BlueLinx Holdings Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter ended July 2, 2011; year-to-date covers the first six months of fiscal 2011. Comparisons are with the corresponding 2010 periods. Amounts below are in millions except per-share data.
Business context
BlueLinx distributes building products in the United States, serving more than 11,500 customers through approximately 60 distribution centers. Structural products accounted for about 38% of Q2 gross sales and specialty products about 62%. The company says its results are closely tied to housing activity and are seasonal, with Q2 and Q3 typically stronger.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $500.8 | $540.8 | $891.4 | $971.8 |
| Gross profit | $57.6 | $64.1 | $103.9 | $116.4 |
| Gross margin | 11.5% | 11.9% | 11.7% | 12.0% |
| Operating income (loss) | $(1.8) | $3.6 | $(6.9) | $(4.4) |
| Net loss | $(9.8) | $(3.4) | $(22.1) | $(18.1) |
| Loss per share | $(0.31) | $(0.11) | $(0.71) | $(0.59) |
| Interest expense | $7.7 | $8.2 | $16.8 | $15.5 |
Q2 sales fell 7.4%; first-half sales fell 8.2%. Structural sales were particularly weak: Q2 structural volume declined 18.9% and structural prices 8.2%; specialty volume rose 16.5%, partly offset by lower prices. First-half structural volume declined 21.6%, while specialty volume increased 15.0%. Gross margin compression and lower gross profit drove the deterioration in operating and net results.
Q2 SG&A was $56.8 million, down slightly from $57.1 million, but rose to 11.3% of sales from 10.6%. First-half SG&A was $105.2 million versus $113.6 million; the comparison includes a $7.2 million real-estate sale gain in 2011. First-half depreciation and amortization declined to $5.6 million from $7.2 million. Interest expense rose year over year for the first half, mainly due to higher average revolving-credit borrowings and debt-cost amortization.
Cash flow, debt and liquidity
- First-half operating cash use was $101.0 million, versus $80.9 million in 2010. Receivables increased $86.5 million and inventory $24.4 million, partly offset by a $32.5 million increase in accounts payable.
- Investing activities provided $3.5 million, including $9.0 million of asset-sale proceeds; capital expenditures were $5.5 million. Financing activities provided $89.4 million, primarily from increased revolving-credit borrowings.
- Cash was $6.1 million at July 2, down from $14.3 million at fiscal year-end. Restricted cash was $49.6 million, primarily mortgage and insurance escrow.
- Working capital was $191.5 million, down from $236.2 million at January 1. Total debt was approximately $474.6 million: $188.9 million drawn on the revolving facility and $285.7 million of mortgage debt. The balance sheet classified $151.5 million as current debt.
- Revolver excess availability was $94.0 million, compared with $103.4 million at year-end; its stated rate was 4.3%. The company reported covenant compliance at filing and said it did not expect availability to fall below the then-applicable threshold, but acknowledged that it would not meet the fixed-charge ratio requirement if the threshold were breached for three consecutive business days.
Outlook, material events and risks
- Management said the downturn in new housing activity was expected to continue to negatively affect results for the foreseeable future, while expressing a belief that housing demand would improve over the long term. No specific earnings or sales guidance was provided.
- After quarter-end, a fully subscribed rights offering generated approximately $60 million gross proceeds and 28.6 million new shares; approximately $56 million was used to repay the revolver. A July 2011 revolver amendment adjusted liquidity thresholds and borrowing-base terms.
- A July 2011 mortgage amendment allowed $38.3 million of escrowed funds to prepay mortgage debt without a premium. The filing also describes the related escrow payment as made in July.
- Unusual items included a $7.2 million first-half gain on property sales, $1.8 million of first-half income associated with the terminated ineffective interest-rate swap, and severe-weather damage at a facility. Weather-related impairment and insurance recoveries largely offset, leaving a reported $0.1 million net expense for the first half.
- Risks include weak housing starts, building-product price and demand volatility, customer creditworthiness, fuel costs, adverse weather, interest rates and access to capital. Management warned that prolonged weak housing conditions could require additional capital. Routine legal matters were not expected to have a material adverse effect; environmental matters could affect results in a given quarter.
Important facts for investors to verify
- Whether housing starts, structural-product volumes and gross margins stabilize or continue to weaken.
- Post-quarter debt balances, cash availability, and compliance with the amended revolver and mortgage terms after the rights-offering proceeds and escrow-funded mortgage prepayment.
- The sustainability of liquidity given substantial seasonal working-capital cash use and low unrestricted cash.
- The effect of the 28.6 million newly issued shares on ownership, voting power and per-share results.
- The filing gives inconsistent rights-offering commencement dates: the notes state June 24, while one MD&A passage says July 24, although both describe expiration on July 22. Verify the correct date against the underlying offering documents.