BlueLinx Holdings Inc. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q1, but the filing covers the quarter ended March 31, 2018. Comparisons below are with the quarter ended April 1, 2017, unless otherwise noted. Results exclude Cedar Creek, acquired after quarter-end.
Business context and financial results
BlueLinx distributes building and industrial products through U.S. distribution centers. In Q1 2018, structural products represented approximately 47% of sales and specialty products approximately 53%.
- Net sales: $437.5 million, up 2.1% from $428.6 million. Management attributed growth largely to higher commodity prices on structural products.
- Gross profit and margin: $55.3 million, up 1.6%; gross margin was 12.7%, unchanged. Structural and specialty gross margins were 9.9% and 15.0%, respectively.
- Operating results: Operating loss was $6.6 million versus income of $5.7 million. Net loss was $13.4 million, or $1.47 per diluted share, versus net income of $0.6 million, or $0.06 per diluted share.
- Expenses: SG&A rose 11.7% to $59.2 million. The quarter included approximately $8.9 million of incremental expense for cash-settled stock appreciation rights and $3.6 million of Cedar Creek-related professional fees. Q1 2017 included a $6.7 million gain on property sales and $4.5 million in multi-employer pension withdrawal charges that did not recur.
- Interest: Interest expense increased to $8.5 million from $5.2 million, including $2.2 million of debt modification fees and $2.1 million of capital lease interest, partly offset by lower mortgage interest.
- Cash flow: Operating activities used $45.0 million, compared with $39.9 million used in Q1 2017. Investing activities provided $107.5 million, primarily reflecting property-sale proceeds. Financing activities used $60.2 million. Cash ended the quarter at $7.1 million.
- Liquidity and debt: At March 31, cash was $7.1 million; revolving borrowings were $223.3 million with $70.1 million of excess availability. Balance-sheet long-term debt, net of discount, was $220.4 million. The $97.8 million mortgage was repaid using proceeds from January sale-leaseback transactions. Total liabilities were $622.4 million and stockholders’ equity was $22.1 million.
- Working capital: Operating working capital was $258.9 million, up $33.1 million from December 30, 2017, mainly from seasonal increases in receivables and inventory, partly offset by higher accounts payable.
Material changes and unusual items
- On January 10, 2018, BlueLinx sold and leased back four distribution centers for gross proceeds of $110.0 million. It recorded $95.1 million of capital lease assets and obligations and deferred an $83.9 million gain for recognition over the lease terms; proceeds repaid the mortgage.
- Cash-settled stock appreciation rights liability increased to approximately $9.9 million from approximately $1.0 million at year-end, largely reflecting the higher share price. The quarter’s related expense materially affected earnings.
- After quarter-end, on April 13, 2018, BlueLinx completed its $413.0 million debt-free, cash-free acquisition of Cedar Creek. The purchase consideration included approximately $345.0 million in cash and $68.0 million of capital leases. The acquisition expanded the company to approximately 70 distribution facilities and 2,600 employees.
- To finance the acquisition, BlueLinx increased its asset-based revolving facility to $600 million and entered into a $180 million secured term loan. The term loan bears interest at LIBOR plus 7.00% (subject to a 1.00% floor), or base rate plus 6.00% (subject to a 2.00% floor), and matures October 13, 2023. These post-quarter financing amounts are not Q1 debt balances.
Outlook, risks, and contingencies
Management gave no specific earnings or sales guidance. It expects ordinary-course operating cash flows and available revolving-credit borrowings to fund routine operations and working-capital needs for at least the next 12 months. The business is seasonal: Q1 and Q4 are typically slower, while Q2 and Q3 are typically stronger. Management cited continued long-term improvement in the U.S. housing market, but results remain exposed to housing starts, product pricing and supply, inventory management, customer credit, competition, weather, fuel costs, interest rates, and broader economic conditions.
The filing identifies Cedar Creek integration, increased indebtedness and interest expense, and long-term non-cancelable distribution-center leases as risks. It also notes that cash-settled stock appreciation rights expense can fluctuate with share price and valuation assumptions. Approximately 34% of employees were union-represented; about 11% of collective bargaining agreements were up for renewal in 2018 or expired and under negotiation. Management stated that reserves were established for probable environmental and legal losses; outcomes could be material in an individual quarter, but were not expected to materially harm long-term financial condition, results, or cash flows. BlueLinx reported compliance with its credit covenants at March 31, 2018.
Key facts for investors to verify
- Whether Cedar Creek integration, synergies, and acquired-business performance support the acquisition’s cost and expanded debt burden.
- Post-acquisition borrowing levels, revolver availability, covenant headroom, and the term loan’s interest and prepayment requirements.
- How recurring operating performance compares after adjusting for the SAR charge, property-sale accounting, and other unusual items.
- Whether seasonal inventory and receivables convert to cash as the selling season progresses.
- The duration and financial impact of sale-leaseback commitments and other capital leases.