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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 JUNE 25, 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 August 9, 2004, there were 5,399,736
shares outstanding of the registrant's common stock, no par value.
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 25, 2004
and December 26, 2003...................................................1
Unaudited Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 25, 2004 and June 27, 2003........2
Unaudited Condensed Consolidated Statement of Stockholders'
Equity (Deficiency) for the Six Months Ended June 25, 2004.......................3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 25, 2004 and June 27, 2003.........................4
Notes to Unaudited Condensed Consolidated Financial
Statements.......................................................................5
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations............................................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........................24
Item 4. Controls and Procedures..............................................................24
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................................25
SIGNATURES......................................................................................26
i
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 25, 2004 AND DECEMBER 26, 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 25, December 26,
2004 2003
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,871 $ 1,612
Cash - restricted 1,000 1,000
Accounts receivable - trade (net of allowance for doubtful accounts
of $6,482 and $6,316) 104,023 83,684
Accounts receivable - other 9,286 12,932
Inventory 133,919 119,301
Prepaid expenses and other current assets 4,119 4,260
Deferred income taxes 9,178 10,318
--------- ---------
Total current assets 265,396 233,107
PROPERTY AND EQUIPMENT, net 29,873 30,605
GOODWILL 202,534 202,227
OTHER INTANGIBLE ASSETS, net 87,927 90,632
OTHER ASSETS 8,898 8,711
--------- ---------
TOTAL ASSETS $ 594,628 $ 565,282
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Revolver $ 4,500 $ --
Current portion of long-term debt 7,000 7,000
Accounts payable 61,484 43,180
Accrued expenses and other current liabilities 20,874 19,623
Current portion of interest rate swaps 3,229 --
Accrued interest payable 5,469 5,803
Accrued merger expenses 4,556 4,739
Income taxes payable 742 --
--------- ---------
Total current liabilities 107,854 80,345
LONG-TERM LIABILITIES:
DEFERRED INCOME TAXES 25,697 22,543
INTEREST RATE SWAPS 4,867 12,793
LONG-TERM DEBT, NET OF CURRENT PORTION 331,025 334,525
--------- ---------
TOTAL LIABILITIES 469,443 450,206
--------- ---------
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 406,596 379,612
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized; 5,399,736
and 5,334,546 shares issued and outstanding 1,994 1,994
Accumulated deficit (282,324) (265,548)
Stockholder loans (1,551) (1,545)
Accumulated other comprehensive income 470 563
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (281,411) (264,536)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 594,628 $ 565,282
========= =========
SEE ACCOMPANYING NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
1
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 25, 2004 June 27, 2003 June 25, 2004 June 27, 2003
------------- ------------- ------------- -------------
NET SALES $ 185,379 $ 159,686 $ 357,983 $ 314,550
COST OF SALES 114,434 99,228 221,315 194,933
--------- --------- --------- ---------
Gross profit 70,945 60,458 136,668 119,617
--------- --------- --------- ---------
OPERATING EXPENSES :
Selling, general and administrative expenses 50,081 41,433 98,338 82,979
Depreciation and amortization 3,443 2,740 6,426 5,622
Special costs and expenses -- 167 -- 378
--------- --------- --------- ---------
Total operating expense 53,524 44,340 104,764 88,979
--------- --------- --------- ---------
OPERATING INCOME 17,421 16,118 31,904 30,638
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS 3,594 362 4,698 1,083
LOSS ON EXTINGUISHMENT OF DEBT -- (14,893) -- (14,893)
INTEREST EXPENSE (10,100) (10,190) (20,294) (19,828)
INTEREST INCOME 25 44 33 80
OTHER INCOME (EXPENSE) 45 (8) 181 (8)
--------- --------- --------- ---------
Income (loss) before income taxes 10,985 (8,567) 16,522 (2,928)
PROVISION (BENEFIT) FOR INCOME TAXES 4,028 (3,141) 6,314 (998)
--------- --------- --------- ---------
NET INCOME (LOSS) 6,957 (5,426) 10,208 (1,930)
PREFERRED STOCK DIVIDENDS (13,723) (11,964) (26,984) (23,525)
--------- --------- --------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (6,766) $ (17,390) $ (16,776) $ (25,455)
========= ========= ========= =========
LOSS PER COMMON SHARE - BASIC $ (1.25) $ (3.23) $ (3.11) $ (4.73)
========= ========= ========= =========
LOSS PER COMMON SHARE - DILUTED $ (1.25) $ (3.23) $ (3.11) $ (4.73)
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
INTERLINE BRANDS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)(UNAUDITED)
SIX MONTHS ENDED JUNE 25, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
Retained Accumulated Total
Earnings Other Stockholders'
Common Stock Stockholder (Accumulated Comprehensive Equity
Shares Amount Loans Deficit) Income (Loss) (Deficiency)
--------- --------- ------------ ------------ ------------ -------------
BALANCE, DECEMBER 26, 2003 5,334,546 $ 1,994 $ (1,545) $ (265,548) $ 563 $ (264,536)
Preferred dividends -- -- -- (26,984) -- (26,984)
Interest on shareholder notes -- -- (6) -- -- (6)
Issuance of restricted stock 65,190 -- -- -- -- --
Comprehensive income:
Net income -- -- -- 10,208 -- --
Foreign currency translation -- -- -- -- (93) --
Total comprehensive income -- -- -- -- -- 10,115
--------- --------- ---------- ---------- --------- ----------
BALANCE, JUNE 25, 2004 5,399,736 $ 1,994 $ (1,551) $ (282,324) $ 470 $ (281,411)
========= ========= ========== ========== ========= ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
INTERLINE BRANDS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003
(IN THOUSANDS)
Six Months Ended
June 25, 2004 June 27, 2003
------------- -------------
OPERATING ACTIVITIES:
Net income $ 10,208 $ (1,930)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,426 5,622
Amortization and write-off of debt issuance costs 957 7,434
Accretion and write-off of discount on 16% senior subordinated notes -- 4,410
Redemption premium on 16% senior subordinated notes -- 3,879
Change in fair value of interest rate swaps (4,697) (1,083)
Loss on disposal of property and equipment -- 3
Interest income on stockholder notes (6) (52)
Deferred income taxes 4,294 (1,569)
16% senior subordinated notes issued for interest due -- 1,674
Changes in assets and liabilities, net of effects of acquisition:
Cash - restricted -- 329
Accounts receivable - trade (20,339) (6,430)
Accounts receivable - other 3,646 4,759
Inventory (14,618) 17,908
Prepaid expenses and other current assets 141 (2,060)
Other assets (100) (368)
Accrued interest payable (334) (356)
Accounts payable 18,304 (9,743)
Accrued expenses and other current liabilities 1,369 (777)
Accrued merger expenses (183) (806)
Income taxes payable 742 --
--------- ---------
Net cash provided by operating activities 5,810 20,844
--------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,692) (2,559)
Purchase of businesses, net of cash acquired (459) (3,787)
--------- ---------
Net cash used in investing activities (4,151) (6,346)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in revolver and swingline, net 4,500 (18,500)
Repayment of debt (3,500) (317,487)
Proceeds from refinancing transactions -- 340,000
Payment of debt issuance and offering costs (307) (11,763)
--------- ---------
Net cash provided by (used in) financing activities 693 (7,750)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (93) 689
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,259 7,437
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,612 5,557
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,871 $ 12,994
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 19,444 $ 17,523
========= =========
Income taxes (net of refunds) $ 424 $ 1,228
========= =========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Dividends on preferred stock $ 26,984 $ 23,525
========= =========
Note issued for purchase of investment $ -- $ 3,275
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial
statements of Interline Brands, Inc. ("Interline" or the "Company") have
been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules and regulations of the
Securities and Exchange Commission, which apply to interim financial
statements. These unaudited condensed consolidated financial statements do
not include all disclosures provided in the annual financial statements and
notes thereto contained in the annual report on form 10-K for Interline
Brands, Inc. for the year ended December 26, 2003 as filed with the
Securities and Exchange Commission on March 25, 2004. All adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented have been recorded. The results
of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
The 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 and six month periods ended June 25, 2004 and
June 27, 2003 by product category were approximately (in millions):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
PRODUCT CATEGORY JUNE 25, 2004 JUNE 27, 2003 JUNE 25, 2004 JUNE 27, 2003
---------------- ------------- ------------- ------------- -------------
Plumbing......................... $81.7 $75.1 $161.1 $151.0
Electrical....................... 26.1 17.6 53.7 34.6
Security Hardware................ 13.0 12.8 25.1 25.2
Hardware......................... 11.1 11.2 21.5 22.0
Appliances and Parts............. 11.1 9.6 21.5 18.9
HVAC............................. 16.4 11.2 25.0 18.9
Other............................ 26.0 22.2 50.1 44.0
------ ------ ------ ------
Total......................... $185.4 $159.7 $358.0 $314.6
====== ====== ====== ======
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
The amounts used in calculating net income (loss) per share data are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2004 2003 2004 2003
-------- --------- --------- ---------
Net Income $ 6,957 $ (5,426) $ 10,208 $ (1,930)
Preferred stock dividends (13,723) (11,964) (26,984) (23,525)
-------- --------- --------- ---------
Net loss applicable to common stockholders $ (6,766) $ (17,390) $ (16,776) $ (25,455)
======== ========= ========= =========
Weighted average shares outstanding - basic 5,400 5,385 5,400 5,385
Effect of dilutive stock options -- -- -- --
-------- --------- --------- ---------
Weighted average shares outstanding - diluted 5,400 5,385 5,400 5,385
======== ========= ========= =========
Options to purchase 191,052 and 177,788 shares of common stock which were
outstanding at June 25, 2004 and June 27, 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 June 25, 2004 and December 26, 2003 consists of the
following:
June 25, December 26,
2004 2003
--------- -----------
Term Loan $ 134,750 $ 138,250
Note payable 3,275 3,275
11.5% Senior Subordinated Notes 200,000 200,000
--------- ---------
338,025 341,525
Less current portion (7,000) (7,000)
--------- ---------
$ 331,025 $ 334,525
========= =========
6
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER 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 June 25, 2004 ranged from 4.86% 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 June 25, 2004, the Company had $7.0 million of letters of credit
issued and $47.8 million available under the revolving loan facility. There
was $4.5 million in borrowings outstanding under the revolving loan
facility at June 25, 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 June 25, 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%. Our existing interest rate exchange
agreements do not qualify for hedge accounting under SFAS 133 "Accounting
for Derivative Instruments 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 market value of the outstanding interest rate
exchange agreements of $8.1 million has been recorded as current portion of
interest rate swaps of $3.2 million and long-term liability of $4.9 million
at June 25, 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 June 25, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
The maturities of long-term debt subsequent to June 25, 2004 are as
follows:
2004 $ 5,250
2005 6,125
2006 11,375
2007 14,000
2008 15,750
Thereafter 285,525
-----------
$ 338,025
===========
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 estimated 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 estimated 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
Cancelled (1,174) 0.50 0.50
---------
Outstanding at June 25, 2004 191,052 $ 0.50 - $ 20.33 $ 6.06
=========
All stock options granted were at prices no less than the estimated fair
market value of the common stock at the grant date.
The Company accounts 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE PER 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 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 resale's 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. These guarantor
subsidiaries constitute all of the Company's direct and indirect
subsidiaries and the separate financial statements of the guarantor
subsidiaries are not presented because management determined they would be
immaterial to investors. 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 JUNE 25, 2004
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands, except share and per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,801 $ 70 $ -- $ 3,871
Cash-restricted 1,000 -- -- 1,000
Accounts receivable - trade, net 104,023 -- -- 104,023
Accounts receivable - other 9,286 -- -- 9,286
Inventory 133,919 -- -- 133,919
Prepaid expenses and other current assets 4,114 5 -- 4,119
Deferred income taxes 9,178 -- -- 9,178
Due from Parent -- 43,111 (43,111) --
Investment in subsidiaries 68,298 -- (68,298) --
--------- --------- --------- ---------
Total current assets 333,619 43,186 (111,409) 265,396
PROPERTY AND EQUIPMENT, net 29,873 -- -- 29,873
GOODWILL 202,534 -- -- 202,534
OTHER INTANGIBLE ASSETS, net 87,927 -- -- 87,927
OTHER ASSETS 5,599 6,795 (3,496) 8,898
--------- --------- --------- ---------
TOTAL ASSETS $ 659,552 $ 49,981 $(114,905) $ 594,628
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Revolver $ 4,500 $ -- $ -- $ 4,500
Current portion of long-term debt 7,000 -- -- 7,000
Accounts payable 61,483 1 -- 61,484
Accrued expenses and other current liabilities 20,874 -- -- 20,874
Current portion of interest rate swaps 3,229 -- -- 3,229
Accrued interest payable 5,469 -- -- 5,469
Accrued merger expenses 4,556 -- -- 4,556
Income taxes payable (3,658) 4,400 -- 742
Due to subsidiaries 43,151 -- (43,151) --
--------- --------- --------- ---------
Total current liabilities 146,604 4,401 (43,151) 107,854
LONG-TERM LIABILITIES:
Deferred income taxes 25,697 -- -- 25,697
Interest rate swaps 4,867 -- -- 4,867
Long-term debt, net of current portion 327,750 3,275 -- 331,025
--------- --------- --------- ---------
TOTAL LIABILITIES 504,918 7,676 (43,151) 469,443
--------- --------- --------- ---------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000
shares authorized; 23,600,014 shares issued and outstanding 406,596 -- -- 406,596
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized,
5,399,736 shares issued and outstanding 1,994 -- -- 1,994
Additional paid-in-capital -- 43,285 (43,285) --
Accumulated deficit (282,324) 28,469 (28,469) (282,324)
Stockholder loans (1,551) -- -- (1,551)
Dividends 29,449 (29,449) -- --
Accumulated other comprehensive loss 470 -- -- 470
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (251,962) 42,305 (71,754) (281,411)
TOTAL LIABILITIES AND STOCKHOLDERS' $ 659,552 $ 49,981 $(114,905) $ 594,628
EQUITY (DEFICIENCY) ========= ========= ========= =========
10
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of December 26, 2003
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands, except share and per share data)
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' $ 626,223 $ 49,963 $(110,904) $ 565,282
EQUITY (DEFICIENCY) ========= ========= ========= =========
11
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 25, 2004
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands, except share and per share data)
NET SALES $ 185,379 $ -- $ -- $ 185,379
COST OF SALES 114,434 -- -- 114,434
--------- --------- --------- ---------
Gross profit 70,945 -- -- 70,945
OPERATING EXPENSES:
Selling, general and administrative expenses 50,078 3 -- 50,081
Depreciation and amortization 3,443 -- -- 3,443
--------- --------- --------- ---------
Total operating expenses 53,521 3 -- 53,524
--------- --------- --------- ---------
OPERATING INCOME 17,424 (3) -- 17,421
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 3,594 -- -- 3,594
INTEREST EXPENSE (13,249) -- 3,149 (10,100)
INTEREST INCOME 25 3,149 (3,149) 25
OTHER INCOME 45 45 (45) 45
EQUITY IN EARNINGS OF SUSIDIARIES 2,146 -- (2,146) --
--------- --------- --------- ---------
Income before income taxes 9,985 3,191 (2,191) 10,985
PROVISION FOR INCOME TAXES 3,028 1,000 -- 4,028
--------- --------- --------- ---------
NET INCOME 6,957 2,191 (2,191) 6,957
PREFERRED STOCK DIVIDENDS (13,723) -- -- (13,723)
--------- --------- --------- ---------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (6,766) $ 2,191 $ (2,191) $ (6,766)
========= ========= ========= =========
12
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 27, 2003
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands, except share and per share data)
NET SALES $ 159,686 $ -- $ -- $ 159,686
COST OF SALES 99,228 -- -- 99,228
--------- --------- --------- ---------
Gross profit 60,458 -- -- 60,458
OPERATING EXPENSES:
Selling, general and administrative expenses 41,418 15 -- 41,433
Depreciation and amortization 2,740 -- -- 2,740
Special costs and expenses 167 -- -- 167
--------- --------- --------- ---------
Total operating expenses 44,325 15 -- 44,340
--------- --------- --------- ---------
OPERATING INCOME 16,133 (15) -- 16,118
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 362 -- -- 362
EARLY EXTINGUISHMENT OF DEBT (14,893) -- -- (14,893)
INTEREST EXPENSE (13,812) -- 3,622 (10,190)
INTEREST INCOME 44 3,622 (3,622) 44
OTHER EXPENSE (8) (8) 8 (8)
EQUITY IN EARNINGS OF SUSIDIARIES 2,307 -- (2,307) --
--------- --------- --------- ---------
(Loss) Income before income taxes (9,867) 3,599 (2,299) (8,567)
(BENEFIT) PROVISION FOR INCOME TAXES (4,441) 1,300 -- (3,141)
--------- --------- --------- ---------
NET (LOSS) INCOME (5,426) 2,299 (2,299) (5,426)
PREFERRED STOCK DIVIDENDS (11,964) -- -- (11,964)
--------- --------- --------- ---------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (17,390) $ 2,299 $ (2,299) $ (17,390)
========= ========= ========= =========
13
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 25, 2004
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands, except share and per share data)
NET SALES $ 357,983 $ -- $ -- $ 357,983
COST OF SALES 221,315 -- -- 221,315
--------- --------- --------- ---------
Gross profit 136,668 -- -- 136,668
OPERATING EXPENSES:
Selling, general and administrative expenses 98,329 8 -- 98,337
Depreciation and amortization 6,427 -- -- 6,427
--------- --------- --------- ---------
Total operating expenses 104,756 8 -- 104,764
--------- --------- --------- ---------
OPERATING INCOME 31,912 (8) -- 31,904
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 4,698 -- -- 4,698
INTEREST EXPENSE (26,270) -- 5,976 (20,294)
INTEREST INCOME 33 5,976 (5,976) 33
OTHER INCOME 181 181 (181) 181
EQUITY IN EARNINGS OF SUSIDIARIES 3,968 -- (3,968) --
--------- --------- --------- ---------
Income before income taxes 14,522 6,149 (4,149) 16,522
PROVISION FOR INCOME TAXES 4,314 2,000 -- 6,314
--------- --------- --------- ---------
NET INCOME 10,208 4,149 (4,149) 10,208
PREFERRED STOCK DIVIDENDS (26,984) -- -- (26,984)
--------- --------- --------- ---------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (16,776) $ 4,149 $ (4,149) $ (16,776)
========= ========= ========= =========
14
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 27, 2003
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands, except share and per share data)
NET SALES $ 314,550 $ -- $ -- $ 314,550
COST OF SALES 194,933 -- -- 194,933
--------- --------- --------- ---------
Gross profit 119,617 -- -- 119,617
OPERATING EXPENSES:
Selling, general and administrative expenses 82,956 23 -- 82,979
Depreciation and amortization 5,622 -- -- 5,622
Special costs and expenses 378 -- -- 378
--------- --------- --------- ---------
Total operating expenses 88,956 23 -- 88,979
--------- --------- --------- ---------
OPERATING INCOME 30,661 (23) -- 30,638
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS 1,083 -- -- 1,083
EARLY EXTINGUISHMENT OF DEBT (14,893) -- -- (14,893)
INTEREST EXPENSE (27,050) -- 7,222 (19,828)
INTEREST INCOME 80 7,222 (7,222) 80
OTHER (EXPENSE) (8) (8) 8 (8)
EQUITY IN EARNINGS OF SUSIDIARIES 4,699 -- (4,699) --
--------- --------- --------- ---------
(Loss) income before income taxes (5,428) 7,191 (4,691) (2,928)
(BENEFIT) PROVISION FOR INCOME TAXES (3,498) 2,500 -- (998)
--------- --------- --------- ---------
NET (LOSS) INCOME (1,930) 4,691 (4,691) (1,930)
PREFERRED STOCK DIVIDENDS (23,525) -- -- (23,525)
--------- --------- --------- ---------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (25,455) $ 4,691 $ (4,691) $ (25,455)
========= ========= ========= =========
15
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 25, 2004
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
------- ---------- ----------- ------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 10,208 $ 4,149 $ (4,149) $ 10,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,426 -- -- 6,426
Amortization of debt issuance costs 957 -- -- 957
Change in fair value of interest rate swaps (4,697) -- -- (4,697)
Interest on shareholder loans (6) -- -- (6)
Deferred income taxes 4,294 -- -- 4,294
Equity in earnings of subsidiaries (4,149) -- 4,149 --
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable - trade (20,339) -- -- (20,339)
Accounts receivable - other 3,646 -- -- 3,646
Inventory (14,618) -- -- (14,618)
Prepaid expenses and other current assets 141 -- -- 141
Due from parent -- (5,975) 5,975 --
Other assets 81 (181) -- (100)
Accrued interest payable (334) -- -- (334)
Accounts payable 18,312 (8) -- 18,304
Accrued expenses and other current liabilities 1,369 -- -- 1,369
Accrued merger expenses (183) -- -- (183)
Income taxes payable (1,258) 2,000 -- 742
Due to subsidiaries 5,975 -- (5,975) --
-------- -------- -------- --------
Net cash provided by (used in) operating activities 5,825 (15) -- 5,810
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,692) -- -- (3,692)
Purchase of business, net of assets acquired (459) -- -- (459)
-------- -------- -------- --------
Net cash used in investing activities (4,151) -- -- (4,151)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Increase in revolver and swingline, net 4,500 -- -- 4,500
Repayment of debt (3,500) -- -- (3,500)
Payment of debt issuance and offering costs (307) -- -- (307)
-------- -------- -------- --------
Net cash provided by financing activities 693 -- -- 693
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (93) -- -- (93)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,274 (15) -- 2,259
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,527 85 -- 1,612
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,801 $ 70 $ -- $ 3,871
======== ======== ======== ========
16
5. SUBSIDIARY GUARANTORS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 27, 2003
- --------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ (1,930) $ 4,692 $ (4,692) $ (1,930)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,622 -- -- 5,622
Amortization and write-off of debt issuance costs 7,434 -- -- 7,434
Accretion and write off of discount on 16% senior subordinated notes 4,410 -- -- 4,410
Redemption premium on 16% senior subordinated notes 3,879 -- -- 3,879
Change in fair value of interest rate swaps (1,083) -- -- (1,083)
Loss on disposal of property and equipment 3 -- -- 3
Interest on shareholder loans (52) -- -- (52)
Deferred income taxes (1,569) -- -- (1,569)
16% senior subordinated notes issued for interest dues 1,674 -- -- 1,674
Equity in earnings of subsidiaries (4,692) -- 4,692 --
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable - trade (6,430) -- -- (6,430)
Accounts receivable - other 4,759 -- -- 4,759
Inventory 17,908 -- -- 17,908
Prepaid expenses and other current assets (2,072) 12 -- (2,060)
Other assets (368) -- -- (368)
Accrued interest payable (356) -- -- (356)
Accounts payable (9,743) -- -- (9,743)
Cash - restricted 329 -- -- 329
Accrued expenses and other current liabilities (779) 2 -- (777)
Accrued merger expenses (806) -- -- (806)
Due to subsidiaries 4,712 -- (4,712) --
Due from parent -- (4,712) 4,712 --
--------- ------- -------- ---------
Net cash provided by (used in) operating activities 20,850 (6) -- 20,844
--------- ------- -------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,559) -- -- (2,559)
Purchase of businesses, net of cash acquired (512) (3,275) -- (3,787)
--------- ------- -------- ---------
Net cash used in investing activities (3,071) (3,275) -- (6,346)
--------- ------- -------- ---------
FINANCING ACTIVITIES:
Decrease in revolver and swingline, net (18,500) -- -- (18,500)
Repayment of long-term borrowing (317,487) -- -- (317,487)
Proceeds from refinancing transactions 340,000 -- -- 340,000
Payment of debt issuance costs (11,763) -- -- (11,763)
Contribution from Parent (3,275) 3,275 -- --
--------- ------- -------- ---------
Net cash (used in) provided by financing activities (11,025) 3,275 -- (7,750)
--------- ------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND 689 -- -- 689
CASH EQUIVALENTS --------- ------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,443 (6) -- 7,437
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,459 98 -- 5,557
--------- ------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,902 $ 92 $ -- $ 12,994
========= ======= ======== =========
17
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
CONDENSED 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 failure to locate and acquire acquisition candidates,
o dependence on key employees,
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.
All information contained in this quarterly report is materially
accurate as of the date of this report. 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. We assume no obligation to update any forward-looking statements after
the date of this quarterly report as a result of new information, future events
or developments, except as required by federal securities law.
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.
18
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 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.
On June 15, 2004, Interline Brands, Inc., a Delaware corporation ("Interline
Delaware"), filed a registration statement on Form S-1 with the Securities and
Exchange Commission (File No. 333-116482) in connection with a proposed initial
public offering of shares of its common stock. Upon completion of certain
proposed reorganization transactions to be effected in connection with and
immediately prior to the initial public offering, Interline Delaware will be our
parent corporation. Interline Delaware intends to use the proceeds of the
offering to repay a portion of our indebtedness, make cash payments in respect
of our preferred stock, terminate our interest rate swap agreements and for
other general corporate purposes.
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. Following are significant accounting policies that management
believes are the most critical in order to fully understand and evaluate our
financial position and results of operations.
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 trends. Adjustments to credit limits are made based upon payment history
and our customers' estimated 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. At June 25, 2004, the allowance for doubtful accounts totaled $6.5
million.
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 allowance 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. To the extent historical results are not indicative of
future results and if events occur that affect our relationships with vendors or
the salability of our products, additional allowance may be needed that will
increase our cost of sales and decrease inventory. At June 25, 2004, our
allowances for excess and obsolete inventory totaled $4.1 million.
19
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.
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 selling, general and
administrative expenses in our statements of operations. Management, with the
assistance of 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
Instruments 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 includes references 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 JUNE 25, 2004 COMPARED TO THREE MONTHS ENDED JUNE 27, 2003
OVERVIEW. Continued targeted investment during the second quarter of
the year in our organic growth initiatives, improved overall market conditions
and acquisition growth associated with our November 2003 Florida Lighting
acquisition resulted in net sales growth of $25.7 million in the second quarter
of the year, a 16.1% increase over the comparable prior year period on the same
number of shipping days. Sales growth rates improved in the second quarter as
compared to the first quarter of the year as we enter what is historically the
stronger sales volume summer months. We continue to enjoy gross margins above
38% and a 9% operating income margin as we continue to invest in our growth
initiatives.
20
NET SALES. Our net sales increased by $25.7 million, or 16.1%, to
$185.4 million in the three months ended June 2004 from $159.7 million in the
three months ended June 2003. Daily sales were $2.9 million in the three months
ended June 2004 and $2.5 million in the three months ended June 2003. The $25.7
million sales increase was attributable to $9.0 million from our Florida
Lighting acquisition referenced above and $1.4 million in reclassified freight
revenues and costs. The remaining increase resulted from a combination of the
new sales and growth initiatives and improved demand for our products. 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, in order to more properly reflect that these amounts are revenues earned
for our products provided. 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 and reduces our operating margin
percent.
GROSS PROFIT. Gross profit increased by $10.4 million, or 17.3%, to
$70.9 million in the three months ended June 2004 from $60.5 million in the
three months ended June 2003. Gross profit margins increased to 38.3% for the
three months ended June 2004 from 37.9% for the three months ended June 2003.
After adjusting for the effect of the $1.4 million reclassification of freight
revenues and costs, gross margin for the three months ended June 2004 would have
been 37.8%. Most of the remaining increase in gross margin dollars was therefore
due to the increase in net sales, as the adjusted gross margin percent was
virtually the same as the comparable prior year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, or SG&A expenses, increased by $8.7 million, or 20.9%,
to $50.1 million in the three months ended June 2004 from $41.4 million in the
three months ended June 2003. Increased SG&A related to the Florida Lighting
acquisition accounted for $2.8 million of the $8.7 million increase, and $1.4
million of the increase was attributable to the freight reclassification
previously discussed. Certain expenses within SG&A, such as the costs of running
distribution centers, delivery expenses and selling expenses, fluctuate with
sales volume and most of the remaining increase in SG&A expenses related to
these items. A small portion of the increase was also attributable to increased
investment in new marketing initiatives and, to a lesser degree, increases in
benefit costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $0.7 million, or 25.7%, to $3.4 million in the three months ended
June 2004 from $2.7 million in the three months ended June 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 from 40 years, and the amortization associated with our Florida
Lighting acquisition.
SPECIAL COSTS AND EXPENSES. There were no special costs and expenses
during the three months ended June 2004 and $0.2 million in the three months
ended June 2003. Special costs and expenses consisted of non-recurring costs
incurred in connection with our acquisition of Barnett Inc. (the "Barnett
Acquisition") in September 2000. 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
increased by $1.3 million, or 8.1%, to $17.4 million in the three months ended
June 2004 from $16.1 million in the three months ended June 2003.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded a gain of $3.6
million in the three months ended June 2004 and $0.4 million in the three months
ended June 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 decreased by $0.1 million in the
three months ended June 2004 to $10.1 million from $10.2 million in the three
months ended June 2003. This slight decrease was attributable to the reduction
in our long-term debt due to the payments made in accordance with our credit
facility of $5.3 million.
PROVISION FOR INCOME TAXES. The provision for income taxes was $4.0
million in the three months ended June 2004 compared to a benefit of $3.1
million in the three months ended June 2003. The effective tax rate for the
three months ended June 2004 and June 2003 was 36.7%
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SIX MONTHS ENDED JUNE 25, 2004 COMPARED TO SIX MONTHS ENDED JUNE 27, 2003
OVERVIEW. Strong improvement in current market conditions, our organic
growth initiatives, and the success of our recent strategic acquisition of
Florida Lighting resulted in net sales growth of $43.4 million in the first six
months of the year, a 13.8% increase over the comparable prior year period on
the same number of shipping days. During the first six months of the year we
invested approximately $2.5 million in growth initiatives directed at increasing
sales volume in each of the three markets that we serve - the facilities
maintenance, professional contractor and distributor markets. Our organic growth
initiatives include the expansion of our national accounts program, the opening
of new contractor showrooms, product line expansion (specifically our appliance
and HVAC product lines), and geographic expansion through the addition of
telesales representatives. Strong net sales growth of 11.5% in the first quarter
and 16.1% growth in the second quarter has been supported by our investment of
approximately $20 million in inventory and $15 million in trade receivables. Our
continued focus on working capital during this period of strong sales growth has
allowed us to maintain our inventory and trade accounts receivable turnover
rates at appropriate levels, resulting in the minimal use of our revolving
credit facility as we use current period cash generation to fund our growth.
NET SALES. Our net sales increased by $43.4 million, or 13.8%, to
$358.0 million in the six months ended June 2004 from $314.6 million in the six
months ended June 2003. Daily sales were $2.8 million in the six months ended
June 2004 and $2.5 million in the six months ended June 2003. The $43.4 million
sales increase was attributable to $17.2 million from our Florida Lighting
acquisition referenced above and $2.7 million in reclassified freight revenues
and costs. The remaining increase was attributable to new sales and growth
initiatives and improved demand for our products as discussed above. During the
third quarter of 2003, we reclassified freight revenue from selling, general and
administrative expenses to net sales, in order to more properly reflect that
these amounts are revenues earned for our products provided. 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 and reduces our operating margin percent.
GROSS PROFIT. Gross profit increased by $17.1 million, or 14.3%, to
$136.7 million in the six months ended June 2004 from $119.6 million in the six
months ended June 2003. Gross profit margins increased to 38.2% for the six
months ended June 2004 from 38.0% for the six months ended June 2003. After
adjusting for the effect of the $2.7 million reclassification of freight
revenue, gross margin for the three months ended June 2004 would have been
37.7%. Accordingly, most of the change in gross margin dollars was due to the
sales volume increase, offset slightly by the margin decrease.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased by
$15.3 million, or 18.5%, to $98.3 million in the six months ended June 2004 from
$83.0 million in the six months ended June 2003. Increased SG&A expenses related
to the Florida Lighting acquisition was $5.7 million of the $15.3million
increase, and $2.7 million of the increase was the freight revenue
reclassification previously discussed. Certain expenses within SG&A, such as the
costs of running distribution centers, delivery expenses and selling expenses,
fluctuate with sales volume and these items along with increased investment in
new marketing initiatives and to a lesser degree increases in benefit costs made
up the remainder of the increases in SG&A.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $0.8 million, or 14.3%, to $6.4 million in the six months ended
June 2004 from $5.6 million in the six months ended June 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, and the amortization associated with our Florida Lighting acquisition.
SPECIAL COSTS AND EXPENSES. There were no special costs and expenses
during the six months ended June 2004 and $0.4 million in the six months ended
June 2003. Special costs and expenses consisted of non-recurring costs incurred
in connection with the Barnett Acquisition. 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
increased by $1.3 million, or 4.1%, to $31.9 million in the six months ended
June 2004 from $30.6 million in the six months ended June 2003.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded a gain of $4.7
million in the six months ended June 2004 and $1.1 million in the six months
ended June 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,
22
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 $0.5 million in the six
months ended June 2004 to $20.3 million from $19.8 million in the six months
ended June 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 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 below in Liquidity and Capital
Resources).
PROVISION FOR INCOME TAXES. The provision for income taxes was $6.3
million in the six months ended June 2004 compared to a benefit of $1.0 million
in the six months ended June 2003. The effective tax rate for the six months
ended June 2004 was 38.2% compared to 34.1% in the six months ended June 2003.
The increase in the effective tax rate was due primarily to changes in foreign
income taxes and non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 25, 2004, we had approximately $47.8 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
senior 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 credit facility,
will be used to support payment obligations incurred for our general corporate
purposes. As of June 25, 2004, we had $7.0 million of letters of credit issued
under the credit facility. With respect to borrowings under our senior credit
facility, we have the option to borrow at an adjusted LIBOR or an alternative
base rate. Interest on the senior 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 $5.8 million in the six
months ended June 2004 compared to $20.8 million in the comparable period for
the prior year. Net cash provided by operating activities in the six months
ended June 2004 was lower than the prior year period as a result of our
increased investment in inventory and trade accounts receivable associated with
our sales growth. In the first six months of the prior year period, sales were
relatively flat and we reduced our inventory investments to appropriately match
our sales trends. During the first six months of 2004, our sales grew 13.8% and
accordingly our inventory levels increased $14.6 million in the six months ended
June 2004 compared to a decrease of $17.9 million in the six months ended June
2003. The increase for the period ending June 2004 was approximately 12.3% and
was in line with our sales growth.
Net cash used in investing activities was $4.2 million in the six
months ended June 2004 compared to $6.3 million in the six months ended June
2003. Net cash used in investing activities in the six months ended June 2004
was primarily attributable to capital expenditures made in the ordinary course
of business.
Net cash provided by financing activities totaled $0.7 million in the
six months ended June 2004 compared to net cash used in financing activities of
$7.8 million in the six months ended June 2003. Net cash provided by financing
activities in the six months ended June 2004 was primarily attributable to net
borrowings under our revolving credit facility. Net cash used in financing
activities in the six months ended June 2003 was attributable to the Refinancing
Transaction described below.
We issued $200 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 million senior secured credit facility which consists of
a $140 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
23
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 June 25 2004, our total
indebtedness was $349.5 million (of which $7.0 million was outstanding in the
form of letters of credit), and our senior indebtedness was $146.2 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 $3.7 million in the six months ended June
2004 compared to $2.6 million in the six months ended June 2003. Capital
expenditures as a percentage of sales were 1.0% in the six months ended June
2004 and 0.8% in the six months ended June 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 and over the long term.
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 pay 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 June 25, 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 six months ended June 25,
2004 we have recognized a non-cash gain of $3.6 million from the change in value
of our interest rate swaps. This increase in value of 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
June 25, 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 $1.9 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 the fair value of these instruments.
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 June 25, 2004. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of June 25, 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.
24
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 June 25, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We 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:
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 Charles Blackmon as 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
We filed current reports on Form 8-K under Item 5 of such forms for each of
June 15, 2004, June 17, 2004, and June 30, 2004.
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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/ Charles Blackmon
------------------------------
Charles Blackmon
Vice President and Chief
Financial Officer
(Duly Authorized Signatory and
Principal Financial Officer)
Date: August 9, 2004