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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

x**       QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 24, 2010**

 

**or**

 

o**          TRANSITION REPORTPURSUANT 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 sincelast report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x    No o

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of 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) |   |                        |

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. As of October 29, 2010, therewere 33,081,390 shares of the registrant’s common stock outstanding (excluding122,300 shares held in treasury), par value $0.01.

 

 

 

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**TABLE OF CONTENTS**

 
| **ITEM**                            | ** **                                                                                                                              | ** ** | **PAGE** |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                |                                                                                                                                    |       |     |
| PART I.  FINANCIAL INFORMATION |                                                                                                                                    |       |
|                                |                                                                                                                                    |       |     |
| 1.                                  | Financial Statements (Unaudited)                                                                                                        |       |     |
|                                | Condensed Consolidated Balance Sheets  as of September 24, 2010 and December 25, 2009                                         |       | 1        |
|                                | Condensed Consolidated Statements of Earnings  for the Three and Nine Months Ended September 24, 2010 and  September 25, 2009 |       | 2        |
|                                | Condensed Consolidated Statements of Cash Flows  for the Nine Months Ended September 24, 2010 and September 25, 2009          |       | 3        |
|                                | Notes to Condensed Consolidated Financial Statements                                                                                    |       | 4        |
| 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                             |       | 19       |
| 3.                                  | Quantitative  and Qualitative Disclosures about Market Risk                                                                             |       | 26       |
| 4.                                  | Controls and  Procedures                                                                                                                |       | 27       |
|                                |                                                                                                                                    |       |     |
| PART II. OTHER INFORMATION     |                                                                                                                                    |       |
|                                |                                                                                                                                    |       |     |
| 1.                                  | Legal Proceedings                                                                                                                       |       | 28       |
| 1A.                                 | Risk Factors                                                                                                                            |       | 28       |
| 2.                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                            |       | 28       |
| 3.                                  | Defaults  Upon Senior Securities                                                                                                        |       | 28       |
| 4.                                  | (Removed and  Reserved)                                                                                                                 |       | 28       |
| 5.                                  | Other Information                                                                                                                       |       | 28       |
| 6.                                  | Exhibits                                                                                                                                |       | 29       |
|                                |                                                                                                                                    |       |     |
| SIGNATURES                          |                                                                                                                                    | 30         |

 

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AS OF SEPTEMBER 24, 2010 AND DECEMBER 25, 2009**

**(in thousands, except share and per share data)**

 
| ** **                                                                                                                                                                                                         | ** ** | **September 24,** | ** ** | **December 25,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                         |       |                   |       |                  |       |
| Current Assets:                                                                                                                                                                                                    |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | $                      | 104,304    |                  | $          | 99,223 |   |
| Short-term investments                                                                                                                                                                                             |       | 469                    |       | 1,479                 |       |
| Accounts receivable - trade (net of allowance for doubtful  accounts of $10,070 and $12,975)                                                                                                                       |       | 132,908                |       | 120,004               |       |
| Inventory                                                                                                                                                                                                          |       | 207,240                |       | 173,422               |       |
| Prepaid expenses and other current assets                                                                                                                                                                          |       | 24,223                 |       | 18,552                |       |
| Deferred income taxes                                                                                                                                                                                              |       | 17,123                 |       | 16,459                |       |
| Total current assets                                                                                                                                                                                               |       | 486,267                |       | 429,139               |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                                                        |       | 51,445                 |       | 46,804                |       |
| Goodwill                                                                                                                                                                                                           |       | 319,151                |       | 319,006               |       |
| Other intangible assets, net                                                                                                                                                                                       |       | 119,707                |       | 124,835               |       |
| Other assets                                                                                                                                                                                                       |       | 9,150                  |       | 9,054                 |       |
| Total assets                                                                                                                                                                                                       |       | $                      | 985,720    |                  | $          | 928,838 |   |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                     |       |                   |       |                  |       |
| Current Liabilities:                                                                                                                                                                                               |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                   |       | $                      | 95,225     |                  | $          | 85,982 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                     |       | 49,398                 |       | 41,715                |       |
| Accrued interest                                                                                                                                                                                                   |       | 3,658                  |       | 1,050                 |       |
| Income taxes payable                                                                                                                                                                                               |       | 897                    |       | 1,285                 |       |
| Current portion of long-term debt                                                                                                                                                                                  |       | —                 |       | 1,590                 |       |
| Capital lease - current                                                                                                                                                                                            |       | 28                     |       | 222                   |       |
| Total current liabilities                                                                                                                                                                                          |       | 149,206                |       | 131,844               |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                                             |       |                   |       |                  |       |
| Deferred income taxes                                                                                                                                                                                              |       | 42,261                 |       | 40,369                |       |
| Long-term debt and capital lease, net of current  portion                                                                                                                                                          |       | 304,202                |       | 304,092               |       |
| Other liabilities                                                                                                                                                                                                  |       | 790                    |       | 798                   |       |
| Total liabilities                                                                                                                                                                                                  |       | 496,459                |       | 477,103               |       |
| Commitments and contingencies                                                                                                                                                                                      |       |                   |       |                  |       |
| Senior preferred stock; $0.01 par value,  20,000,000 authorized; none outstanding as of September 24, 2010 and  December 25, 2009                                                                        |       | —                 |       | —                |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                         |       |                   |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 33,143,690 issued and 33,021,390 outstanding as of  September 24, 2010 and 32,640,957 issued and 32,524,251 outstanding as  of December 25, 2009 |       | 331                    |       | 326                   |       |
| Additional paid-in capital                                                                                                                                                                                         |       | 588,027                |       | 576,747               |       |
| Accumulated deficit                                                                                                                                                                                                |       | (98,572                | )          | (124,745              | )          |
| Accumulated other comprehensive income                                                                                                                                                                             |       | 1,648                  |       | 1,483                 |       |
| Treasury stock, at cost, 122,300 shares as of  September 24, 2010 and 116,706 as of December 25, 2009                                                                                                    |       | (2,173                 | )          | (2,076                | )          |
| Total stockholders’ equity                                                                                                                                                                                    |       | 489,261                |       | 451,735               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                    |       | $                      | 985,720    |                  | $          | 928,838 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)**

**THREE AND NINE MONTHS ENDED SEPTEMBER 24, 2010 ANDSEPTEMBER 25, 2009**

**(in thousands, except share and per share data)**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 24,**           | ** ** | **September 25,**          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                    |       | $                                | 276,821    |                            | $          | 277,948 |   | $ | 792,193 |   | $ | 804,661 |   |
| Cost of sales                                |       | 171,991                          |       | 175,726                         |       | 490,649 |   | 507,528 |   |
| Gross profit                                 |       | 104,830                          |       | 102,222                         |       | 301,544 |   | 297,133 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Operating Expenses:                          |       |                             |       |                            |       |   |   |   |   |
| Selling, general and administrative expenses |       | 76,987                           |       | 76,191                          |       | 231,686 |   | 239,009 |   |
| Depreciation and amortization                |       | 4,981                            |       | 4,535                           |       | 14,667 |   | 13,561 |   |
| Total operating expenses                     |       | 81,968                           |       | 80,726                          |       | 246,353 |   | 252,570 |   |
| Operating income                             |       | 22,862                           |       | 21,496                          |       | 55,191 |   | 44,563 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | —                           |       | (248                            | )          | — |   | 1,295 |   |
| Interest expense                             |       | (4,373                           | )          | (4,577                          | )          | (13,092 | ) | (14,673 | ) |
| Interest and other income                    |       | 541                              |       | 554                             |       | 1,266 |   | 1,284 |   |
| Income before income taxes                   |       | 19,030                           |       | 17,225                          |       | 43,365 |   | 32,469 |   |
| Income taxes                                 |       | 7,518                            |       | 6,794                           |       | 17,192 |   | 12,694 |   |
| Net income                                   |       | $                                | 11,512     |                            | $          | 10,431 |   | $ | 26,173 |   | $ | 19,775 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Earnings Per Share:                          |       |                             |       |                            |       |   |   |   |   |
| Basic                                        |       | $                                | 0.35       |                            | $          | 0.32 |   | $ | 0.79 |   | $ | 0.61 |   |
| Diluted                                      |       | $                                | 0.34       |                            | $          | 0.32 |   | $ | 0.78 |   | $ | 0.60 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Weighted-Average Shares Outstanding:         |       |                             |       |                            |       |   |   |   |   |
| Basic                                        |       | 33,084,756                       |       | 32,511,597                      |       | 32,931,814 |   | 32,493,797 |   |
| Diluted                                      |       | 33,796,615                       |       | 33,070,041                      |       | 33,685,652 |   | 32,826,466 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

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**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**NINE MONTHS ENDED SEPTEMBER 24, 2010 AND SEPTEMBER 25,2009**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **2010**               | ** ** | **2009**               | ** ** |
| Cash Flows from Operating Activities:                                                    |       |                   |       |                   |       |
| Net income                                                                               |       | $                      | 26,173     |                   | $          | 19,775 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |       |                   |       |                   |       |
| Depreciation and amortization                                                            |       | 14,970                 |       | 14,169                 |       |
| Amortization of debt issuance costs                                                      |       | 775                    |       | 829                    |       |
| Amortization of discount on 81/8% senior subordinated  notes                             |       | 115                    |       | 108                    |       |
| Gain on extinguishment of debt, net of discount                                          |       | —                 |       | (1,295                 | )          |
| Write-off of deferred acquisition costs                                                  |       | —                 |       | 672                    |       |
| Share-based compensation                                                                 |       | 3,299                  |       | 3,075                  |       |
| Excess tax benefits from share-based compensation                                        |       | (775                   | )          | (1                     | )          |
| Deferred income taxes                                                                    |       | 1,270                  |       | 6,113                  |       |
| Provision for doubtful accounts                                                          |       | 3,629                  |       | 7,330                  |       |
| Loss on disposal of property and equipment                                               |       | 129                    |       | 13                     |       |
|                                                                                     |       |                   |       |                   |       |
| Changes in assets and liabilities which provided  (used) cash, net of business acquired: |       |                   |       |                   |       |
| Accounts receivable - trade                                                              |       | (16,499                | )          | (8,959                 | )          |
| Inventory                                                                                |       | (33,756                | )          | 26,720                 |       |
| Prepaid expenses and other current assets                                                |       | (5,670                 | )          | 4,478                  |       |
| Other assets                                                                             |       | (97                    | )          | 774                    |       |
| Accounts payable                                                                         |       | 9,235                  |       | 16,061                 |       |
| Accrued expenses and other current liabilities                                           |       | 6,691                  |       | 8,751                  |       |
| Accrued interest                                                                         |       | 2,609                  |       | 2,394                  |       |
| Income taxes                                                                             |       | 345                    |       | 1,321                  |       |
| Other liabilities                                                                        |       | 6                      |       | (145                   | )          |
| Net cash provided by operating activities                                                |       | 12,449                 |       | 102,183                |       |
| Cash Flows from Investing Activities:                                                    |       |                   |       |                   |       |
| Purchase of property and equipment, net                                                  |       | (12,937                | )          | (9,078                 | )          |
| Purchase of short-term investments                                                       |       | (3,002                 | )          | (1,830                 | )          |
| Proceeds from sales and maturities of short-term  investments                            |       | 4,012                  |       | 203                    |       |
| Purchase of businesses, net of cash acquired                                             |       | (145                   | )          | (381                   | )          |
| Net cash used in investing activities                                                    |       | (12,072                | )          | (11,086                | )          |
| Cash Flows from Financing Activities:                                                    |       |                   |       |                   |       |
| (Decrease) Increase in purchase card payable, net                                        |       | (1,463                 | )          | 492                    |       |
| Repayment of term debt                                                                   |       | (1,590                 | )          | (56,488                | )          |
| Repayment of 81/8% senior subordinated  notes                                            |       | —                 |       | (34,157                | )          |
| Payments on capital lease obligations                                                    |       | (198                   | )          | (177                   | )          |
| Proceeds from stock options exercised                                                    |       | 7,211                  |       | 17                     |       |
| Excess tax benefits from share-based compensation                                        |       | 775                    |       | 1                      |       |
| Treasury stock acquired to satisfy minimum tax  withholding requirements                 |       | (97                    | )          | (34                    | )          |
| Net cash provided by (used in) financing  activities                                     |       | 4,638                  |       | (90,346                | )          |
| Effect of exchange rate changes on cash and cash  equivalents                            |       | 66                     |       | 216                    |       |
| Net increase in cash and cash equivalents                                                |       | 5,081                  |       | 967                    |       |
| Cash and cash equivalents at beginning of period                                         |       | 99,223                 |       | 62,724                 |       |
| Cash and cash equivalents at end of period                                               |       | $                      | 104,304    |                   | $          | 63,691 |   |
|                                                                                     |       |                   |       |                   |       |
| Supplemental Disclosure of Cash Flow Information:                                        |       |                   |       |                   |       |
| Cash paid during the period for:                                                         |       |                   |       |                   |       |
| Interest                                                                                 |       | $                      | 9,410      |                   | $          | 11,278 |   |
| Income taxes, net of refunds                                                             |       | $                      | 15,644     |                   | $          | 5,371 |   |
|                                                                                     |       |                   |       |                   |       |
| Schedule of Non-Cash Investing and Financing  Activities:                                |       |                   |       |                   |       |
| Property acquired through lease incentives                                               |       | $                      | 2,445      |                   | $          | 3,009 |   |
| Adjustments to liabilities assumed and goodwill on  businesses acquired                  |       | $                      | —     |                   | $          | 732 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

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**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**THREE AND NINE MONTHS ENDED SEPTEMBER 24, 2010 ANDSEPTEMBER 25, 2009**

** **

 

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

 

*Business*

 

Interline Brands, Inc., a Delaware corporation, and itssubsidiaries (“Interline” or the “Company”) is a direct marketer and specialtydistributor of maintenance, repair and operations (“MRO”) products. The Companysells plumbing, electrical, hardware, security, heating, ventilation and airconditioning (“HVAC”), janitorial and sanitary supplies and other MRO products.Interline’s highly diverse customer base consists of multi-family housing,educational, lodging, government and health care facilities, professionalcontractors and specialty distributors.

 

The Company markets and sells its products primarily through twelvedistinct and targeted brands. The Company utilizes a variety of sales channels,including a direct sales force, telesales representatives, a direct marketingprogram, brand-specific websites and a national accounts sales program. TheCompany delivers its products through its network of distribution centers andprofessional contractor showrooms located throughout the United States andCanada, vendor managed inventory locations at large professional contractorcustomer locations and its dedicated fleet of trucks. Through its broaddistribution network, the Company is able to provide next-day delivery serviceto approximately 98% of the U.S. population and same-day delivery service tomost major metropolitan markets in the U.S.

 

*Basis of Presentation*

 

The accompanying unaudited interim condensed consolidated financial statementsof Interline have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“US GAAP”) and instructionsto the Quarterly Report on Form 10-Q and Article 10 of Regulation S-Xpromulgated by the Securities and Exchange Commission (“SEC”). Accordingly,certain information and footnote disclosures normally included in financialstatements included in the Company’s Annual Report on Form 10-K have beencondensed or omitted. The accompanying unaudited interim condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and related notes included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 25,2009 filed with the SEC.

 

All adjustments, consisting of normal recurring adjustments, which are,in the opinion of management, necessary for a fair statement of the results forthe interim periods presented have been recorded. The results of operations forthe interim periods presented are not necessarily indicative of the results tobe expected for the full year.

 

The preparation of condensed consolidated financial statements inconformity with US GAAP 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 the date of the filingof this Quarterly Report on Form 10-Q with the SEC.

 

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*Fair Value of Financial Instruments*

 

TheCompany defines fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. Disclosure about how fair value isdetermined for assets and liabilities is based on a hierarchy established fromthe 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.                                                           |

 

Thedetermination of where assets and liabilities fall within this hierarchy isbased upon the lowest level of input that is significant to the fair valuemeasurement.

 

The fair value of cash and cash equivalents, accounts receivable, andaccounts payable approximate the carrying amount because of the shortmaturities of these items.

 

The Company’s short-term investments, which are classified asavailable-for-sale, are comprised of pre-refunded municipal bonds. Pre-refundedmunicipal bonds are bonds that are refinanced by the issuer and remainoutstanding in the marketplace until a specific call date or maturity date isreached. Pre-refunded municipal bonds are secured by U.S. Treasury securitiesplaced in an irrevocable escrow account. As of September 24, 2010, all ofthe Company’s pre-refunded municipal bonds have contractual maturities of lessthan one year. The following table shows the original cost and fair value ofthe Company’s short-term investments as of September 24, 2010 and December 25,2009 (in thousands):

 
| ** **                       | ** ** | **September 24, 2010** | ** ** | **December 25, 2009** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Description**                  | ** ** | **Original  Cost**               | ** ** | **Fair  Value**                 | ** ** | **Original  Cost** | ** ** | **Fair  Value** | ** ** |
| Pre-refunded municipal bonds (1) |       | $                                | 469        |                            | $          | 469 |   | $ | 1,478 |   | $ | 1,479 |   |
|                                  |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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(1)          Fair value estimated using Level 1 inputs. The fair valueof the pre-refunded municipal bonds is determined by quoted market prices asthey are publicly traded.

 

The following table shows the carrying amount and the fair value ofterm debt and the 81/8% senior subordinated notesas of September 24, 2010 and December 25, 2009 (in thousands):

 
| ** **                                                        | ** ** | **September 24, 2010** | ** ** | **December 25, 2009** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Description**                                                   | ** ** | **Carrying  Amount**             | ** ** | **Fair  Value**                 | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Term debt (1)                                                     |       | $                                | 154,225    |                            | $          | 148,431 |   | $ | 154,225 |   | $ | 145,771 |   |
| 81/8% senior subordinated  notes, net of unamortized discount (2) |       | 149,977                          |       | 154,071                         |       | 149,863 |   | 151,434 |   |
| ** **                                                        |       | $                                | 304,202    |                            | $          | 302,502 |   | $ | 304,088 |   | $ | 297,205 |   |

 

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(1)          Fair value estimated using Level 2 inputs. The fair valueof term loans is estimated using a discounted cash flow analysis based onborrowing rates available to companies with similar credit ratings for loanswith similar terms and maturity.

(2)          Fair value estimated using Level 1 inputs. The fair valueof the 81/8%senior subordinated notes is determined by quoted market prices as they arepublicly traded.

 

*SegmentInformation*

 

TheCompany has one operating segment and, therefore, one reportable segment, thedistribution of MRO products.

 

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TheCompany’s net sales for the three and nine months ended September 24, 2010and September 25, 2009 by product category were as follows (in thousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 24,**           | ** ** | **September 25,**          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| **Product Category**                 | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Janitorial and sanitary                   |       | $                                | 78,520     |                            | $          | 80,546 |   | $ | 226,629 |   | $ | 229,105 |   |
| Plumbing                                  |       | 70,581                           |       | 71,379                          |       | 212,152 |   | 218,418 |   |
| Heating, ventilation and air conditioning |       | 33,874                           |       | 33,891                          |       | 87,121 |   | 86,139 |   |
| Electrical and lighting                   |       | 20,658                           |       | 22,811                          |       | 60,800 |   | 66,232 |   |
| Appliances and parts                      |       | 18,255                           |       | 17,954                          |       | 48,829 |   | 49,030 |   |
| Security                                  |       | 12,987                           |       | 13,449                          |       | 37,546 |   | 39,502 |   |
| Hardware and tools                        |       | 12,474                           |       | 12,885                          |       | 35,623 |   | 37,140 |   |
| Other                                     |       | 29,472                           |       | 25,033                          |       | 83,493 |   | 79,095 |   |
| Total                                     |       | $                                | 276,821    |                            | $          | 277,948 |   | $ | 792,193 |   | $ | 804,661 |   |

 

**2****.             ACCOUNTSRECEIVABLE**

 

TheCompany’s trade receivables are exposed to credit risk. The majority of themarkets served by the Company are comprised of numerous individual accounts.The Company monitors the creditworthiness of its customers on an ongoing basisand provides a reserve for estimated bad debt losses. If the financialcondition of the Company’s customers were to deteriorate, increases in itsallowance for doubtful accounts may be needed.

 

Theactivity in the allowance for doubtful accounts consisted of the following (inthousands):

 
| **Balance at  December 25,  2009** | ** ** | **Charged to  Expense** | ** ** | **Deductions(1)** | ** ** | **Balance at  September 24,  2010** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| $                                            | 12,975     |                         | $          | 3,629             |       | $                                             | (6,534     | ) | $ | 10,070 |   |
|                                              |            |                              |            |                   |            |                                               |            |  |  |  |  |

 

----

(1)          Accounts receivable written-off as uncollectible, net of recoveries.The majority of the accounts written-off had been fully reserved for in priorperiods.

 

**3****.             RESTRUCTURINGAND ACQUISITION ACCRUALS**

 

*RestructuringAccruals*

 

Since 2008, the Company has undertaken certain significant changes inits cost structure. These operational initiatives focus on reducing the Company’soverall operating cost structure. The following table summarizes the changes toaccruals, which are included in accrued expenses and other current liabilities,during the nine months ended September 24, 2010 (in thousands):

 
| ** **                         | ** ** | **Employee  Separation  Costs** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at December 25, 2009  |       | $                               | 177        |                                             | $          | 1,324     |       | $ | 1,501 |   |
| Payments                           |       | (72                             | )          | (675                                             | )          | (747      | )          |
| Adjustments(1)                     |       | —                          |       | (69                                              | )          | (69       | )          |
| Balance at September 24, 2010 |       | $                               | 105        |                                             | $          | 580       |       | $ | 685 |   |

 

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(1)          Adjustments reflect a change in estimate of remainingliabilities for facility closing and other costs.

 

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Employeeseparation costs include severance pay and other related benefits associatedwith the termination of selling, administrative and warehouse personnel.Facility closing and other costs include lease tails, property and equipmentdisposals and other shut-down expenses associated with distribution center andprofessional contractor showroom consolidations.

 

*AcquisitionAccruals*

 

Thefollowing table summarizes the accruals assumed in connection with the Company’sbusiness combinations, which are included in accrued expenses and other currentliabilities (in thousands):

 
| ** **                         | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at December 25, 2009  |       | $                                            | 55         |                                             | $          | 1,340     |       | $ | 1,395 |   |
| Payments                           |       | (11                                          | )          | (39                                              | )          | (50       | )          |
| Balance at September 24, 2010 |       | $                                            | 44         |                                             | $          | 1,301     |       | $ | 1,345 |   |

 

**4****.             EARNINGSPER SHARE**

 

Basicearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock and participating securities outstandingduring the period. Participating securities are unvested share-based paymentawards that contain rights to receive non-forfeitable dividends (whether paidor unpaid), such as deferred stock units. The impact of participating securities on the calculation isinsignificant.

 

Dilutedearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock and participating securities outstandingduring the period as adjusted for the potential dilutive effect of stockoptions and non-vested shares of restricted stock and restricted share unitsusing the treasury stock method.

 

The following summarizes the shares of common stock used to calculateearnings per share including the potentially dilutive impact of stock options,restricted stock and restricted share units, calculated using the treasurystock method, as included in the calculation of diluted weighted-averageshares:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 24,**           | ** ** | **September 25,**          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                                    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted average shares outstanding - basic   |       | 33,084,756                       |       | 32,511,597                      |       | 32,931,814 |   | 32,493,797 |   |
| Dilutive shares resulting from:               |       |                             |       |                            |       |   |   |   |   |
| Stock options                                 |       | 315,464                          |       | 256,724                         |       | 371,721 |   | 115,929 |   |
| Restricted stock                              |       | 437                              |       | 594                             |       | 813 |   | 205 |   |
| Restricted share units                        |       | 395,958                          |       | 301,126                         |       | 381,304 |   | 216,535 |   |
| Weighted average shares outstanding - diluted |       | 33,796,615                       |       | 33,070,041                      |       | 33,685,652 |   | 32,826,466 |   |

 

During the three months ended September 24, 2010 and September 25,2009, stock options to purchase 1,849,705 shares and 1,848,540 shares of commonstock, respectively, were excluded from the computations of dilutedweighted-average shares outstanding because their effect would beanti-dilutive. During the nine months ended September 24, 2010 and September 25,2009, stock options to purchase 1,910,550 shares and 2,998,537 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.             COMPREHENSIVE INCOME**

 

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 and nine months ended September 24,2010 and September 25, 2009 are as follows (in thousands):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 24,**           | ** ** | **September 25,**          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                                              | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                              |       | $                                | 11,512     |                            | $          | 10,431 |   | $ | 26,173 |   | $ | 19,775 |   |
| Other comprehensive income (loss):                      |       |                             |       |                            |       |   |   |   |   |
| Amortization of unrecognized gain on employee  benefits |       | 5                                |       | 3                               |       | 13 |   | 9 |   |
| Foreign currency translation                            |       | 68                               |       | 305                             |       | 152 |   | 545 |   |
| Total comprehensive income                              |       | $                                | 11,585     |                            | $          | 10,739 |   | $ | 26,338 |   | $ | 20,329 |   |

 

**6.             SHARE-BASED COMPENSATION**

 

Duringthe three months ended September 24, 2010 and September 25, 2009,share-based compensation expense was $1.3 million and $1.1 million,respectively. During the nine months ended September 24, 2010 and September 25,2009, share-based compensation expense was $3.3 million and $3.1 million,respectively. As of September 24, 2010, there was $8.8 million of totalunrecognized share-based compensation expense related to unvested share-basedpayment awards. The expense is expected to be recognized over aweighted-average period of 1.9 years.

 

The Company did not grant stock options during the three months ended September 24,2010 and September 25, 2009. During the nine months ended September 24,2010 and September 25, 2009, the Company granted 292,473 and 503,026 stockoptions, respectively, with a weighted-average grant date fair value of $7.21and $3.46, respectively. The fair values of stock options were estimated usingthe Black-Scholes option-pricing model. Expected volatility is based onhistorical performance of the Company’s stock. The Company also considers historicaldata to estimate the timing and amount of stock option exercises andforfeitures. The expected life represents the period of time that stock optionsare expected to remain outstanding and is based on the contractual term of thestock options and expected exercise behavior. The risk-free interest rate isbased on U.S. Treasury zero-coupon issues with a remaining term equal to theexpected option life assumed at the date of grant.

 

The Black-Scholes weighted-average assumptions were as follows:

 
| ** **               | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 24,**          | ** ** | **September 25,** | ** ** |
| ** **               | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Expected volatility      |       | 41.5                            | %          | 43.0 | % |
| Expected dividends       |       | 0.0                             | %          | 0.0 | % |
| Risk-free interest rate  |       | 2.4                             | %          | 2.1 | % |
| Expected life (in years) |       | 5.0                             |       | 5.0 |   |

 

Stockoptions exercised during the three months ended September 24, 2010 and September 25,2009 were 15,924 and 1,150, respectively, with an intrinsic value of $0.1million and less than $0.1 million, respectively. Stock options exercisedduring the nine months ended September 24, 2010 and September 25,2009 were 481,573 and 1,150, respectively, with an intrinsic value of $2.1million and less than $0.1 million, respectively.

 

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A summary status of restricted stock, restricted share units anddeferred stock units as of September 24, 2010 and changes during the ninemonths 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                                |       | —                    |       | —                               |       | 172,421                            |       | 17.99 |   | 24,824 |   | 20.95 |   |
| Vested                                 |       | (2,300                    | )          | 22.27                                |       | (19,548                            | )          | 21.92 |   | — |   | — |   |
| Forfeited                              |       | —                    |       | —                               |       | (17,773                            | )          | 7.89 |   | — |   | — |   |
| Outstanding at September 24, 2010 |       | 8,050                     |       | $                                    | 23.84      |                               | 587,476    |   | $ | 11.07 |   | 93,134 |   | $ | 19.27 |   |

 

Restrictedstock awards vested during the nine months ended September 24, 2010 and September 25,2009 were 2,300 and 2,550, respectively, with a fair value of less than $0.1million in each period.

 

Restrictedshare units vested during the nine months ended September 24, 2010 and September 25,2009 were 19,548 and 9,500, respectively, with a fair value of $0.3 million and$0.1 million, respectively.

 

**7.             CONTINGENCIES**

 

*ContingentLiabilities*

 

Asof September 24, 2010 and December 25, 2009, the Company wascontingently liable for unused letters of credit aggregating $8.6 million and$9.5 million, respectively.

 

*Legal Proceedings*

 

The Company is involved in various legal proceedings in the ordinarycourse of its business that are not anticipated to have a material adverseeffect on the Company’s results of operations or financial position.

 

**8.             GUARANTORSUBSIDIARIES**

 

InJune 2006, Interline New Jersey, the Company’s principal operatingsubsidiary (“Interline New Jersey” or the “Subsidiary Issuer”), issued $200.0million of 81/8% senior subordinated notesdue 2014 and entered into a $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”).

 

Theguarantees by the Parent Company and the Guarantor Subsidiaries are senior toany of their existing and future subordinated obligations, equal in right ofpayment with any of their existing and future senior subordinated indebtednessand subordinated to any of their existing and future senior indebtedness.

 

TheParent Company is a holding company whose only asset is the stock of itssubsidiaries. The Company conducts virtually all of its business operationsthrough Interline New Jersey. Accordingly, the Company’s only material sourcesof cash are dividends and distributions with respect to its ownership interestsin Interline New Jersey that are derived from the earnings and cash flowgenerated by Interline New Jersey. Through September 24, 2010, nodividends have been paid.

 

Thefollowing tables set forth, on a condensed consolidating basis, the balancesheets, statements of operations and statements of cash flows for the ParentCompany, Subsidiary Issuer and Guarantor Subsidiaries for all financialstatement periods presented in the Company’s condensed consolidated financialstatements. The non-guarantor subsidiaries are minor and are included in thecondensed financial data of the Subsidiary Issuer. The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the following tablesdo not reflect any such allocation.

 

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**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OF SEPTEMBER 24, 2010**

**(in thousands)**

 
| ** **                                                | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                           |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                                 |       | $               | —     |           | $          | 104,222          |       | $                 | 82         |             | $          | — |   | $ | 104,304 |   |
| Short-term investments                                    |       | —          |       | 469            |       | —           |       | —            |       | 469              |       |
| Accounts receivable - trade                               |       | —          |       | 132,908        |       | —           |       | —            |       | 132,908          |       |
| Inventory                                                 |       | —          |       | 207,240        |       | —           |       | —            |       | 207,240          |       |
| Intercompany receivable                                   |       | —          |       | —         |       | 141,710          |       | (141,710          | )          | —           |       |
| Other current assets                                      |       | —          |       | 41,345         |       | 1                |       | —            |       | 41,346           |       |
| Total current assets                                      |       | —          |       | 486,184        |       | 141,793          |       | (141,710          | )          | 486,267          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                               |       | —          |       | 51,445         |       | —           |       | —            |       | 51,445           |       |
| Goodwill                                                  |       | —          |       | 319,151        |       | —           |       | —            |       | 319,151          |       |
| Other intangible assets, net                              |       | —          |       | 119,707        |       | —           |       | —            |       | 119,707          |       |
| Investment in subsidiaries                                |       | 489,261         |       | 146,842        |       | —           |       | (636,103          | )          | —           |       |
| Other assets                                              |       | —          |       | 2,280          |       | 6,870            |       | —            |       | 9,150            |       |
| Total assets                                              |       | $               | 489,261    |           | $          | 1,125,609        |       | $                 | 148,663    |             | $          | (777,813 | ) | $ | 985,720 |   |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**            |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                                      |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                          |       | $               | —     |           | $          | 95,225           |       | $                 | —     |             | $          | — |   | $ | 95,225 |   |
| Accrued expenses and other current liabilities            |       | —          |       | 52,132         |       | 1,821            |       | —            |       | 53,953           |       |
| Intercompany payable                                      |       | —          |       | 141,710        |       | —           |       | (141,710          | )          | —           |       |
| Current portion of long-term debt and capital  lease      |       | —          |       | 28             |       | —           |       | —            |       | 28               |       |
| Total current liabilities                                 |       | —          |       | 289,095        |       | 1,821            |       | (141,710          | )          | 149,206          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                                    |       |            |       |           |       |             |       |              |       |             |       |
| Long-term debt and capital lease, net of current  portion |       | —          |       | 304,202        |       | —           |       | —            |       | 304,202          |       |
| Other liabilities                                         |       | —          |       | 43,051         |       | —           |       | —            |       | 43,051           |       |
| Total liabilities                                         |       | —          |       | 636,348        |       | 1,821            |       | (141,710          | )          | 496,459          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                                    |       | —          |       | 839,460        |       | —           |       | (839,460          | )          | —           |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)                       |       | 489,261         |       | (350,199       | )          | 146,842          |       | 203,357           |       | 489,261          |       |
| Total liabilities and stockholders’ equity           |       | $               | 489,261    |           | $          | 1,125,609        |       | $                 | 148,663    |             | $          | (777,813 | ) | $ | 985,720 |   |

 

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**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OF DECEMBER 25, 2009**

**(in thousands)**

 
| ** **                                                | ** ** | **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          | )          | —           |       |
| Current portion of long-term debt and capital  lease      |       | —          |       | 1,812          |       | —           |       | —            |       | 1,812            |       |
| Total current liabilities                                 |       | —          |       | 260,473        |       | 1,742            |       | (130,371          | )          | 131,844          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                                    |       |            |       |           |       |             |       |              |       |             |       |
| Long-term debt and capital lease, net of current  portion |       | —          |       | 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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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE THREE MONTHS ENDED SEPTEMBER 24, 2010**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   | ** ** | ** **      |       |           |       |                |       |              | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 276,821             |       | $                 | —     |             | $          | — |   | $ | 276,821 |   |
| Cost of sales                                          |       | —          |       | 171,991        |       | —              |       | —            |       | 171,991          |       |
| Gross profit                                           |       | —          |       | 104,830        |       | —              |       | —            |       | 104,830          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 81,088         |       | 7                   |       | (4,108            | )          | 76,987           |       |
| Depreciation and amortization                          |       | —          |       | 4,981          |       | —              |       | —            |       | 4,981            |       |
| Other operating income                                 |       | —          |       | —         |       | (4,108              | )          | 4,108             |       | —           |       |
| Equity earnings of subsidiaries                        |       | (11,512         | )          | (3,436         | )          | —              |       | 14,948            |       | —           |       |
| Total operating expenses                               |       | (11,512         | )          | 82,633         |       | (4,101              | )          | 14,948            |       | 81,968           |       |
| Operating income                                       |       | 11,512          |       | 22,197         |       | 4,101               |       | (14,948           | )          | 22,862           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (4,683         | )          | 851                 |       | —            |       | (3,832           | )          |
| Income before income taxes                             |       | 11,512          |       | 17,514         |       | 4,952               |       | (14,948           | )          | 19,030           |       |
| Income taxes                                           |       | —          |       | 6,002          |       | 1,516               |       | —            |       | 7,518            |       |
| Net income                                             |       | 11,512          |       | 11,512         |       | 3,436               |       | (14,948           | )          | 11,512           |       |
| Preferred stock dividends                              |       | —          |       | (28,313        | )          | —              |       | 28,313            |       | —           |       |
| Net income (loss) attributable to common  stockholders |       | $               | 11,512     |           | $          | (16,801             | )          | $                 | 3,436      |             | $          | 13,365 |   | $ | 11,512 |   |

 

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(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE THREE MONTHS ENDED SEPTEMBER 25, 2009**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 272,251             |       | $                 | 5,697      |             | $          | — |   | $ | 277,948 |   |
| Cost of sales                                          |       | —          |       | 172,189        |       | 3,537               |       | —            |       | 175,726          |       |
| Gross profit                                           |       | —          |       | 100,062        |       | 2,160               |       | —            |       | 102,222          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 74,893         |       | 1,298               |       | —            |       | 76,191           |       |
| Depreciation and amortization                          |       | —          |       | 4,378          |       | 157                 |       | —            |       | 4,535            |       |
| Equity earnings of subsidiaries                        |       | (17,225         | )          | (3,237         | )          | —              |       | 20,462            |       | —           |       |
| Total operating expense                                |       | (17,225         | )          | 76,034         |       | 1,455               |       | 20,462            |       | 80,726           |       |
| Operating income                                       |       | 17,225          |       | 24,028         |       | 705                 |       | (20,462           | )          | 21,496           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Loss on extinguishment of debt, net                    |       | —          |       | (248           | )          | —              |       | —            |       | (248             | )          |
| Interest and other (expense) income, net               |       | —          |       | (4,912         | )          | 5,015               |       | (4,126            | )          | (4,023           | )          |
| Income before income taxes                             |       | 17,225          |       | 18,868         |       | 5,720               |       | (24,588           | )          | 17,225           |       |
| Income tax provision                                   |       | 6,794           |       | 4,735          |       | 2,059               |       | (6,794            | )          | 6,794            |       |
| Net income                                             |       | 10,431          |       | 14,133         |       | 3,661               |       | (17,794           | )          | 10,431           |       |
| Preferred stock dividends                              |       | —          |       | (24,682        | )          | —              |       | 24,682            |       | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               | 10,431     |           | $          | (10,549             | )          | $                 | 3,661      |             | $          | 6,888 |   | $ | 10,431 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2010**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 792,193             |       | $                 | —     |             | $          | — |   | $ | 792,193 |   |
| Cost of sales                                          |       | —          |       | 490,649        |       | —              |       | —            |       | 490,649          |       |
| Gross profit                                           |       | —          |       | 301,544        |       | —              |       | —            |       | 301,544          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 243,520        |       | 21                  |       | (11,855           | )          | 231,686          |       |
| Depreciation and amortization                          |       | —          |       | 14,667         |       | —              |       | —            |       | 14,667           |       |
| Other operating income                                 |       | —          |       | —         |       | (11,855             | )          | 11,855            |       | —           |       |
| Equity earnings of subsidiaries                        |       | (26,173         | )          | (9,560         | )          | —              |       | 35,733            |       | —           |       |
| Total operating expenses                               |       | (26,173         | )          | 248,627        |       | (11,834             | )          | 35,733            |       | 246,353          |       |
| Operating income                                       |       | 26,173          |       | 52,917         |       | 11,834              |       | (35,733           | )          | 55,191           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (14,100        | )          | 2,274               |       | —            |       | (11,826          | )          |
| Income before income taxes                             |       | 26,173          |       | 38,817         |       | 14,108              |       | (35,733           | )          | 43,365           |       |
| Income taxes                                           |       | —          |       | 12,644         |       | 4,548               |       | —            |       | 17,192           |       |
| Net income                                             |       | 26,173          |       | 26,173         |       | 9,560               |       | (35,733           | )          | 26,173           |       |
| Preferred stock dividends                              |       | —          |       | (82,105        | )          | —              |       | 82,105            |       | —           |       |
| Net income (loss) attributable to common  stockholders |       | $               | 26,173     |           | $          | (55,932             | )          | $                 | 9,560      |             | $          | 46,372 |   | $ | 26,173 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2009**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 790,707             |       | $                 | 13,954     |             | $          | — |   | $ | 804,661 |   |
| Cost of sales                                          |       | —          |       | 498,686        |       | 8,842               |       | —            |       | 507,528          |       |
| Gross profit                                           |       | —          |       | 292,021        |       | 5,112               |       | —            |       | 297,133          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 235,363        |       | 3,646               |       | —            |       | 239,009          |       |
| Depreciation and amortization                          |       | —          |       | 13,075         |       | 486                 |       | —            |       | 13,561           |       |
| Equity earnings of subsidiaries                        |       | (32,469         | )          | (9,241         | )          | —              |       | 41,710            |       | —           |       |
| Total operating expense                                |       | (32,469         | )          | 239,197        |       | 4,132               |       | 41,710            |       | 252,570          |       |
| Operating income                                       |       | 32,469          |       | 52,824         |       | 980                 |       | (41,710           | )          | 44,563           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Gain on extinguishment of debt, net                    |       | —          |       | 1,295          |       | —              |       | —            |       | 1,295            |       |
| Interest and other (expense) income, net               |       | —          |       | (16,046        | )          | 14,691              |       | (12,034           | )          | (13,389          | )          |
| Income before income taxes                             |       | 32,469          |       | 38,073         |       | 15,671              |       | (53,744           | )          | 32,469           |       |
| Income tax provision                                   |       | 12,694          |       | 7,317          |       | 5,377               |       | (12,694           | )          | 12,694           |       |
| Net income                                             |       | 19,775          |       | 30,756         |       | 10,294              |       | (41,050           | )          | 19,775           |       |
| Preferred stock dividends                              |       | —          |       | (71,576        | )          | —              |       | 71,576            |       | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               | 19,775     |           | $          | (40,820             | )          | $                 | 10,294     |             | $          | 30,526 |   | $ | 19,775 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW(UNAUDITED)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2010**

**(in thousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating  activities          |       | $               | —     |           | $          | 12,602           |       | $                 | (153       | )                | $          | — |   | $ | 12,449 |   |
| Cash Flows from Investing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —          |       | (12,937        | )          | —           |       | —            |       | (12,937          | )          |
| Purchase of short-term investments                            |       | —          |       | (3,002         | )          | —           |       | —            |       | (3,002           | )          |
| Proceeds from sales and maturities of short-term  investments |       | —          |       | 4,012          |       | —           |       | —            |       | 4,012            |       |
| Purchase of businesses, net of cash acquired                  |       | —          |       | (145           | )          | —           |       | —            |       | (145             | )          |
| Other                                                         |       | —          |       | (182           | )          | —           |       | 182               |       | —           |       |
| Net cash used in investing activities                         |       | —          |       | (12,254        | )          | —           |       | 182               |       | (12,072          | )          |
| Cash Flows from Financing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Increase in purchase card payable, net                        |       | —          |       | (1,463         | )          | —           |       | —            |       | (1,463           | )          |
| Repayment of debt and capital lease obligations               |       | —          |       | (1,788         | )          | —           |       | —            |       | (1,788           | )          |
| Proceeds from stock options exercised                         |       | —          |       | 7,211          |       | —           |       | —            |       | 7,211            |       |
| Other                                                         |       | —          |       | 678            |       | 182              |       | (182              | )          | 678              |       |
| Net cash provided by financing activities                     |       | —          |       | 4,638          |       | 182              |       | (182              | )          | 4,638            |       |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |       | 66             |       | —           |       | —            |       | 66               |       |
| Net increase in cash and cash equivalents                     |       | —          |       | 5,052          |       | 29               |       | —            |       | 5,081            |       |
| Cash and cash equivalents at beginning of period              |       | —          |       | 99,170         |       | 53               |       | —            |       | 99,223           |       |
| Cash and cash equivalents at end of period                    |       | $               | —     |           | $          | 104,222          |       | $                 | 82         |             | $          | — |   | $ | 104,304 |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW(UNAUDITED)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2009**

**(in thousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating  activities          |       | $               | —     |           | $          | 105,297          |       | $                 | (3,114     | )                | $          | — |   | $ | 102,183 |   |
| Cash Flows from Investing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —          |       | (8,991         | )          | (87              | )          | —            |       | (9,078           | )          |
| Purchase of short-term investments                            |       | —          |       | (1,830         | )          | —           |       | —            |       | (1,830           | )          |
| Proceeds from sales and maturities of short-term  investments |       | —          |       | 203            |       | —           |       | —            |       | 203              |       |
| Purchase of businesses, net of cash acquired                  |       | —          |       | (381           | )          | —           |       | —            |       | (381             | )          |
| Other                                                         |       | —          |       | (3,002         | )          | —           |       | 3,002             |       | —           |       |
| Net cash used in investing activities                         |       | —          |       | (14,001        | )          | (87              | )          | 3,002             |       | (11,086          | )          |
| Cash Flows from Financing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Increase in purchase card payable, net                        |       | —          |       | 492            |       | —           |       | —            |       | 492              |       |
| Repayment of debt and capital lease obligations               |       | —          |       | (56,665        | )          | —           |       | —            |       | (56,665          | )          |
| Repayment of 81/8% senior subordinated  notes                 |       | —          |       | (34,157        | )          | —           |       | —            |       | (34,157          | )          |
| Other                                                         |       | —          |       | (16            | )          | 3,002            |       | (3,002            | )          | (16              | )          |
| Net cash (used in) provided by financing  activities          |       | —          |       | (90,346        | )          | 3,002            |       | (3,002            | )          | (90,346          | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |       | 216            |       | —           |       | —            |       | 216              |       |
| Net increase (decrease) in cash and cash  equivalents         |       | —          |       | 1,166          |       | (199             | )          | —            |       | 967              |       |
| Cash and cash equivalents at beginning of period              |       | —          |       | 62,293         |       | 431              |       | —            |       | 62,724           |       |
| Cash and cash equivalents at end of period                    |       | $               | —     |           | $          | 63,459           |       | $                 | 232        |             | $          | — |   | $ | 63,691 |   |

 

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**9.             SUBSEQUENT EVENT**

 

OnOctober 29, 2010, Interline New Jersey acquired substantially all ofthe assets and a portion of the liabilities of CleanSource, Inc. (“CleanSource”).The aggregate purchase price of $60.1 million is comprised of $54.6 million incash and an earn-out of up to $5.5 million in cash over two years. The Companyhas not completed the allocation of the purchase price. CleanSource, which isheadquartered in San Jose, California, is a large regional distributor ofjanitorial and sanitation (“JanSan”) supplies. CleanSource offers over 4,000products and primarily serves institutional facilities in the healthcare andeducation markets, as well as building services contractors. This acquisitionrepresents a geographical expansion of the Company’s JanSan offering to the westcoast of the United States.

 

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** **

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*References to “us” and “we” are to the Company. You should read thefollowing discussion in conjunction with our unaudited condensed consolidatedfinancial statements and related notes included in this quarterly report, andour audited consolidated financial statements and related notes and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our Annual Report on Form 10-K filed with the Securities andExchange Commission (“SEC”).*

 

**Forward-LookingStatements**

 

Thisreport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”) that are subject to risks and uncertainties.You should not place undue reliance on those statements because they aresubject to numerous uncertainties and factors relating to our operations andbusiness environment, all of which are difficult to predict and many of whichare beyond our control. Forward-looking statements include informationconcerning our possible or assumed future results of operations, includingdescriptions of our business strategy. These statements often include wordssuch as “may,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate”or similar expressions, including, without limitation, certain statements inResults of Operations, Liquidity and Capital Resources and Item 3. Quantitativeand Qualitative Disclosures About Market Risk. 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:

 

·                  economicslowdowns,

·                  general marketconditions,

·                  credit marketcontractions,

·                  currencyexchange rates,

·                  changes to tariffs between the countriesin which we operate,

·                  labor andbenefit costs,

·                  weatherconditions,

·                  the loss ofsignificant customers,

·                  consumerspending and debt levels,

·                  apartmentvacancy rates and effective rents,

·                  adverse changesin trends in the home improvement and remodeling and home building markets,

·                  product costand price fluctuations due to market conditions,

·                  the highlycompetitive nature of the maintenance, repair and operations distributionindustry,

·                  materialfacilities and systems disruptions and shutdowns,

·                  governmentaland educational budgets,

·                  failure torealize expected benefits from acquisitions,

·                  our ability topurchase products from suppliers on favorable terms,

·                  failure tolocate, acquire and successfully integrate acquisition candidates,

·                  the length ofour supply chains,

·                  work stoppages orother business interruptions at transportation centers or shipping ports,

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

·                  our ability toaccurately predict market trends,

·                  dependence onkey employees,

·                  healthcarecosts,

·                  our inabilityto protect trademarks,

·                  adverse publicityand litigation,

·                  our level ofdebt,

·                  interest ratefluctuations,

·                  our customers’ability to pay us,

·                  future cashflows,

·                  changes inconsumer preferences, and

·                  the otherfactors described under “Part I. Item 1A—Risk Factors” in our AnnualReport on Form 10-K filed with the SEC.

 

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Youshould keep in mind that any forward-looking statement made by us in thisreport, or elsewhere, speaks only as of the date on which we make it. New risksand uncertainties arise from time to time, and it is impossible for us topredict these events or how they may affect us. In light of these risks anduncertainties, you should keep in mind that any forward-looking statement madein this report or elsewhere might not occur. Notwithstanding the foregoing, allinformation contained in this report is materially accurate as of the date ofthis report.

 

**Overview**

 

We are a leading national distributor and direct marketer ofmaintenance, repair and operations (“MRO”) products. We have one operatingsegment, the distribution of MRO products. We stock approximately 100,000 MROproducts in the following categories: appliances; cabinetry; electrical; floorcoverings; gas; hardware; hearth and chimney; heating, ventilation and airconditioning (“HVAC”); janitorial and sanitary; lighting; paint and sundries;plumbing; pool; security; shop and office supplies; tools and equipment; windowcoverings; and other miscellaneous products. Our products are primarily usedfor the repair, maintenance, remodeling, refurbishment and construction ofproperties and non-industrial facilities.

 

Our highly diverse customer base includes facilities maintenance customers,which consist of multi-family housing facilities, educational institutions,lodging and health care facilities, government properties and building servicecontractors; professional contractors who are primarily involved in the repair,remodeling and construction of residential and non-industrial facilities; andspecialty distributors, including plumbing and hardware retailers. Ourcustomers range in size from individual contractors and independent hardwarestores to apartment management companies and national purchasing groups.

 

We market and sell our products primarily through twelve distinct andtargeted brands, each of which is nationally recognized in the markets we servefor providing quality products at competitive prices with reliable same-day ornext-day delivery. The Wilmar®, AmSan®, Sexauer®, Maintenance USA® and Trayco® brandsgenerally serve our facilities maintenance customers; the Barnett®, Copperfield®, U.S. Lock® and SunStar® brandsgenerally serve our professional contractor customers; and the Hardware Express®, LeranSM and AF LightingSM brandsgenerally serve our specialty distributors customers. Our multi-brand operatingmodel, which we believe is unique in the industry, allows us to use a singleplatform to deliver tailored products and services to meet the individual needsof each respective customer group served. We reach our markets using a varietyof sales channels, including a sales force of approximately 575 field salesrepresentatives, approximately 325 inside sales and customer servicerepresentatives, a direct marketing program of approximately five millionpieces annually, brand-specific websites and a national accounts sales program.

 

We deliver our products through our network of 55 distribution centers,23 professional contractor showrooms located throughout the United States andCanada, 35 vendor-managed inventory locations at large customer locations and adedicated fleet of trucks. Our broad distribution network enables us to providereliable, next-day delivery service to approximately 98% of the U.S. populationand same-day delivery service to most major metropolitan markets in the U.S.

 

Our information technology and logistics platform supports our majorbusiness functions, allowing us to market and sell our products at varyingprice points depending on the customer’s service requirements. While we marketour products under a variety of branded catalogs, generally our brands drawfrom the same inventory within common distribution centers and share associatedemployee and transportation costs. In addition, we have centralized marketing,purchasing and catalog production operations to support our brands. We believethat our information technology and logistics platform also benefits ourcustomers by allowing us to offer a broad product selection at highlycompetitive prices while maintaining the unique customer appeal of each of ourtargeted brands. Overall, our common operating platform has enabled us toimprove customer service, maintain lower operating costs, efficiently manageworking capital and support our growth initiatives.

 

**Recent Developments**

 

OnOctober 29, 2010, we acquired substantially all of the assets and aportion of the liabilities of CleanSource, Inc. (“CleanSource”). Theaggregate purchase price of $60.1 million is comprised of $54.6 million in cashand an earn-out of up to $5.5 million in cash over two years. We have notcompleted the allocation of the purchase price. CleanSource, which isheadquartered in San Jose, California, is a large regional distributor ofjanitorial and sanitation (“JanSan”) supplies. CleanSource offers over 4,000products and primarily serves institutional facilities in the healthcare andeducation markets, as well as building services contractors. This acquisitionrepresents a geographical expansion of our JanSan offering to the west coast ofthe United States.

 

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**Resultsof Operations**

 

Thefollowing table presents information derived from the condensed consolidatedstatements of earnings expressed as a percentage of revenues for the three andnine months ended September 24, 2010 and September 25, 2009:

 
| ** **                                   | ** ** | **% of Net Sales** | ** ** | **% Increase**    | ** ** | **% of Net Sales** | ** ** | **% Increase**    | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|-----------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended**  | ** ** | **(Decrease)**         | ** ** | **Nine Months Ended**   | ** ** | **(Decrease)**         | ** ** |
| ** **                                   | ** ** | **September 24,**            | ** ** | **September 25,** | ** ** | **2010**                          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** | **2010** | ** ** |
| ** **                                   | ** ** | **2010**                          | ** ** | **2009**               | ** ** | **vs. 2009 (1)**        | ** ** | **2010**               | ** ** | **2009** | ** ** | **vs. 2009 (1)** | ** ** |
|                                         |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| Net sales                                    |       | 100.0                             | %          | 100.0                  | %          | (0.4                              | )%         | 100.0                  | %          | 100.0 | % | (1.5 | )% |
| Cost of sales                                |       | 62.1                              |       | 63.2                   |       | (2.1                              | )          | 61.9                   |       | 63.1 |   | (3.3 | ) |
| Gross profit                                 |       | 37.9                              |       | 36.8                   |       | 2.6                               |       | 38.1                   |       | 36.9 |   | 1.5 |   |
|                                         |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| Operating Expenses:                          |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| Selling, general and administrative expenses |       | 27.8                              |       | 27.4                   |       | 1.0                               |       | 29.2                   |       | 29.7 |   | (3.1 | ) |
| Depreciation and amortization                |       | 1.8                               |       | 1.6                    |       | 9.8                               |       | 1.9                    |       | 1.7 |   | 8.2 |   |
| Total operating expense                      |       | 29.6                              |       | 29.0                   |       | 1.5                               |       | 31.1                   |       | 31.4 |   | (2.5 | ) |
| Operating income                             |       | 8.3                               |       | 7.7                    |       | 6.4                               |       | 7.0                    |       | 5.5 |   | 23.8 |   |
|                                         |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | —                            |       | (0.1                   | )          | 100.0                             |       | —                 |       | 0.2 |   | (100.0 | ) |
| Interest expense                             |       | (1.6                              | )          | (1.6                   | )          | (4.5                              | )          | (1.7                   | )          | (1.8 | ) | (10.8 | ) |
| Interest income and other income             |       | 0.2                               |       | 0.2                    |       | (2.3                              | )          | 0.2                    |       | 0.2 |   | (1.4 | ) |
| Income before income taxes                   |       | 6.9                               |       | 6.2                    |       | 10.5                              |       | 5.5                    |       | 4.0 |   | 33.6 |   |
| Income tax provision                         |       | (2.7                              | )          | (2.4                   | )          | 10.7                              |       | (2.2                   | )          | (1.6 | ) | 35.4 |   |
| Net income                                   |       | 4.2                               | %          | 3.8                    | %          | 10.4                              | %          | 3.3                    | %          | 2.5 | % | 32.4 | % |

 

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(1)          Percent increase (decrease) represents the actual change asa percent of the prior year’s result.

 

*Overview.*During thethree months ended September 24, 2010, our net sales decreased 0.4%. Webelieve this decrease is associated with the general economic downturn andcredit crisis. Sales to customers in our facilities maintenance end-markets,which make up 74% of our total sales and include residential multi-familyhousing and institutional MRO customers, declined 1.5% during the third quarterof 2010 compared to the third quarter of 2009. Sales to our professionalcontractor and specialty distributor customers, which represent 15% and 11% ofour total sales, respectively, increased 0.1% and 4.1%, respectively. Althoughwe are starting to see some signs of stabilization, demand from these customerscontinues to be negatively impacted by recessionary declines in residential newconstruction and renovations activity. We expect continued variability withinour end-markets; however, we believe the impact on sales related to the marketweakness during 2010 will be less severe than we experienced during 2009. Weexpect sales to our facilities maintenance, professional contractor andspecialty distributor end-markets to remain relatively flat during theremainder of 2010 as the general economic downturn and credit crisis isexpected to continue specifically with respect to the housing market.

 

Netincome as a percentage of sales was 4.2% in the third quarter compared to 3.8%in the comparable prior year period. The increase in net income as a percent ofsales is primarily a result of higher gross profit margins and lowercompensation-related expenses, offset in part by higher facility consolidationcosts and higher depreciation and amortization expense.

 

Weare continuing to focus on keeping our operating costs low in the near termwhile continuing to invest in our operating platform for the long term.Accordingly, our plans include continued investments in the consolidation ofour distribution network and in information technology solutions to optimizecustomer service.

 

*Three Months Ended September 24, 2010 Compared to ThreeMonths Ended September 25, 2009*

 

*Net Sales.*Our net sales decreased by$1.1 million, or 0.4%, to $276.8 million in the three months ended September 24,2010 from $277.9 million in the three months ended September 25,2009. The decrease in sales resulted from the net impact of a 1.5% decrease insales to our facilities maintenance customers offset by an increase in sales toour professional contractor and specialty distributor customers of 0.1% and4.1%, respectively.

 

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*Gross Profit.*Gross profit increased by$2.6 million, or 2.6%, to $104.8 million in the three months ended September 24,2010 from $102.2 million in the three months ended September 25,2009. Our gross profit margin increased 110 basis points to 37.9% for the threemonths ended September 24, 2010 compared to 36.8% for the three monthsended September 25, 2009. The increase in gross margin is primarily due tocontinued improvement in selling margins from the optimization of productpricing as well as higher supplier rebates.

 

*Selling, General and Administrative Expenses.*SG&Aexpenses increased by $0.8 million, or 1.0%, to $77.0 million in the threemonths ended September 24, 2010 from $76.2 million in the three monthsended September 25, 2009. As a percent of sales, SG&A increased to27.8% for the three months ended September 24, 2010 compared to 27.4% forthe three months ended September 25, 2009. The increase in SG&Aexpenses is primarily due to costs incurred related to our distributionconsolidation efforts partly offset by decreases in occupancy-related expensesresulting from previous consolidations of distribution centers and closings ofunderperforming professional contractor showrooms, and lowercompensation-related expenses.

 

*Depreciation andAmortization.*Depreciationand amortization expense increased by $0.4 million to $5.0 million in thethree months ended September 24, 2010 from $4.5 million in the three monthsended September 25, 2009. As a percentage of sales, depreciation andamortization was 1.8% or 20 basis points higher than the 1.6% in the comparableprior year period. This increase was due to higher depreciation resulting fromour higher capital spending over the last three years associated with ourinformation technology infrastructure and distribution center consolidation andintegration efforts.

 

*Operating Income.*As a result of theforegoing, operating income increased by $1.4 million, or 6.4%, to$22.9 million in the three months ended September 24, 2010 from $21.5million in the three months ended September 25, 2009. As a percent ofsales, operating income increased to 8.3% in the three months ended September 24,2010 compared to 7.7% in the three months ended September 25, 2009.

 

*Loss onExtinguishment of Debt*.We did not extinguish debt in the three months ended September 24, 2010.During the three months ended September 25, 2009, we repaid $30.0 millionof our term loan ahead of schedule. In connection with the term loanprepayment, we recorded a loss on extinguishment of debt of $0.2 millionassociated with the write-off of deferred financing costs.

 

*Interest Expense.*Interest expense decreasedby $0.2 million in the three months ended September 24, 2010 to$4.4 million from $4.6 million in the three months ended September 25,2009. This decrease was primarily due to lower debt balances outstandingcompared to last year associated with the repayments of our term debt and therepurchase of our 81/8% senior subordinated notes and lower interest rates.

 

*Interest and Other Income.* Interest and other income decreased less than $0.1 millionto $0.5 million in the three months ended September 24, 2010 compared to$0.6 million in the three months ended September 25, 2009. The decreasewas primarily attributable to lower interest income earned from our short-terminvestments resulting from a lower interest-rate environment.

 

*Provision for Income Taxes.*The effectivetax rate for the three months ended September 24, 2010 was 39.5% comparedto 39.4% for the three months ended September 25, 2009. The increase inthe effective tax rate was primarily due to the write-off of deferred taxassets associated with share-based compensation arising from stock options thatwere forfeited due to employee terminations as well as lower tax exemptinterest income, partially offset by a decrease in nondeductible expenditures.

 

*Nine Months Ended September 24, 2010 Compared to NineMonths Ended September 25, 2009*

 

*Net Sales.*Our net sales decreased by$12.5 million, or 1.5%, to $792.2 million in the nine months ended September 24,2010 from $804.7 million in the nine months ended September 25, 2009.The decline in sales resulted from the net decline in sales to our facilities maintenanceand professional contractor customers of 1.7% and 2.6%, respectively.  Sales to our specialty distributor customerswere flat.

 

*Gross Profit.*Gross profit increased by$4.4 million, or 1.5%, to $301.5 million in the nine months ended September 24,2010 from $297.1 million in the nine months ended September 25, 2009.Our gross profit margin increased 120 basis points to 38.1% for the nine monthsended September 24, 2010 compared to 36.9% for the nine months ended September 25,2009. 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&Aexpenses decreased by $7.3 million, or 3.1%, to $231.7 million in the ninemonths ended September 24, 2010 from $239.0 million in the nine monthsended September 25, 2009. As a percent of sales, SG&A decreased to29.2% for the nine months ended September 24, 2010 compared to 29.7% forthe nine months ended September

 

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25,2009. The decrease in SG&A expenses is primarily due to $3.7 million oflower bad debt expense as well as decreases in occupancy and personnel-relatedexpenses resulting from previous closings of underperforming professionalcontractor showrooms, consolidations of distribution centers and headcountreductions, and lower costs incurred directly related to our distributionconsolidation efforts.

 

*Depreciation andAmortization.*Depreciationand amortization expense increased by $1.1 million to $14.7 million in thenine months ended September 24, 2010 from $13.6 million in the nine monthsended September 25, 2009. As a percentage of sales, depreciation andamortization was 1.9% or 20 basis points higher than the 1.7% in the comparableprior year period. This increase was due to higher depreciation resulting fromour higher capital spending over the last three years associated with ourinformation technology infrastructure and distribution center consolidation andintegration efforts.

 

*Operating Income.*As a result of theforegoing, operating income increased by $10.6 million, or 23.8%, to $55.2million in the nine months ended September 24, 2010 from $44.6 million inthe nine months ended September 25, 2009. As a percent of sales, operatingincome increased to 7.0% in the nine months ended September 24, 2010compared to 5.5% in the nine months ended September 25, 2009.

 

*Gain onExtinguishment of Debt*.We did not extinguish debt in the nine months ended September 24, 2010.During the nine months ended September 25, 2009, we repurchased $36.4million of our 81/8% senior subordinated notes at an average of 93.8% of par,or $34.2 million. In addition, we repaid $55.2 million of our term loan aheadof schedule. In connection with the repurchase of our 81/8%senior subordinated notes and the term loan prepayment, we recorded a gain onextinguishment of debt of $1.3 million net of $0.1 million and $0.9 million inoriginal issue discount and deferred financing costs written-off, respectively.

 

*Interest Expense.*Interest expense decreasedby $1.6 million in the nine months ended September 24, 2010 to$13.1 million from $14.7 million in the nine months ended September 25,2009. This decrease was primarily due to lower debt balances outstandingcompared to last year associated with the repayments of our term debt and therepurchase of our 81/8% senior subordinated notes and lower interest rates.

 

*Interest and Other Income.* Interest and other income decreased less than $0.1 millionto $1.3 million in the nine months ended September 24, 2010 compared to$1.3 million in the nine months ended September 25, 2009.

 

*Provision for Income Taxes.*The effectivetax rate for the nine months ended September 24, 2010 was 39.6% comparedto 39.1% for the nine months ended September 25, 2009. The increase in theeffective tax rate was primarily due to the write-off of deferred tax assets associatedwith share-based compensation arising from stock options that were forfeiteddue to employee terminations and the decrease in the benefit recognizedassociated with unrecognized tax benefits. During the nine months ended September 25,2009, we obtained resolution related to an uncertain state tax position and weadjusted the accrual previously established, of which $0.1 million favorablyimpacted our effective tax rate.

 

**Liquidity and Capital Resources**

 

*Overview*

 

Weare a holding company whose only asset is the stock in Interline New Jersey. Weconduct virtually all of our business operations through Interline New Jersey.Accordingly, our only material sources of cash are dividends and distributionswith respect to our ownership interests in Interline New Jersey that arederived from the earnings and cash flow generated by Interline New Jersey.

 

Wehave outstanding $150.7 million of 81/8% seniorsubordinated notes due 2014 and we have a $330.0 million bank credit facility.The 81/8% seniorsubordinated notes mature on June 15, 2014 and interest is payable on June 15and December 15 of each year. As of September 24, 2010, the 81/8% senior subordinated noteshad an estimated fair market value of $154.1 million, or 102.3% of par. Thebank credit facility consists of a $230.0 million 7-year term loan and a $100.0million 6-year revolving credit facility of which a portion not to exceed $40.0million is available in the form of letters of credit. As of September 24,2010, Interline New Jersey had $8.6 million of letters of creditissued under the revolving loan facility and $154.2 million of aggregateprincipal outstanding under the term loan facility.

 

Thedebt instruments of Interline New Jersey, primarily the credit facility enteredinto on June 23, 2006 and the indenture governing the terms of the 81/8% senior subordinated notes,contain significant restrictions on the payment of dividends and distributionsto us by Interline New Jersey. Interline New Jersey’s credit facility allows itto pay dividends, make distributions to us or make investments in us in anaggregate amount not to exceed $2.0 million during any fiscal year, so long asInterline New Jersey is not in default or would be in default as a result ofsuch payments. In addition, ordinary course distributions for overhead (up to$3.0 

 

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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 oremployees and (provided Interline New Jersey is not in default) aggregatepayments of up to $40.0 million depending on the pro forma net leverage ratioas of the last day of the previous quarter. In addition, the indenture for the81/8% 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*

 

Workingcapital increased by $39.8 million to $337.1 million as of September 24,2010 from $297.3 million as of December 25, 2009. The increase in workingcapital was primarily funded by cash flows from operations.

 

*CashFlow*

 

*Operating Activities.* Net cash provided byoperating activities was $12.4 million in the nine months ended September 24,2010 compared to net cash provided by operating activities of$102.2 million in the nine months ended September 25, 2009.

 

Netcash provided by operating activities of $12.4 million in the nine months endedSeptember 24, 2010 primarily consisted of net income of $26.2 million,adjustments for non-cash items of $23.4 million and cash used in workingcapital items of $37.0 million. Adjustments for non-cash items primarilyconsisted of $15.0 million in depreciation and amortization of property,equipment and intangible assets, $3.6 million in bad debt expense, $2.5 millionin share-based compensation net of excess tax benefits, $1.3 million indeferred income taxes and $0.8 million in amortization of debt issuance costs.The cash used in working capital items consisted of $33.8 million fromincreased inventory levels primarily as a result of seasonal inventory demandsand the stocking of our new distribution centers in Chicago, Illinois,Philadelphia, Pennsylvania, and Jacksonville, Florida, $16.5 million fromincreased trade receivables, net of changes in our allowance for doubtfulaccounts, resulting from the timing of collections and $5.7 million fromincreased prepaid expenses and other current assets primarily as a result ofhigher rebates receivable from vendors.  These items were offset by $9.2 million from increased trade payablesbalances as a result of the timing of purchases and related payments, $6.7million of increased accrued expenses and other current liabilities primarilydue to increased lease liabilities associated with our new distribution centersand higher accrued compensation and related benefits at period-end resultingfrom the timing of payments, $2.6 million from timing of interest payments and$0.3 million from the increase in income taxes payable resulting from anincrease in income before taxes.

 

Net cash provided by operating activities of $102.2 million in the ninemonths ended September 25, 2009 primarily consisted of net income of $19.8million, adjustments for non-cash items of $31.0 million and cash provided byworking capital items of $50.8 million. Adjustments for non-cash itemsprimarily consisted of $14.2 million in depreciation and amortization ofproperty, equipment and intangible assets, $7.3 million in bad debt expense,$6.1 million in deferred income taxes, $3.1 million in share-basedcompensation, $0.8 million in amortization of debt issuance costs and thewrite-off of $0.7 million in deferred acquisition costs due to the adoption ofa new accounting standard on business combinations, offset by $1.3 million innet gain from the repurchase of $36.4 million of our 81/8% senior subordinated notesand the repayment of $55.2 million of our term debt. The cash provided byworking capital items primarily consisted of $26.7 million from decreasedinventory levels as a result of decreased purchases associated with lowerdemand, $16.1 million from increased trade payables balances as a result of thetiming of purchases and related payments, $8.8 million from accrued expensesarising from the timing of the payment of certain expenses primarily fromseverance and distribution center closing costs associated with our previouslydiscussed operational initiatives, such as headcount reductions, consolidationof certain distribution centers and closing of underperforming professionalcontractor centers as well as higher accrued compensation and related benefitsat period-end, $4.5 million from decreased prepaid expenses and other currentassets primarily from the collection of rebates from vendors, $1.3 million fromthe increase in income taxes and $2.4 million from timing of interest payments.These items were partially offset by $9.0 million in higher trade receivablesresulting from increased sales activity during the three months ended September 25,2009 compared to the three months ended December 26, 2008.

 

*Investing Activities.* Net cash used in investingactivities was $12.1 million in the nine months ended September 24, 2010compared to net cash used in investing activities of $11.1 million in the ninemonths ended September 25, 2009.

 

Net cash used in investingactivities in the nine months ended September 24, 2010 was primarilyattributable to $12.9 million of capital expenditures associated with ourdistribution center consolidation projects and our information technologyinfrastructure, as

 

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well as those made in theordinary course of business, offset by net proceeds from sales and maturitiesof short-term investments of $1.0 million.

 

Net cash used in investingactivities in the nine months ended September 25, 2009 was primarilyattributable to capital expenditures associated with our distribution centerconsolidation projects as well as those made in the ordinary course of businessof $9.1 million, net purchases of short-term investments of $1.6 million and$0.4 million in costs related to purchases of businesses, net of cash acquired.

 

*Financing Activities.* Net cashprovided by financing activities totaled $4.6 million in the nine monthsended September 24, 2010 compared to net cash used in financing activities of$90.3 million in the nine months ended September 25, 2009.

 

Net cash provided byfinancing activities in the nine months ended September 24, 2010 wasattributable to proceeds received from stock options exercised and relatedexcess tax benefits of $8.0 million, partially offset by a $1.8 millionrepayment of term debt and capital lease obligations and a $1.5 million netdecrease in purchase card payable.

 

Netcash used in financing activities in the nine months ended September 25, 2009was attributable to our debt reduction of $90.8 million primarily comprised ofour repurchase of $36.4 million of our 81/8% senior subordinated notes at an average of 93.8% of par, or $34.2million and our repayment of $56.7 million of borrowings on our term debt andcapital lease obligations offset by the net increase in purchase card payableof $0.5 million.

 

*Capital Expenditures*

 

Capitalexpenditures were $12.9 million in the nine months ended September 24, 2010compared to $9.1 million in the nine months ended September 25, 2009. Capitalexpenditures as a percentage of sales were 1.6% in the nine months endedSeptember 24, 2010 compared to 1.1% in the nine months ended September 25,2009. The increase in capital expenditures was driven primarily by thecontinued consolidation of our distribution center network, including theinvestments in larger, more efficient distribution centers. In addition, duringthe nine months ended September 24, 2010 and September 25, 2009, we acquiredleasehold improvements through non-cash lease incentives of $2.4 million and$3.0 million, respectively.

 

*Credit Facility*

 

Borrowingsunder the term loan and the delayed draw facility bear interest, at InterlineNew Jersey’s option, at either LIBOR plus 1.75% or at the alternate base rate,which is the greater of the Prime Rate or the Federal Funds Effective Rate plus0.50%, plus 0.75%. Borrowings under the revolving credit facility bearinterest, at Interline New Jersey’s option, at either LIBOR plus 1.75% or atthe alternate base rate plus 0.50%. As of September 24, 2010, the weightedaverage interest rate in effect with respect to the term loan and the delayeddraw facility was 2.01% for the LIBOR option and 4.00% for the alternate baserate option. Outstanding letters of credit under the revolving credit facilityare subject to a per annum fee equal to the applicable margin under therevolving credit facility. The interest rate spread is subject to a pricinggrid that is based on the ratio of net total indebtedness to consolidatedearnings before interest, taxes, depreciation and amortization (“EBITDA”), asdefined by the credit facility. The term loan and the delayed draw facilitymature on June 23, 2013 and the revolving loan facility matures on June 23,2012. In accordance with the terms of our credit facility, amounts under theterm loan and the delayed draw facility are due and payable in quarterlyinstallments equal to 1.0% of the original principal amount on an annual basisthrough June 23, 2013, with the balance payable in one final installment at thematurity date. As a result of our repayments of borrowings on our term debt, weare not required to make another principal payment until the debt matures in2013.

 

Thebank credit facility, which is secured by substantially all of the assets ofInterline New Jersey and is guaranteed by us and by the domestic subsidiariesof Interline New Jersey, contains affirmative, negative and financial covenantsthat limit Interline New Jersey’s ability to incur additional indebtedness, paydividends on its common stock or redeem, repurchase or retire its common stockor subordinated indebtedness, make certain investments, sell assets, andconsolidate, merge or transfer assets, and that require Interline New Jersey tomaintain certain financial ratios as of the last day of each fiscal quarter,including a minimum ratio based on an adjusted consolidated EBITDA, as definedby the credit facility, to consolidated cash interest expense and a maximum ratioof net total indebtedness to an adjusted consolidated EBITDA, as defined by thecredit facility. The maximum ratio of net total indebtedness to adjustedconsolidated EBITDA, as defined by the credit facility, was 3.5x. Interline NewJersey and the Company were in compliance with all covenants at September 24,2010.

 

Inconnection with the bank credit facility, Interline New Jersey is required topay administrative fees, commitment fees, letter of credit issuance andadministration fees and certain expenses and to provide certain indemnities,all of which are customary for financings of this type. The bank creditfacility also allows for certain incremental term loans and incrementalcommitments under the 

 

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revolvingcredit facility which are available to Interline New Jersey to repayindebtedness and make acquisitions if certain conditions, including various financialratios are met.

 

*Liquidity*

 

Historically,our capital requirements have been for debt service obligations, workingcapital requirements, including inventory, accounts receivable and accountspayable, acquisitions, the expansion and maintenance of our distributionnetwork and upgrades of our information systems. We expect this to continue inthe foreseeable future. Historically, we have funded these requirements throughcash flow generated from operating activities and funds borrowed under our creditfacility. We expect our cash on hand, cash flow from operations and loanavailability under our credit facility to be our primary source of funds in thefuture. Letters of credit, which are issued under the revolving creditfacility, are used to support payment obligations incurred for our generalcorporate purposes.

 

As of September 24, 2010, we had $55.2 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 September 24, 2010, we had $104.8 million of total cash on handand permitted investments (including $25.0 million in cash that, for thecovenant compliance ratio, is netted against debt). On October 29, 2010, weused $54.6 million of our cash on hand to acquire substantially all of theassets and a portion of the liabilities of CleanSource.

 

We believe that cash and cash equivalents, cash flow from operationsand available borrowing capacity under our credit facility will be adequate tofinance our ongoing operational cash flow needs and debt service obligationsfor the next twelve months.

 

*Contractual Obligations*

 

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

 

**CriticalAccounting Policies**

 

In preparing the unaudited condensed consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America, management is required to make certain estimates, judgmentsand assumptions. These estimates, judgments and assumptions affect the reportedamounts of assets and liabilities, including the disclosure of contingentassets and liabilities, at the date of the financial statements and thereported amounts of revenues and expenses during the periods presented. On anongoing basis, management evaluates these estimates and assumptions. Managementbases its estimates and assumptions on historical experience and on variousother factors that are believed to be reasonable at the time the estimates andassumptions are made. Actual results may differ from these estimates andassumptions under different circumstances or conditions.

 

Our critical accounting policies are included in our Annual Report onForm 10-K for the year ended December 25, 2009 filed with the SEC. During thethree months ended September 24, 2010, there were no significant changes to anyof our critical accounting policies.

 

**ITEM 3. Quantitative andQualitative Disclosures About Market Risk**

 

*Commodity Price Risk*

 

We are aware of thepotentially unfavorable effects inflationary pressures may create throughhigher product and material costs, higher asset replacement costs and relateddepreciation and higher interest rates. In addition, our operating performanceis affected by price fluctuations in copper, oil, stainless steel, aluminum,zinc, plastic and PVC and other commodities and raw materials. We seek tominimize the effects of inflation and changing prices through economies ofpurchasing and inventory management resulting in cost reductions andproductivity improvements as well as price increases to maintain reasonableprofit margins. However, such commodity price fluctuations have from time totime created cyclicality in our financial performance, and could continue to doso in the future. In addition, our use of priced catalogs may not allow us tooffset such cost increases quickly, resulting in a decrease in gross marginsand profit.

 

*InterestRate Risk*

 

Ourvariable rate term debt is sensitive to changes in the general level ofinterest rates. As of September 24, 2010, the weighted average interest rate ineffect with respect to our $154.2 million variable rate term debt was 2.01% forthe LIBOR option and 4.00% for the alternate base rate option. While ourvariable rate term debt obligations expose us to the risk of rising interestrates, we

 

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donot believe that the potential exposure is material to our overall financialperformance or results of operations. Based on the outstanding variable rateterm debt as of September 24, 2010, a 1.0% annual increase or decrease incurrent market interest rates would have the effect of causing a $1.2 millionpre-tax change to our statement of operations for the nine months endedSeptember 24, 2010.

 

The fair market value of ourfixed rate debt is subject to interest rate risk. As of September 24, 2010, thefair market value of our $150.7 million 81/8% senior subordinated notes was approximately $154.1 million, or 102.3%of par.

 

*Foreign Currency Exchange Risk*

 

Themajority of our purchases from foreign-based suppliers is from China and othercountries in Asia and is transacted in U.S. dollars. Accordingly, our exposureto risk from foreign currency exchange rates was not material as of September24, 2010.

 

*DerivativeFinancial Instruments*

 

Asof September 24, 2010, we did not have any interest rate exchange agreements orswaps. Historically, we entered into derivative financial instruments from timeto time, including interest rate exchange agreements or swaps, to manage ourexposure to fluctuations in interest rates on our debt.

 

Weperiodically evaluate the costs and benefits of any changes in our interestrate risk. Based on such evaluation, we may enter into new interest rate swapsto manage our interest rate exposure. Our derivative activities, all of whichare for purposes other than trading, are initiated within the guidelines ofcorporate risk-management policies.

 

**ITEM 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer (ourprincipal executive officer and principal financial officer), evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of September 24, 2010. Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of September 24, 2010, our disclosure controls andprocedures were effective to (1) ensure that material information disclosed byus in the reports that we file or submit under the Exchange Act is accumulatedand communicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure and(2) ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

 

*Changes inInternal Control over Financial Reporting*

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) occurred during the quarter ended September 24, 2010that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. Legal Proceedings**

 

We are involved in various legalproceedings that have arisen in the ordinary course of our business and havenot been fully adjudicated. These actions, when ultimately concluded anddetermined, will not, in the opinion of management, have a material effect uponour consolidated financial position, results of operations or liquidity.

 

**ITEM 1A. Risk Factors**

 

For information regardingfactors that could affect our financial position, results of operations andcash flows, see the risk factors discussion provided in our Annual Report onForm 10-K for the year ended December 25, 2009 in Part I. Item 1A. RiskFactors. See also “Part I. Item 2—Forward Looking Statements” above.

 

Therehave been no material changes from the risk factors previously disclosed in ourAnnual Report on Form 10-K for the year ended December 25, 2009.

 

**ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

*UnregisteredSales of Equity Securities*

 

None.

 

*Purchasesof Equity Securities by the Issuer*

 

None.

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

**ITEM 4. (Removed and Reserved)**

 

**ITEM 5. Other Information**

 

None.

 

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**ITEM 6. Exhibits**

 

The following exhibits are beingfiled as part of this Quarterly Report on Form 10-Q:

 
| 12.1 |   | Computation  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 the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned hereunto duly authorized.

 
| ** **             | ** ** | **INTERLINE  BRANDS, INC.**                                  |
|------------------------|------------|--------------------------------------------------------------|
|                   |       | Registrant                                                   |
|                   |       |                                                         |
|                   |       |                                                         |
|                   |       |                                                         |
| Date: November 1, 2010 | By:        | /S/ JOHN A. EBNER                                            |
|                   |       | John A. Ebner                                                |
|                   |       | Chief Financial Officer                                      |
|                   |       | (Duly Authorized Signatory and  Principal Financial Officer) |

 

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