Bluelinx Holdings Inc. annual report, FY2011

BlueLinx Holdings Inc. — FY2011 Form 10-K

Business context and reporting period. BlueLinx distributes structural and specialty building products to customers across the United States. The fiscal year ended December 31, 2011 and comprised 52 weeks; the filing also reports fourth-quarter results. The business operated through about 55 distribution centers, serving approximately 11,500 customers with products from more than 750 suppliers.

Financial performance and liquidity

Metric	FY2011	FY2010
Net sales	$1,755.4 million	$1,804.4 million
Gross profit / margin	$210.1 million / 12.0%	$210.7 million / 11.7%
Operating loss	$8.3 million	$23.9 million
Interest expense	$30.5 million	$33.8 million
Net loss	$38.6 million; $0.89 per share	$53.2 million; $1.73 per share
Cash from operating activities	$(49.6) million	$(29.9) million

FY2011 gross margin improved 0.3 percentage points, while sales fell 2.7%. Structural-product sales declined 15.5%, primarily on a 15.1% volume decrease; specialty-product sales grew 8.4%, with volume up 7.4%. EBITDA was $1.8 million, a non-GAAP measure defined by the company.

Fourth-quarter net sales were $391.1 million, versus $367.9 million in the prior-year quarter; gross profit was $48.0 million versus $44.3 million. The fourth-quarter net loss narrowed to $10.3 million from $20.2 million, and operating loss narrowed to $2.6 million from $12.2 million.

At year-end, cash was $4.9 million and working capital was $233.4 million. Total debt was $337.7 million, down from $382.9 million. Debt included $93.4 million outstanding on the U.S. revolver, $1.1 million on the Canadian revolver, and a $243.3 million mortgage. Available borrowing capacity was $115.7 million under the U.S. facility and $2.6 million under the Canadian facility. Stockholders’ equity was $8.4 million.

Material changes versus the prior period

• Sales declined as single-family housing starts fell 9%; specialty growth only partly offset weaker structural-product demand.
• Operating loss improved mainly as SG&A fell by $13.3 million and depreciation and amortization fell by $2.8 million. SG&A included gains from property sales ($10.6 million), a headquarters lease modification ($2.0 million), and an insurance settlement ($1.4 million); these items were not recurring operating improvements.
• Interest expense decreased by $3.3 million, reflecting lower debt. Net loss improved by $14.7 million.
• A July 2011 rights offering raised approximately $60 million gross ($58.5 million net); about $56 million was used to repay the U.S. revolver. Shares outstanding increased from 32.7 million at the start of the year to 62.0 million at year-end.
• The pension plan’s unfunded status increased to $35.5 million from $18.8 million. Accumulated other comprehensive loss also widened, largely due to pension-related losses.

Outlook, risks, contingencies, and unusual items

• Management expected the housing downturn to continue to pressure results in 2012 and said the timing and extent of market recovery were uncertain. It believed available facilities and other sources could fund routine operations and capital needs for the next 12 months, but warned that prolonged weak conditions could require additional capital.
• Management estimated FY2012 capital expenditures of approximately $4 million. The company expected to transfer $10.8 million to mortgage collateral in 2012.
• The U.S. revolver requires a 1.1-to-1.0 fixed-charge coverage ratio if availability falls below the specified threshold. The company reported covenant compliance at filing, but stated that it would not meet that ratio at current operating results if the threshold were breached.
• The mortgage has a fixed 6.35% rate and a large $225.3 million principal payment scheduled for 2016. The U.S. revolver matures in January 2014. Debt is secured by operating assets and real estate and is subject to restrictive covenants.
• The three-year engineered-lumber purchase agreement with Georgia-Pacific expired February 12, 2012. BlueLinx launched its own engineered-product brand in most markets and entered a Weyerhaeuser supply agreement for New England; management said the financial impact was not yet predictable. Georgia-Pacific accounted for about 11% of FY2011 purchases.
• Management intended to seek an IRS waiver related to the 2012 pension contribution to preserve cash. The stated minimum required contribution was $5.4 million; expected 2012 cash funding was about $4.1 million, including a prior-year amount. A waiver was not assured.
• Dividends had been suspended indefinitely since 2007. Lowe’s and affiliated companies represented about 10.4% of FY2011 sales.
• Other key risks include housing and building-product cyclicality, commodity price and supply volatility, customer credit losses, fuel costs, competition, labor negotiations, environmental obligations, and potential asbestos claims associated with Georgia-Pacific products. The filing describes routine legal proceedings as not expected to have a material adverse effect; the tender-offer-related shareholder cases had been dismissed.
• Newtown, Connecticut facility damage from severe winter weather generated approximately $5.8 million of insurance proceeds and a $1.4 million gain. Management reported no significant impairment of long-lived assets.

Most important facts for investors to verify

• Whether operating cash burn and low cash on hand remain manageable, and whether revolver availability stays above the covenant threshold.
• The timing and refinancing or repayment plan for the 2014 revolver maturity and the substantial 2016 mortgage principal payment.
• Whether housing demand, structural-product volumes, and gross margins recover, and whether specialty-product growth can continue.
• The actual sales, margins, and working-capital effects of the new engineered-wood sourcing and private-label strategy.
• The final pension funding requirement and outcome of the requested IRS waiver, alongside changes in the plan’s funded status.
• The extent to which FY2011 operating-loss improvement depended on property, lease, and insurance gains rather than recurring operations; also verify the impact of the equity issuance on per-share results.
• The audited statements show FY2010 year-end cash of $14.297 million, while one selected-data table reports $14.927 million; confirm the correct comparative amount.

Ernst & Young issued unqualified audit opinions on the consolidated financial statements and internal control over financial reporting; management also concluded that financial reporting controls were effective as of December 31, 2011.