Table of Contents

 

 

 

**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, 2010****

 

****or****

 

****o********        ********TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****

 

****For the transition period from                       to                       ****

 

****Commission File Number: 001-32380****

 

**INTERLINE BRANDS, INC.**

(Exact name of registrant as specified in its charter)

 

| ****Delaware****                        | **** **** | ****03-0542659****          |
|-----------------------------------------|----------------|-----------------------------|
| ****(State or other jurisdiction of**** | **** **** | ****(I.R.S. Employer****    |
| ****incorporation or organization)****  | **** **** | ****Identification No.)**** |

 

| ****701  San Marco Boulevard****                 | ** **     | ** **         |
|--------------------------------------------------|----------------|--------------------|
| ****Jacksonville,  Florida****                   | **** **** | ****32207****      |
| ****(Address of principal executive offices)**** | **** **** | ****(Zip code)**** |

 

**(904) 421-1400**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                   |   | Accelerated filer x         |
|---------------------------------------------|--------|-----------------------------|
|                                        |   |                        |
| Non-accelerated filer o                     |   | Smaller reporting company o |
| (Do not check if smaller reporting company) |   |                        |

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2010, there were 32,981,152 shares of the registrant’s common stock outstanding (excluding 121,791 shares held in treasury), par value $0.01.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ****ITEM****                               | **** **** | ** **                                                                                                                      | ****PAGE****   |
|--------------------------------------------|----------------|---------------------------------------------------------------------------------------------------------------------------------|----------------|
| **** ****                             | **** **** |                                                                                                                            |           |
| ****PART I. FINANCIAL INFORMATION**** |
|                                       |           | **** ****                                                                                                                  |           |
| ****1.****                                 | **** **** | ****Financial Statements  (Unaudited)****                                                                                       |           |
| **** ****                             | **** **** | ****Condensed Consolidated Balance Sheets as of  March 26, 2010 and December 25, 2009****                             | ****1****      |
| **** ****                             | **** **** | ****Condensed Consolidated Statements of Earnings for the  Three Months Ended March 26, 2010 and March 27, 2009****   | ****2****      |
| **** ****                             | **** **** | ****Condensed Consolidated Statements of Cash Flows for  the Three Months Ended March 26, 2010 and March 27, 2009**** | ****3****      |
| **** ****                             | **** **** | ****Notes to Condensed Consolidated Financial Statements****                                                                    | ****4****      |
| ****2.****                                 | **** **** | ****Management’s  Discussion and Analysis of Financial Condition and Results of Operations****                             | ****16****     |
| ****3.****                                 | **** **** | ****Quantitative and  Qualitative Disclosures about Market Risk****                                                             | ****22****     |
| ****4.****                                 | **** **** | ****Controls and Procedures****                                                                                                 | ****23****     |
| **** ****                             | **** **** | **** ****                                                                                                                  | **** **** |
| ****PART II. OTHER INFORMATION****    |
|                                       |           | **** ****                                                                                                                  |           |
| ****1.****                                 | **** **** | ****Legal Proceedings****                                                                                                       | ****24****     |
| ****1A.****                                | **** **** | ****Risk Factors****                                                                                                            | ****24****     |
| ****2.****                                 | **** **** | ****Unregistered Sales of  Equity Securities and Use of Proceeds****                                                            | 24             |
| ****3.****                                 | **** **** | ****Defaults Upon Senior Securities****                                                                                         | 24             |
| ****4.****                                 | **** **** | (Removed and Reserved)                                                                                                          | 24             |
| 5.                                         |           | Other Information                                                                                                               | 24             |
| ****6.****                                 | **** **** | ****Exhibits****                                                                                                                | ****25****     |
| **** ****                             | **** **** | **** ****                                                                                                                  | **** **** |
| ****SIGNATURES****                         | ****26****     |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

 

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)**

**ASOF MARCH 26, 2010 AND DECEMBER 25, 2009**

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                                                                     | ** ** | **March 26,** | ** ** | **December 25,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                     |       |               |       |                  |       |
| Current Assets:                                                                                                                                                                                                |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                  | 116,153    |                  | $          | 99,223 |   |
| Short-term investments                                                                                                                                                                                         |       | 1,441              |       | 1,479                 |       |
| Accounts receivable - trade (net of allowance for doubtful  accounts of $11,144 and $12,975)                                                                                                                   |       | 119,563            |       | 120,004               |       |
| Inventory                                                                                                                                                                                                      |       | 176,792            |       | 173,422               |       |
| Prepaid expenses and other current assets                                                                                                                                                                      |       | 18,371             |       | 18,552                |       |
| Deferred income taxes                                                                                                                                                                                          |       | 16,432             |       | 16,459                |       |
| Total current assets                                                                                                                                                                                           |       | 448,752            |       | 429,139               |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                                                    |       | 47,695             |       | 46,804                |       |
| Goodwill                                                                                                                                                                                                       |       | 319,006            |       | 319,006               |       |
| Other intangible assets, net                                                                                                                                                                                   |       | 123,117            |       | 124,835               |       |
| Other assets                                                                                                                                                                                                   |       | 8,804              |       | 9,054                 |       |
| Total assets                                                                                                                                                                                                   |       | $                  | 947,374    |                  | $          | 928,838 |   |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                  |       |               |       |                  |       |
| Current Liabilities:                                                                                                                                                                                           |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                               |       | $                  | 89,328     |                  | $          | 85,982 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                 |       | 41,637             |       | 41,715                |       |
| Accrued interest                                                                                                                                                                                               |       | 4,099              |       | 1,050                 |       |
| Income taxes payable                                                                                                                                                                                           |       | 1,409              |       | 1,285                 |       |
| Current portion of long-term debt                                                                                                                                                                              |       | 1,500              |       | 1,590                 |       |
| Capital lease - current                                                                                                                                                                                        |       | 159                |       | 222                   |       |
| Total current liabilities                                                                                                                                                                                      |       | 138,132            |       | 131,844               |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                                         |       |               |       |                  |       |
| Deferred income taxes                                                                                                                                                                                          |       | 40,430             |       | 40,369                |       |
| Long-term debt and capital lease, net of current  portion                                                                                                                                                      |       | 304,127            |       | 304,092               |       |
| Other liabilities                                                                                                                                                                                              |       | 781                |       | 798                   |       |
| Total liabilities                                                                                                                                                                                              |       | 483,470            |       | 477,103               |       |
| Commitments and contingencies                                                                                                                                                                                  |       |               |       |                  |       |
| Senior preferred stock; $0.01 par value, 20,000,000  authorized; none outstanding as of March 26, 2010 and December 25,  2009                                                                        |       | —             |       | —                |       |
|                                                                                                                                                                                                           |       |               |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                     |       |               |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,998,168 issued and 32,878,797 outstanding as of March 26,  2010 and 32,640,957 issued and 32,524,251 outstanding as of December 25,  2009 |       | 330                |       | 326                   |       |
| Additional paid-in capital                                                                                                                                                                                     |       | 583,232            |       | 576,747               |       |
| Accumulated deficit                                                                                                                                                                                            |       | (119,175           | )          | (124,745              | )          |
| Accumulated other comprehensive income                                                                                                                                                                         |       | 1,629              |       | 1,483                 |       |
| Treasury stock, at cost, 119,371 shares as of  March 26, 2010 and 116,706 as of December 25, 2009                                                                                                    |       | (2,112             | )          | (2,076                | )          |
| Total stockholders’ equity                                                                                                                                                                                |       | 463,904            |       | 451,735               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                |       | $                  | 947,374    |                  | $          | 928,838 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFEARNINGS (UNAUDITED)**

**THREEMONTHS ENDED MARCH 26, 2010 AND MARCH 27, 2009**

**(inthousands, except share and per share data)**

 
| ** **                                    | ** ** | **March 26,** | ** ** | **March 27,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2010**           | ** ** | **2009**           | ** ** |
|                                          | ** ** |                    | ** ** | ** **         | ** ** |
| Net  sales                                    |       | $                  | 245,218    |               | $          | 256,793 |   |
| Cost  of sales                                |       | 150,071            |       | 160,197            |       |
| Gross  profit                                 |       | 95,147             |       | 96,596             |       |
|                                          |       |                    |       |               |       |
| Operating  Expenses:                          |       |               |       |               |       |
| Selling,  general and administrative expenses |       | 77,229             |       | 83,920             |       |
| Depreciation  and amortization                |       | 4,751              |       | 4,634              |       |
| Total  operating expenses                     |       | 81,980             |       | 88,554             |       |
| Operating  income                             |       | 13,167             |       | 8,042              |       |
|                                          |       |                    |       |               |       |
| Gain  on extinguishment of debt, net          |       | —             |       | 1,720              |       |
| Interest  expense                             |       | (4,353             | )          | (5,379             | )          |
| Interest  and other income                    |       | 424                |       | 290                |       |
| Income  before income taxes                   |       | 9,238              |       | 4,673              |       |
| Income  taxes                                 |       | 3,668              |       | 1,751              |       |
| Net  income                                   |       | $                  | 5,570      |               | $          | 2,922 |   |
|                                          |       |                    |       |               |       |
| Earnings  Per Share:                          |       |               |       |               |       |
| Basic                                         |       | $                  | 0.17       |               | $          | 0.09 |   |
| Diluted                                       |       | $                  | 0.17       |               | $          | 0.09 |   |
|                                          |       |                    |       |               |       |
| Weighted-Average  Shares Outstanding:         |       |               |       |               |       |
| Basic                                         |       | 32,674,154         |       | 32,481,049         |       |
| Diluted                                       |       | 33,370,605         |       | 32,552,442         |       |

 

*Seeaccompanying notes to**condensed**consolidated financialstatements.*

 

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**THREEMONTHS ENDED MARCH 26, 2010 AND MARCH 27, 2009**

**(inthousands)**

**** ****
| ** **                                                                               | ** ** | **March 26,** | ** ** | **March 27,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                               | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| Cash Flows from Operating Activities:                                                    |       |               |       |               |       |
| Net income                                                                               |       | $                  | 5,570      |               | $          | 2,922 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |       |               |       |               |       |
| Depreciation and amortization                                                            |       | 4,903              |       | 4,781              |       |
| Amortization of debt issuance costs                                                      |       | 255                |       | 287                |       |
| Amortization of discount on 81/8% senior subordinated notes                              |       | 37                 |       | 37                 |       |
| Gain on extiguishment of debt, net of discount                                           |       | —             |       | (2,165             | )          |
| Write-off of debt issuance costs                                                         |       | —             |       | 445                |       |
| Write-off of deferred acquisition costs                                                  |       | —             |       | 672                |       |
| Share-based compensation                                                                 |       | 774                |       | 823                |       |
| Excess tax benefits from share-based compensation                                        |       | (515               | )          | —             |       |
| Deferred income taxes                                                                    |       | 124                |       | 1,261              |       |
| Provision for doubtful accounts                                                          |       | 1,456              |       | 4,992              |       |
| Loss on disposal of property and equipment                                               |       | 17                 |       | 1                  |       |
|                                                                                     |       |               |       |               |       |
| Changes in assets and liabilities which provided  (used) cash, net of business acquired: |       |               |       |               |       |
| Accounts receivable - trade                                                              |       | (981               | )          | 8,082              |       |
| Inventory                                                                                |       | (3,311             | )          | 11,557             |       |
| Prepaid expenses and other current assets                                                |       | 182                |       | 5,723              |       |
| Other assets                                                                             |       | 249                |       | 70                 |       |
| Accounts payable                                                                         |       | 3,337              |       | 17,858             |       |
| Accrued expenses and other current liabilities                                           |       | 329                |       | 3,487              |       |
| Accrued interest                                                                         |       | 3,049              |       | 2,481              |       |
| Income taxes                                                                             |       | 603                |       | (582               | )          |
| Other liabilities                                                                        |       | (12                | )          | (157               | )          |
| Net cash provided by operating activities                                                |       | 16,066             |       | 62,575             |       |
| Cash Flows from Investing Activities:                                                    |       |               |       |               |       |
| Purchase of property and equipment, net                                                  |       | (3,733             | )          | (2,393             | )          |
| Purchase of short-term investments                                                       |       | (1,342             | )          | —             |       |
| Proceeds from sales and maturities of short-term  investments                            |       | 1,379              |       | —             |       |
| Purchase of businesses, net of cash acquired                                             |       | —             |       | (126               | )          |
| Net cash used in investing activities                                                    |       | (3,696             | )          | (2,519             | )          |
| Cash Flows from Financing Activities:                                                    |       |               |       |               |       |
| Decrease in purchase card payable, net                                                   |       | (1,025             | )          | (1,677             | )          |
| Repayment of term debt                                                                   |       | (90                | )          | (6,163             | )          |
| Repayment of 81/8% senior subordinated notes                                             |       | —             |       | (34,157            | )          |
| Payments on capital lease obligations                                                    |       | (64                | )          | (58                | )          |
| Proceeds from stock options exercised                                                    |       | 5,200              |       | —             |       |
| Excess tax benefits from share-based compensation                                        |       | 515                |       | —             |       |
| Treasury stock acquired to satisfy minimum tax  withholding requirements                 |       | (36                | )          | —             |       |
| Net cash provided by (used in) financing activities                                      |       | 4,500              |       | (42,055            | )          |
| Effect of exchange rate changes on cash and cash  equivalents                            |       | 60                 |       | (34                | )          |
| Net increase in cash and cash equivalents                                                |       | 16,930             |       | 17,967             |       |
| Cash and cash equivalents at beginning of period                                         |       | 99,223             |       | 62,724             |       |
| Cash and cash equivalents at end of period                                               |       | $                  | 116,153    |               | $          | 80,691 |   |
|                                                                                     |       |               |       |               |       |
| Supplemental Disclosure of Cash Flow Information:                                        |       |               |       |               |       |
| Cash paid during the period for :                                                        |       |               |       |               |       |
| Interest                                                                                 |       | $                  | 945        |               | $          | 2,740 |   |
| Income taxes, net of refunds                                                             |       | $                  | 3,072      |               | $          | 1,181 |   |
|                                                                                     |       |               |       |               |       |
| Schedule of Non-Cash Investing and Financing  Activities:                                |       |               |       |               |       |
| Property acquired through lease incentives                                               |       | $                  | 610        |               | $          | 2,412 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**THREEMONTHS ENDED MARCH 26, 2010 AND MARCH 27, 2009**

** **

**1.**             DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

** **

*Business*

 

Interline Brands, Inc.,a Delaware corporation, and its subsidiaries (“Interline” or the “Company”) isa direct marketer and specialty distributor of maintenance, repair andoperations (“MRO”) products. The Company sells plumbing, electrical, hardware,security, heating, ventilation and air conditioning (“HVAC”), janitorial andsanitary supplies and other MRO products. Interline’s highly diverse customerbase consists of multi-family housing, educational, lodging, government andhealth care facilities, professional contractors and specialty distributors.

 

The Company markets and sells its products primarilythrough twelve distinct and targeted brands. The Company utilizes a variety ofsales channels, including a direct sales force, telesales representatives, adirect marketing program, brand-specific websites and a national accounts salesprogram. The Company delivers its products through its network of regional distributioncenters and professional contractor showrooms located throughout the UnitedStates and Canada, two national distribution centers, vendor managed inventorylocations at large professional contractor customer locations and its dedicatedfleet of trucks. Through its broad distribution network, the Company is able toprovide next-day delivery service to at least 98% of the U.S. population andsame-day delivery service to most major metropolitan markets in the U.S.

 

*Basis of Presentation*

 

The accompanying unaudited interim condensedconsolidated financial statements of Interline have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand instructions to the Quarterly Report on Form 10-Q and Article 10of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).Accordingly, certain information and footnote disclosures normally included infinancial statements included in the Company’s Annual Report on Form 10-Khave been condensed or omitted. The accompanying unaudited interim condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 25,2009 filed with the SEC.

 

All adjustments, consisting of normal recurringadjustments, which are, in the opinion of management, necessary for a fairstatement of the results for the interim periods presented have been recorded.The results of operations for the interim periods presented are not necessarilyindicative of the results to be expected for the full year.

 

The preparation of condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the condensed consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Significant estimates include valuation reserves foraccounts receivable and income taxes, lower of cost or market and obsolescencereserves for inventory, reserves for self-insurance programs and valuation ofgoodwill and other intangible assets. Actual results could differ from thoseestimates.

 

The Company evaluated subsequent events through thedate of the filing of this Quarterly Report on Form 10-Q with the SEC.

 

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*Fair Value of Financial Instruments*

 

The Company defines fair value as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. Disclosureabout how fair value is determined for assets and liabilities is based on ahierarchy established from the significant levels of inputs as follows:

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

 

The determination of where assets and liabilities fallwithin this hierarchy is based upon the lowest level of input that issignificant to the fair value measurement.

 

The fair value of cash and cash equivalents, accountsreceivable, and accounts payable approximate the carrying amount because of theshort maturities of these items.

 

The Company’s short-term investments, which areclassified as available-for-sale, are comprised of pre-refunded municipalbonds. Pre-refunded municipal bonds are bonds that are refinanced by the issuerand remain outstanding in the marketplace until a specific call date ormaturity date is reached. Pre-refunded municipal bonds are secured by U.S.Treasury securities placed in an irrevocable escrow account. As of March 26,2010, all of the Company’s pre-refunded municipal bonds have contractualmaturities of less than one year. The following table shows the original costand fair value of the Company’s short-term investments as of March 26,2010 and December 25, 2009 (in thousands):

 
| ** **                        | ** ** | **March 26, 2010** | ** ** | **December 25, 2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Description**                   | ** ** | **Original  Cost**      | ** ** | **Fair  Value**            | ** ** | **Original  Cost** | ** ** | **Fair  Value** | ** ** |
| Pre-refunded  municipal bonds (1) |       | $                       | 1,442      |                       | $          | 1,441 |   | $ | 1,478 |   | $ | 1,479 |   |
|                                   |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

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(1)   Fair value estimated usingLevel 1 inputs. The fair value of the pre-refunded municipal bonds isdetermined by quoted market prices as they are publicly traded.

 

The following table shows the carrying amount and thefair value of term debt and the 81/8% senior subordinated notes as of March 26, 2010and December 25, 2009 (in thousands):

 
| ** **                                                        | ** ** | **March 26, 2010** | ** ** | **December 25, 2009** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Description**                                                   | ** ** | **Carrying  Amount**    | ** ** | **Fair  Value**            | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Term  debt (1)                                                    |       | $                       | 154,225    |                       | $          | 147,426 |   | $ | 154,225 |   | $ | 145,771 |   |
| 81/8% senior  subordinated notes, net of unamortized discount (2) |       | 149,900                 |       | 151,434                    |       | 149,863 |   | 151,434 |   |
| ** **                                                        |       | $                       | 304,125    |                       | $          | 298,860 |   | $ | 304,088 |   | $ | 297,205 |   |

 

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(1)   Fair value estimated usingLevel 2 inputs. The fair value of term loans is estimated using a discountedcash flow analysis based on borrowing rates available to companies with similarcredit ratings for loans with similar terms and maturity.

(2)   Fair value estimated usingLevel 1 inputs. The fair value of the 81/8% senior subordinated notes isdetermined by quoted market prices as they are publicly traded.

 

*SegmentInformation*

 

The Company has one operating segment and onereportable segment, the distribution of MRO products.

 

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TheCompany’s net sales for the three months ended March 26, 2010 and March 27,2009 by product category were as follows (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **March 26,**     | ** ** | **March 27,** | ** ** |
| **Product Category**                       | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Janitorial  and sanitary                   |       | $                      | 72,103     |   | $ | 71,902 |   |
| Plumbing                                   |       | 70,401                 |       | 75,240 |   |
| Electrical  and lighting                   |       | 19,945                 |       | 21,827 |   |
| Heating,  ventilation and air conditioning |       | 18,600                 |       | 20,539 |   |
| Appliances  and parts                      |       | 14,374                 |       | 15,151 |   |
| Security                                   |       | 12,248                 |       | 13,096 |   |
| Hardware  and tools                        |       | 11,129                 |       | 11,299 |   |
| Other                                      |       | 26,418                 |       | 27,739 |   |
| Total                                      |       | $                      | 245,218    |   | $ | 256,793 |   |

 

**2**.             ACCOUNTS RECEIVABLE

** **

The Company’s trade receivables are exposed to creditrisk. The majority of the markets served by the Company are comprised of numerousindividual accounts. The Company monitors the creditworthiness of its customerson an ongoing basis and provides a reserve for estimated bad debt losses. Ifthe financial condition of the Company’s customers were to deteriorate,increases in its allowance for doubtful accounts may be needed.

 

The activity in the allowance for doubtful accountsconsisted of the following (in thousands):

 
| **Balance at  December 25,  2009** | ** ** | **Charged to  Expense** | ** ** | **Deductions(1)** | ** ** | **Balance at  March 26,  2010** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------|------------|--------------------------------------|------------|
| $                                       | 12,975     |                    | $          | 1,456             |       | $                                    | (3,287     | ) | $ | 11,144 |   |
|                                         |            |                         |            |                   |            |                                      |            |  |  |  |  |

 

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(1)   Accounts receivable written-offas uncollectible, net of recoveries. The majority of the accounts written-offhad been fully reserved for in prior periods.

 

**3**.             RESTRUCTURING AND ACQUISITION ACCRUALS

** **

*Restructuring Accruals*

 

During the three months ended September 26, 2008, the Company began undertaking certain significant changes in its cost structure. These operational initiatives focus on reducing the Company’s overall operating cost structure. The following table summarizes the changes to accruals related to the Company’s restructuring, which are included in accrued expenses and other current liabilities (in thousands):

 
| ** **                         | ** ** | **Employee  Separation  Costs** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|-----------|------------|
| Balance  at December 25, 2009 |       | $                               | 177        |                                   | $          | 1,324     |       | $ | 1,501 |   |
| Payments                           |       | (61                             | )          | (353                                   | )          | (414      | )          |
| Balance  at March 26, 2010    |       | $                               | 116        |                                   | $          | 971       |       | $ | 1,087 |   |

 

Employee separation costs include severance pay and other related benefits associated with the termination of selling, administrative and warehouse personnel. Facility closing and other costs include lease tails, property and equipment disposals and other shut-down expenses associated with distribution center and professional contractor showroom consolidations.

 

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*Acquisition Accruals*

 

The following table summarizes the accruals assumed in connection with the Company’s business combinations, which are included in accrued expenses and other current liabilities (in thousands):

 
| ** **                      | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and   Other Costs** | ** ** | **Total** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------|------------|
| Balance  at March 26, 2010 |       | $                                       | 55         |                                    | $          | 1,340     |       | $ | 1,395 |   |
|                                 |            |                                         |            |                                         |            |           |            |  |  |  |

 

There were no provisions or payments made during the three months ended March 26, 2010.

 

**4**.             EARNINGS PER SHARE

** **

Basic earnings per share is computed by dividing netincome by the weighted-average number of shares of common stock andparticipating securities outstanding during the period. Participatingsecurities are unvested share-based payment awards that contain rights toreceive non-forfeitable dividends (whether paid or unpaid), such as deferredstock units.

 

Diluted earnings per share is computed by dividing netincome by the weighted-average number of shares of common stock andparticipating securities outstanding during the period as adjusted for thepotential dilutive effect of stock options and non-vested shares of restrictedstock and restricted share units using the treasury stock method.

 

The following summarizes the shares of common stockused to calculate earnings per share including the potentially dilutive impactof stock options, restricted stock and restricted share units, calculated usingthe treasury stock method, as included in the calculation of dilutedweighted-average shares:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 26,**     | ** ** | **March 27,** | ** ** |
| ** **                                     | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Weighted  average shares outstanding - basic   |       | 32,674,154             |       | 32,481,049 |   |
| Dilutive  shares resulting from:               |       |                   |       |   |   |
| Stock  options                                 |       | 357,515                |       | — |   |
| Restricted  stock                              |       | 899                    |       | — |   |
| Restricted  share units                        |       | 338,037                |       | 71,393 |   |
| Weighted  average shares outstanding - diluted |       | 33,370,605             |       | 32,552,442 |   |

 

During the three months ended March 26, 2010 and March 27,2009, stock options to purchase 1,871,606 shares and 3,772,548 shares of commonstock, respectively, were excluded from the computations of dilutedweighted-average shares outstanding because their effect would beanti-dilutive.

 

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**5.****            ****COMPREHENSIVEINCOME**

 

Comprehensiveincome refers to revenues, expenses, gains and losses that are included incomprehensive income but are excluded from net income as these amounts arerecorded directly as an adjustment to stockholders’ equity, net of tax. Thecomponents of comprehensive income for the three months ended March 26,2010 and March 27, 2009 are as follows (in thousands):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **March 26,**     | ** ** | **March 27,** | ** ** |
| ** **                                              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  income                                             |       | $                      | 5,570      |   | $ | 2,922 |   |
| Other  comprehensive income (loss):                     |       |                   |       |   |   |
| Foreign  currency translation                           |       | 143                    |       | (106 | ) |
| Amortization  of unrecognized gain on employee benefits |       | 4                      |       | 3 |   |
| Unrealized  loss on short-term investments              |       | (1                     | )          | — |   |
| Total  comprehensive income                             |       | $                      | 5,716      |   | $ | 2,819 |   |

 

**6.****            ****SHARE-BASED COMPENSATION**

 

During each of thethree months ended March 26, 2010 and March 27, 2009, share-basedcompensation expense was $0.8 million. As of March 26, 2010, there was$9.6 million of total unrecognized share-based compensation expense related tounvested share-based payment awards. The expense is expected to be recognizedover a weighted-average period of 2.5 years.

 

During the threemonths ended March 26, 2010 and March 27, 2009, the Company granted255,737 and 450,526 stock options, respectively, with a weighted-average grantdate fair value of $7.10 and $3.15, respectively. The fair values of stockoptions were estimated using the Black-Scholes option-pricing model. Expectedvolatility is based on historical performance of the Company’s stock. TheCompany also considers historical data to estimate the timing and amount ofstock option exercises and forfeitures. The expected life represents the periodof time that stock options are expected to remain outstanding and is based onthe contractual term of the stock options and expected exercise behavior. Therisk-free interest rate is based on U.S. Treasury zero-coupon issues with aremaining term equal to the expected option life assumed at the date of grant.

 

The Black-Scholesweighted-average assumptions were as follows:

 
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|------------------------|------------|
| ** **                | ** ** | **March 26,**     | ** ** | **March 27,** | ** ** |
| ** **                | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Expected  volatility      |       | 41.6                   | %          | 42.6 | % |
| Expected  dividends       |       | 0.0                    | %          | 0.0 | % |
| Risk-free  interest rate  |       | 2.4                    | %          | 2.1 | % |
| Expected  life (in years) |       | 5.0                    |       | 5.0 |   |

 

During the threemonths ended March 26, 2010, there were 347,548 stock options exercisedwith an intrinsic value of $1.3 million. There were no stock options exercisedduring the three months ended March 27, 2009.

 

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A summary statusof restricted stock, restricted share units and deferred stock units as of March 26,2010 and changes during the three months then ended is presented below:

 
| ** **                             | ** ** | **Restricted Stock** | ** ** | **Restricted Share Units** | ** ** | **Deferred Stock Units** | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | ** **           | ** ** | **Weighted-**              | ** ** | ** **               | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                             | ** ** | ** **           | ** ** | **Average**                | ** ** | ** **               | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                             | ** ** | ** **           | ** ** | **Grant Date**             | ** ** | ** **               | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                             | ** ** | **Shares**           | ** ** | **Fair Value**             | ** ** | **Shares**               | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding  at December 25, 2009 |       | 10,350               |       | $                          | 23.49      |                     | 452,376    |   | $ | 8.69 |   | 68,310 |   | $ | 18.66 |   |
| Granted                                |       | —               |       | —                     |       | 163,158                  |       | 15.81 |   | — |   | — |   |
| Vested                                 |       | (2,300               | )          | 22.27                      |       | (9,149                   | )          | 21.86 |   | — |   | — |   |
| Forfeited                              |       | —               |       | —                     |       | (17,773                  | )          | 7.89 |   | — |   | — |   |
| Outstanding  at March 26, 2010    |       | 8,050                |       | $                          | 23.84      |                     | 588,612    |   | $ | 11.14 |   | 68,310 |   | $ | 18.66 |   |

 

During the threemonths ended March 26, 2010, 2,300 restricted stock awards vested with afair value of less than $0.1 million. During the three months ended March 26,2010, 9,149 restricted share units vested with a fair value of $0.1 million. Norestricted stock or restricted share units vested during the three months endedMarch 27, 2009.

 

**7.**                                      GUARANTOR SUBSIDIARIES

** **

In June 2006, Interline New Jersey, the Company’sprincipal operating subsidiary (“Interline New Jersey” or the “SubsidiaryIssuer”), issued $200.0 million of 81/8% senior subordinated notes due 2014 and entered intoa $330.0 million bank credit facility. The 81/8% senior subordinated notes and the bank creditfacility are fully and unconditionally guaranteed, jointly and severally, on asenior subordinated basis by the Company (the “Parent Company”) and all ofInterline New Jersey’s 100% owned domestic subsidiaries: Wilmar Holdings, Inc.,Wilmar Financial, Inc. and Glenwood Acquisition LLC (collectively the “GuarantorSubsidiaries”). Effective December 25, 2009, Eagle Maintenance Supply, Inc.,which was previously one of Interline New Jersey’s 100% owned domesticsubsidiaries, was merged into Interline New Jersey.

 

The guarantees by the Parent Company and the GuarantorSubsidiaries are senior to any of their existing and future subordinatedobligations, equal in right of payment with any of their existing and futuresenior subordinated indebtedness and subordinated to any of their existing andfuture senior indebtedness.

 

The Parent Company is a holding company whose onlyasset is the stock of its subsidiaries. The Company conducts virtually all ofits business operations through Interline New Jersey. Accordingly, the Company’sonly material sources of cash are dividends and distributions with respect toits ownership interests in Interline New Jersey that are derived from theearnings and cash flow generated by Interline New Jersey. Through March 26,2010, no dividends have been paid.

 

The following tables set forth, on a condensedconsolidating basis, the balance sheets, statements of operations andstatements of cash flows for the Parent Company, Subsidiary Issuer andGuarantor Subsidiaries for all financial statement periods presented in the Company’scondensed consolidated financial statements. The non-guarantor subsidiaries areminor and are included in the condensed financial data of the SubsidiaryIssuer. The Subsidiary Issuer does not allocate integration expenses, corporateoverhead or other expenses for shared services to the Guarantor Subsidiaries;therefore, the following tables do not reflect any such allocation.

 

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**ASOF MARCH 26, 2010**

**(inthousands)**

 
| ** **                                      | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                 |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                       |       | $               | —     |           | $          | 116,099          |       | $                 | 54         |             | $          | — |   | $ | 116,153 |   |
| Short-term investments                          |       | —          |       | 1,441          |       | —           |       | —            |       | 1,441            |       |
| Accounts receivable - trade                     |       | —          |       | 119,563        |       | —           |       | —            |       | 119,563          |       |
| Inventory                                       |       | —          |       | 176,792        |       | —           |       | —            |       | 176,792          |       |
| Intercompany receivable                         |       | —          |       | —         |       | 135,449          |       | (135,449          | )          | —           |       |
| Other current assets                            |       | —          |       | 34,800         |       | 3                |       | —            |       | 34,803           |       |
| Total current assets                            |       | —          |       | 448,695        |       | 135,506          |       | (135,449          | )          | 448,752          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                     |       | —          |       | 47,695         |       | —           |       | —            |       | 47,695           |       |
| Goodwill                                        |       | —          |       | 319,006        |       | —           |       | —            |       | 319,006          |       |
| Other intangible assets, net                    |       | —          |       | 123,117        |       | —           |       | —            |       | 123,117          |       |
| Investment in subsidiaries                      |       | 463,904         |       | 140,252        |       | —           |       | (604,156          | )          | —           |       |
| Other assets                                    |       | —          |       | 2,329          |       | 6,475            |       | —            |       | 8,804            |       |
| Total assets                                    |       | $               | 463,904    |           | $          | 1,081,094        |       | $                 | 141,981    |             | $          | (739,605 | ) | $ | 947,374 |   |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                            |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                |       | $               | —     |           | $          | 89,328           |       | $                 | —     |             | $          | — |   | $ | 89,328 |   |
| Accrued expenses and other current liabilities  |       | —          |       | 45,416         |       | 1,729            |       | —            |       | 47,145           |       |
| Intercompany payable                            |       | —          |       | 135,449        |       | —           |       | (135,449          | )          | —           |       |
| Debt and capital lease - short-term             |       | —          |       | 1,659          |       | —           |       | —            |       | 1,659            |       |
| Total current liabilities                       |       | —          |       | 271,852        |       | 1,729            |       | (135,449          | )          | 138,132          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                          |       |            |       |           |       |             |       |              |       |             |       |
| Debt and capital lease - long-term              |       | —          |       | 304,127        |       | —           |       | —            |       | 304,127          |       |
| Other liabilities                               |       | —          |       | 41,211         |       | —           |       | —            |       | 41,211           |       |
| Total liabilities                               |       | —          |       | 617,190        |       | 1,729            |       | (135,449          | )          | 483,470          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                          |       | —          |       | 783,790        |       | —           |       | (783,790          | )          | —           |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)             |       | 463,904         |       | (319,886       | )          | 140,252          |       | 179,634           |       | 463,904          |       |
| Total liabilities and stockholders’ equity |       | $               | 463,904    |           | $          | 1,081,094        |       | $                 | 141,981    |             | $          | (739,605 | ) | $ | 947,374 |   |

 

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**ASOF DECEMBER 25, 2009**

**(inthousands)**

 
| ** **                                      | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                 |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                       |       | $               | —     |           | $          | 98,487           |       | $                 | 736        |             | $          | — |   | $ | 99,223 |   |
| Short-term investments                          |       | —          |       | 1,479          |       | —           |       | —            |       | 1,479            |       |
| Accounts receivable - trade                     |       | —          |       | 117,361        |       | 2,644            |       | (1                | )          | 120,004          |       |
| Inventory                                       |       | —          |       | 171,063        |       | 2,359            |       | —            |       | 173,422          |       |
| Intercompany receivable                         |       | —          |       | —         |       | 130,370          |       | (130,370          | )          | —           |       |
| Other current assets                            |       | —          |       | 34,826         |       | 185              |       | —            |       | 35,011           |       |
| Total current assets                            |       | —          |       | 423,216        |       | 136,294          |       | (130,371          | )          | 429,139          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                     |       | —          |       | 46,619         |       | 185              |       | —            |       | 46,804           |       |
| Goodwill                                        |       | —          |       | 312,252        |       | 6,754            |       | —            |       | 319,006          |       |
| Other intangible assets, net                    |       | —          |       | 122,457        |       | 2,378            |       | —            |       | 124,835          |       |
| Investment in subsidiaries                      |       | 451,735         |       | 150,593        |       | —           |       | (602,328          | )          | —           |       |
| Other assets                                    |       | —          |       | 2,285          |       | 6,769            |       | —            |       | 9,054            |       |
| Total assets                                    |       | $               | 451,735    |           | $          | 1,057,422        |       | $                 | 152,380    |             | $          | (732,699 | ) | $ | 928,838 |   |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                            |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                |       | $               | —     |           | $          | 85,983           |       | $                 | —     |             | $          | (1 | ) | $ | 85,982 |   |
| Accrued expenses and other current liabilities  |       | —          |       | 42,308         |       | 1,742            |       | —            |       | 44,050           |       |
| Intercompany payable                            |       | —          |       | 130,370        |       | —           |       | (130,370          | )          | —           |       |
| Debt and capital lease - short-term             |       | —          |       | 1,812          |       | —           |       | —            |       | 1,812            |       |
| Total current liabilities                       |       | —          |       | 260,473        |       | 1,742            |       | (130,371          | )          | 131,844          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                          |       |            |       |           |       |             |       |              |       |             |       |
| Debt and capital lease - long-term              |       | —          |       | 304,092        |       | —           |       | —            |       | 304,092          |       |
| Other liabilities                               |       | —          |       | 41,122         |       | 45               |       | —            |       | 41,167           |       |
| Total liabilities                               |       | —          |       | 605,687        |       | 1,787            |       | (130,371          | )          | 477,103          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                          |       | —          |       | 757,355        |       | —           |       | (757,355          | )          | —           |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)             |       | 451,735         |       | (305,620       | )          | 150,593          |       | 155,027           |       | 451,735          |       |
| Total liabilities and stockholders’ equity |       | $               | 451,735    |           | $          | 1,057,422        |       | $                 | 152,380    |             | $          | (732,699 | ) | $ | 928,838 |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FORTHE THREE MONTHS ENDED MARCH 26, 2010**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   | ** ** | ** **      |       |           |       |                |       |              | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 245,218             |       | $                 | —     |             | $          | — |   | $ | 245,218 |   |
| Cost of sales                                          |       | —          |       | 150,071        |       | —              |       | —            |       | 150,071          |       |
| Gross profit                                           |       | —          |       | 95,147         |       | —              |       | —            |       | 95,147           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 77,223         |       | 6                   |       | —            |       | 77,229           |       |
| Depreciation and amortization                          |       | —          |       | 4,751          |       | —              |       | —            |       | 4,751            |       |
| Equity earnings of subsidiaries                        |       | (9,238          | )          | (2,648         | )          | —              |       | 11,886            |       | —           |       |
| Total operating expenses                               |       | (9,238          | )          | 79,326         |       | 6                   |       | 11,886            |       | 81,980           |       |
| Operating income                                       |       | 9,238           |       | 15,821         |       | (6                  | )          | (11,886           | )          | 13,167           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (4,638         | )          | 4,403               |       | (3,694            | )          | (3,929           | )          |
| Income before income taxes                             |       | 9,238           |       | 11,183         |       | 4,397               |       | (15,580           | )          | 9,238            |       |
| Income taxes                                           |       | 3,668           |       | 2,253          |       | 1,415               |       | (3,668            | )          | 3,668            |       |
| Net income                                             |       | 5,570           |       | 8,930          |       | 2,982               |       | (11,912           | )          | 5,570            |       |
| Preferred stock dividends                              |       | —          |       | (26,435        | )          | —              |       | 26,435            |       | —           |       |
| Net income (loss) attributable to common  stockholders |       | $               | 5,570      |           | $          | (17,505             | )          | $                 | 2,982      |             | $          | 14,523 |   | $ | 5,570 |   |

 

----

(1)   The SubsidiaryIssuer does not allocate integration expenses, corporate overhead or otherexpenses for shared services to the Guarantor Subsidiaries; therefore, theresults for the Guarantor Subsidiaries do not reflect any such allocation.

 

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FORTHE THREE MONTHS ENDED MARCH 27, 2009**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   | ** ** | ** **      |       |           |       |                |       |              | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 252,956             |       | $                 | 3,837      |             | $          | — |   | $ | 256,793 |   |
| Cost of sales                                          |       | —          |       | 157,778        |       | 2,419               |       | —            |       | 160,197          |       |
| Gross profit                                           |       | —          |       | 95,178         |       | 1,418               |       | —            |       | 96,596           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 82,777         |       | 1,143               |       | —            |       | 83,920           |       |
| Depreciation and amortization                          |       | —          |       | 4,469          |       | 165                 |       | —            |       | 4,634            |       |
| Equity earnings of subsidiaries                        |       | (4,673          | )          | (3,012         | )          | —              |       | 7,685             |       | —           |       |
| Total operating expenses                               |       | (4,673          | )          | 84,234         |       | 1,308               |       | 7,685             |       | 88,554           |       |
| Operating income                                       |       | 4,673           |       | 10,944         |       | 110                 |       | (7,685            | )          | 8,042            |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Gain on extinguishment of debt, net                    |       | —          |       | 1,720          |       | —              |       | —            |       | 1,720            |       |
| Interest and other (expense) income, net               |       | —          |       | (6,044         | )          | 4,813               |       | (3,858            | )          | (5,089           | )          |
| Income before income taxes                             |       | 4,673           |       | 6,620          |       | 4,923               |       | (11,543           | )          | 4,673            |       |
| Income taxes                                           |       | 1,751           |       | 158            |       | 1,593               |       | (1,751            | )          | 1,751            |       |
| Net income                                             |       | 2,922           |       | 6,462          |       | 3,330               |       | (9,792            | )          | 2,922            |       |
| Preferred stock dividends                              |       | —          |       | (23,045        | )          | —              |       | 23,045            |       | —           |       |
| Net income (loss) attributable to common  stockholders |       | $               | 2,922      |           | $          | (16,583             | )          | $                 | 3,330      |             | $          | 13,253 |   | $ | 2,922 |   |

 

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(1)   The SubsidiaryIssuer does not allocate integration expenses, corporate overhead or otherexpenses for shared services to the Guarantor Subsidiaries; therefore, theresults for the Guarantor Subsidiaries do not reflect any such allocation.

 

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)**

**FORTHE THREE MONTHS ENDED MARCH 26, 2010**

**(inthousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                          | ** ** | ** **      |       |           |       |             |       |              | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating activities           |       | $               | —     |           | $          | 16,268           |       | $                 | (202       | )                | $          | — |   | $ | 16,066 |   |
| Cash Flows from Investing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —          |       | (3,733         | )          | —           |       | —            |       | (3,733           | )          |
| Purchase of short-term investments                            |       | —          |       | (1,342         | )          | —           |       | —            |       | (1,342           | )          |
| Proceeds from sales and maturities of short-term  investments |       | —          |       | 1,379          |       | —           |       | —            |       | 1,379            |       |
| Other                                                         |       | —          |       | (203           | )          | —           |       | 203               |       | —           |       |
| Net cash used in investing activities                         |       | —          |       | (3,899         | )          | —           |       | 203               |       | (3,696           | )          |
| Cash Flows from Financing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Increase in purchase card payable, net                        |       | —          |       | (1,025         | )          | —           |       | —            |       | (1,025           | )          |
| Repayment of debt and capital lease obligations               |       | —          |       | (154           | )          | —           |       | —            |       | (154             | )          |
| Proceeds from stock options exercised                         |       | —          |       | 5,200          |       | —           |       | —            |       | 5,200            |       |
| Other                                                         |       | —          |       | 479            |       | 203              |       | (203              | )          | 479              |       |
| Net cash provided by (used in) financing activities           |       | —          |       | 4,500          |       | 203              |       | (203              | )          | 4,500            |       |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |       | 60             |       | —           |       | —            |       | 60               |       |
| Net increase (decrease) in cash and cash  equivalents         |       | —          |       | 16,929         |       | 1                |       | —            |       | 16,930           |       |
| Cash and cash equivalents at beginning of period              |       | —          |       | 99,170         |       | 53               |       | —            |       | 99,223           |       |
| Cash and cash equivalents at end of period                    |       | $               | —     |           | $          | 116,099          |       | $                 | 54         |             | $          | — |   | $ | 116,153 |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)**

**FORTHE THREE MONTHS ENDED MARCH 27, 2009**

**(inthousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                          | ** ** | ** **      |       |           |       |             |       |              | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating activities           |       | $               | —     |           | $          | 63,890           |       | $                 | (1,315     | )                | $          | — |   | $ | 62,575 |   |
| Cash Flows from Investing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —          |       | (2,390         | )          | (3               | )          | —            |       | (2,393           | )          |
| Purchase of businesses, net of cash acquired                  |       | —          |       | (126           | )          | —           |       | —            |       | (126             | )          |
| Other                                                         |       | —          |       | (1,103         | )          | —           |       | 1,103             |       | —           |       |
| Net cash (used in) provided by investing activities           |       | —          |       | (3,619         | )          | (3               | )          | 1,103             |       | (2,519           | )          |
| Cash Flows from Financing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Decrease in purchase card payable, net                        |       | —          |       | (1,677         | )          | —           |       | —            |       | (1,677           | )          |
| Repayment of debt and capital lease obligations               |       | —          |       | (6,221         | )          | —           |       | —            |       | (6,221           | )          |
| Repayment of 81/8% senior subordinated notes                  |       | —          |       | (34,157        | )          | —           |       | —            |       | (34,157          | )          |
| Other                                                         |       | —          |       | —         |       | 1,103            |       | (1,103            | )          | —           |       |
| Net cash (used in) provided by financing activities           |       | —          |       | (42,055        | )          | 1,103            |       | (1,103            | )          | (42,055          | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |       | (34            | )          | —           |       | —            |       | (34              | )          |
| Net increase (decrease) in cash and cash  equivalents         |       | —          |       | 18,182         |       | (215             | )          | —            |       | 17,967           |       |
| Cash and cash equivalents at beginning of period              |       | —          |       | 62,293         |       | 431              |       | —            |       | 62,724           |       |
| Cash and cash equivalents at end of period                    |       | $               | —     |           | $          | 80,475           |       | $                 | 216        |             | $          | — |   | $ | 80,691 |   |

 

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**ITEM 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*References to “us” and “we” are to the Company. Youshould read the following discussion in conjunction with our unauditedcondensed consolidated financial statements and related notes included in thisquarterly report, and our audited consolidated financial statements and relatednotes and Management’s Discussion and Analysis of Financial Condition andResults of Operations included in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission (“SEC”).*

 

**Forward-Looking Statements**

 

This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 (the “Exchange Act”) that are subject torisks and uncertainties. You should not place undue reliance on thosestatements because they are subject to numerous uncertainties and factorsrelating to our operations and business environment, all of which are difficultto predict and many of which are beyond our control. Forward-looking statementsinclude information concerning our possible or assumed future results ofoperations, including descriptions of our business strategy. These statementsoften include words such as “may,” “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate” or similar expressions. These statements are based onassumptions that we have made in light of our experience in the industry aswell as our perceptions of historical trends, current conditions, expectedfuture developments and other factors we believe are appropriate under thecircumstances. As you read and consider this report, you should understand thatthese statements are not guarantees of performance or results. They involverisks, uncertainties and assumptions. Although we believe that theseforward-looking statements are based on reasonable assumptions, you should beaware that many factors could affect our actual financial results or results ofoperations and could cause actual results to differ materially from those inthe forward-looking statements. These factors include:

 

·                  economic slowdowns,

·                  general market conditions,

·                  credit market contractions,

·                  the loss of significant customers,

·                  currency exchange rates,

·                  product cost and price fluctuations due to marketconditions,

·                  consumer spending and debt levels,

·                  adverse changes in trends in the home improvement andremodeling and home building markets,

·                  the highly competitive nature of the maintenance,repair and operations distribution industry,

·                  material facilities and systems disruptions andshutdowns,

·                  failure to realize expected benefits fromacquisitions,

·                  our ability to purchase products from suppliers onfavorable terms,

·                  the length of our supply chains,

·                  work stoppages or other business interruptions attransportation centers or shipping ports,

·                  fluctuations in the cost of commodity-based products,raw materials and fuel prices,

·                  our ability to accurately predict market trends,

·                  failure to locate, acquire and successfully integrateacquisition candidates,

·                  dependence on key employees,

·                  our inability to protect trademarks,

·                  adverse publicity and litigation,

·                  our level of debt,

·                  interest rate fluctuations,

·                  future cash flows,

·                  changes in consumer preferences,

·                  labor and benefit costs,

·                  weather conditions, and

·                  the other factors described under “Part I. Item1A—Risk Factors” in our Annual Report on Form 10-K filed with the SEC.

 

You should keep in mindthat any forward-looking statement made by us in this report, or elsewhere,speaks only as of the date on which we make it. New risks and uncertaintiesarise from time to time, and it is impossible for us to predict these events orhow they may affect us. In light of these risks and uncertainties, you shouldkeep in mind that any forward-looking statement made in this report orelsewhere might not occur. Notwithstanding the foregoing, all informationcontained in this report is materially accurate as of the date of this report.

 

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**Overview**

 

We are a leadingnational distributor and direct marketer of maintenance, repair and operations(“MRO”) products. We have one operating segment, the distribution of MROproducts. We stock approximately 100,000 MRO products in the followingcategories: appliances; cabinetry; electrical; floor coverings; gas; hardware;hearth and chimney; heating, ventilation and air conditioning (“HVAC”);janitorial and sanitary; lighting; paint and sundries; plumbing; pool;security; shop and office supplies; tools and equipment; window coverings; andother miscellaneous products. Our products are primarily used for the repair,maintenance, remodeling, refurbishment and construction of properties andnon-industrial facilities.

 

Our highly diversecustomer base includes facilities maintenance customers, which consist ofmulti-family housing facilities, educational institutions, lodging and healthcare facilities, government properties and building service contractors;professional contractors who are primarily involved in the repair, remodelingand construction of residential and non-industrial facilities; and specialtydistributors, including plumbing and hardware retailers. Our customers range insize from individual contractors and independent hardware stores to apartmentmanagement companies and national purchasing groups.

 

We market and sellour products primarily through twelve distinct and targeted brands, each ofwhich is nationally recognized in the markets we serve for providing qualityproducts at competitive prices with reliable same-day or next-day delivery. TheWilmar, AmSan, Sexauer, Maintenance USA and Trayco brands generally serve ourfacilities maintenance customers; the Barnett, Copperfield, U.S. Lock andSunStar brands generally serve our professional contractor customers; and theHardware Express, Leran and AF Lighting brands generally serve our specialtydistributors customers. Our multi-brand operating model, which we believe isunique in the industry, allows us to use a single platform to deliver tailoredproducts and services to meet the individual needs of each respective customergroup served. We reach our markets using a variety of sales channels, includinga sales force of approximately 600 field sales representatives, approximately350 inside sales and customer service representatives, a direct marketingprogram of approximately five million pieces annually, brand-specific websitesand a national accounts sales program.

 

We deliver ourproducts through our network of two national distribution centers (“NDCs”), 57regional distribution centers, 22 professional contractor showrooms locatedthroughout the United States and Canada, 31 vendor-managed inventory locationsat large customer locations and a dedicated fleet of trucks. Our broaddistribution network enables us to provide reliable, next-day delivery serviceto at least 98% of the U.S. population and same-day deliveryservice to most major metropolitan markets in the U.S.

 

Our informationtechnology and logistics platform supports our major business functions,allowing us to market and sell our products at varying price points dependingon the customer’s service requirements. While we market our products under avariety of branded catalogs, generally our brands draw from the same inventorywithin common distribution centers and share associated employee andtransportation costs. In addition, we have centralized marketing, purchasingand catalog production operations to support our brands. We believe that ourinformation technology and logistics platform also benefits our customers byallowing us to offer a broad product selection at highly competitive priceswhile maintaining the unique customer appeal of each of our targeted brands.Overall, our common operating platform has enabled us to improve customerservice, maintain lower operating costs, efficiently manage working capital andsupport our growth initiatives.

 

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**Resultsof Operations**

 

The following tablepresents information derived from the condensed consolidated statements ofearnings expressed as a percentage of revenues for the three months ended March 26,2010 and March 27, 2009:

 
| ** **                                   | ** ** | **%  of Net Sales**     | ** ** | **%  Increase**    | ** ** |
|----------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **Three  Months Ended** | ** ** | **(Decrease)**     | ** ** |
| ** **                                   | ** ** | **March 26,**      | ** ** | **March 27,** | ** ** | **2010** | ** ** |
| ** **                                   | ** ** | **2010**                | ** ** | **2009**           | ** ** | **vs.  2009 (1)** | ** ** |
|                                         |       |                    |       |               |       |   |   |
| Net sales                                    |       | 100.0                   | %          | 100.0              | %          | (4.5 | )% |
| Cost of sales                                |       | 61.2                    |       | 62.4               |       | (6.3 | ) |
| Gross profit                                 |       | 38.8                    |       | 37.6               |       | (1.5 | ) |
|                                         |       |                    |       |               |       |   |   |
| Operating Expenses:                          |       |                    |       |               |       |   |   |
| Selling, general and administrative expenses |       | 31.5                    |       | 32.7               |       | (8.0 | ) |
| Depreciation and amortization                |       | 1.9                     |       | 1.8                |       | 2.5 |   |
| Total operating expense                      |       | 33.4                    |       | 34.5               |       | (7.4 | ) |
| Operating income                             |       | 5.4                     |       | 3.1                |       | 63.7 |   |
|                                         |       |                    |       |               |       |   |   |
| Gain on extinguishment of debt, net          |       | —                  |       | 0.7                |       | 100.0 |   |
| Interest expense                             |       | (1.8                    | )          | (2.1               | )          | (19.1 | ) |
| Interest income and other income             |       | 0.2                     |       | 0.1                |       | 46.2 |   |
| Income before income taxes                   |       | 3.8                     |       | 1.8                |       | 97.7 |   |
| Income tax provision                         |       | (1.5                    | )          | (0.7               | )          | 109.5 |   |
| Net income                                   |       | 2.3                     | %          | 1.1                | %          | 90.6 | % |

 

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(1)          Percent increase(decrease) represents the actual change as a percent of the prior year’sresult.

 

*Overview.*During the three months ended March 26,2010, our net sales declined 4.5%. We believe this decline is associated withthe widely reported and prolonged general economic downturn. Sales to customersin our facilities maintenance end-markets, which make up 72% of our total salesand include residential multi-family housing and institutional MRO customers,declined 3.1% during the first quarter of 2010 compared to the first quarter of2009. Sales to our professional contractor and specialty distributor customers,which represent 16% and 12% of our total sales, respectively, declined 8.9% and6.7%, respectively. Demand from these customers continues to be negativelyimpacted by recessionary declines in residential new construction andrenovations activity.

 

Net income as a percentage of sales was 2.3% in thefirst quarter compared to 1.1% in the comparable prior year period. Theincrease in net income as a percent of sales is primarily a result of highergross profit margins, lower bad debt expense, lower occupancy expenses andlower severance and facility closing costs.

 

We are continuing to focus on keeping our operatingcosts low in the near term while continuing to invest in our operating platformfor the long term. Accordingly, in addition to the operational initiatives suchas headcount reductions, the closing of underperforming professional contractorshowrooms and the consolidation of distribution centers, most of which havebeen completed, our plans include continued investments in the consolidation ofour distribution network and in information technology solutions to optimizecustomer service.

 

*Three Months Ended March 26, 2010 Compared to ThreeMonths Ended March 27, 2009*

 

*Net Sales.*Our net sales decreased by $11.6 million, or 4.5%, to$245.2 million in the three months ended March 26, 2010 from$256.8 million in the three months ended March 27, 2009. The declinein sales resulted from the net impact of a 3.1% decrease

in sales to ourfacilities maintenance customers and a continued decline in sales to ourprofessional contractor and specialty distributor customers of 8.9% and 6.7%,respectively. We continue to experience some variability in our end-markets;however, we expect the impact on sales during the remainder of 2010 will beless severe than in 2009. In addition, we are starting to see signs ofstabilization in the overall economy and our end-markets; therefore, expectsales to our end-markets to be relatively flat during the remainder of 2010.

 

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*GrossProfit.*Grossprofit decreased by $1.4 million, or 1.5%, to $95.1 million in thethree months ended March 26, 2010 from $96.6 million in the threemonths ended March 27, 2009 as a direct result of the decrease in sales.Our gross profit margin increased 120 basis points to 38.8% for the threemonths ended March 26, 2010 compared to 37.6% for the three months ended March 27,2009. The increase in gross margin is primarily due to continued improvement inselling margins from the optimization of product pricing as well as highersupplier rebates.

 

*Selling, General and Administrative Expenses.*SG&A expenses decreased by $6.7million, or 8.0%, to $77.2 million in the three months ended March 26,2010 from $83.9 million in the three months ended March 27, 2009. As apercent of sales, SG&A decreased to 31.5% for the three months ended March 26,2010 compared to 32.7% for the three months ended March 27, 2009. The decreasein SG&A expenses is primarily due to $3.5 million of lower bad debtexpense as well as decreases in occupancy and personnel-related expensesresulting from previous closings of underperforming professional contractorshowrooms and consolidations of distribution centers and headcount reductions.

 

*Depreciation and Amortization.*Depreciation and amortizationexpense increased by $0.1 million to $4.8 million in the three monthsended March 26, 2010 from $4.6 million in the three months ended March 27,2009. As a percentage of sales, depreciation and amortization was 1.9% or 10basis points higher than the 1.8% in the comparable prior year period.

 

*Operating Income.*As a result of the foregoing, operatingincome increased by $5.1 million, or 63.7%, to $13.2 million in the threemonths ended March 26, 2010 from $8.0 million in the three months ended March 27,2009. As a percent of sales, operating income increased to 5.4% in the threemonths ended March 26, 2010 compared to 3.1% in the three months ended March 27,2009.

 

*Gain on Extinguishment of Debt*. We did not extinguish debt inthe three months ended March 26, 2010. Gain on extinguishment of debt was$1.7 million in the three months ended March 27, 2009. During the threemonths ended March 27, 2009, we repurchased $36.4 million of our 81/8% senior subordinated notes at an average of 93.8% of par, or$34.2 million. In addition, during the three months ended March 27, 2009,we repaid $5.2 million of our term loan ahead of schedule. In connection withthe repurchase of our 81/8% senior subordinated notes andthe term loan payment, we recorded a gain on extinguishment of debt of $1.7million net of $0.5 million in original issue discount and deferred financingcosts written-off.

 

*Interest Expense.*Interest expense decreased by $1.0 millionin the three months ended March 26, 2010 to $4.4 million from$5.4 million in the three months ended March 27, 2009. This decreasewas primarily due to $55.3 million in lower debt balances outstanding comparedto last year associated with the repayments of our term debt and the repurchaseof our 81/8% senior subordinated notes and lower interest rates.

 

*Interest andOther Income.*Interest and other income increased $0.1 million to $0.4 million in the threemonths ended March 26, 2010 compared to $0.3 million in the three monthsended March 27, 2009. The increase was primarily attributable to interestincome earned from our short-term investments.

 

*Provisionfor Income Taxes.*Theeffective tax rate for the three months ended March 26, 2010 was 39.7%compared to 37.5% for the three months ended March 27, 2009. The increasein the effective tax rate was due to the write-off of deferred tax assetsassociated with share-based compensation arising from stock options that wereforfeited due to employee terminations and the decrease in the benefitrecognized associated with unrecognized tax benefits. During the three monthsended March 27, 2009, we obtained resolution related to an uncertain statetax position and we adjusted the accrual previously established, of which $0.1million favorably impacted our effective tax rate.

 

**Liquidityand Capital Resources**

 

*Overview*

 

We are a holding company whose only asset is the stockof our subsidiaries. We conduct virtually all of our business operationsthrough Interline New Jersey. Accordingly, our only material sources of cashare dividends and distributions with respect to our ownership interests inInterline New Jersey that are derived from the earnings and cash flow generatedby Interline New Jersey.

 

We have outstanding $150.7 million of 81/8% seniorsubordinated notes due 2014 and we have a $330.0 million bank credit facility.The 81/8%senior subordinated notes mature on June 15, 2014 and interest is payableon June 15 and December 15 of each year. As of March 26, 2010,the 81/8%senior subordinated notes had an estimated fair market value of $151.4 million,or 100.5% of par. The bank credit facility consists of a $230.0 million 7-yearterm loan and a $100.0 million 6-year revolving credit facility of which aportion not exceeding $40.0 million is available in the form of letters ofcredit. As of March 26, 2010, Interline New Jersey had 

 

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$8.9 millionof letters of credit issued under the revolving loan facility and$154.2 million of aggregate principal outstanding under the term loanfacility.

 

The debt instruments of Interline New Jersey,primarily the credit facility entered into on June 23, 2006 and theindenture governing the terms of the 81/8% senior subordinated notes, contain significantrestrictions on the payment of dividends and distributions to us by InterlineNew Jersey. Interline New Jersey’s credit facility allows it to pay dividends,make distributions to us or make investments in us in an aggregate amount notto exceed $2.0 million during any fiscal year, so long as Interline New Jerseyis not in default or would be in default as a result of such payments. Inaddition, ordinary course distributions for overhead (up to $3.0 millionannually) and taxes are permitted, as are annual payments of up to $7.5 millionin respect of our stock option or other benefit plans for management or employeesand (provided Interline New Jersey is not in default) aggregate payments of upto $40.0 million depending on the pro forma net leverage ratio as of the lastday of the previous quarter. In addition, the indenture for the 81/8% seniorsubordinated notes generally restricts the ability of Interline New Jersey topay distributions to us and to make advances to, or investments in, us to anamount generally equal to 50% of the net income of Interline New Jersey, plusan amount equal to the net proceeds from certain equity issuances, subject tocompliance with a leverage ratio and no default having occurred and continuing.The indenture also contains certain permitted exceptions including (1) allowingus to pay our franchise taxes and other fees required to maintain our corporateexistence, to pay for general corporate and overhead expenses and to payexpenses incurred in connection with certain financing, acquisition ordisposition transactions, in an aggregate amount not to exceed $10.0 millionper year; (2) allowing certain tax payments; and (3) allowing certainpermitted distributions up to $75 million. For further description of thecredit facility, see “Credit Facility” below.

 

*FinancialCondition*

 

Working capital increased by $13.3 million to $310.6million as of March 26, 2010 from $297.3 million as of December 25,2009. The increase in working capital was primarily funded by cash flows fromoperating activities.

 

*Cash Flow*

 

*OperatingActivities.* Netcash provided by operating activities was $16.1 million in the threemonths ended March 26, 2010 compared to net cash provided by operatingactivities of $62.6 million in the three months ended March 27, 2009.

 

Net cash provided byoperating activities of $16.1 million in the three months ended March 26,2010 primarily consisted of net income of $5.6 million, adjustments fornon-cash items of $7.1 million and cash provided by working capital items of$3.2 million. Adjustments for non-cash items primarily consisted of $4.9million in depreciation and amortization of property, equipment and intangibleassets, $1.5 million in bad debt expense and $0.8 million in share-basedcompensation. The cash provided by working capital items primarily consisted of$3.3 million from increased trade payables balances as a result of the timingof purchases and related payments, $3.0 million from timing of interestpayments and $0.6 million from the increase in income taxes resulting from anincrease in income before taxes. These items were partially offset by $3.3million from increased inventory levels as a result of the stocking of our newdistribution center in Chicago, Illinois, and $1.0 million from increased tradereceivables, net of changes in our allowance for doubtful accounts, resultingfrom the timing of collections.

 

Net cash provided byoperating activities of $62.6 million in the three months ended March 27,2009 primarily consisted of net income of $2.9 million, adjustments fornon-cash items of $11.2 million and cash provided by working capital items of$48.5 million. Adjustments for non-cash items primarily consisted of $4.8million in depreciation and amortization of property, equipment and intangibleassets, $4.9 million in bad debt expense, $1.3 million in deferred incometaxes, $0.8 million in share-based compensation and $0.3 million inamortization of debt issuance costs offset by $1.7 million in net gain from therepurchase of $36.4 million of our 81/8% senior subordinated notes and the repayment of $5.2million of our term debt. The cash provided by working capital items primarilyconsisted of $8.1 million in lower trade receivables resulting from increasedcollections and the decline in sales, $11.6 million from decreased inventorylevels as a result of decreased purchases associated with expected demand, $5.8million from decreased prepaid expenses and other current assets primarily fromthe collection of rebates from vendors, $17.9 million from increased tradepayables balances as a result of the timing of purchases and related payments,$3.5 million from accrued expenses primarily from higher accrued compensationand related benefits at period-end and $2.5 million from accrued interest.These items were partially offset by $0.6 million used for income taxes.

 

*Investing Activities.* Net cash used in investingactivities was $3.7 million in the three months ended March 26, 2010compared to net cash used in investing activities of $2.5 million in the threemonths ended March 27, 2009.

 

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Net cash used in investingactivities in the three months ended March 26, 2010 was primarily attributable to capitalexpenditures associated with our distribution center consolidation projects aswell as those made in the ordinary course of business of $3.7 million.

 

Net cash used in investingactivities in the three months ended March 27, 2009 was primarily attributable to capitalexpenditures made in the ordinary course of business of $2.4 million.

 

*Financing Activities.* Net cash provided by financingactivities totaled $4.5 million in the three months ended March 26,2010 compared to net cash used in financing activities of $42.1 million inthe three months ended March 27, 2009.

 

Net cash provided by financing activities in the threemonths ended March 26, 2010 was attributable to proceeds received fromstock options exercised and related excess tax benefits of $5.7 million,partially offset by a $1.0 million net decrease in purchase card payable.

 

Net cash used infinancing activities in the three months ended March 27, 2009 wasattributable to our repurchase of $36.4 million of our 81/8% seniorsubordinated notes at an average of 93.8% of par, or $34.2 million, ourrepayment of $6.2 million of borrowings on our credit facility and capitallease obligations and the net decrease in purchase card payable of $1.7million.

 

*CapitalExpenditures*

 

Capitalexpenditures were $3.7 million in the three months ended March 26, 2010compared to $2.4 million in the three months ended March 27, 2009. In addition,during the three months ended March 26, 2010, we acquired $0.6 million ofproperty through lease incentives. Capital expenditures as a percentage of sales were1.5% in the three months ended March 26, 2010 compared to 0.9% in thethree months ended March 27, 2009. The increase in capital expenditureswas driven primarily by the continued consolidation of our distribution centernetwork, including the investments in larger, more efficient distribution centers.

 

*Credit Facility*

 

Borrowings under the term loan and the delayed drawfacility bear interest, at Interline New Jersey’s option, at either LIBOR plus1.75% or at the alternate base rate, which is the greater of the Prime Rate orthe Federal Funds Effective Rate plus 0.50%, plus 0.75%. Borrowings under therevolving credit facility bear interest, at Interline New Jersey’s option, ateither LIBOR plus 1.75% or at the alternate base rate plus 0.50%. As of March 26,2010, the weighted average interest rate in effect with respect to the termloan and the delayed draw facility was 2.00% for the LIBOR option and 4.00% forthe alternate base rate option. Outstanding letters of credit under therevolving credit facility are subject to a per annum fee equal to theapplicable margin under the revolving credit facility. The interest rate spreadis subject to a pricing grid that is based on the ratio of net totalindebtedness to consolidated earnings before interest, taxes, depreciation andamortization (“EBITDA”), as defined by the credit facility. The term loan andthe delayed draw facility mature on June 23, 2013 and the revolving loanfacility matures on June 23, 2012. In accordance with the terms of ourcredit facility, amounts under the term loan and the delayed draw facility aredue and payable in quarterly installments equal to 1.0% of the originalprincipal amount on an annual basis through June 23, 2013, with thebalance payable in one final installment at the maturity date. As a result ofour repayments of borrowings on our term debt, we are not required to makeanother principal payment until the debt matures in 2013.

 

The bank credit facility, which is secured bysubstantially all of the assets of Interline New Jersey and is guaranteed by usand by the domestic subsidiaries of Interline New Jersey, contains affirmative,negative and financial covenants that limit Interline New Jersey’s ability toincur additional indebtedness, pay dividends on its common stock or redeem,repurchase or retire its common stock or subordinated indebtedness, makecertain investments, sell assets, and consolidate, merge or transfer assets,and that require Interline New Jersey to maintain certain financial ratios asof the last day of each fiscal quarter, including a minimum ratio based on anadjusted consolidated EBITDA, as defined by the credit facility, toconsolidated cash interest expense and a maximum ratio of net totalindebtedness to an adjusted consolidated EBITDA, as defined by the creditfacility. The maximum ratio of net total indebtedness to adjusted consolidatedEBITDA, as defined by the credit facility, was 3.5. Interline New Jersey andthe Company were in compliance with all covenants at March 26, 2010.

 

In connection with the bank credit facility, InterlineNew Jersey is required to pay administrative fees, commitment fees, letter ofcredit issuance and administration fees and certain expenses and to providecertain indemnities, all of which are customary for financings of this type.The bank credit facility also allows for certain incremental term loans andincremental commitments under the revolving credit facility which are availableto Interline New Jersey to repay indebtedness and make acquisitions if certainconditions, including various financial ratios are met.

 

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*Liquidity*

 

Historically, our capitalrequirements have been for debt service obligations, working capital requirements,including inventory, accounts receivable and accounts payable, acquisitions,the expansion and maintenance of our distribution network and upgrades of ourinformation systems. We expect this to continue in the foreseeable future.Historically, we have funded these requirements through cash flow generatedfrom operating activities and funds borrowed under our credit facility. Weexpect our cash on hand, cash flow from operations and loan availability underour credit facility to be our primary source of funds in the future. Letters ofcredit, which are issued under the revolving credit facility, are used tosupport payment obligations incurred for our general corporate purposes.

 

As of March 26, 2010, we had $33.1 million of availabilityunder Interline New Jersey’s $100.0 million revolving credit facilityafter the limitation under the bank credit facility’s ratio of net totalindebtedness to adjusted consolidated EBITDA, as defined by the creditfacility. As of March 26, 2010, we had $117.6 million of total cash onhand and permitted investments (including $25.0 million in cash that, for thecovenant compliance ratio, is netted against debt).

 

We believe thatcash and cash equivalents, cash flow from operations and available borrowingcapacity under our credit facility will be adequate to finance our ongoingoperational cash flow needs and debt service obligations for the next twelvemonths.

 

*ContractualObligations*

 

Our contractualobligations are disclosed in our Annual Report on Form 10-K for the yearended December 25, 2009 filed with the SEC. There have been no materialchanges to our contractual obligations since December 25, 2009.

 

**Critical Accounting Policies**

 

In preparing theunaudited condensed consolidated financial statements in conformity withaccounting 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 ofassets and liabilities, including the disclosure of contingent assets andliabilities, at the date of the financial statements and the reported amountsof revenues and expenses during the periods presented. On an ongoing basis,management evaluates these estimates and assumptions. Management bases itsestimates and assumptions on historical experience and on various other factorsthat are believed to be reasonable at the time the estimates and assumptionsare made. Actual results may differ from these estimates and assumptions underdifferent circumstances or conditions.

 

Our criticalaccounting policies are included in our Annual Report on Form 10-K for theyear ended December 25, 2009 filed with the SEC. During the three monthsended March 26, 2010, there were no significant changes to any of ourcritical accounting policies.

 

**ITEM 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

*Commodity Price Risk*

 

We are aware of the potentially unfavorable effectsinflationary pressures may create through higher product and material costs,higher asset replacement costs and related depreciation and higher interestrates. In addition, our operating performance is affected by price fluctuationsin copper, oil, stainless steel, aluminum, zinc, plastic and PVC and othercommodities and raw materials. We seek to minimize the effects of inflation andchanging prices through economies of purchasing and inventory managementresulting in cost reductions and productivity improvements as well as priceincreases to maintain reasonable profit margins. However, such commodity pricefluctuations have from time to time created cyclicality in our financialperformance, and could continue to do so in the future. In addition, our use ofpriced catalogs may not allow us to offset such cost increases quickly,resulting in a decrease in gross margins and profit.

 

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*InterestRate Risk*

 

Our variable rate term debt is sensitive to changes inthe general level of interest rates. As of March 26, 2010, the weightedaverage interest rate in effect with respect to our $154.2 million variablerate term debt was 2.00% for the LIBOR option and 4.00% for the alternate base rateoption. While our variable rate term debt obligations expose us to the risk ofrising interest rates, we do not believe that the potential exposure ismaterial to our overall financial performance or results of operations. Basedon the outstanding variable rate term debt as of March 26, 2010, a 1.0%annual increase or decrease in current market interest rates would have theeffect of causing a $0.4 million pre-tax change to our statement of operationsfor the three months ended March 26, 2010.

 

The fair market value of ourfixed rate debt is subject to interest rate risk. As of March 26, 2010,the fair market value of our $150.7 million 81/8% senior subordinated notes was approximately $151.4 million,or 100.5% of par.

 

*ForeignCurrency Exchange Risk*

 

The majority of our purchases from foreign-basedsuppliers are from China and other countries in Asia and are transacted in U.S.dollars. Accordingly, our exposure to risk from foreign currency exchange rateswas not material as of March 26, 2010.

 

*DerivativeFinancial Instruments*

 

As of March 26, 2010, we did not have anyinterest rate exchange agreements or swaps. Historically, we entered intoderivative financial instruments from time to time, including interest rateexchange agreements or swaps, to manage our exposure to fluctuations ininterest rates on our debt.

 

We periodically evaluate the costs and benefits of anychanges in our interest rate risk. Based on such evaluation, we may enter intonew interest rate swaps to manage our interest rate exposure. Our derivativeactivities, all of which are for purposes other than trading, are initiatedwithin the guidelines of corporate risk-management policies.

 

**ITEM 4.Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures*

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer (our principal executive officerand principal financial officer), evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of March 26, 2010. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of March 26,2010, our disclosure controls and procedures were effective to (1) ensurethat material information disclosed by us in the reports that we file or submitunder the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure and (2) ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

*Changes in Internal Control overFinancial Reporting*

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the quarter ended March 26, 2010 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II. OTHERINFORMATION**

 

**ITEM1. Legal Proceedings**

 

We are involved invarious legal proceedings that have arisen in the ordinary course of ourbusiness and have not been fully adjudicated. These actions, when ultimatelyconcluded and determined, will not, in the opinion of management, have amaterial effect upon our consolidated financial position, results of operationsor liquidity.

 

**ITEM 1A. Risk Factors**

 

For information regarding factors that couldaffect our financial position, results of operations and cash flows, see the riskfactors discussion provided in our Annual Report on Form 10-K for the yearended December 25, 2009 in Part I. Item 1A. Risk Factors. See also “Part I. Item 2—ForwardLooking Statements” above.

 

There have been nomaterial changes from the risk factors previously disclosed in our AnnualReport on Form 10-K for the year ended December 25, 2009.

 

**ITEM2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

*Unregistered Sales of EquitySecurities*

 

None.

 

*Purchases of Equity Securities bythe Issuer*

 

The following table summarizes repurchases ofour stock during the three months ended March 26, 2010, comprised entirelyof shares sold to us to satisfy employee tax withholding obligations that aroseupon the vesting of restricted share units and restricted stock awards:

 
| **Period**                                | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total  Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum  Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| January 2010                         |       |                                    |       |                                |       |                                                                                           |       |                                                                                        |       |
| (December 26 - January 22)      |       | 245                                     |       | $                                   | 18.29      |                                                                                           | —     |                                                                                        | —     |   |
| February 2010                        |       |                                    |       |                                |       |                                                                                           |       |                                                                                        |       |
| (January 23 — February 19) |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                      |       |
| March 2010                           |       |                                    |       |                                |       |                                                                                           |       |                                                                                        |       |
| (February 20 — March 26)   |       | 2,420                                   |       | 12.96                               |       | —                                                                                         |       | —                                                                                      |       |
| Total                                     |       | 2,665                                   |       | $                                   | 13.45      |                                                                                           | —     |                                                                                        | —     |   |

 

**ITEM 3. Defaults UponSenior Securities**

 

None.

 

**ITEM 4. (Removed andReserved)**

 

**ITEM 5. Other Information**

 

None.

 

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**ITEM6. Exhibits**

 

Thefollowing exhibits are being filed as part of this Quarterly Report on Form 10-Q:

 
| 12.1 |   | Computation of ratio of  earnings to fixed charges and earnings to combined fixed charges and  preferred dividends of Interline Brands, Inc. (furnished herewith).                                                                   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of the  Chief Executive Officer of Interline Brands, Inc., pursuant to  Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (furnished herewith).         |
| 31.2 |   | Certification of the  Chief Financial Officer of Interline Brands, Inc., pursuant to  Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (furnished herewith).         |
| 32.1 |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange  Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| 32.2 |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange  Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (furnished herewith). |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 
| ** **             | ** ** | **INTERLINE  BRANDS, INC.**                                              |
|------------------------|------------|--------------------------------------------------------------------------|
|                   |       | Registrant                                                               |
|                   |       |                                                                     |
|                   |       |                                                                     |
| Date: May 3, 2010 | By:        | /S/ JOHN A. EBNER                                                        |
|                   |       | John A. Ebner                                                            |
|                   |       | Chief Financial Officer  and Treasurer                                   |
|                   |       | (Duly Authorized  Signatory, Principal Financial and Accounting Officer) |

 

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