 5,373,660 $ 1,994 $ (1,533) $(275,558) $ 540 $ (274,557)
========= ========= ========= ========= ============== ==================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
INTERLINE BRANDS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 26, 2004 AND MARCH 28,
2003 (In thousands)
THREE MONTHS ENDED
MARCH 26, 2004 MARCH 28, 2003
-------------- --------------
OPERATING ACTIVITIES :
Net income $ 3,251 $ 3,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,983 2,878
Amortization of debt issuance costs 487 414
Accretion of discount on 16% senior subordinated notes -- 115
Change in fair value of interest rate swaps (1,104) (721)
Interest on stockholder notes 12 (26)
Deferred income taxes 140 41
16% senior subordinated notes issued for interest due -- 716
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable - trade (8,408) (3,588)
Accounts receivable - other 4,411 3,329
Inventory 817 10,122
Prepaid expenses and other current assets 602 1,156
Other assets (150) (547)
Accrued interest payable 5,477 1,182
Accounts payable 6,493 (6,444)
Accrued expenses and other current liabilities 179 (1,001)
Accrued merger expenses (88) (721)
Income taxes payable 1,138 --
-------- --------
Net cash provided by operating activities 16,240 10,401
-------- --------
INVESTING ACTIVITIES :
Purchase of property and equipment (1,429) (1,578)
Purchase of businesses, net of cash acquired (289) --
-------- --------
Net cash used in investing activities (1,718) (1,578)
-------- --------
FINANCING ACTIVITIES :
Decrease in revolver and swingline, net -- (7,500)
Repayment of debt (1,750) --
Payment of debt issuance costs (218) --
-------- --------
Net cash used in financing activities (1,968) (7,500)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (23) 270
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,531 1,593
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,612 5,557
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,143 $ 7,150
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for :
Interest, net $ 4,209 $ 7,132
======== ========
Income taxes (net of refunds) $ 270 $ 181
======== ========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Dividends on preferred stock $ 13,261 $ 11,561
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Interline
Brands, Inc. ("Interline" or the "Company") reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The results of operations for
the interim periods presented are not necessarily indicative of the
results to be expected for the full year.
The Company is in one industry, the distribution of maintenance, repair
and operations, or MRO, products. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information", the Company has one
operating segment. Our net sales for the three month periods ended March
26, 2004 and March 28, 2003 by product category were as follows (in
millions):
THREE MONTHS ENDED THREE MONTHS ENDED
PRODUCT CATEGORY MARCH 26, 2004 MARCH 28, 2003
- ---------------- -------------- --------------
Plumbing................................ $79.4 $75.9
Electrical.............................. 27.6 17.0
Security Hardware....................... 12.1 12.4
Hardware................................ 10.4 10.8
Appliances and Parts.................... 10.4 9.3
HVAC.................................... 8.6 7.7
Other................................... 24.1 21.8
Total................................. $172.6 $154.9
2. EARNINGS PER SHARE
Net income per share for all periods has been computed in accordance with
SFAS No. 128, "Earnings per Share". Basic net income per share is computed
by dividing net income by the weighted-average number of shares
outstanding during the year. Diluted net income per share is computed by
dividing net income attributable to common stockholders by the
weighted-average number of shares outstanding during the year, assuming
dilution.
5
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The amounts used in calculating net income (loss) per share data are as
follows:
THREE MONTHS ENDED
MARCH 26, MARCH 28,
2004 2003
---------- ---------
Net income $ 3,251 $ 3,496
Preferred stock dividends (13,261) (11,561)
-------- --------
Net loss applicable to common stockholders $(10,010) $ (8,065)
======== ========
Weighted average shares outstanding - basic 5,374 5,385
Effect of dilutive stock options -- --
-------- --------
Weighted average shares outstanding - diluted 5,374 5,385
======== ========
Options to purchase 192,226 and 177,788 shares of common stock which were
outstanding at March 26, 2004 and March 28, 2003, respectively, were not
included in the computation of weighted average shares outstanding-diluted
because the options exercise prices are greater than the average fair
market value of common stock and the effect would be antidilutive.
3. DEBT
Long-term debt at March 26, 2004 and December 26, 2003 consists of the
following:
MARCH 26, DECEMBER 26,
2004 2003
------------ -------------
Term Loan $ 136,500 $ 138,250
Note payable 3,275 3,275
11.5% Senior Subordinated Notes 200,000 200,000
------------ -------------
339,775 341,525
Less current portion (7,000) (7,000)
------------ -------------
$ 332,775 $ 334,525
============ =============
6
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
In May 2003, the Company completed an offering of $200.0 million principal
amount of 11.5% Senior Subordinated Notes due 2011 and entered into a new
$205.0 million senior secured credit facility which consists of a $140.0
million term loan facility and a $65.0 million revolving loan facility, a
portion of which is available in the form of letters of credit. The net
proceeds from the offering of Senior Subordinated Notes and the
refinancing of the former credit facility with the new credit facility
were used to: (1) repay all outstanding indebtedness under our former
credit facility, (2) redeem all of the 16% senior subordinated notes, (3)
pay accrued interest and related redemption premiums on our former debt
and (4) pay transaction fees and expenses related to the offering and new
credit facility. These transactions are referred to collectively as the
"Refinancing Transactions".
The $200.0 million principal amount 11.5% Senior Subordinated Notes due
2011 pay interest each May 15 and November 15. Prior to May 15, 2006, the
Company may redeem up to 35% of the Senior Subordinated Notes using
proceeds of certain equity offerings. The Company may redeem all or a
portion of the notes after May 15, 2007, subject to redemption premiums
unless redeemed after May 15, 2009.
Borrowings under the term loan facility and revolving loan facility bear
interest, at the Company's option, at either LIBOR plus a spread or at an
alternate base rate plus a spread. Interest rates in effect on borrowings
under the term loan facility at March 26, 2004 ranged from 4.61% for LIBOR
based borrowings to 6.50% for prime based borrowings. Outstanding letters
of credit under the revolving loan facility are subject to a per annum fee
equal to the applicable spread over the adjusted LIBOR for revolving
loans. The term loan facility matures on November 30, 2009 and the
revolving loan facility matures on May 31, 2008.
As of March 26, 2004, the Company had $5.0 million of letters of credit
issued and $60.0 million available under the revolving loan facility.
There were no borrowings outstanding under the revolving loan facility at
March 26, 2004. The credit facility is secured by substantially all of the
assets of the Company.
Periodically, the Company enters into derivative financial instruments,
including interest rate exchange agreements, to manage its exposure to
fluctuations in interest rates on its debt. At March 26, 2004, the Company
had interest rate exchange agreements, or swaps, outstanding with a total
notional amount of $151.0 million. These agreements, which mature between
April and October of 2005, effectively fix the interest rate on the
Company's variable rate borrowings under the term loan facility at a
weighted average rate of 6.56%. The market value of the outstanding
interest rate exchange agreements has been recorded as a long-term
liability of $11.7 million at March 26, 2004. The Company's derivative
activities are for purposes other than trading.
The credit facility contains customary affirmative and negative covenants
that limit the Company's ability to incur additional indebtedness, pay
dividends on its common stock or redeem, repurchase or retire its common
stock or subordinated indebtedness, make certain investments, sell assets,
and consolidate, merge or transfer assets, and that require the Company to
maintain certain debt to cash flow and interest expense coverage ratios.
The Company was in compliance with all covenants at March 26, 2004.
In April 2003, the Company issued a non-recourse note payable in the
principal amount of $3.3 million for the purchase of an investment. This
note, which is secured only by the investment, bears interest at a rate of
4% per annum, with principal due in full in April 2010.
7
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The maturities of long-term debt subsequent to March 26, 2004 are as
follows:
2004 $ 5,250
2005 7,875
2006 11,375
2007 14,000
2008 15,750
Thereafter 285,525
----------------
$ 339,775
================
4. STOCK OPTION PLANS
During 2000, the Company established a Stock Award Plan, (the "2000
Plan"), under which the Company may award a total of 525,000 shares of
common stock in the form of incentive stock options, nonqualified stock
options, stock appreciation rights, or SARs, and restricted stock awards,
all of which may be awarded to directors, officers, key employees and
consultants. The exercise price per share for an incentive stock option
may not be less than 100% of the fair market value of a share of common
stock on the grant date. The exercise price per share for an incentive
stock option granted to a person owning stock possessing more than 10% of
the total combined voting power of all classes of stock may not be less
than 110% of the fair market value of a share of common stock on the
grant date, and may not be exercisable after the expiration of five years
from the date of grant. The options generally vest ratably over a
five-year period and may not be exercisable after the expiration of 10
years from the date of grant. The Company's compensation committee will
determine in its sole discretion whether a SAR is settled in cash, shares
or a combination of cash and shares.
A summary of the status of the Company's stock option plans is as
follows:
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE EXERCISE
OF SHARES PER SHARE PRICE PER SHARE
Outstanding at December 26, 2003 187,532 $ 0.50 - $20.33 $ 6.17
2004:
Granted 4,694 0.50 0.50
-------
Outstanding at March 26, 2004 192,226 $ 0.50 - $20.33 $ 6.06
=======
All stock options granted were at prices no less than the fair market
value of the common stock at the grant date.
The Company accounted for the option plans in accordance with APB Opinion
No. 25, under which no compensation cost has been recognized for stock
option awards.
Compensation cost for options granted which was determined based on the
estimated fair value at the grant date consistent with the method
prescribed by SFAS 123, did not have a material effect on net income. The
fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions used
for options granted in 2003 and 2004: dividend yield of 0%, expected
volatility of 0%, risk-free interest rate of 3.48% and 4.05% respectively,
and expected life of 5 years.
8
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
5. SUBSIDIARY GUARANTORS
The Company completed an offering of $200 million principal amount of
Senior Subordinated Notes in connection with its Refinancing Transactions.
The Company has filed a registration statement with the Securities and
Exchange Commission with respect to an exchange offer for the Senior
Subordinated Notes and with respect to resales of the Senior Subordinated
Notes by an affiliate of the Company for market-making purposes. The
registration statement has been declared effective by the SEC. The
Company's new Senior Subordinated Notes are fully and unconditionally
guaranteed, jointly and severally, on a subordinated basis by Wilmar
Holdings, Inc., Wilmar Financial, Inc., and Glenwood Acquisition LLC
(wholly-owned subsidiaries of Interline). The guarantees by these
subsidiary guarantors (the "Subsidiary Guarantors") will be senior to any
of their existing and future subordinated obligations, equal in right of
payment with any of their existing and future senior subordinated
indebtedness and subordinated to any of their existing and future senior
indebtedness. Accordingly, condensed consolidating financial statements for
Interline Brands, Inc. and the Subsidiary Guarantors are presented below.
9
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of March 26, 2004
- ---------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ -------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,072 $ 71 $ -- $ 14,143
Cash-restricted 1,000 -- -- 1,000
Accounts receivable - trade, net 92,092 -- -- 92,092
Accounts receivable - other 8,521 -- -- 8,521
Inventory 118,484 -- -- 118,484
Prepaid expenses and other current assets 3,652 7 -- 3,659
Deferred income taxes 10,382 -- -- 10,382
Due from Parent -- 46,086 (46,086) --
Investment in subsidiaries 66,151 -- (66,151) --
--------- --------- --------- ---------
Total current assets 314,354 46,164 (112,237) 248,281
PROPERTY AND EQUIPMENT, net 30,049 -- -- 30,049
GOODWILL 202,227 -- -- 202,227
OTHER INTANGIBLE ASSETS, net 89,366 -- -- 89,366
OTHER ASSETS 5,562 6,749 (3,451) 8,860
--------- --------- --------- ---------
TOTAL ASSETS $ 641,558 $ 52,913 $(115,688) $ 578,783
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ -- $ -- $ 7,000
Accounts payable 49,670 3 -- 49,673
Accrued expenses and other current liabilities 19,514 -- -- 19,514
Accrued interest payable 11,279 -- -- 11,279
Accrued merger expenses 4,651 -- -- 4,651
Income taxes payable (2,262) 3,400 -- 1,138
Due to subsidiaries 46,126 -- (46,126) --
--------- --------- --------- ---------
Total current liabilities 135,978 3,403 (46,126) 93,255
LONG-TERM LIABILITIES:
Deferred income taxes 22,746 -- -- 22,746
Interest rate swaps 11,691 -- -- 11,691
Long-term debt, net of current portion 329,500 3,275 -- 332,775
--------- --------- --------- ---------
TOTAL LIABILITIES 499,915 6,678 (46,126) 460,467
--------- --------- --------- ---------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000
shares authorized; 23,600,014 shares issued and outstanding 392,873 -- -- 392,873
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized,
5,373,660 shares issued and outstanding 1,994 -- -- 1,994
Additional paid-in-capital -- 43,285 (43,285) --
Accumulated deficit (275,558) 26,277 (26,277) (275,558)
Stockholder loans (1,533) -- -- (1,533)
Dividends 23,327 (23,327) -- --
Accumulated other comprehensive loss 540 -- -- 540
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (251,230) 46,235 (69,562) (274,557)
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 641,558 $ 52,913 $(115,688) $ 578,783
========= ========= ========= =========
10
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of December 26, 2003
- ---------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ -------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,527 $ 85 $ -- $ 1,612
Cash-restricted 1,000 -- -- 1,000
Accounts receivable - trade, net 83,684 -- -- 83,684
Accounts receivable - other 12,932 -- -- 12,932
Inventory 119,301 -- -- 119,301
Prepaid expenses and other current assets 4,255 5 -- 4,260
Deferred income taxes 10,318 -- -- 10,318
Due from Parent -- 43,259 (43,259) --
--------- --------- --------- ---------
Investment in subsidiaries 64,330 -- (64,330) --
Total current assets 297,347 43,349 (107,589) 233,107
PROPERTY AND EQUIPMENT, net 30,605 -- -- 30,605
GOODWILL 202,227 -- -- 202,227
OTHER INTANGIBLE ASSETS, net 90,632 -- -- 90,632
OTHER ASSETS 5,412 6,614 (3,315) 8,711
--------- --------- --------- ---------
TOTAL ASSETS $ 626,223 $ 49,963 $(110,904) $ 565,282
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ -- $ -- $ 7,000
Accounts payable 43,170 10 -- 43,180
Accrued expenses and other current liabilities 19,623 -- -- 19,623
Accrued interest payable 5,803 -- -- 5,803
Accrued merger expenses 4,739 -- -- 4,739
Income taxes payable (2,400) 2,400 -- --
Due to subsidiaries 43,299 -- (43,299) --
--------- --------- --------- ---------
Total current liabilities 121,234 2,410 (43,299) 80,345
LONG-TERM LIABILITIES:
Deferred income taxes 22,543 -- -- 22,543
Interest rate swaps 12,793 -- -- 12,793
Long-term debt, net of current portion 331,250 3,275 -- 334,525
--------- --------- --------- ---------
TOTAL LIABILITIES 487,820 5,685 (43,299) 450,206
--------- --------- --------- ---------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000
shares authorized; 23,600,014 shares issued and outstanding 379,612 -- -- 379,612
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized,
5,334,546 shares issued and outstanding 1,994 -- -- 1,994
Additional paid-in-capital -- 43,285 (43,285) --
Accumulated deficit (265,548) 24,320 (24,320) (265,548)
Stockholder loans (1,545) -- -- (1,545)
Dividends 23,327 (23,327) -- --
Accumulated other comprehensive loss 563 -- -- 563
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (241,209) 44,278 (67,605) (264,536)
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 626,223 $ 49,963 $(110,904) $ 565,282
========= ========= ========= =========
11
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended March 26, 2004
- ----------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ -------------
(In thousands)
NET SALES $ 172,604 $ -- $ -- $ 172,604
COST OF SALES 106,881 -- -- 106,881
--------- --------- --------- ---------
Gross profit 65,723 -- -- 65,723
OPERATING EXPENSES:
Selling, general and administrative expenses 48,252 5 -- 48,257
Depreciation and amortization 2,983 -- -- 2,983
--------- --------- --------- ---------
Total operating expenses 51,235 5 -- 51,240
--------- --------- --------- ---------
OPERATING INCOME 14,488 (5) -- 14,483
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 1,104 -- -- 1,104
INTEREST EXPENSE (13,021) -- 2,827 (10,194)
INTEREST INCOME 8 2,827 (2,827) 8
OTHER INCOME (EXPENSE) 136 136 (136) 136
EQUITY IN EARNINGS OF SUSIDIARIES 1,822 -- (1,822) --
--------- --------- --------- ---------
Income (loss) before income taxes 4,537 2,958 (1,958) 5,537
PROVISION FOR INCOME TAXES 1,286 1,000 -- 2,286
--------- --------- --------- ---------
NET INCOME (LOSS) 3,251 1,958 (1,958) 3,251
PREFERRED STOCK DIVIDENDS (13,261) -- -- (13,261)
--------- --------- --------- ---------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (10,010) $ 1,958 $ (1,958) $ (10,010)
========= ========= ========= =========
12
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended March 28, 2003
- ---------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ -------------
(In thousands)
NET SALES $ 154,864 $ -- $ -- $ 154,864
COST OF SALES 95,705 -- -- 95,705
--------- --------- --------- ---------
Gross profit 59,159 -- -- 59,159
OPERATING EXPENSES:
Selling, general and administrative expenses 41,541 8 -- 41,549
Depreciation and amortization 2,878 -- -- 2,878
Special costs and expenses 211 -- -- 211
--------- --------- --------- ---------
Total operating expenses 44,630 8 -- 44,638
--------- --------- --------- ---------
OPERATING INCOME 14,529 (8) -- 14,521
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 721 -- -- 721
INTEREST EXPENS (13,240) -- 3,600 (9,640)
INTEREST INCOME 37 3,600 (3,600) 37
EQUITY IN EARNINGS OF SUSIDIARIES 2,392 -- (2,392) --
--------- --------- --------- ---------
Income (loss) before income taxes 4,439 3,592 (2,392) 5,639
PROVISION FOR INCOME TAXES 943 1,200 -- 2,143
--------- --------- --------- ---------
NET INCOME (LOSS) 3,496 2,392 (2,392) 3,496
PREFERRED STOCK DIVIDENDS (11,561) -- -- (11,561)
--------- --------- --------- ---------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (8,065) $ 2,392 $ (2,392) $ (8,065)
========= ========= ========= =========
13
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended March 26, 2004
- ----------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ -------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 3,251 $ 1,958 $ (1,958) $ 3,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,983 -- -- 2,983
Amortization of debt issuance costs 487 -- -- 487
Accretion of discount on 16% senior subordinated notes -- -- -- --
Change in fair value of interest rate swaps (1,104) -- -- (1,104)
Interest on shareholder loans 12 -- -- 12
Deferred income taxes 140 -- -- 140
16% senior subordinated notes issued for interest due -- -- -- --
Equity in earnings of subsidiaries (1,958) -- 1,958 --
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable - trade (8,408) -- -- (8,408)
Accounts receivable - other 4,411 -- -- 4,411
Inventory 817 -- -- 817
Prepaid expenses and other current assets 604 (2) -- 602
Due from parent -- (2,826) 2,826 --
Other assets (14) (136) -- (150)
Accrued interest payable 5,477 -- -- 5,477
Accounts payable 6,501 (8) -- 6,493
Accrued expenses and other current liabilities 179 -- -- 179
Accrued merger expenses (88) -- -- (88)
Income taxes payable 138 1,000 -- 1,138
Due to subsidiaries 2,826 -- (2,826) --
-------- -------- -------- --------
Net cash provided by (used in) operating activities 16,254 (14) -- 16,240
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,429) -- -- (1,429)
Purchase of business, net of assets acquired (289) -- -- (289)
-------- -------- -------- --------
Net cash used in investing activities (1,718) -- -- (1,718)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Repayment of debt (1,750) -- -- (1,750)
Payment of debt issuance costs (218) -- -- (218)
-------- -------- -------- --------
Net cash used in financing activities (1,968) -- -- (1,968)
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (23) -- -- (23)
-------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,545 (14) -- 12,531
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,527 85 -- 1,612
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,072 $ 71 $ -- $ 14,143
======== ======== ======== ========
14
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended March 28, 2003
- ----------------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ -------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 3,496 $ 2,392 $ (2,392) $ 3,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,878 -- -- 2,878
Amortization of debt issuance costs 414 -- -- 414
Accretion and write off of discount on 16% senior subordinated notes 115 -- -- 115
Change in fair value of interest rate swaps (721) -- -- (721)
Interest on shareholder loans (26) -- -- (26)
Deferred income taxes 41 -- -- 41
16% senior subordinated notes issued for interest dues 716 -- -- 716
Equity in earnings of subsidiaries (2,392) -- 2,392 --
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable - trade (3,588) -- -- (3,588)
Accounts receivable - other 3,329 -- -- 3,329
Inventory 10,122 -- -- 10,122
Prepaid expenses and other current assets 1,154 2 -- 1,156
Other assets (547) -- -- (547)
Accrued interest payable 1,182 -- -- 1,182
Accounts payable (6,444) -- -- (6,444)
Accrued expenses and other current liabilities (1,002) 1 -- (1,001)
Accrued merger expenses (721) -- -- (721)
Due to subsidiaries 2,400 -- (2,400) --
Income taxes payable -- -- -- --
Due from parent -- (2,400) 2,400 --
-------- -------- -------- --------
Net cash provided by (used in) operating activities 10,406 (5) -- 10,401
INVESTING ACTIVITIES:
Purchase of property and equipment (1,578) -- -- (1,578)
-------- -------- -------- --------
Net cash used in investing activities (1,578) -- -- (1,578)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Increase in revolver and swingline, net (7,500) -- -- (7,500)
Repayment of long-term borrowing -- -- -- --
Payment of debt issuance costs -- -- -- --
-------- -------- -------- --------
Net cash used in financing activities (7,500) -- -- (7,500)
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 270 -- -- 270
-------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,598 (5) -- 1,593
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,459 98 -- 5,557
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,057 $ 93 $ -- $ 7,150
======== ======== ======== ========
15
ITEM 2.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN THIS QUARTERLY
REPORT, AND OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE SEC.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains forward-looking statements that are
subject to risks and uncertainties. You should not place undue reliance on those
statements because they are subject to numerous uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Forward-looking statements
include information concerning our possible or assumed future results of
operations, including descriptions of our business strategy. These statements
often include words such as "may," "believe," "expect," "anticipate," "intend,"
"plan," "estimate" or similar expressions. 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 quarterly 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:
o material facilities and systems disruptions and shutdowns,
o our ability to purchase products from suppliers on favorable
terms,
o product cost and price fluctuations due to market conditions,
o dependence on key employees,
o failure to locate and acquire acquisition candidates,
o our level of debt,
o interest rate fluctuations,
o future cash flows,
o the highly competitive nature of the maintenance, repair and
operations distribution industry,
o general market conditions,
o changes in consumer preferences,
o adverse publicity and litigation, and
o labor and benefit costs and
o the other factors listed under "Risk Factors" in our Annual
Report on Form 10-K filed with the SEC.
You should keep in mind that any forward-looking statement made by us
in this quarterly report speaks only as of the date on which we make it. New
risks and uncertainties arise from time to time, and it is impossible for us to
predict these events or how they may affect us. In light of these risks and
uncertainties, you should keep in mind that any forward-looking statement made
in this quarterly report might not occur.
OVERVIEW
We are a leading direct marketer and specialty distributor of
maintenance, repair and operations, or MRO, products, according to recent
industry publications. We sell plumbing, electrical, hardware, security
hardware, heating, ventilation and air conditioning, or HVAC, and other MRO
products. Our customer base includes multi-family housing, educational, lodging
and health care facilities, professional contractors and other distributors. Our
customers range in size from individual contractors and independent hardware
stores to large institutional real estate owners.
We market and sell our products primarily through eight distinct and
targeted brands. The product and service offerings of each brand are tailored to
the unique needs of the customer groups it serves. We reach our
16
markets using a variety of sales channels, including a direct sales force of
field sales representatives, telesales representatives, a direct mail program,
brand-specific e-commerce websites and a national accounts sales program.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make certain estimates, judgments and assumptions.
These estimates, judgments and assumptions affect the reported amounts of assets
and liabilities, including the disclosure of contingent assets and liabilities,
at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. On an ongoing basis, management evaluates
these estimates and assumptions. Management bases its estimates and assumptions
on historical experience and on various other factors that are believed to be
reasonable at the time the estimates and assumptions are made. Actual results
may differ from these estimates and assumptions under different circumstances or
conditions. The significant accounting policies that management and the audit
committee of our board of directors believe are the most critical in order to
fully understand and evaluate our financial position and results of operations
include the following policies.
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability to collect outstanding amounts from customers. The
allowances include specific amounts for those accounts that are likely to be
uncollectible, such as accounts of customers in bankruptcy and general
allowances for those accounts that management currently believes to be
collectible but later become uncollectible. Estimates are used to determine the
allowances for bad debts and are based on historical collection experience,
current economic trends, credit-worthiness of customers and changes in customer
payment terms. Adjustments to credit limits are made based upon payment history
and our customers' current credit-worthiness. If the financial condition of our
customers were to deteriorate, additional allowances may be needed which will
increase selling, general and administrative expenses and decrease accounts
receivable.
ESTIMATING ALLOWANCES FOR EXCESS AND OBSOLETE INVENTORY
Inventories are valued at the lower of cost or market. We maintain
allowances for excess and obsolete inventory and for the difference by which the
cost of the inventory exceeds the estimated market value. Changes to these
allowances are reflected in cost of sales in the period the revision is made. In
order to determine the allowances, management reviews inventory quantities on
hand, slow movement reports and sales history reports. Management estimates the
required reserve based on estimated demand for products and market conditions.
If actual market conditions are less favorable than those estimated by
management and if there is a decrease in demand for certain products, additional
allowances may be required which will increase cost of sales and decrease the
value of inventories.
IMPAIRMENT OF GOODWILL, INTANGIBLES AND OTHER LONG-LIVED ASSETS
Management assesses the recoverability of our goodwill, identifiable
intangibles and other long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (1) significant
underperformance relative to expected historical or projected future operating
results; (2) significant negative industry or economic trends; (3) a significant
increase in competition; and (4) a significant increase in interest rates on
debt. If the recoverability of these assets is unlikely because of the existence
of one or more of the above-mentioned factors, an impairment analysis is
performed using a projected discounted cash flow method. Management must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of these respective assets. If these estimates or related
assumptions change in the future, we may be required to record an impairment
charge. Impairment charges would be included in selling, general and
administrative expenses in our statements of operations, and would result in
reduced carrying amounts of the related assets in our balance sheets.
17
LEGAL CONTINGENCIES
From time to time, in the course of our business, we become involved in
legal proceedings. In accordance with SFAS 5 "Accounting for Contingencies," if
it is probable that, as a result of a pending legal claim, an asset had been
impaired or a liability had been incurred at the date of the financial
statements and the amount of the loss is estimable, an accrual for the costs to
resolve the claim is recorded in accrued expenses in our balance sheets.
Professional fees related to legal claims are included in general and
administrative expenses in our statements of operations. Management, with the
assistance of outside counsel, determines whether it is probable that a
liability from a legal claim has been incurred and estimates the amount of loss.
The analysis is based upon potential results, assuming a combination of
litigation and settlement strategies. Management does not believe that currently
pending proceedings will have a material adverse effect on our consolidated
financial position. It is possible, however, that future results of operations
for any particular period could be materially affected by changes in our
assumptions related to these proceedings.
DERIVATIVE FINANCIAL INSTRUMENTS
We periodically enter into derivative financial instruments, including
interest rate exchange agreements, or swaps, to manage exposure to fluctuations
in interest rates on our debt. Under our current swap agreements, we pay a fixed
rate on the notional amount to a bank and the bank pays us a variable rate on
the notional amount equal to a base LIBOR rate. Our existing interest rate swaps
do not qualify for hedge accounting under SFAS 133 "Accounting for Derivative
Statements and Hedging Activities," and are recorded at fair value in our
balance sheet with changes in the fair value reflected in non-operating expense.
The fair market value of these instruments is determined by quotes obtained from
the related counter parties. The valuation of these derivative instruments is a
significant estimate that is largely affected by changes in interest rates and
market volatility. If interest rates significantly increase or decrease or
interest rate volatility increases or decreases, the value of these instruments
will significantly change, resulting in an impact on our earnings.
RESULTS OF OPERATIONS
The following discussion refers to the term daily sales. Daily sales
are defined as sales for a period of time divided by the number of shipping days
in that period of time.
THREE MONTHS ENDED MARCH 26, 2004 COMPARED TO THREE MONTHS ENDED MARCH 28, 2003
OVERVIEW. First quarter 2004 demand in the facilities maintenance and
professional contractor markets improved compared to the same period in 2003. As
a distributor of a wide range of plumbing, electrical and hardware products, we
are affected by price fluctuations in raw materials such as stainless steel,
copper, aluminum, plastic and other related commodities. During the first
quarter of 2004, commodity prices rose significantly, which contributed to our
sales and gross profit growth during the period. In addition, electrical and
specialty lighting sales stemming from our November 2003 acquisition of Florida
Lighting contributed to our quarter over quarter double-digit sales growth. Our
operating income as a percentage of net sales in the first quarter was lower
than the prior year period by approximately 100 basis points, reflecting our
continued investment in new sales and marketing initiatives, such as our
national accounts program, expansion of our field sales and telesales networks,
increased incentive compensation costs, and the opening of two contractor
showrooms. Higher distribution costs related to increases in fuel prices during
the quarter also contributed to increased costs.
NET SALES. Our net sales increased by $17.7 million, or 11.5%, to
$172.6 million in the three months ended March 2004 from $154.9 million in the
three months ended March 2003. Daily sales were $2.7 million in the three months
ended March 2004 and $2.4 million in the three months ended March 2003. During
the third quarter of 2003, we reclassified freight costs paid by our customers
("freight revenue") from selling, general and administrative expenses to net
sales. This reclassification did not have an effect on operating income.
However, on a prospective basis it increases both net sales and selling, general
and administrative costs. The effect of this reclassification for the three
months ended March 2004 was $1.5 million. After adjusting for the effect of this
freight reclassification and the Florida Lighting acquisition, which occurred at
the end of November 2003, our sales for the first quarter of 2004 increased
approximately 5.2% over the prior year
18
period. This increase in sales was associated with higher demand for our
products in most of our markets as well as commodity related price increases.
GROSS PROFIT. Gross profit increased by $6.6 million, or 11.1%, to
$65.7 million in the three months ended March 2004 from $59.1 million in the
three months ended March 2003. Gross profit margins decreased to 38.1% for the
three months ended March 2004 from 38.2% for the three months ended March 2003.
This decline was primarily due to product mix and, more specifically, an
increase in commodity product sales as a percentage of total sales in the
quarter. Commodity products are typically sold at lower gross margins than our
other products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, or SG&A expenses, increased by $6.7 million, or 16.1%,
to $48.3 million in the three months ended March 2004 from $41.5 million in the
three months ended March 2003. Excluding the effect of the freight
reclassification and the Florida Lighting acquisition referenced above, SG&A
expenses increased $2.4 million, or 5.7%. This increase was primarily due to
higher payroll and fringe benefits costs associated with our investment in new
sales and marketing initiatives.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $0.1 million, or 3.6%, to $3.0 million in the three months ended
March 2004 from $2.9 million in the three months ended March 2003. This was
primarily due to a change in accounting estimate made in the third quarter of
2003 to change the estimated useful life of certain acquired customer lists to
17 years.
SPECIAL COSTS AND EXPENSES. There were no special costs and expenses
during the three months ended March 2004 and $0.2 million in the three months
ended March 2003. Special costs and expenses consisted of non-recurring costs
incurred in connection with our acquisition of Barnett. This decrease was due to
the fact that the consolidation of the Barnett Acquisition is substantially
completed.
OPERATING INCOME. As a result of the foregoing, operating income
remained relatively level at $14.5 million in the three months ended March 2004
and 2003.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded a gain of $1.1
million in the three months ended March 2004 and $0.7 million in the three
months ended March 2003 related to changes in the market value of our interest
rate swap instruments. The non-cash gains were attributable to changes in market
conditions, including but not limited to fluctuations in interest rates, general
market volatility, and the remaining tenor of our instruments.
INTEREST EXPENSE. Interest expense increased by $0.6 million in the
three months ended March 2004 to $10.2 million from $9.6 million in the three
months ended March 2003. This increase was attributable to higher average debt
balances and incrementally higher interest costs associated with our entry into
a new credit facility and issuance of $200.0 million aggregate principal amount
11.5% senior subordinated notes due 2011, or the 11.5% notes, in May 2003 as
part of the Refinancing Transactions (described in Liquidity and Capital
Resources).
PROVISION FOR INCOME TAXES. The provision for income taxes was $2.3
million in the three months ended March 2004 compared to $2.1 million in the
three months ended March 2003. The effective tax rate for the three months ended
March 2004 was 41.3% compared to 38.0% in the three months ended March 2003. The
increase in the effective tax rate was due primarily to an increase in state
taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 26, 2004, we had approximately $60.0 million of
availability under our $65.0 million revolving credit facility. Historically,
our capital requirements have been for debt service obligations, acquisitions,
the expansion and maintenance of our distribution network, upgrades of our
proprietary information systems software and working capital requirements. We
expect this to continue in the foreseeable future. Historically, we have funded
these requirements through internally generated cash flow and funds borrowed
under our credit facility. We expect our cash flow from operations and the loan
availability under our credit facility to be our primary source of funds in the
future. Letters of credit, which are issued under the revolving loan facility
under our credit facility, will be used to support payment obligations incurred
for our general corporate purposes. As of
19
March 26, 2004, we had $5.0 million of letters of credit issued under the credit
facility. With respect to borrowings under our credit facility, we have the
option to borrow at an adjusted LIBOR or an alternative base rate. Interest on
the credit facility is payable quarterly, and with respect to any LIBOR
borrowings, on the last day of the interest period applicable to the term of the
borrowing.
Net cash provided by operating activities was $16.2 million in the
three months ended March 2004 compared to $10.4 million in the comparable period
for the prior year. Net cash provided by operating activities in the three
months ended March 2004 was higher than the prior year period as a result of
changes in the timing of required interest payments associated with paying
interest on our 11.5% notes on a semi-annual basis in the current period as
opposed to our 16% senior subordinated notes due 2008 on a quarterly basis in
the prior year period, as well as improved working capital trends.
Net cash used in investing activities was $1.7 million in the three
months ended March 2004 compared to $1.6 million in the three months ended March
2003. Net cash used in investing activities in the three months ended March 2004
and March 2003 was primarily attributable to capital expenditures made in the
ordinary course of business.
Net cash used in financing activities totaled $2.0 million in the three
months ended March 2004 compared to net cash used in financing activities of
$7.5 million in the three months ended March 2003. Net cash used in financing
activities in the three months ended March 2004 was primarily attributable to
the repayment of debt. Net cash used in financing activities in the three months
ended March 2003 was attributable to repayment of borrowings against our former
revolving credit facility.
We issued $200.0 million aggregate principal amount of our 11.5% notes
in May 2003 as part of the Refinancing Transactions as follows. On May 29, 2003,
we entered into a new $205.0 million senior secured credit facility which
consists of a $140.0 million term loan facility and a $65.0 million revolving
loan facility. The net proceeds from the offering of the 11.5% notes and the
refinancing of our former credit facility with a new credit facility were used
to: (1) repay all outstanding indebtedness under our former credit facility, (2)
redeem all of our outstanding 16% senior subordinated notes due 2008, (3) pay
accrued interest and related redemption premiums on our former debt and (4) pay
transaction fees and expenses related to the offering and the new credit
facility. We refer to these transactions collectively as the "Refinancing
Transactions". As of March 26, 2004, our total indebtedness was $344.8 million
(of which $5.0 million was outstanding in the form of letters of credit), and
our senior indebtedness was $141.5 million. On December 19, 2003 we amended our
senior credit facility such that with respect to any term loans, the applicable
rate was reduced from LIBOR plus 4.5% to LIBOR plus 3.5%.
Capital expenditures were $1.4 million in the three months ended March
2004 compared to $1.6 million in the three months ended March 2003. Capital
expenditures as a percentage of sales were 0.8% in the three months ended March
2004 and 1.0% in the three months ended March 2003.
Our principal working capital need is for inventory and trade accounts
receivable, which have generally increased with the growth in our business. Our
principal sources of cash to fund our working capital needs are cash generated
from operating activities and borrowings under our revolving credit facility.
We believe that cash flow from operations and available borrowing
capacity under our credit facility will be adequate to finance our ongoing
operational cash flow needs and debt service obligations for the next twelve
months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Periodically, we enter into derivative financial instruments, including
interest rate exchange agreements, or swaps, to manage our exposure to
fluctuations in interest rates on our debt. Under our existing swaps, we pay a
fixed rate on the notional amount to our banks and the banks pays us a variable
rate on the notional amount equal to a base LIBOR rate. The total notional
amount of these transactions was $151.0 million at March 26, 2004. These
agreements, which mature between April and October of 2005, effectively fix the
interest at a weighted average rate of 6.56%. In the three months ended March
26, 2004 we have recognized a non-cash gain of $1.1 million from the change in
value of our interest rate swaps. This increase in value of
20
the interest rate swaps is attributable to changes in market conditions
including, but not limited to, fluctuations in interest rates, general market
volatility, and the remaining tenor of our instruments.
Periodically, we perform an analysis to determine the effect on
interest expense of instantaneous and sustained parallel shifts in interest
rates of plus or minus 100 basis points over a period of twelve months. As of
March 26, 2004, this analysis reflected that a 100 basis point change in
interest rates would have resulted in a change in the fair value of the interest
rate swaps of approximately $2.3 million. While this simulation is a useful
measure of our sensitivity to changing rates, it is not a forecast of the future
results and is based on many assumptions that, if changed, could cause a
different outcome. In addition, a change in U.S. Treasury rates in the
designated amounts accompanied by a change in the shape of the Treasury yield
curve would cause significantly different changes to net interest income than
indicated above.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and principal
financial officer), evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of March 26, 2004. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of March 26, 2004, our disclosure
controls and procedures were (1) designed to ensure that material information
relating to us, including our consolidated subsidiaries, is made known to our
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being prepared
and (2) effective, in that they provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended March 26, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that have arisen in the
ordinary course of our business and have not been fully adjudicated. These
actions, when ultimately concluded and determined, will not, in the opinion of
management, have a material effect upon our consolidated financial position,
results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
The following exhibits are being filed as part of this Quarterly Report
on Form 10-Q:
10.25 Employment Agreement dated as of January 7, 2004 by and
between Interline Brands, Inc. and Fred Bravo
10.26 Employment Agreement dated as of January 7, 2004 by and
between Interline Brands, Inc. and Pamela L. Maxwell
31.1 Certification of Michael J. Grebe as President and Chief
Executive Officer of Interline Brands, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of William E. Sanford as Executive Vice
President and Chief Financial Officer of Interline Brands,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
b. REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERLINE BRANDS, INC.
BY: /s/ William E. Sanford
--------------------------------------
William E. Sanford
Executive Vice President, Chief
Financial Officer and Secretary
(Duly Authorized Signatory and
Principal Financial Officer)
Date: May 10, 2004
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